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 March 31, 2016

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	(I.R.S. Employer
incorporation or organization)	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 April 26, 2016, there were 6,862,568 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

		Page Reference
PART I	FINANCIAL INFORMATION
Item 1	Financial Statements and Supplementary Data	3
	Consolidated Balance Sheets (Unaudited)	3
	Consolidated Statements of Income (Unaudited)	4
	Consolidated Statements of Comprehensive Income (Unaudited)	5
	Consolidated Statements of Cash Flows (Unaudited)	6
	Notes to Interim Unaudited Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item  3	Quantitative and Qualitative Disclosures about Market Risk	45
Item 4	Controls and Procedures	48
PART II	OTHER INFORMATION
Item 1	Legal Proceedings	49
Item 1a	Risk Factors	49
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3	Defaults on Senior Securities	49
Item 4	Mine Safety Disclosure	49
Item 5	Other Information	49
Item 6	Exhibits	50
	Signatures	51

2

MERCHANTS BANCSHARES, INC.

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements and Supplementary Data

Merchants Bancshares, Inc.

Consolidated Balance Sheets

(Unaudited)

	March 31,		December 31,
(In thousands except share and per share data)	2016		2015
ASSETS
Cash and due from banks	$	27,586	$	30,605
Interest earning deposits with banks and other short-term investments		53,054		119,578
Total cash and cash equivalents		80,640		150,183
Investments:
Securities available for sale, at fair value (amortized cost of $289,744 and $283,185)		294,048		283,454
Securities held to maturity (fair value of $118,062 and $120,093)		115,392		119,674
Total investments		409,440		403,128
Loans		1,421,603		1,414,280
Less: Allowance for loan losses		12,173		12,040
Net loans		1,409,430		1,402,240
Federal Home Loan Bank stock		3,863		3,797
Bank premises and equipment, net		14,532		15,030
Investment in real estate limited partnerships		5,827		5,687
Bank owned life insurance		10,606		10,551
Core deposit intangible		1,309		1,360
Goodwill		6,872		6,967
Other assets		21,111		22,294
Total assets	$	1,963,630	$	2,021,237
LIABILITIES
Deposits:
Demand (noninterest bearing)	$	620,190	$	631,244
Savings, interest bearing checking and money market accounts		677,600		665,623
Time Deposits		228,998		254,572
Total deposits		1,526,788		1,551,439
Securities sold under agreements to repurchase and short-term debt		249,003		286,639
Other long-term debt		4,716		5,238
Junior subordinated debentures issued to unconsolidated subsidiary trust		20,619		20,619
Other liabilities		9,903		9,248
Total liabilities		1,811,029		1,873,183
STOCKHOLDERS' EQUITY
Preferred stock
Class A non-voting shares authorized - 200,000, none outstanding		—		—
Class B voting shares authorized - 1,500,000, none outstanding		—		—
Common stock, $.01 par value		75		72
Authorized: 10,000,000 shares; Issued: 7,172,043 at March 31, 2016 and 7,168,869 at December 31, 2015
Outstanding: 6,858,473 at March 31, 2016 and 6,855,294 at December 31, 2015
Capital in excess of par value		55,155		55,063
Retained earnings		107,789		106,219
Treasury stock, at cost: 589,103 shares including 275,596 shares held by the Compensation Plan for Directors and Trustees at March 31, 2016 and 612,935 shares including 299,360 shares held by the Compensation Plan for Directors and Trustees at December 31, 2015		(13,511)		(13,798)
Deferred compensation arrangements: 275,596 shares at March 31, 2016 and 299,360 shares at December 31, 2015		6,255		6,521
Accumulated other comprehensive (loss) income		(3,162)		(6,023)
Total stockholders' equity		152,601		148,054
Total liabilities and stockholders' equity	$	1,963,630	$	2,021,237

See accompanying notes to unaudited consolidated financial statements

3

Merchants Bancshares, Inc.

Consolidated Statements of Income

(Unaudited)

	Three Months Ended
	March 31,
(In thousands except per share data)	2016		2015
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	12,804	$	10,623
Investment income:
Interest and dividends on investment securities		1,997		1,910
Interest on interest earning deposits with banks and other short-term investments		81		73
Total interest and dividend income		14,882		12,606
INTEREST EXPENSE
Savings, interest bearing checking and money market accounts		440		367
Time deposits		391		334
Securities sold under agreement to repurchase and other short-term debt		109		155
Long-term debt		210		197
Total interest expense		1,150		1,053
Net interest income		13,732		11,553
Provision for credit losses		205		—
Net interest income after provision for credit losses		13,527		11,553
NONINTEREST INCOME
Trust division income		867		895
Net debit card income		649		693
Overdraft income		631		446
Service charges on deposits		415		340
Other		362		296
Total noninterest income		2,924		2,670
NONINTEREST EXPENSE
Compensation and benefits		6,308		5,048
Occupancy expense		1,139		1,143
Equipment expense		719		766
Telephone expense		198		217
Legal and professional fees		593		442
Mobile & internet banking		366		386
Core / Item processing		517		406
Marketing		192		152
State franchise  taxes		398		286
FDIC insurance		254		218
Merger costs		133		—
Core deposit intangible		51		—
Other		1,051		943
Total noninterest expense		11,919		10,007
Income before provision for income taxes		4,532		4,216
Provision for income taxes		1,042		880
NET INCOME	$	3,490	$	3,336
Basic earnings per common share	$	0.51	$	0.53
Diluted earnings per common share	$	0.50	$	0.53

See accompanying notes to unaudited consolidated financial statements

4

Merchants Bancshares, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended
	March 31,
(In thousands)	2016		2015
Net income	$	3,490	$	3,336
Other comprehensive income,  net of tax:
Unrealized  holding gain on securities available for sale, net of taxes of $1,411 and $422		2,624		783
Amortization of unrealized holding losses of securities transferred from available for sale to held to maturity, net of taxes of $68 and $67		127		124
Change in net unrealized loss on interest rate swaps, net of taxes of $19 and $11		35		21
Pension liability adjustment, net of taxes of $41 and $36		75		67
Other comprehensive income		2,861		995
Comprehensive income	$	6,351	$	4,331

See accompanying notes to unaudited consolidated financial statements

5

Merchants Bancshares, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31,
(In thousands)	2016		2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,490	$	3,336
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		215		—
Depreciation and amortization		542		523
Amortization of investment security premiums and accretion of discounts, net		298		252
Amortization of deferred loan costs		148		—
Amortization of core deposit intangible		51		—
Stock based compensation		166		33
Deferred (gain) on sale of premises		(129)		(129)
Equity in losses of real estate limited partnerships, net		393		282
Increase in cash surrender value of bank owned life insurance		(55)		(61)
Changes in assets and liabilities:
Net change in interest receivable		(511)		(360)
Net change in other assets		347		1,300
Net change in interest payable		(16)		(9)
Net change in other liabilities		844		356
Net cash provided by operating activities		5,783		5,523
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities available for sale		8,487		10,284
Proceeds from maturities of investment securities held to maturity		4,412		4,295
Purchases of investment securities available for sale		(15,277)		(54,778)
Loan originations in excess of principal payments		(7,543)		(17,912)
Purchases of Federal Home Loan Bank stock, net		(66)		—
Real estate limited partnership investments		(513)		(543)
Purchases of bank premises and equipment		(44)		(612)
Net cash (used in) investing activities		(10,544)		(59,266)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits		(24,651)		21,025
Net increase (decrease) in securities sold under agreement to repurchase and other short-term borrowing		(37,636)		(52,078)
Principal issued (payments) on long-term debt		(522)		(20)
Cash dividends paid		(1,920)		(1,772)
Increase (decrease) in deferred compensation arrangements		(53)		48
Net cash (used in) by financing activities		(64,782)		(32,797)
Increase (decrease) in cash and cash equivalents		(69,543)		(86,540)
Cash and cash equivalents beginning of period		150,183		154,459
Cash and cash equivalents end of period	$	80,640	$	67,919
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Total interest payments	$	1,166	$	1,062
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Distribution of stock under deferred compensation arrangements	$	559	$	515

See accompanying notes to unaudited consolidated financial statements

6

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, 2015, filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2016.

NOTE 1: FINANCIAL STATEMENT PRESENTATION

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Merchants Bancshares, Inc. (the “Company”), and its wholly-owned subsidiary Merchants Bank (the “Bank,” and collectively with the Company, “Merchants”, “we,” “us, or “our”). All material intercompany accounts and transactions are eliminated in consolidation. We offer a full range of deposit, loan, cash management, and trust services to meet the financial needs of individual consumers, businesses and municipalities at 31 full-service banking offices throughout the state of Vermont and one full-service banking office in Massachusetts as of March 31, 2016.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 GAAP for complete financial statements. All adjustments necessary for a fair presentation of our interim consolidated financial statements as of March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015 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 U.S. Generally Accepted Accounting Principles (“GAAP”) requires Management 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 credit losses, income taxes, interest income recognition on loans and investments and analysis of other-than-temporary impairment of our investment securities portfolio. Operating results in the future may vary from the amounts derived from Management's estimates and assumptions.

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS

ASU 2016-02 – Leases – This Update increases the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. For lessees, all leases will be required to be recognized on the balance sheet by recording a right-of-use asset and a lease liability. The accounting applied by a lessor is largely unchanged from that applied under the existing guidance. The ASU requires additional qualitative and quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for fiscal years beginning after December 15, 2018, including the interim periods. The Company is currently evaluating the impact of this new requirement on the consolidated financial statements.

7

ASU 2016-09 – Improvements to Employee Share-Based Payment Accounting – This Update simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. The update requires all excess tax benefits and tax deficiencies related to share-based awards to be recognized as income tax expense or benefit in the income statement. In addition, the update includes changes to the classification of excess tax benefits on the statement of cash flows, an election related to the accounting for forfeitures, minimum statutory tax withholding requirements, as well as the classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The guidance is effective for fiscal years beginning after December 15, 2016, including the interim periods. The Company is currently evaluating the impact of this new requirement on the consolidated financial statements.

ASU 2014-09 – Revenue from Contracts with Customers – In May 2014 the FASB amended existing guidance related to revenue from contracts with customers. This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, this amendment specifies the accounting for some costs to obtain or fulfill a contract with a customer. These amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that period. The amendments should be applied retrospectively to all periods presented or retrospectively with the cumulative effect recognized at the date of initial application. The Company is currently evaluating the impact of this new requirement on the consolidated financial statements.

NOTE 3: ACQUISITION OF NUVO BANK & TRUST COMPANY

On December 4, 2015, the Company completed the acquisition of NUVO Bank & Trust Company (“NUVO”), located in Springfield, Massachusetts.  NUVO's banking business operates as a division of Merchants Bank, a wholly owned subsidiary of Merchants. Total consideration paid by Merchants for NUVO's outstanding stock comprised 517,109 shares of common stock and $5.109 million in cash.  Merchants also paid an aggregate of $878,718 to cash out NUVO stock options and a portion of its common stock warrants and issued replacement warrants to purchase an aggregate of 90,474 shares of Merchants common stock on adjusted terms, consisting of warrants expiring in 2017 to purchase 56,104 shares at an exercise price of $20.69 and warrants expiring in 2018 to purchase 34,370 shares at an exercise price of $41.39 per share.  The results of NUVO’s operations are included in the Company’s unaudited consolidated statements of income for the period ended March 31, 2016.

The acquisition of NUVO expands the Company’s New England footprint beyond Vermont and into the Springfield and greater Western Massachusetts commercial banking market. The Company now has 32 banking locations, including the new office in Springfield, Massachusetts.

The acquisition of NUVO was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the acquisition date. The excess of consideration paid of $6.872 million over the fair value of net assets acquired has been reported as goodwill in the Company’s unaudited consolidated statements of financial condition as of March 31, 2016. Goodwill created in the acquisition is not deductible for income tax purposes. This goodwill consists largely of the synergies and cost savings arising from the combining of the operations of the two companies.

The assets acquired and liabilities assumed in the acquisition of NUVO were recorded at their preliminary estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment.

8

In connection with the acquisition, the consideration paid and the fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition are summarized in the following table:

(In thousands)
Consideration paid:
Common stock issued in exchange for NUVO shares	$	16,889
Cash paid for NUVO shares		5,988
Stock warrants issued		470
Total consideration paid	$	23,347
Assets acquired:
Cash and cash equivalents	$	7,070
Interest bearing time deposits with banks		110
Investments		4,365
Restricted investment in bank stock		376
Loans		149,360
Premises and equipment , net		580
Accrued interest receivable		369
Core deposit intangible		1,377
Deferred tax asset		1,926
Other assets		355
Total assets acquired		165,888
Liabilities assumed:
Deposits		144,482
Federal Home Loan Bank advances		4,001
Accrued interest payable		42
Tax effect of acquisition fair value adjustments		705
Other liabilities		183
Total liabilities assumed		149,413
Net assets acquired	$	16,475
Goodwill	$	6,872

The following table details the changes in fair value of the consideration paid and the net assets acquired as of December 4, 2015 from the amounts originally reported in the Company’s Form 10-K for the year ended December 31, 2015:

(In thousands)
Goodwill reported as of December 31, 2015	$	6,967
Effect of adjustments to:
Consideration paid:
Stock warrants issued		(74)
Assets acquired:
Investments		21
Adjusted goodwill as of March 31, 2016	$	6,872

The changes to goodwill during the three months ended March 31, 2016 are primarily due to changes in the final market value for assets acquired and consideration paid. In many cases, the fair values of assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and discounting them at appropriate market rates. These changes had no impact on current quarter or previously reported income.

9

Fair value of acquired assets and liabilities

The fair values of assets acquired and liabilities assumed in the NUVO acquisition were determined, for many categories, by estimating the cash flows expected to result from those assets and liabilities and discounting them at appropriate market rates.  The most significant category of assets for which this procedure was used was acquired loans. The excess of expected cash flows above the fair value of the majority of acquired loans will be accreted to interest income over the remaining lives of the loans in accordance with FASB ASC 310-20, Nonrefundable Fees and Other Costs. Receivables acquired that were not subject to the requirements of ASC 310-30 include non-impaired loans with a fair value and gross contractual receivables of $146,086 and $145,855 on the date of acquisition. The carrying amount of loans purchased with evidence of credit deterioration accounted for under ASC 310-30 acquired in the acquisition totaled $3.3 million.

In accordance with U.S. GAAP, there was no carryover of the allowance for loan losses that had previously been recorded by NUVO.

In connection with the acquisition of NUVO, the Company recorded a net deferred income tax asset of $1.2 million related to NUVO’s net operating loss carryforward, as well as other tax attributes of the acquired company, along with the effects of fair value adjustments resulting from applying the purchase method of accounting.

The fair value of savings and transaction deposit accounts acquired from NUVO provide value to the Company as a source of core funding. The fair value of the core deposit intangible (“CDI”) was determined based on a discounted cash flow analysis using a discount rate based on the estimated cost of capital for a market participant. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available to the Company. The life of the deposit base and projected deposit attrition rates were determined using the Company’s historical deposit data as NUVO, being a de novo bank in 2008, has relatively little history related to account attrition. The CDI was valued at $1.38 million or 2.08% of savings and demand deposits. The intangible asset is being amortized on an accelerated basis over ten years. Amortization recorded during the three months ended March 31, 2016 was $51 thousand. The amount recorded from the December 4, 2015 acquisition date through December 31, 2015 was $17 thousand.

The fair value of time deposit and brokered time deposit accounts was determined by discounting the future cash flows by the market interest rates. This valuation adjustment was determined to be $650 thousand and is being amortized in line with the expected cash flows driven by the maturities of these deposits primarily over the next two years. Amortization during the three months ended March 31, 2016 was $81 thousand. The amortization from December 4, 2015 acquisition date through December 31, 2015 was $27 thousand. Direct costs related to the merger were expensed as incurred. For the three months ended March 31, 2016, the Company incurred $133 thousand in merger-related expenses. As of December 31, 2015, $1.88 million in merger-related expenses were incurred, including a fee paid to our financial advisor, merger proxy expenses, integration and conversion fees legal fees and other merger-related expenses.

NOTE 4: GOODWILL AND INTANGIBLE ASSETS

The goodwill and intangible balances presented below resulted from the Company’s acquisition of NUVO.  The acquisition of NUVO resulted in goodwill of $6.872 million and CDI of $1.377 million.  For further information regarding goodwill and other intangible assets recorded in connection with the acquisition of NUVO, including the effect of adjustments to goodwill, please refer to Note 3.

10

Goodwill

Goodwill is deemed to have an indefinite life is not amortized, but is instead subject to impairment tests. There was no impairment for the three months ended March 31, 2016 or the three months ended December 31, 2015. 

	March 31,		December 31,
(In thousands)	2016		2015
Beginning of period	$	6,967	$	—
Effect of adjustments		(95)
Goodwill		—		6,967
Impairment		—		—
End of period	$	6,872	$	6,967

Other Intangible Assets

Acquired CDI were as follows:

		March 31,		December 31,
(In thousands)		2016		2015
Beginning of period	$	1,360	$	—
Additions		—		1,377
Amortization		51		17
End of period	$	1,309	$	1,360

The CDI recognized in 2015 related to the acquisition of NUVO. Aggregate amortization expense for the CDI was $51 thousand for the three months ended March 31, 2016 and $17 thousand for the three months ended December 31, 2015.

The estimated amortization expense for each of the next five years:

(In thousands)		Amount
Remainder of 2016	$	153
2017		173
2018		147
2019		126
2020		120
2021		120
Thereafter		470

11

NOTE 5: INVESTMENT SECURITIES

Investments in securities are classified as available for sale or held to maturity as of March 31, 2016 and December 31, 2015. The amortized cost and fair values of the securities classified as available for sale and held to maturity as of March 31, 2016 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gains		Losses		Value
Available for Sale:
U.S. Treasury Obligations	$	25,067	$	294	$	—	$	25,361
U.S. Government Sponsored Enterprises ("U.S. GSEs")		31,045		384		—		31,429
Federal Home Loan Bank ("FHLB") Obligations		56,326		797		(1)		57,122
Residential Real Estate Mortgage-backed Securities ("Agency MBSs")		91,137		2,193		(29)		93,301
Agency Commercial Mortgage Backed Securities ("Agency CMBSs")		24,520		152		—		24,672
Agency Collateralized Mortgage Obligations ("Agency CMOs")		61,338		533		(55)		61,816
Asset Backed Securities ("ABSs")		311		36		—		347
Total Available for Sale	$	289,744	$	4,389	$	(85)	$	294,048

			Gross		Gross
	Amortized		Unrecognized		Unrecognized		Fair
	Cost		Gains		Losses		Value
Held to Maturity:
U.S. Agency Obligations	$	19,227	$	818	$	—	$	20,045
U.S. GSEs		9,571		236		—		9,807
FHLB Obligations		4,767		202		—		4,969
Agency CMOs		75,040		1,227		(64)		76,203
Agency MBSs		6,787		251		—		7,038
Total Held to Maturity	$	115,392	$	2,734	$	(64)	$	118,062

12

The amortized cost and fair values of the securities classified as available for sale and held to maturity as of December 31, 2015 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gains		Losses		Value
Available for Sale:
U.S. Treasury Obligations	$	25,064	$	61	$	(12)	$	25,113
U.S. GSEs		20,895		3		(104)		20,794
FHLB Obligations		51,230		107		(226)		51,111
Agency MBSs		96,073		1,688		(512)		97,249
Agency CMBSs		24,950		—		(397)		24,553
Agency CMOs		64,648		74		(443)		64,279
ABSs		325		30		—		355
Total Available for Sale	$	283,185	$	1,963	$	(1,694)	$	283,454

			Gross		Gross
	Amortized		Unrecognized		Unrecognized		Fair
	Cost		Gains		Losses		Value
Held to Maturity:
U.S. Agency Obligations	$	20,084	$	486	$	—	$	20,570
U.S. GSEs		9,556		166		—		9,722
FHLB Obligations		4,758		76		—		4,834
Agency CMOs		78,249		253		(716)		77,786
Agency MBSs		7,027		154		—		7,181
Total Held to Maturity	$	119,674	$	1,135	$	(716)	$	120,093

The contractual final maturity distribution of the debt securities classified as available for sale of March 31, 2016, are as follows:

									Securities
			After One		After Five				not due
	Within		But Within		But Within		After Ten		at a Single
(In thousands)	One Year		Five Years		Ten Years		Years		Maturity		Total
Available for Sale (at fair value):
U.S. Treasury Obligations	$	101	$	25,260	$	—	$	—	$	N/A	$	25,361
U.S. GSEs		—		31,429		—		—		N/A		31,429
FHLB Obligations		—		45,570		11,552		—		N/A		57,122
Agency MBSs		N/A		N/A		N/A		N/A		93,301		93,301
Agency CMBSs		N/A		N/A		N/A		N/A		24,672		24,672
Agency CMOs		N/A		N/A		N/A		N/A		61,816		61,816
ABSs		N/A		N/A		N/A		N/A		347		347
Total Available for Sale	$	101	$	102,259	$	11,552	$	—	$	180,136	$	294,048
Available for Sale (at amortized cost):
U.S. Treasury Obligations	$	101	$	24,966	$	—	$	—	$	N/A	$	25,067
U.S. GSEs		—		31,045		—		—		N/A		31,045
FHLB Obligations		—		45,121		11,205		—		N/A		56,326
Agency MBSs		N/A		N/A		N/A		N/A		91,137		91,137
Agency CMBSs		N/A		N/A		N/A		N/A		24,520		24,520
Agency CMOs		N/A		N/A		N/A		N/A		61,338		61,338
ABSs		N/A		N/A		N/A		N/A		311		311
Total Available for Sale	$	101	$	101,132	$	11,205	$	—	$	177,306	$	289,744

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The contractual final maturity distribution of the debt securities classified as held to maturity of March 31, 2016, are as follows:

									Securities
			After One		After Five				not due
	Within		But Within		But Within		After Ten		at a Single
(In thousands)	One Year		Five Years		Ten Years		Years		Maturity		Total
Held to Maturity (at fair value):
U.S. Agency Obligations	$	—	$	—	$	—	$	20,045	$	N/A	$	20,045
U.S. GSEs		—		—		9,807		—		N/A		9,807
FHLB Obligations		—		—		4,969		—		N/A		4,969
Agency CMOs		N/A		N/A		N/A		N/A		76,203		76,203
Agency MBSs		N/A		N/A		N/A		N/A		7,038		7,038
Total Held to Maturity	$	—	$	—	$	14,776	$	20,045	$	83,241	$	118,062
Held to Maturity (at amortized cost):
U.S. Agency Obligations	$	—	$	—	$	—	$	19,227	$	N/A	$	19,227
U.S. GSEs		—		—		9,571		—		N/A		9,571
FHLB Obligations		—		—		4,767		—		N/A		4,767
Agency CMOs		N/A		N/A		N/A		N/A		75,040		75,040
Agency MBSs		N/A		N/A		N/A		N/A		6,787		6,787
Total Held to Maturity	$	—	$	—	$	14,338	$	19,227	$	81,827	$	115,392

Actual maturities will differ from contractual maturities because borrowers may have rights to call or prepay obligations.

For the three months ended March 31, 2016 and 2015, we did not record any securities gains or losses related to the sale of securities.

Securities with a carrying value of $334.38 million and $335.81million at March 31, 2016 and December 31, 2015, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes required by law.

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at March 31, 2016, were as follows:

	Less Than 12 Months					12 Months or More						Total
	Number	Fair				Number	Fair					Number	Fair
(In thousands)	of Issues	Value		Loss		of Issues		Value		Loss		of Issues		Value		Loss
Available for Sale:
FHLB Obligations	1	$	5,133	$	(1)		$		—	$	—	1	$		5,133	$	(1)
Agency MBSs	2		7,228		(29)				—		—	2			7,228		(29)
Agency CMBSs			—		—				—		—	—			—		—
Agency CMOs	1		3,752		(1)	3			5,899		(54)	4			9,651		(55)
ABSs			—		—				—		—	—			—		—
Total Available for Sale	4	$	16,113	$	(31)	3	$		5,899	$	(54)	7	$		22,012	$	(85)
Held to Maturity:
Agency CMOs	—	$	—	$	—	1	$		3,597	$	(64)	1	$		3,597	$	(64)
Total Held to Maturity	—	$	—	$	—	1	$		3,597	$	(64)	1	$		3,597	$	(64)

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Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at December 31, 2015, were as follows:

	Less Than 12 Months					12 Months or More						Total
	Number	Fair				Number	Fair					Number	Fair
(In thousands)	of Issues	Value		Loss		of Issues	Value			Loss		of Issues	Value			Loss
Available for Sale:
U.S. Treasury Obligations	3	$	15,068	$	(12)	—	$	—	$		—	3	$	15,068	$		(12)
U.S. GSEs	3		14,817		(104)	—		—			—	3		14,817			(104)
FHLB Obligations	8		39,094		(226)	—		—			—	8		39,094			(226)
Agency MBSs	17		60,748		(512)	—		—			—	17		60,748			(512)
Agency CMBSs	5		19,608		(331)	1		4,761			(66)	6		24,369			(397)
Agency CMOs	15		42,235		(283)	3		6,089			(160)	18		48,324			(443)
Total Available for Sale	51	$	191,570	$	(1,468)	4	$	10,850	$		(226)	55	$	202,420	$		(1,694)
Held to Maturity:
Agency CMOs	14	$	51,713	$	(623)	2	$	5,287	$		(93)	16	$	57,000	$		(716)
Total Held to Maturity	14	$	51,713	$	(623)	2	$	5,287	$		(93)	16	$	57,000	$		(716)

There were no securities classified as trading at March 31, 2016 and December 31, 2015.

Unrealized losses on investment securities result from the cost basis of the security being higher than its current fair value. These differences 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.

At March 31, 2016, all of our MBSs and CMOs held were issued by U.S. government-sponsored entities and agencies, primarily Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”), institutions which the government has affirmed its commitment to support.  Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because we do not have the intent to sell these securities and it is not likely that we will be required to sell the securities before their anticipated recovery, we do not consider these securities to be other-than-temporarily impaired at March 31, 2016.

Agency MBSs and Agency CMOs consist of pools of residential mortgages which are guaranteed by FNMA, FHLMC, or Government National Mortgage Association (“GNMA”) with various origination dates and maturities.  Agency CMBS consists of bonds backed by commercial real estate which are guaranteed by FNMA and GNMA.

During the first quarter of 2014, we transferred securities with a total amortized cost of $12.63 million, and a corresponding fair value of $12.64 million, from available for sale to held to maturity.  The net unrealized gain, net of taxes, on these securities at the dates of the transfers was $8 thousand. During the third and fourth quarters of 2013, we transferred securities with a total amortized cost of $152.89 million, and a corresponding fair value of $147.45 million, from available for sale to held to maturity. The net unrealized holding loss, net of taxes, on these securities at the dates of the transfers was $3.53 million. The unrealized holding gains and losses at the time of transfer continues to be reported in accumulated other comprehensive income, net of tax and are amortized over the remaining lives of the securities as an adjustment of the yield.  The amortization of the unamortized holding gains and losses reported in accumulated other comprehensive income will offset the effect on interest income of the premium and discount for the transferred securities.  The remaining unamortized balance of the net losses for the securities transferred from available for sale to held to maturity was $3.35 million or $2.17 million, net of tax at March 31, 2016.

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NOTE 6: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

The following table presents the contractual maturity of our secured borrowings and class of collateral pledged:

	At March 31, 2016
	Remaining Contractual Maturity of the Agreements
	Overnight and						Greater Than
(In thousands)	Continuous		Up to 30 Days		30-90 Days		90 Days		Total
Repurchase Agreements:
Available for Sale:
U.S. Treasury Obligations	$	23,587	$	—	$	—	$	—	$	23,587
U.S. GSEs		15,043		—		—		—		15,043
FHLB Obligations		44,031		—		—		—		44,031
Agency MBSs		37,839		—		336		—		38,175
Agency CMBSs		13,770		—		—		—		13,770
Agency CMOs		24,269		—		—		—		24,269
Total Available for Sale	$	158,539	$	—	$	336	$	—	$	158,875
(In thousands)
Held to Maturity:
U.S. Agency Obligations	$	14,359	$	—	$	—	$	—	$	14,359
Agency CMOs		57,445		—		—		—		57,445
Agency MBSs		18,324		—		—		—		18,324
Total Held to Maturity	$	90,128	$	—	$	—	$	—	$	90,128

The fair value of securities pledged to secure repurchase agreements may decline. The Company manages this risk by having a policy to pledge securities valued above the gross outstanding balance of repurchase agreements. Securities sold under agreements to repurchase are secured by securities with a carrying value of $249.11 million at March 31, 2016 and $287.27 million at December 31, 2015.

NOTE 7: LOANS AND THE ALLOWANCE FOR CREDIT LOSSES

Loans

The composition of our loan portfolio at March 31, 2016 and December 31, 2015 was as follows:

(In thousands)	March 31, 2016		December 31, 2015
Commercial, financial and agricultural	$	247,074	$	237,451
Municipal loans		105,433		105,421
Real estate loans – residential		461,009		468,443
Real estate loans – commercial		556,836		558,004
Real estate loans – construction		42,209		34,802
Installment loans		9,009		10,115
All other loans		33		44
Total loans	$	1,421,603	$	1,414,280

We primarily originate commercial, commercial real estate, municipal obligations and residential real estate loans to customers throughout the states of Vermont and Massachusetts. There are no significant industry concentrations in the loan portfolio. Loans totaled $1.42 billion and $1.41 billion at March 31, 2016 and December 31, 2015, respectively. Total loans included $1.22 million and $1.20 million of net deferred loan origination costs at March 31, 2016 and December 31,

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2015, respectively. The aggregate amount of overdrawn deposit balances classified as loan balances was $291 thousand and $308 thousand at March 31, 2016 and December 31, 2015, respectively.

The following table reflects our loan loss experience and activity in the allowance for loan losses for the three months ended March 31, 2016:

	Commercial,
	financial
	and				Real estate-		Real estate-		Real estate-
(In thousands)	agricultural		Municipal		residential		commercial		construction		Installment		All other		Totals
Allowance for loan losses:
Beginning balance	$	2,696	$	590	$	2,882	$	5,386	$	420	$	66	$	—	$	12,040
Charge-offs		(3)		—		(73)		—		—		(42)		—		(118)
Recoveries		2		—		11		4		—		19		—		36
Provision (credit)		161		32		37		(109)		45		49		—		215
Ending balance	$	2,856	$	622	$	2,857	$	5,281	$	465	$	92	$	—	$	12,173

The $215 thousand provision for loan losses includes a $205 thousand provision for credit losses plus $10 thousand of excess reserves from the reserve for undisbursed lines and letters.

The following table reflects our loan loss experience and activity in the allowance for loan losses for the three months ended December 31, 2015:

	Commercial,
	financial
	and				Real estate-		Real estate-		Real estate-
(In thousands)	agricultural		Municipal		residential		commercial		construction		Installment		All other		Totals
Allowance for loan losses:
Beginning balance	$	2,833	$	631	$	2,959	$	5,238	$	493	$	56	$	—	$	12,210
Charge-offs		(2)		—		(28)		—		—		(43)		—		(73)
Recoveries		3		—		15		1		—		11		—		30
Provision (credit)		(138)		(41)		(64)		147		(73)		42		—		(127)
Ending balance	$	2,696	$	590	$	2,882	$	5,386	$	420	$	66	$	—	$	12,040

The provision for loan losses includes $(127) thousand of excess reserves to the reserve for undisbursed lines and letters.

The following table reflects our loan loss experience and activity in the allowance for loan losses for the three months ended March 31, 2015:

	Commercial,
	financial				Real
	and				estate-		Real estate-		Real estate
(In thousands)	agricultural		Municipal		residential		commercial		construction		Installment		All other		Totals
Allowance for loan losses:
Beginning balance	$	2,583	$	623	$	3,038	$	5,209	$	325	$	13	$	42	$	11,833
Charge-offs		(29)		—		(55)		—		—		(74)		—		(158)
Recoveries		25		—		3		1		—		53		—		82
Provision (credit)		280		(93)		38		(61)		39		71		(42)		232
Ending balance	$	2,859	$	530	$	3,024	$	5,149	$	364	$	63	$	—	$	11,989

The provision for loan losses includes $232 thousand of excess reserves from the reserve for undisbursed lines and letters.

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The following presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based upon impairment method at March 31, 2016:

	Commercial,
	financial and				Real estate-		Real estate-		Real estate-
(In thousands)	agricultural		Municipal		residential		commercial		construction		Installment		All other		Totals
Allowance for loan losses:
Ending balance individually evaluated for impairment	$	135	$	—	$	87	$	—	$	—	$	—	$	—	$	222
Ending balance collectively evaluated for impairment		2,721		622		2,770		5,281		465		92		—		11,951
Ending balance acquired with deteriorated credit quality		—		—		—		—		—		—		—		—
Totals	$	2,856	$	622	$	2,857	$	5,281	$	465	$	92	$	—	$	12,173
Financing receivables:
Ending balance individually evaluated for impairment	$	705	$	—	$	589	$	1,120	$	—	$	11	$	—	$	2,425
Ending balance collectively evaluated for impairment		245,222		105,433		460,420		553,698		42,209		8,998		33		1,416,013
Ending balance acquired with deteriorated credit quality		1,147		—		—		2,018		—		—		—		3,165
Totals	$	247,074	$	105,433	$	461,009	$	556,836	$	42,209	$	9,009	$	33	$	1,421,603

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The following presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based upon impairment method at December 31, 2015:

	Commercial,
	financial and				Real estate-		Real estate-		Real estate-
(In thousands)	agricultural		Municipal		residential		commercial		construction		Installment		All other		Totals
Allowance for loan losses:
Ending balance individually evaluated for impairment	$	—	$	—	$	137	$	—	$	—	$	—	$	—	$	137
Ending balance collectively evaluated for impairment		2,696		590		2,745		5,386		420		66		—		11,903
Ending balance acquired with deteriorated credit quality		—		—				—		—		—		—		—
Totals	$	2,696	$	590	$	2,882	$	5,386	$	420	$	66	$	—	$	12,040
Financing receivables:
Ending balance individually evaluated for impairment	$	595	$	—	$	706	$	647	$	—	$	22	$	—	$	1,970
Ending balance collectively evaluated for impairment		235,652		105,421		467,737		555,323		34,802		10,093		44		1,409,072
Ending balance acquired with deteriorated credit quality		1,204		—		—		2,034		—		—		—		3,238
Totals	$	237,451	$	105,421	$	468,443	$	558,004	$	34,802	$	10,115	$	44	$	1,414,280

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The table below presents the recorded investment of loans segregated by class, with delinquency aging as of March 31, 2016:

	31-60		61-90		91 Days		Total
	Days		Days		or More		Past
(In thousands)	Past Due		Past Due		Past Due		Due		Current			Nonperforming	Total
Commercial, financial and agricultural	$	2,142	$	612	$	—	$	2,754	$	242,622	$	1,698	$	247,074
Municipal		—		—		—		—		105,433		—		105,433
Real estate-residential:
First mortgage		26		—		—		26		419,144		589		419,759
Second mortgage		3		—		—		3		41,247		—		41,250
Real estate-commercial:
Owner occupied		589		449		—		1,038		215,602		2,085		218,725
Non-owner occupied		—		136		—		136		337,511		464		338,111
Real estate-construction:
Residential		—		—		—		—		2,161		—		2,161
Commercial		—		—		—		—		40,048		—		40,048
Installment		75		—		—		75		8,923		11		9,009
Other		—		—		—		—		33		—		33
Total	$	2,835	$	1,197	$	—	$	4,032	$	1,412,724	$	4,847	$	1,421,603

Of the total nonperforming loans in the aging table above, $2.32 million are past due of which $400 are restructured loans and $0 were 91 days or more past due and accruing. 

The table below presents the recorded investment of loans segregated by class, with delinquency aging as of December 31, 2015:

	31-60		61-90			91 Days			Total
	Days		Days			or More			Past
(In thousands)	Past Due		Past Due			Past Due			Due		Current			Nonperforming		Total
Commercial, financial and agricultural	$	—		$	251	$	—	$		251	$	235,820	$	1,380	$		237,451
Municipal		—			—		—			—		105,421		—			105,421
Real estate-residential:
First mortgage		50			—		—			50		425,520		706			426,276
Second mortgage		—			8		—			8		42,159		—			42,167
Real estate-commercial:
Owner occupied		323			—		—			323		219,080		1,605			221,008
Non-owner occupied		—			—		—			—		336,514		482			336,996
Real estate-construction:
Residential		—			—		—			—		2,422		—			2,422
Commercial		—			—		—			—		32,380		—			32,380
Installment		61			9		—			70		10,023		22			10,115
Other		—			—		—			—		44		—			44
Total	$	434		$	268	$	—	$		702	$	1,409,383	$	4,195	$		1,414,280

Of the total nonperforming loans in the aging table above, $2.65 million are past due of which $471 are restructured loans and $0 were 91 days or more past due and accruing.

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Impaired loans by class at March 31, 2016 and for the three months ended March 31, 2016 are as follows:

	Period Ended						Three Months Ended
	March 31, 2016						March 31, 2016
			Unpaid					Average	Interest
	Recorded		Principal		Related			Recorded	Income
(In thousands)	Investment		Balance		Allowance			Investment	Recognized
With no related allowance recorded
Commercial, financial and agricultural	$	101	$	101	$	—	$	390	$	1
Residential:
First mortgage		198		256		—		241		2
Second mortgage		—		—		—		3		—
Commercial Real Estate:
Owner occupied		656		646		—		401		—
Non-owner occupied		464		471		—		470		—
Construction:
Residential		—		—		—		—		—
Commercial		—		—		—		—		—
Installment		11		11		—		8		—
With related allowance recorded
Commercial, financial and agricultural		604		607		135		254		—
Residential:
First mortgage		391		391		87		425		—
Second mortgage		—		—		—		—		—
Commercial Real Estate:
Owner occupied		—		—		—		—		—
Total
Commercial, financial and agricultural		705		708		135		644		1
Residential:		589		647		87		669		2
Commercial Real Estate:		1,120		1,117		—		871		—
Construction		—		—		—		—		—
Installment		11		11		—		8		—
Total	$	2,425	$	2,483	$	222	$	2,192	$	3

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Impaired loans by class at December 31, 2015 and for the three months ended March 31, 2015 are as follows:

	Period Ended						Three Months Ended
	December 31, 2015						March 31, 2015
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
(In thousands)	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial, financial and agricultural	$	595	$	599	$	—	$	109	$	—
Residential:
First mortgage		264		322		—		147		1
Second mortgage		—		—		—		79		—
Commercial Real Estate:
Owner occupied		165		165		—		—		—
Non-owner occupied		482		482
Installment		22		22		—		—		—
With related allowance recorded
Commercial, financial and agricultural		—		—		—		166		—
Residential:
First mortgage		442		442		137		439		—
Second mortgage		—		—		—		6		—
Commercial Real Estate:
Owner occupied		—		—		—		—		—
Installment		—		—		—		—		—
Total
Commercial, financial and agricultural		595		599		—		275		—
Residential:		706		764		137		671		1
Commercial Real Estate:		647		647		—		—		—
Installment		22		22		—		—		—
Total	$	1,970	$	2,032	$	137	$	946	$	1

Residential and commercial loans serviced for others at March 31, 2016 and December 31, 2015 amounted to approximately $34.49 million and $27.87 million, respectively.

Nonperforming loans at March 31, 2016 and December 31, 2015 are as follows:

(In thousands)	March 31, 2016		December 31, 2015
Nonaccrual  loans	$	3,777	$	3,513
Loans greater than 90 days and accruing		—		—
Troubled debt restructurings ("TDRs")		1,070		682
Total nonperforming loans	$	4,847	$	4,195

Of the total TDRs in the table above, $864 thousand at March 31, 2016 and $472 thousand at December 31, 2015, are non-accruing. There was one commercial loan restructured with a balance of $464 thousand in the three months ending March 31, 2016. In the three months ending March 31, 2015, there were zero loans that were restructured The loan modified in 2016 was individually evaluated for impairment and it was determined that no reserve was required.

TDRs represent balances where the existing loan was modified involving a concession in rate, term or payment amount due to the distressed financial condition of the borrower. There were three restructured residential mortgages at March 31,

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2016 with balances totaling $121 thousand. There were three restructured commercial loans at March 31, 2016 with a balance of $949 thousand. Five of the six TDRs at March 31, 2016 continue to pay as agreed according to the modified terms. The one TDR that was delinquent at March 31, 2016 totaled $400 thousand.  At March 31, 2016, there were no commitments to lend additional funds to borrowers whose loans have been modified in a troubled debt restructuring. We had no commitments to lend additional funds to borrowers whose loans were in nonaccrual status or to borrowers whose loans were 91 days past due and still accruing at March 31, 2016. Interest income on restructured loans during the three months ending March 31, 2016 and 2015 was insignificant.

Nonaccrual loans by class as of March 31, 2016 and December 31, 2015 are as follows:

(In thousands)	March 31, 2016		December 31, 2015
Commercial, financial and agricultural	$	1,213	$	823
Real estate - residential:
First mortgage		468		581
Second mortgage		—		—
Real estate - commercial:
Owner occupied		2,085		1,605
Non owner occupied		—		482
Installment		11		22
Total nonaccruing non-TDR loans	$	3,777	$	3,513
Nonaccruing TDR’s
Commercial, financial and agricultural		400		472
Real estate – residential:
First mortgage		—		—
Real estate - commercial:
Non owner occupied		464		—
Total nonaccrual loans including TDRs	$	4,641	$	3,985

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 fallback repayment sources, typically collateral and personal guarantees. Pass rated commercial loan relationships with a total exposure of $1 million or greater 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, marginally adequate 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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Residential real estate and consumer loans

We do not use a grading system for our performing residential real estate and consumer loans. Credit quality for these loans is based on performance and payment status.

Below is a summary of loans by credit quality indicator as of March 31, 2016:

					Pass-		Special		Sub-
(In thousands)	Unrated		Pass		Watch		Mention		Standard		Total
Commercial, financial and agricultural	$	506	$	188,426	$	41,409	$	831	$	15,902	$	247,074
Municipal		47		91,596		13,790		—		—		105,433
Real estate – residential:
First mortgage		414,056		5,073		162		—		468		419,759
Second mortgage		41,250		—		—		—		—		41,250
Real estate – commercial:
Owner occupied		234		163,721		38,281		3,366		13,123		218,725
Non-owner occupied		475		290,236		45,280		453		1,667		338,111
Real estate – construction:
Residential		369		1,792		—		—		—		2,161
Commercial		140		34,591		3,555		—		1,762		40,048
Installment		8,998		—		—		—		11		9,009
All other loans		33		—		—		—		—		33
Total	$	466,108	$	775,435	$	142,477	$	4,650	$	32,933	$	1,421,603

Below is a summary of loans by credit quality indicator as of December 31, 2015:

					Pass-		Special		Sub-
(In thousands)	Unrated		Pass		Watch		Mention		Standard		Total
Commercial, financial and agricultural	$	597	$	179,451	$	45,977	$	4,177	$	7,249	$	237,451
Municipal		58		92,011		13,352		—		—		105,421
Real estate – residential:
First mortgage		420,798		4,733		164		—		581		426,276
Second mortgage		42,167		—		—		—		—		42,167
Real estate – commercial:
Owner occupied		296		161,810		41,477		5,959		11,466		221,008
Non-owner occupied		166		290,337		44,485		444		1,564		336,996
Real estate – construction:
Residential		478		1,944		—		—		—		2,422
Commercial		145		27,299		3,136		—		1,800		32,380
Installment		10,093		—		—		—		22		10,115
All other loans		44		—		—		—		—		44
Total	$	474,842	$	757,585	$	148,591	$	10,580	$	22,682	$	1,414,280

The carrying amount of loans purchased with evidence of credit deterioration accounted for under ASC 310-30 acquired in the acquisition totaled $3.17 million and $3.24 million at March 31, 2016 and December 31, 2015, respectively.  There was no transfer of nonaccretable yield to accretable.

NOTE 8: 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

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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.

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:

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

· 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.

· 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.

The types of instruments valued based on quoted market prices in active markets include most U.S. government and Agency securities, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy. We do not adjust the quoted price for such instruments.

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds, less liquid mortgage products, less liquid Agency securities, less liquid listed equities, state, municipal and provincial obligations, and certain physical commodities. Such instruments are generally classified within Level 2 of the fair value hierarchy.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions; valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, Management’s best estimate will be used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Subsequent to inception, Management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

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Financial instruments on a recurring basis

The table below presents the balance of financial assets and liabilities at March 31, 2016 measured at fair value on a recurring basis:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Treasury Obligations	$	25,361	$	—	$	25,361	$	—
U.S. GSEs		31,429		—		31,429		—
FHLB Obligations		57,122		—		57,122		—
Agency MBSs		93,301		—		93,301		—
Agency CMBSs		24,672		—		24,672		—
Agency CMOs		61,816		—		61,816		—
ABSs		347		—		347		—
Interest rate swap agreements		2,177		—		2,177		—
Total assets	$	296,225	$	—	$	296,225	$	—
Liabilities
Interest rate swap agreements		1,859		—		1,859		—
Total liabilities	$	1,859	$	—	$	1,859	$	—

The table below presents the balance of financial assets and liabilities at December 31, 2015 measured at fair value on a recurring basis:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Treasury Obligations	$	25,113	$	—	$	25,113	$	—
U.S. GSEs		20,794		—		20,794		—
FHLB Obligations		51,111		—		51,111		—
Agency MBSs		97,249		—		97,249		—
Agency CMBSs		24,553		—		24,553		—
Agency CMOs		64,279		—		64,279		—
ABSs		355		—		355		—
Interest rate swap agreements		1,084		—		1,084		—
Total assets	$	284,538	$	—	$	284,538	$	—
Liabilities
Interest rate swap agreements		1,004		—		1,004		—
Total liabilities	$	1,004	$	—	$	1,004	$	—

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 Note 5 to these consolidated financial statements.

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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 months ended March 31, 2016 or December 31, 2015.  There were no Level 3 assets measured at fair value on a recurring basis during the three months ended March 31, 2016 or December 31, 2015.

Financial instruments on a non-recurring basis

Certain financial assets are also measured at fair value on a non-recurring basis, however they were not material at March 31, 2016 or December 31, 2015. These financial assets include impaired loans and OREO.

Fair value of financial instruments

The fair value of Merchants’ financial instruments as of March 31, 2016 are summarized in the table below:

	Carrying
(In thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	80,640	$	80,640	$	80,640	$	—	$	—
Securities available for sale		294,048		294,048		—		294,048		—
Securities held to maturity		115,392		118,062		—		118,062		—
FHLB stock		3,863		N/A		N/A		N/A		N/A
Loans, net of allowance for loan losses		1,409,430		1,414,717		—		—		1,414,717
Interest rate swap agreement		2,177		2,177		—		2,177		—
Accrued interest receivable		4,885		4,885		—		1,061		3,824
Total	$	1,910,435	$	1,914,529	$	80,640	$	415,348	$	1,418,541
Deposits	$	1,526,788	$	1,527,214	$	1,297,791	$	229,423	$	—
Securities sold under agreement to repurchase		249,003		248,955		—		248,955		—
Other long-term debt		4,716		4,726		—		4,726		—
Junior subordinated debentures issued to unconsolidated subsidiary trust		20,619		15,449		—		15,449		—
Interest rate swap agreement		1,859		1,859		—		1,859		—
Accrued interest payable		136		136		13		123		—
Total	$	1,803,121	$	1,798,339	$	1,297,804	$	500,535	$	—

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The fair value of Merchants’ financial instruments as of December 31, 2015 are summarized in the table below:

	Carrying
(In thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	150,183	$	150,183	$	150,183	$	—	$	—
Securities available for sale		283,454		283,454		—		283,454		—
Securities held to maturity		119,674		120,093		—		120,093		—
FHLB stock		3,797		N/A		N/A		N/A		N/A
Loans, net of allowance for loan losses		1,402,240		1,397,877		—		—		1,397,877
Interest rate swap agreement		1,084		1,084		—		1,084		—
Accrued interest receivable		4,374		4,374		—		1,085		3,289
Total	$	1,964,806	$	1,957,065	$	150,183	$	405,716	$	1,401,166
Deposits	$	1,551,439	$	1,551,046	$	1,296,867	$	254,179	$	—
Securities sold under agreement to repurchase		286,639		286,586		—		286,586		—
Other long-term debt		5,238		5,191		—		5,191		—
Junior subordinated debentures issued to unconsolidated subsidiary trust		20,619		14,975		—		14,975		—
Interest rate swap agreement		1,004		1,004		—		1,004		—
Accrued interest payable		152		152		13		139		—
Total	$	1,865,091	$	1,858,954	$	1,296,880	$	562,074	$	—

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accrued interest receivable and accrued interest payable approximate fair value. It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

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 resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously.  The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Deposits - The fair value of deposits with no stated maturity, which includes demand, savings, interest bearing checking and money market accounts, is equal to the amount payable on demand resulting in a Level 1 classification. The fair value of variable rate, fixed term certificates of deposit also approximates the carrying amount reported in the consolidated balance sheets. 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 resulting in a Level 2 classification.

Debt - The fair value of debt is estimated using current market rates for borrowings of similar remaining maturity resulting in a Level 2 classification.

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 is not material as of March 31, 2016 and December 31, 2015.

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NOTE 9: EMPLOYEE BENEFIT PLANS

Pension Plan

Prior to January 1995, we maintained a noncontributory defined benefit plan (the “Pension Plan”) covering all eligible employees. During 1995, the Pension Plan was curtailed. Accordingly, all accrued benefits were fully vested and no additional years of service or age will be accrued.

The following tables summarize the components of net periodic benefit cost and other changes in Pension Plan assets and benefit obligations recognized in other comprehensive income for the three months ended March 31, 2016 and 2015:

	Three Months Ended
	March 31,
(In thousands)	2016		2015
Interest cost	$	112	$	112
Expected return on plan assets		(242)		(264)
Service costs		14		13
Net loss amortization		116		103
Net periodic pension cost (benefit)	$	—	$	(36)

We have no minimum required contribution for 2016.

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

NOTE 10: EARNINGS PER SHARE

The following table presents reconciliations of the calculations of basic and diluted earnings per share for the three months ended March 31, 2016 and 2015:

	Three Months Ended
	March 31,
(In thousands except per share data)	2016		2015
Net income	$	3,490	$	3,336
Weighted average common shares outstanding		6,856		6,329
Dilutive effect of common stock equivalents		110		13
Weighted average common and common equivalent shares outstanding		6,966		6,342
Basic earnings per common share	$	0.51	$	0.53
Diluted earnings per common share	$	0.50	$	0.53

Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Anti-dilutive warrants totaling 34.4 thousand shares for the three months ended March 31, 2016 have been excluded from the calculation of diluted EPS. There were no anti-dilutive shares excluded for the three months ended March 31, 2015.

NOTE 11: STOCK REPURCHASE PROGRAM

We extended our stock buyback program through January 26, 2017. Under the program, which was originally adopted in January 2007, 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 $23.00 since the program's adoption.

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NOTE 12: COMMITMENTS AND CONTINGENCIES

Financial Instruments with Off-Balance Sheet Risk

Merchants is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its 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.

Exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and financial guarantees written is represented by the contractual amount of those instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitment is expected to expire without being drawn upon, the total commitment amount does not necessarily represent a future cash requirement. We evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained by us upon extension of credit is based on Management's credit evaluation of the counterparty, and an appropriate amount of real and/or personal property is typically obtained as collateral.

Disclosures are required regarding liability-recognition for the fair value at issuance of certain guarantees. We do not issue any guarantees that would require liability-recognition or disclosure, other than our standby letters of credit. We have issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and 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 $6.19million at March 31, 2016 and $6.30 million at December 31, 2015, respectively, 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 and 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.

We may enter into commitments to sell loans, which involve market and interest rate risk. There were no such commitments at March 31, 2016 or December 31, 2015.

Balances at the Federal Reserve Bank

At March 31, 2016 and December 31, 2015, amounts at the Federal Reserve Bank included $26.03 million and $30.52 million, respectively, held to satisfy certain reserve requirements of the Federal Reserve Bank.

Legal Proceedings

We have been named as defendants in various legal proceedings arising from our normal business activities. Although the amount of any ultimate liability with respect to such proceedings cannot be determined, in the opinion of Management, based upon input from counsel on the anticipated outcome of such proceedings, any such liability will not have a material effect on our consolidated financial position.

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NOTE 13: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents changes in accumulated other comprehensive income (loss) by component, net of tax for the Three months ending March 31, 2016.

	Unrealized		Unrealized Gains
	Gains (Losses)		(Losses) on Securities
	on Securities		Transferred From						Accumulated Other
	Available-For-		Available-For-Sale to				Interest Rate		Comprehensive
(In thousands)	Sale		Held-To-Maturity		Pension Plan		Swaps		Income (Loss)
Beginning Balance December 31, 2015	$	166	$	(2,297)	$	(3,737)	$	(155)	$	(6,023)
Other comprehensive income before reclassifications		2,624		—		—		35		2,659
Transfer of securities from available-for-sale to held-to-maturity		—		—		—		—		—
Accretion of unrealized losses of securities transferred from available-for-sale to held-to-maturity recognized in other comprehensive income		—		127		—		—		127
Reclassification adjustments for (gains) losses reclassified into income		—		—		75		—		75
Net current period other comprehensive (loss) income		2,624		127		75		35		2,861
Balance March 31, 2016	$	2,790	$	(2,170)	$	(3,662)	$	(120)	$	(3,162)

The following table presents changes in accumulated other comprehensive income (loss) by component, net of tax for the three months ending March 31, 2015.

	Unrealized		Unrealized Gains
	Gains (Losses)		(Losses) on Securities
	on Securities		Transferred From						Accumulated Other
	Available-For-		Available-For-Sale to				Interest Rate		Comprehensive
(In thousands)	Sale		Held-To-Maturity		Pension Plan		Swaps		Income (Loss)
Beginning Balance December 31, 2014	$	1,482	$	(2,824)	$	(3,395)	$	(311)	$	(5,048)
Other comprehensive income before reclassifications		783		—		—		21		804
Transfer of securities from available-for-sale to held-to-maturity		—		—		—		—		—
Accretion of unrealized losses of securities transferred from available-for-sale to held-to-maturity recognized in other comprehensive income		—		124		—		—		124
Reclassification adjustments for (gains) losses reclassified into income		—		—		67		—		67
Net current period other comprehensive (loss) income		783		124		67		21		995
Balance March 31, 2015	$	2,265	$	(2,700)	$	(3,328)	$	(290)	$	(4,053)

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Details of the reclassification adjustments in the above table for the three months ended March 31, 2016 and 2015 are presented below:

Details about Accumulated Other	Three Months Ended
Comprehensive Income Components	March 31,				Affected Line Item in the Statement
(In thousands)		2016		2015	Where Net Income is Presented
Amortization of defined benefit pension plan
	$	(116)	$	(103)	Compensation and benefits expense
		(116)		(103)	Total before tax
		41		36	Provision for income taxes
	$	(75)	$	(67)	Net of tax
Total reclassification adjustments	$	(75)	$	(67)	(Increase) / Decrease to Net Income

NOTE 14: DERIVATIVE FINANCIAL INSTRUMENTS

At March 31, 2016 and December 31, 2015, we had an interest rate swap with a notional amount of $10 million that was designated as a cash flow hedge. The swap was used to convert a portion of the floating rate interest on our trust preferred issuance to a fixed rate of interest. 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. There was no ineffective portion recognized in earnings during the three months ended March 31, 2016 or March 31, 2015. The fair value of $185 thousand and $239 thousand was reflected in other liabilities in the accompanying consolidated balance sheets at March 31, 2016 and December 31, 2015, respectively.

We entered into interest rate swaps with a notional amount of $46.4 million with certain commercial customers.  In order to minimize our risk, these customer derivatives (pay floating/receive fixed swaps) have been offset with essentially matching interest rate swaps with our counterparty totaling $46.4 million (pay fixed/receive floating swaps). At March 31, 2016, the weighted average receive rate of these interest rate swaps was 2.15%, the weighted average pay rate was 3.64% and the weighted average maturity was 9.9 years.  The fair values of $1.674 million and $1.674 million were reflected in other assets and other liabilities, respectively, in the accompanying consolidated balance sheets at March 31, 2016. At December 31, 2015, the weighted average receive rate of these interest rate swaps was 2.13%, the weighted average pay rate was 3.60% and the weighted average maturity was 10.2 years.  The fair values of $765 thousand and $765 thousand were reflected in other assets and other liabilities, respectively, in the accompanying consolidated balance sheets at December 31, 2015. Hedge accounting has not been applied for these derivatives.  Because the terms of the swaps 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.

We entered into interest rate swaps with notional amounts totaling $8.9 million at March 31, 2016, and $9.8 million at December 31, 2015, that were designated as fair value hedges of certain fixed rate loans with municipalities. At March 31, 2016, the weighted average receive rate of these interest rate swaps was 1.79%, the weighted average pay rate was 3.26% and the weighted average maturity was 16.3 years. The fair value of $503 thousand at March 31, 2016, was reflected as a reduction to loans and an increase to other assets. At December 31, 2015 the weighted average receive rate of these interest rate swaps was 1.78%, the weighted average pay rate was 3.25% and the weighted average maturity was 16.6 years. The fair value of $319 thousand at December 31, 2015, was reflected as a reduction to loans and an increase to other assets. The ineffective portion of the interest swaps was immaterial and as such, amounts are not recognized in earnings.

We assessed our counterparty risk at March 31, 2016 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 Note 8 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. These statements include, among others, statements regarding our intent, belief or expectations with respect to economic conditions, trends affecting our financial condition or results of operations, and our exposure to market, interest rate and credit risk. 

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 other factors, difficulties in achieving cost savings in connection with the recent acquisition of NUVO Bank & Trust Company (“NUVO”) or in achieving such cost savings within the expected timeframe; adverse conditions in the capital and debt markets; changes in interest rates; competitive pressures from other financial institutions and non-bank entities; weakness in general economic conditions on a national basis or in the local markets in which we operate, including changes which adversely affect borrowers’ ability to service and repay our loans; changes in the value of securities and other assets; changes in loan default and charge-off rates; the adequacy of loan loss reserves; reductions in deposit levels necessitating increased borrowing to fund loans and investments; changes in government regulation; and changes in assumptions used in making such forward-looking statements, as well as the other risks and uncertainties detailed in our Annual Report on Form 10-K.. Forward-looking statements speak only as of the date on which they are made. 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 statement is made.

Use of Non-GAAP Financial Measures

Certain information in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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 taxable 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 taxable 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 taxable 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. A reconciliation of taxable equivalent financial information to our consolidated financial statements prepared in accordance with GAAP appears at the bottom of the table entitled “Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Net Interest Margin” on page 35.  A 35.0% tax rate was used in both 2016 and 2015.

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General

The following discussion and analysis of financial condition as of March 31, 2016 and December 31, 2015 and results of operations of Merchants and its subsidiaries for the three months ended March 31, 2016 and 2015 should be read in conjunction with the consolidated financial statements and notes thereto and selected statistical information appearing elsewhere in this Quarterly Report on Form 10-Q. The financial condition and results of operations of Merchants essentially reflect the operations of its principal subsidiary, Merchants Bank.

RESULTS OF OPERATIONS

Overview

We realized net income of $3.49 million, or basic earnings per share of $0.51 and diluted earnings per share of $0.50 for the three months ended March 31, 2016. This compares to net income of $3.34 million, or basic and diluted earnings per share of $0.53 for the three months ended March 31, 2015. The return on average assets was 0.71% for the three months ended March 31, 2016 compared to 0.78% for the three months ended March 31, 2015.  The return on average equity was 9.32% and 10.56% for the three months ended March 31, 2016 and 2015, respectively. Merchants Bancshares’ Board of Directors approved a dividend of $0.28 per share, payable May 26, 2016, to stockholders of record as of May 12, 2016.

Shareholders’ equity ended the quarter at $152.60 million, and the book value per share increased by $0.66 to $22.25 per share at March 31, 2016 from $21.59 at December 31, 2015. At March 31, 2016, our Common Equity Tier 1 ratio was 12.95%. At March 31, 2016, the tier 1 leverage ratio decreased slightly to 8.53%, the total risk-based capital ratio increased to 15.85% and the tangible capital ratio increased to 7.39% from 8.77%, 15.77% and 6.94%, respectively, at December 31, 2015.

· Net interest income: Our fully taxable equivalent net interest income was $14.27 million for the three months ended March 31, 2016, an increase of $2.21 million from the same period in 2015.  The taxable equivalent net interest margin was 3.02% for the three months ended March 31, 2016, compared to 2.95% for the same period in 2015.

· Provision for Credit Losses: The provision for credit losses was $205 thousand for the three months ending March 31, 2016, compared to $0 during the three months ending March 31, 2015. 

· Non-interest income: Total noninterest income for the first quarter of 2016 was $2.92 million, an increase of $254 thousand from the first quarter of 2015. This increase was primarily due to higher service charges on deposits.

· Non-interest expense: Excluding merger, severance and retirement costs, noninterest expense was $11.50 million for the first quarter of 2016, an increase of $644 thousand on a linked quarter basis which is primarily attributable to a full quarter of NUVO operations.

· Loans: Quarterly average loan balances for the first quarter of 2016 and 2015 were $1.42 billion and $1.19 billion, respectively. Average loan balances increased $230.43 million from the first quarter of 2015, which reflects organic growth and the acquired NUVO loan portfolio which totaled $146.75 million at March 31, 2016.

· Investments: The investment portfolio, which includes FHLB stock, ended the quarter at $413.30 million, an increase of $25.69 million from the same period in 2015.

· Deposits: Quarterly average deposit balances increased by $196.99 million to $1.53 billion for the three months ended March 31, 2016 from $1.33 billion for the same period in 2015. Securities sold under agreement to repurchase, which represent collateralized customer accounts, were $249.00 million at March 31, 2016, an increase of $42.62 million from March 31, 2015.

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Net Interest Income

As shown on the following table, our taxable equivalent net interest income was $14.27 million for the three months ended March 31, 2016 compared to $12.06 million for the three months ended March 31, 2015.Our fully taxable equivalent net interest margin increased 7 basis points to 3.02% for the three months ended March 31, 2016 from 2.95% for the same period in 2015.The increase in margin is composed of an increase in asset yields offset by a slighter increase in funding costs.

The following table presents 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 (“FTE”) basis, using a 35% rate.  Nonaccrual loans are included in the average loan balance outstanding.

Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Net Interest Margin

	Three Months Ended
	March 31, 2016						March 31, 2015
	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	$	1,417,710	$	13,337	3.78	%	$	1,187,278	$	11,127	3.80	%
Investments		400,501		1,997	2.01	%		366,059		1,910	2.12	%
Interest-earning deposits with banks and other short-term investments		74,294		81	0.44	%		102,394		73	0.29	%
Total interest earning assets		1,892,505		15,415	3.28	%		1,655,731		13,110	3.21	%
Allowance for loan losses		(12,073)						(11,892)
Cash and due from banks		31,058						25,478
Bank premises and equipment, net		14,841						15,387
Bank owned life insurance		10,571						10,334
Other assets		36,570						23,271
Total assets	$	1,973,472					$	1,718,309
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing deposits:
Savings, interest bearing checking and money market accounts	$	671,823	$	440	0.26	%	$	540,846	$	367	0.28	%
Time deposits		239,818		391	0.66	%		207,849		334	0.65	%
Total interest bearing deposits		911,641		831	0.37	%		748,695		701	0.38	%
Securities sold under agreements to repurchase, short-term		259,999		109	0.17	%		230,113		155	0.27	%
Other long-term debt		4,833		15	1.25	%		2,307		12	2.11	%
Junior subordinated debentures issued to unconsolidated subsidiary trust		20,619		195	3.80	%		20,619		185	3.59	%
Total borrowed funds		285,451		319	0.45	%		253,039		352	0.57	%
Total interest bearing liabilities		1,197,092	$	1,150	0.39	%		1,001,734	$	1,053	0.43	%
Noninterest bearing deposits		616,553						582,573
Other liabilities		9,973						7,708
Stockholders' equity		149,854						126,294
Total liabilities and stockholders' equity	$	1,973,472					$	1,718,309
Net interest earning assets	$	695,413					$	653,997
Net interest income (fully taxable equivalent)			$	14,265					$	12,057
Tax equivalent adjustment				(533)						(504)
Net interest income			$	13,732					$	11,553
Net interest rate spread					2.89	%					2.78	%
Net interest margin					3.02	%					2.95	%

The following table presents the extent to which changes in interest rates and changes in the volume of earning assets and interest bearing liabilities have affected interest income and interest expense during the periods indicated. Information is

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presented in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume) and (iii) changes in volume/rate (change in volume multiplied by change in rate).

Analysis of Changes in Fully Taxable Equivalent Net Interest Income

	Three Months Ended						Due to
	March 31,				Increase						Volume/
(In thousands)	2016		2015		(Decrease)		Volume		Rate		Rate
Fully taxable equivalent interest income:
Loans, including fees on loans	$	13,337	$	11,127	$	2,210	$	2,177	$	(48)	$	81
Investments		1,997		1,910		87		182		(104)		9
Federal funds sold, securities sold under agreements to repurchase and interest bearing deposits with banks		81		73		8		(20)		38		(10)
Total interest income		15,415		13,110		2,305		2,339		(114)		80
Less interest expense:
Savings, interest bearing checking and money market accounts		440		367		73		91		(22)		4
Time deposits		391		334		57		52		3		2
Federal funds purchased and Federal Home Loan Bank short-term borrowings		—		—		—		—		—		—
Securities sold under agreements to repurchase, short-term		109		155		(46)		—		(58)		12
Other long-term debt		15		12		3		13		(5)		(5)
Junior subordinated debentures issued to unconsolidated subsidiary trust		195		185		10		—		11		(1)
Total interest expense		1,150		1,053		97		156		(71)		12
Net interest income	$	14,265	$	12,057	$	2,208	$	2,183	$	(43)	$	68

Provision for Credit Losses

The allowance for loan losses at March 31, 2016 was $12.17 million, or 0.86% of total loans and 251% of nonperforming loans, compared to the December 31, 2015 balance of $12.04 million, or 0.85% of total loans and 287% of nonperforming loans.  We recorded a provision of $205 thousand during the three months ending March 31, 2016 compared to $0 during the three months ending March 31, 2015. The primary factor for the provision in the first quarter of 2016 was modest decline in credit quality primarily related to the portfolio acquired with NUVO. Performing loans past due 31-90 days were 0.28% of total loans at March 31, 2016 compared to 0.05% at December 31, 2015.  Nonperforming loans as a percent of total loans were 0.34% at March 31, 2016 compared to 0.30% at December 31, 2015.  Accruing substandard loans increased to 1.99% of total loans at March 31, 2016 compared to 1.32% at December 31, 2015.  Net charge-offs for the first quarter 2016 total $82 thousand. All of these factors are taken into consideration during Management’s quarterly review of the Allowance. For a more detailed discussion of our Allowance and nonperforming assets, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Credit Quality and Allowance for Credit Losses” below.

NONINTEREST INCOME AND EXPENSES

Noninterest Income

Noninterest income for the first quarter of 2016 was $2.9 million, a decrease of $163.0 thousand on a linked quarter basis and an increase of $254 thousand from the first quarter of 2015. The decline on a linked quarter basis was attributable to higher debit card and other fee income recognized in the fourth quarter of 2015. The increase from the first quarter of 2015 was due to higher service charges on deposit accounts.

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Noninterest Expense

Excluding merger, severance and retirement costs, noninterest expense was $11.50 million, $10.85 million and $9.80 million for the three months ended March 31, 2016, December 31, 2015 and March 31, 2015, respectively. See the non-GAAP table below for our calculation of core noninterest expense. The increase of $644 thousand on a linked quarter basis is primarily attributable to a full quarter of NUVO operations. The increase of $1.7 million on a quarter to quarter basis is largely due to the following items:

· In the first quarter of 2016 we recognized a full quarter impact of noninterest expenses related to NUVO. The related expenses during the quarter were $850 thousand.

· Total compensation and benefits increased by $682 thousand during the first quarter of 2016 which is primarily attributable to higher commission and incentive expense of $467 thousand, an increase in employee benefit expense of $116 thousand as well as an increase in base compensation related to an annual merit increase.

· Vermont State franchise tax increased by $112 thousand.

· Professional fees increased by $161 thousand during the current period which is primarily driven by temporary contracted consulting services related to interim senior management positions.

Noninterest Expense non-GAAP Reconciliation

	Three Months Ended
	March 31,		December 31,		March 31,
(In thousands)	2016		2015		2015
Noninterest expense	$	11,919	$	12,892	$	10,007
Less:
Merger related expenses		133		1,511		—
Severance and retirement costs		289		528		211
Core noninterest expense	$	11,497	$	10,853	$	9,796

Income Taxes

Merchants Bancshares’ effective tax rate was 23% for the three months ended March 31, 2016, compared to 21% for the quarter ended March 31, 2015. 

BALANCE SHEET ANALYSIS

Our total assets were $1.96 billion at March 31, 2016, a slight decrease of $57.61 million on a linked quarter basis and an increase $268.65 million for the same period in 2015. Our average earning assets increased to $1.89 billion for the quarter ended March 31, 2016 from $1.71 billion on a linked quarter basis and $1.66 billion from the same period in 2015.

Loans

Quarterly average loans for the first quarter of 2016 were $1.42 billion, a $111 million, or 8.5%, increase over average loans for the quarter ending December 31, 2015 of $1.31 billion. Loans at March 31, 2016 were $1.42 billion, a $7.32 million increase from $1.41 billion at December 31, 2015. Growth for the first quarter 2016 was driven by commercial loan growth partially offset by a reduction of residential loans in the Vermont business.

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The composition of our loan portfolio is shown in the following table:

(In thousands)	March 31, 2016		December 31, 2015		March 31, 2015
Commercial, financial and agricultural	$	247,074	$	237,451	$	195,782
Municipal loans		105,433		105,421		91,410
Residential		461,009		468,443		461,459
Commercial Real Estate		556,836		558,004		419,500
Construction		42,209		34,802		28,512
Installment loans		9,009		10,115		3,454
All other loans		33		44		53
Total loans	$	1,421,603	$	1,414,280	$	1,200,170

Totals above are shown net of deferred loans fees of $1.22 million, $1.20 million, and $702 thousand for March 31, 2016, December 31, 2015, and March 31, 2015, respectively.

Investments

The investment portfolio is used to generate interest income, manage liquidity and mitigate interest rate sensitivity. The average investment portfolio, including FHLB stock, for the first quarter of 2016 was $400.50 million, an increase of $34.44 million from the average balance for the first quarter of 2015 and a decrease of $5.59 million from the average balance for the fourth quarter of 2015. The ending balance in the investment portfolio, including FHLB stock, at March 31, 2016 was $413.30 million, compared to $387.61 million at March 31, 2015 and $406.93 million at December 31, 2015. The book balance of the portfolio at March 31, 2016 includes a $4.30 million unrealized gain on the available for sale portion of the investment portfolio, compared to an unrealized gain of $269 thousand at December 31, 2015.

The composition of our investment portfolio as of March 31, 2016, including both available for sale and held to maturity securities, consisted of the following: 

	Amortized		Fair
(In thousands)	Cost		Value
Available for Sale:
U.S. Treasury Obligations	$	25,067	$	25,361
U.S. Government Sponsored Enterprises ("U.S. GSEs")		31,045		31,429
Federal Home Loan Bank ("FHLB") Obligations		56,326		57,122
Residential Real Estate Mortgage-backed Securities ("Agency MBSs")		91,137		93,301
Agency Commercial Mortgage Backed Securities ("Agency CMBSs")		24,520		24,672
Agency Collateralized Mortgage Obligations ("Agency CMOs")		61,338		61,816
Asset Backed Securities ("ABSs")		311		347
Total Available for Sale	$	289,744	$	294,048
Held to Maturity:
U.S. Agency Obligations	$	19,227	$	20,045
U.S. GSEs		9,571		9,807
FHLB Obligations		4,767		4,969
Agency CMOs		75,040		76,203
Agency MBSs		6,787		7,038
Total Held to Maturity		115,392		118,062
Total Securities	$	405,136	$	412,110

Agency MBSs and Agency CMOs consist of pools of residential mortgages which are guaranteed by the FNMA, FHLMC, or GNMA with various origination dates and maturities.  Agency CMBS consists of bonds backed by commercial real estate which are guaranteed by FNMA and GNMA. 

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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 basis, which may be maturity. 

As a member of the Federal Home Loan Bank system, we are required to invest in stock of the FHLB in an amount determined based on our borrowings from the FHLB of Boston (“FHLBB”).  Our investment in FHLBB stock totaled $3.86 million at March 31, 2016 compared to $4.38 million at March 31, 2015 and $3.80 million at December 31, 2015. The FHLBB continues to be classified as “adequately capitalized” by its primary regulator. Based on current available information, we have concluded that our investment in FHLBB stock is not impaired.  We will continue to monitor our investment in FHLBB stock. 

Deposits and Other Liabilities

Quarterly average deposit balances increased by $197 million to $1.53 billion, a 14.8% increase over quarterly averages from the first quarter of 2015.  The increase was due to higher retail and trust account deposits as well as the acquired NUVO deposits.  Securities sold under agreement to repurchase, which represent collateralized customer accounts, were $249.00 million at March 31, 2016, an increase of $42.62 million from March 31, 2015 due to an increase in municipal cash flows.

CREDIT QUALITY AND ALLOWANCE FOR CREDIT LOSSES

Recent statistics on the United States economy show continued improvement in the labor market and a Real GDP increase at an annual rate of 1.0%.  Nationwide unemployment rates have declined to 5.0% from 5.5% in March 2015.

In Vermont, seasonally-adjusted statewide unemployment rates continue to decline and are tied for the 7th lowest unemployment rate in the country in January 2016.  The Massachusetts seasonally-adjusted statewide unemployment rate was slightly lower than the national average and is ranked as the 24th lowest unemployment rate in the country.

Credit quality

Credit quality is a major strategic focus and strength of our company.  Although we actively manage current nonperforming and classified loans, there is no assurance that we will not have increased levels of problem assets in the future.  The composition of the nonperforming pool is dynamic with accounts moving in and out of this category over time.

The following table summarizes our nonperforming loans (“NPL”) and nonperforming assets (“NPA”) as of the dates indicated:

(In thousands)	March 31, 2016		December 31, 2015		March 31, 2015
Nonaccrual loans	$	3,777	$	3,513	$	1,118
Loans past due greater than 90 days and accruing		—		—		—
Troubled debt restructurings (“TDR”)		1,070		682		180
Total nonperforming loans		4,847		4,195		1,298
OREO		72		12		—
Total nonperforming assets	$	4,919	$	4,207	$	1,298

Nonperforming loans at March 31, 2016 were $4.85 million, including $3.04 million in nonperforming loans acquired from NUVO.  Of the $4.85 million in nonperforming loans in the table above $4.25 million in commercial and commercial real estate loans, $589 thousand are residential mortgages, and $11 thousand are installment loans.

Our analysis indicates that, through a combination of estimated collateral value and, where needed, an appropriately allocated reserve, any additional loss exposure on current non-accruing loans is minimal. 

TDRs represent balances where the existing loan was modified involving a concession in rate, term or payment amount due to the distressed financial condition of the borrower. There were three restructured residential mortgages at March 31,

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2016 with balances totaling $121 thousand. There were three restructured commercial loans at March 31, 2016 with a balance of $949 thousand.  At March 31, 2016, five TDRs continue to pay as agreed according to the modified terms and are considered well-secured. One TDR is not paying as agreed according to the terms and is not considered well-secured.

Excluded from the nonperforming balances discussed above are loans that are 31 to 90 days past due, which are not necessarily considered classified or impaired.  Accruing loans 31 to 90 days past due as a percentage of total loans as of the periods indicated are presented in the following table:

Period Ended	31-90 Days
March 31, 2016	0.28	%
December 31, 2015	0.05	%
March 31, 2015	0.06	%
December 31, 2014	0.04	%

Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days. If a loan or a portion of a loan is internally classified as impaired or is partially charged-off, the loan is generally classified as nonaccrual. Loans that are on a current payment status or past due less than 91 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt. Income accruals are suspended on all non-accruing loans, and all previously accrued and uncollected interest is charged against current income. 

Loans may be returned to accrual status when there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms of the loans and all principal and interest amounts contractually due, including arrearages, are reasonably assured of repayment within an acceptable period of time.

While a loan is classified as nonaccrual and the future collectability of the recorded loan balance is uncertain, any payments received are generally applied to reduce the principal balance. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan has been partially charged-off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Interest collections in excess of that amount are recorded as a reduction of principal.

A loan remains in non-accruing status until the factors which suggest doubtful collectability no longer exist, the loan is liquidated, or when 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, we can, and may, initiate foreclosure proceedings.  The result of such action will either be to cause repayment of the loan with the proceeds of a foreclosure sale or to give us possession of the collateral in order to manage a future resale of the real estate.  Foreclosed property is recorded at the lower of its cost or estimated fair value, less any estimated costs to sell and is actively marketed.  Any cost in excess of the estimated fair value on the transfer date is charged to the allowance for loan losses, while further declines in market values are recorded as OREO expense in the consolidated statements of income. Nonperforming loans, which primarily consist of non-accruing residential mortgage, commercial, commercial real estate loans and TDRs totaled $4.85 million and $4.20 million at March 31, 2016 and December 31, 2015, respectively.  At March 31, 2016, $995 thousand of nonperforming loans had specific reserve allocations totaling $222 thousand. 

Substandard loans at March 31, 2016 totaled $32.93 million, of which $28.29 million in loans continue to accrue interest.   Loans identified as substandard have well-defined weaknesses that, if not addressed, could result in a loss.  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 loan loss reserve.

Accruing substandard loans at March 31, 2016 reflect a $9.59 million increase in balances since December 31, 2015. At March 31, 2016, accruing substandard loans related to owner-occupied commercial real estate totaled $12.80 million,

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investor commercial real estate loans totaled $1.01 million, residential investment real estate loans totaled $190 thousand, and $14.29 million in substandard loans are outstanding to corporate borrowers in a variety of different industries. Fifteen borrowers in a variety of industries account for 94% of the total accruing substandard loans.

To date, with very few exceptions, payments due from accruing substandard borrowers have been made as agreed and Management’s ongoing evaluation of these borrowers’ financial condition and collateral indicates a reasonable certainty that these exposures are adequately secured. 

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, Management incorporates 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.

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 and standby letters of credit.  The reserves are based on Management's estimate of the amount required to reflect the probable incurred losses in the loan portfolio, based on circumstances and conditions known at each reporting date. We review the adequacy of the reserves quarterly. Factors considered in evaluating the adequacy of the reserves 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, estimated fair values of properties that secure impaired loans and utilization rates of lines of credit.

The adequacy of the reserves are 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 allowance for loan losses if Management needs more time to evaluate all of the facts and circumstances relevant to that particular loan.

The general allowance for loan losses is a percentage-based reflection of historical loss experience adjusted for qualitative factors 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 Management determines the level of anticipated losses in the portfolio increased or diminished, the ALL is adjusted through current earnings. Management believes that the reserves are 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.

The following table reflects our loan loss experience and activity in the allowance for loan losses for the periods indicated:

	Three Months		Twelve Months		Three Months
	Ended		Ended		Ended
(In thousands)	March 31, 2016		December 31, 2015		March 31, 2015
Average loans during the period	$	1,417,710	$	1,240,386	$	1,187,278
Allowance beginning of the year		12,040		11,833		11,833
Charge-offs:

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Commercial, financial & agricultural		(3)			(29)			(29)
Residential		(73)			(112)			(55)
Commercial Real Estate		—			—			—
Installment, Other		(42)			(108)			(74)
Total charge-offs		(118)			(249)			(158)
Recoveries:
Commercial, financial & agricultural		2			34			25
Residential		11			52			3
Commercial Real Estate		4			2			1
Construction		—			—			—
Installment, Other		19			52			53
Total recoveries		36			140			82
Net recoveries (charge-offs)		(82)			(109)			(76)
Provision for credit losses		215			316			232
Allowance end of period	$	12,173		$	12,040		$	11,989
Ratio of net (charge-offs) recoveries to average loans outstanding		(0.02)	%		(0.01)	%		(0.03)	%
Components:
Provision for allowance for loan losses	$	215		$	316		$	232
Provision for reserve for undisbursed lines and letters of credit		(10)			(66)			(232)
Provision for credit losses	$	205		$	250		$	—

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

	March 31, 2016		December 31, 2015		March 31, 2015
NPL to total loans	0.34	%	0.30	%	0.11	%
NPA to total assets	0.25	%	0.21	%	0.08	%
Allowance for loan losses to total loans	0.86	%	0.85	%	1.00	%
Allowance for loan losses to NPL	251	%	287	%	924	%

We will continue to take all appropriate measures to restore nonperforming assets to performing status or otherwise liquidate these assets in an orderly fashion so as to maximize their value. 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 loan officers 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 lenders. 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 Lender, the Senior Credit Officer, and/or our President. With the exception of certain municipal loans, all extensions of credit of $5 million or greater to any one borrower, or related party interest, are reviewed and approved by the Loan Committee of Merchants Bank’s Board of Directors. Short-term Revenue Anticipation and Tax Anticipation extensions of credit of $8 million or greater to a municipality are reviewed and approved by the Loan Committee of Merchants Bank’s Board of Directors.

The Loan Committee and the credit department regularly monitor our loan portfolio. The entire loan portfolio, as well as individual loans, is 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 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

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performance during the year.  We have also hired external loan review firms to assist in monitoring the commercial, municipal, construction and residential loan portfolios. The commercial loan review firm reviews a minimum threshold of our commercial loan portfolio each year. These comprehensive reviews assessed the accuracy of our risk rating system as well as the effectiveness of credit administration in managing overall credit risks.

All loan officers are required to service their loan portfolios and account relationships. Loan officers, a commercial workout officer, or collection 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.

Liquidity and Capital Resource Management

General

Liquid assets are maintained at levels considered adequate to meet our liquidity needs.  Liquidity is adjusted as appropriate to meet asset and liability management objectives. Liquidity is monitored by the Asset and Liability Committee (“ALCO”) of Merchants Bank’s Board of Directors, based upon Merchants Bank’s policies. Our primary sources of liquidity are deposits, amortization and prepayment of loans, maturities of investment securities and other short-term investments, periodic principal repayments on mortgage-backed and other amortizing securities, advances from the FHLBB, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. Interest rates on deposits are priced to maintain a desired level of total deposits.

As of March 31, 2016, we could borrow up to $65 million in overnight funds through unsecured borrowing lines established with correspondent banks.  In addition, we have established both overnight and longer term lines of credit with the FHLBB. These borrowings are secured by residential mortgage loans. At March 31, 2016, we pledged loans with a carrying value of $374.45 million which carries a $265.06 million borrowing capacity at the FHLBB, less borrowings and letters of credit of $17.14 million, resulting in quarter-end capacity of $247.92 million. At December 31, 2015, we pledged loans with a carrying value of $369.78 million which carried a $262.17 million borrowing capacity at the FHLBB, less borrowings and letters of credit of $15.25 million, resulting in year-end capacity of $246.92 million. We also have the ability to borrow through the use of repurchase agreements, collateralized by our investments, with certain approved counterparties. Our investment portfolio, which is managed by the ALCO, had a carrying amount of $405.14 million at March 31, 2016, of which $334.38 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 Federal Reserve Bank, or are in a fully insured account with one of our correspondent banks.

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Presented below are our short-term borrowings during the periods indicated:

	Three Months Ended			Three Months Ended
(Dollars in thousands)	March 31, 2016			December 31, 2015
Securities sold under agreement to repurchase, short-term
Amount outstanding at end of period	$	249,003		$	286,639
Maximum during the period amount outstanding		286,639			318,788
Average amount outstanding		259,999			268,614
Weighted average-rate during the period		0.17	%		0.16	%
Weighted average rate at period end		0.18	%		0.19	%

Commitments and Off-Balance Sheet Risk

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. Contingent obligations under standby letters of credit totaled approximately $6.19 million and $6.30 million at March 31, 2016 and December 31, 2015, respectively, 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.  The fair value of our standby letters of credit at March 31, 2016 and December 31, 2015 was insignificant. 

Capital Resources

We are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. It is the policy of the Board of Governors of the Federal Reserve System (the “FRB”) that banks and bank holding companies, respectively, should pay dividends only out of current earnings and only if, after paying such dividends, the bank or bank holding company would remain adequately capitalized. The FRB has the authority to prohibit a bank holding company, such as us, from paying dividends if it deems such payment to be an unsafe or unsound practice. The FDIC has the authority to use its enforcement powers to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. Federal law also prohibits the payment of dividends by a bank that will result in the bank failing to meet its applicable capital requirements on a pro forma basis.  We are also subject to the regulatory framework for prompt corrective action that requires us to meet specific capital guidelines to be considered well capitalized. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum ratios of common equity, total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Management believes, as of March 31, 2016, that Merchants met all capital adequacy requirements to which it is subject.

Under rules effective January 1, 2015, a bank holding company, such as the Merchants, is considered well capitalized if the bank holding company (i) has a total risk based capital ratio of at least 10%, (ii) has a Tier I risk-based capital ratio of at least 8%, and (iii) is not subject to any written agreement order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. In addition, the FDIC has amended its prompt corrective action rules to reflect the new capital rules. Under the FDIC’s revised rules, which became effective January 1, 2015, an FDIC supervised institution is considered well capitalized if it (i) has a total risk-based capital ratio of 10.0% or greater; (ii) a Tier I risk-based capital ratio of 8.0% or greater; (iii) a common Tier I equity ratio of at least 6.5% or greater, (iv) a leverage capital ratio of 5.0% or greater; and (iv) is not subject to any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure.  The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-out is exercised.  Merchants elected to opt-out of this regulatory capital provision.  By opting out of the provision, Merchants retains what is known

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as the accumulated other comprehensive income filter.  The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” in addition to the amount necessary to meet its minimum risk-based capital requirements.

Under the U.S. Basel III Capital Rules, banks are required to maintain a “capital conservation buffer” above the minimum risk-based capital requirements. The phase in period for these requirements begins January 1, 2016 with a “capital conservation buffer” of 0.625% above the minimum risk-based capital requirements.  When fully phased in on January 1, 2019, banks must maintain a “capital conservation buffer” of 2.50%. As of March 31, 2016, our capital ratios exceeded the minimum capital requirements which included the initial period as well as the fully-phased in “capital conservation buffer” of 2.50%. 

As of March 31, 2016, the most recent notification from the FDIC categorized Merchants Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that Management believes have changed Merchants Bank’s category.

The following table summarizes Merchants’ and Merchants Bank’s capital ratios in comparison to the regulatory requirements:

									To Be Well-
									Capitalized Under				Fully Phased-in,
	Actual				For Capital				Prompt Corrective				with Capital
	March 31, 2016				Adequacy Purposes				Action Provisions				Conservation Buffers
(In thousands)	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Merchants Bancshares, Inc.:
Tier 1 Leverage Capital	$	167,670	8.53	%	$	78,643	4.00	%		N/A	N/A			N/A	N/A
Tier 1 Risk-Based Capital		167,670	14.71	%		68,404	6.00	%		N/A	N/A		$	96,906	8.50	%
Total Risk-Based Capital		180,748	15.85	%		91,205	8.00	%		N/A	N/A			119,707	10.50	%
Common Equity Tier 1 Capital		147,670	12.95	%		51,303	4.50	%		N/A	N/A			79,805	7.00	%
Merchants Bank:
Tier 1 Leverage Capital	$	165,847	8.41	%	$	78,840	4.00	%	$	98,550	5.00	%		N/A	N/A
Tier 1 Risk-Based Capital		165,847	14.48	%		68,714	6.00	%		91,618	8.00	%	$	97,344	8.50	%
Total Risk-Based Capital		178,925	15.62	%		91,618	8.00	%		114,523	10.00	%		120,249	10.50	%
Common Equity Tier 1 Capital		165,847	14.48	%		51,535	4.50	%		74,440	6.50	%		80,166	7.00	%

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

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

Risk Management

General

Our Management and Board of Directors are committed to sound risk management practices throughout the organization. We have developed and implemented a 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 us 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 Act and the Sarbanes-Oxley Act of 2002.

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Market 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 Board of Directors. Our Investment Policy details the types of securities that may be purchased, and establishes portfolio limits and maturity limits for the various sectors. The Investment Policy also establishes specific investment quality limits. Our Board of Directors has established a Board-level Asset/Liability Committee (“ALCO”), which delegates responsibility for carrying out the asset/liability management policies to the Management-level Asset/Liability Committee (the “Management ALCO”). The Management 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 Management ALCO manages the investment portfolio. As the portfolio has grown, the Management ALCO has used portfolio diversification as a way to mitigate the risk of being too heavily invested in any single asset class. We continued to work to maximize net interest income while mitigating risk during the year through further repositioning of the investment portfolio, selective sales of specific securities, as well as carefully monitoring the overall duration and average life of the portfolio, and monitoring individual securities, among other strategies.

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, on- and off-balance sheet, which can be accessed quickly in time of need.  As discussed above under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resource Management,” 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. Our liquidity monitoring process identifies early liquidity stress triggers, and also allows us to model worst case liquidity scenarios, and various responses to those scenarios.

Interest Rate Risk

Interest rate risk is the exposure to a movement in interest rates, which, as described above, affects our net interest income. Asset and liability management is governed by policies reviewed and approved annually by Merchants Bank’s Board of Directors. The ALCO meets frequently to review and develop asset/liability management strategies and tactics.

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 by using a combination of on-balance sheet and off-balance sheet strategies.  On-balance sheet strategies generally consist of 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 and average lives of loans and the pricing and maturity of deposits. We also use off-balance sheet strategies, such as interest rate swaps and interest rate caps and floors, to help minimize our exposure to changes in interest rates.  By using derivative financial instruments to hedge exposures to changes in interest rates we are exposed 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, creating credit risk.  We minimize 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.

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The ALCO is responsible for ensuring that our Board of Directors receives accurate information regarding our interest rate risk position at least quarterly. The investment advisory firm and ALCO consultant meet collectively 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 investment advisor reports on the overall performance of the portfolio and performs modeling of the cash flow, effective duration, and yield characteristics of the portfolio under various interest rate scenarios; and also reviews and provides detail on individual holdings in the portfolio. 

The ALCO consultant’s most recent review was as of March 31, 2016. The consultant ran a base simulation assuming no changes in rates as well as a 200 basis point rising and, because rates continue to be very low, a 100 basis point falling interest rate scenario that 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 that assumed a parallel shift of the curve over 24 months, a 500 basis point rising simulation which assumed the curve flattened over a 24 month time frame, and a 500 basis point rising simulation which assumed the increase in rates was delayed by two years.   A summary of the results is as follows:

Current/Flat Rates: Net interest income levels are projected to trend downward throughout the simulation. The sustained low rate environment causes continued margin pressures as assets continue to reprice, and are replaced at lower rates than the existing portfolio, while funding costs are at or near their floors.

Falling Rates: If rates fall 100 basis points our net interest income is projected to trend downward through the simulation. Margins and income decline as asset yields continue to reprice lower with no relief on the funding side. 

Rising Rates:  Net interest income is projected to increase throughout the simulation given a rise in rates regardless of the shape of the yield curve because our interest rate risk position is structurally asset sensitive due to our strong core funding position which supports a shorter term asset base. If 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 lower. 

We have established a target range for the change in net interest income in year one of zero to 7.5%. The net interest income simulation as of March 31, 2016 showed that the change in net interest income for the next 12 months from our expected or “most likely” forecast was as follows:

	Percent Change in Net
Rate Change	Interest Income
Up 200 basis points	1.90	%
Down 100 basis points	(2.10)	%

The change in net interest income in the second year of the simulation shows a more pronounced downward trend in the flat and down 100 basis points scenarios, the projected change is (3.5)% and (14.6)%, respectively, while the up 200 basis points simulation produces an increase of 6.5%.  The degree to which this exposure materializes will depend, in part, on our ability to manage our balance sheet as interest rates rise or fall.

Actual results may differ materially from those projected. The analysis assumes a static balance sheet. All rate changes are ramped over a 12 month time horizon based upon a parallel yield curve shift. In the down 100 basis points scenario, Federal funds and Treasury yields are floored at 0.01% while Prime is floored at 3.00%.  All other market rates (e.g. LIBOR, FHLB) are floored at 0.25% to reflect credit spreads. The model used to perform the balance sheet simulation assumes a parallel shift of the yield curve over 12 months and reprices every interest-bearing asset and liability on our balance sheet. The model incorporates product specific loan prepayment assumptions and uses contractual repricing dates for variable rate loan products and contractual maturities for fixed rate products. The model uses product-specific assumptions for deposits which are subject to repricing based on current market conditions. The model uses the Yield Book, Inc. system to analyze the investment portfolio which produces bond specific cash flows forecasts for each rate scenario tested in the analysis.  The analysis details bond maturity, amortization, repricing characteristics, and optionality.  The cash flow forecasts take into consideration assumptions for absolute rate movements, the period over which rates are assumed to shift and assumed changes in the shape of the yield curve. The model also assumes that the rate at which residential

47

mortgage related assets prepay will vary as rates rise and fall, based on prepayment estimates derived from Applied Financial Technologies.

The preceding sensitivity analysis does not represent our forecast and should not be relied upon as being indicative of expected operating results.  These estimates are based upon numerous assumptions including without limitation: 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, among others. While assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change. 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.

The most significant ongoing factor affecting market risk exposure of net interest income during the quarter ended March 31, 2016 was the sustained low interest rate environment.  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.

Credit Risk

The Board of Directors reviews and approves our loan policy on an annual basis. Among other things, the loan policy establishes restrictions regarding the types of loans that may be granted, and the distribution of loan types within our portfolio. Our loan portfolio is continuously monitored for performance, creditworthiness and strength of documentation through the use of a variety of management reports and the assistance of an external loan review firm.  Credit ratings are assigned to commercial loans and are routinely reviewed. Loan officers, under the supervision of the Senior Lender and Senior Credit Officer, take remedial actions to assure full and timely payment of loan balances when necessary.  Our policy is to discontinue the accrual of interest on loans when scheduled payments become contractually past due 91 or more days and the ultimate collectability of principal or interest become doubtful.  In certain instances the accrual of interest is discontinued prior to 91 days past due if Management determines that the borrower will not be able to continue making timely payments.

Item 4 – Controls and Procedures

Our principal executive officer, interim 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 interim 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 interim 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 March  31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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MERCHANTS BANCSHARES, INC.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

We are involved in various legal proceedings arising from our normal business activities. In the opinion of Management, based upon input from counsel on the anticipated outcome of such proceedings, final disposition of these proceedings will not have a material adverse effect on our consolidated financial position.

Item 1a – Risk Factors

In addition to the other information set forth in this report, 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, 2015 filed with the SEC on March 14, 2016, 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.

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

None.

Item 3 – Defaults on Senior Securities

None.

Item 4 – Mine Safety Disclosure

Not applicable.

Item 5 – Other Information

None.

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PART IV

Item 6 – Exhibits

The following exhibits are either filed or attached as part of this report, or are incorporated herein by reference:

Exhibit	Description
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 March 31, 2016 formatted in XBRL: (i) Consolidated Balance Sheets at March 31, 2016 and December 31, 2015; (ii) Consolidated Statements of Income for the three months ended March 31, 2016 and 2015; (iii) Consolidated Statements of Comprehensive Income for the three  months ended March 31, 2016 and 2015; (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015; and (v) Notes to Interim Unaudited Consolidated Financial Statements. *

*Filed herewith

**Furnished herewith

50

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/Geoffrey R. Hesslink

Geoffrey R. Hesslink

President and Chief Executive Officer

/s/ Eric A. Segal

Eric A. Segal

Interim Principal Financial Officer,

Principal Accounting Officer and Treasurer

May 9, 2016

Date

51

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, Geoffrey R. Hesslink, 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 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:  May 9,  2016

/s/ Geoffrey R. Hesslink

Geoffrey R. Hesslink

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

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 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:  May 9, 2016

/s/ Eric A. Segal

Eric A. Segal

Interim Principal Financial Officer, Principal Accounting Officer & Treasurer

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 ended March 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Geoffrey R. Hesslink, 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.

/s/ Geoffrey R. Hesslink

Geoffrey R. Hesslink

President & Chief Executive Officer

May 9, 2016

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 ended March 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Eric A. Segal, Interim Principal Financial Officer, Principal Accounting Officer and Treasurer 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.

/s/ Eric A. Segal

Eric A. Segal

Interim Principal Financial Officer, Principal Accounting Officer & Treasurer

May 9, 2016

Date

XML

Document And Entity Information - shares	3 Months Ended
	Mar. 31, 2016	Apr. 26, 2016
Document And Entity Information
Entity Registrant Name	MERCHANTS BANCSHARES INC
Trading Symbol	mbvt
Entity Central Index Key	0000726517
Document Type	10-Q
Document Period End Date	Mar. 31, 2016
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		6,862,568
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q1

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
ASSETS
Cash and due from banks	$ 27,586	$ 30,605
Interest earning deposits with banks and other short-term investments	53,054	119,578
Total cash and cash equivalents	80,640	150,183
Investments:
Securities available for sale, at fair value (amortized cost of $289,744 and $283,185)	294,048	283,454
Securities held to maturity (fair value of $120,093 and $139,171)	115,392	119,674
Total investments	409,440	403,128
Loans	1,421,603	1,414,280
Less: Allowance for loan losses	12,173	12,040
Net loans	1,409,430	1,402,240
Federal Home Loan Bank stock	3,863	3,797
Bank premises and equipment, net	14,532	15,030
Investment in real estate limited partnerships	5,827	5,687
Bank owned life insurance	10,606	10,551
Core deposit intangible	1,309	1,360
Goodwill	6,872	6,967
Other assets	21,111	22,294
Total assets	1,963,630	2,021,237
LIABILITIES
Demand (noninterest bearing)	620,190	631,244
Savings, interest bearing checking and money market accounts	677,600	665,623
Time Deposits	228,998	254,572
Total deposits	1,526,788	1,551,439
Securities sold under agreements to repurchase and short-term debt	249,003	286,639
Other long-term debt	4,716	5,238
Junior subordinated debentures issued to unconsolidated subsidiary trust	20,619	20,619
Other liabilities	9,903	9,248
Total liabilities	1,811,029	1,873,183
STOCKHOLDERS' EQUITY
Common stock, $.01 par value Authorized: 10,000,000 shares; Issued: 7,172,043 at March 31, 2016 and 7,168,869 at December 31, 2015 Outstanding: 6,858,473 at March 31, 2016 and 6,855,294 at December 31, 2015	75	72
Capital in excess of par value	55,155	55,063
Retained earnings	107,789	106,219
Treasury stock, at cost: 313,507 shares at March 31, 2016 and 313,575 shares at December 31, 2015	(13,511)	(13,798)
Deferred compensation arrangements: 275,596 shares at March 31, 2016 and 299,360 shares at December 31, 2015	6,255	6,521
Accumulated other comprehensive (loss) income	3,162	6,023
Total stockholders' equity	152,601	148,054
Total liabilities and stockholders' equity	$ 1,963,630	$ 2,021,237
Preferred Class A non-voting
STOCKHOLDERS' EQUITY
Preferred stock
Preferred Class B voting
STOCKHOLDERS' EQUITY
Preferred stock

XML

Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Securities available for sale, amortized cost	$ 289,744	$ 283,185
Securities held to maturity, fair value	$ 118,062	$ 120,093
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	10,000,000	10,000,000
Common stock, shares issued	7,172,043	7,168,869
Common stock, shares outstanding	6,858,473	6,855,294
Treasury stock, shares	589,103	612,935
Deferred compensation arrangements
Common stock, shares outstanding	275,596	299,360
Preferred Class A non-voting
Preferred stock, shares authorized	200,000	200,000
Preferred stock, shares outstanding	0	0
Preferred Class B voting
Preferred stock, shares authorized	1,500,000	1,500,000
Preferred stock, shares outstanding	0	0

XML

Consolidated Statements of Income - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$ 12,804	$ 10,623
Investment income:
Interest and dividends on investment securities	1,997	1,910
Interest on interest earning deposits with banks and other short-term investments	81	73
Total interest and dividend income	14,882	12,606
INTEREST EXPENSE
Savings, interest bearing checking and money market accounts	440	367
Time deposits	391	334
Securities sold under agreement to repurchase and other short-term debt	109	155
Long-term debt	210	197
Total interest expense	1,150	1,053
Net interest income	13,732	11,553
Provision for credit losses	205
Net interest income after provision for credit losses	13,527	11,553
NONINTEREST INCOME
Trust division income	867	895
Net debit card income	649	693
Overdraft income	631	446
Service charges on deposits	415	340
Other	362	296
Total noninterest income	2,924	2,670
NONINTEREST EXPENSE
Compensation and benefits	6,308	5,048
Occupancy expense	1,139	1,143
Equipment expense	719	766
Telephone expense	198	217
Legal and professional fees	593	442
Mobile & internet banking	366	386
Core / Item processing	517	406
Marketing	192	152
State franchise taxes	398	286
FDIC Insurance	254	218
Merger costs	133
Core deposit intangible	51
Other	1,051	943
Total noninterest expense	11,919	10,007
Income before provision for income taxes	4,532	4,216
Provision for income taxes	1,042	880
NET INCOME	$ 3,490	$ 3,336
Basic earnings per common share (in dollars per share)	$ 0.51	$ 0.53
Diluted earnings per common share (in dollars per share)	$ 0.50	$ 0.53

XML

Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Consolidated Statements Of Comprehensive Income
Net income	$ 3,490	$ 3,336
Other comprehensive (loss) income, net of tax:
Unrealized holding gain (losses) on securities available for sale, net of taxes of $(704) and $422	2,624	783
Amortization of unrealized holding losses of securities transferred from available for sale to held to maturity, net of taxes of $279 and $67	127	124
Change in net unrealized loss on interest rate swaps, net of taxes of $84 and $11	35	21
Pension liability adjustment, net of taxes of $(183) and $36	75	67
Other comprehensive (loss) income	2,861	995
Comprehensive (loss) income	$ 6,351	$ 4,331

XML

Consolidated Statements of Comprehensive Income (Parenthetical) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Consolidated Statements Of Comprehensive Income
Unrealized (loss) gain on securities available for sale, tax	$ 1,411	$ 422
Amortization of unrealized holding losses of securities transferred from available for sale to held to maturity, tax	68	67
Change in net unrealized loss on interest rate swaps, tax	19	11
Pension liability adjustment, tax	$ 41	$ 36

XML

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 3,490	$ 3,336
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	215
Depreciation and amortization	542	523
Amortization of investment security premiums and accretion of discounts, net	298	252
Amortization of deferred loan costs	148
Amortization of core deposit intangible	51
Stock based compensation	166	33
Deferred (gain) on sale of premises	(129)	(129)
Equity in losses of real estate limited partnership, net	(393)	(282)
Increase in cash surrender value of bank owned life insurance	(55)	(61)
Changes in assets and liabilities:
Net change in interest receivable	(511)	(360)
Net change in other assets	347	1,300
Net change in interest payable	(16)	(9)
Net change in other liabilities	844	356
Net cash provided by operating activities	5,783	5,523
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities available for sale	8,487	10,284
Proceeds from maturities of investment securities held to maturity	4,412	4,295
Purchases of investment securities available for sale	(15,277)	(54,778)
Loan originations in excess of principal payments	(7,543)	(17,912)
Purchases of Federal Home Loan Bank stock, net	(66)
Real estate limited partnership investments	(513)	(543)
Purchases of bank premises and equipment	(44)	(612)
Net cash provided by (used in) investing activities	(10,544)	(59,266)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits	(24,651)	21,025
Net increase in securities sold under agreement to repurchase and other short-term borrowing	(37,636)	(52,078)
Principal issued (payments) on long-term debt	(522)	(20)
Cash dividends paid	(1,920)	(1,772)
Increase in deferred compensation arrangements	(53)	48
Net cash provided by financing activities	(64,782)	(32,797)
Increase (decrease) in cash and cash equivalents	(69,543)	(86,540)
Cash and cash equivalents beginning of year	150,183	154,459
Cash and cash equivalents end of year	80,640	67,919
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Total interest payments	1,166	1,062
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Distribution of stock under deferred compensation arrangements	$ 559	$ 515

XML

FINANCIAL STATEMENT PRESENTATION

3 Months Ended

Mar. 31, 2016

FINANCIAL STATEMENT PRESENTATION

FINANCIAL STATEMENT PRESENTATION

NOTE 1: FINANCIAL STATEMENT PRESENTATION

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Merchants Bancshares, Inc. (the “Company”), and its wholly-owned subsidiary Merchants Bank (the “Bank,” and collectively with the Company, “Merchants”, “we,” “us, or “our”). All material intercompany accounts and transactions are eliminated in consolidation. We offer a full range of deposit, loan, cash management, and trust services to meet the financial needs of individual consumers, businesses and municipalities at 31 full-service banking offices throughout the state of Vermont and one full-service banking office in Massachusetts as of March 31, 2016.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 GAAP for complete financial statements. All adjustments necessary for a fair presentation of our interim consolidated financial statements as of March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015 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 U.S. Generally Accepted Accounting Principles (“GAAP”) requires Management 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 credit losses, income taxes, interest income recognition on loans and investments and analysis of other-than-temporary impairment of our investment securities portfolio. Operating results in the future may vary from the amounts derived from Management's estimates and assumptions.

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RECENT ACCOUNTING PRONOUNCEMENTS

3 Months Ended

Mar. 31, 2016

RECENT ACCOUNTING PRONOUNCEMENTS

RECENT ACCOUNTING PRONOUNCEMENTS

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS

ASU 2016-02 – Leases – This Update increases the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. For lessees, all leases will be required to be recognized on the balance sheet by recording a right-of-use asset and a lease liability. The accounting applied by a lessor is largely unchanged from that applied under the existing guidance. The ASU requires additional qualitative and quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for fiscal years beginning after December 15, 2018, including the interim periods. The Company is currently evaluating the impact of this new requirement on the consolidated financial statements.

ASU 2016-09 – Improvements to Employee Share-Based Payment Accounting – This Update simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. The update requires all excess tax benefits and tax deficiencies related to share-based awards to be recognized as income tax expense or benefit in the income statement. In addition, the update includes changes to the classification of excess tax benefits on the statement of cash flows, an election related to the accounting for forfeitures, minimum statutory tax withholding requirements, as well as the classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The guidance is effective for fiscal years beginning after December 15, 2016, including the interim periods. The Company is currently evaluating the impact of this new requirement on the consolidated financial statements.

ASU 2014-09 – Revenue from Contracts with Customers – In May 2014 the FASB amended existing guidance related to revenue from contracts with customers. This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, this amendment specifies the accounting for some costs to obtain or fulfill a contract with a customer. These amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that period. The amendments should be applied retrospectively to all periods presented or retrospectively with the cumulative effect recognized at the date of initial application. The Company is currently evaluating the impact of this new requirement on the consolidated financial statements.

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ACQUISITION of NUVO BANK & TRUST COMPANY

3 Months Ended

Mar. 31, 2016

ACQUISITION of NUVO BANK & TRUST COMPANY

ACQUISITION of NUVO BANK & TRUST COMPANY

NOTE 3: ACQUISITION OF NUVO BANK & TRUST COMPANY

On December 4, 2015, the Company completed the acquisition of NUVO Bank & Trust Company (“NUVO”), located in Springfield, Massachusetts.  NUVO's banking business operates as a division of Merchants Bank, a wholly owned subsidiary of Merchants. Total consideration paid by Merchants for NUVO's outstanding stock comprised 517,109 shares of common stock and $5.109 million in cash.  Merchants also paid an aggregate of $878,718 to cash out NUVO stock options and a portion of its common stock warrants and issued replacement warrants to purchase an aggregate of 90,474 shares of Merchants common stock on adjusted terms, consisting of warrants expiring in 2017 to purchase 56,104 shares at an exercise price of $20.69 and warrants expiring in 2018 to purchase 34,370 shares at an exercise price of $41.39 per share.  The results of NUVO’s operations are included in the Company’s unaudited consolidated statements of income for the period ended March 31, 2016.

The acquisition of NUVO expands the Company’s New England footprint beyond Vermont and into the Springfield and greater Western Massachusetts commercial banking market. The Company now has 32 banking locations, including the new office in Springfield, Massachusetts.

The acquisition of NUVO was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the acquisition date. The excess of consideration paid of $6.872 million over the fair value of net assets acquired has been reported as goodwill in the Company’s unaudited consolidated statements of financial condition as of March 31, 2016. Goodwill created in the acquisition is not deductible for income tax purposes. This goodwill consists largely of the synergies and cost savings arising from the combining of the operations of the two companies.

The assets acquired and liabilities assumed in the acquisition of NUVO were recorded at their preliminary estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment.

In connection with the acquisition, the consideration paid and the fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition are summarized in the following table:

(In thousands)
Consideration paid:
Common stock issued in exchange for NUVO shares	$	16,889
Cash paid for NUVO shares		5,988
Stock warrants issued		470
Total consideration paid	$	23,347
Assets acquired:
Cash and cash equivalents	$	7,070
Interest bearing time deposits with banks		110
Investments		4,365
Restricted investment in bank stock		376
Loans		149,360
Premises and equipment , net		580
Accrued interest receivable		369
Core deposit intangible		1,377
Deferred tax asset		1,926
Other assets		355
Total assets acquired		165,888
Liabilities assumed:
Deposits		144,482
Federal Home Loan Bank advances		4,001
Accrued interest payable		42
Tax effect of acquisition fair value adjustments		705
Other liabilities		183
Total liabilities assumed		149,413
Net assets acquired	$	16,475
Goodwill	$	6,872

The following table details the changes in fair value of the consideration paid and the net assets acquired as of December 4, 2015 from the amounts originally reported in the Company’s Form 10-K for the year ended December 31, 2015:

(In thousands)
Goodwill reported as of December 31, 2015	$	6,967
Effect of adjustments to:
Consideration paid:
Stock warrants issued		(74)
Assets acquired:
Investments		21
Adjusted goodwill as of March 31, 2016	$	6,872

The changes to goodwill during the three months ended March 31, 2016 are primarily due to changes in the final market value for assets acquired and consideration paid. In many cases, the fair values of assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and discounting them at appropriate market rates. These changes had no impact on current quarter or previously reported income.

Fair value of acquired assets and liabilities

The fair values of assets acquired and liabilities assumed in the NUVO acquisition were determined, for many categories, by estimating the cash flows expected to result from those assets and liabilities and discounting them at appropriate market rates.  The most significant category of assets for which this procedure was used was acquired loans. The excess of expected cash flows above the fair value of the majority of acquired loans will be accreted to interest income over the remaining lives of the loans in accordance with FASB ASC 310-20, Nonrefundable Fees and Other Costs. Receivables acquired that were not subject to the requirements of ASC 310-30 include non-impaired loans with a fair value and gross contractual receivables of $146,086 and $145,855 on the date of acquisition. The carrying amount of loans purchased with evidence of credit deterioration accounted for under ASC 310-30 acquired in the acquisition totaled $3.3 million.

In accordance with U.S. GAAP, there was no carryover of the allowance for loan losses that had previously been recorded by NUVO.

In connection with the acquisition of NUVO, the Company recorded a net deferred income tax asset of $1.2 million related to NUVO’s net operating loss carryforward, as well as other tax attributes of the acquired company, along with the effects of fair value adjustments resulting from applying the purchase method of accounting.

The fair value of savings and transaction deposit accounts acquired from NUVO provide value to the Company as a source of core funding. The fair value of the core deposit intangible (“CDI”) was determined based on a discounted cash flow analysis using a discount rate based on the estimated cost of capital for a market participant. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available to the Company. The life of the deposit base and projected deposit attrition rates were determined using the Company’s historical deposit data as NUVO, being a de novo bank in 2008, has relatively little history related to account attrition. The CDI was valued at $1.38 million or 2.08% of savings and demand deposits. The intangible asset is being amortized on an accelerated basis over ten years. Amortization recorded during the three months ended March 31, 2016 was $51 thousand. The amount recorded from the December 4, 2015 acquisition date through December 31, 2015 was $17 thousand.

The fair value of time deposit and brokered time deposit accounts was determined by discounting the future cash flows by the market interest rates. This valuation adjustment was determined to be $650 thousand and is being amortized in line with the expected cash flows driven by the maturities of these deposits primarily over the next two years. Amortization during the three months ended March 31, 2016 was $81 thousand. The amortization from December 4, 2015 acquisition date through December 31, 2015 was $27 thousand. Direct costs related to the merger were expensed as incurred. For the three months ended March 31, 2016, the Company incurred $133 thousand in merger-related expenses. As of December 31, 2015, $1.88 million in merger-related expenses were incurred, including a fee paid to our financial advisor, merger proxy expenses, integration and conversion fees legal fees and other merger-related expenses.

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GOODWILL AND INTANGIBLE ASSETS

3 Months Ended

Mar. 31, 2016

GOODWILL AND INTANGIBLE ASSETS

GOODWILL AND INTANGIBLE ASSETS

NOTE 4: GOODWILL AND INTANGIBLE ASSETS

The goodwill and intangible balances presented below resulted from the Company’s acquisition of NUVO.  The acquisition of NUVO resulted in goodwill of $6.872 million and CDI of $1.377 million.  For further information regarding goodwill and other intangible assets recorded in connection with the acquisition of NUVO, including the effect of adjustments to goodwill, please refer to Note 3.

Goodwill

Goodwill is deemed to have an indefinite life is not amortized, but is instead subject to impairment tests. There was no impairment for the three months ended March 31, 2016 or the three months ended December 31, 2015. 

	March 31,		December 31,
(In thousands)	2016		2015
Beginning of period	$	6,967	$	—
Effect of adjustments		(95)
Goodwill		—		6,967
Impairment		—		—
End of period	$	6,872	$	6,967

Other Intangible Assets

Acquired CDI were as follows:

		March 31,		December 31,
(In thousands)		2016		2015
Beginning of period	$	1,360	$	—
Additions		—		1,377
Amortization		51		17
End of period	$	1,309	$	1,360

The CDI recognized in 2015 related to the acquisition of NUVO. Aggregate amortization expense for the CDI was $51 thousand for the three months ended March 31, 2016 and $17 thousand for the three months ended December 31, 2015.

The estimated amortization expense for each of the next five years:

(In thousands)		Amount
Remainder of 2016	$	153
2017		173
2018		147
2019		126
2020		120
2021		120
Thereafter		470

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INVESTMENT SECURITIES

3 Months Ended

Mar. 31, 2016

INVESTMENT SECURITIES

INVESTMENT SECURITIES

NOTE 5: INVESTMENT SECURITIES

Investments in securities are classified as available for sale or held to maturity as of March 31, 2016 and December 31, 2015. The amortized cost and fair values of the securities classified as available for sale and held to maturity as of March 31, 2016 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gains		Losses		Value
Available for Sale:
U.S. Treasury Obligations	$	25,067	$	294	$	—	$	25,361
U.S. Government Sponsored Enterprises ("U.S. GSEs")		31,045		384		—		31,429
Federal Home Loan Bank ("FHLB") Obligations		56,326		797		(1)		57,122
Residential Real Estate Mortgage-backed Securities ("Agency MBSs")		91,137		2,193		(29)		93,301
Agency Commercial Mortgage Backed Securities ("Agency CMBSs")		24,520		152		—		24,672
Agency Collateralized Mortgage Obligations ("Agency CMOs")		61,338		533		(55)		61,816
Asset Backed Securities ("ABSs")		311		36		—		347
Total Available for Sale	$	289,744	$	4,389	$	(85)	$	294,048

			Gross		Gross
	Amortized		Unrecognized		Unrecognized		Fair
	Cost		Gains		Losses		Value
Held to Maturity:
U.S. Agency Obligations	$	19,227	$	818	$	—	$	20,045
U.S. GSEs		9,571		236		—		9,807
FHLB Obligations		4,767		202		—		4,969
Agency CMOs		75,040		1,227		(64)		76,203
Agency MBSs		6,787		251		—		7,038
Total Held to Maturity	$	115,392	$	2,734	$	(64)	$	118,062

The amortized cost and fair values of the securities classified as available for sale and held to maturity as of December 31, 2015 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gains		Losses		Value
Available for Sale:
U.S. Treasury Obligations	$	25,064	$	61	$	(12)	$	25,113
U.S. GSEs		20,895		3		(104)		20,794
FHLB Obligations		51,230		107		(226)		51,111
Agency MBSs		96,073		1,688		(512)		97,249
Agency CMBSs		24,950		—		(397)		24,553
Agency CMOs		64,648		74		(443)		64,279
ABSs		325		30		—		355
Total Available for Sale	$	283,185	$	1,963	$	(1,694)	$	283,454

			Gross		Gross
	Amortized		Unrecognized		Unrecognized		Fair
	Cost		Gains		Losses		Value
Held to Maturity:
U.S. Agency Obligations	$	20,084	$	486	$	—	$	20,570
U.S. GSEs		9,556		166		—		9,722
FHLB Obligations		4,758		76		—		4,834
Agency CMOs		78,249		253		(716)		77,786
Agency MBSs		7,027		154		—		7,181
Total Held to Maturity	$	119,674	$	1,135	$	(716)	$	120,093

The contractual final maturity distribution of the debt securities classified as available for sale of March 31, 2016, are as follows:

									Securities
			After One		After Five				not due
	Within		But Within		But Within		After Ten		at a Single
(In thousands)	One Year		Five Years		Ten Years		Years		Maturity		Total
Available for Sale (at fair value):
U.S. Treasury Obligations	$	101	$	25,260	$	—	$	—	$	N/A	$	25,361
U.S. GSEs		—		31,429		—		—		N/A		31,429
FHLB Obligations		—		45,570		11,552		—		N/A		57,122
Agency MBSs		N/A		N/A		N/A		N/A		93,301		93,301
Agency CMBSs		N/A		N/A		N/A		N/A		24,672		24,672
Agency CMOs		N/A		N/A		N/A		N/A		61,816		61,816
ABSs		N/A		N/A		N/A		N/A		347		347
Total Available for Sale	$	101	$	102,259	$	11,552	$	—	$	180,136	$	294,048
Available for Sale (at amortized cost):
U.S. Treasury Obligations	$	101	$	24,966	$	—	$	—	$	N/A	$	25,067
U.S. GSEs		—		31,045		—		—		N/A		31,045
FHLB Obligations		—		45,121		11,205		—		N/A		56,326
Agency MBSs		N/A		N/A		N/A		N/A		91,137		91,137
Agency CMBSs		N/A		N/A		N/A		N/A		24,520		24,520
Agency CMOs		N/A		N/A		N/A		N/A		61,338		61,338
ABSs		N/A		N/A		N/A		N/A		311		311
Total Available for Sale	$	101	$	101,132	$	11,205	$	—	$	177,306	$	289,744

The contractual final maturity distribution of the debt securities classified as held to maturity of March 31, 2016, are as follows:

									Securities
			After One		After Five				not due
	Within		But Within		But Within		After Ten		at a Single
(In thousands)	One Year		Five Years		Ten Years		Years		Maturity		Total
Held to Maturity (at fair value):
U.S. Agency Obligations	$	—	$	—	$	—	$	20,045	$	N/A	$	20,045
U.S. GSEs		—		—		9,807		—		N/A		9,807
FHLB Obligations		—		—		4,969		—		N/A		4,969
Agency CMOs		N/A		N/A		N/A		N/A		76,203		76,203
Agency MBSs		N/A		N/A		N/A		N/A		7,038		7,038
Total Held to Maturity	$	—	$	—	$	14,776	$	20,045	$	83,241	$	118,062
Held to Maturity (at amortized cost):
U.S. Agency Obligations	$	—	$	—	$	—	$	19,227	$	N/A	$	19,227
U.S. GSEs		—		—		9,571		—		N/A		9,571
FHLB Obligations		—		—		4,767		—		N/A		4,767
Agency CMOs		N/A		N/A		N/A		N/A		75,040		75,040
Agency MBSs		N/A		N/A		N/A		N/A		6,787		6,787
Total Held to Maturity	$	—	$	—	$	14,338	$	19,227	$	81,827	$	115,392

Actual maturities will differ from contractual maturities because borrowers may have rights to call or prepay obligations.

For the three months ended March 31, 2016 and 2015, we did not record any securities gains or losses related to the sale of securities.

Securities with a carrying value of $334.38 million and $335.81million at March 31, 2016 and December 31, 2015, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes required by law.

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at March 31, 2016, were as follows:

	Less Than 12 Months					12 Months or More						Total
	Number	Fair				Number	Fair					Number	Fair
(In thousands)	of Issues	Value		Loss		of Issues		Value		Loss		of Issues		Value		Loss
Available for Sale:
FHLB Obligations	1	$	5,133	$	(1)		$		—	$	—	1	$		5,133	$	(1)
Agency MBSs	2		7,228		(29)				—		—	2			7,228		(29)
Agency CMBSs			—		—				—		—	—			—		—
Agency CMOs	1		3,752		(1)	3			5,899		(54)	4			9,651		(55)
ABSs			—		—				—		—	—			—		—
Total Available for Sale	4	$	16,113	$	(31)	3	$		5,899	$	(54)	7	$		22,012	$	(85)
Held to Maturity:
Agency CMOs	—	$	—	$	—	1	$		3,597	$	(64)	1	$		3,597	$	(64)
Total Held to Maturity	—	$	—	$	—	1	$		3,597	$	(64)	1	$		3,597	$	(64)

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at December 31, 2015, were as follows:

	Less Than 12 Months					12 Months or More						Total
	Number	Fair				Number	Fair					Number	Fair
(In thousands)	of Issues	Value		Loss		of Issues	Value			Loss		of Issues	Value			Loss
Available for Sale:
U.S. Treasury Obligations	3	$	15,068	$	(12)	—	$	—	$		—	3	$	15,068	$		(12)
U.S. GSEs	3		14,817		(104)	—		—			—	3		14,817			(104)
FHLB Obligations	8		39,094		(226)	—		—			—	8		39,094			(226)
Agency MBSs	17		60,748		(512)	—		—			—	17		60,748			(512)
Agency CMBSs	5		19,608		(331)	1		4,761			(66)	6		24,369			(397)
Agency CMOs	15		42,235		(283)	3		6,089			(160)	18		48,324			(443)
Total Available for Sale	51	$	191,570	$	(1,468)	4	$	10,850	$		(226)	55	$	202,420	$		(1,694)
Held to Maturity:
Agency CMOs	14	$	51,713	$	(623)	2	$	5,287	$		(93)	16	$	57,000	$		(716)
Total Held to Maturity	14	$	51,713	$	(623)	2	$	5,287	$		(93)	16	$	57,000	$		(716)

There were no securities classified as trading at March 31, 2016 and December 31, 2015.

Unrealized losses on investment securities result from the cost basis of the security being higher than its current fair value. These differences 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.

At March 31, 2016, all of our MBSs and CMOs held were issued by U.S. government-sponsored entities and agencies, primarily Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”), institutions which the government has affirmed its commitment to support.  Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because we do not have the intent to sell these securities and it is not likely that we will be required to sell the securities before their anticipated recovery, we do not consider these securities to be other-than-temporarily impaired at March 31, 2016.

Agency MBSs and Agency CMOs consist of pools of residential mortgages which are guaranteed by FNMA, FHLMC, or Government National Mortgage Association (“GNMA”) with various origination dates and maturities.  Agency CMBS consists of bonds backed by commercial real estate which are guaranteed by FNMA and GNMA.

During the first quarter of 2014, we transferred securities with a total amortized cost of $12.63 million, and a corresponding fair value of $12.64 million, from available for sale to held to maturity.  The net unrealized gain, net of taxes, on these securities at the dates of the transfers was $8 thousand. During the third and fourth quarters of 2013, we transferred securities with a total amortized cost of $152.89 million, and a corresponding fair value of $147.45 million, from available for sale to held to maturity. The net unrealized holding loss, net of taxes, on these securities at the dates of the transfers was $3.53 million. The unrealized holding gains and losses at the time of transfer continues to be reported in accumulated other comprehensive income, net of tax and are amortized over the remaining lives of the securities as an adjustment of the yield.  The amortization of the unamortized holding gains and losses reported in accumulated other comprehensive income will offset the effect on interest income of the premium and discount for the transferred securities.  The remaining unamortized balance of the net losses for the securities transferred from available for sale to held to maturity was $3.35 million or $2.17 million, net of tax at March 31, 2016.

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SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM DEBT

3 Months Ended

Mar. 31, 2016

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM DEBT

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM DEBT

NOTE 6: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

The following table presents the contractual maturity of our secured borrowings and class of collateral pledged:

	At March 31, 2016
	Remaining Contractual Maturity of the Agreements
	Overnight and						Greater Than
(In thousands)	Continuous		Up to 30 Days		30-90 Days		90 Days		Total
Repurchase Agreements:
Available for Sale:
U.S. Treasury Obligations	$	23,587	$	—	$	—	$	—	$	23,587
U.S. GSEs		15,043		—		—		—		15,043
FHLB Obligations		44,031		—		—		—		44,031
Agency MBSs		37,839		—		336		—		38,175
Agency CMBSs		13,770		—		—		—		13,770
Agency CMOs		24,269		—		—		—		24,269
Total Available for Sale	$	158,539	$	—	$	336	$	—	$	158,875
(In thousands)
Held to Maturity:
U.S. Agency Obligations	$	14,359	$	—	$	—	$	—	$	14,359
Agency CMOs		57,445		—		—		—		57,445
Agency MBSs		18,324		—		—		—		18,324
Total Held to Maturity	$	90,128	$	—	$	—	$	—	$	90,128

The fair value of securities pledged to secure repurchase agreements may decline. The Company manages this risk by having a policy to pledge securities valued above the gross outstanding balance of repurchase agreements. Securities sold under agreements to repurchase are secured by securities with a carrying value of $249.11 million at March 31, 2016 and $287.27 million at December 31, 2015.

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LOANS AND THE ALLOWANCE FOR CREDIT LOSSES

3 Months Ended

Mar. 31, 2016

LOANS AND THE ALLOWANCE FOR CREDIT LOSSES

LOANS AND THE ALLOWANCE FOR CREDIT LOSSES

NOTE 7: LOANS AND THE ALLOWANCE FOR CREDIT LOSSES

Loans

The composition of our loan portfolio at March 31, 2016 and December 31, 2015 was as follows:

(In thousands)	March 31, 2016		December 31, 2015
Commercial, financial and agricultural	$	247,074	$	237,451
Municipal loans		105,433		105,421
Real estate loans – residential		461,009		468,443
Real estate loans – commercial		556,836		558,004
Real estate loans – construction		42,209		34,802
Installment loans		9,009		10,115
All other loans		33		44
Total loans	$	1,421,603	$	1,414,280

We primarily originate commercial, commercial real estate, municipal obligations and residential real estate loans to customers throughout the states of Vermont and Massachusetts. There are no significant industry concentrations in the loan portfolio. Loans totaled $1.42 billion and $1.41 billion at March 31, 2016 and December 31, 2015, respectively. Total loans included $1.22 million and $1.20 million of net deferred loan origination costs at March 31, 2016 and December 31, 2015, respectively. The aggregate amount of overdrawn deposit balances classified as loan balances was $291 thousand and $308 thousand at March 31, 2016 and December 31, 2015, respectively.

The following table reflects our loan loss experience and activity in the allowance for loan losses for the three months ended March 31, 2016:

	Commercial,
	financial
	and				Real estate-		Real estate-		Real estate-
(In thousands)	agricultural		Municipal		residential		commercial		construction		Installment		All other		Totals
Allowance for loan losses:
Beginning balance	$	2,696	$	590	$	2,882	$	5,386	$	420	$	66	$	—	$	12,040
Charge-offs		(3)		—		(73)		—		—		(42)		—		(118)
Recoveries		2		—		11		4		—		19		—		36
Provision (credit)		161		32		37		(109)		45		49		—		215
Ending balance	$	2,856	$	622	$	2,857	$	5,281	$	465	$	92	$	—	$	12,173

The $215 thousand provision for loan losses includes a $205 thousand provision for credit losses plus $10 thousand of excess reserves from the reserve for undisbursed lines and letters.

The following table reflects our loan loss experience and activity in the allowance for loan losses for the three months ended December 31, 2015:

	Commercial,
	financial
	and				Real estate-		Real estate-		Real estate-
(In thousands)	agricultural		Municipal		residential		commercial		construction		Installment		All other		Totals
Allowance for loan losses:
Beginning balance	$	2,833	$	631	$	2,959	$	5,238	$	493	$	56	$	—	$	12,210
Charge-offs		(2)		—		(28)		—		—		(43)		—		(73)
Recoveries		3		—		15		1		—		11		—		30
Provision (credit)		(138)		(41)		(64)		147		(73)		42		—		(127)
Ending balance	$	2,696	$	590	$	2,882	$	5,386	$	420	$	66	$	—	$	12,040

The provision for loan losses includes $(127) thousand of excess reserves to the reserve for undisbursed lines and letters.

The following table reflects our loan loss experience and activity in the allowance for loan losses for the three months ended March 31, 2015:

	Commercial,
	financial				Real
	and				estate-		Real estate-		Real estate
(In thousands)	agricultural		Municipal		residential		commercial		construction		Installment		All other		Totals
Allowance for loan losses:
Beginning balance	$	2,583	$	623	$	3,038	$	5,209	$	325	$	13	$	42	$	11,833
Charge-offs		(29)		—		(55)		—		—		(74)		—		(158)
Recoveries		25		—		3		1		—		53		—		82
Provision (credit)		280		(93)		38		(61)		39		71		(42)		232
Ending balance	$	2,859	$	530	$	3,024	$	5,149	$	364	$	63	$	—	$	11,989

The provision for loan losses includes $232 thousand of excess reserves from the reserve for undisbursed lines and letters.

The following presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based upon impairment method at March 31, 2016:

	Commercial,
	financial and				Real estate-		Real estate-		Real estate-
(In thousands)	agricultural		Municipal		residential		commercial		construction		Installment		All other		Totals
Allowance for loan losses:
Ending balance individually evaluated for impairment	$	135	$	—	$	87	$	—	$	—	$	—	$	—	$	222
Ending balance collectively evaluated for impairment		2,721		622		2,770		5,281		465		92		—		11,951
Ending balance acquired with deteriorated credit quality		—		—		—		—		—		—		—		—
Totals	$	2,856	$	622	$	2,857	$	5,281	$	465	$	92	$	—	$	12,173
Financing receivables:
Ending balance individually evaluated for impairment	$	705	$	—	$	589	$	1,120	$	—	$	11	$	—	$	2,425
Ending balance collectively evaluated for impairment		245,222		105,433		460,420		553,698		42,209		8,998		33		1,416,013
Ending balance acquired with deteriorated credit quality		1,147		—		—		2,018		—		—		—		3,165
Totals	$	247,074	$	105,433	$	461,009	$	556,836	$	42,209	$	9,009	$	33	$	1,421,603

The following presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based upon impairment method at December 31, 2015:

	Commercial,
	financial and				Real estate-		Real estate-		Real estate-
(In thousands)	agricultural		Municipal		residential		commercial		construction		Installment		All other		Totals
Allowance for loan losses:
Ending balance individually evaluated for impairment	$	—	$	—	$	137	$	—	$	—	$	—	$	—	$	137
Ending balance collectively evaluated for impairment		2,696		590		2,745		5,386		420		66		—		11,903
Ending balance acquired with deteriorated credit quality		—		—				—		—		—		—		—
Totals	$	2,696	$	590	$	2,882	$	5,386	$	420	$	66	$	—	$	12,040
Financing receivables:
Ending balance individually evaluated for impairment	$	595	$	—	$	706	$	647	$	—	$	22	$	—	$	1,970
Ending balance collectively evaluated for impairment		235,652		105,421		467,737		555,323		34,802		10,093		44		1,409,072
Ending balance acquired with deteriorated credit quality		1,204		—		—		2,034		—		—		—		3,238
Totals	$	237,451	$	105,421	$	468,443	$	558,004	$	34,802	$	10,115	$	44	$	1,414,280

The table below presents the recorded investment of loans segregated by class, with delinquency aging as of March 31, 2016:

	31-60		61-90		91 Days		Total
	Days		Days		or More		Past
(In thousands)	Past Due		Past Due		Past Due		Due		Current			Nonperforming	Total
Commercial, financial and agricultural	$	2,142	$	612	$	—	$	2,754	$	242,622	$	1,698	$	247,074
Municipal		—		—		—		—		105,433		—		105,433
Real estate-residential:
First mortgage		26		—		—		26		419,144		589		419,759
Second mortgage		3		—		—		3		41,247		—		41,250
Real estate-commercial:
Owner occupied		589		449		—		1,038		215,602		2,085		218,725
Non-owner occupied		—		136		—		136		337,511		464		338,111
Real estate-construction:
Residential		—		—		—		—		2,161		—		2,161
Commercial		—		—		—		—		40,048		—		40,048
Installment		75		—		—		75		8,923		11		9,009
Other		—		—		—		—		33		—		33
Total	$	2,835	$	1,197	$	—	$	4,032	$	1,412,724	$	4,847	$	1,421,603

Of the total nonperforming loans in the aging table above, $2.32 million are past due of which $400 are restructured loans and $0 were 91 days or more past due and accruing. 

The table below presents the recorded investment of loans segregated by class, with delinquency aging as of December 31, 2015:

	31-60		61-90			91 Days			Total
	Days		Days			or More			Past
(In thousands)	Past Due		Past Due			Past Due			Due		Current			Nonperforming		Total
Commercial, financial and agricultural	$	—		$	251	$	—	$		251	$	235,820	$	1,380	$		237,451
Municipal		—			—		—			—		105,421		—			105,421
Real estate-residential:
First mortgage		50			—		—			50		425,520		706			426,276
Second mortgage		—			8		—			8		42,159		—			42,167
Real estate-commercial:
Owner occupied		323			—		—			323		219,080		1,605			221,008
Non-owner occupied		—			—		—			—		336,514		482			336,996
Real estate-construction:
Residential		—			—		—			—		2,422		—			2,422
Commercial		—			—		—			—		32,380		—			32,380
Installment		61			9		—			70		10,023		22			10,115
Other		—			—		—			—		44		—			44
Total	$	434		$	268	$	—	$		702	$	1,409,383	$	4,195	$		1,414,280

Of the total nonperforming loans in the aging table above, $2.65 million are past due of which $471 are restructured loans and $0 were 91 days or more past due and accruing.

Impaired loans by class at March 31, 2016 and for the three months ended March 31, 2016 are as follows:

	Period Ended						Three Months Ended
	March 31, 2016						March 31, 2016
			Unpaid					Average	Interest
	Recorded		Principal		Related			Recorded	Income
(In thousands)	Investment		Balance		Allowance			Investment	Recognized
With no related allowance recorded
Commercial, financial and agricultural	$	101	$	101	$	—	$	390	$	1
Residential:
First mortgage		198		256		—		241		2
Second mortgage		—		—		—		3		—
Commercial Real Estate:
Owner occupied		656		646		—		401		—
Non-owner occupied		464		471		—		470		—
Construction:
Residential		—		—		—		—		—
Commercial		—		—		—		—		—
Installment		11		11		—		8		—
With related allowance recorded
Commercial, financial and agricultural		604		607		135		254		—
Residential:
First mortgage		391		391		87		425		—
Second mortgage		—		—		—		—		—
Commercial Real Estate:
Owner occupied		—		—		—		—		—
Total
Commercial, financial and agricultural		705		708		135		644		1
Residential:		589		647		87		669		2
Commercial Real Estate:		1,120		1,117		—		871		—
Construction		—		—		—		—		—
Installment		11		11		—		8		—
Total	$	2,425	$	2,483	$	222	$	2,192	$	3

Impaired loans by class at December 31, 2015 and for the three months ended March 31, 2015 are as follows:

	Period Ended						Three Months Ended
	December 31, 2015						March 31, 2015
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
(In thousands)	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial, financial and agricultural	$	595	$	599	$	—	$	109	$	—
Residential:
First mortgage		264		322		—		147		1
Second mortgage		—		—		—		79		—
Commercial Real Estate:
Owner occupied		165		165		—		—		—
Non-owner occupied		482		482
Installment		22		22		—		—		—
With related allowance recorded
Commercial, financial and agricultural		—		—		—		166		—
Residential:
First mortgage		442		442		137		439		—
Second mortgage		—		—		—		6		—
Commercial Real Estate:
Owner occupied		—		—		—		—		—
Installment		—		—		—		—		—
Total
Commercial, financial and agricultural		595		599		—		275		—
Residential:		706		764		137		671		1
Commercial Real Estate:		647		647		—		—		—
Installment		22		22		—		—		—
Total	$	1,970	$	2,032	$	137	$	946	$	1

Residential and commercial loans serviced for others at March 31, 2016 and December 31, 2015 amounted to approximately $34.49 million and $27.87 million, respectively.

Nonperforming loans at March 31, 2016 and December 31, 2015 are as follows:

(In thousands)	March 31, 2016		December 31, 2015
Nonaccrual  loans	$	3,777	$	3,513
Loans greater than 90 days and accruing		—		—
Troubled debt restructurings ("TDRs")		1,070		682
Total nonperforming loans	$	4,847	$	4,195

Of the total TDRs in the table above, $864 thousand at March 31, 2016 and $472 thousand at December 31, 2015, are non-accruing. There was one commercial loan restructured with a balance of $464 thousand in the three months ending March 31, 2016. In the three months ending March 31, 2015, there were zeroloans that were restructured The loan modified in 2016 was individually evaluated for impairment and it was determined that noreserve was required.

TDRs represent balances where the existing loan was modified involving a concession in rate, term or payment amount due to the distressed financial condition of the borrower. There were three restructured residential mortgages at March 31, 2016 with balances totaling $121 thousand. There were three restructured commercial loans at March 31, 2016 with a balance of $949 thousand. Five of the six TDRs at March 31, 2016 continue to pay as agreed according to the modified terms. The one TDR that was delinquent at March 31, 2016 totaled $400 thousand.  At March 31, 2016, there were no commitments to lend additional funds to borrowers whose loans have been modified in a troubled debt restructuring. We had no commitments to lend additional funds to borrowers whose loans were in nonaccrual status or to borrowers whose loans were 91 days past due and still accruing at March 31, 2016. Interest income on restructured loans during the three months ending March 31, 2016 and 2015 was insignificant.

Nonaccrual loans by class as of March 31, 2016 and December 31, 2015 are as follows:

(In thousands)	March 31, 2016		December 31, 2015
Commercial, financial and agricultural	$	1,213	$	823
Real estate - residential:
First mortgage		468		581
Second mortgage		—		—
Real estate - commercial:
Owner occupied		2,085		1,605
Non owner occupied		—		482
Installment		11		22
Total nonaccruing non-TDR loans	$	3,777	$	3,513
Nonaccruing TDR’s
Commercial, financial and agricultural		400		472
Real estate – residential:
First mortgage		—		—
Real estate - commercial:
Non owner occupied		464		—
Total nonaccrual loans including TDRs	$	4,641	$	3,985

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 fallback repayment sources, typically collateral and personal guarantees. Pass rated commercial loan relationships with a total exposure of $1 million or greater 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, marginally adequate 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.

Residential real estate and consumer loans

We do not use a grading system for our performing residential real estate and consumer loans. Credit quality for these loans is based on performance and payment status.

Below is a summary of loans by credit quality indicator as of March 31, 2016:

					Pass-		Special		Sub-
(In thousands)	Unrated		Pass		Watch		Mention		Standard		Total
Commercial, financial and agricultural	$	506	$	188,426	$	41,409	$	831	$	15,902	$	247,074
Municipal		47		91,596		13,790		—		—		105,433
Real estate – residential:
First mortgage		414,056		5,073		162		—		468		419,759
Second mortgage		41,250		—		—		—		—		41,250
Real estate – commercial:
Owner occupied		234		163,721		38,281		3,366		13,123		218,725
Non-owner occupied		475		290,236		45,280		453		1,667		338,111
Real estate – construction:
Residential		369		1,792		—		—		—		2,161
Commercial		140		34,591		3,555		—		1,762		40,048
Installment		8,998		—		—		—		11		9,009
All other loans		33		—		—		—		—		33
Total	$	466,108	$	775,435	$	142,477	$	4,650	$	32,933	$	1,421,603

Below is a summary of loans by credit quality indicator as of December 31, 2015:

					Pass-		Special		Sub-
(In thousands)	Unrated		Pass		Watch		Mention		Standard		Total
Commercial, financial and agricultural	$	597	$	179,451	$	45,977	$	4,177	$	7,249	$	237,451
Municipal		58		92,011		13,352		—		—		105,421
Real estate – residential:
First mortgage		420,798		4,733		164		—		581		426,276
Second mortgage		42,167		—		—		—		—		42,167
Real estate – commercial:
Owner occupied		296		161,810		41,477		5,959		11,466		221,008
Non-owner occupied		166		290,337		44,485		444		1,564		336,996
Real estate – construction:
Residential		478		1,944		—		—		—		2,422
Commercial		145		27,299		3,136		—		1,800		32,380
Installment		10,093		—		—		—		22		10,115
All other loans		44		—		—		—		—		44
Total	$	474,842	$	757,585	$	148,591	$	10,580	$	22,682	$	1,414,280

The carrying amount of loans purchased with evidence of credit deterioration accounted for under ASC 310-30 acquired in the acquisition totaled $3.17 million and $3.24 million at March 31, 2016 and December 31, 2015, respectively.  There was no transfer of nonaccretable yield to accretable.

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FAIR VALUE OF FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2016

FAIR VALUE OF FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 8: 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.

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:

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

· 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.

· 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.

The types of instruments valued based on quoted market prices in active markets include most U.S. government and Agency securities, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy. We do not adjust the quoted price for such instruments.

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds, less liquid mortgage products, less liquid Agency securities, less liquid listed equities, state, municipal and provincial obligations, and certain physical commodities. Such instruments are generally classified within Level 2 of the fair value hierarchy.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions; valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, Management’s best estimate will be used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Subsequent to inception, Management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

Financial instruments on a recurring basis

The table below presents the balance of financial assets and liabilities at March 31, 2016 measured at fair value on a recurring basis:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Treasury Obligations	$	25,361	$	—	$	25,361	$	—
U.S. GSEs		31,429		—		31,429		—
FHLB Obligations		57,122		—		57,122		—
Agency MBSs		93,301		—		93,301		—
Agency CMBSs		24,672		—		24,672		—
Agency CMOs		61,816		—		61,816		—
ABSs		347		—		347		—
Interest rate swap agreements		2,177		—		2,177		—
Total assets	$	296,225	$	—	$	296,225	$	—
Liabilities
Interest rate swap agreements		1,859		—		1,859		—
Total liabilities	$	1,859	$	—	$	1,859	$	—

The table below presents the balance of financial assets and liabilities at December 31, 2015 measured at fair value on a recurring basis:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Treasury Obligations	$	25,113	$	—	$	25,113	$	—
U.S. GSEs		20,794		—		20,794		—
FHLB Obligations		51,111		—		51,111		—
Agency MBSs		97,249		—		97,249		—
Agency CMBSs		24,553		—		24,553		—
Agency CMOs		64,279		—		64,279		—
ABSs		355		—		355		—
Interest rate swap agreements		1,084		—		1,084		—
Total assets	$	284,538	$	—	$	284,538	$	—
Liabilities
Interest rate swap agreements		1,004		—		1,004		—
Total liabilities	$	1,004	$	—	$	1,004	$	—

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 Note 5 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 notransfersbetweenLevel 1 and Level 2 for the three months ended March 31, 2016 or December 31, 2015.  There were no Level 3 assets measured at fair value on a recurring basis during the three months ended March 31, 2016 or December 31, 2015.

Financial instruments on a non-recurring basis

Certain financial assets are also measured at fair value on a non-recurring basis, however they were not material at March 31, 2016 or December 31, 2015. These financial assets include impaired loans and OREO.

Fair value of financial instruments

The fair value of Merchants’ financial instruments as of March 31, 2016 are summarized in the table below:

	Carrying
(In thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	80,640	$	80,640	$	80,640	$	—	$	—
Securities available for sale		294,048		294,048		—		294,048		—
Securities held to maturity		115,392		118,062		—		118,062		—
FHLB stock		3,863		N/A		N/A		N/A		N/A
Loans, net of allowance for loan losses		1,409,430		1,414,717		—		—		1,414,717
Interest rate swap agreement		2,177		2,177		—		2,177		—
Accrued interest receivable		4,885		4,885		—		1,061		3,824
Total	$	1,910,435	$	1,914,529	$	80,640	$	415,348	$	1,418,541
Deposits	$	1,526,788	$	1,527,214	$	1,297,791	$	229,423	$	—
Securities sold under agreement to repurchase		249,003		248,955		—		248,955		—
Other long-term debt		4,716		4,726		—		4,726		—
Junior subordinated debentures issued to unconsolidated subsidiary trust		20,619		15,449		—		15,449		—
Interest rate swap agreement		1,859		1,859		—		1,859		—
Accrued interest payable		136		136		13		123		—
Total	$	1,803,121	$	1,798,339	$	1,297,804	$	500,535	$	—

The fair value of Merchants’ financial instruments as of December 31, 2015 are summarized in the table below:

	Carrying
(In thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	150,183	$	150,183	$	150,183	$	—	$	—
Securities available for sale		283,454		283,454		—		283,454		—
Securities held to maturity		119,674		120,093		—		120,093		—
FHLB stock		3,797		N/A		N/A		N/A		N/A
Loans, net of allowance for loan losses		1,402,240		1,397,877		—		—		1,397,877
Interest rate swap agreement		1,084		1,084		—		1,084		—
Accrued interest receivable		4,374		4,374		—		1,085		3,289
Total	$	1,964,806	$	1,957,065	$	150,183	$	405,716	$	1,401,166
Deposits	$	1,551,439	$	1,551,046	$	1,296,867	$	254,179	$	—
Securities sold under agreement to repurchase		286,639		286,586		—		286,586		—
Other long-term debt		5,238		5,191		—		5,191		—
Junior subordinated debentures issued to unconsolidated subsidiary trust		20,619		14,975		—		14,975		—
Interest rate swap agreement		1,004		1,004		—		1,004		—
Accrued interest payable		152		152		13		139		—
Total	$	1,865,091	$	1,858,954	$	1,296,880	$	562,074	$	—

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accrued interest receivable and accrued interest payable approximate fair value. It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

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 resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously.  The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Deposits - The fair value of deposits with no stated maturity, which includes demand, savings, interest bearing checking and money market accounts, is equal to the amount payable on demand resulting in a Level 1 classification. The fair value of variable rate, fixed term certificates of deposit also approximates the carrying amount reported in the consolidated balance sheets. 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 resulting in a Level 2 classification.

Debt - The fair value of debt is estimated using current market rates for borrowings of similar remaining maturity resulting in a Level 2 classification.

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 is not material as of March 31, 2016 and December 31, 2015.

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EMPLOYEE BENEFIT PLANS

3 Months Ended

Mar. 31, 2016

EMPLOYEE BENEFIT PLANS

EMPLOYEE BENEFIT PLANS

NOTE 9: EMPLOYEE BENEFIT PLANS

Pension Plan

Prior to January 1995, we maintained a noncontributory defined benefit plan (the “Pension Plan”) covering all eligible employees. During 1995, the Pension Plan was curtailed. Accordingly, all accrued benefits were fully vested and no additional years of service or age will be accrued.

The following tables summarize the components of net periodic benefit cost and other changes in Pension Plan assets and benefit obligations recognized in other comprehensive income for the three months ended March 31, 2016 and 2015:

	Three Months Ended
	March 31,
(In thousands)	2016		2015
Interest cost	$	112	$	112
Expected return on plan assets		(242)		(264)
Service costs		14		13
Net loss amortization		116		103
Net periodic pension cost (benefit)	$	—	$	(36)

We have no minimum required contribution for 2016.

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

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EARNINGS PER SHARE

3 Months Ended

Mar. 31, 2016

EARNINGS PER SHARE

EARNINGS PER SHARE

NOTE 10: EARNINGS PER SHARE

The following table presents reconciliations of the calculations of basic and diluted earnings per share for the three months ended March 31, 2016 and 2015:

	Three Months Ended
	March 31,
(In thousands except per share data)	2016		2015
Net income	$	3,490	$	3,336
Weighted average common shares outstanding		6,856		6,329
Dilutive effect of common stock equivalents		110		13
Weighted average common and common equivalent shares outstanding		6,966		6,342
Basic earnings per common share	$	0.51	$	0.53
Diluted earnings per common share	$	0.50	$	0.53

Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Anti-dilutive warrants totaling 34.4 thousand shares for the three months ended March 31, 2016 have been excluded from the calculation of diluted EPS. There were no anti-dilutive shares excluded for the three months ended March 31, 2015.

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STOCK REPURCHASE PROGRAM

3 Months Ended

Mar. 31, 2016

STOCK REPURCHASE PROGRAM

STOCK REPURCHASE PROGRAM

NOTE 11: STOCK REPURCHASE PROGRAM

We extended our stock buyback program through January 26, 2017. Under the program, which was originally adopted in January 2007, 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 $23.00 since the program's adoption.

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COMMITMENTS AND CONTINGENCIES

3 Months Ended

Mar. 31, 2016

COMMITMENTS AND CONTINGENCIES.

COMMITMENTS AND CONTINGENCIES

NOTE 12: COMMITMENTS AND CONTINGENCIES

Financial Instruments with Off-Balance Sheet Risk

Merchants is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its 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.

Exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and financial guarantees written is represented by the contractual amount of those instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitment is expected to expire without being drawn upon, the total commitment amount does not necessarily represent a future cash requirement. We evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained by us upon extension of credit is based on Management's credit evaluation of the counterparty, and an appropriate amount of real and/or personal property is typically obtained as collateral.

Disclosures are required regarding liability-recognition for the fair value at issuance of certain guarantees. We do not issue any guarantees that would require liability-recognition or disclosure, other than our standby letters of credit. We have issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and 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 $6.19million at March 31, 2016 and $6.30 million at December 31, 2015, respectively, 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 and 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.

We may enter into commitments to sell loans, which involve market and interest rate risk. There were no such commitments at March 31, 2016 or December 31, 2015.

Balances at the Federal Reserve Bank

At March 31, 2016 and December 31, 2015, amounts at the Federal Reserve Bank included $26.03 million and $30.52 million, respectively, held to satisfy certain reserve requirements of the Federal Reserve Bank.

Legal Proceedings

We have been named as defendants in various legal proceedings arising from our normal business activities. Although the amount of any ultimate liability with respect to such proceedings cannot be determined, in the opinion of Management, based upon input from counsel on the anticipated outcome of such proceedings, any such liability will not have a material effect on our consolidated financial position.

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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

3 Months Ended

Mar. 31, 2016

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

NOTE 13: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents changes in accumulated other comprehensive income (loss) by component, net of tax for the Three months ending March 31, 2016.

	Unrealized		Unrealized Gains
	Gains (Losses)		(Losses) on Securities
	on Securities		Transferred From						Accumulated Other
	Available-For-		Available-For-Sale to				Interest Rate		Comprehensive
(In thousands)	Sale		Held-To-Maturity		Pension Plan		Swaps		Income (Loss)
Beginning Balance December 31, 2015	$	166	$	(2,297)	$	(3,737)	$	(155)	$	(6,023)
Other comprehensive income before reclassifications		2,624		—		—		35		2,659
Transfer of securities from available-for-sale to held-to-maturity		—		—		—		—		—
Accretion of unrealized losses of securities transferred from available-for-sale to held-to-maturity recognized in other comprehensive income		—		127		—		—		127
Reclassification adjustments for (gains) losses reclassified into income		—		—		75		—		75
Net current period other comprehensive (loss) income		2,624		127		75		35		2,861
Balance March 31, 2016	$	2,790	$	(2,170)	$	(3,662)	$	(120)	$	(3,162)

The following table presents changes in accumulated other comprehensive income (loss) by component, net of tax for the three months ending March 31, 2015.

	Unrealized		Unrealized Gains
	Gains (Losses)		(Losses) on Securities
	on Securities		Transferred From						Accumulated Other
	Available-For-		Available-For-Sale to				Interest Rate		Comprehensive
(In thousands)	Sale		Held-To-Maturity		Pension Plan		Swaps		Income (Loss)
Beginning Balance December 31, 2014	$	1,482	$	(2,824)	$	(3,395)	$	(311)	$	(5,048)
Other comprehensive income before reclassifications		783		—		—		21		804
Transfer of securities from available-for-sale to held-to-maturity		—		—		—		—		—
Accretion of unrealized losses of securities transferred from available-for-sale to held-to-maturity recognized in other comprehensive income		—		124		—		—		124
Reclassification adjustments for (gains) losses reclassified into income		—		—		67		—		67
Net current period other comprehensive (loss) income		783		124		67		21		995
Balance March 31, 2015	$	2,265	$	(2,700)	$	(3,328)	$	(290)	$	(4,053)

Details of the reclassification adjustments in the above table for the three months ended March 31, 2016 and 2015 are presented below:

Details about Accumulated Other	Three Months Ended
Comprehensive Income Components	March 31,				Affected Line Item in the Statement
(In thousands)		2016		2015	Where Net Income is Presented
Amortization of defined benefit pension plan
	$	(116)	$	(103)	Compensation and benefits expense
		(116)		(103)	Total before tax
		41		36	Provision for income taxes
	$	(75)	$	(67)	Net of tax
Total reclassification adjustments	$	(75)	$	(67)	(Increase) / Decrease to Net Income

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DERIVATIVE FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2016

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

NOTE 14: DERIVATIVE FINANCIAL INSTRUMENTS

At March 31, 2016 and December 31, 2015, we had an interest rate swap with a notional amount of $10 million that was designated as a cash flow hedge. The swap was used to convert a portion of the floating rate interest on our trust preferred issuance to a fixed rate of interest. 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. There was no ineffective portion recognized in earnings during the three months ended March 31, 2016 or March 31, 2015. The fair value of $185 thousand and $239 thousand was reflected in other liabilities in the accompanying consolidated balance sheets at March 31, 2016 and December 31, 2015, respectively.

We entered into interest rate swaps with a notional amount of $46.4 million with certain commercial customers.  In order to minimize our risk, these customer derivatives (pay floating/receive fixed swaps) have been offset with essentially matching interest rate swaps with our counterparty totaling $46.4 million (pay fixed/receive floating swaps). At March 31, 2016, the weighted average receive rate of these interest rate swaps was 2.15%, the weighted average pay rate was 3.64% and the weighted average maturity was 9.9 years.  The fair values of $1.674 million and $1.674 million were reflected in other assets and other liabilities, respectively, in the accompanying consolidated balance sheets at March 31, 2016. At December 31, 2015, the weighted average receive rate of these interest rate swaps was 2.13%, the weighted average pay rate was 3.60% and the weighted average maturity was 10.2 years.  The fair values of $765 thousand and $765 thousand were reflected in other assets and other liabilities, respectively, in the accompanying consolidated balance sheets at December 31, 2015. Hedge accounting has not been applied for these derivatives.  Because the terms of the swaps 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.

We entered into interest rate swaps with notional amounts totaling $8.9 million at March 31, 2016, and $9.8 million at December 31, 2015, that were designated as fair value hedges of certain fixed rate loans with municipalities. At March 31, 2016, the weighted average receive rate of these interest rate swaps was 1.79%, the weighted average pay rate was 3.26% and the weighted average maturity was 16.3 years. The fair value of $503 thousand at March 31, 2016, was reflected as a reduction to loans and an increase to other assets. At December 31, 2015 the weighted average receive rate of these interest rate swaps was 1.78%, the weighted average pay rate was 3.25% and the weighted average maturity was 16.6 years. The fair value of $319 thousand at December 31, 2015, was reflected as a reduction to loans and an increase to other assets. The ineffective portion of the interest swaps was immaterial and as such, amounts are not recognized in earnings.

We assessed our counterparty risk at March 31, 2016 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 Note 8 to these consolidated financial statements.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Mar. 31, 2016

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Merchants Bancshares, Inc. (the “Company”), and its wholly-owned subsidiary Merchants Bank (the “Bank,” and collectively with the Company, “Merchants”, “we,” “us, or “our”). All material intercompany accounts and transactions are eliminated in consolidation. We offer a full range of deposit, loan, cash management, and trust services to meet the financial needs of individual consumers, businesses and municipalities at 31 full-service banking offices throughout the state of Vermont and one full-service banking office in Massachusetts as of March 31, 2016.

Basis of Presentation

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 GAAP for complete financial statements. All adjustments necessary for a fair presentation of our interim consolidated financial statements as of March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015 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

Management’s Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires Management 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 credit losses, income taxes, interest income recognition on loans and investments and analysis of other-than-temporary impairment of our investment securities portfolio. Operating results in the future may vary from the amounts derived from Management's estimates and assumptions.

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ACQUISITION of NUVO BANK & TRUST COMPANY (Tables)

3 Months Ended

Mar. 31, 2016

Consideration paid and the fair value of identifiable assets acquired and liabilities assumed

(In thousands)
Consideration paid:
Common stock issued in exchange for NUVO shares	$	16,889
Cash paid for NUVO shares		5,988
Stock warrants issued		470
Total consideration paid	$	23,347
Assets acquired:
Cash and cash equivalents	$	7,070
Interest bearing time deposits with banks		110
Investments		4,365
Restricted investment in bank stock		376
Loans		149,360
Premises and equipment , net		580
Accrued interest receivable		369
Core deposit intangible		1,377
Deferred tax asset		1,926
Other assets		355
Total assets acquired		165,888
Liabilities assumed:
Deposits		144,482
Federal Home Loan Bank advances		4,001
Accrued interest payable		42
Tax effect of acquisition fair value adjustments		705
Other liabilities		183
Total liabilities assumed		149,413
Net assets acquired	$	16,475
Goodwill	$	6,872

NUVO Bank & Trust Company

Schedule of changes in fair value of the consideration paid and the net assets acquired

(In thousands)
Goodwill reported as of December 31, 2015	$	6,967
Effect of adjustments to:
Consideration paid:
Stock warrants issued		(74)
Assets acquired:
Investments		21
Adjusted goodwill as of March 31, 2016	$	6,872

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GOODWILL AND INTANGIBLE ASSETS (Tables)

3 Months Ended

Mar. 31, 2016

Schedule of other intangible assets

		March 31,		December 31,
(In thousands)		2016		2015
Beginning of period	$	1,360	$	—
Additions		—		1,377
Amortization		51		17
End of period	$	1,309	$	1,360

Schedule of estimated amortization expense for each of the next five years

(In thousands)		Amount
Remainder of 2016	$	153
2017		173
2018		147
2019		126
2020		120
2021		120
Thereafter		470

NUVO Bank & Trust Company

Schedule of goodwill

(In thousands)
Goodwill reported as of December 31, 2015	$	6,967
Effect of adjustments to:
Consideration paid:
Stock warrants issued		(74)
Assets acquired:
Investments		21
Adjusted goodwill as of March 31, 2016	$	6,872

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INVESTMENT SECURITIES (Tables)

3 Months Ended

Mar. 31, 2016

INVESTMENT SECURITIES

Schedule of investments in securities are classified as available for sale or held to maturity

The amortized cost and fair values of the securities classified as available for sale and held to maturity as of March 31, 2016 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gains		Losses		Value
Available for Sale:
U.S. Treasury Obligations	$	25,067	$	294	$	—	$	25,361
U.S. Government Sponsored Enterprises ("U.S. GSEs")		31,045		384		—		31,429
Federal Home Loan Bank ("FHLB") Obligations		56,326		797		(1)		57,122
Residential Real Estate Mortgage-backed Securities ("Agency MBSs")		91,137		2,193		(29)		93,301
Agency Commercial Mortgage Backed Securities ("Agency CMBSs")		24,520		152		—		24,672
Agency Collateralized Mortgage Obligations ("Agency CMOs")		61,338		533		(55)		61,816
Asset Backed Securities ("ABSs")		311		36		—		347
Total Available for Sale	$	289,744	$	4,389	$	(85)	$	294,048

			Gross		Gross
	Amortized		Unrecognized		Unrecognized		Fair
	Cost		Gains		Losses		Value
Held to Maturity:
U.S. Agency Obligations	$	19,227	$	818	$	—	$	20,045
U.S. GSEs		9,571		236		—		9,807
FHLB Obligations		4,767		202		—		4,969
Agency CMOs		75,040		1,227		(64)		76,203
Agency MBSs		6,787		251		—		7,038
Total Held to Maturity	$	115,392	$	2,734	$	(64)	$	118,062

The amortized cost and fair values of the securities classified as available for sale and held to maturity as of December 31, 2015 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gains		Losses		Value
Available for Sale:
U.S. Treasury Obligations	$	25,064	$	61	$	(12)	$	25,113
U.S. GSEs		20,895		3		(104)		20,794
FHLB Obligations		51,230		107		(226)		51,111
Agency MBSs		96,073		1,688		(512)		97,249
Agency CMBSs		24,950		—		(397)		24,553
Agency CMOs		64,648		74		(443)		64,279
ABSs		325		30		—		355
Total Available for Sale	$	283,185	$	1,963	$	(1,694)	$	283,454

			Gross		Gross
	Amortized		Unrecognized		Unrecognized		Fair
	Cost		Gains		Losses		Value
Held to Maturity:
U.S. Agency Obligations	$	20,084	$	486	$	—	$	20,570
U.S. GSEs		9,556		166		—		9,722
FHLB Obligations		4,758		76		—		4,834
Agency CMOs		78,249		253		(716)		77,786
Agency MBSs		7,027		154		—		7,181
Total Held to Maturity	$	119,674	$	1,135	$	(716)	$	120,093

Schedule of contractual final maturity distribution of the debt securities classified as available for sale

The contractual final maturity distribution of the debt securities classified as available for sale of March 31, 2016, are as follows:

									Securities
			After One		After Five				not due
	Within		But Within		But Within		After Ten		at a Single
(In thousands)	One Year		Five Years		Ten Years		Years		Maturity		Total
Available for Sale (at fair value):
U.S. Treasury Obligations	$	101	$	25,260	$	—	$	—	$	N/A	$	25,361
U.S. GSEs		—		31,429		—		—		N/A		31,429
FHLB Obligations		—		45,570		11,552		—		N/A		57,122
Agency MBSs		N/A		N/A		N/A		N/A		93,301		93,301
Agency CMBSs		N/A		N/A		N/A		N/A		24,672		24,672
Agency CMOs		N/A		N/A		N/A		N/A		61,816		61,816
ABSs		N/A		N/A		N/A		N/A		347		347
Total Available for Sale	$	101	$	102,259	$	11,552	$	—	$	180,136	$	294,048
Available for Sale (at amortized cost):
U.S. Treasury Obligations	$	101	$	24,966	$	—	$	—	$	N/A	$	25,067
U.S. GSEs		—		31,045		—		—		N/A		31,045
FHLB Obligations		—		45,121		11,205		—		N/A		56,326
Agency MBSs		N/A		N/A		N/A		N/A		91,137		91,137
Agency CMBSs		N/A		N/A		N/A		N/A		24,520		24,520
Agency CMOs		N/A		N/A		N/A		N/A		61,338		61,338
ABSs		N/A		N/A		N/A		N/A		311		311
Total Available for Sale	$	101	$	101,132	$	11,205	$	—	$	177,306	$	289,744

The contractual final maturity distribution of the debt securities classified as held to maturity of March 31, 2016, are as follows:

									Securities
			After One		After Five				not due
	Within		But Within		But Within		After Ten		at a Single
(In thousands)	One Year		Five Years		Ten Years		Years		Maturity		Total
Held to Maturity (at fair value):
U.S. Agency Obligations	$	—	$	—	$	—	$	20,045	$	N/A	$	20,045
U.S. GSEs		—		—		9,807		—		N/A		9,807
FHLB Obligations		—		—		4,969		—		N/A		4,969
Agency CMOs		N/A		N/A		N/A		N/A		76,203		76,203
Agency MBSs		N/A		N/A		N/A		N/A		7,038		7,038
Total Held to Maturity	$	—	$	—	$	14,776	$	20,045	$	83,241	$	118,062
Held to Maturity (at amortized cost):
U.S. Agency Obligations	$	—	$	—	$	—	$	19,227	$	N/A	$	19,227
U.S. GSEs		—		—		9,571		—		N/A		9,571
FHLB Obligations		—		—		4,767		—		N/A		4,767
Agency CMOs		N/A		N/A		N/A		N/A		75,040		75,040
Agency MBSs		N/A		N/A		N/A		N/A		6,787		6,787
Total Held to Maturity	$	—	$	—	$	14,338	$	19,227	$	81,827	$	115,392

Schedule of gross unrealized and unrecognized losses on investment securities available for sale and fair value of related securities

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at March 31, 2016, were as follows:

	Less Than 12 Months					12 Months or More						Total
	Number	Fair				Number	Fair					Number	Fair
(In thousands)	of Issues	Value		Loss		of Issues		Value		Loss		of Issues		Value		Loss
Available for Sale:
FHLB Obligations	1	$	5,133	$	(1)		$		—	$	—	1	$		5,133	$	(1)
Agency MBSs	2		7,228		(29)				—		—	2			7,228		(29)
Agency CMBSs			—		—				—		—	—			—		—
Agency CMOs	1		3,752		(1)	3			5,899		(54)	4			9,651		(55)
ABSs			—		—				—		—	—			—		—
Total Available for Sale	4	$	16,113	$	(31)	3	$		5,899	$	(54)	7	$		22,012	$	(85)
Held to Maturity:
Agency CMOs	—	$	—	$	—	1	$		3,597	$	(64)	1	$		3,597	$	(64)
Total Held to Maturity	—	$	—	$	—	1	$		3,597	$	(64)	1	$		3,597	$	(64)

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at December 31, 2015, were as follows:

	Less Than 12 Months					12 Months or More						Total
	Number	Fair				Number	Fair					Number	Fair
(In thousands)	of Issues	Value		Loss		of Issues	Value			Loss		of Issues	Value			Loss
Available for Sale:
U.S. Treasury Obligations	3	$	15,068	$	(12)	—	$	—	$		—	3	$	15,068	$		(12)
U.S. GSEs	3		14,817		(104)	—		—			—	3		14,817			(104)
FHLB Obligations	8		39,094		(226)	—		—			—	8		39,094			(226)
Agency MBSs	17		60,748		(512)	—		—			—	17		60,748			(512)
Agency CMBSs	5		19,608		(331)	1		4,761			(66)	6		24,369			(397)
Agency CMOs	15		42,235		(283)	3		6,089			(160)	18		48,324			(443)
Total Available for Sale	51	$	191,570	$	(1,468)	4	$	10,850	$		(226)	55	$	202,420	$		(1,694)
Held to Maturity:
Agency CMOs	14	$	51,713	$	(623)	2	$	5,287	$		(93)	16	$	57,000	$		(716)
Total Held to Maturity	14	$	51,713	$	(623)	2	$	5,287	$		(93)	16	$	57,000	$		(716)

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SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM DEBT (Tables)

3 Months Ended

Mar. 31, 2016

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM DEBT

Schedule of contractual maturity of secured borrowings and class of collateral pledged

	At March 31, 2016
	Remaining Contractual Maturity of the Agreements
	Overnight and						Greater Than
(In thousands)	Continuous		Up to 30 Days		30-90 Days		90 Days		Total
Repurchase Agreements:
Available for Sale:
U.S. Treasury Obligations	$	23,587	$	—	$	—	$	—	$	23,587
U.S. GSEs		15,043		—		—		—		15,043
FHLB Obligations		44,031		—		—		—		44,031
Agency MBSs		37,839		—		336		—		38,175
Agency CMBSs		13,770		—		—		—		13,770
Agency CMOs		24,269		—		—		—		24,269
Total Available for Sale	$	158,539	$	—	$	336	$	—	$	158,875
(In thousands)
Held to Maturity:
U.S. Agency Obligations	$	14,359	$	—	$	—	$	—	$	14,359
Agency CMOs		57,445		—		—		—		57,445
Agency MBSs		18,324		—		—		—		18,324
Total Held to Maturity	$	90,128	$	—	$	—	$	—	$	90,128

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LOANS AND THE ALLOWANCE FOR CREDIT LOSSES (Tables)

3 Months Ended

Mar. 31, 2016

LOANS AND THE ALLOWANCE FOR CREDIT LOSSES

Schedule of composition of loan portfolio

(In thousands)	March 31, 2016		December 31, 2015
Commercial, financial and agricultural	$	247,074	$	237,451
Municipal loans		105,433		105,421
Real estate loans – residential		461,009		468,443
Real estate loans – commercial		556,836		558,004
Real estate loans – construction		42,209		34,802
Installment loans		9,009		10,115
All other loans		33		44
Total loans	$	1,421,603	$	1,414,280

Schedule of loan loss experience and activity in allowance for loan losses

The following table reflects our loan loss experience and activity in the allowance for loan losses for the three months ended March 31, 2016:

	Commercial,
	financial
	and				Real estate-		Real estate-		Real estate-
(In thousands)	agricultural		Municipal		residential		commercial		construction		Installment		All other		Totals
Allowance for loan losses:
Beginning balance	$	2,696	$	590	$	2,882	$	5,386	$	420	$	66	$	—	$	12,040
Charge-offs		(3)		—		(73)		—		—		(42)		—		(118)
Recoveries		2		—		11		4		—		19		—		36
Provision (credit)		161		32		37		(109)		45		49		—		215
Ending balance	$	2,856	$	622	$	2,857	$	5,281	$	465	$	92	$	—	$	12,173

The $215 thousand provision for loan losses includes a $205 thousand provision for credit losses plus $10 thousand of excess reserves from the reserve for undisbursed lines and letters.

The following table reflects our loan loss experience and activity in the allowance for loan losses for the three months ended December 31, 2015:

	Commercial,
	financial
	and				Real estate-		Real estate-		Real estate-
(In thousands)	agricultural		Municipal		residential		commercial		construction		Installment		All other		Totals
Allowance for loan losses:
Beginning balance	$	2,833	$	631	$	2,959	$	5,238	$	493	$	56	$	—	$	12,210
Charge-offs		(2)		—		(28)		—		—		(43)		—		(73)
Recoveries		3		—		15		1		—		11		—		30
Provision (credit)		(138)		(41)		(64)		147		(73)		42		—		(127)
Ending balance	$	2,696	$	590	$	2,882	$	5,386	$	420	$	66	$	—	$	12,040

Schedule of allowance for loan losses and recorded investment in loans

The following presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based upon impairment method at March 31, 2016:

	Commercial,
	financial and				Real estate-		Real estate-		Real estate-
(In thousands)	agricultural		Municipal		residential		commercial		construction		Installment		All other		Totals
Allowance for loan losses:
Ending balance individually evaluated for impairment	$	135	$	—	$	87	$	—	$	—	$	—	$	—	$	222
Ending balance collectively evaluated for impairment		2,721		622		2,770		5,281		465		92		—		11,951
Ending balance acquired with deteriorated credit quality		—		—		—		—		—		—		—		—
Totals	$	2,856	$	622	$	2,857	$	5,281	$	465	$	92	$	—	$	12,173
Financing receivables:
Ending balance individually evaluated for impairment	$	705	$	—	$	589	$	1,120	$	—	$	11	$	—	$	2,425
Ending balance collectively evaluated for impairment		245,222		105,433		460,420		553,698		42,209		8,998		33		1,416,013
Ending balance acquired with deteriorated credit quality		1,147		—		—		2,018		—		—		—		3,165
Totals	$	247,074	$	105,433	$	461,009	$	556,836	$	42,209	$	9,009	$	33	$	1,421,603

The following presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based upon impairment method at December 31, 2015:

	Commercial,
	financial and				Real estate-		Real estate-		Real estate-
(In thousands)	agricultural		Municipal		residential		commercial		construction		Installment		All other		Totals
Allowance for loan losses:
Ending balance individually evaluated for impairment	$	—	$	—	$	137	$	—	$	—	$	—	$	—	$	137
Ending balance collectively evaluated for impairment		2,696		590		2,745		5,386		420		66		—		11,903
Ending balance acquired with deteriorated credit quality		—		—				—		—		—		—		—
Totals	$	2,696	$	590	$	2,882	$	5,386	$	420	$	66	$	—	$	12,040
Financing receivables:
Ending balance individually evaluated for impairment	$	595	$	—	$	706	$	647	$	—	$	22	$	—	$	1,970
Ending balance collectively evaluated for impairment		235,652		105,421		467,737		555,323		34,802		10,093		44		1,409,072
Ending balance acquired with deteriorated credit quality		1,204		—		—		2,034		—		—		—		3,238
Totals	$	237,451	$	105,421	$	468,443	$	558,004	$	34,802	$	10,115	$	44	$	1,414,280

Schedule of recorded investment of loans, including nonaccrual and restructured loans

The table below presents the recorded investment of loans segregated by class, with delinquency aging as of March 31, 2016:

	31-60		61-90		91 Days		Total
	Days		Days		or More		Past
(In thousands)	Past Due		Past Due		Past Due		Due		Current			Nonperforming	Total
Commercial, financial and agricultural	$	2,142	$	612	$	—	$	2,754	$	242,622	$	1,698	$	247,074
Municipal		—		—		—		—		105,433		—		105,433
Real estate-residential:
First mortgage		26		—		—		26		419,144		589		419,759
Second mortgage		3		—		—		3		41,247		—		41,250
Real estate-commercial:
Owner occupied		589		449		—		1,038		215,602		2,085		218,725
Non-owner occupied		—		136		—		136		337,511		464		338,111
Real estate-construction:
Residential		—		—		—		—		2,161		—		2,161
Commercial		—		—		—		—		40,048		—		40,048
Installment		75		—		—		75		8,923		11		9,009
Other		—		—		—		—		33		—		33
Total	$	2,835	$	1,197	$	—	$	4,032	$	1,412,724	$	4,847	$	1,421,603

Of the total nonperforming loans in the aging table above, $2.32 million are past due of which $400 are restructured loans and $0 were 91 days or more past due and accruing. 

The table below presents the recorded investment of loans segregated by class, with delinquency aging as of December 31, 2015:

Schedule of impaired loans by class

Impaired loans by class at March 31, 2016 and for the three months ended March 31, 2016 are as follows:

	Period Ended						Three Months Ended
	March 31, 2016						March 31, 2016
			Unpaid					Average	Interest
	Recorded		Principal		Related			Recorded	Income
(In thousands)	Investment		Balance		Allowance			Investment	Recognized
With no related allowance recorded
Commercial, financial and agricultural	$	101	$	101	$	—	$	390	$	1
Residential:
First mortgage		198		256		—		241		2
Second mortgage		—		—		—		3		—
Commercial Real Estate:
Owner occupied		656		646		—		401		—
Non-owner occupied		464		471		—		470		—
Construction:
Residential		—		—		—		—		—
Commercial		—		—		—		—		—
Installment		11		11		—		8		—
With related allowance recorded
Commercial, financial and agricultural		604		607		135		254		—
Residential:
First mortgage		391		391		87		425		—
Second mortgage		—		—		—		—		—
Commercial Real Estate:
Owner occupied		—		—		—		—		—
Total
Commercial, financial and agricultural		705		708		135		644		1
Residential:		589		647		87		669		2
Commercial Real Estate:		1,120		1,117		—		871		—
Construction		—		—		—		—		—
Installment		11		11		—		8		—
Total	$	2,425	$	2,483	$	222	$	2,192	$	3

Impaired loans by class at December 31, 2015 and for the three months ended March 31, 2015 are as follows:

	Period Ended						Three Months Ended
	December 31, 2015						March 31, 2015
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
(In thousands)	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial, financial and agricultural	$	595	$	599	$	—	$	109	$	—
Residential:
First mortgage		264		322		—		147		1
Second mortgage		—		—		—		79		—
Commercial Real Estate:
Owner occupied		165		165		—		—		—
Non-owner occupied		482		482
Installment		22		22		—		—		—
With related allowance recorded
Commercial, financial and agricultural		—		—		—		166		—
Residential:
First mortgage		442		442		137		439		—
Second mortgage		—		—		—		6		—
Commercial Real Estate:
Owner occupied		—		—		—		—		—
Installment		—		—		—		—		—
Total
Commercial, financial and agricultural		595		599		—		275		—
Residential:		706		764		137		671		1
Commercial Real Estate:		647		647		—		—		—
Installment		22		22		—		—		—
Total	$	1,970	$	2,032	$	137	$	946	$	1

Schedule of nonperforming loans

(In thousands)	March 31, 2016		December 31, 2015
Nonaccrual  loans	$	3,777	$	3,513
Loans greater than 90 days and accruing		—		—
Troubled debt restructurings ("TDRs")		1,070		682
Total nonperforming loans	$	4,847	$	4,195

Schedule of nonaccrual loans by class

(In thousands)	March 31, 2016		December 31, 2015
Commercial, financial and agricultural	$	1,213	$	823
Real estate - residential:
First mortgage		468		581
Second mortgage		—		—
Real estate - commercial:
Owner occupied		2,085		1,605
Non owner occupied		—		482
Installment		11		22
Total nonaccruing non-TDR loans	$	3,777	$	3,513
Nonaccruing TDR’s
Commercial, financial and agricultural		400		472
Real estate – residential:
First mortgage		—		—
Real estate - commercial:
Non owner occupied		464		—
Total nonaccrual loans including TDRs	$	4,641	$	3,985

Schedule of loans by credit quality indicator

Below is a summary of loans by credit quality indicator as of March 31, 2016:

					Pass-		Special		Sub-
(In thousands)	Unrated		Pass		Watch		Mention		Standard		Total
Commercial, financial and agricultural	$	506	$	188,426	$	41,409	$	831	$	15,902	$	247,074
Municipal		47		91,596		13,790		—		—		105,433
Real estate – residential:
First mortgage		414,056		5,073		162		—		468		419,759
Second mortgage		41,250		—		—		—		—		41,250
Real estate – commercial:
Owner occupied		234		163,721		38,281		3,366		13,123		218,725
Non-owner occupied		475		290,236		45,280		453		1,667		338,111
Real estate – construction:
Residential		369		1,792		—		—		—		2,161
Commercial		140		34,591		3,555		—		1,762		40,048
Installment		8,998		—		—		—		11		9,009
All other loans		33		—		—		—		—		33
Total	$	466,108	$	775,435	$	142,477	$	4,650	$	32,933	$	1,421,603

Below is a summary of loans by credit quality indicator as of December 31, 2015:

					Pass-		Special		Sub-
(In thousands)	Unrated		Pass		Watch		Mention		Standard		Total
Commercial, financial and agricultural	$	597	$	179,451	$	45,977	$	4,177	$	7,249	$	237,451
Municipal		58		92,011		13,352		—		—		105,421
Real estate – residential:
First mortgage		420,798		4,733		164		—		581		426,276
Second mortgage		42,167		—		—		—		—		42,167
Real estate – commercial:
Owner occupied		296		161,810		41,477		5,959		11,466		221,008
Non-owner occupied		166		290,337		44,485		444		1,564		336,996
Real estate – construction:
Residential		478		1,944		—		—		—		2,422
Commercial		145		27,299		3,136		—		1,800		32,380
Installment		10,093		—		—		—		22		10,115
All other loans		44		—		—		—		—		44
Total	$	474,842	$	757,585	$	148,591	$	10,580	$	22,682	$	1,414,280

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FAIR VALUE OF FINANCIAL INSTRUMENTS (Tables)

3 Months Ended

Mar. 31, 2016

FAIR VALUE OF FINANCIAL INSTRUMENTS

Schedule of financial instruments on a recurring basis

The table below presents the balance of financial assets and liabilities at March 31, 2016 measured at fair value on a recurring basis:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Treasury Obligations	$	25,361	$	—	$	25,361	$	—
U.S. GSEs		31,429		—		31,429		—
FHLB Obligations		57,122		—		57,122		—
Agency MBSs		93,301		—		93,301		—
Agency CMBSs		24,672		—		24,672		—
Agency CMOs		61,816		—		61,816		—
ABSs		347		—		347		—
Interest rate swap agreements		2,177		—		2,177		—
Total assets	$	296,225	$	—	$	296,225	$	—
Liabilities
Interest rate swap agreements		1,859		—		1,859		—
Total liabilities	$	1,859	$	—	$	1,859	$	—

The table below presents the balance of financial assets and liabilities at December 31, 2015 measured at fair value on a recurring basis:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Treasury Obligations	$	25,113	$	—	$	25,113	$	—
U.S. GSEs		20,794		—		20,794		—
FHLB Obligations		51,111		—		51,111		—
Agency MBSs		97,249		—		97,249		—
Agency CMBSs		24,553		—		24,553		—
Agency CMOs		64,279		—		64,279		—
ABSs		355		—		355		—
Interest rate swap agreements		1,084		—		1,084		—
Total assets	$	284,538	$	—	$	284,538	$	—
Liabilities
Interest rate swap agreements		1,004		—		1,004		—
Total liabilities	$	1,004	$	—	$	1,004	$	—

Schedule of fair value of financial instruments

The fair value of Merchants’ financial instruments as of March 31, 2016 are summarized in the table below:

	Carrying
(In thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	80,640	$	80,640	$	80,640	$	—	$	—
Securities available for sale		294,048		294,048		—		294,048		—
Securities held to maturity		115,392		118,062		—		118,062		—
FHLB stock		3,863		N/A		N/A		N/A		N/A
Loans, net of allowance for loan losses		1,409,430		1,414,717		—		—		1,414,717
Interest rate swap agreement		2,177		2,177		—		2,177		—
Accrued interest receivable		4,885		4,885		—		1,061		3,824
Total	$	1,910,435	$	1,914,529	$	80,640	$	415,348	$	1,418,541
Deposits	$	1,526,788	$	1,527,214	$	1,297,791	$	229,423	$	—
Securities sold under agreement to repurchase		249,003		248,955		—		248,955		—
Other long-term debt		4,716		4,726		—		4,726		—
Junior subordinated debentures issued to unconsolidated subsidiary trust		20,619		15,449		—		15,449		—
Interest rate swap agreement		1,859		1,859		—		1,859		—
Accrued interest payable		136		136		13		123		—
Total	$	1,803,121	$	1,798,339	$	1,297,804	$	500,535	$	—

The fair value of Merchants’ financial instruments as of December 31, 2015 are summarized in the table below:

	Carrying
(In thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	150,183	$	150,183	$	150,183	$	—	$	—
Securities available for sale		283,454		283,454		—		283,454		—
Securities held to maturity		119,674		120,093		—		120,093		—
FHLB stock		3,797		N/A		N/A		N/A		N/A
Loans, net of allowance for loan losses		1,402,240		1,397,877		—		—		1,397,877
Interest rate swap agreement		1,084		1,084		—		1,084		—
Accrued interest receivable		4,374		4,374		—		1,085		3,289
Total	$	1,964,806	$	1,957,065	$	150,183	$	405,716	$	1,401,166
Deposits	$	1,551,439	$	1,551,046	$	1,296,867	$	254,179	$	—
Securities sold under agreement to repurchase		286,639		286,586		—		286,586		—
Other long-term debt		5,238		5,191		—		5,191		—
Junior subordinated debentures issued to unconsolidated subsidiary trust		20,619		14,975		—		14,975		—
Interest rate swap agreement		1,004		1,004		—		1,004		—
Accrued interest payable		152		152		13		139		—
Total	$	1,865,091	$	1,858,954	$	1,296,880	$	562,074	$	—

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EMPLOYEE BENEFIT PLANS (Tables)

3 Months Ended

Mar. 31, 2016

EMPLOYEE BENEFIT PLANS

Net periodic pension cost (benefit)

	Three Months Ended
	March 31,
(In thousands)	2016		2015
Interest cost	$	112	$	112
Expected return on plan assets		(242)		(264)
Service costs		14		13
Net loss amortization		116		103
Net periodic pension cost (benefit)	$	—	$	(36)

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EARNINGS PER SHARE (Tables)

3 Months Ended

Mar. 31, 2016

EARNINGS PER SHARE

Reconciliations Of Calculations Of Basic And Diluted Earnings Per Share

	Three Months Ended
	March 31,
(In thousands except per share data)	2016		2015
Net income	$	3,490	$	3,336
Weighted average common shares outstanding		6,856		6,329
Dilutive effect of common stock equivalents		110		13
Weighted average common and common equivalent shares outstanding		6,966		6,342
Basic earnings per common share	$	0.51	$	0.53
Diluted earnings per common share	$	0.50	$	0.53

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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Tables)

3 Months Ended

Mar. 31, 2016

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated Other Comprehensive Income (Loss) By Component

The following table presents changes in accumulated other comprehensive income (loss) by component, net of tax for the Three months ending March 31, 2016.

	Unrealized		Unrealized Gains
	Gains (Losses)		(Losses) on Securities
	on Securities		Transferred From						Accumulated Other
	Available-For-		Available-For-Sale to				Interest Rate		Comprehensive
(In thousands)	Sale		Held-To-Maturity		Pension Plan		Swaps		Income (Loss)
Beginning Balance December 31, 2015	$	166	$	(2,297)	$	(3,737)	$	(155)	$	(6,023)
Other comprehensive income before reclassifications		2,624		—		—		35		2,659
Transfer of securities from available-for-sale to held-to-maturity		—		—		—		—		—
Accretion of unrealized losses of securities transferred from available-for-sale to held-to-maturity recognized in other comprehensive income		—		127		—		—		127
Reclassification adjustments for (gains) losses reclassified into income		—		—		75		—		75
Net current period other comprehensive (loss) income		2,624		127		75		35		2,861
Balance March 31, 2016	$	2,790	$	(2,170)	$	(3,662)	$	(120)	$	(3,162)

The following table presents changes in accumulated other comprehensive income (loss) by component, net of tax for the three months ending March 31, 2015.

	Unrealized		Unrealized Gains
	Gains (Losses)		(Losses) on Securities
	on Securities		Transferred From						Accumulated Other
	Available-For-		Available-For-Sale to				Interest Rate		Comprehensive
(In thousands)	Sale		Held-To-Maturity		Pension Plan		Swaps		Income (Loss)
Beginning Balance December 31, 2014	$	1,482	$	(2,824)	$	(3,395)	$	(311)	$	(5,048)
Other comprehensive income before reclassifications		783		—		—		21		804
Transfer of securities from available-for-sale to held-to-maturity		—		—		—		—		—
Accretion of unrealized losses of securities transferred from available-for-sale to held-to-maturity recognized in other comprehensive income		—		124		—		—		124
Reclassification adjustments for (gains) losses reclassified into income		—		—		67		—		67
Net current period other comprehensive (loss) income		783		124		67		21		995
Balance March 31, 2015	$	2,265	$	(2,700)	$	(3,328)	$	(290)	$	(4,053)

Reclassification Adjustment Details

Details about Accumulated Other	Three Months Ended
Comprehensive Income Components	March 31,				Affected Line Item in the Statement
(In thousands)		2016		2015	Where Net Income is Presented
Amortization of defined benefit pension plan
	$	(116)	$	(103)	Compensation and benefits expense
		(116)		(103)	Total before tax
		41		36	Provision for income taxes
	$	(75)	$	(67)	Net of tax
Total reclassification adjustments	$	(75)	$	(67)	(Increase) / Decrease to Net Income

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FINANCIAL STATEMENT PRESENTATION (Details)	3 Months Ended
	Mar. 31, 2016 item
Number of locations	32
Vermont
Number of locations	31
Massachusetts
Number of locations	1

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ACQUISITION of NUVO BANK & TRUST COMPANY - Acquisition (Details)		3 Months Ended
	Dec. 04, 2015 USD ($) item $ / shares shares	Mar. 31, 2016 item
Business Acquisition
Number of locations | item		32
NUVO Bank & Trust Company
Business Acquisition
Consideration transferred ( in shares)	517,109
Cash paid for NUVO shares | $	$ 5,109,000
Aggregate payment to cash out NUVO stock options and portion of common stock warrants | $	$ 878,718
Number of shares callable by warrants	90,474
Number of businesses acquired | item	2
NUVO Bank & Trust Company | 2017 Warrants
Business Acquisition
Number of shares callable by warrants	56,104
Exercise price of warrants | $ / shares	$ 20.69
NUVO Bank & Trust Company | 2018 Warrants
Business Acquisition
Number of shares callable by warrants	34,370
Exercise price of warrants | $ / shares	$ 41.39

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ACQUISITION of NUVO BANK & TRUST COMPANY - Assets Aquired and Liabilities Assumed (Details) - USD ($) $ in Thousands	Dec. 04, 2015	Mar. 31, 2016	Dec. 31, 2015
Liabilities assumed:
Goodwill		$ 6,872	$ 6,967
NUVO Bank & Trust Company
Consideration paid:
Common stock issued in exchange for NUVO shares	$ 16,889
Cash paid for NUVO shares	5,988
Stock warrants issued	470
Total consideration paid	23,347
Assets acquired:
Cash and cash equivalents	7,070
Interest bearing time deposits with banks	110
Investments	4,365
Restricted investment in bank stock	376
Loans	149,360
Premises and equipment , net	580
Accrued interest receivable	369
Core deposit intangible	1,377
Deferred tax asset	1,926
Other assets	355
Total assets acquired	165,888
Liabilities assumed:
Deposits	144,482
Federal Home Loan Bank advances	4,001
Accrued interest payable	42
Tax effect of acquisition fair value adjustments	705
Other liabilities	183
Total liabilities assumed	149,413
Net assets acquired	16,475
Goodwill	$ 6,872	$ 6,872	$ 6,967

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ACQUISITION of NUVO BANK & TRUST COMPANY - Acquired Loans PCI (ASC 310-30) (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2016 USD ($)
Goodwill [Roll Forward]
Goodwill, Beginning Balance	$ 6,967
Goodwill, Ending Balance	6,872
NUVO Bank & Trust Company
Goodwill [Roll Forward]
Goodwill, Beginning Balance	6,967
Stock warrants issued	(74)
Investments	21
Goodwill, Ending Balance	$ 6,872

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ACQUISITION of NUVO BANK & TRUST COMPANY - Loans Excluded from ASC 310-30 (Details) $ in Thousands		1 Months Ended	3 Months Ended		12 Months Ended
	Dec. 04, 2015 USD ($)	Dec. 31, 2015 USD ($)	Mar. 31, 2016 USD ($)	Dec. 31, 2015 USD ($)	Dec. 31, 2015 USD ($)
Certain Loans Acquired in Transfer Not Accounted for as Debt Securities
Amortization of core deposit intangible			$ 51
Amortization of valuation adjustment of deposits			81
Merger costs			133		$ 1,880
Core deposit intangible
Certain Loans Acquired in Transfer Not Accounted for as Debt Securities
Amortization of core deposit intangible		$ 17	$ 51	$ 17	17
NUVO Bank & Trust Company
Certain Loans Acquired in Transfer Not Accounted for as Debt Securities
Deferred Tax Assets, Net		1,200		$ 1,200	$ 1,200
Core deposit intangible	$ 1,377
Percentage of savings and demand deposit	2.08
NUVO Bank & Trust Company | Discounted Cashflow
Certain Loans Acquired in Transfer Not Accounted for as Debt Securities
Valuation adjustment		$ 650
Period of amortization of valuation adjustment		2 years
Amortization of valuation adjustment of deposits		$ 27
NUVO Bank & Trust Company | Core deposit intangible
Certain Loans Acquired in Transfer Not Accounted for as Debt Securities
Core deposit intangible	$ 1,380
Amortization period of intangible assets		10 years
NUVO Bank & Trust Company | Excluded from ASC 310-30 accounting
Certain Loans Acquired in Transfer Not Accounted for as Debt Securities
Fair value of Loans	146,086
Contractually required principal and interest at acquisition	$ 145,855

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GOODWILL AND INTANGIBLE ASSETS - Goodwill Rollforward (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2016	Dec. 31, 2015
Goodwill Rollforward
Goodwill, Beginning Balance	$ 6,967
Effect of adjustments	(95)
Goodwill		$ 6,967
Impairment	0	0
Goodwill, Ending Balance	$ 6,872	$ 6,967

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GOODWILL AND INTANGIBLE ASSETS - Acquired Intangible Assets (Details) - USD ($) $ in Thousands	1 Months Ended	3 Months Ended		12 Months Ended
	Dec. 31, 2015	Mar. 31, 2016	Dec. 31, 2015	Dec. 31, 2015
Other Intangible Assets
Balance at beginning of period		$ 1,360
Amortization of core deposit intangible		51
Balance at end of period	$ 1,360	1,309	$ 1,360	$ 1,360
Core deposit intangible
Other Intangible Assets
Balance at beginning of period		1,360
Additions				1,377
Amortization of core deposit intangible	17	51	17	17
Balance at end of period	$ 1,360	$ 1,309	$ 1,360	$ 1,360

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GOODWILL AND INTANGIBLE ASSETS - Estimated Amortization Expense (Details) $ in Thousands	Mar. 31, 2016 USD ($)
Estimated amortization expense
Remainder of 2016	$ 153
2017	173
2018	147
2019	126
2020	120
2021	120
Thereafter	$ 470

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INVESTMENT SECURITIES - Investments in Securities Classified as Available for Sale or Held To Maturity (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2016	Dec. 31, 2015
Available for Sale
Amortized Cost	$ 289,744	$ 283,185
Gross Unrealized Gains	4,389	1,963
Gross Unrealized Losses	(85)	(1,694)
Fair Value	294,048	283,454
Held to Maturity
Amortized Cost	115,392	119,674
Gross Unrealized Gains	2,734	1,135
Gross Unrealized Losses	(64)	(716)
Fair Value	118,062	120,093
U.S. Treasury Obligations
Available for Sale
Amortized Cost	25,067	25,064
Gross Unrealized Gains	294	61
Gross Unrealized Losses		(12)
Fair Value	25,361	25,113
U.S. Agency Obligations
Held to Maturity
Amortized Cost	19,227	20,084
Gross Unrealized Gains	818	486
Fair Value	20,045	20,570
U.S. GSEs
Available for Sale
Amortized Cost	31,045	20,895
Gross Unrealized Gains	384	3
Gross Unrealized Losses		(104)
Fair Value	31,429	20,794
Held to Maturity
Amortized Cost	9,571	9,556
Gross Unrealized Gains	236	166
Fair Value	9,807	9,722
FHLB Obligations
Available for Sale
Amortized Cost	56,326	51,230
Gross Unrealized Gains	797	107
Gross Unrealized Losses	(1)	(226)
Fair Value	57,122	51,111
Held to Maturity
Amortized Cost	4,767	4,758
Gross Unrealized Gains	202	76
Fair Value	4,969	4,834
Agency MBSs
Available for Sale
Amortized Cost	91,137	96,073
Gross Unrealized Gains	2,193	1,688
Gross Unrealized Losses	(29)	(512)
Fair Value	93,301	97,249
Held to Maturity
Amortized Cost	6,787	7,027
Gross Unrealized Gains	251	154
Fair Value	7,038	7,181
Agency CMBSs
Available for Sale
Amortized Cost	24,520	24,950
Gross Unrealized Gains	152
Gross Unrealized Losses		(397)
Fair Value	24,672	24,553
Agency CMOs
Available for Sale
Amortized Cost	61,338	64,648
Gross Unrealized Gains	533	74
Gross Unrealized Losses	(55)	(443)
Fair Value	61,816	64,279
Held to Maturity
Amortized Cost	75,040	78,249
Gross Unrealized Gains	1,227	253
Gross Unrealized Losses	(64)	(716)
Fair Value	76,203	77,786
ABSs
Available for Sale
Amortized Cost	311	325
Gross Unrealized Gains	36	30
Fair Value	$ 347	$ 355

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INVESTMENT SECURITIES - Contractual Final Maturity Distribution of Debt Securities Classified as Available for Sale and Held to Maturity (Details) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Available for Sale, Fair Value
Within One Year	$ 101
After One But Within Five Years	102,259
After Five But Within Ten Years	11,552
Securities not due at a Single Maturity	180,136
Total	294,048
Available for Sale, Amortized Cost
Within One Year	101
After One But Within Five Years	101,132
After Five But Within Ten Years	11,205
Securities not due at a Single Maturity	177,306
Total	289,744
Held to Maturity, Fair Value
After Five But Within Ten Years	14,776
After Ten Years	20,045
Securities not due at a Single Maturity	83,241
Total	118,062	$ 120,093
Held to Maturity, Amortized Cost
After Five But Within Ten Years	14,338
After Ten Years	19,227
Securities not due at a Single Maturity	81,827
Total	115,392	119,674
U.S. Treasury Obligations
Available for Sale, Fair Value
Within One Year	101
After One But Within Five Years	25,260
Total	25,361
Available for Sale, Amortized Cost
Within One Year	101
After One But Within Five Years	24,966
Total	25,067
U.S. Agency Obligations
Held to Maturity, Fair Value
After Ten Years	20,045
Total	20,045	20,570
Held to Maturity, Amortized Cost
After Ten Years	19,227
Total	19,227	20,084
U.S. GSEs
Available for Sale, Fair Value
After One But Within Five Years	31,429
Total	31,429
Available for Sale, Amortized Cost
After One But Within Five Years	31,045
Total	31,045
Held to Maturity, Fair Value
After Five But Within Ten Years	9,807
Total	9,807	9,722
Held to Maturity, Amortized Cost
After Five But Within Ten Years	9,571
Total	9,571	9,556
FHLB Obligations
Available for Sale, Fair Value
After One But Within Five Years	45,570
After Five But Within Ten Years	11,552
Total	57,122
Available for Sale, Amortized Cost
After One But Within Five Years	45,121
After Five But Within Ten Years	11,205
Total	56,326
Held to Maturity, Fair Value
After Five But Within Ten Years	4,969
Total	4,969	4,834
Held to Maturity, Amortized Cost
After Five But Within Ten Years	4,767
Total	4,767	4,758
Agency MBSs
Available for Sale, Fair Value
Securities not due at a Single Maturity	93,301
Total	93,301
Available for Sale, Amortized Cost
Securities not due at a Single Maturity	91,137
Total	91,137
Held to Maturity, Fair Value
Securities not due at a Single Maturity	7,038
Total	7,038	7,181
Held to Maturity, Amortized Cost
Securities not due at a Single Maturity	6,787
Total	6,787	7,027
Agency CMBSs
Available for Sale, Fair Value
Securities not due at a Single Maturity	24,672
Total	24,672
Available for Sale, Amortized Cost
Securities not due at a Single Maturity	24,520
Total	24,520
Agency CMOs
Available for Sale, Fair Value
Securities not due at a Single Maturity	61,816
Total	61,816
Available for Sale, Amortized Cost
Securities not due at a Single Maturity	61,338
Total	61,338
Held to Maturity, Fair Value
Securities not due at a Single Maturity	76,203
Total	76,203	77,786
Held to Maturity, Amortized Cost
Securities not due at a Single Maturity	75,040
Total	75,040	$ 78,249
ABSs
Available for Sale, Fair Value
Securities not due at a Single Maturity	347
Total	347
Available for Sale, Amortized Cost
Securities not due at a Single Maturity	311
Total	$ 311

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INVESTMENT SECURITIES - Proceeds, Gross Gains and Gross Losses on Available for Sale Securities (Details) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Investments.
Carrying value of securities pledged	$ 334,380	$ 335,810

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INVESTMENT SECURITIES - Gross Unrealized Losses on Investment Securities and Fair Value of Related Securities (Details)	3 Months Ended	12 Months Ended
	Mar. 31, 2016 USD ($) item	Dec. 31, 2015 USD ($) item
Available for Sale
Available-for-sale Securities, Less than 12 months Number of Issues | item	4	51
Available-for-sale Securities, 12 months or more, Number of Issues | item	3	4
Available-for-sale Securities, Continuous Unrealized Loss Position, Number of Issues | item	7	55
Available-for-sale Securities, Less than 12 months, Fair Value	$ 16,113,000	$ 191,570,000
Available-for-sale Securities, Less than 12 months, Loss	(31,000)	(1,468,000)
Available-for-sale Securities, 12 months or more, Fair Value	5,899,000	(10,850,000)
Available-for-sale Securities, 12 months or more, Loss	(54,000)	(226,000)
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value, Total	22,012,000	202,420,000
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses, Total	(85,000)	$ (1,694,000)
Held to Maturity
Held to Maturity Securities, Less Than 12 Months, Number of Issues | item		14
Held to Maturity Securities, 12 Months or More, Number of Issues	$ 1	$ 2
Held to Maturity Securities, Continuous Unrealized Loss Position, Number of Issues | item	1	16
Held to Maturity Securities, Less Than 12 Months, Fair Value		$ 51,713,000
Held to Maturity Securities, Less Than 12 Months, Loss		(623,000)
Held to Maturity Securities, 12 Months or More, Fair Value	$ 3,597,000	5,287,000
Held to Maturity Securities, 12 Months or More, Loss	(64,000)	(93,000)
Held to Maturity Securities, Continuous Unrealized Loss Position, Fair Value, Total	3,597,000	57,000,000
Held to Maturity Securities, Continuous Unrealized Loss Position, Aggregate Losses, Total	$ (64,000)	$ (716,000)
U.S. Treasury Obligations
Available for Sale
Available-for-sale Securities, Less than 12 months Number of Issues | item		3
Available-for-sale Securities, Continuous Unrealized Loss Position, Number of Issues | item		3
Available-for-sale Securities, Less than 12 months, Fair Value		$ 15,068,000
Available-for-sale Securities, Less than 12 months, Loss		(12,000)
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value, Total		15,068,000
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses, Total		$ (12,000)
U.S. GSEs
Available for Sale
Available-for-sale Securities, Less than 12 months Number of Issues | item		3
Available-for-sale Securities, Continuous Unrealized Loss Position, Number of Issues | item		3
Available-for-sale Securities, Less than 12 months, Fair Value		$ 14,817,000
Available-for-sale Securities, Less than 12 months, Loss		(104,000)
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value, Total		14,817,000
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses, Total		$ (104,000)
FHLB Obligations
Available for Sale
Available-for-sale Securities, Less than 12 months Number of Issues | item	1	8
Available-for-sale Securities, Continuous Unrealized Loss Position, Number of Issues | item	1	8
Available-for-sale Securities, Less than 12 months, Fair Value	$ 5,133,000	$ 39,094,000
Available-for-sale Securities, Less than 12 months, Loss	(1,000)	(226,000)
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value, Total	5,133,000	39,094,000
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses, Total	$ (1,000)	$ (226,000)
Agency MBSs
Available for Sale
Available-for-sale Securities, Less than 12 months Number of Issues | item	2	17
Available-for-sale Securities, Continuous Unrealized Loss Position, Number of Issues | item	2	17
Available-for-sale Securities, Less than 12 months, Fair Value	$ 7,228,000	$ 60,748,000
Available-for-sale Securities, Less than 12 months, Loss	(29,000)	(512,000)
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value, Total	7,228,000	60,748,000
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses, Total	$ (29,000)	$ (512,000)
Agency CMBSs
Available for Sale
Available-for-sale Securities, Less than 12 months Number of Issues | item		5
Available-for-sale Securities, 12 months or more, Number of Issues | item		1
Available-for-sale Securities, Continuous Unrealized Loss Position, Number of Issues | item		6
Available-for-sale Securities, Less than 12 months, Fair Value		$ 19,608,000
Available-for-sale Securities, Less than 12 months, Loss		(331,000)
Available-for-sale Securities, 12 months or more, Fair Value		(4,761,000)
Available-for-sale Securities, 12 months or more, Loss		(66,000)
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value, Total		24,369,000
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses, Total		$ (397,000)
Agency CMOs
Available for Sale
Available-for-sale Securities, Less than 12 months Number of Issues | item	1	15
Available-for-sale Securities, 12 months or more, Number of Issues | item	3	3
Available-for-sale Securities, Continuous Unrealized Loss Position, Number of Issues | item	4	18
Available-for-sale Securities, Less than 12 months, Fair Value	$ 3,752,000	$ 42,235,000
Available-for-sale Securities, Less than 12 months, Loss	(1,000)	(283,000)
Available-for-sale Securities, 12 months or more, Fair Value	5,899,000	(6,089,000)
Available-for-sale Securities, 12 months or more, Loss	(54,000)	(160,000)
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value, Total	9,651,000	48,324,000
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses, Total	(55,000)	$ (443,000)
Held to Maturity
Held to Maturity Securities, Less Than 12 Months, Number of Issues | item		14
Held to Maturity Securities, 12 Months or More, Number of Issues	$ 1	$ 2
Held to Maturity Securities, Continuous Unrealized Loss Position, Number of Issues | item	1	16
Held to Maturity Securities, Less Than 12 Months, Fair Value		$ 51,713,000
Held to Maturity Securities, Less Than 12 Months, Loss		(623,000)
Held to Maturity Securities, 12 Months or More, Fair Value	$ 3,597,000	5,287,000
Held to Maturity Securities, 12 Months or More, Loss	(64,000)	(93,000)
Held to Maturity Securities, Continuous Unrealized Loss Position, Fair Value, Total	3,597,000	57,000,000
Held to Maturity Securities, Continuous Unrealized Loss Position, Aggregate Losses, Total	$ (64,000)	$ (716,000)

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INVESTMENT SECURITIES - Securities Transferred between AFS and HTM (Details) - USD ($)	3 Months Ended			6 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Mar. 31, 2014	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2015
Investment Securities
Securities classified as trading	$ 0					$ 0
Securities transferred from available-for-sale to held-to-maturity category, remaining unamortized loss, net of tax	(2,624,000)	$ (783,000)
Transferred From Available-For-Sale to Held-To-Maturity
Investment Securities
Securities transferred from available-for-sale to held-to-maturity category, amortized cost			$ 12,630,000		$ 152,890,000
Securities transferred from available-for-sale to held-to-maturity category, fair value			12,640,000		$ 147,450,000
Securities transferred from available-for-sale to held-to-maturity category, unrealized holding gain				$ 3,530,000
Securities transferred from available-for-sale to held-to-maturity category, remaining unamortized loss	3,350,000
Securities transferred from available-for-sale to held-to-maturity category, remaining unamortized loss, net of tax	2,170,000
Unrealized Gains (Losses) on Securities | Transferred From Available-For-Sale to Held-To-Maturity
Investment Securities
Securities transferred from available-for-sale to held-to-maturity category, unrealized holding gain			$ 8,000
Securities transferred from available-for-sale to held-to-maturity category, remaining unamortized loss, net of tax	$ 127,000	$ (124,000)

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SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM DEBT (Details) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Available-for-sale Securities Pledged as Collateral	$ 158,875
Held-to-maturity Securities Pledged as Collateral	90,128
Carrying value of pledged securities	249,110	$ 287,270
Overnight and Continuous
Available-for-sale Securities Pledged as Collateral	158,539
Held-to-maturity Securities Pledged as Collateral	90,128
30-90 Days
Available-for-sale Securities Pledged as Collateral	336
U.S. Treasury Obligations
Available-for-sale Securities Pledged as Collateral	23,587
U.S. Treasury Obligations | Overnight and Continuous
Available-for-sale Securities Pledged as Collateral	23,587
U.S. Agency Obligations
Held-to-maturity Securities Pledged as Collateral	14,359
U.S. Agency Obligations | Overnight and Continuous
Held-to-maturity Securities Pledged as Collateral	14,359
U.S. GSEs
Available-for-sale Securities Pledged as Collateral	15,043
U.S. GSEs | Overnight and Continuous
Available-for-sale Securities Pledged as Collateral	15,043
FHLB Obligations
Available-for-sale Securities Pledged as Collateral	44,031
FHLB Obligations | Overnight and Continuous
Available-for-sale Securities Pledged as Collateral	44,031
Agency MBSs
Available-for-sale Securities Pledged as Collateral	38,175
Held-to-maturity Securities Pledged as Collateral	18,324
Agency MBSs | Overnight and Continuous
Available-for-sale Securities Pledged as Collateral	37,839
Held-to-maturity Securities Pledged as Collateral	18,324
Agency MBSs | 30-90 Days
Available-for-sale Securities Pledged as Collateral	336
Agency CMBSs
Available-for-sale Securities Pledged as Collateral	13,770
Held-to-maturity Securities Pledged as Collateral	57,445
Agency CMBSs | Overnight and Continuous
Available-for-sale Securities Pledged as Collateral	13,770
Held-to-maturity Securities Pledged as Collateral	57,445
Agency CMOs
Available-for-sale Securities Pledged as Collateral	24,269
Agency CMOs | Overnight and Continuous
Available-for-sale Securities Pledged as Collateral	$ 24,269

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LOANS AND THE ALLOWANCE FOR CREDIT LOSSES - Composition of Loan Portfolio (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2016	Dec. 31, 2015
Financing Receivable, Recorded Investment
Total Loans	$ 1,421,603	$ 1,414,280
Net deferred loan origination fees	1,220	1,200
Overdrawn deposit balances classified as loan balances	291	308
Commercial, financial and agricultural
Financing Receivable, Recorded Investment
Total Loans	247,074	237,451
Municipal
Financing Receivable, Recorded Investment
Total Loans	105,433	105,421
Real estate loans - residential
Financing Receivable, Recorded Investment
Total Loans	461,009	468,443
Real estate loans - commercial
Financing Receivable, Recorded Investment
Total Loans	556,836	558,004
Real estate loans - construction
Financing Receivable, Recorded Investment
Total Loans	42,209	34,802
Installment
Financing Receivable, Recorded Investment
Total Loans	9,009	10,115
All other loans
Financing Receivable, Recorded Investment
Total Loans	$ 33	$ 44

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LOANS AND THE ALLOWANCE FOR CREDIT LOSSES - Loan Loss Experience and Activity in Allowance for Credit Losses (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Dec. 31, 2015	Mar. 31, 2015
Loan loss experience and activity in allowance for loan losses
Beginning balance	$ 12,040	$ 12,210	$ 11,833
Charge-offs	(118)	(73)	(158)
Recoveries	36	30	82
Provision (credit)	215	(127)	232
Ending balance	12,173	12,040	11,989
Additional disclosures
Provision for credit losses	205
Excess credit reserves	10
Commercial, financial and agricultural
Loan loss experience and activity in allowance for loan losses
Beginning balance	2,696	2,833	2,583
Charge-offs	(3)	(2)	(29)
Recoveries	2	3	25
Provision (credit)	161	(138)	280
Ending balance	2,856	2,696	2,859
Municipal
Loan loss experience and activity in allowance for loan losses
Beginning balance	590	631	623
Provision (credit)	32	(41)	(93)
Ending balance	622	590	530
Real estate loans - residential
Loan loss experience and activity in allowance for loan losses
Beginning balance	2,882	2,959	3,038
Charge-offs	(73)	(28)	(55)
Recoveries	11	15	3
Provision (credit)	37	(64)	38
Ending balance	2,857	2,882	3,024
Real estate loans - commercial
Loan loss experience and activity in allowance for loan losses
Beginning balance	5,386	5,238	5,209
Recoveries	4	1	1
Provision (credit)	(109)	147	(61)
Ending balance	5,281	5,386	5,149
Real estate loans - construction
Loan loss experience and activity in allowance for loan losses
Beginning balance	420	493	325
Provision (credit)	45	(73)	39
Ending balance	465	420	364
Installment
Loan loss experience and activity in allowance for loan losses
Beginning balance	66	56	13
Charge-offs	(42)	(43)	(74)
Recoveries	19	11	53
Provision (credit)	49	42	71
Ending balance	$ 92	$ 66	63
All other loans
Loan loss experience and activity in allowance for loan losses
Beginning balance			42
Provision (credit)			$ (42)

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LOANS AND THE ALLOWANCE FOR CREDIT LOSSES - Allowance for Loan Losses and Recorded Investment in Loans (Details) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015	Sep. 30, 2015	Mar. 31, 2015	Dec. 31, 2014
Financing Receivable, Allowance for Credit Losses [Line Items]
Ending balance individually evaluated for impairment	$ 222	$ 137
Ending balance collectively evaluated for impairment	11,951	11,903
Total allowance for credit losses	12,173	12,040	$ 12,210	$ 11,989	$ 11,833
Financing receivables, Ending balance individually evaluated for impairment	2,425	1,970
Financing receivables, Ending balance collectively evaluated for impairment	1,416,013	1,409,072
Total	1,421,603	1,414,280
Receivables acquired with deteriorated credit quality
Financing Receivable, Allowance for Credit Losses [Line Items]
Total	3,165	3,238
Commercial, financial and agricultural
Financing Receivable, Allowance for Credit Losses [Line Items]
Ending balance individually evaluated for impairment	135
Ending balance collectively evaluated for impairment	2,721	2,696
Total allowance for credit losses	2,856	2,696	2,833	2,859	2,583
Financing receivables, Ending balance individually evaluated for impairment	705	595
Financing receivables, Ending balance collectively evaluated for impairment	245,222	235,652
Total	247,074	237,451
Commercial, financial and agricultural | Receivables acquired with deteriorated credit quality
Financing Receivable, Allowance for Credit Losses [Line Items]
Total	1,147	1,204
Municipal
Financing Receivable, Allowance for Credit Losses [Line Items]
Ending balance collectively evaluated for impairment	622	590
Total allowance for credit losses	622	590	631	530	623
Financing receivables, Ending balance collectively evaluated for impairment	105,433	105,421
Total	105,433	105,421
Real estate loans - residential
Financing Receivable, Allowance for Credit Losses [Line Items]
Ending balance individually evaluated for impairment	87	137
Ending balance collectively evaluated for impairment	2,770	2,745
Total allowance for credit losses	2,857	2,882	2,959	3,024	3,038
Financing receivables, Ending balance individually evaluated for impairment	589	706
Financing receivables, Ending balance collectively evaluated for impairment	460,420	467,737
Total	461,009	468,443
Real estate loans - commercial
Financing Receivable, Allowance for Credit Losses [Line Items]
Ending balance collectively evaluated for impairment	5,281	5,386
Total allowance for credit losses	5,281	5,386	5,238	5,149	5,209
Financing receivables, Ending balance individually evaluated for impairment	1,120	647
Financing receivables, Ending balance collectively evaluated for impairment	553,698	555,323
Total	556,836	558,004
Real estate loans - commercial | Receivables acquired with deteriorated credit quality
Financing Receivable, Allowance for Credit Losses [Line Items]
Total	2,018	2,034
Real estate loans - construction
Financing Receivable, Allowance for Credit Losses [Line Items]
Ending balance collectively evaluated for impairment	465	420
Total allowance for credit losses	465	420	493	364	325
Financing receivables, Ending balance collectively evaluated for impairment	42,209	34,802
Total	42,209	34,802
Installment
Financing Receivable, Allowance for Credit Losses [Line Items]
Ending balance collectively evaluated for impairment	92	66
Total allowance for credit losses	92	66	$ 56	$ 63	13
Financing receivables, Ending balance individually evaluated for impairment	11	22
Financing receivables, Ending balance collectively evaluated for impairment	8,998	10,093
Total	9,009	10,115
All other loans
Financing Receivable, Allowance for Credit Losses [Line Items]
Total allowance for credit losses					$ 42
Financing receivables, Ending balance collectively evaluated for impairment	33	44
Total	$ 33	$ 44

XML

LOANS AND THE ALLOWANCE FOR CREDIT LOSSES - Recorded Investment of Loans, Including Nonaccrual and Restructured Loans, by Class (Details) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Past due loans
Total	$ 1,421,603	$ 1,414,280
Past due loans	4,032	702
31-60 Days Past Due
Past due loans
Past due loans	2,835	434
61-90 Days Past Due
Past due loans
Past due loans	1,197	268
Current
Past due loans
Total	1,412,724	1,409,383
Nonperforming
Past due loans
Total	4,847	4,195
First mortgage
Past due loans
Total		426,276
Past due loans		50
First mortgage | 31-60 Days Past Due
Past due loans
Past due loans		50
First mortgage | Current
Past due loans
Total		425,520
First mortgage | Nonperforming
Past due loans
Total		706
Second mortgage
Past due loans
Total		42,167
Past due loans		8
Second mortgage | 61-90 Days Past Due
Past due loans
Past due loans		8
Second mortgage | Current
Past due loans
Total		42,159
Owner occupied
Past due loans
Total		221,008
Past due loans		323
Owner occupied | 31-60 Days Past Due
Past due loans
Past due loans		323
Owner occupied | Current
Past due loans
Total		219,080
Owner occupied | Nonperforming
Past due loans
Total		1,605
Non-owner occupied
Past due loans
Total		336,996
Non-owner occupied | Current
Past due loans
Total		336,514
Non-owner occupied | Nonperforming
Past due loans
Total		482
Residential
Past due loans
Total		2,422
Residential | Current
Past due loans
Total		2,422
Commercial
Past due loans
Total		32,380
Commercial | Current
Past due loans
Total		32,380
Installment
Past due loans
Total	9,009	10,115
Past due loans		70
Installment | 31-60 Days Past Due
Past due loans
Past due loans		61
Installment | 61-90 Days Past Due
Past due loans
Past due loans		9
Installment | Current
Past due loans
Total		10,023
Installment | Nonperforming
Past due loans
Total		22
All other loans
Past due loans
Total	33	44
All other loans | Current
Past due loans
Total		44
Commercial, financial and agricultural
Past due loans
Total	247,074	237,451
Past due loans	2,754	251
Commercial, financial and agricultural | 31-60 Days Past Due
Past due loans
Past due loans	2,142
Commercial, financial and agricultural | 61-90 Days Past Due
Past due loans
Past due loans	612	251
Commercial, financial and agricultural | Current
Past due loans
Total	242,622	235,820
Commercial, financial and agricultural | Nonperforming
Past due loans
Total	1,698	1,380
Municipal
Past due loans
Total	105,433	105,421
Municipal | Current
Past due loans
Total	105,433	105,421
Real estate loans - residential
Past due loans
Total	461,009	468,443
Real estate loans - residential | First mortgage
Past due loans
Total	419,759	426,276
Past due loans	26
Real estate loans - residential | First mortgage | 31-60 Days Past Due
Past due loans
Past due loans	26
Real estate loans - residential | First mortgage | Current
Past due loans
Total	419,144
Real estate loans - residential | First mortgage | Nonperforming
Past due loans
Total	589
Real estate loans - residential | Second mortgage
Past due loans
Total	41,250	42,167
Past due loans	3
Real estate loans - residential | Second mortgage | 31-60 Days Past Due
Past due loans
Past due loans	3
Real estate loans - residential | Second mortgage | Current
Past due loans
Total	41,247
Real estate loans - commercial
Past due loans
Total	556,836	558,004
Real estate loans - commercial | Owner occupied
Past due loans
Total	218,725	221,008
Past due loans	1,038
Real estate loans - commercial | Owner occupied | 31-60 Days Past Due
Past due loans
Past due loans	589
Real estate loans - commercial | Owner occupied | 61-90 Days Past Due
Past due loans
Past due loans	449
Real estate loans - commercial | Owner occupied | Current
Past due loans
Total	215,602
Real estate loans - commercial | Owner occupied | Nonperforming
Past due loans
Total	2,085
Real estate loans - commercial | Non-owner occupied
Past due loans
Total	338,111	336,996
Past due loans	136
Real estate loans - commercial | Non-owner occupied | 61-90 Days Past Due
Past due loans
Past due loans	136
Real estate loans - commercial | Non-owner occupied | Current
Past due loans
Total	337,511
Real estate loans - commercial | Non-owner occupied | Nonperforming
Past due loans
Total	464
Real estate loans - construction
Past due loans
Total	42,209	34,802
Real estate loans - construction | Residential
Past due loans
Total	2,161	2,422
Real estate loans - construction | Residential | Current
Past due loans
Total	2,161
Real estate loans - construction | Commercial
Past due loans
Total	40,048	32,380
Real estate loans - construction | Commercial | Current
Past due loans
Total	40,048
Real estate loans - construction | Installment
Past due loans
Total	9,009
Past due loans	75
Real estate loans - construction | Installment | 31-60 Days Past Due
Past due loans
Past due loans	75
Real estate loans - construction | Installment | Current
Past due loans
Total	8,923
Real estate loans - construction | Installment | Nonperforming
Past due loans
Total	11
Real estate loans - construction | All other loans
Past due loans
Total	33
Real estate loans - construction | All other loans | Current
Past due loans
Total	33
Accruing loans
Past due loans
Past due loans	0
Accruing loans | 91 Days or More Past Due
Past due loans
Past due loans		0
Non-accrual loans
Past due loans
Past due loans	2,320	2,650
Restructured loans
Past due loans
Past due loans	$ 400	$ 471

XML

LOANS AND THE ALLOWANCE FOR CREDIT LOSSES - Impaired Loans by Class (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Dec. 31, 2015
Financing Receivable, Impaired
Recorded Investment	$ 2,425		$ 1,970
Unpaid Principal Balance	2,483		2,032
Related allowance	222		137
Average Recorded Investment	2,192	$ 946
Interest Income Recognized	3	1
Loans	1,421,603		1,414,280
First mortgage
Financing Receivable, Impaired
Loans			426,276
Second mortgage
Financing Receivable, Impaired
Loans			42,167
Owner occupied
Financing Receivable, Impaired
Loans			221,008
Non-owner occupied
Financing Receivable, Impaired
Loans			336,996
Installment
Financing Receivable, Impaired
Recorded Investment	11		22
Unpaid Principal Balance	11		22
Average Recorded Investment	8
Loans	9,009		10,115
Commercial, financial and agricultural
Financing Receivable, Impaired
Recorded Investment	705		595
Unpaid Principal Balance	708		599
Related allowance	135
Average Recorded Investment	644	275
Interest Income Recognized	1
Loans	247,074		237,451
Real estate loans - residential
Financing Receivable, Impaired
Recorded Investment	589		706
Unpaid Principal Balance	647		764
Related allowance	87		137
Average Recorded Investment	669	671
Interest Income Recognized	2	1
Loans	461,009		468,443
Real estate loans - residential | First mortgage
Financing Receivable, Impaired
Loans	419,759		426,276
Real estate loans - residential | Second mortgage
Financing Receivable, Impaired
Loans	41,250		42,167
Real estate loans - commercial
Financing Receivable, Impaired
Recorded Investment	1,120		647
Unpaid Principal Balance	1,117		647
Average Recorded Investment	871
Loans	556,836		558,004
Real estate loans - commercial | Owner occupied
Financing Receivable, Impaired
Loans	218,725		221,008
Real estate loans - commercial | Non-owner occupied
Financing Receivable, Impaired
Loans	338,111		336,996
Real estate loans - construction
Financing Receivable, Impaired
Loans	42,209		34,802
Real estate loans - construction | Installment
Financing Receivable, Impaired
Loans	9,009
Residential and commercial loans serviced for others
Financing Receivable, Impaired
Loans	34,490		27,870
With no related allowance recorded | Installment
Financing Receivable, Impaired
Recorded Investment	11
Unpaid Principal Balance	11
Average Recorded Investment	8
With no related allowance recorded | Commercial, financial and agricultural
Financing Receivable, Impaired
Recorded Investment	101		595
Unpaid Principal Balance	101		599
Average Recorded Investment	390	109
Interest Income Recognized	1
With no related allowance recorded | Real estate loans - residential | First mortgage
Financing Receivable, Impaired
Recorded Investment	198		264
Unpaid Principal Balance	256		322
Average Recorded Investment	241	147
Interest Income Recognized	2	1
With no related allowance recorded | Real estate loans - residential | Second mortgage
Financing Receivable, Impaired
Average Recorded Investment	3	79
With no related allowance recorded | Real estate loans - commercial | Owner occupied
Financing Receivable, Impaired
Recorded Investment	656		165
Unpaid Principal Balance	646		165
Average Recorded Investment	401
With no related allowance recorded | Real estate loans - commercial | Non-owner occupied
Financing Receivable, Impaired
Recorded Investment	464		482
Unpaid Principal Balance	471		482
Average Recorded Investment	470
With no related allowance recorded | Real estate loans - commercial | Installment
Financing Receivable, Impaired
Recorded Investment			22
Unpaid Principal Balance			22
With related allowance recorded | Commercial, financial and agricultural
Financing Receivable, Impaired
Recorded Investment	604
Unpaid Principal Balance	607
Related allowance	135
Average Recorded Investment	254	166
With related allowance recorded | Real estate loans - residential | First mortgage
Financing Receivable, Impaired
Recorded Investment	391		442
Unpaid Principal Balance	391		442
Related allowance	87		$ 137
Average Recorded Investment	$ 425	439
With related allowance recorded | Real estate loans - residential | Second mortgage
Financing Receivable, Impaired
Average Recorded Investment		$ 6

XML

LOANS AND THE ALLOWANCE FOR CREDIT LOSSES - Nonperforming Loans (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2016 USD ($) loan item	Mar. 31, 2015 loan	Dec. 31, 2015 USD ($)
Nonaccrual loans	$ 3,777		$ 3,513
Troubled debt restructurings ("TDRs")	1,070		682
Total nonperforming loans	4,847		4,195
Nonaccruing TDR's	864		472
Troubled debt restructured loans ("TDRs")	$ 1,070		$ 682
Number of TDRs agreed to pay | item	5
Number of TDRs | item	6
Commitments to lend additional funds to borrowers	$ 0
Non-accrual loans
Nonaccruing TDR's	$ 400
Number of TDRs | loan	1
Commitments to lend additional funds to borrowers	$ 0
Residential mortgage | Restructured loans
Troubled debt restructurings ("TDRs")	$ 121
Number of loans | loan	3
Reserves	$ 0
Troubled debt restructured loans ("TDRs")	121
Real estate loans - commercial | Restructured loans
Troubled debt restructurings ("TDRs")	$ 464
Number of loans | loan	3	0
Reserves	$ 0
Troubled debt restructured loans ("TDRs")	464
Total troubled debt restructured loans ("TDRs")	$ 949

XML

LOANS AND THE ALLOWANCE FOR CREDIT LOSSES - Nonaccrual Loans by Class (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Dec. 31, 2015
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total nonaccrual loans	$ 4,641	$ 3,985
Non accrual non-TDR loans	3,777	3,513
Exposure threshold for loans subject to formal review	1,000
Commercial, financial and agricultural
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total nonaccrual loans	1,213	823
Nonaccruing TDR's	400	472
Real estate loans - residential | First mortgage
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total nonaccrual loans	468	581
Real estate loans - commercial | Owner occupied
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total nonaccrual loans	2,085	1,605
Nonaccruing TDR's	464
Real estate loans - commercial | Non-owner occupied
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total nonaccrual loans		482
Installment
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total nonaccrual loans	$ 11	$ 22

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LOANS AND THE ALLOWANCE FOR CREDIT LOSSES - Summary of Loans by Credit Quality Indicator (Details) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Financing Receivable, Recorded Investment
Loans	$ 1,421,603	$ 1,414,280
First mortgage
Financing Receivable, Recorded Investment
Loans		426,276
Second mortgage
Financing Receivable, Recorded Investment
Loans		42,167
Owner occupied
Financing Receivable, Recorded Investment
Loans		221,008
Non-owner occupied
Financing Receivable, Recorded Investment
Loans		336,996
Residential
Financing Receivable, Recorded Investment
Loans		2,422
Commercial
Financing Receivable, Recorded Investment
Loans		32,380
Installment
Financing Receivable, Recorded Investment
Loans	9,009	10,115
All other loans
Financing Receivable, Recorded Investment
Loans	33	44
Unrated
Financing Receivable, Recorded Investment
Loans	466,108	474,842
Unrated | Installment
Financing Receivable, Recorded Investment
Loans	8,998	10,093
Unrated | All other loans
Financing Receivable, Recorded Investment
Loans	33	44
Pass
Financing Receivable, Recorded Investment
Loans	775,435	757,585
Pass-Watch
Financing Receivable, Recorded Investment
Loans	142,477	148,591
Special Mention
Financing Receivable, Recorded Investment
Loans	4,650	10,580
Sub-standard
Financing Receivable, Recorded Investment
Loans	32,933	22,682
Sub-standard | Installment
Financing Receivable, Recorded Investment
Loans	11	22
Commercial, financial and agricultural
Financing Receivable, Recorded Investment
Loans	247,074	237,451
Commercial, financial and agricultural | Unrated
Financing Receivable, Recorded Investment
Loans	506	597
Commercial, financial and agricultural | Pass
Financing Receivable, Recorded Investment
Loans	188,426	179,451
Commercial, financial and agricultural | Pass-Watch
Financing Receivable, Recorded Investment
Loans	41,409	45,977
Commercial, financial and agricultural | Special Mention
Financing Receivable, Recorded Investment
Loans	831	4,177
Commercial, financial and agricultural | Sub-standard
Financing Receivable, Recorded Investment
Loans	15,902	7,249
Municipal
Financing Receivable, Recorded Investment
Loans	105,433	105,421
Municipal | Unrated
Financing Receivable, Recorded Investment
Loans	47	58
Municipal | Pass
Financing Receivable, Recorded Investment
Loans	91,596	92,011
Municipal | Pass-Watch
Financing Receivable, Recorded Investment
Loans	13,790	13,352
Real estate loans - residential
Financing Receivable, Recorded Investment
Loans	461,009	468,443
Real estate loans - residential | First mortgage
Financing Receivable, Recorded Investment
Loans	419,759	426,276
Real estate loans - residential | Second mortgage
Financing Receivable, Recorded Investment
Loans	41,250	42,167
Real estate loans - residential | Unrated | First mortgage
Financing Receivable, Recorded Investment
Loans	414,056	420,798
Real estate loans - residential | Unrated | Second mortgage
Financing Receivable, Recorded Investment
Loans	41,250	42,167
Real estate loans - residential | Pass | First mortgage
Financing Receivable, Recorded Investment
Loans	5,073	4,733
Real estate loans - residential | Pass-Watch | First mortgage
Financing Receivable, Recorded Investment
Loans	162	164
Real estate loans - residential | Sub-standard | First mortgage
Financing Receivable, Recorded Investment
Loans	468	581
Real estate loans - commercial
Financing Receivable, Recorded Investment
Loans	556,836	558,004
Real estate loans - commercial | Owner occupied
Financing Receivable, Recorded Investment
Loans	218,725	221,008
Real estate loans - commercial | Non-owner occupied
Financing Receivable, Recorded Investment
Loans	338,111	336,996
Real estate loans - commercial | Unrated | Owner occupied
Financing Receivable, Recorded Investment
Loans	234	296
Real estate loans - commercial | Unrated | Non-owner occupied
Financing Receivable, Recorded Investment
Loans	475	166
Real estate loans - commercial | Pass | Owner occupied
Financing Receivable, Recorded Investment
Loans	163,721	161,810
Real estate loans - commercial | Pass | Non-owner occupied
Financing Receivable, Recorded Investment
Loans	290,236	290,337
Real estate loans - commercial | Pass-Watch | Owner occupied
Financing Receivable, Recorded Investment
Loans	38,281	41,477
Real estate loans - commercial | Pass-Watch | Non-owner occupied
Financing Receivable, Recorded Investment
Loans	45,280	44,485
Real estate loans - commercial | Special Mention | Owner occupied
Financing Receivable, Recorded Investment
Loans	3,366	5,959
Real estate loans - commercial | Special Mention | Non-owner occupied
Financing Receivable, Recorded Investment
Loans	453	444
Real estate loans - commercial | Sub-standard | Owner occupied
Financing Receivable, Recorded Investment
Loans	13,123	11,466
Real estate loans - commercial | Sub-standard | Non-owner occupied
Financing Receivable, Recorded Investment
Loans	1,667	1,564
Real estate loans - construction
Financing Receivable, Recorded Investment
Loans	42,209	34,802
Real estate loans - construction | Residential
Financing Receivable, Recorded Investment
Loans	2,161	2,422
Real estate loans - construction | Commercial
Financing Receivable, Recorded Investment
Loans	40,048	32,380
Real estate loans - construction | Installment
Financing Receivable, Recorded Investment
Loans	9,009
Real estate loans - construction | All other loans
Financing Receivable, Recorded Investment
Loans	33
Real estate loans - construction | Unrated | Residential
Financing Receivable, Recorded Investment
Loans	369	478
Real estate loans - construction | Unrated | Commercial
Financing Receivable, Recorded Investment
Loans	140	145
Real estate loans - construction | Pass | Residential
Financing Receivable, Recorded Investment
Loans	1,792	1,944
Real estate loans - construction | Pass | Commercial
Financing Receivable, Recorded Investment
Loans	34,591	27,299
Real estate loans - construction | Pass-Watch | Commercial
Financing Receivable, Recorded Investment
Loans	3,555	3,136
Real estate loans - construction | Sub-standard | Commercial
Financing Receivable, Recorded Investment
Loans	$ 1,762	$ 1,800

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LOANS AND THE ALLOWANCE FOR CREDIT LOSSES - Purchased Credit Impaired Loans (Details) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015	Dec. 04, 2015
Accounted for under ASC 310-30 | NUVO Bank & Trust Company
Accounts, Notes, Loans and Financing Receivable
Carrying amount of loans purchased with evidence of credit deterioration accounted for under ASC 310-30	$ 3,170	$ 3,240	$ 3,300

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FAIR VALUE OF FINANCIAL INSTRUMENTS - Financial Assets and Liabilities Measured At Fair Value, Recurring Basis (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2016	Dec. 31, 2015
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets	$ 296,225	$ 284,538
Liabilities	1,859	1,004
Transfers, Assets, level 1 to level 2	0	0
Transfers, Assets, level 2 to level 1	0	0
Transfers, Liabilities, level 1 to level 2	0	0
Transfers, Liabilities, level 2 to level 1	0	0
Fair value assets level 3 net transfers	0	0
Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets	296,225	284,538
Liabilities	1,859	1,004
U.S. Treasury Obligations
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets	25,361	25,113
U.S. Treasury Obligations | Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets	25,361	25,113
U.S. GSEs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets	31,429	20,794
U.S. GSEs | Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets	31,429	20,794
FHLB Obligations
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets	57,122	51,111
FHLB Obligations | Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets	57,122	51,111
Agency MBSs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets	93,301	97,249
Agency MBSs | Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets	93,301	97,249
Agency CMBSs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets	24,672	24,553
Agency CMBSs | Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets	24,672	24,553
Agency CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets	61,816	64,279
Agency CMOs | Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets	61,816	64,279
ABSs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets	347	355
ABSs | Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets	347	355
Interest Rate Swap
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets	2,177	1,084
Liabilities	1,859	1,004
Interest Rate Swap | Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis
Assets	2,177	1,084
Liabilities	$ 1,859	$ 1,004

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FAIR VALUE OF FINANCIAL INSTRUMENTS - Fair Value of Financial Instruments (Details) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015	Mar. 31, 2015	Dec. 31, 2014
Assets:
Cash and cash equivalents	$ 80,640	$ 150,183	$ 67,919	$ 154,459
Securities available for sale	294,048	283,454
Securities held to maturity	118,062	120,093
FHLB stock	3,863	3,797
Level 1
Assets:
Cash and cash equivalents	80,640	150,183
Total assets	80,640	150,183
Liabilities:
Deposits	1,297,791	1,296,867
Accrued interest payable	13	13
Total liabilities	1,297,804	1,296,880
Level 2
Assets:
Securities available for sale	294,048	283,454
Securities held to maturity	118,062	120,093
Interest rate swap agreement	2,177	1,084
Accrued interest receivable	1,061	1,085
Total assets	415,348	405,716
Liabilities:
Deposits	229,423	254,179
Securities sold under agreement to repurchase	248,955	286,586
Other long-term debt	4,726	5,191
Junior subordinated debentures issued to unconsolidated subsidiary trust	15,449	14,975
Interest rate swap agreement	1,859	1,004
Accrued interest payable	123	139
Total liabilities	500,535	562,074
Level 3
Assets:
Loans, net of allowance for loan losses	1,414,717	1,397,877
Accrued interest receivable	3,824	3,289
Total assets	1,418,541	1,401,166
Carrying Amount
Assets:
Cash and cash equivalents	80,640	150,183
Securities available for sale	294,048	283,454
Securities held to maturity	115,392	119,674
FHLB stock	3,863	3,797
Loans, net of allowance for loan losses	1,409,430	1,402,240
Interest rate swap agreement	2,177	1,084
Accrued interest receivable	4,885	4,374
Total assets	1,910,435	1,964,806
Liabilities:
Deposits	1,526,788	1,551,439
Securities sold under agreement to repurchase	249,003	286,639
Other long-term debt	4,716	5,238
Junior subordinated debentures issued to unconsolidated subsidiary trust	20,619	20,619
Interest rate swap agreement	1,859	1,004
Accrued interest payable	136	152
Total liabilities	1,803,121	1,865,091
Fair Value
Assets:
Cash and cash equivalents	80,640	150,183
Securities available for sale	294,048	283,454
Securities held to maturity	118,062	120,093
Loans, net of allowance for loan losses	1,414,717	1,397,877
Interest rate swap agreement	2,177	1,084
Accrued interest receivable	4,885	4,374
Total assets	1,914,529	1,957,065
Liabilities:
Deposits	1,527,214	1,551,046
Securities sold under agreement to repurchase	248,955	286,586
Other long-term debt	4,726	5,191
Junior subordinated debentures issued to unconsolidated subsidiary trust	15,449	14,975
Interest rate swap agreement	1,859	1,004
Accrued interest payable	136	152
Total liabilities	$ 1,798,339	$ 1,858,954

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EMPLOYEE BENEFIT PLANS (Details) - USD ($) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Dec. 31, 2016
Interest cost	$ 112	$ 112
Expected return on plan assets	(242)	(264)
Service costs	14	13
Net loss amortization	116	103
Net periodic pension cost		(36)
Net loss amortization	$ (116)	$ (103)
Minimum
Minimum required contribution			$ 0

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EARNINGS PER SHARE (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Net income	$ 3,490	$ 3,336
Weighted average common shares outstanding	6,856	6,329
Dilutive effect of common stock equivalents	110	13
Weighted average common and common equivalent shares outstanding	6,966	6,342
Basic earnings per common share	$ 0.51	$ 0.53
Diluted earnings per common share	$ 0.50	$ 0.53
Warrants
Earnings Per Share, Diluted, Other Disclosures [Abstract]
Warrants or shares which were not included in the calculation of diluted earnings per share	34,400

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STOCK REPURCHASE PROGRAM (Details) - $ / shares	120 Months Ended
	Dec. 31, 2016	Jan. 31, 2007
STOCK REPURCHASE PROGRAM
Shares authorized to be repurchased under the stock repurchase program		200,000
Shares repurchased under the stock repurchase program	143,475
Average price per share for shares purchased under the stock repurchase program	$ 23.00

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COMMITMENTS AND CONTINGENCIES (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Dec. 31, 2015
Fair Value, Off-balance Sheet Risks, Disclosure Information
Financial instruments whose contract amounts represent credit risk		$ 6,300
Expiration term of contingent obligations, months	12 months
Balances at the Federal Reserve Bank	$ 26,030	$ 30,520
Standby letters of credit
Fair Value, Off-balance Sheet Risks, Disclosure Information
Financial instruments whose contract amounts represent credit risk	$ 6,190

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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) - Changes in Accumulated Other Comprehensive Income (Loss) By Component (Details) - USD ($)	3 Months Ended			6 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Mar. 31, 2014	Dec. 31, 2014
Accumulated other comprehensive income (loss) by component
Balance	$ (6,023,000)
Other comprehensive income before reclassifications, Interest rate swaps	35,000	$ 21,000
Accretion of unrealized losses of securities transferred from available-for-sale to held-to-maturity recognized in other comprehensive income	127,000	124,000
Net current period other comprehensive (loss) income, Unrealized (gains) losses on securities	2,624,000	783,000
Net current period other comprehensive (loss) income, Pension and postretirement benefit plans	75,000	67,000
Balance	(3,162,000)
Transferred From Available-For-Sale to Held-To-Maturity
Accumulated other comprehensive income (loss) by component
Transfer of securities from available-for-sale to held-to-maturity				$ 3,530,000
Net current period other comprehensive (loss) income, Unrealized (gains) losses on securities	(2,170,000)
Unrealized Gains (Losses) on Securities | Available for sale
Accumulated other comprehensive income (loss) by component
Balance	166,000	1,482,000
Other comprehensive income before reclassifications, Unrealized (gains) losses on securities	2,624,000	783,000
Net current period other comprehensive (loss) income, Unrealized (gains) losses on securities	2,624,000	783,000
Balance	2,790,000	2,265,000		1,482,000
Unrealized Gains (Losses) on Securities | Transferred From Available-For-Sale to Held-To-Maturity
Accumulated other comprehensive income (loss) by component
Balance	(2,297,000)	(2,824,000)
Transfer of securities from available-for-sale to held-to-maturity			$ 8,000
Accretion of unrealized losses of securities transferred from available-for-sale to held-to-maturity recognized in other comprehensive income	127,000	124,000
Net current period other comprehensive (loss) income, Unrealized (gains) losses on securities	(127,000)	124,000
Balance	(2,170,000)	(2,700,000)		(2,824,000)
Pension Plan
Accumulated other comprehensive income (loss) by component
Balance	(3,737,000)	(3,395,000)
Reclassification adjustments for (gains) losses reclassified into income, Pension and postretirement benefit plans		67,000
Reclassification adjustments for (gains) losses reclassified into income, Interest rate swaps	75,000
Net current period other comprehensive (loss) income, Pension and postretirement benefit plans	75,000	67,000
Balance	(3,662,000)	(3,328,000)		(3,395,000)
Interest Rate Swap
Accumulated other comprehensive income (loss) by component
Balance	(155,000)	(311,000)
Other comprehensive income before reclassifications, Interest rate swaps	35,000	21,000
Net current period other comprehensive (loss) income, Interest rate swaps	35,000	21,000
Balance	(120,000)	(290,000)		(311,000)
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) by component
Balance	(6,023,000)	(5,048,000)
Other comprehensive income before reclassifications, Accumulated other comprehensive income (loss)	2,659,000	804,000
Accretion of unrealized losses of securities transferred from available-for-sale to held-to-maturity recognized in other comprehensive income	127,000	124,000
Reclassification adjustments for (gains) losses reclassified into income, Accumulated other comprehensive income (loss)	75,000	67,000
Net current periodic change, Accumulated other comprehensive income (loss)	2,861,000	995,000
Balance	$ (3,162,000)	$ (4,053,000)		$ (5,048,000)

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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) - Reclassification Adjustments (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Reclassification Adjustment out of Accumulated Other Comprehensive Income
Provision for income taxes	$ 1,042	$ 880
Reclassification adjustments
Reclassification Adjustment out of Accumulated Other Comprehensive Income
Total reclassification adjustments	(75)	(67)
Reclassification adjustments | Pension Plan
Reclassification Adjustment out of Accumulated Other Comprehensive Income
Compensation and benefits	(116)	(103)
Total before tax	(116)	(103)
Provision for income taxes	41	36
Net of tax	$ (75)	$ (67)

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DERIVATIVE FINANCIAL INSTRUMENTS (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2016	Dec. 31, 2015
Cash Flow Hedge | Interest Rate Swap
Derivative
Interest rate swaps designated as cash flow hedges, notional amount	$ 10,000	$ 10,000
Fair values of effective portion of hedges reflected in Other Comprehensive Income	185	239
Fair Value Hedge | Interest Rate Swap
Derivative
Interest rate swaps designated as cash flow hedges, notional amount	8,900	9,800
Fair values of effective portion of hedges reflected in Other Comprehensive Income	$ 503	$ 319
Average receive rate	1.79%	1.78%
Average pay rate	3.26%	3.25%
Weighted average maturity	16 years 3 months 18 days	16 years 7 months 6 days
Not designated as hedging instrument | Interest Rate Swap
Derivative
Average receive rate	2.15%	2.13%
Average pay rate	3.64%	3.60%
Weighted average maturity	9 years 10 months 24 days	10 years 2 months 12 days
Not designated as hedging instrument | Interest Rate Swap | Other Assets
Derivative
Interest rate derivative assets, fair value	$ 1,674	$ 765
Not designated as hedging instrument | Interest Rate Swap | Other Liabilities
Derivative
Interest rate derivative liabilities, fair value	1,674	$ 765
Not designated as hedging instrument | Pay Floating Receive Fixed Interest Rate Swap [Member]
Derivative
Interest rate swaps designated as cash flow hedges, notional amount	46,400
Not designated as hedging instrument | Pay Fixed Receive Floating Interest Rate Swap [Member]
Derivative
Interest rate swaps designated as cash flow hedges, notional amount	$ 46,400