5. Fair Value of Financial Instruments

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

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

				Fair Value of Financial Instruments Using
June 30, 2013 (in thousands)	Carrying Amount			Quoted Prices in Active Markets for Identical Assets (Level 1)			Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Estimated Fair Value
Assets:
Cash and Cash Equivalents	$	45,306		$	45,306		$	-		$	-		$	45,306

Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		26,482			21,416			5,066			-			26,482
Obligations of States and Political Subdivisions		5,612			-			-			5,612			5,612
Mortgage Backed Securities		392,574						392,574			-			392,574
Corporate Securities		49,560			8,122			41,438			-			49,560
Other		1,186			876			310			-			1,186
Total Investment Securities Available-for-Sale		475,414			30,414			439,388			5,612			475,414

Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		64,648			-			58,009			7,360			65,369
Mortgage Backed Securities		217			-			220			-			220
Other		2,194			-			2,194			-			2,194
Total Investment Securities Held-to-Maturity		67,059			-			60,423			7,360			67,783

FHLB Stock		7,187			N/	A		N/	A		N/	A		N/	A
Loans & Leases, Net of Deferred Fees & Allowance:
Commercial Real Estate		387,427			-			-			387,017			387,017
Agricultural Real Estate		309,107			-			-			310,902			310,902
Real Estate Construction		31,741			-			-			31,901			31,901
Residential 1st Mortgages		135,436			-			-			137,951			137,951
Home Equity Lines and Loans		34,514			-			-			37,225			37,225
Agricultural		204,203			-			-			201,957			201,957
Commercial		150,572			-			-			149,593			149,593
Consumer & Other		5,378			-			-			5,400			5,400
Leases		2,667			-			-			2,667			2,667
Unallocated Allowance		(224	)		-			-			(224	)		(224	)
Total Loans & Leases, Net of Deferred Fees & Allowance		1,260,821			-			-			1,264,389			1,264,389
Accrued Interest Receivable		7,609			-			7,609			-			7,609

Liabilities:
Deposits:
Demand		429,526			429,526			-			-			429,526
Interest Bearing Transaction		248,447			248,447			-			-			248,447
Savings and Money Market		588,009			588,009			-			-			588,009
Time		444,175			-			444,579			-			444,579
Total Deposits		1,710,157			1,265,982			444,579			-			1,710,561
FHLB Advances & Securities Sold Under Agreement to Repurchase		43,300			-			43,300			-			43,300
Subordinated Debentures		10,310			-			5,665			-			5,665
Accrued Interest Payable		438			-			438			-			438

				Fair Value of Financial Instruments Using
December 31, 2012 (in thousands)	Carrying Amount			Quoted Prices in Active Markets for Identical Assets (Level 1)			Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Estimated Fair Value
Assets:
Cash and Cash Equivalents	$	129,426		$	129,426		$	-		$	-		$	129,426

Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		26,823			21,731			5,092			-			26,823
Obligations of States and Political Subdivisions		5,665			-			-			5,665			5,665
Mortgage Backed Securities		352,772			-			352,772			-			352,772
Corporate Securities		22,558			4,020			18,538			-			22,558
Other		10,173			9,863			310			-			10,173
Total Investment Securities Available-for-Sale		417,991			35,614			376,712			5,665			417,991

Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		65,694			-			60,177			7,810			67,987
Mortgage Backed Securities		484			-			496			-			496
Other		2,214			-			2,214			-			2,214
Total Investment Securities Held-to-Maturity		68,392			-			62,887			7,810			70,697

FHLB Stock		7,368			N/	A		N/	A		N/	A		N/	A
Loans, Net of Deferred Loan Fees & Allowance:
Commercial Real Estate		344,084			-			-			349,524			349,524
Agricultural Real Estate		309,115			-			-			316,302			316,302
Real Estate Construction		31,694			-			-			32,024			32,024
Residential 1st Mortgages		139,038			-			-			144,203			144,203
Home Equity Lines and Loans		38,807			-			-			41,419			41,419
Agricultural		210,595			-			-			209,578			209,578
Commercial		135,330			-			-			134,647			134,647
Consumer & Other		4,876			-			-			4,847			4,847
Unallocated Allowance		(854	)		-			-			(854	)		(854	)
Total Loans, Net of Deferred Loan Fees & Allowance		1,212,685			-			-			1,231,690			1,231,690
Accrued Interest Receivable		6,389			-			-			6,389			6,389

Liabilities:
Deposits:
Demand		462,251			462,251			-			-			462,251
Interest Bearing Transaction		259,141			259,141			-			-			259,141
Savings and Money Market		541,526			541,526			-			-			541,526
Time		459,108			-			459,993			-			459,993
Total Deposits		1,722,026			1,262,918			459,993			-			1,722,911
Subordinated Debentures		10,310			-			5,750			-			5,750
Accrued Interest Payable		498			-			498			-			498

				Fair Value of Financial Instruments Using
June 30, 2012 (in thousands)	Carrying Amount			Quoted Prices in Active Markets for Identical Assets (Level 1)			Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Estimated Fair Value
Assets:
Cash and Cash Equivalents	$	40,769		$	40,769		$	-		$	-		$	40,769

Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		57,078			10,724			46,354			-			57,078
Obligations of States and Political Subdivisions		5,724			-			-			5,724			5,724
Mortgage Backed Securities		427,637			-			427,637			-			427,637
Corporate Securities		8,995			-			8,995			-			8,995
Other		2,458			2,148			310			-			2,458
Total Investment Securities Available-for-Sale		501,892			12,872			483,296			5,724			501,892

Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		67,159			-			61,820			7,786			69,606
Mortgage Backed Securities		806			-			831			-			831
Other		2,230			-			2,230			-			2,230
Total Investment Securities Held-to-Maturity		70,195			-			64,881			7,786			72,667

FHLB Stock		7,368			N/	A		N/	A		N/	A		N/	A
Loans, Net of Deferred Loan Fees & Allowance:
Commercial Real Estate		320,418			-			-			330,783			330,783
Agricultural Real Estate		282,997			-			-			292,152			292,152
Real Estate Construction		34,133			-			-			34,423			34,423
Residential 1st Mortgages		121,602			-			-			125,110			125,110
Home Equity Lines and Loans		42,770			-			-			45,809			45,809
Agricultural		202,946			-			-			202,991			202,991
Commercial		162,083			-			-			161,242			161,242
Consumer & Other		5,658			-			-			5,731			5,731
Unallocated Allowance		(1,711	)		-			-			(1,711	)		(1,711	)
Total Loans, Net of Deferred Loan Fees & Allowance		1,170,896			-			-			1,196,530			1,196,530
Accrued Interest Receivable		7,223			-			7,223			-			7,223

Liabilities:
Deposits:
Demand		360,290			360,290			-			-			360,290
Interest Bearing Transaction		223,343			223,343			-			-			223,343
Savings and Money Market		542,922			542,922			-			-			542,922
Time		505,670			-			506,638			-			506,638
Total Deposits		1,632,225			1,126,555			506,638			-			1,633,193
FHLB Advances & Securities Sold Under Agreement to Repurchase		50,998			-			51,065			-			51,065
Subordinated Debentures		10,310			-			5,841			-			5,841
Accrued Interest Payable		796			-			796			-			796

Fair value estimates presented herein are based on pertinent information available to management as of June 30, 2013, December 31, 2012, and June 30, 2012. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purpose of these financial statements since that date, and; therefore, current estimates of fair value may differ significantly from the amounts presented above. The methods and assumptions used to estimate the fair value of each class of financial instrument listed in the table above are explained below.

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

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

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

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

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

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

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

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