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
September 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	$	47,625		$	47,625		$	-		$	-		$	47,625

Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		28,643			23,587			5,056			-			28,643
Mortgage Backed Securities		342,077			-			342,077			-			342,077
Corporate Securities		49,761			8,171			41,590			-			49,761
Other		1,284			974			310			-			1,284
Total Investment Securities Available-for-Sale		421,765			32,732			389,033			-			421,765

Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		67,717			-			55,188			12,753			67,941
Mortgage Backed Securities		121			-			122			-			122
Other		3,123			-			3,123			-			3,123
Total Investment Securities Held-to-Maturity		70,961			-			58,433			12,753			71,186

FHLB Stock		7,187			N/	A		N/	A		N/	A		N/	A
Loans & Leases, Net of Deferred Fees & Allowance:
Commercial Real Estate		395,550			-			-			399,792			399,792
Agricultural Real Estate		308,188			-			-			313,920			313,920
Real Estate Construction		26,161			-			-			26,437			26,437
Residential 1st Mortgages		142,504			-			-			145,778			145,778
Home Equity Lines and Loans		34,410			-			-			36,988			36,988
Agricultural		212,309			-			-			211,418			211,418
Commercial		136,002			-			-			137,033			137,033
Consumer & Other		4,895			-			-			4,945			4,945
Leases		4,523			-			-			4,523			4,523
Unallocated Allowance		(842	)		-			-			(842	)		(842	)
Total Loans & Leases, Net of Deferred Fees & Allowance		1,263,700			-			-			1,279,992			1,279,992
Accrued Interest Receivable		8,214			-			8,214			-			8,214

Liabilities:
Deposits:
Demand		435,778			435,778			-			-			435,778
Interest Bearing Transaction		257,650			257,650			-			-			257,650
Savings and Money Market		561,277			561,277			-			-			561,277
Time		439,081			-			439,485			-			439,485
Total Deposits		1,693,786			1,254,705			439,485			-			1,694,190
FHLB Advances		5,900			-			5,900			-			5,900
Subordinated Debentures		10,310			-			5,665			-			5,665
Accrued Interest Payable		357			-			357			-			357

				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
September 30, 2012 (in thousands)	Carrying Amount			Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Total Estimated Fair Value
Assets:
Cash and Cash Equivalents	$	33,464		$	33,464	$	-	$	-		$	33,464

Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		46,971			10,627		36,344		-			46,971
Obligations of States and Political Subdivisions		5,704			-		-		5,704			5,704
Mortgage Backed Securities		389,812			-		389,812		-			389,812
Corporate Securities		14,864			-		14,864		-			14,864
Other		5,826			5,516		310		-			5,826
Total Investment Securities Available-for-Sale		463,177			16,143		441,330		5,704			463,177

Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		66,098			-		60,983		7,738			68,721
Mortgage Backed Securities		640			-		660		-			660
Other		2,222			-		2,222		-			2,222
Total Investment Securities Held-to-Maturity		68,960			-		63,865		7,738			71,603

FHLB Stock		7,368			N/A		N/A		N/A			N/A
Loans, Net of Deferred Loan Fees & Allowance:
Commercial Real Estate		331,331			-		-		340,570			340,570
Agricultural Real Estate		290,202			-		-		298,168			298,168
Real Estate Construction		30,840			-		-		31,236			31,236
Residential 1st Mortgages		135,922			-		-		141,334			141,334
Home Equity Lines and Loans		40,475			-		-		43,243			43,243
Agricultural		184,794			-		-		184,647			184,647
Commercial		158,117			-		-		157,440			157,440
Consumer & Other		5,370			-		-		5,454			5,454
Unallocated Allowance		(628	)		-		-		(628	)		(628	)
Total Loans, Net of Deferred Loan Fees & Allowance		1,176,423			-		-		1,201,464			1,201,464
Accrued Interest Receivable		8,037			-		-		8,037			8,037

Liabilities:
Deposits:
Demand		369,635			369,635		-		-			369,635
Interest Bearing Transaction		238,223			238,223		-		-			238,223
Savings and Money Market		540,690			540,690		-		-			540,690
Time		482,957			-		483,950		-			483,950
Total Deposits		1,631,505			1,148,548		483,950		-			1,632,498
FHLB Advances		482			-		547		-			547
Subordinated Debentures		10,310			-		5,478		-			5,478
Accrued Interest Payable		526			-		526		-			526

Fair value estimates presented herein are based on pertinent information available to management as of September 30, 2013, December 31, 2012, and September 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.