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, 2014 (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	$	39,216		$	39,216		$	-		$	-		$	39,216

Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		13,361			13,361			-			-			13,361
Mortgage Backed Securities		322,680			39,566			283,114			-			322,680
Other		485			175			310			-			485
Total Investment Securities Available-for-Sale		336,526			53,102			283,424			-			336,526

Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		67,206			-			54,375			13,539			67,914
Other		2,235			-			2,235			-			2,235
Total Investment Securities Held-to-Maturity		69,441			-			56,610			13,539			70,149

FHLB Stock		7,677			N/	A		N/	A		N/	A		N/	A
Loans & Leases, Net of Deferred Fees & Allowance:
Commercial Real Estate		465,707			-			-			462,469			462,469
Agricultural Real Estate		360,215			-			-			360,976			360,976
Real Estate Construction		102,783			-			-			103,095			103,095
Residential 1st Mortgages		167,168			-			-			169,971			169,971
Home Equity Lines and Loans		30,608			-			-			32,601			32,601
Agricultural		231,739			-			-			230,572			230,572
Commercial		184,889			-			-			184,466			184,466
Consumer & Other		4,595			-			-			4,619			4,619
Leases		35,063									33,519			33,519
Unallocated Allowance		(1,263	)		-			-			(1,263	)		(1,263	)
Total Loans & Leases, Net of Deferred Fees & Allowance		1,581,504			-			-			1,581,025			1,581,025
Accrued Interest Receivable		8,986			-			8,986			-			8,986

Liabilities:
Deposits:
Demand		516,093			516,093			-			-			516,093
Interest Bearing Transaction		326,368			326,368			-			-			326,368
Savings and Money Market		614,137			614,137			-			-			614,137
Time		419,615			-			419,663			-			419,663
Total Deposits		1,876,213			1,456,598			419,663			-			1,876,261
FHLB Advances		36,000			-			36,000			-			36,000
Subordinated Debentures		10,310			-			6,227			-			6,227
Accrued Interest Payable		314			-			314			-			314

				Fair Value of Financial Instruments Using
December 31, 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	$	83,677		$	83,677		$	-		$	-		$	83,677

Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		28,436			23,394			5,042			-			28,436
Mortgage Backed Securities		324,929			-			324,929			-			324,929
Corporate Securities		49,380			8,191			41,189			-			49,380
Other		1,894			1,584			310			-			1,894
Total Investment Securities Available-for-Sale		404,639			33,169			371,470			-			404,639

Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		65,685			-			51,563			14,307			65,870
Mortgage Backed Securities		45			-			45			-			45
Other		2,775			-			2,775			-			2,775
Total Investment Securities Held-to-Maturity		68,505			-			54,383			14,307			68,690

FHLB Stock		7,187			N/	A		N/	A		N/	A		N/	A
Loans & Leases, Net of Deferred Fees & Allowance:
Commercial Real Estate		402,336			-			-			403,790			403,790
Agricultural Real Estate		324,688			-			-			328,704			328,704
Real Estate Construction		40,438			-			-			40,800			40,800
Residential 1st Mortgages		150,184			-			-			153,352			153,352
Home Equity Lines and Loans		32,710			-			-			35,250			35,250
Agricultural		244,209			-			-			242,950			242,950
Commercial		144,701			-			-			145,131			145,131
Consumer & Other		4,876			-			-			4,912			4,912
Leases		12,094			-			-			11,851			11,851
Unallocated Allowance		(2,274	)		-			-			(2,274	)		(2,274	)
Total Loans & Leases, Net of Deferred Fees & Allowance		1,353,962			-			-			1,364,466			1,364,466
Accrued Interest Receivable		6,941			-			6,941			-			6,941

Liabilities:
Deposits:
Demand		495,963			495,963			-			-			495,963
Interest Bearing Transaction		291,795			291,795			-			-			291,795
Savings and Money Market		589,511			589,511			-			-			589,511
Time		430,422			-			430,752			-			430,752
Total Deposits		1,807,691			1,377,269			430,752			-			1,808,021
Subordinated Debentures		10,310			-			6,224			-			6,224
Accrued Interest Payable		352			-			352			-			352

				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 estimates presented herein are based on pertinent information available to management as of September 30, 2014, December 31, 2013, and September 30, 2013. 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 are 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.