AMES NATIONAL CORP - Quarter Report: 2010 March (Form 10-Q)

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[Mark One]

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

¨	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 0-32637

AMES NATIONAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

IOWA	42-1039071
(State or Other Jurisdiction of Incorporation or Organization)	(I. R. S. Employer Identification Number)

405 FIFTH STREET

AMES, IOWA 50010

(Address of Principal Executive Offices)

Registrant's Telephone Number, Including Area Code: (515) 232-6251

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. Yes x 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 (Section 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). Yes ¨ No ¨

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

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

COMMON STOCK, $2.00 PAR VALUE		9,432,915
(Class)		(Shares Outstanding at April 30, 2010)

AMES NATIONAL CORPORATION

INDEX

		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets at March 31, 2010 and December 31, 2009	3

	Consolidated Statements of Income for the three months ended March 31, 2010 and 2009	4

	Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009	5

	Notes to Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	32

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1.A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3.	Defaults Upon Senior Securities	33

Item 4.	Removed and Reserved	33

Item 5.	Other Information	33

Item 6.	Exhibits	33

Signatures		34

Index

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

	March 31,		December 31,
ASSETS	2010		2009

Cash and due from banks	$	25,422,556	$	18,796,664
Interest bearing deposits in financial institutions		34,097,282		24,776,088
Securities available-for-sale		419,052,593		418,655,018
Loans receivable, net		408,906,164		415,434,236
Loans held for sale		1,708,365		1,023,200
Bank premises and equipment, net		11,780,912		11,909,404
Accrued income receivable		6,450,914		5,710,226
Deferred income taxes		3,228,044		3,867,523
Other real estate owned		11,140,683		10,480,449
Other assets		4,567,509		4,916,991

Total assets	$	926,355,022	$	915,569,799

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits
Demand, noninterest bearing	$	94,569,046	$	99,918,848
NOW accounts		195,451,550		197,393,459
Savings and money market		191,829,393		184,631,343
Time, $100,000 and over		92,014,067		87,054,194
Other time		149,641,257		153,166,105
Total deposits		723,505,313		722,163,949

Federal funds purchased and securities sold under agreements to repurchase		44,557,180		40,489,505
Short-term borrowings		101,535		138,874
FHLB advances and other long-term borrowings		38,500,000		36,500,000
Dividend payable		1,037,620		943,292
Accrued expenses and other liabilities		3,331,051		2,994,291
Total liabilities		811,032,699		803,229,911

STOCKHOLDERS' EQUITY
Common stock, $2 par value, authorized 18,000,000 shares; 9,432,915 shares issued and outstanding		18,865,830		18,865,830
Additional paid-in capital		22,651,222		22,651,222
Retained earnings		69,935,681		67,703,701
Accumulated other comprehensive income-net unrealized gain on securities available-for-sale		3,869,590		3,119,135
Total stockholders' equity		115,322,323		112,339,888

Total liabilities and stockholders' equity	$	926,355,022	$	915,569,799

See Notes to Consolidated Financial Statements.

Index

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three Months Ended
	March 31,
	2010		2009

Interest and dividend income:
Loans, including fees	$	6,099,479	$	6,611,175
Securities:
Taxable		1,827,521		2,111,495
Tax-exempt		1,365,582		1,278,656
Federal funds sold		-		11,075
Interest bearing deposits		130,113		105,071
Total interest and dividend income		9,422,695		10,117,472

Interest expense:
Deposits		1,662,354		2,441,530
Other borrowed funds		403,158		468,384
Total interest expense		2,065,512		2,909,914

Net interest income		7,357,183		7,207,558

Provision for loan losses		323,798		229,654

Net interest income after provision for loan losses		7,033,385		6,977,904


Noninterest income:
Trust department income		530,716		382,552
Service fees		399,823		421,450
Securities gains (losses), net		536,983		(350,675	)
Other-than-temporary impairment of investment securities		-		(22,661	)
Gain on sales of loans held for sale		153,536		262,906
Merchant and ATM fees		165,387		146,010
Other		171,320		166,390
Total noninterest income		1,957,765		1,005,972

Noninterest expense:
Salaries and employee benefits		2,598,039		2,346,759
Data processing		450,964		478,635
Occupancy expenses		401,154		392,804
FDIC insurance assessments		313,357		479,911
Other real estate owned		56,353		426,844
Other operating expenses		713,072		701,467
Total noninterest expense		4,532,939		4,826,420

Income before income taxes		4,458,211		3,157,456

Provision for income taxes		1,188,611		716,316

Net income	$	3,269,600	$	2,441,140

Basic and diluted earnings per share	$	0.35	$	0.26

Dividends declared per share	$	0.11	$	0.10

Comprehensive income	$	4,020,055	$	1,046,046

See Notes to Consolidated Financial Statements.

Index

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Three Months Ended
	March 31,
	2010			2009

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,269,600		$	2,441,140
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		323,798			229,654
Provision (credit) for off-balance sheet commitments		13,000			(5,000	)
Amortization and (accretion), net		636,519			(8,219	)
Depreciation		181,712			216,076
Provision for deferred taxes		198,735			701,262
Securities losses (gains), net		(536,983	)		350,675
Other-than-temporary impairment of investment securities		-			22,661
Impairment of other real estate owned		-			320,282
Gain on sale of other real estate owned		(11,754	)		-
Change in assets and liabilities:
Decreasae (increase) in loans held for sale		(685,165	)		473,020
Decrease (increase) in accrued income receivable		(740,688	)		439,498
Decrease in other assets		346,202			634,412
Increase in accrued expenses and other liabilities		323,760			336,288
Net cash provided by operating activities		3,318,736			6,151,749

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale		(48,046,365	)		(42,606,042	)
Proceeds from sale of securities available-for-sale		11,881,313			10,783,617
Proceeds from maturities and calls of securities available-for-sale		36,859,140			23,910,121
Net increase in interest bearing deposits in financial institutions		(9,321,194	)		(2,233,435	)
Net increase in federal funds sold		-			(32,241,000	)
Net decrease in loans		5,502,745			14,512,896
Net proceeds for the sale of other real estate owned		51,216			254,728
Purchase of bank premises and equipment, net		(49,940	)		(52,821	)
Improvements in other real estate owned		1,833			1,125
Net cash used in investing activities		(3,121,252	)		(27,670,811	)

CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits		1,341,364			20,246,750
Increase (decrease) in federal funds purchased and securities sold under agreements to repurchase		4,067,675			(700,565	)
Payments on short-term borrowings, net		(37,339	)		(691,049	)
Proceeds from FHLB advances		2,500,000			2,500,000
Payments on FHLB advances		(500,000	)		(4,500,000	)
Dividends paid		(943,292	)		(2,641,216	)
Net cash provided by financing activities		6,428,408			14,213,920

Net increase (decrease) in cash and cash equivalents		6,625,892			(7,305,142	)

CASH AND DUE FROM BANKS
Beginning		18,796,664			24,697,591
Ending	$	25,422,556		$	17,392,449

Continued

Index

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(unaudited)

	Three Months Ended
	March 31,
	2010		2009


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments (receipt) for:
Interest	$	2,116,133	$	3,052,441
Income taxes		696,462		(918,253	)

SUPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Transfer of loans to other real estate owned	$	701,529	$	491,516

See Notes to Consolidated Financial Statements.

Index

AMES NATIONAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

1.	Significant Accounting Policies

The consolidated financial statements for the three month periods ended March 31, 2010 and 2009 are unaudited. In the opinion of the management of Ames National Corporation (the "Company"), these financial statements reflect all adjustments, consisting only of normal recurring accruals, necessary to present fairly these consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of results which may be expected for an entire year. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been omitted in accordance with the requirements for interim financial statements. The interim financial statements and notes thereto should be read in conjunction with the year-end audited financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2009 (the “Annual Report”). The consolidated financial statements include the accounts of the Company and its wholly-owned banking subsidiaries (the “Banks”). All significant intercompany balances and transactions have been eliminated in consolidation. Certain immaterial reclassifications have been made to previously presented financial statements to conform to the 2010 presentation.

Fair value of financial instruments: The following methods and assumptions were used by the Company in estimating fair value disclosures:

Cash and due from banks and interest bearing deposits in financial institutions: The recorded amount of these assets approximates fair value.

Securities available-for-sale: Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the securities credit rating, prepayment assumptions and other factors such as credit loss assumptions.

Loans held for sale: The fair value of loans held for sale is based on prevailing market prices.

Loans receivable: The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates, which reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the historical experience, with repayments for each loan classification modified, as required, by an estimate of the effect of current economic and lending conditions. The effect of nonperforming loans is considered in assessing the credit risk inherent in the fair value estimate.

Deposit liabilities: Fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW accounts and money market accounts, are equal to the amount payable on demand as of the respective balance sheet date. Fair values of certificates of deposit are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

Federal funds purchased and securities sold under agreements to repurchase: The carrying amounts of federal funds purchased and securities sold under agreements to repurchase approximate fair value because of the generally short-term nature of the instruments.

Index

Short-term borrowings: The carrying amounts of short-term borrowings approximate fair value because of the generally short-term nature of the instruments.

FHLB advances and other long-term borrowings: Fair values of FHLB advances and other long-term borrowings are estimated using discounted cash flow analysis based on interest rates currently being offered with similar terms.

Accrued income receivable and accrued interest payable: The carrying amounts of accrued income receivable and interest payable approximate fair value.

New Accounting Pronouncements

On December 23, 2009 the FASB issued guidance which modifies certain aspects contained in the Transfers and Servicing topic of FASB ASC 860. This standard enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. This standard was effective for the Company as of January 1, 2010 with adoption applied prospectively for transfers that occur on or after that date. The adoption of this standard did not have a material impact on the Company’s financial position or results of operations.

In January, 2010, the FASB issued guidance which modifies certain aspects contained in the Fair Value Measurements and Disclosure topic of FAS ASC 820. This standard enhances information reported to users of the financial statements by providing additional and enhanced disclosures about the fair value measurements. This standard was effective for the company as of January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which will be effective on January 1, 2011. The adoption of this standard did not have a material impact on the Company’s financial position or results of operations.

Dividends

On February 10, 2010, the Company declared a cash dividend on its common stock, payable on May 17, 2010 to stockholders of record as of May 3, 2010, equal to $0.11 per share.

3.	Earnings Per Share

Earnings per share amounts were calculated using the weighted average shares outstanding during the periods presented. The weighted average outstanding shares for the three months ended March 31, 2010 and 2009 were 9,432,915. The Company had no potentially dilutive securities outstanding during the periods presented.

4.	Off-Balance Sheet Arrangements

The Company is party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2009.

Index

5.	Fair Value of Financial Instruments

The estimated fair values of the Company’s financial instruments (as described in Note 1) were as follows:

	March 31, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Financial assets:
Cash and due from banks	$	25,422,556	$	25,423,000	$	18,796,664	$	18,797,000
Federal funds sold		-		-		-		-
Interest-bearing deposits		34,097,282		34,097,000		24,776,088		24,766,000
Securities available-for-sale		419,052,593		419,053,000		418,655,018		418,655,000
Loans receivable, net		408,906,164		404,202,000		415,434,236		411,344,000
Loans held for sale		1,708,365		1,708,000		1,023,200		1,023,000
Accrued income receivable		6,450,914		6,451,000		5,710,226		5,710,000
Financial liabilities:
Deposits	$	723,505,313	$	726,225,000	$	722,163,949	$	725,840,000
Federal funds purchased and securities sold under agreements to repurchase		44,557,180		44,557,000		40,489,505		40,490,000
Other short-term borrowings		101,535		102,000		138,874		139,000
Long-term borrowings		38,500,000		43,369,000		36,500,000		41,504,000
Accrued interest payable		1,041,493		1,041,000		1,092,191		1,092,000

The methodology used to determine fair value as of March 31, 2010 did not change from the methodology used in the Annual Report.

6.	Fair Value Measurements

Assets and liabilities carried at fair value are required to be classified and disclosed according to the process for determining fair value. There are three levels of determining fair value.

Level 1:

Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

Level 2:

Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.

Level 3:

Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Index

The following table presents the balances of assets measured at fair value on a recurring basis by level as of March 31, 2010 and December 31, 2009:

			Quoted Prices in Active markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)

March 31, 2010

U.S. treasury	$	520,000	$	520,000	$	-	$	-
U.S. government agencies		106,521,000		-		106,521,000		-
U.S. government mortgage-backed securities		96,716,000		-		96,716,000		-
State and political subdivisions		185,068,000		-		185,068,000		-
Corporate bonds		22,282,000		-		22,282,000		-
Equity securities, financial industry common stock		2,722,000		2,722,000		-		-
Equity securities, other		5,224,000		2,028,000		3,196,000		-

	$	419,053,000	$	5,270,000	$	413,783,000	$	-

December 31, 2009

U.S. treasury	$	525,000	$	525,000	$	-	$	-
U.S. government agencies		106,640,000		-		106,640,000		-
U.S. government mortgage-backed securities		101,589,000		-		101,589,000		-
State and political subdivisions		178,052,000		-		178,052,000		-
Corporate bonds		24,300,000		-		24,300,000		-
Equity securities, financial industry common stock		2,347,000		2,347,000		-		-
Equity securities, other		5,202,000		2,023,000		3,179,000		-

	$	418,655,000	$	4,895,000	$	413,760,000	$	-

(a)

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the securities credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, as well as U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. Level 2 securities include U.S. government agency securities, mortgage-backed securities (including pools and collateralized mortgage obligations), municipal bonds, and corporate debt securities. There were no transfers between level one and two classifications. The Company’s policy is to recognize transfers in and transfers out as of the actual date of the event or change in circumstances that caused the transfer.

Index

Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the assets carried on the balance sheet (after specific reserves) by caption and by level with the required valuation hierarchy as of March 31, 2010 and December 31, 2009:

			Quoted Prices in Active markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)

March 31, 2010

Loans	$	4,233,000	$	-	$	-	$	4,233,000

Other real estate owned		11,141,000		-		-		11,141,000

Total	$	15,374,000	$	-	$	-	$	15,374,000

December 31, 2009

Loans	$	4,807,000	$	-	$	-	$	4,807,000

Other real estate owned		10,480,000		-		-		10,480,000

Total	$	15,287,000	$	-	$	-	$	15,287,000

Loans in the tables above consist of impaired credits held for investment. Impaired loans are valued by management based on collateral values underlying the loans. Management uses original appraised values and adjusts for trends observed in the market to determine the value of impaired loans. Other real estate owned in the table above consists of real estate obtained through foreclosure. Management uses appraised values and adjusts for trends observed in the market and for disposition costs in determining the value of other real estate owned.

Index

7.	Debt and Equity Securities

The amortized cost of securities available for sale and their approximate fair values are summarized below:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
March 31, 2010:
U.S. treasury	$	499,192	$	21,204	$	-		$	520,396
U.S. government agencies		105,772,396		860,397		(111,601	)		106,521,192
U.S. government mortgage-backed securities		94,620,853		2,138,723		(43,356	)		96,716,220
State and political subdivisions		182,213,004		3,202,778		(348,328	)		185,067,454
Corporate bonds		21,004,062		1,322,612		(44,801	)		22,281,873
Equity securities, financial industry common stock		3,402,389		-		(681,148	)		2,721,241
Equity securities, other		5,398,491		17,700		(191,974	)		5,224,217
	$	412,910,387	$	7,563,414	$	(1,421,208	)	$	419,052,593

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
December 31, 2009:
U.S. treasury	$	498,972	$	26,219	$	-		$	525,191
U.S. government agencies		105,903,470		969,583		(233,169	)		106,639,884
U.S. government mortgage-backed securities		100,106,597		1,724,922		(242,033	)		101,589,486
State and political subdivisions		175,298,674		3,109,322		(355,571	)		178,052,425
Corporate bonds		23,094,417		1,253,157		(47,880	)		24,299,694
Equity securities, financial industry common stock		3,402,389		-		(1,056,088	)		2,346,301
Equity securities, other		5,399,493		58,400		(255,856	)		5,202,037
	$	413,704,012	$	7,141,603	$	(2,190,597	)	$	418,655,018

Non-interest income for the three months ended March 31, 2010 and 2009 was primarily impacted by net security gains (losses) of approximately $537,000 and ($351,000), respectively.

Index

Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2010 and December 31, 2009, are summarized as follows:

	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2010:

Securities available for sale:
U.S. government agencies	$	30,896,708	$	(100,993	)	$	457,446	$	(10,608	)	$	31,354,154	$	(111,601	)
U.S. government mortgage-backed securities		11,653,483		(43,356	)		-		-			11,653,483		(43,356	)
State and political subsidivisions		24,153,227		(297,395	)		2,588,170		(50,933	)		26,741,397		(348,328	)
Corporate obligations		1,466,747		(25,309	)		732,818		(19,492	)		2,199,565		(44,801	)
Equity securities, financial industry common stock		-		-			2,721,241		(681,148	)		2,721,241		(681,148	)
Equity securities, other		-		-			1,996,518		(191,974	)		1,996,518		(191,974	)
	$	68,170,165	$	(467,053	)	$	8,496,193	$	(954,155	)	$	76,666,358	$	(1,421,208	)

	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Decmeber 31, 2009:

Securities available for sale:
U.S. government agencies	$	20,945,895	$	(221,061	)	$	493,118	$	(12,108	)	$	21,439,013	$	(233,169	)
U.S. government mortgage-backed securities		35,520,408		(242,033	)		-		-			35,520,408		(242,033	)
State and political subsidivisions		25,536,025		(292,017	)		2,701,961		(63,554	)		28,237,986		(355,571	)
Corporate obligations		998,971		(764	)		2,687,426		(47,116	)		3,686,397		(47,880	)
Equity securities, financial industry common stock		-		-			2,346,301		(1,056,088	)		2,346,301		(1,056,088	)
Equity securities, other		-		-			1,932,636		(255,856	)		1,932,636		(255,856	)
	$	83,001,299	$	(755,875	)	$	10,161,442	$	(1,434,722	)	$	93,162,741	$	(2,190,597	)

At March 31, 2010, debt securities have unrealized losses of $548,086. These losses are generally due to changes in interest rates or general market conditions. In analyzing an issuers’ financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond ratings agencies have occurred and industry analysts’ reports. Unrealized losses on equity securities totaled $873,122 as of March 31, 2010. Management analyzed the financial condition of the equity issuers and considered the general market conditions and other factors in concluding that the unrealized losses on equity securities were not other-than-temporary. Due to potential changes in conditions, it is at least reasonably possible that changes in fair values and management’s assessments will occur in the near term and that such changes could lead to additional impairment charges, thereby materially affecting the amounts reported in the Company’s financial statements.

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8.	Impaired Loans and Allowance for Loan Losses

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payment of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The Company will apply its normal loan review procedures to identify loans that should be evaluated for impairment. Impairment of $819,000 and $999,000 is included in the allowance for loan losses as of March 31, 2010 and December 31, 2009, respectively. The following is a recap of impaired loans at March 31, 2010 and December 31, 2009:

	March 31,		December 31,
	2010		2009

Impaired loans without a valuation allowance	$	3,017,000	$	4,381,000
Impaired loans with a valuation allowance		5,052,000		5,806,000
Total impaired loans	$	8,069,000	$	10,187,000

Valuation related to impaired loans	$	819,000	$	999,000

Total nonaccrual loans	$	8,310,000	$	10,187,000

Total loans past due ninety days or more and still accruing	$	107,000	$	121,000

	Three Months Ended March 31,
	2010		2009

Average investments in impaired loans	$	9,128,000	$	7,378,000
Interest income that would have been recognized on impaired loans	$	118,000	$	136,000
Interest income recorded on impaired loans	$	98,000	$	21,000

Changes in the allowance for loan losses were as follows for the three months ended March 31, 2010 and 2009:

	Three Months Ended
	March 31,
	2010			2009

Balance, beginning	$	7,651,510		$	6,779,215
Loans charged-off		(315,131	)		(96,963	)
Recoveries of loans charged-off		21,397			20,375
Net charge offs		(293,734	)		(76,588	)
Provision for loan losses		323,798			229,654
Balance, ending	$	7,681,574		$	6,932,281

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9.	Subsequent Events

Management evaluated subsequent events through the date the financial statements were issued. There were no significant events or transactions occurring after March 31, 2010, but prior to May 6, 2010 that provided additional evidence about conditions that existed at March 31, 2010. There were no events or transactions that provided evidence about conditions that did not exist at March 31, 2010.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Ames National Corporation (the “Company”) is a bank holding company established in 1975 that owns and operates five bank subsidiaries in central Iowa (the “Banks”). The following discussion is provided for the consolidated operations of the Company and its Banks, First National Bank, Ames, Iowa (First National), State Bank & Trust Co. (State Bank), Boone Bank & Trust Co. (Boone Bank), Randall-Story State Bank (Randall-Story Bank) and United Bank & Trust NA (United Bank). The purpose of this discussion is to focus on significant factors affecting the Company's financial condition and results of operations.

The Company does not engage in any material business activities apart from its ownership of the Banks. Products and services offered by the Banks are for commercial and consumer purposes including loans, deposits and trust services. The Banks also offer investment services through a third-party broker dealer. The Company employs eleven individuals to assist with financial reporting, human resources, audit, compliance, marketing, technology systems and the coordination of management activities, in addition to 183 full-time equivalent individuals employed by the Banks.

The Company’s primary competitive strategy is to utilize seasoned and competent Bank management and local decision making authority to provide customers with faster response times and more flexibility in the products and services offered. This strategy is viewed as providing an opportunity to increase revenues through creating a competitive advantage over other financial institutions. The Company also strives to remain operationally efficient to provide better profitability while enabling the Company to offer more competitive loan and deposit rates.

The principal sources of Company revenues and cash flow are: (i) interest and fees earned on loans made by the Banks; (ii) service charges on deposit accounts maintained at the Banks; (iii) interest on fixed income investments held by the Banks; (iv) fees on trust services provided by those Banks exercising trust powers and (v) securities gains. The Company’s principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) salaries and employee benefits; (iii) data processing costs associated with maintaining the Banks’ loan and deposit functions; (iv) occupancy expenses for maintaining the Banks’ facilities; and (v) FDIC insurance assessments. The largest component contributing to the Company’s net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest bearing liabilities (primarily deposits and other borrowings). One of management’s principal functions is to manage the spread between interest earned on earning assets and interest paid on interest bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk.

The Company had net income of $3,270,000, or $0.35 per share, for the three months ended March 31, 2010, compared to net income of $2,441,000, or $0.26 per share, for the three months ended March 31, 2009. Total equity capital as of March 31, 2010 totaled $115.3 million or 12.4% of total assets.

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The Company’s earnings for the first quarter increased $828,000 from the $2,441,000 earned a year ago. The higher quarterly earnings can be primarily attributed to increased securities gains, lower other real estate owned expenses and lower FDIC insurance assessments, offset in part by an increase in salaries and employee benefits. For the three months ended March 31, 2010, securities gain were $537,000 as compared to securities losses of $351,000 for the three month ended March 31, 2009. The decrease in other real estate costs of $370,000 is due primarily to write downs in 2009, with no write downs in 2010. The decrease in the FDIC insurance assessments of $167,000 is due primarily to lower quarterly deposit assessments. FDIC insurance assessments are expected to negatively impact future operating results if bank failures continue to erode the FDIC insurance fund. For the three months ended March 31, 2010, 41 banks have failed compared to 140 bank failures for the year ended December 31, 2009.

Net loan charge-offs for the quarter totaled $294,000, compared to net charge-offs of $77,000 in the first quarter of 2009. The provision for loan losses for the first quarter of 2010 totaled $324,000 compared to the provision for loan losses of $230,000 for the same period in 2009. This increase in the provision for loan losses was due primarily to the continuing weakness in general economic conditions, offset in part by decreases in outstanding loans and the specific allowance for loan losses on impaired loans.

The following management discussion and analysis will provide a review of important items relating to:

·	Challenges

·	Key Performance Indicators and Industry Results

·	Critical Accounting Policies

·	Income Statement Review

·	Balance Sheet Review

·	Asset Quality and Credit Risk Management

·	Liquidity and Capital Resources

·	Forward-Looking Statements and Business Risks

Challenges

Management has identified certain challenges that may negatively impact the Company’s revenues in the future and is attempting to position the Company to best respond to those challenges.

· In March of 2009, the OCC imposed individual minimum capital ratios requiring First National to maintain, on an ongoing basis, Tier One Leverage Capital of 9% of Adjusted Total Assets and Total Risk Based Capital of 11% of Risk Weighted Assets. As of March 31, 2010, First National exceeded these capital ratios. Failure to maintain the individual minimum capital ratios could result in additional regulatory action against First National.

· Interest rates are likely to increase as the economy continues its gradual recovery and an increasing interest rate environment may present a challenge to the Company. Increases in interest rates may negatively impact the Company’s net interest margin if interest expense increases more quickly than interest income. The Company’s earning assets (primarily its loan and investment portfolio) have longer maturities than its interest bearing liabilities (primarily deposits and other borrowings); therefore, in a rising interest rate environment, interest expense may increase more quickly than interest income as the interest bearing liabilities reprice more quickly than earning assets. In response to this challenge, the Banks model quarterly the changes in income that would result from various changes in interest rates. Management believes Bank earning assets have the appropriate maturity and repricing characteristics to optimize earnings and the Banks’ interest rate risk positions.

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· The Company’s market in central Iowa has numerous banks, credit unions, and investment and insurance companies competing for similar business opportunities. This competitive environment will continue to put downward pressure on the Banks’ net interest margins and thus affect profitability. Strategic planning efforts at the Company and Banks continue to focus on capitalizing on the Banks’ strengths in local markets while working to identify opportunities for improvement to gain competitive advantages.

· The Company’s equity securities portfolio (held at the holding company level and excluding equity holding by the Banks) is $4.7 million as of March 31, 2010. The Company invests a portion of its’ capital that may be utilized for future expansion in a portfolio of primarily financial and utility stocks. The Company has focused on stocks that have historically paid dividends in an effort to lessen the negative effects of a bear market. The strategy, however, did not prove successful in 2010 and 2009 as problems due to the national recession caused a significant decline in the market value and dividend rates of the Company’s equity securities. Unrealized losses in the Company’s equity portfolio totaled $873,000 and $1.3 million (at the holding company level on an unconsolidated basis) as of March 31, 2010 and December 31, 2009, respectively. The Company had no realized losses in its equity portfolio during the three months ended March 31, 2010, compared to realized losses of $53,000 during the three months ended March 31, 2009 (at the holding company level on an unconsolidated basis). Additionally, the Company recognized no impairment losses in the equity portfolio during the three months ended March 31, 2010 and 2009. It is possible that the Company may incur impairment losses in the remainder of 2010 which would have a negative impact on the Company’s earnings for the year.

· Loans amounted to $408.9 million and $415.4 million as of March 31, 2010 and December 31, 2009, respectively. The loan portfolio decreased 1.6% during the three months ended March 31, 2010. The decline in the loan portfolio is primarily due to the decrease in loan volume due to a weakening of loan demand as payments and prepayments exceeded originations. The declines occurred primarily in the commercial operating and commercial real estate loan portfolios. A continued decline in the loan portfolio would have a negative impact on the Company’s earnings for the year.

· The economic conditions for commercial real estate developers in the Des Moines metropolitan area deteriorated in recent years and significantly contributed to the Company’s increased level of non-performing loans, other real estate owned and related costs since 2007. The Company has $8,975,000 in other real estate owned in the Des Moines market. The Company has $3.4 million in impaired loans with four Des Moines development companies with specific reserves totaling $350,000. The Company has additional customer relationships with real estate developers in the Des Moines area that may become impaired in the future if economic conditions do not improve or become worse. The Company has a limited number of such credits and is actively engaged with the customers to minimize credit risk.

· Other real estate owned amounted to $11.1 million and $10.5 million as of March 31, 2010 and December 31, 2009, respectively. Other real estate owned costs amounted to $56,000 and $427,000 for the three months ended March 31, 2010 and 2009, respectively. Management obtains independent appraisals or performs evaluations to determine that these properties are carried at the lower of the new cost basis or fair value less cost to sell. It is at least reasonably possible that change in fair values will occur in the near term and that such changes could have a negative impact on the Company’s earnings.

· The FDIC imposes an assessment against all depository institutions for deposit insurance. Notably, the FDIC has the authority to increase insurance assessments. FDIC insurance assessments amounted to $313,000 and $480,000 for the three months ended March 31, 2010 and 2009, respectively. For the three months ended March 31, 2010, 41 banks failed as compared 140 bank failures for the year ended December 31, 2009. In 2011, the FDIC has a scheduled assessment increase for all FDIC insured institutions. An increase in FDIC deposit assessments will have a negative impact on the Company’s earnings.

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· The Company operates in a highly regulated environment and is subject to extensive regulation, supervision and examination. Applicable laws and regulations may change, and there is no assurance that such changes will not adversely affect the Company’s business. In this respect potentially landscape-changing legislative proposals have been introduced in Congress and by regulatory agencies with respect to their respective regulatory powers. Such regulation and supervision govern the activities in which an institution may engage and are intended primarily for the protection of the Bank, its depositors and the FDIC. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including but not limited to the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of restrictions on activities, regulatory policy, regulations, or legislation, including but not limited to changes in the regulations governing banks, could have a material impact on the Company’s operations. It is unknown at this time to what extent legislation will be passed into law or regulatory proposals will be adopted, or the effect that such passage or adoption will have on the banking industry or the Company.

Key Performance Indicators and Industry Results

Certain key performance indicators for the Company and the industry are presented in the following chart. The industry figures are compiled by the Federal Deposit Insurance Corporation (FDIC) and are derived from 8,012 commercial banks and savings institutions insured by the FDIC. Management reviews these indicators on a quarterly basis for purposes of comparing the Company’s performance from quarter to quarter against the industry as a whole.

Selected Indicators for the Company and the Industry

	Quarter Ended March 31,			Year Ended December 31,
	2010			2009						2008						2007
	Company			Company			Industry *			Company			Industry			Company			Industry

Return on average assets		1.43	%		1.02	%		0.09	%		0.74	%		0.12	%		1.30	%		0.81	%

Return on average equity		11.46	%		8.31	%		0.90	%		5.89	%		1.24	%		9.89	%		7.75	%

Net interest margin		3.78	%		3.78	%		3.47	%		3.94	%		3.18	%		3.39	%		3.29	%

Efficiency ratio		48.66	%		63.87	%		55.53	%		67.40	%		59.02	%		53.71	%		59.37	%

Capital ratio		12.51	%		12.32	%		8.65	%		12.57	%		7.49	%		13.20	%		7.98	%

*Latest available data

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Key performances indicators include:

· Return on Assets

This ratio is calculated by dividing net income by average assets. It is used to measure how effectively the assets of the Company are being utilized in generating income. The Company's annualized return on average assets was 1.43% and 1.15%, respectively, for the three month periods ending March 31, 2010 and 2009. The increase in this ratio in 2010 from the previous period is primarily the result of higher net income.

· Return on Equity

This ratio is calculated by dividing net income by average equity. It is used to measure the net income or return the Company generated for the shareholders’ equity investment in the Company. The Company's return on average equity was 11.46% and 9.32%, respectively for the three month periods ending March 31, 2010 and 2009. The increase in this ratio in 2010 from the previous period is primarily the result of higher net income.

· Net Interest Margin

The net interest margin for the three months ended March 31, 2010 was 3.78% compared to 3.97% for the three months ended March 31, 2009. The ratio is calculated by dividing net interest income by average earning assets. Earning assets are primarily made up of loans and investments that earn interest. This ratio is used to measure how well the Company is able to maintain interest rates on earning assets above those of interest-bearing liabilities, which is the interest expense paid on deposits and other borrowings. This decrease is primarily the result of lower yields on interest earning assets, offset in part by lower cost of funds on deposits and other borrowings and an increase in the average balance of securities available-for-sale. The lower yields and cost of funds were due primarily to lower market interest rates as interest earning assets and interest-bearing liabilities are repricing.

· Efficiency Ratio

This ratio is calculated by dividing noninterest expense by net interest income and noninterest income. The ratio is a measure of the Company’s ability to manage noninterest expenses. The Company’s efficiency ratio was 48.7% and 58.8% for the three months ended March 31, 2010 and 2009, respectively. The improvement in the efficiency ratio in 2010 from the previous period is primarily the result of securities gains in 2010 as compared to securities losses in 2009 and decreased expenses related to other real estate owned and FDIC insurance assessments.

· Capital Ratio

The average capital ratio is calculated by dividing average total equity capital by average total assets. It measures the level of average assets that are funded by shareholders’ equity. Given an equal level of risk in the financial condition of two companies, the higher the capital ratio, generally the more financially sound the company. The Company’s capital ratio is significantly higher than the industry average.

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Industry Results

The FDIC Quarterly Banking Profile reported the following results for the fourth quarter of 2009:

Fourth Quarter Earnings Are Slightly Above Break-Even

The benefits of a recovering economy and stable financial markets in year-over-year comparisons were evident in the performance of insured depository institutions in the fourth quarter. The small profit reported by the industry in the quarter essentially represented break-even performance, but it contrasted sharply with the record quarterly loss posted in the fourth quarter of 2008. Fourth quarter bank net income for the industry was $914 million, compared with a $37.8 billion net loss a year earlier. While much of the year-over-year earnings improvement was concentrated among the largest banks, there was also evidence of a broader improving trend. For the first time in three years, more than half of insured institutions reported year-over-year improvement in net income. The percentage of institutions reporting a net loss for the quarter was lower than a year ago. The average return on assets (ROA) for all four of the asset size groups featured in the Quarterly Banking Profile was better than a year ago, although only the largest size group—institutions with more than $10 billion in assets—had a positive average ROA for the quarter.

Revenues Rebound from Fourth Quarter 2008

A number of factors contributed to the year-over-year improvement in quarterly earnings. Noninterest income was $21.7 billion (53.2%) higher than in the fourth quarter of 2008, as several categories of noninterest income that were negative a year ago swung back into positive territory. Trading revenues totaled $2.8 billion in the quarter, compared with $9.2 billion in trading losses a year earlier. Servicing income also rebounded strongly, from a $390 million loss a year ago to a gain of $8.0 billion. Loan sales produced $1.3 billion in gains, versus $1.3 billion in losses in the fourth quarter of 2008. Another significant contribution to the improvement in earnings came from a $16.2 billion (14.2%) decline in noninterest expense. This decline was the result of an $18.1 billion (77.2%) reduction in charges for goodwill impairment and other intangible asset expenses. Quarterly loan-loss provisions posted a year-over-year decline for the first time since the third quarter of 2006, falling by $10.0 billion (14.1%). Provisions remained above $60 billion for the fifth consecutive quarter, but the $61.1 billion that institutions set aside in the quarter was the smallest quarterly total since the third quarter of 2008. Realized gains on securities and other assets totaled $158 million, an $8.7 billion improvement over the $8.6 billion in realized losses reported by the industry a year ago. Net interest income was higher than a year ago but only by $1.7 billion (1.8%).

Margins Register Improvement

The average net interest margin (NIM) in the fourth quarter was 3.49%, slightly lower than the 3.51% reported in the third quarter but higher than the 3.33% average in the fourth quarter of 2008. The quarter-over-quarter decline was concentrated among larger institutions. More than half of all institutions (55.5%) reported higher NIMs compared to third quarter levels. Also, quarterly NIMs at a majority of institutions (53.0%) increased from a year ago, with larger institutions reporting the biggest gains. Margin improvements helped offset declines in interest-bearing assets. Earning assets declined by $138.8 billion (1.2%) during the fourth quarter and fell by $477.2 billion (4.1%) for the full year.

Full Year Earnings Remain Well below Historical Norms

Full-year 2009 net income was $12.5 billion, up from $4.5 billion in 2008, but well below the $100 billion in net income the industry reported for 2007. Increased noninterest income, higher net interest income, and lower realized losses on securities and other assets outstripped increased noninterest expenses and higher loan loss provisions to produce the increase in earnings. Noninterest income was $52.8 billion (25.4%) higher than in 2008, with trading revenue registering a $26.6 billion improvement. Net interest income was $38.1 billion (10.6%) higher, as the full-year industry NIM rose for the first time in seven years. The average NIM in 2009 was 3.47%, the highest annual average since 2005. Realized losses on securities and other assets fell from $15.4 billion in 2008 to $1.4 billion in 2009. These positive contributions to the rise in full year earnings were partially offset by a $71.5 billion (40.6%) increase in loan loss provisions and a $16.3 billion (4.4%) increase in noninterest expense. More than one in four institutions (29.5%) reported negative net income for the year, up from 24.8% in 2008. This is the highest proportion of unprofitable institutions in any year since at least 1984. The average ROA in 2009 was 0.09%, up from 0.03% in 2008. As was the case in 2008, full-year industry earnings for 2009 (which consist of calendar-year net income of 8,012 insured institutions filing December 31 financial reports) would have been significantly lower if losses experienced by institutions that failed during the year were reflected in year-end reporting.

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Loan Losses Rise for Twelfth Consecutive Quarter

Asset quality indicators worsened in the fourth quarter. Net charge-offs (NCOs) totaled $53.0 billion, an increase of $14.4 billion (37.2%) over the same period in 2008. The annualized net charge-off rate rose to 2.89%, up from 1.95% a year earlier and 2.72% in the third quarter of 2009. This is the highest quarterly NCO rate reported by the industry in the 26 years for which quarterly NCO data are available. NCOs in all major loan categories increased from a year ago. The largest increases occurred in residential mortgage loans, where NCOs rose by $3.3 billion (47.7%); credit cards (up by $2.7 billion, or 41.4%); loans to commercial and industrial (C&I) borrowers (up $2.3 billion, or 37.0%); home equity loans (up $1.9 billion, or 58.6%); and real estate loans secured by nonfarm nonresidential properties (up $1.9 billion, or 130.9%). This is the 12th consecutive quarter that NCOs have posted a year-over-year increase.

Growth in Noncurrent Loans Slows

Noncurrent loans and leases continued to rise through the end of the year, with a few notable exceptions. The total amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) increased by $24.3 billion (6.6%) in the fourth quarter, to $391.3 billion, or 5.37% of all loans and leases at year end. This is the highest level for the industry’s noncurrent rate in the 26 years that all insured institutions have reported noncurrent loan data. The increase in noncurrent loans in the quarter was largely driven by noncurrent residential mortgage loans, which rose by $23.2 billion (14.9%). Much of this increase—$19.1 billion—consisted of rebooked GNMA mortgages that have government guarantees. The amount of real estate loans secured by nonfarm nonresidential real estate properties that were noncurrent rose by $4.5 billion (12.2%). In contrast, noncurrent C&I loans declined by $3.5 billion (7.7%), and noncurrent real estate construction and development (C&D) loans fell by $2.0 billion (2.7%). This was the first time in three years that noncurrent C&I loans have declined and the first time in four years that noncurrent C&D loans have fallen.

Reserves Exceed Three Percent of Total Loans

Reserves for loan and lease losses increased by only $7.0 billion (3.2%) in the fourth quarter, as institutions added $8.1 billion more in loss provisions to their reserves than they took out in net charge-offs. The average coverage ratio of reserves to noncurrent loans and leases fell from 60.1% to 58.1%, ending the year at the lowest level since midyear 1991. In contrast, the industry’s ratio of reserves to total loans and leases rose from 2.97% to 3.12% during the quarter, and is now at its highest level since the creation of the FDIC. During 2009, 119 institutions filed year-to-date financial reports for one or more quarters of the year before their failure. Together, these institutions reported more than $8.2 billion in net losses through the first three quarters of 2009 that are not included in full-year earnings for the industry. These losses are reflected in the published quarterly industry earnings totals for the first three quarters of 2009. In addition, under purchase accounting rules, income and expenses that have been booked by acquired institutions are reset to zero as of the date when a change in ownership occurs; previously accrued income and expenses are reflected as adjustments to the assets, equity capital, and reserves of acquired institutions and are not included in the subsequent reporting of year-to-date income and expense.

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Capital Ratios Improve

The industry’s capital also registered relatively slow growth in the quarter. Bank equity increased by only $4.1 billion (0.3%), the smallest increase in the last four quarters. Leverage capital (as defined for Prompt Corrective Action purposes) increased by $11.9 billion (1.1%). Despite the slow growth in capital, the industry’s regulatory capital ratios all improved, as industry assets fell.

Banks Report Further Declines in Loan Balances

Total assets of insured institutions fell for a fourth consecutive quarter, declining by $137.2 billion (1.0%). During the year, total industry assets declined by a net $731.7 billion (5.3%), the largest percentage decline in a year since the inception of the FDIC. Total loan and lease balances declined for the sixth quarter in a row, falling by $128.8 billion (1.7%). The fourth-quarter decline was led by C&I loan balances, which fell by $54.5 billion (4.3%); real estate C&D loans (down $41.5 billion, or 8.4%); loans to depository institutions (down $21.2 billion, or 15.9%); and residential mortgage loans (down $11.2 billion, or 0.6%). Credit card balances increased $29.1 billion during the quarter (7.4%), but balances in all other major loan categories declined. Insured institutions continued to add to their securities holdings. Slightly more than half of all insured institutions (52%) reported declining loan balances in the fourth quarter. Total securities increased by $103.7 billion (4.3%) during the quarter, with mortgage backed securities rising by $44.8 billion (3.3%), and U.S. Treasury securities increasing by $15.9 billion (18.3%). During 2009, insured institution securities holdings increased by $465.1 billion (22.9%).

Deposit Growth Remains Strong

Institutions continued to increase their reliance on deposit funding in the fourth quarter. Even as assets were declining, total deposits increased by $125.7 billion (1.4%), as domestic noninterest-bearing deposits rose by $89.8 billion (6.1%). Nondeposit liabilities fell by $268.1 billion (10.0%) during the quarter, led by a $184.1 billion (23.3%) decline in Federal funds purchased and securities sold under repurchase agreements. Federal Home Loan Bank advances fell by $42.6 billion (7.4%). During the quarter, the percentage of industry assets funded by deposits rose from 68.7% to 70.4%, the highest level since March 31, 1996.

Industry Consolidation Continues

The number of insured commercial banks and savings institutions reporting financial results declined by 87 during the fourth quarter. Only three new charters were added during the quarter, while 43 institutions were absorbed by mergers and 45 institutions failed. For the full year, the number of reporting institutions fell from 8,305 to 8,012. Only 31 new charters were added in 2009, the smallest annual total since 1942. Mergers absorbed 179 institutions during the year, and 140 insured institutions failed. This is the largest number of bank failures in a year since 1992. The number of institutions on the FDIC’s “Problem List” rose to 702 at the end of 2009, from 552 at the end of the third quarter and 252 at the end of 2008. Total assets of “problem” institutions were $402.8 billion at year end 2009, compared with $345.9 billion at the end of September and $159.0 billion at the end of 2008. Both the number and assets of “problem” institutions are at the highest level since June 30, 1993.

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Critical Accounting Policies

The discussion contained in this Item 2 and other disclosures included within this report are based, in part, on the Company’s audited consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained in these statements is, for the most part, based on the financial effects of transactions and events that have already occurred. However, the preparation of these statements requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

The Company’s significant accounting policies are described in the “Notes to Consolidated Financial Statements” contained in the Company’s Annual Report. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified its most critical accounting policies to be those related to the allowance for loan losses, valuation of other real estate owned and the assessment of other-than-temporary impairment of certain financial instruments.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses that is treated as an expense and charged against earnings. Loans are charged against the allowance for loan losses when management believes that collectability of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem loans. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include the general economic environment in the Company’s market area. To the extent actual results differ from forecasts and management’s judgment, the allowance for loan losses may be greater or lesser than future charge-offs. Due to potential changes in conditions, it is at least reasonably possible that change in estimates will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.

Other Real Estate Owned

Real estate properties acquired through or in lieu of foreclosure are initially recorded at the fair value less estimated selling cost at the date of foreclosure. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and property held for sale is carried at the lower of the new cost basis or fair value less cost to sell. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds its fair value. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Independent appraisals or evaluations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost basis or fair value less cost to sell. These appraisals or evaluations are inherently subjective and require estimates that are susceptible to significant revisions as more information becomes available. Due to potential changes in conditions, it is at least reasonably possible that changes in fair values will occur in the near term and that such changes could materially affect the amounts reported in the Company’s financial statements.

Index

Other-Than-Temporary Impairment of Investment Securities

Declines in the fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are generally reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the intent to sell the investment securities and the more likely than not requirement that the Company will be required to sell the investment securities prior to recovery (2) the length of time and the extent to which the fair value has been less than cost and (3) the financial condition and near-term prospects of the issuer. Due to potential changes in conditions, it is at least reasonably possible that change in management’s assessment of other-than-temporary impairment will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.

Index

Income Statement Review for the Three Months ended March 31, 2010

The following highlights a comparative discussion of the major components of net income and their impact for the three month periods ended March 31, 2010 and 2009:

AVERAGE BALANCES AND INTEREST RATES

The following two tables are used to calculate the Company’s net interest margin. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest bearing liabilities. The net interest margin is equal to the interest income less the interest expense divided by average earning assets.

AVERAGE BALANCE SHEETS AND INTEREST RATES

	Three Months ended March 31,

	2010							2009

	Average balance		Revenue/ expense		Yield/ rate			Average balance		Revenue/ expense		Yield/ rate
ASSETS
(dollars in thousands)
Interest-earning assets
Loans 1
Commercial	$	68,042	$	993		5.84	%	$	73,120	$	923		5.05	%
Agricultural		39,674		582		5.87	%		36,106		557		6.17	%
Real estate		286,054		4,201		5.87	%		317,465		4,772		6.01	%
Consumer and other		24,173		323		5.34	%		24,533		359		5.85	%

Total loans (including fees)		417,943		6,099		5.84	%		451,224		6,611		5.86	%

Investment securities
Taxable		239,761		1,828		3.05	%		178,875		2,111		4.72	%
Tax-exempt 2		170,464		2,097		4.92	%		132,201		1,956		5.92	%
Total investment securities		410,225		3,925		3.83	%		311,076		4,067		5.23	%

Interest bearing deposits with banks		26,647		130		1.95	%		10,843		105		3.88	%
Federal funds sold		2		0		0.19	%		21,208		11		0.21	%

Total interest-earning assets		854,817	$	10,154		4.75	%		794,351	$	10,794		5.44	%

Noninterest-earning assets		57,529							51,213


TOTAL ASSETS	$	912,346						$	845,564

1 Average loan balance includes nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included.

2 Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 35%.

Index

AVERAGE BALANCE SHEETS AND INTEREST RATES

	Three Months ended March 31,

	2010								2009

	Average balance		Revenue/ expense			Yield/ rate			Average balance		Revenue/ expense			Yield/ rate
LIABILITIES AND STOCKHOLDERS' EQUITY
(dollars in thousands)
Interest-bearing liabilities
Deposits
Savings, NOW accounts, and money markets	$	377,963	$	347			0.37	%	$	330,562	$	482			0.58	%
Time deposits < $100,000		151,205		865			2.29	%		163,634		1,304			3.19	%
Time deposits > $100,000		89,824		451			2.01	%		81,262		656			3.23	%
Total deposits		618,992		1,663			1.07	%		575,458		2,442			1.70	%
Other borrowed funds		84,106		403			1.92	%		78,800		468			2.38	%

Total Interest-bearing liabilities		703,098		2,066			1.18	%		654,258		2,910			1.78	%

Noninterest-bearing liabilities
Demand deposits		90,321								81,237
Other liabilities		4,821								5,340

Stockholders' equity		114,106								104,729

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	912,346							$	845,564


Net interest income			$	8,088			3.78	%			$	7,884			3.97	%

Spread Analysis
Interest income/average assets	$	10,154		4.45	%				$	10,794		5.11	%
Interest expense/average assets	$	2,066		0.91	%				$	2,910		1.38	%
Net interest income/average assets	$	8,088		3.55	%				$	7,884		3.73	%

Net Interest Income

For the three months ended March 31, 2010 and 2009, the Company's net interest margin adjusted for tax exempt income was 3.78% and 3.97%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended March 31, 2010 totaled $7,357,000 compared to $7,208,000 for the three months ended March 31, 2009.

For the three months ended March 31, 2010, interest income decreased $695,000 or 6.9% when compared to the same period in 2009. The decrease from 2009 was primarily attributable to lower investment securities average yields and lower average balances of loans in the current period, offset in part by higher average balances of investment securities.

Interest expense decreased $844,000 or 29.0% for the three months ended March 31, 2010 when compared to the same period in 2009. The lower interest expense for the period is primarily attributable to lower average rates paid on deposits and borrowings, offset in part by an increase in the average balance of savings, NOW and money market accounts.

Index

Provision for Loan Losses

The Company’s provision for loan losses for the three months ended March 31, 2010 was $324,000 compared to a provision for loan losses of $230,000 for the three months ended March 31, 2009. This increase in the provision for loan losses was due primarily to the continuing weakness in general economic conditions, offset in part by decreases in outstanding loans and the specific allowance for loan losses on impaired loans. Net charge-offs of $294,000 were realized in the three months ended March 31, 2010 and compare to net charge-offs of $77,000 for the three months ended March 31, 2009.

Non-interest Income and Expense

Non-interest income increased $952,000 during the three months ended March 31, 2010 compared to the same period in 2009 primarily as the result of securities gain of $537,000 in 2010 as compared to securities losses of $351,000 in 2009. Excluding net security gains and other-than-temporary impairment write downs on certain investment securities for the three months ending March 31, 2010 and 2009, non-interest income increased $41,000, or 3.0%.

Non-interest expense decreased $293,000 or 6.1% for the three months ended March 31, 2010 compared to the same period in 2009 primarily as the result of lower quarterly FDIC insurance assessments in 2010 and no write-downs of other real estate owned for the three months ended March 31, 2010 as compared to $320,000 of write downs for the three months ended March 31, 2009. These decreases were partially offset by an increase in salaries and employee benefits.

Income Taxes

The provision for income taxes expense for the three months ended March 31, 2010 and 2009 was $1,189,000 and $716,000, representing an effective tax rate of 27% and 23%, respectively. The higher pretax earnings in 2010 and the reduced effect of income from tax exempt securities lead to the higher effective tax rate in comparison to same period in 2009.

Balance Sheet Review

As of March 31, 2010, total assets were $926,355,000, a $10,785,000 increase compared to December 31, 2009. The increase in deposits and securities sold under agreements to repurchase and a decrease in the loan portfolio funded an increase in interest bearing deposits in financial institutions and cash and due from banks. The decrease in the loan portfolio is due in part to a decrease in loan demand, as payments and repayments exceed originations.

Investment Portfolio

The investment portfolio totaled $419,053,000 as of March 31, 2010, 0.1% higher than the December 31, 2009 balance of $418,655,000. The state and political subdivisions portfolio increase was partially offset by decreases in the U.S. Government mortgage-backed securities and the corporate bonds portfolio

On a quarterly basis, the investment securities portfolio is reviewed for other-than-temporary impairment. As of March 31, 2010, existing gross unrealized losses of $1,421,000 are considered to be temporary in nature due to market interest rate fluctuations and other factors, rather than deteriorations in the credit component of the securities. As a result of the Company’s favorable liquidity position, the Company does not have the intent to sell impaired securities and management believes it is more likely than not that the Company will hold these securities until recovery of their cost basis to avoid considering an impairment to be other-than-temporary.

Index

Loan Portfolio

The loan portfolio declined $6,528,000, or 1.6%, during the three months as net loans totaled $408,906,000 as of March 31, 2010 compared to $415,434,000 as of December 31, 2009. The decline in the loan portfolio is primarily due to the decrease in loan volume due to a weakening of loan demand as payments and prepayments exceeded originations. The declines in the loan portfolio occurred primarily in the commercial operating and commercial real estate loan portfolios.

Deposits

Deposits totaled $723,505,000 as of March 31, 2010, an increase of $1,341,000 from December 31, 2009. The increase is primarily attributed to increases in public funds accounts, money market, savings and certificate of deposit accounts, offset in part by decreases in NOW and demand accounts. The increases of $4,787,000 in public funds and $2,060,000 in retail and commercial certificates of deposits were partially offset by declines of $4,334,000 in commercial core deposits and $1,172,000 in retail core deposits.

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

Federal funds purchased and securities sold under agreements to repurchase totaled $44,557,000 as of March 31, 2010, $4,068,000 higher than December 31, 2009. This increase in securities sold under agreements to repurchase is primarily due to increases in existing customer balances and a new public funds customer, offset in part by a decrease in federal funds purchased.

Other Borrowed Funds

FHLB advances and other long-term borrowings totaled $38,500,000 as of March 31, 2010, $2,000,000 higher than December 31, 2009. The increase is attributable to FHLB advance borrowings of $2,500,000, offset by FHLB advance maturities of $500,000.

Off-Balance Sheet Arrangements

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2009.

Asset Quality Review and Credit Risk Management

The Company’s credit risk is historically centered in the loan portfolio, which on March 31, 2010 totaled $408,906,000 compared to $415,434,000 as of December 31, 2009. Net loans comprise 44% of total assets as of March 31, 2010. The object in managing loan portfolio risk is to reduce the risk of loss resulting from a customer’s failure to perform according to the terms of a transaction and to quantify and manage credit risk on a portfolio basis. The Company’s level of problem loans (consisting of non-accrual loans and loans past due 90 days or more) as a percentage of total loans was 2.02% at March 31, 2010, as compared to 2.45% at December 31, 2009 and 1.84% at March 31, 2009. The Company’s level of problem loans a percentage of total loans at March 31, 2010 of 2.02% is lower than the Company’s peer group (439 bank holding companies with assets of $500 million to $1 billion) of 3.34% as of December 31, 2009.

Index

Impaired loans, net of specific reserves, totaled $7,250,000 as of March 31, 2010 compared to impaired loans of $9,188,000 as of December 31, 2009. The decrease in impaired loans from December 31, 2009 to March 31, 2010, is due primarily to the repayment of one large construction real estate loan and the repossession of a construction real estate property. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payment of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The Company applies its normal loan review procedures to identify loans that should be evaluated for impairment. As of March 31, 2009, non-accrual loans totaled $8,310,000; loans past due 90 days and still accruing totaled $107,000. This compares to non-accrual loans of $10,187,000 and loans past due 90 days and still accruing of $121,000 on December 31, 2009. Other real estate owned totaled $11,141,000 as of March 31, 2010 and $10,480,000 as of December 31, 2009.

The allowance for loan losses as a percentage of outstanding loans as of March 31, 2010 and December 31, 2009 was 1.84% and 1.81%, respectively. The allowance for loan losses totaled $7,682,000 and $7,652,000 as of March 31, 2010 and December 31, 2009, respectively. Net charge-offs for the three months ended March 31, 2010 totaled $294,000 compared to net charge-offs of $77,000 for the three months ended March 31, 2009. The increase in the general allowance for loan losses was due primarily to continuing weakness in the general economic conditions.

The allowance for loan losses is management’s best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Factors considered in establishing an appropriate allowance include: an assessment of the financial condition of the borrower, a realistic determination of value and adequacy of underlying collateral, the condition of the local economy and the condition of the specific industry of the borrower, an analysis of the levels and trends of loan categories and a review of delinquent and classified loans.

Liquidity and Capital Resources

Liquidity management is the process by which the Company, through its Banks’ Asset and Liability Committees (ALCO), ensures that adequate liquid funds are available to meet its financial commitments on a timely basis, at a reasonable cost and within acceptable risk tolerances. These commitments include funding credit obligations to borrowers, funding of mortgage originations pending delivery to the secondary market, withdrawals by depositors, maintaining adequate collateral for pledging for public funds, trust deposits and borrowings, paying dividends to shareholders, payment of operating expenses, funding capital expenditures and maintaining deposit reserve requirements.

Liquidity is derived primarily from core deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity and prepayment of investment securities; net cash provided from operations; and access to other funding sources. Other funding sources include federal funds purchased lines, Federal Home Loan Bank (FHLB) advances and other capital market sources.

As of March 31, 2010, the level of liquidity and capital resources of the Company remain at a satisfactory level and compare favorably to that of other FDIC insured institutions. Management believes that the Company's liquidity sources will be sufficient to support its existing operations for the foreseeable future.

Index

The liquidity and capital resources discussion will cover the following topics:

·	Review the Company’s Current Liquidity Sources

·	Review of Statements of Cash Flows

·	Company Only Cash Flows

·	Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs

·	Capital Resources

Review of the Company’s Current Liquidity Sources

Liquid assets of cash and due from banks and interest-bearing deposits in financial institutions as of March 31, 2010 and December 31, 2009 totaled $59,520,000 and $43,573,000, respectively, provide a level of liquidity.

Other sources of liquidity available to the Banks as of March 31, 2010 include outstanding lines of credit with the Federal Home Loan Bank of Des Moines, Iowa of $72,622,000, with $18,500,000 of outstanding FHLB advances at March 31, 2010. Federal funds borrowing capacity at correspondent banks was $106,245,000, with no outstanding federal fund balances as of March 31, 2010. The Company had securities sold under agreements to repurchase totaling $44,557,000 and long-term repurchase agreements of $20,000,000 as of March 31, 2010.

Total investments as of March 31, 2010 were $419,053,000 compared to $418,655,000 as of December 31, 2009. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of March 31, 2010.

The investment portfolio serves an important role in the overall context of balance sheet management in terms of balancing capital utilization and liquidity. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and credit considerations. The portfolio’s scheduled maturities represent a significant source of liquidity.

Review of Statements of Cash Flows

Net cash provided by operating activities for the three months ended March 31, 2010 totaled $3,319,000 compared to the $6,152,000 provided for the three months ended March 31, 2009. The decrease in net cash provided by operating activities was primarily related to increases in accrued interest receivable, loans held for sale, changes in net securities gains, offset in part by an increase in net income.

Net cash used in investing activities for the three months ended March 31, 2010 was $3,121,000 and compares to $27,671,000 for the three months ended March 31, 2009. The decrease in net cash used in investing activities was primarily due to changes in federal funds sold and securities available-for-sale, offset in part by changes in loans and interest bearing deposits in financial institutions.

Net cash provided by financing activities for the three months ended March 31, 2010 totaled $6,428,000 compared to $14,214,000 for the three months ended March 31, 2009. The decrease in net cash provided by financing activities was primarily due to changes in deposits, offset in part by changes in borrowings, federal funds purchased and securities sold under agreements to repurchase and dividends paid. As of March 31, 2010, the Company did not have any external debt financing, off-balance sheet financing arrangements, or derivative instruments linked to its stock.

Index

Company Only Cash Flows

The Company’s liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. The Company requires adequate liquidity to pay its expenses and pay stockholder dividends. For the three months ended March 31, 2010, dividends paid by the Banks to the Company amounted to $850,000 compared to $920,000 for the same period in 2009. Various federal and state statutory provisions limit the amounts of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements, which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order. First National has not paid any dividends to the Company in 2010 and 2009; however, dividends from First National are expected to resume in the latter half of 2010 if profitability and growth expectations are met. The Company increased the quarterly dividend declared by the Company to $0.11 per share in 2010 from $0.10 per share in 2009.

The Company has unconsolidated interest bearing deposits and marketable investment securities totaling $8,075,000 as of March 31, 2010 that are presently available to provide additional liquidity to the Banks.

Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs

No material capital expenditures or material changes in the capital resource mix are anticipated at this time. The primary cash flow uncertainty would be a sudden decline in deposits causing the Banks to liquidate securities. Historically, the Banks have maintained an adequate level of short-term marketable investments to fund the temporary declines in deposit balances. There are no known trends in liquidity and cash flow needs as of March 31, 2010 that are of concern to management.

Capital Resources

The Company’s total stockholders’ equity as of March 31, 2010 totaled $115,322,000 and was higher than the $112,340,000 recorded as of December 31, 2009. At March 31, 2010 and December 31, 2009, stockholders’ equity as a percentage of total assets was 12.45% and 12.27%, respectively. The capital levels of the Company currently exceed applicable regulatory guidelines as of March 31, 2010.

Forward-Looking Statements and Business Risks

The Private Securities Litigation Reform Act of 1995 provides the Company with the opportunity to make cautionary statements regarding forward-looking statements contained in this Quarterly Report, including forward-looking statements concerning the Company’s future financial performance and asset quality. Any forward-looking statement contained in this Quarterly Report is based on management’s current beliefs, assumptions and expectations of the Company’s future performance, taking into account all information currently available to management. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to management. If a change occurs, the Company’s business, financial condition, liquidity, results of operations, asset quality, plans and objectives may vary materially from those expressed in the forward-looking statements. The risks and uncertainties that may affect the actual results of the Company include, but are not limited to, the following: economic conditions, particularly in the concentrated geographic area in which the Company and its affiliate banks operate; competitive products and pricing available in the marketplace; changes in credit and other risks posed by the Company’s loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for loan losses dictated by new market conditions or regulatory requirements; fiscal and monetary policies of the U.S. government; changes in governmental regulations affecting financial institutions (including regulatory fees and capital requirements); changes in prevailing interest rates; credit risk management and asset/liability management; the financial and securities markets; the availability of and cost associated with sources of liquidity; and other risks and uncertainties inherent in the Company’s business, including those discussed under the headings “Risk Factors” and “Forward-Looking Statements and Business Risks” in the Company’s Annual Report. Management intends to identify forward-looking statements when using words such as “believe”, “expect”, “intend”, “anticipate”, “estimate”, “should” or similar expressions. Undue reliance should not be placed on these forward-looking statements. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Index

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The Company's market risk is comprised primarily of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk results from the changes in market interest rates which may adversely affect the Company's net interest income. Management continually develops and applies strategies to mitigate this risk. Management does not believe that the Company's primary market risk exposure and how it has been managed year-to-date in 2010 changed significantly when compared to 2009.

Item 4.

Controls and Procedures

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended). Based on that evaluation, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There was no change in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

Index

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

Not applicable

Item 1.A.

Risk Factors

The following paragraphs supplement the discussion under Items 1A “Risk Factors” in the Company’s Annual Report:

Regulatory concerns.

On March 16, 2009, the Office of the Comptroller of the Currency (OCC) informed the Company’s lead bank, First National Bank, of the OCC’s decision to establish individual minimum capital ratios for First National Bank in excess of the capital ratios that would otherwise be imposed under applicable regulatory standards. The OCC is requiring First National Bank to maintain, on an ongoing basis, Tier 1 Leverage Capital of 9% of Adjusted Total Assets and Total Risk Based Capital of 11% of Risk-Weighted Assets. As of March 31, 2010, First National Bank exceeded the 9% Tier 1 and 11% Total Risk Based capital requirements. Failure to maintain the individual minimum capital ratios established by the OCC could result in additional regulatory action against First National Bank.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable

Item 3.

Defaults Upon Senior Securities

Not applicable

Item 4.

Reserved

Item 5.

Other information

Not applicable

Item 6.

Exhibits

31.1	Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

31.2	Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.

32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.

Index

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.

	AMES NATIONAL CORPORATION

DATE: May 7, 2010	By:	/s/	Thomas H. Pohlman

			Thomas H. Pohlman, President
			(Principal Executive Officer)

			By: /s/ John P. Nelson

			John P. Nelson, Vice President
			(Principal Financial Officer)

Index

EXHIBIT INDEX

The following exhibits are filed herewith:

Exhibit No.		Description

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350