AMES NATIONAL CORP - Quarter Report: 2011 June (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 June 30, 2011

o	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 o

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 x No o

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 o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o 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		9,410,882
(Class)		(Shares Outstanding at July 29, 2011)

AMES NATIONAL CORPORATION

INDEX

		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets at June 30, 2011 and December 31, 2010	3

	Consolidated Statements of Income for the three and six months ended June 30, 2011 and 2010	4

	Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010	5

	Notes to Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	40

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	41

Item 1.A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 3.	Defaults Upon Senior Securities	42

Item 4.	Removed and Reserved	42

Item 5.	Other Information	42

Item 6.	Exhibits	42

Signatures		43

Index

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

ASSETS	June 30, 2011			December 31, 2010

Cash and due from banks	$	17,409,710		$	15,478,133
Federal funds sold		32,000			3,000,000
Interest bearing deposits in financial institutions		28,273,377			19,229,814
Securities available-for-sale		496,471,059			469,907,901
Loans receivable, net		424,979,404			418,093,571
Loans held for sale		1,553,454			1,993,108
Bank premises and equipment, net		11,411,585			11,538,588
Accrued income receivable		6,215,233			6,098,535
Deferred income taxes		540,007			3,305,983
Other real estate owned		10,159,075			10,538,883
Other assets		3,511,492			3,790,329

Total assets	$	1,000,556,396		$	962,974,845

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits
Demand, noninterest bearing	$	108,530,544		$	105,513,143
NOW accounts		216,436,716			201,230,880
Savings and money market		214,625,416			199,017,213
Time, $100,000 and over		101,262,795			94,858,053
Other time		140,919,842			143,242,355
Total deposits		781,775,313			743,861,644

Federal funds purchased and securities sold under agreements to repurchase		46,820,461			54,858,701
Other short-term borrowings		915,180			2,047,175
Federal Home Loan Bank advances		16,212,679			16,745,497
Other long-term borrowings		20,000,000			20,000,000
Dividend payable		1,226,279			1,037,621
Accrued expenses and other liabilities		3,329,092			3,061,183
Total liabilities		870,279,004			841,611,821

STOCKHOLDERS' EQUITY
Common stock, $2 par value, authorized 18,000,000 shares; issued 9,432,915 shares; outstanding 9,410,882 shares as of June 30, 2011 and 9,432,915 shares as of December 31, 2010		18,865,830			18,865,830
Additional paid-in capital		22,651,222			22,651,222
Retained earnings		80,782,828			76,519,493
Treasury stock, at cost; 22,033 shares and no shares at June 30, 2011 and December 31, 2010, respectively		(374,533	)		-
Accumulated other comprehensive income-net unrealized gain on securities available-for-sale		8,352,045			3,326,479
Total stockholders' equity		130,277,392			121,363,024

Total liabilities and stockholders' equity	$	1,000,556,396		$	962,974,845

See Notes to Consolidated Financial Statements.

Index

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010

Interest income:
Loans, including fees	$	5,999,888	$	6,023,730	$	11,740,320	$	12,123,209
Securities:
Taxable		1,796,068		1,770,707		3,458,537		3,598,228
Tax-exempt		1,630,994		1,429,568		3,267,959		2,795,150
Interest bearing deposits and federal funds sold		116,767		129,198		224,693		259,311
Total interest income		9,543,717		9,353,203		18,691,509		18,775,898

Interest expense:
Deposits		1,382,703		1,563,610		2,753,614		3,225,964
Other borrowed funds		354,265		402,304		732,907		805,462
Total interest expense		1,736,968		1,965,914		3,486,521		4,031,426

Net interest income		7,806,749		7,387,289		15,204,988		14,744,472

Provision for loan losses		404,788		170,416		404,788		494,214

Net interest income after provision for loan losses		7,401,961		7,216,873		14,800,200		14,250,258

Noninterest income:
Trust department income		557,156		465,298		1,071,700		996,014
Service fees		364,660		435,365		694,218		835,188
Securities gains, net		164,971		134,830		586,126		671,813
Gain on sale of loans held for sale		207,523		171,453		428,388		324,989
Merchant and ATM fees		195,623		195,137		371,494		360,524
Other noninterest income		242,283		209,460		427,490		380,780
Total noninterest income		1,732,216		1,611,543		3,579,416		3,569,308

Noninterest expense:
Salaries and employee benefits		2,955,348		2,706,545		5,721,856		5,304,584
Data processing		481,003		494,681		926,818		945,645
Occupancy expenses		322,307		364,955		716,465		766,109
FDIC insurance assessments		205,754		278,109		478,496		591,466
Other real estate owned		210,935		62,954		286,730		119,307
Other operating expenses, net		676,957		728,405		1,331,548		1,441,477
Total noninterest expense		4,852,304		4,635,649		9,461,913		9,168,588

Income before income taxes		4,281,873		4,192,767		8,917,703		8,650,978

Provision for income taxes		1,038,501		1,066,761		2,201,810		2,255,372

Net income	$	3,243,372	$	3,126,006	$	6,715,893	$	6,395,606

Basic and diluted earnings per share	$	0.34	$	0.33	$	0.71	$	0.68

Dividends declared per share	$	0.13	$	0.11	$	0.26	$	0.22

Comprehensive income	$	7,138,415	$	4,413,196	$	11,741,459	$	8,433,251

See Notes to Consolidated Financial Statements.

Index

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2011 and 2010

(unaudited)

	2011			2010

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	6,715,893		$	6,395,606
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		404,788			494,214
Provision for off-balance sheet commitments		5,000			13,000
Amortization, net		2,461,727			1,389,789
Depreciation		336,162			381,534
Provision (credit) for deferred income taxes		(185,547	)		157,636
Securities gains, net		(586,126	)		(671,813	)
Impairment of other real estate owned		163,443			14,900
Gain on sale of other real estate owned		(98,833	)		(35,922	)
Change in assets and liabilities:
Decrease (increase) in loans held for sale		439,654			(1,487,058	)
Increase in accrued income receivable		(116,698	)		(208,065	)
Decrease in other assets		274,117			560,326
Increase in accrued expenses and other liabilities		262,909			244,506
Net cash provided by operating activities		10,076,489			7,248,653

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale		(125,856,535	)		(109,570,798	)
Proceeds from sale of securities available-for-sale		20,926,918			16,353,562
Proceeds from maturities and calls of securities available-for-sale		84,465,457			77,459,834
Net increase in interest bearing deposits in financial institutions		(9,041,073	)		(580,942	)
Net decrease in federal funds sold		2,968,000			-
Net decrease (increase) in loans		(7,504,207	)		3,805,797
Net proceeds from the sale of other real estate owned		576,252			571,028
Purchase of bank premises and equipment, net		(204,439	)		(131,960	)
Other changes in other real estate owned		(47,468	)		1,601
Net cash used in investing activities		(33,717,095	)		(12,091,878	)

CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits		37,913,669			(6,959,248	)
Increase (decrease) in federal funds purchased and securities sold under agreements to repurchase		(8,038,240	)		9,790,097
Payments from other short-term borrowings, net		(1,131,995	)		(132,055	)
Proceeds from FHLB and other long-term borrowings		-			2,500,000
Payments on FHLB and other long-term borrowings		(532,818	)		(500,000	)
Purchase of treasury stock		(374,533	)		-
Dividends paid		(2,263,900	)		(1,980,913	)
Net cash provided by financing activities		25,572,183			2,717,881

Net increase (decrease) in cash and due from banks		1,931,577			(2,125,344	)

CASH AND DUE FROM BANKS
Beginning		15,478,133			18,796,664
Ending	$	17,409,710		$	16,671,320

Index

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Six Months Ended June 30, 2011 and 2010

(unaudited)

	2011		2010

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash payments for:
Interest	$	3,456,462	$	4,128,891
Income taxes		2,345,541		2,107,614

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Transfer of loans to other real estate owned	$	213,586	$	701,529

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 and six month periods ended June 30, 2011 and 2010 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, 2010 (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 2011 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, interest bearing deposits in financial institutions and federal funds sold: 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 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.

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

Deposit liabilities: Fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW 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.

Index

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.

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

Federal Home Loan Bank advances and other long-term borrowings: Fair values of Federal Home Loan Bank (“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

In April, 2011 the Financial Accounting Standards Board (“FASB”) issued guidance which modifies certain aspects contained in the Receivables topic of FASB Accounting Standards Codification (“ASC”) 310. The standard clarifies the guidance on evaluating whether a restructuring constitutes a troubled debt restructuring, The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The adoption is not expected to have a significant impact on the Company’s financial statements.

In June, 2011, the FASB issued guidance on comprehensive income to require that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, the guidance requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The guidance is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

In May, 2011, the FASB issued amended guidance which eliminates terminology difference between U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) on the measurement of fair value and the related fair value disclosures. While largely consistent with existing fair value measurement principles and disclosures, the changes were made as part of the continuing efforts to converge GAAP and IFRS. The adoption of this guidance is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

2. Dividends

On May 11, 2011, the Company declared a cash dividend on its common stock, payable on August 15, 2011 to stockholders of record as of August 1, 2011, equal to $0.13 per share.

Index

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 June 30, 2011 and 2010 were 9,427,711 and 9,432,915, respectively. The weighted average outstanding shares for the six months ended June 30, 2011 and 2010 were 9,430,362 and 9,432,915, respectively. 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, 2010.

5. Fair Value of Financial Instruments

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

	June 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Financial assets:
Cash and due from banks	$	17,409,710	$	17,410,000	$	15,478,133	$	15,478,000
Federal funds sold		32,000		32,000		3,000,000		3,000,000
Interest bearing deposits		28,273,377		28,273,000		19,229,814		19,230,000
Securities available-for-sale		496,471,059		496,471,000		469,907,901		469,908,000
Loans receivable, net		424,979,404		425,811,000		418,093,571		415,833,000
Loans held for sale		1,553,454		1,553,000		1,993,108		1,993,000
Accrued income receivable		6,215,233		6,215,000		6,098,535		6,099,000
Financial liabilities:
Deposits	$	781,775,313	$	783,212,000	$	743,861,644	$	746,401,000
Federal funds purchased and securities sold under agreements to repurchase		46,820,461		46,820,000		54,858,701		54,859,000
Other short-term borrowings		915,180		915,000		2,047,175		2,047,000
FHLB and other long-term borrowings		36,212,679		38,998,000		36,745,497		39,303,000
Accrued interest payable		900,514		901,000		870,455		870,000

The methodology used to determine fair value as of June 30, 2011 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.

Index

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.

The following table presents the balances of assets measured at fair value on a recurring basis by level as of June 30, 2011 and December 31, 2010:

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

June 30, 2011

U.S. government agencies	$	81,117,000	$	-	$	81,117,000	$	-
U.S. government mortgage-backed secuirities		154,829,000		-		154,829,000		-
State and political subdivisions		234,363,000		-		234,363,000		-
Corporate bonds		20,344,000		-		20,344,000		-
Equity securities, financial industry common stock		2,709,000		2,709,000		-		-
Equity securities, other		3,109,000		71,000		3,038,000		-

	$	496,471,000	$	2,780,000	$	493,691,000	$	-

December 31, 2010

U.S. treasury	$	503,000	$	503,000	$	-	$	-
U.S. government agencies		87,413,000		-		87,413,000		-
U.S. government mortgage-backed securities		127,349,000		-		127,349,000		-
State and political subdivisions		228,373,000		-		228,373,000		-
Corporate bonds		20,372,000		-		20,372,000		-
Equity securities, financial industry common stock		2,814,000		2,814,000		-		-
Equity securities, other		3,084,000		18,000		3,066,000		-

	$	469,908,000	$	3,335,000	$	466,573,000	$	-

Index

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.

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 valuation hierarchy as of June 30, 2011 and December 31, 2010:

Description	Total		Active markets for Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)

June 30, 2011

Loans receivable	$	3,509,000	$	-	$	-	$	3,509,000
Other real estate owned		10,159,000		-		-		10,159,000

Total	$	13,668,000	$	-	$	-	$	13,668,000

December 31, 2010

Loans receivable	$	3,660,000	$	-	$	-	$	3,660,000
Other real estate owned		10,539,000		-		-		10,539,000

Total	$	14,199,000	$	-	$	-	$	14,199,000

Loans receivable in the tables above consist of impaired credits held for investment. Impaired loans are valued by management based on collateral values underlying the 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 loans receivable evaluated for impairment and 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			Fair Value
June 30, 2011:
U.S. government agencies	$	78,915,332	$	2,203,428	$	(1,510	)	$	81,117,250
U.S. government mortgage-backed securities		150,714,340		4,129,172		(14,414	)		154,829,098
State and political subdivisions		228,091,747		6,438,818		(167,324	)		234,363,241
Corporate bonds		19,044,588		1,300,090		(698	)		20,343,980
Equity securities, financial industry common stock		3,402,389		-		(693,748	)		2,708,641
Equity securities, other		3,045,449		63,400		-			3,108,849
	$	483,213,845	$	14,134,908	$	(877,694	)	$	496,471,059

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2010:
U.S. treasury	$	499,885	$	3,265	$	-		$	503,150
U.S. government agencies		86,336,578		1,190,768		(114,727	)		87,412,619
U.S. government mortgage-backed securities		125,740,846		2,237,443		(629,668	)		127,348,621
State and political subdivisions		226,352,715		3,254,157		(1,234,045	)		228,372,827
Corporate bonds		19,220,366		1,183,213		(31,575	)		20,372,004
Equity securities, financial industry common stock		3,402,389		-		(588,208	)		2,814,181
Equity securities, other		3,074,999		9,500		-			3,084,499
	$	464,627,778	$	7,878,346	$	(2,598,223	)	$	469,907,901

Non-interest income for the three months ended June 30, 2011 and 2010 was primarily impacted by net security gains of approximately $165,000 and $135,000, respectively. Non-interest income for the six months ended June 30, 2011 and 2010 was primarily impacted by net security gains of approximately $586,000 and $672,000, 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 June 30, 2011 and December 31, 2010, 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
June 30, 2011:

Securities available-for-sale:
U.S. government agencies	$	500,875	$	(1,510	)	$	-	$	-		$	500,875	$	(1,510	)
U.S. government mortgage-backed securities		5,509,977		(9,827	)		1,664,000		(4,587	)		7,173,977		(14,414	)
State and political subdivisions		12,043,107		(166,505	)		303,144		(819	)		12,346,251		(167,324	)
Corporate obligations		108,656		(698	)		-		-			108,656		(698	)
Equity securities, financial industry common stock		-		-			2,708,641		(693,748	)		2,708,641		(693,748	)
	$	18,162,615	$	(178,540	)	$	4,675,785	$	(699,154	)	$	22,838,400	$	(877,694	)


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

Securities available-for-sale:
U.S. government agencies	$	15,321,189	$	(107,139	)	$	372,404	$	(7,588	)	$	15,693,593	$	(114,727	)
U.S. government mortgage-backed securities		43,327,689		(629,668	)		-		-			43,327,689		(629,668	)
State and political subdivisions		53,299,308		(1,218,282	)		497,051		(15,763	)		53,796,359		(1,234,045	)
Corporate obligations		2,022,914		(31,575	)		-		-			2,022,914		(31,575	)
Equity securities, financial industry common stock		-		-			2,814,181		(588,208	)		2,814,181		(588,208	)
	$	113,971,100	$	(1,986,664	)	$	3,683,636	$	(611,559	)	$	117,654,736	$	(2,598,223	)

At June 30, 2011, debt securities have unrealized losses of $183,946. 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 $693,748 as of June 30, 2011. 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 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.

Index

8. Credit Disclosures

Activity in the allowance for loan losses, on a disaggregated basis, for the three and six months ended June 30, 2011 and 2010 is as follows:

	Three Months Ended June 30, 2011
	Construction Real Estate			1-4 Family Residential Real Estate			Commercial Real Estate			Agricultural Real Estate		Commercial			Agricultural			Consumer and Other			Total
Balance, March 31, 2011	$	766,000		$	1,421,000		$	2,728,000		$	516,000	$	1,120,000		$	702,000		$	274,000		$	7,527,000
Provision (credit) for loan losses		(19,000	)		22,000			111,000			9,000		312,000			3,000			(33,000	)		405,000
Recoveries of loans charged-off		-			-			-			-		1,000			4,000			4,000			9,000
Loans charged-off		-			(6,000	)		(51,000	)		-		-			(6,000	)		(2,000	)		(65,000	)
Balance, June 30, 2011	$	747,000		$	1,437,000		$	2,788,000		$	525,000	$	1,433,000		$	703,000		$	243,000		$	7,876,000

	Six Months Ended June 30 2011
	Construction Real Estate			1-4 Family Residential Real Estate			Commercial Real Estate			Agricultural Real Estate		Commercial			Agricultural			Consumer and Other			Total
Balance, December 31, 2010	$	731,000		$	1,404,000		$	2,720,000		$	486,000	$	1,152,000		$	735,000		$	293,000		$	7,521,000
Provision (credit) for loan losses		16,000			39,000			119,000			39,000		266,000			(29,000	)		(45,000	)		405,000
Recoveries of loans charged-off		-			-			-			-		15,000			7,000			7,000			29,000
Loans charged-off		-			(6,000	)		(51,000	)		-		-			(10,000	)		(12,000	)		(79,000	)
Balance, June 30, 2011	$	747,000		$	1,437,000		$	2,788,000		$	525,000	$	1,433,000		$	703,000		$	243,000		$	7,876,000

	Three Months Ended June 30, 2010
	Construction Real Estate			1-4 Family Residential Real Estate			Commercial Real Estate			Agricultural Real Estate		Commercial			Agricultural			Consumer and Other			Total
Balance, March 31, 2010	$	1,065,000		$	1,207,000		$	2,667,000		$	524,000	$	1,259,000		$	676,000		$	284,000		$	7,682,000
Provision (credit) for loan losses		70,000			117,000			52,000			20,000		(88,000	)		5,000			(6,000	)		170,000
Recoveries of loans charged-off		-			-			-			-		3,000			9,000			13,000			25,000
Loans charged-off		-			(1,000	)		-			-		-			(13,000	)		(13,000	)		(27,000	)
Balance, June 30, 2010	$	1,135,000		$	1,323,000		$	2,719,000		$	544,000	$	1,174,000		$	677,000		$	278,000		$	7,850,000

	Six Months Ended June 30, 2010
	Construction Real Estate			1-4 Family Residential Real Estate			Commercial Real Estate			Agricultural Real Estate		Commercial			Agricultural			Consumer and Other			Total
Balance, December 31, 2009	$	1,040,000		$	1,133,000		$	2,683,000		$	523,000	$	1,199,000		$	642,000		$	432,000		$	7,652,000
Provision (credit) for loan losses		117,000			306,000			56,000			21,000		(29,000	)		40,000			(17,000	)		494,000
Recoveries of loans charged-off		-			-			-			-		4,000			23,000			19,000			46,000
Loans charged-off		(22,000	)		(116,000	)		(20,000	)		-		-			(28,000	)		(156,000	)		(342,000	)
Balance, June 30, 2010	$	1,135,000		$	1,323,000		$	2,719,000		$	544,000	$	1,174,000		$	677,000		$	278,000		$	7,850,000

Index

Allowance for loan losses disaggregated on the basis of impairment analysis method as of June 30, 2011 and December 31, 2010 is as follows:

	June 30, 2011
	Construction Real Estate		1-4 Family Residential Real Estate		Commercial Real Estate		Agricultural Real Estate		Commercial		Agricultural		Consumer and Other		Total
Individually evaluated for impairment	$	196,000	$	130,000	$	11,000	$	-	$	400,000	$	-	$	11,000	$	748,000
Collectively evaluated for impairment		551,000		1,307,000		2,777,000		525,000		1,033,000		703,000		232,000		7,128,000
Balance June 30, 2011	$	747,000	$	1,437,000	$	2,788,000	$	525,000	$	1,433,000	$	703,000	$	243,000	$	7,876,000

	December 31, 2010
	Construction Real Estate		1-4 Family Residential Real Estate		Commercial Real Estate		Agricultural Real Estate		Commercial		Agricultural		Consumer and Other		Total
Individually evaluated for impairment	$	223,000	$	158,000	$	42,000	$	-	$	-	$	-	$	22,000	$	445,000
Collectively evaluated for impairment		508,000		1,246,000		2,678,000		486,000		1,152,000		735,000		271,000		7,076,000
Balance December 31, 2010	$	731,000	$	1,404,000	$	2,720,000	$	486,000	$	1,152,000	$	735,000	$	293,000	$	7,521,000

Loans receivable disaggregated on the basis of impairment analysis method as of June 30, 2011 and December 31, 2010 is as follows:

	June 30, 2011
	Construction Real Estate		1-4 Family Residential Real Estate		Commercial Real Estate		Agricultural Real Estate		Commercial		Agricultural		Consumer and Other		Total
Individually evaluated for impairment	$	2,501,000	$	2,333,000	$	852,000	$	-	$	630,000	$	-	$	13,000	$	6,329,000
Collectively evaluated for impairment		17,960,000		86,988,000		149,816,000		32,158,000		74,374,000		45,421,000		19,872,000		426,589,000

Balance June 30, 2011	$	20,461,000	$	89,321,000	$	150,668,000	$	32,158,000	$	75,004,000	$	45,421,000	$	19,885,000	$	432,918,000

	December 31, 2010
	Construction Real Estate		1-4 Family Residential Real Estate		Commercial Real Estate		Agricultural Real Estate		Commercial		Agricultural		Consumer and Other		Total
Individually evaluated for impairment	$	4,156,000	$	1,395,000	$	802,000	$	-	$	45,000	$	-	$	34,000	$	6,432,000
Collectively evaluated for impairment		15,441,000		87,538,000		138,568,000		31,931,000		78,128,000		45,630,000		22,018,000		419,254,000

Balance December 31, 2010	$	19,597,000	$	88,933,000	$	139,370,000	$	31,931,000	$	78,173,000	$	45,630,000	$	22,052,000	$	425,686,000

Index

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. The following is a recap of impaired loans, on a disaggregated basis, at June 30, 2011 and December 31, 2010 and the average recorded investment and interest income recognized on these loans for the three and six months ended June 30, 2011:

	June 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no specific reserve recorded:
Real estate - construction	$	-	$	-	$	-
Real estate - 1 to 4 family residential		1,855,000		1,855,000		-
Real estate - commercial		217,000		217,000		-
Real estate - agricultural		-		-		-
Operating - commercial		-		-		-
Operating - agricultural		-		-		-
Consumer and other		-		-		-
Total loans with no specific reserve:		2,072,000		2,072,000		-

With an allowance recorded:
Real estate - construction		2,501,000		2,501,000		196,000
Real estate - 1 to 4 family residential		478,000		478,000		130,000
Real estate - commercial		635,000		635,000		11,000
Real estate - agricultural		-		-		-
Operating - commercial		630,000		630,000		400,000
Operating - agricultural		-		-		-
Consumer and other		13,000		13,000		11,000
Total loans with specific reserve:		4,257,000		4,257,000		748,000

Total
Real estate - construction		2,501,000		2,501,000		196,000
Real estate - 1 to 4 family residential		2,333,000		2,333,000		130,000
Real estate - commercial		852,000		852,000		11,000
Real estate - agricultural		-		-		-
Operating - commercial		630,000		630,000		400,000
Operating - agricultural		-		-		-
Consumer and other		13,000		13,000		11,000

	$	6,329,000	$	6,329,000	$	748,000

Index

	Three Months ended June 30, 2011				Six Months Ended June 30, 2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no specific reserve recorded:
Real estate - construction	$	575,000	$	182,000	$	813,000	$	182,000
Real estate - 1 to 4 family residential		1,178,000		-		1,067,000		-
Real estate - commercial		268,000		-		224,000		-
Real estate - agricultural		-		-		-		-
Operating - commercial		23,000		-		30,000		-
Operating - agricultural		-		-		-		-
Consumer and other		-		-		3,000		-
Total loans with no specific reserve:		2,044,000		182,000		2,137,000		182,000

With an allowance recorded:
Real estate - construction		2,639,000		-		2,714,000		-
Real estate - 1 to 4 family residential		511,000		-		523,000		-
Real estate - commercial		643,000		-		650,000		-
Real estate - agricultural		-		-		-		-
Operating - commercial		315,000		-		210,000		-
Operating - agricultural		-		-		-		-
Consumer and other		14,000		-		17,000		-
Total loans with specific reserve:		4,122,000		-		4,114,000		-

Total
Real estate - construction		3,214,000		182,000		3,527,000		182,000
Real estate - 1 to 4 family residential		1,689,000		-		1,590,000		-
Real estate - commercial		911,000		-		874,000		-
Real estate - agricultural		-		-		-		-
Operating - commercial		338,000		-		240,000		-
Operating - agricultural		-		-		-		-
Consumer and other		14,000		-		20,000		-

	$	6,166,000	$	182,000	$	6,251,000	$	182,000

Index

	December 31, 2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance

With no specific reserve recorded:
Real estate - construction	$	1,290,000	$	1,290,000	$	-
Real estate - 1 to 4 family residential		846,000		846,000		-
Real estate - commercial		136,000		136,000		-
Real estate - agricultural		-		-		-
Operating - commercial		45,000		145,000		-
Operating - agricultural		-		-		-
Consumer and other		10,000		10,000		-
Total loans with no specific reserve:		2,327,000		2,427,000		-

With an allowance recorded:
Real estate - construction		2,866,000		2,866,000		223,000
Real estate - 1 to 4 family residential		549,000		549,000		158,000
Real estate - commercial		666,000		666,000		42,000
Real estate - agricultural		-		-		-
Operating - commercial		-		-		-
Operating - agricultural		-		-		-
Consumer and other		24,000		24,000		22,000
Total loans with specific reserve:		4,105,000		4,105,000		445,000

Total
Real estate - construction		4,156,000		4,156,000		223,000
Real estate - 1 to 4 family residential		1,395,000		1,395,000		158,000
Real estate - commercial		802,000		802,000		42,000
Real estate - agricultural		-		-		-
Operating - commercial		45,000		145,000		-
Operating - agricultural		-		-		-
Consumer and other		34,000		34,000		22,000

	$	6,432,000	$	6,532,000	$	445,000

There are no significant differences between nonaccrual and impaired loan balances at June 30, 2011 and December 31, 2010.

Index

An aging analysis of the recorded investment in loans, on a disaggregated basis, as of June 30, 2011 and December 31, 2010, are as follows:

	June 30, 2011
	30-89 Past Due		Greater Than 90 Days		Total Past Due		Current		Total		Greater Than 90 Days Accruing

Real estate - construction	$	-	$	-	$	-	$	20,461,000	$	20,461,000	$	-
Real estate - 1 to 4 family residential		1,293,000		1,525,000		2,818,000		86,503,000		89,321,000		193,000
Real estate - commercial		-		278,000		278,000		150,390,000		150,668,000		-
Real estate - agricultural		33,000		-		33,000		32,125,000		32,158,000		-
Operating - commercial		879,000		15,000		894,000		74,110,000		75,004,000		-
Operating - agricultural		-		-		-		45,421,000		45,421,000		-
Consumer and other		124,000		7,000		131,000		19,754,000		19,885,000		-

	$	2,329,000	$	1,825,000	$	4,154,000	$	428,764,000	$	432,918,000	$	193,000

	December 31, 2010
	30-89 Past Due		Greater Than 90 Days		Total Past Due		Current		Total		Greater Than 90 Days Accruing

Real estate - construction	$	135,000	$	-	$	135,000	$	19,462,000	$	19,597,000	$	-
Real estate - 1 to 4 family residential		413,000		684,000		1,097,000		87,836,000		88,933,000		21,000
Real estate - commercial		205,000		136,000		341,000		139,029,000		139,370,000		-
Real estate - agricultural		49,000		-		49,000		31,883,000		31,932,000		-
Operating - commercial		1,399,000		45,000		1,444,000		76,728,000		78,172,000		-
Operating - agricultural		-		-		-		45,630,000		45,630,000		-
Consumer and other		131,000		10,000		141,000		21,911,000		22,052,000		-

	$	2,332,000	$	875,000	$	3,207,000	$	422,479,000	$	425,686,000	$	21,000

The credit risk profile as of June 30, 2011 and December 31, 2010 is as follows:

The credit risk profile by internally assigned grade, on a disaggregated basis, at June 30, 2011 is as follows:

	Construction Real Estate		Commercial Real Estate		Agricultural Real Estate		Commercial Operating		Agricultural Operating		Total

Pass	$	6,806,000	$	94,499,000	$	29,424,000	$	63,836,000	$	42,598,000	$	237,163,000
Special Mention		2,927,000		43,425,000		2,187,000		9,043,000		2,285,000		59,867,000
Substandard		8,227,000		11,892,000		547,000		1,495,000		538,000		22,699,000
Substandard-Impaired		2,501,000		852,000		-		630,000		-		3,983,000

	$	20,461,000	$	150,668,000	$	32,158,000	$	75,004,000	$	45,421,000	$	323,712,000

Index

The credit risk profile based on payment activity, on a disaggregated basis, at June 30, 2011 is as follows:

	1-4 Family Residential Real Estate		Consumer and Other		Total

Performing	$	86,795,000	$	19,872,000	$	106,667,000
Non-performing		2,526,000		13,000		2,539,000

	$	89,321,000	$	19,885,000	$	109,206,000

The credit risk profile by internally assigned grade, on a disaggregated basis, at December 31, 2010 is as follows:

	Construction Real Estate		Commercial Real Estate		Agricultural Real Estate		Commercial Operating		Agricultural Operating		Total

Pass	$	6,739,000	$	83,235,000	$	29,580,000	$	64,791,000	$	42,941,000	$	227,286,000
Special Mention		3,694,000		42,137,000		2,351,000		8,922,000		1,318,000		58,422,000
Substandard		5,008,000		13,196,000		-		4,415,000		1,371,000		23,990,000
Substandard-Impaired		4,156,000		802,000		-		45,000		-		5,003,000

	$	19,597,000	$	139,370,000	$	31,931,000	$	78,173,000	$	45,630,000	$	314,701,000

The credit risk profile based on payment activity, on a disaggregated basis, at December 31, 2010 is as follows:

	1-4 Family Residential Real Estate		Consumer and Other		Total

Performing	$	87,538,000	$	22,018,000	$	109,556,000
Non-performing		1,395,000		34,000		1,429,000

	$	88,933,000	$	22,052,000	$	110,985,000

9. Subsequent Events

Management evaluated subsequent events through the date the financial statements were issued. There were no significant events or transactions occurring after June 30, 2011, but prior to August 9, 2011 that provided additional evidence about conditions that existed at June 30, 2011. There were no events or transactions that provided evidence about conditions that did not exist at June 30, 2011.

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.

Index

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 177 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 Company and Banks; (ii) interest on fixed income investments held by the Company and Banks; (iii) fees on trust services provided by those Banks exercising trust powers; (iv) service charges on deposit accounts maintained at the Banks and (v) securities gains. The Company’s principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) provision for loan losses; (iii) salaries and employee benefits; (iv) data processing costs associated with maintaining the Banks’ loan and deposit functions; (v) occupancy expenses for maintaining the Banks’ facilities; and (vi) Federal Deposit Insurance Corporation (“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 $3,243,000, or $0.34 per share, for the three months ended June 30, 2011, compared to net income of $3,126,000, or $0.33 per share, for the three months ended June 30, 2010. Total equity capital as of June 30, 2011 totaled $130.3 million or 13.0% of total assets.

The increase in quarterly earnings can be primarily attributed to higher net interest income and trust department income, offset in part by higher provision for loan losses, salaries and employee benefits and other real estate owned costs.

Net loan charge-offs for the quarter totaled $56,000, compared to net charge-offs of $2,000 in the second quarter of 2010. The provision for loan losses for the second quarter of 2011 totaled $405,000, compared to the provision for loan losses of $170,000 for the same period in 2010. This increase in the provision for loan losses was due primarily to a higher level of specific reserves allocated to an impaired loan.

The Company had net income of $6,716,000, or $0.71 per share, for the six months ended June 30, 2011, compared to net income of $6,396,000, or $0.68 per share, for the six months ended June 30, 2010.

Index

The increase in earnings can be primarily attributed to higher net interest income and gain on sale of loans, offset in part by lower service fees and higher salaries and employee benefits and other real estate owned costs.

Net loan charge-offs for the six months ended June 30, 2011 totaled $50,000, compared to net charge-offs of $296,000 for the six months ended June 30, 2010. The provision for loan losses for the six months ended June 30, 2011 totaled $405,000, compared to the provision for loan losses of $494,000 for the same period in 2010. Net loan charge-offs and the provision for loan losses remain manageable as a result of stable economic conditions in the Company’s lending.

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 events or circumstances that may negatively impact the Company’s financial condition and results of operations in the future and is attempting to position the Company to best respond to those challenges.

· 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.

· 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 compress 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 has $2.3 million in impaired loans, net of specific reserves totaling $196,000, with two Des Moines area development companies. 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.

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· Other real estate owned amounted to $10.2 million and $10.5 million as of June 30, 2011 and December 31, 2010, respectively. Other real estate owned costs amounted to $287,000 and $119,000 for the six months ended June 30, 2011 and 2010, 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. The FDIC has the authority to increase insurance assessments. FDIC insurance assessments amounted to $478,000 and $591,000 for the six months ended June 30, 2011 and 2010, respectively. Through June 30, 2011, 48 banks failed compared to 161 bank failures for the year ended December 31, 2010 and 140 for the year ended December 31, 2009. An increase in FDIC deposit assessments will have a negative impact on the Company’s earnings.

· The Company operates in a highly regulated environment and is subject to extensive regulation, supervision and examination. The compliance burden and impact on the Company’s operations and profitability is significant. Additionally, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act’) was signed into law. The impacts on operations of the Dodd-Frank Act are currently unknown, as the Dodd-Frank Act delegates to various federal agencies the task of implementing its many provisions through regulation. Hundreds of new federal regulations, studies and reports addressing all of the major areas of the new law, including the regulation of financial institutions and their holding companies, will be required, ensuring that federal rules and policies in this area will be further developing for months and years to come. Based on the provisions of the Dodd-Frank Act and anticipated implementing regulations, it is highly likely that financial institutions as well as their holding companies will be subject to significantly increased regulation and compliance obligations that expose them to noncompliance risk and consequences. The Bureau of Financial Consumer Protection (“BCFP”) has broad rulemaking authority to administer and carry out the purposes and objectives of the new federal consumer protection laws, and to prevent evasions thereof,” with respect to all financial institutions that offer financial products and services to consumers. The BCFP is also authorized to prescribe rules, applicable to any covered person or service provider, identifying and prohibiting acts or practices that are “unfair, deceptive, or abusive” in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service (“UDAP authority”). The full reach and impact of the BCFP’s broad new rulemaking powers and UDAP authority on the operations of financial institutions offering consumer financial products or services is currently unknown. Notwithstanding, insured depository institutions with assets of $10 billion or less will continue to be supervised and examined by their primary federal regulators, rather than the BCFP, with respect to compliance with the federal consumer protection laws. 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. Applicable laws and regulations may change, and there is no assurance that such changes will not adversely affect the Company’s business.

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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 FDIC and are derived from 7,574 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

	June 30, 2011						March 31, 2011
	3 Months			6 Months			3 Months						Year Ended December 31,
	Ended			Ended			Ended						2010						2009
	Company			Company			Company			Industry*			Company			Industry			Company			Industry

Return on assets		1.28	%		1.34	%		1.40	%		0.87	%		1.40	%		0.66	%		1.02	%		0.09	%

Return on equity		10.20	%		10.74	%		11.31	%		7.75	%		10.91	%		5.99	%		8.31	%		0.90	%

Net interest margin		3.63	%		3.58	%		3.53	%		3.66	%		3.74	%		3.76	%		3.78	%		3.47	%

Efficiency ratio		50.87	%		50.37	%		49.86	%		60.75	%		50.26	%		57.22	%		63.87	%		55.53	%

Capital ratio		12.57	%		12.50	%		12.42	%		9.14	%		12.80	%		8.90	%		12.32	%		8.65	%

*Latest available data

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 1.28% and 1.35%, respectively, for the three month periods ending June 30, 2011 and 2010. The decrease in this ratio in 2011 from the previous period is primarily the result of an increase in average assets, offset in part by an increase in 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 10.20% and 10.73%, respectively for the three month periods ending June 30, 2011 and 2010. The decrease in this ratio in 2011 from the previous period is primarily the result of higher average equity, offset in part by an increase in net income.

· Net Interest Margin

The net interest margin for the three months ended June 30, 2011 and 2010 was 3.63% and 3.73%, respectively. 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. The decrease in this ratio in 2011 is primarily the result of an increase in lower yielding investment securities.

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· 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 50.87% and 51.51% for the three months ended June 30, 2011 and 2010, respectively. The change in the efficiency ratio in 2011 from the previous period is primarily the result of increased net interest income and trust department income, offset in part by higher salaries and employee benefits.

· 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.

Industry Results

The FDIC Quarterly Banking Profile reported the following results for the first quarter of 2011:

Profits Rise for Seventh Consecutive Quarter

Bank earnings continued to benefit from falling loan-loss provisions in first quarter 2011 as FDIC-insured commercial banks and savings institutions posted their highest quarterly net income since the onset of the financial crisis. Net income totaled $29.0 billion, an $11.6 billion (66.5%) increase from first quarter 2010, and the best quarterly result since second quarter 2007. This is the seventh consecutive quarter that industry earnings have registered year-over-year gains. More than half of all institutions (56.2%) reported improved earnings, and fewer institutions were unprofitable (15.4% compared to 19.3% in first quarter 2010).

Loss Provisions Are Less than Half the Level of a Year Ago

Provisions for loan losses fell to $20.7 billion in the first quarter from $51.6 billion a year earlier. This marks the sixth quarter in a row that loss provisions have had a year-over-year decline. It is the smallest quarterly loss provision for the industry since third quarter 2007. The largest reductions in provisions occurred at credit card lenders that made sizable additions to their loan-loss reserves a year ago, but almost half of all institutions (48.9%) reported lower provisions. Fewer than a third (32.6%) increased their provisions from year-earlier levels.

Revenues Exhibit Weakness

The positive contribution from reduced provisions outweighed the negative effect of lower revenues at many institutions. Net operating revenue (net interest income plus total noninterest income) was $5.5 billion (3.2%) lower than a year ago. This is only the second time in the 27 years for which data are available that the industry has reported a year-over-year decline in quarterly net operating revenue.

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Decline in Revenues Is Concentrated among Large Institutions

Net interest income declined year-over-year for the first time since fourth quarter 1989, falling by $3.2 billion (3%), while noninterest income was $2.2 billion (3.7%) lower than in first quarter 2010. The reduction in net interest income was caused by narrower net interest margins and weak growth in interest-earning assets. The decline in noninterest income reflected lower revenues from service charges on deposit accounts (down $1.7 billion, or 17.3% at institutions filing Call Reports) and reduced trading income (down $1 billion, or 11.7%). Much of the reduction in net operating revenue was concentrated at larger institutions; more than half of all institutions (59.5%) reported year-over-year increases in net operating revenue, with 57.6% reporting higher net interest income and 52.1% reporting increased noninterest income. However, of the ten largest institutions, which together hold more than half of all insured institution assets, six reported year-over-year declines in net operating revenue, six had declines in noninterest income and eight reported lower net interest income.

Loan Losses Improve across All Main Loan Categories

Net loan charge-offs (NCOs) declined for a third consecutive quarter. Insured institutions charged-off $33.3 billion in the first quarter, a $19.9 billion (37.5%) decline from first quarter 2010. Almost half of all (48.9%) reported lower NCOs, while 41.5% reported increases. NCOs were lower in all major loan categories. The largest reduction occurred in credit cards, where NCOs fell by $7.3 billion (39.1%). Real estate construction loan NCOs were $3 billion (51.5%) lower than in first quarter 2010, while charge-offs of closed-end 1-4 family residential mortgages fell by $2.6 billion (29.6%). Commercial and industrial (C&I) loan NCOs also declined by $2.6 billion (43.1%).

Noncurrent Loan Balances Fall for a Fourth Consecutive Quarter

Noncurrent loan balances (loans 90 days or more past due or in nonaccrual status) fell by $17 billion (4.7%) during the quarter. At the end of March, insured institutions reported $341.7 billion in noncurrent loans and leases, down from $358.7 billion at the end of 2010. This is the fourth consecutive quarter that noncurrent loans have declined, and they are now $68.2 billion (16.6%) below the peak level reached a year ago. Half of all institutions (50.3%) reported reductions in their noncurrent loan balances, while 43.1% reported increases. Noncurrent balances declined in all major loan categories. Noncurrent C&I loans declined by $6.1 billion (21.1%), noncurrent construction and development loans fell by $4.3 billion (8.3%), and noncurrent closed-end 1-4 family residential mortgages declined by $2.8 billion (1.6%). The average noncurrent loan rate at the end of the quarter was 4.71%, the lowest level since second quarter 2009.

Most Large Banks Reduce Their Reserves

Net charge-offs exceeded loss provisions by $12.6 billion in the first quarter, contributing to a $13 billion (5.6%) drop in the industry’s loan-loss reserves. This is the fourth consecutive quarter that aggregate reserves have declined; they are now $44.9 billion (17.1%) below the peak level of a year ago. The decline in reserves was concentrated among the largest banks. Sixteen of the 19 institutions with assets greater than $100 billion reduced their reserves in the first quarter, and almost two-thirds of institutions with assets between $10 billion and $100 billion (63.2%) also reported reserve declines. Some of the largest reductions in reserves occurred at credit card lenders. In contrast to the trend at large banks, most institutions with less than $1 billion in assets (60.1%) increased their reserves during the quarter.

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Capital Levels Improve

Additions to capital in the first quarter surpassed the decline in reserves. Bank equity capital increased by $25.1 billion (1.7%), as retained earnings contributed $13.9 billion. Total risk-based capital increased by $17.8 billion (1.3%). Tier 1 leverage capital increased by $25.8 billion (2.2%), but tier 2 capital fell by $7.9 billion (3.4%), reflecting lower loan-loss reserves. At the end of the quarter, 96% of all institutions, representing over 99% of total industry assets, met or exceeded the highest regulatory capital requirements as defined for Prompt Corrective Action (PCA) purposes. Industry averages for all three regulatory capital ratios rose to all-time high levels, driven by improvements at the largest institutions.

Asset Growth Occurs Outside Loan Portfolios

Total assets of insured institutions increased by $94.7 billion (0.7%) during the quarter. Balances with Federal Reserve banks increased by $116.3 billion (23.5%) at Call Report filers with $300 million or more in total assets. Mortgage-backed securities holdings rose by $34.5 billion (2.3%). Total loan and lease balances continued to fall, declining by $126.6 billion (1.7%). This is the fifth-largest quarterly percentage decline in loan balances in the 28 years for which data are available, and it marks the tenth time in the last eleven quarters that reported loan balances have fallen (the one exception was caused by the implementation of FASB 166 and 167, which resulted in the consolidation of as much as $400 billion in securitized loans onto banks’ balance sheets in first quarter 2010). The largest declines in loan balances were in 1-4 family residential mortgages, which fell by $63.8 billion (3.4%), credit cards (down $38.9 billion, or 5.5%), and in real estate construction and development loans, which declined by $25.9 billion (8.1%). Balances fell in most major loan categories, with the exception of C&I loans, which increased by $18.1 billion (1.5%) and loans to depository institutions, which rose by $10.2 billion (9.3%). Almost half of the growth in C&I loans (47%) represented loans to non-U.S. borrowers, while 86.2% of the increase in loans to depository institutions consisted of loans to foreign banks. At the end of March, net loans and leases represented 52.4% of insured institutions’ assets, the lowest share since the early 1970s.

Deposit Growth Remains Strong

Deposits at FDIC-insured institutions increased by $178.8 billion (1.9%), as deposits in foreign offices rose by $61.4 billion (4%), and domestic office deposits grew by $117.4 billion (1.5%). Noninterest- deposits in domestic offices increased by $58.3 billion (3.5%), while interest-bearing deposits were up by $59.1 billion (1%). Nondeposit liabilities fell by $101.1 billion (4.2%), with Fed funds purchased declining by $44.6 billion (37.5%), and FHLB advances falling by $28.6 billion (7.4%).

The Pace of Bank Failures Slows

The number of insured commercial banks and savings institutions reporting financial results declined from 7,658 to 7,574 in the first quarter. One new reporting institution was added during the quarter, while 56 institutions were absorbed by mergers and 26 institutions failed. One report had not been received at the time these data were prepared. The number of institutions on the FDIC’s “Problem List” increased from 884 to 888 during the quarter. Assets of “problem” institutions increased from $390 billion to $397 billion. Insured institutions reported 2.09 million full-time equivalent employees in the first quarter, an increase of 65,632 (3.2%) from first quarter 2010.

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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 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.

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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.

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Income Statement Review for the Three Months ended June 30, 2011

The following highlights a comparative discussion of the major components of net income and their impact for the three month periods ended June 30, 2011 and 2010:

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 June 30,

	2011							2010

	Average balance		Revenue/ expense		Yield/ rate			Average balance		Revenue/ expense		Yield/ rate
ASSETS
(dollars in thousands)
Interest-earning assets
Loans 1
Commercial	$	77,980	$	1,008		5.17	%	$	69,555	$	926		5.32	%
Agricultural		45,193		625		5.53	%		42,852		625		5.83	%
Real estate		285,317		4,094		5.74	%		285,482		4,157		5.82	%
Consumer and other		21,427		273		5.10	%		22,981		316		5.50	%

Total loans (including fees)		429,917		6,000		5.58	%		420,870		6,024		5.73	%

Investment securities
Taxable		265,544		1,796		2.71	%		236,131		1,771		3.00	%
Tax-exempt 2		219,884		2,507		4.56	%		181,940		2,195		4.83	%
Total investment securities		485,428		4,303		3.55	%		418,071		3,966		3.79	%

Interest bearing deposits with banks and federal funds sold		42,496		117		1.10	%		35,692		129		1.45	%

Total interest-earning assets		957,841	$	10,420		4.35	%		874,633	$	10,119		4.63	%

Noninterest-earning assets		53,884							52,670


TOTAL ASSETS	$	1,011,725						$	927,303

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%.

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AVERAGE BALANCE SHEETS AND INTEREST RATES

	Three Months ended June 30,
	2011								2010

	Average balance		Revenue/ expense			Yield/ rate			Average balance		Revenue/ expense			Yield/ rate
LIABILITIES AND STOCKHOLDERS' EQUITY
(dollars in thousands)
Interest-bearing liabilities
Deposits
NOW, savings accounts and money markets	$	454,626	$	367			0.32	%	$	395,083	$	359			0.36	%
Time deposits > $100,000		99,172		404			1.63	%		88,119		414			1.88	%
Time deposits < $100,000		141,102		612			1.74	%		148,493		791			2.13	%
Total deposits		694,900		1,383			0.80	%		631,695		1,564			0.99	%
Other borrowed funds		78,119		354			1.81	%		84,056		403			1.92	%

Total Interest-bearing liabilities		773,019		1,737			0.90	%		715,751		1,967			1.10	%

Noninterest-bearing liabilities
Demand deposits		106,277								90,330
Other liabilities		5,282								4,711

Stockholders' equity		127,147								116,511

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,011,725							$	927,303


Net interest income			$	8,683			3.63	%			$	8,152			3.73	%

Spread Analysis
Interest income/average assets	$	10,420		4.12	%				$	10,119		4.37	%
Interest expense/average assets	$	1,737		0.69	%				$	1,967		0.85	%
Net interest income/average assets	$	8,683		3.43	%				$	8,152		3.52	%

Net Interest Income

For the three months ended June 30, 2011 and 2010, the Company's net interest margin adjusted for tax exempt income was 3.63% and 3.73%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended June 30, 2011 totaled $7,807,000 compared to $7,387,000 for the three months ended June 30, 2010.

For the three months ended June 30, 2011, interest income increased $191,000 or 2.0% when compared to the same period in 2010. The increase from 2010 was primarily attributable to recognition of nonaccrual interest income and higher average balance of investment securities, offset in part by lower average yields on loans and investment securities.

Interest expense decreased $229,000 or 11.6% for the three months ended June 30, 2011 when compared to the same period in 2010. The lower interest expense for the period is primarily attributable to lower average rates paid on time deposits.

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Provision for Loan Losses

The Company’s provision for loan losses for the three months ended June 30, 2011 was $405,000 compared to a provision for loan losses of $170,000 for the three months ended June 30, 2010. A higher level of specific reserves was allocated to an impaired loan which leads to a higher provision for loan losses. Net charge-offs of $56,000 were realized in the three months ended June 30, 2011 and compare to net charge-offs of $2,000 for the three months ended June 30, 2010.

Non-interest Income and Expense

Non-interest income increased $121,000 during the three months ended June 30, 2011 compared to the same period in 2010 primarily as a result of higher trust department income, offset in part by a decrease in service fees. The increase in trust department income was due primarily to increases in the number of customer relationships and income related to improving fair values for fee based managed assets. The decrease in service fees was primarily due to lower overdraft fees due in part to regulatory changes associated with the Dodd-Frank Act. Excluding net security gains for the three months ending June 30, 2011 and 2010, non-interest income increased $91,000, or 6.1%.

Non-interest expense increased $217,000 or 4.7% for the three months ended June 30, 2011 compared to the same period in 2010 can be mainly attributed to higher salaries and employee benefit and other real estate owned costs, offset in part by a decrease in FDIC insurance assessments. The increase in salaries and benefit costs were due to normal salary increases and increasing incentive pay as the result of higher profitability. The increase in other real estate owned costs were due primarily to impairment write-downs in 2011 as compared to 2010. The lower FDIC insurance assessments are due primarily to lower assessment rates.

Income Taxes

The provision for income taxes expense for the three months ended June 30, 2011 and 2010 was $1,039,000 and $1,067,000, representing an effective tax rate of 24% and 25%, respectively. The decrease in income tax expense was due primarily to an increased effect of income from tax exempt securities in 2011, offset in part by higher pretax earnings in 2011.

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Income Statement Review for the Six Months ended June 30, 2011

The following highlights a comparative discussion of the major components of net income and their impact for the six month periods ended June 30, 2011 and 2010:

AVERAGE BALANCES AND INTEREST RATES

AVERAGE BALANCE SHEETS AND INTEREST RATES

	Six Months ended June 30,

	2011							2010

	Average balance		Revenue/ expense		Yield/ rate			Average balance		Revenue/ expense		Yield/ rate
ASSETS
(dollars in thousands)
Interest-earning assets
Loans 1
Commercial	$	78,217	$	2,011		5.14	%	$	68,802	$	1,918		5.58	%
Agricultural		43,361		1,199		5.53	%		41,272		1,207		5.85	%
Real estate		283,009		7,975		5.64	%		285,766		8,360		5.85	%
Consumer and other		21,617		553		5.12	%		23,556		638		5.42	%

Total loans (including fees)		426,204		11,738		5.51	%		419,396		12,123		5.78	%

Investment securities
Taxable		263,574		3,459		2.62	%		237,936		3,598		3.02	%
Tax-exempt 2		218,786		5,023		4.59	%		176,234		4,291		4.87	%
Total investment securities		482,360		8,482		3.52	%		414,170		7,889		3.81	%

Interest bearing deposits with banks and federal funds sold		39,002		225		1.15	%		31,195		259		1.66	%

Total interest-earning assets		947,566	$	20,445		4.32	%		864,761	$	20,271		4.69	%

Noninterest-earning assets		52,787							55,104


TOTAL ASSETS	$	1,000,353						$	919,865

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%.

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AVERAGE BALANCE SHEETS AND INTEREST RATES

	Six Months ended June 30,

	2011								2010

	Average balance		Revenue/ expense			Yield/ rate			Average balance		Revenue/ expense			Yield/ rate
LIABILITIES AND STOCKHOLDERS' EQUITY
(dollars in thousands)
Interest-bearing liabilities
Deposits
NOW, savings accounts and money markets	$	437,755	$	693			0.32	%	$	386,570	$	708			0.37	%
Time deposits > $100,000		99,155		816			1.65	%		88,967		865			1.94	%
Time deposits < $100,000		141,574		1,245			1.76	%		149,842		1,653			2.21	%
Total deposits		678,484		2,754			0.81	%		625,379		3,226			1.03	%
Other borrowed funds		87,039		733			1.68	%		84,065		805			1.92	%

Total Interest-bearing liabilities		765,523		3,487			0.91	%		709,444		4,031			1.14	%

Noninterest-bearing liabilities
Demand deposits		104,590								90,325
Other liabilities		5,229								4,781

Stockholders' equity		125,011								115,315


TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,000,353							$	919,865


Net interest income			$	16,958			3.58	%			$	16,240			3.76	%

Spread Analysis
Interest income/average assets	$	20,445		4.09	%				$	20,271		4.41	%
Interest expense/average assets	$	3,487		0.70	%				$	4,031		0.88	%
Net interest income/average assets	$	16,958		3.39	%				$	16,240		3.53	%

Net Interest Income

For the six months ended June 30, 2011 and 2010, the Company's net interest margin adjusted for tax exempt income was 3.58% and 3.76%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the six months ended June 30, 2011 totaled $15,205,000 compared to $14,744,000 for the six months ended June 30, 2010.

For the six months ended June 30, 2011, interest income decreased $84,000 or 0.4% when compared to the same period in 2010. The decrease from 2010 was primarily attributable to lower average yields on loans and investment securities, offset in part by the recognition of nonaccrual interest income and higher average balances of investment securities.

Index

Interest expense decreased $545,000 or 13.5% for the six months ended June 30, 2011 when compared to the same period in 2010. The lower interest expense for the period is primarily attributable to lower average rates paid on time deposits.

Provision for Loan Losses

The Company’s provision for loan losses for the six months ended June 30, 2011 was $405,000 compared to a provision for loan losses of $494,000 for the six months ended June 30, 2010. The provision for loan losses in 2011 was primarily due to an increase in the allowance for loan losses on an impaired credit. The provision for loan losses in 2010 was due primarily to net charge-offs. Net charge-offs of $50,000 were realized in the six months ended June 30, 2011 and compare to net charge-offs of $296,000 for the six months ended June 30, 2010

Non-interest Income and Expense

Non-interest income increased $10,000 during the six months ended June 30, 2011 compared to the same period in 2010 primarily as the result of an increase in gain on the sale of loans held for sale and trust department income, offset in part by a decrease in service fees. The increase in gain on sale of loans held for sale is primarily due to an increased volume of loans sold. The increase in trust department income was due primarily to increases in the number of customer relationships and income related to improving fair values for fee based managed assets. The decreases in service fees are primarily due to lower overdraft fees due in part to regulatory changes associated with the Dodd-Frank Act. Excluding net security gains for the six months ending June 30, 2011 and 2010, non-interest income increased $96,000, or 3.3%.

Non-interest expense increased $293,000 or 3.2% for the six months ended June 30, 2011 compared to the same period in 2010 can be mainly attributed to higher salaries and employee benefit costs and other real estate owned costs, offset in part by a decrease in FDIC insurance assessments. The increase in salaries and benefit costs were due to normal salary increases and increasing incentive pay as the result of higher profitability. The higher other real estate owned costs are primarily due to impairment write downs. The lower FDIC insurance assessments are due primarily to lower assessment rates.

Income Taxes

The provision for income taxes expense for the six months ended June 30, 2011 and 2010 was $2,202,000 and $2,255,000, representing an effective tax rate of 25% and 26%, respectively. The decrease in income tax expense was due primarily to an increased effect of income from tax exempt securities in 2011, offset in part by higher pretax earnings in 2011.

Balance Sheet Review

As of June 30, 2011, total assets were $1,000,556,000, a $37,582,000 increase compared to December 31, 2010. The increase in securities available-for-sale, interest bearing deposits in financial institutions and loans were funded primarily by an increase in deposits, partially offset by a decrease in securities sold under repurchase agreement.

Investment Portfolio

The investment portfolio totaled $496,471,000 as of June 30, 2011, 5.7% higher than the December 31, 2010 balance of $469,908,000. The increase in the investment portfolio was primarily due to an increase in U.S. government mortgage-backed securities, offset in part by a decrease in U.S. government agency securities.

Index

On a quarterly basis, the investment securities portfolio is reviewed for other-than-temporary impairment. As of June 30, 2011, gross unrealized losses of $878,000, are considered to be temporary in nature due to the general economic conditions and other factors. 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.

Loan Portfolio

The loan portfolio, net of the allowance for loan losses, increased $6,886,000, or 1.6%, during the six months as net loans totaled $424,979,000 as of June 30, 2011 compared to $418,094,000 as of December 31, 2010. The increase in the loan portfolio is primarily due to an increase in the commercial real estate loan portfolio.

Deposits

Deposits totaled $781,775,000 as of June 30, 2011, an increase of $37,914,000 from December 31, 2010. The increase in deposits occurred in NOW, savings, money market and time deposit accounts $100,000 and over and the increases occurred in public, commercial and retail types of deposit accounts.

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

Federal funds purchased and securities sold under agreements to repurchase totaled $46,820,000 as of June 30, 2011, $8,038,000 lower than December 31, 2010. This decrease is due primarily to a decrease in securities sold under agreement to repurchase, offset in part by an increase in federal funds purchased. The decrease in securities sold under agreements to repurchase is primarily due to decreases related to two customers accounts.

Federal Home Loan Bank (“FHLB”) Advances and Other Long-Term Borrowings

FHLB advances and other long-term borrowings totaled $36,213,000 and $36,745,000 as of June 30, 2011 and December 31, 2010, respectively. During the six months ended June 30, 2011, payments on FHLB advances amounted to $532,000.

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, 2010.

Asset Quality Review and Credit Risk Management

The Company’s credit risk is historically centered in the loan portfolio, which on June 30, 2011 totaled $424,979,000 compared to $418,094,000 as of December 31, 2010. Net loans comprise 42.5% of total assets as of June 30, 2011. 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 1.48% at June 30, 2011, as compared to 1.79% at December 31, 2010 and 1.86% at June 30, 2010. The Company’s level of problem loans as a percentage of total loans at June 30, 2011 of 1.48% is lower than the Company’s peer group (299 bank holding companies with assets of $1 billion to $3 billion) of 3.43% as of March 31, 2011.

Index

Impaired loans, net of specific reserves, totaled $5,581,000 as of June 30, 2011 compared to impaired loans of $5,987,000 as of December 31, 2010 and $6,834,000 as of June 30, 2010. The decrease in impaired loans from December 31, 2010 to June 30, 2011, is due primarily to increased allowance for loan loss related to on one impaired credit. 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.

We monitor and report our troubled debt restructuring on a quarterly basis. At June 30, 2011, troubled debt restructurings were not a material portion of the loan portfolio. We review 90 days past due loans that are still accruing interest no less frequently than quarterly to determine if there is a strong reason that the credit should not be placed on non-accrual. As of June 30, 2011, non-accrual loans totaled $6,215,000; loans past due 90 days and still accruing totaled $193,000. This compares to non-accrual loans of $6,277,000 and loans past due 90 days and still accruing of $21,000 on December 31, 2010. Other real estate owned totaled $10,159,000 as of June 30, 2011 and $10,539,000 as of December 31, 2010.

The allowance for loan losses as a percentage of outstanding loans as of June 30, 2011 and December 31, 2010 was 1.82% and 1.77%, respectively. The allowance for loan losses totaled $7,876,000 and $7,521,000 as of June 30, 2011 and December 31, 2010, respectively. Net charge-offs of loans for the six months ended June 30, 2011 totaled $50,000, compared to net charge-offs of loans of $296,000 for the six months ended June 30, 2010.

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.

Index

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, FHLB advances and other capital market sources.

As of June 30, 2011, 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.

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

· Review of 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 June 30, 2011 and December 31, 2010 totaled $45,715,000 and $37,708,000, respectively, and provide a level of liquidity.

Other sources of liquidity available to the Banks as of June 30, 2011 include outstanding lines of credit with the Federal Home Loan Bank of Des Moines, Iowa of $73,250,000, with $16,213,000 of outstanding FHLB advances at June 30, 2011. Federal funds borrowing capacity at correspondent banks was $109,780,000, with $10,800,000 of outstanding federal fund balances as of June 30, 2011. The Company had securities sold under agreements to repurchase totaling $36,020,000 and long-term repurchase agreements of $20,000,000 as of June 30, 2011.

Total investments as of June 30, 2011 were $496,471,000 compared to $469,908,000 as of December 31, 2010. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of June 30, 2011.

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 six months ended June 30, 2011 totaled $10,076,000 compared to the $7,248,000 provided by the six months ended June 30, 2010. The increase in net cash provided by operating activities was primarily related to changes in loans held for sale and increase in amortization.

Net cash used in investing activities for the six months ended June 30, 2011 was $33,717,000 and compared to $12,092,000 for the six months ended June 30, 2010. The increase in net cash used in investing activities was primarily due to changes in securities available-for-sale, interest bearing deposits in financial institutions and loans, offset in part by changes in federal funds sold.

Index

Net cash provided by financing activities for the six months ended June 30, 2011 totaled $25,572,000 compared to $2,718,000 for the six months ended June 30, 2010. The increase in net cash provided by financing activities was primarily due to changes in deposits, offset in part by decreases in decreases in securities sold under agreements to repurchase and changes in borrowings. As of June 30, 2011, the Company did not have any external debt financing, off-balance sheet financing arrangements, or derivative instruments linked to its stock.

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 six months ended June 30, 2011, dividends paid by the Banks to the Company amounted to $2,642,000 compared to $1,700,000 for the same period in 2010. 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. The quarterly dividend declared by the Company increased to $0.13 per share in 2011 from $0.11 per share in 2010.

The Company, on an unconsolidated basis, has interest bearing deposits and marketable investment securities totaling $11,450,000 as of June 30, 2011 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 June 30, 2011 that are of concern to management.

Capital Resources

The Company’s total stockholders’ equity as of June 30, 2011 totaled $130,277,000 and was higher than the $121,363,000 recorded as of December 31, 2010. At June 30, 2011 and December 31, 2010, stockholders’ equity as a percentage of total assets was 13.02% and 12.60%, respectively. The capital levels of the Company currently exceed applicable regulatory guidelines as of June 30, 2011.

Index

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.

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 2011 changed significantly when compared to 2010.

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.

Index

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.

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, of the OCC’s decision to establish individual minimum capital ratios for First National in excess of the capital ratios that would otherwise be imposed under applicable regulatory standards. The OCC was requiring First National 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 June 22, 2011, the OCC lifted the above imposed individual minimum capital ratios.

Index

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

In May, 2011, the Company approved a Stock Repurchase Plan which provided for the repurchase of up to 100,000 shares of the Company’s common stock. At June 30, 2011, there were 77,967 shares remaining to be purchased under the plan.

The following table provides information with respect to purchase made by or on behalf of the Company or any “affiliated purchases” (as defined in rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended June 30, 2011.

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicaly Announced Plans		Maximum Number of Shares that May Yet Be Purchased Under The Plan

April 1, 2011 to April 30, 2011		-	$	-		-		100,000

May 1, 2011 to May 31, 2011		-	$	-		-		100,000

June 1, 2011 to June 30, 2011		22,033	$	17.00		22,033		77,967

Total		22,033				22,033

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Removed and 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.

101.INS

XBRL Instance Document(1)

101.SCH

XBRL Taxonomy Extension Schema Document(1)

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document(1)

101.LAB

XBRL Taxonomy Extension Label Linkbase Document(1)

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document(1)

(1)	These interactive data files shall not be deemed filed for the purposes of Section 11 or 12 of the Securities Exchange Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

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: August 9, 2011	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

101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

(1)	These interactive data files shall not be deemed filed for the purposes of Section 11 or 12 of the Securities Exchange Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.