AMES NATIONAL CORP - Quarter Report: 2016 March (Form 10-Q)

atlo20160331_10q.htm Table Of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[Mark One]

[X]

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

For the quarterly period ended March 31, 2016

[_]

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

For the transition period from ____________ to ____________

Commission File Number 0-32637

AMES NATIONAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

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

405 FIFTH STREET

AMES, IOWA 50010

(Address of Principal Executive Offices)

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

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No ____

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

Large accelerated filer____ Accelerated filer __X__ Non-accelerated filer ____ Smaller reporting company ____

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

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

COMMON STOCK, $2.00 PAR VALUE	9,310,913
(Class)	(Shares Outstanding at April 29, 2016)

Table Of Contents

AMES NATIONAL CORPORATION

INDEX

		Page

Part I.	Financial Information

Item 1.	Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets at March 31, 2016 and December 31, 2015	3

	Consolidated Statements of Income for the three months ended March 31, 2016 and 2015	4

	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015	5

	Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2016 and 2015	6

	Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015	7

	Notes to Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45

Item 4.	Controls and Procedures	45

Part II.	Other Information

Item 1.	Legal Proceedings	45

Item 1.A.	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Mine Safety Disclosures	46

Item 5.	Other Information	46

Item 6.	Exhibits	47

	Signatures	48

Table Of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

	March 31,		December 31,
	2016		2015
ASSETS
Cash and due from banks	$	21,620,875	$	24,005,801
Interest bearing deposits in financial institutions		59,739,010		26,993,091
Securities available-for-sale		523,272,746		537,632,990
Loans receivable, net		695,627,262		701,328,171
Loans held for sale		443,571		539,370
Bank premises and equipment, net		16,768,218		17,007,798
Accrued income receivable		7,381,129		7,565,791
Other real estate owned		1,124,384		1,249,915
Deferred income taxes		-		1,276,571
Core deposit intangible, net		1,213,483		1,308,731
Goodwill		6,732,216		6,732,216
Other assets		975,895		1,106,698

Total assets	$	1,334,898,789	$	1,326,747,143

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits
Demand, noninterest bearing	$	193,177,754	$	202,542,011
NOW accounts		304,055,155		298,227,493
Savings and money market		369,326,455		354,026,475
Time, $250,000 and over		38,715,001		36,956,653
Other time		178,579,704		182,440,490
Total deposits		1,083,854,069		1,074,193,122

Securities sold under agreements to repurchase		50,379,586		54,289,915
Federal Home Loan Bank (FHLB) advances		15,500,000		18,542,203
Other borrowings		13,000,000		13,000,000
Deferred income taxes		139,019		-
Dividend payable		1,955,292		1,862,183
Accrued expenses and other liabilities		4,598,993		3,609,663
Total liabilities		1,169,426,959		1,165,497,086

STOCKHOLDERS' EQUITY

Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 9,310,913 shares as of March 31, 2016 and December 31, 2015		18,621,826		18,621,826
Additional paid-in capital		20,878,728		20,878,728
Retained earnings		120,119,566		118,267,767
Accumulated other comprehensive income - net unrealized gain on securities available-for-sale		5,851,710		3,481,736
Total stockholders' equity		165,471,830		161,250,057

Total liabilities and stockholders' equity	$	1,334,898,789	$	1,326,747,143

See Notes to Consolidated Financial Statements.

Table Of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three Months Ended
	March 31,
	2016			2015

Interest income:
Loans, including fees	$	7,857,970		$	7,399,690
Securities:
Taxable		1,495,310			1,566,398
Tax-exempt		1,400,031			1,486,360
Interest bearing deposits and federal funds sold		95,703			93,378
Total interest income		10,849,014			10,545,826

Interest expense:
Deposits		750,121			762,396
Other borrowed funds		263,370			338,163
Total interest expense		1,013,491			1,100,559

Net interest income		9,835,523			9,445,267

Provision for loan losses		192,014			77,300

Net interest income after provision for loan losses		9,643,509			9,367,967

Noninterest income:
Wealth management income		787,108			687,910
Service fees		397,091			394,559
Securities gains, net		201,693			4,949
Gain on sale of loans held for sale		176,757			213,986
Merchant and card fees		344,073			314,594
Other noninterest income		192,750			150,221
Total noninterest income		2,099,472			1,766,219

Noninterest expense:
Salaries and employee benefits		4,051,784			3,724,934
Data processing		761,132			664,535
Occupancy expenses, net		603,437			526,087
FDIC insurance assessments		163,988			182,996
Professional fees		267,916			292,438
Business development		235,160			232,844
Other real estate owned expense (income), net		(19,616	)		148,063
Core deposit intangible amortization		95,248			113,623
Other operating expenses, net		275,675			253,337
Total noninterest expense		6,434,724			6,138,857

Income before income taxes		5,308,257			4,995,329

Provision for income taxes		1,501,166			1,360,400

Net income	$	3,807,091		$	3,634,929

Basic and diluted earnings per share	$	0.41		$	0.39

Dividends declared per share	$	0.21		$	0.20

See Notes to Consolidated Financial Statements.

Table Of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

	Three Months Ended
	March 31,
	2016			2015


Net income	$	3,807,091		$	3,634,929
Other comprehensive income, before tax:
Unrealized gains on securities before tax:
Unrealized holding gains arising during the period		3,963,557			3,494,946
Less: reclassification adjustment for gains realized in net income		201,693			4,949
Other comprehensive income, before tax		3,761,864			3,489,997
Tax effect related to other comprehensive income		(1,391,890	)		(1,291,303	)
Other comprehensive income, net of tax		2,369,974			2,198,694
Comprehensive income	$	6,177,065		$	5,833,623

See Notes to Consolidated Financial Statements.

Table Of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

Three Months Ended March 31, 2016 and 2015
	Common Stock		Additional Paid-in-Capital		Retained Earnings			Accumulated Other Comprehensive Income, Net of Taxes		Total Stockholders' Equity

Balance, December 31, 2014	$	18,621,826	$	20,878,728	$	110,701,847		$	4,472,017	$	154,674,418
Net income		-		-		3,634,929			-		3,634,929
Other comprehensive income		-		-		-			2,198,694		2,198,694
Cash dividends declared, $0.20 per share		-		-		(1,862,183	)		-		(1,862,183	)
Balance, March 31, 2015	$	18,621,826	$	20,878,728	$	112,474,593		$	6,670,711	$	158,645,858

Balance, December 31, 2015	$	18,621,826	$	20,878,728	$	118,267,767		$	3,481,736	$	161,250,057
Net income		-		-		3,807,091			-		3,807,091
Other comprehensive income		-		-		-			2,369,974		2,369,974
Cash dividends declared, $0.21 per share		-		-		(1,955,292	)		-		(1,955,292	)
Balance, March 31, 2016	$	18,621,826	$	20,878,728	$	120,119,566		$	5,851,710	$	165,471,830

See Notes to Consolidated Financial Statements.

Table Of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Three Months Ended March 31, 2016 and 2015

	2016			2015

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,807,091		$	3,634,929
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		192,014			77,300
Provision for off-balance sheet commitments		20,000			-
Amortization, net		760,460			887,871
Amortization of core deposit intangible asset		95,248			113,623
Depreciation		291,393			259,680
Deferred income taxes		23,700			(23,101	)
Securities gains, net		(201,693	)		(4,949	)
Loss on sale of premises and equipment, net		-			1,132
Impairment of other real estate owned		-			27,453
(Gain) loss on sale of other real estate owned, net		(25,841	)		55,742
Change in assets and liabilities:
Decrease in loans held for sale		95,799			352,650
(Increase) decrease in accrued income receivable		184,662			(47,118	)
(Increase) decrease in other assets		129,371			(167,275	)
Increase in accrued expenses and other liabilities		969,330			1,413,345
Net cash provided by operating activities		6,341,534			6,581,282

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale		(6,944,567	)		(23,877,871	)
Proceeds from sale of securities available-for-sale		12,365,100			517,076
Proceeds from maturities and calls of securities available-for-sale		12,090,662			13,761,096
Net (increase) in interest bearing deposits in financial institutions		(32,745,919	)		(30,745,866	)
Decrease in federal funds sold		-			6,000
Net (increase) decrease in loans		5,551,541			(2,390,660	)
Net proceeds from the sale of other real estate owned		151,372			987,156
Purchase of bank premises and equipment, net		(50,381	)		(100,967	)
Net cash (used in) investing activities		(9,582,192	)		(41,844,036	)

CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits		9,670,447			30,690,209
Increase (decrease) in securities sold under agreements to repurchase		(3,910,329	)		7,536,306
Payments on FHLB borrowings and other borrowings		(3,042,203	)		(73,616	)
Dividends paid		(1,862,183	)		(1,675,964	)
Net cash provided by financing activities		855,732			36,476,935

Net increase (decrease) in cash and due from banks		(2,384,926	)		1,214,181

CASH AND DUE FROM BANKS
Beginning		24,005,801			23,730,257
Ending	$	21,620,875		$	24,944,438

Table Of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(unaudited)

Three Months Ended March 31, 2016 and 2015

	2016		2015

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for:
Interest	$	1,025,880	$	1,179,859
Income taxes		12,000		44,982

See Notes to Consolidated Financial Statements.

Table Of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

1. Significant Accounting Policies

The consolidated financial statements for the three months ended March 31, 2016 and 2015 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 accounting principles generally accepted in the United States of America 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, 2015 (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.

Goodwill: Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill resulting from acquisitions is not amortized, but is tested for impairment annually or whenever events change and circumstances indicate that it is more likely than not that an impairment loss has occurred. Goodwill is tested for impairment using a two-step process that begins with an estimation of the fair value of a reporting unit. The second step, if necessary, measures the amount of impairment, if any.

Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. At March 31, 2016, Company management has performed a goodwill impairment assessment and determined goodwill was not impaired.

New Accounting Pronouncements: In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-02, Leases (Topic 842). The ASU requires a lessee to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (“GAAP”), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Unlike current GAAP, which requires that only capital leases be recognized on the balance sheet, the ASC requires that both types of leases by recognized on the balance sheet. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018. Early application is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Among other items the ASC requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2017. The effect of the adoption of this guidance has not yet been determined by the Company.

Table Of Contents

2. Dividends

On February 10, 2016, the Company declared a cash dividend on its common stock, payable on May 16, 2016 to stockholders of record as of May 1, 2016, equal to $0.21 per share.

3. Earnings Per Share

Earnings per share amounts were calculated using the weighted average shares outstanding during the periods presented. The weighted average outstanding shares for the three months ended March 31, 2016 and 2015 were 9,310,913. 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, 2015.

5. Fair Value Measurements

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

Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

Level 2: Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatility, prepayment speeds, credit risk); or inputs 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.

Table Of Contents

The following table presents the balances of assets measured at fair value on a recurring basis by level as of March 31, 2016 and December 31, 2015. (in thousands)

Description	Total		Level 1		Level 2		Level 3

2016

U.S. government treasuries	$	1,491	$	1,491	$	-	$	-
U.S. government agencies		105,708		-		105,708		-
U.S. government mortgage-backed securities		90,614		-		90,614		-
State and political subdivisions		270,394		-		270,394		-
Corporate bonds		52,026		-		52,026		-
Equity securities, other		3,040		-		3,040		-

	$	523,273	$	1,491	$	521,782	$	-

2015

U.S. government treasuries	$	1,467	$	1,467	$	-	$	-
U.S. government agencies		106,445		-		106,445		-
U.S. government mortgage-backed securities		98,079		-		98,079		-
State and political subdivisions		277,597		-		277,597		-
Corporate bonds		50,889		-		50,889		-
Equity securities, other		3,156		-		3,156		-

	$	537,633	$	1,467	$	536,166	$	-

Level 1 securities include U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. U.S government mortgage-backed securities, state and political subdivisions, most corporate bonds and other equity securities are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things.

The Company's policy is to recognize transfers between levels at the end of each reporting period, if applicable. There were no transfers between levels of the fair value hierarchy during the three months ended March 31, 2016.

Table Of Contents

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 within the valuation hierarchy as of March 31, 2016 and December 31, 2015. (in thousands)

Description	Total		Level 1		Level 2		Level 3

2016

Loans receivable	$	1,012	$	-	$	-	$	1,012
Other real estate owned		1,124		-		-		1,124

Total	$	2,136	$	-	$	-	$	2,136

2015

Loans receivable	$	603	$	-	$	-	$	603
Other real estate owned		1,250		-		-		1,250

Total	$	1,853	$	-	$	-	$	1,853

Loans Receivable: Loans in the tables above consist of impaired credits held for investment. In accordance with the loan impairment guidance, impairment was measured based on the fair value of collateral less estimated selling costs for collateral dependent loans. Fair value for impaired loans is based upon appraised values of collateral adjusted for trends observed in the market. A valuation allowance was recorded for the excess of the loan’s recorded investment over the amounts determined by the collateral value method. This valuation allowance is a component of the allowance for loan losses. The Company considers these fair value measurements as level 3.

Other Real Estate Owned: Other real estate owned in the table above consists of real estate obtained through foreclosure. Other real estate owned is recorded at fair value less estimated selling costs, at the date of transfer, with any impairment amount charged to the allowance for loan losses. Subsequent to the transfer, other real estate owned is carried at the lower of cost or fair value, less estimated selling costs, with any impairment amount recorded as a noninterest expense. The carrying value of other real estate owned is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value exceeds the fair value less estimated selling costs. Management uses appraised values and adjusts for trends observed in the market and for disposition costs in determining the value of other real estate owned. A valuation allowance was recorded for the excess of the asset’s recorded investment over the amount determined by the fair value, less estimated selling costs. This valuation allowance is a component of the allowance for other real estate owned. The valuation allowance was $675,000 as of March 31, 2016 and $681,000 as of December 31, 2015. The Company considers these fair value measurements as level 3.

Table Of Contents

The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of March 31, 2016 and December 31, 2015 are as follows: (in thousands)

2016

Estimated

Valuation

Range

Fair Value

Techniques

Unobservable Inputs

(Average)

Impaired Loans

1,012

Evaluation of collateral

Estimation of value

NM*

Other real estate owned

1,124

Appraisal

Appraisal adjustment

10%

(6%)

2015

Estimated

Valuation

Range

Fair Value

Techniques

Unobservable Inputs

(Average)

Impaired Loans

603

Evaluation of collateral

Estimation of value

NM*

Other real estate owned

1,250

Appraisal

Appraisal adjustment

10%

(8%)

* Not Meaningful. Evaluations of the underlying assets are completed for each impaired loan with a specific reserve. The types of collateral vary widely and could include accounts receivables, inventory, a variety of equipment and real estate. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered included aging of receivables, condition of the collateral, potential market for the collateral and estimated disposal costs. These discounts will vary from loan to loan, thus providing a range would not be meaningful.

Accounting principles generally accepted in the United States of America (GAAP) requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below.

Fair value of financial instruments:

Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases in which quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain financial instruments with a fair value that is not practicable to estimate and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Company.

The following disclosures represent financial instruments in which the ending balances at March 31, 2016 and December 31, 2015 are not carried at fair value in their entirety on the consolidated balance sheets.

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

Table Of Contents

Securities available-for-sale: Fair value measurement for Level 1 securities is based upon quoted prices. Fair value measurement for Level 2 securities are based upon quoted prices, if available. If quoted prices are not available, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. Level 1 securities include U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. U.S government mortgage-backed securities, state and political subdivisions, some corporate bonds and other equity securities are reported at fair value utilizing Level 2 inputs.

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.

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

Securities sold under agreements to repurchase: The carrying amounts of securities sold under agreements to repurchase approximate fair value because of the generally short-term nature of the instruments.

FHLB advances and other borrowings: Fair values of FHLB advances and other 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 accrued interest payable approximate fair value.

Commitments to extend credit and standby letters of credit: The fair values of commitments to extend credit and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and credit worthiness of the counterparties. The carrying value and fair value of the commitments to extend credit and standby letters of credit are not considered significant.

Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Table Of Contents

The estimated fair values of the Company’s financial instruments as described above as of March 31, 2016 and December 31, 2015 are as follows: (in thousands)

		2016				2015
	Fair Value			Estimated				Estimated
	Hierarchy	Carrying		Fair		Carrying		Fair
	Level	Amount		Value		Amount		Value

Financial assets:
Cash and due from banks	Level 1	$	21,621	$	21,621	$	24,006	$	24,006
Interest bearing deposits	Level 1		59,739		59,739		26,993		26,993
Securities available-for-sale	See previous table		523,273		523,273		537,633		537,633
Loans receivable, net	Level 2		695,627		691,935		701,328		702,438
Loans held for sale	Level 2		444		444		539		539
Accrued income receivable	Level 1		7,381		7,381		7,566		7,566
Financial liabilities:
Deposits	Level 2	$	1,083,854	$	1,085,214	$	1,074,193	$	1,075,289
Securities sold under agreements to repurchase	Level 1		50,380		50,380		54,290		54,290
FHLB advances	Level 2		15,500		15,897		18,542		19,017
Other borrowings	Level 2		13,000		13,727		13,000		13,807
Accrued interest payable	Level 1		410		410		413		413

The methodologies used to determine fair value as of March 31, 2016 did not change from the methodologies described in the December 31, 2015 Annual Financial Statements.

Table Of Contents

6. Debt and Equity Securities

The amortized cost of securities available-for-sale and their fair values as of March 31, 2016 and December 31, 2015 are summarized below: (in thousands)

2016:			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value

U.S. government treasuries	$	1,448	$	43	$	-		$	1,491
U.S. government agencies		103,728		1,996		(16	)		105,708
U.S. government mortgage-backed securities		88,414		2,217		(17	)		90,614
State and political subdivisions		265,624		5,135		(365	)		270,394
Corporate bonds		51,730		562		(266	)		52,026
Equity securities, other		3,040		-		-			3,040
	$	513,984	$	9,953	$	(664	)	$	523,273

2015:			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value

U.S. government treasuries	$	1,444	$	23	$	-		$	1,467
U.S. government agencies		105,948		797		(300	)		106,445
U.S. government mortgage-backed securities		96,373		1,828		(123	)		98,078
State and political subdivisions		273,771		4,359		(533	)		277,597
Corporate bonds		51,414		227		(751	)		50,890
Equity securities, other		3,156		-		-			3,156
	$	532,106	$	7,234	$	(1,707	)	$	537,633

The proceeds, gains and losses from securities available-for-sale are summarized as follows: (in thousands)

	Three Months Ended
	March 31,
	2016			2015
Proceeds from sales of securities available-for-sale	$	12,365		$	517

Gross realized gains on securities available-for-sale		208			5

Gross realized losses on securities available-for-sale		(6	)		-
Tax provision applicable to net realized gains on securities available-for-sale		71			2

Table Of Contents

Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are summarized as of March 31, 2016 and December 31, 2015 are as follows: (in thousands)

	Less than 12 Months					12 Months or More					Total
2016:	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses

Securities available-for-sale:
U.S. government agencies	$	3,038	$	(16	)	$	-	$	-		$	3,038	$	(16	)
U.S. government mortgage-backed securities		2,503		(2	)		2,791		(15	)		5,294		(17	)
State and political subdivisions		21,955		(337	)		3,874		(28	)		25,829		(365	)
Corporate bonds		6,823		(47	)		9,369		(219	)		16,192		(266	)
	$	34,319	$	(402	)	$	16,034	$	(262	)	$	50,353	$	(664	)

	Less than 12 Months					12 Months or More					Total
2015:	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Securities available-for-sale:
U.S. government agencies	$	30,245	$	(253	)	$	3,121	$	(47	)	$	33,366	$	(300	)
U.S. government mortgage-backed securities		22,842		(123	)		-		-			22,842		(123	)
State and political subdivisions		38,202		(414	)		11,096		(119	)		49,298		(533	)
Corporate bonds		22,091		(249	)		14,614		(502	)		36,705		(751	)
	$	113,380	$	(1,039	)	$	28,831	$	(668	)	$	142,211	$	(1,707	)

Gross unrealized losses on debt securities totaled $664,000 as of March 31, 2016. These unrealized losses are generally due to changes in interest rates or general market conditions. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, state or political subdivision, or corporations. Management then determines whether downgrades by bond rating agencies have occurred, and reviews industry analysts’ reports. The Company’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates. Management concluded that the gross unrealized losses on debt securities were temporary. Due to potential changes in conditions, it is at least reasonably possible that changes in fair values and management’s assessments will occur in the near term and that such changes could materially affect the amounts reported in the Company’s financial statements.

Table Of Contents

Loans Receivable and Credit Disclosures

Activity in the allowance for loan losses, on a disaggregated basis, for the three months ended March 31, 2016 and 2015 is as follows: (in thousands)

	Three Months Ended March 31, 2016
				1-4 Family
	Construction			Residential			Commercial		Agricultural							Consumer
	Real Estate			Real Estate			Real Estate		Real Estate		Commercial			Agricultural		and Other			Total
Balance, December 31, 2015	$	999		$	1,806		$	3,557	$	760	$	1,371		$	1,256	$	239		$	9,988
Provision (credit) for loan losses		(212	)		(51	)		206		57		105			66		21			192
Recoveries of loans charged-off		-			2			-		-		1			-		1			4
Loans charged-off		-			-			-		-		(77	)		-		(5	)		(82	)
Balance, March 31, 2016	$	787		$	1,757		$	3,763	$	817	$	1,400		$	1,322	$	256		$	10,102

	Three Months Ended March 31, 2015
			1-4 Family
	Construction		Residential		Commercial		Agricultural								Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial			Agricultural			and Other		Total
Balance, December 31, 2014	$	495	$	1,648	$	3,214	$	737	$	1,247		$	1,312		$	186	$	8,839
Provision (credit) for loan losses		36		100		24		32		(111	)		(14	)		10		77
Recoveries of loans charged-off		5		4		-		-		1			1			1		12
Loans charged-off		-		-		-		-		-			(2	)		-		(2	)
Balance, March 31, 2015	$	536	$	1,752	$	3,238	$	769	$	1,137		$	1,297		$	197	$	8,926

Allowance for loan losses disaggregated on the basis of impairment analysis method as of March 31, 2016 and December 31, 2015 is as follows: (in thousands)

2016			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	162	$	-	$	-	$	207	$	-	$	-	$	369
Collectively evaluated for impairment		787		1,595		3,763		817		1,193		1,322		256		9,733
Balance March 31, 2016	$	787	$	1,757	$	3,763	$	817	$	1,400	$	1,322	$	256	$	10,102

2015			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	273	$	2	$	-	$	164	$	-	$	-	$	439
Collectively evaluated for impairment		999		1,533		3,555		760		1,207		1,256		239		9,549
Balance December 31, 2015	$	999	$	1,806	$	3,557	$	760	$	1,371	$	1,256	$	239	$	9,988

Table Of Contents

Loans receivable disaggregated on the basis of impairment analysis method as of March 31, 2016 and December 31, 2015 is as follows (in thousands):

2016			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	1,140	$	505	$	-	$	744	$	11	$	85	$	2,485
Collectively evaluated for impairment		48,933		133,997		276,840		66,868		75,261		79,218		22,216		703,333

Balance March 31, 2016	$	48,933	$	135,137	$	277,345	$	66,868	$	76,005	$	79,229	$	22,301	$	705,818

2015			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	1,050	$	558	$	-	$	197	$	11	$	2	$	1,818
Collectively evaluated for impairment		66,268		126,026		251,331		62,530		102,318		79,522		21,597		709,592

Balance December 31, 2015	$	66,268	$	127,076	$	251,889	$	62,530	$	102,515	$	79,533	$	21,599	$	711,410

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.

Table Of Contents

The following is a recap of impaired loans, on a disaggregated basis, as of March 31, 2016 and December 31, 2015: (in thousands)

	2016						2015
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no specific reserve recorded:
Real estate - construction	$	-	$	31	$	-	$	-	$	31	$	-
Real estate - 1 to 4 family residential		493		508		-		296		304		-
Real estate - commercial		505		1,096		-		456		1,030		-
Real estate - agricultural		-		-		-		-		-		-
Commercial		10		17		-		11		17		-
Agricultural		11		13		-		11		13		-
Consumer and other		85		86		-		2		2		-
Total loans with no specific reserve:		1,104		1,751		-		776		1,397		-

With an allowance recorded:
Real estate - construction		-		-		-		-		-		-
Real estate - 1 to 4 family residential		647		786		162		754		891		273
Real estate - commercial		-		-		-		102		111		2
Real estate - agricultural		-		-		-		-		-		-
Commercial		734		744		207		186		262		164
Agricultural		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		-
Total loans with specific reserve:		1,381		1,530		369		1,042		1,264		439

Total
Real estate - construction		-		31		-		-		31		-
Real estate - 1 to 4 family residential		1,140		1,294		162		1,050		1,195		273
Real estate - commercial		505		1,096		-		558		1,141		2
Real estate - agricultural		-		-		-		-		-		-
Commercial		744		761		207		197		279		164
Agricultural		11		13		-		11		13		-
Consumer and other		85		86		-		2		2		-

	$	2,485	$	3,281	$	369	$	1,818	$	2,661	$	439

Table Of Contents

The following is a recap of the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2016 and 2015: (in thousands)

	Three Months Ended March 31,
	2016				2015
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no specific reserve recorded:
Real estate - construction	$	-	$	-	$	192	$	-
Real estate - 1 to 4 family residential		395		1		72		-
Real estate - commercial		481		-		633		-
Real estate - agricultural		-		-		-		-
Commercial		11		-		458		3
Agricultural		11		-		15		-
Consumer and other		44		-		6		1
Total loans with no specific reserve:		942		1		1,376		4

With an allowance recorded:
Real estate - construction		-		-		-		-
Real estate - 1 to 4 family residential		701		5		783		-
Real estate - commercial		51		-		157		-
Real estate - agricultural		-		-		-		-
Commercial		460		-		81		-
Agricultural		-		-		-		-
Consumer and other		-		-		-		-
Total loans with specific reserve:		1,212		5		1,021		-

Total
Real estate - construction		-		-		192		-
Real estate - 1 to 4 family residential		1,096		6		855		-
Real estate - commercial		532		-		790		-
Real estate - agricultural		-		-		-		-
Commercial		471		-		539		3
Agricultural		11		-		15		-
Consumer and other		44		-		6		1

	$	2,154	$	6	$	2,397	$	4

The interest foregone on nonaccrual loans for the three months ended March 31, 2016 and 2015 was approximately $39,000 and $44,000, respectively.

The Company had loans meeting the definition of a troubled debt restructuring (TDR) of $806,000 as of March 31, 2016, of which all were included in impaired loans and nonaccrual loans. The Company had TDRs of $780,000 as of December 31, 2015, all of which were included in impaired and nonaccrual loans.

Table Of Contents

The following tables sets forth information on the Company’s TDRs, on a disaggregated basis, occurring in the three months ended March 31, 2016 and 2015: (dollars in thousands)

	Three Months Ended March 31,
	2016						2015
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment

Real estate - construction		-	$	-	$	-		-	$	-	$	-
Real estate - 1 to 4 family residential		-		-		-		-		-		-
Real estate - commercial		-		-		-		-		-		-
Real estate - agricultural		-		-		-		-		-		-
Commercial		-		-		-		-		-		-
Agricultural		-		-		-		-		-		-
Consumer and other		3		70		70		-		-		-

		3	$	70	$	70		-	$	-	$	-

During the three months ended March 31, 2016, the Company granted concessions to borrowers experiencing financial difficulties for three loans. The three consumer loans were extended beyond normal terms at an interest rate below a market interest rate.

The Company did not grant any concessions on any significant loans experiencing financial difficulties during the three months ended March 31, 2015.

The Company considers TDR loans to have payment default when it is past due 60 days or more.

No TDR loan modified during the twelve months ended March 31, 2016 and 2015 had a payment default.

There were no charge-offs related to TDRs for the three months ended March 31, 2016 and 2015.

Table Of Contents

An aging analysis of the recorded investments in loans, on a disaggregated basis, as of March 31, 2016 and December 31, 2015, is as follows: (in thousands)

2016			90 Days								90 Days
	30-89		or Greater		Total						or Greater
	Past Due		Past Due		Past Due		Current		Total		Accruing

Real estate - construction	$	-	$	-	$	-	$	48,933	$	48,933	$	-
Real estate - 1 to 4 family residential		1,124		184		1,308		133,829		135,137		-
Real estate - commercial		-		-		-		277,345		277,345		-
Real estate - agricultural		-		-		-		66,868		66,868		-
Commercial		1,968		94		2,062		73,943		76,005		-
Agricultural		174		-		174		79,055		79,229		-
Consumer and other		48		3		51		22,250		22,301		-

	$	3,314	$	281	$	3,595	$	702,223	$	705,818	$	-

2015			90 Days								90 Days
	30-89		or Greater		Total						or Greater
	Past Due		Past Due		Past Due		Current		Total		Accruing

Real estate - construction	$	-	$	-	$	-	$	66,268	$	66,268	$	-
Real estate - 1 to 4 family residential		1,311		307		1,618		125,458		127,076		75
Real estate - commercial		1,356		-		1,356		250,533		251,889		-
Real estate - agricultural		-		-		-		62,530		62,530		-
Commercial		266		204		470		102,045		102,515		-
Agricultural		-		-		-		79,533		79,533		-
Consumer and other		79		-		79		21,520		21,599		-

	$	3,012	$	511	$	3,523	$	707,887	$	711,410	$	75

Table Of Contents

The credit risk profile by internally assigned grade, on a disaggregated basis, as of March 31, 2016 and December 31, 2015 is as follows: (in thousands)

2016	Construction		Commercial		Agricultural
	Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total

Pass	$	43,139	$	254,233	$	54,996	$	59,317	$	59,092	$	470,777
Watch		4,625		16,027		11,392		13,940		18,141		64,125
Special Mention		-		770		-		185		41		996
Substandard		1,169		5,810		480		1,819		1,944		11,222
Substandard-Impaired		-		505		-		744		11		1,260

	$	48,933	$	277,345	$	66,868	$	76,005	$	79,229	$	548,380

2015	Construction		Commercial		Agricultural
	Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total

Pass	$	60,700	$	227,425	$	55,503	$	91,096	$	71,457	$	506,181
Watch		4,487		17,523		6,865		8,329		7,156		44,360
Special Mention		-		388		-		224		81		693
Substandard		1,081		5,995		162		2,669		828		10,735
Substandard-Impaired		-		558		-		197		11		766

	$	66,268	$	251,889	$	62,530	$	102,515	$	79,533	$	562,735

The credit risk profile based on payment activity, on a disaggregated basis, as of March 31, 2016 and December 31, 2015 is as follows:

2016	1-4 Family
	Residential		Consumer
	Real Estate		and Other		Total

Performing	$	133,994	$	22,221	$	156,215
Non-performing		1,143		80		1,223

	$	135,137	$	22,301	$	157,438

2015	1-4 Family
	Residential		Consumer
	Real Estate		and Other		Total

Performing	$	125,951	$	21,597	$	147,548
Non-performing		1,125		2		1,127

	$	127,076	$	21,599	$	148,675

Table Of Contents

Other Real Estate Owned

The following table provides the composition of other real estate owned as of March 31, 2016 and December 31, 2015: (in thousands)

	2016		2015

Construction and land development	$	739	$	739
1 to 4 family residential real estate		385		511

	$	1,124	$	1,250

The Company is actively marketing the assets referred to in the table above. Management uses appraised values and adjusts for trends observed in the market and for disposition costs in determining the value of other real estate owned. The assets above are primarily located in the Ames, Iowa area.

Goodwill

Goodwill is not amortized but is evaluated for impairment at least annually. For income tax purposes, goodwill is amortized over fifteen years.

10. Core deposit intangible asset

The following sets forth the carrying amounts and accumulated amortization of core deposit intangible assets at March 31, 2016 and December 31, 2015: (in thousands)

	2016				2015
	Gross		Accumulated		Gross		Accumulated
	Amount		Amortization		Amount		Amortization

Core deposit intangible asset	$	2,518	$	1,304	$	2,518	$	1,209

The weighted average life of the core deposit intangible is 3 years as of March 31, 2016 and December 31, 2015.

Table Of Contents

The following sets forth the activity related to core deposit intangible assets for the three months ended March 31, 2016 and 2015: (in thousands)

	Three Months Ended
	March 31,
	2016			2015

Beginning core deposit intangible, net	$	1,309		$	1,730
Amortization		(95	)		(113	)

Ending core deposit intangible, net	$	1,214		$	1,617

Estimated remaining amortization expense on core deposit intangible for the years ending December 31^st is as follows: (in thousands)

2016	$	258
2017		298
2018		251
2019		128
2020		71
2021		71
After		137

	$	1,214

Table Of Contents

11.

Secured Borrowings

The following sets forth the pledged collateral at estimated fair value related to securities sold under repurchase agreements and term repurchase agreements as of March 31, 2016 and December 31, 2015: (in thousands)

	2016						2015
	Remaining Contractual Maturity of the Agreements
			Greater than						Greater than
	Overnight		90 days		Total		Overnight		90 days		Total

Securities sold under agreements to repurchase:
U.S. government treasuries	$	1,491	$	-	$	1,491	$	1,467	$	-	$	1,467
U.S. government agencies		47,371		-		47,371		46,755		-		46,755
U.S. government mortgage-backed securities		37,678		-		37,678		41,657		-		41,657

Total	$	86,540	$	-	$	86,540	$	89,879	$	-	$	89,879

Term repurchase agreements (Other 3borrowings):
U.S. government agencies	$	-	$	14,324	$	14,324	$	-	$	12,503	$	12,503
U.S. government mortgage-backed securities		-		449		449		-		676		676

Total	$	-	$	14,773	$	14,773	$	-	$	13,179	$	13,179

Total pledged collateral	$	86,540	$	14,773	$	101,313	$	89,879	$	13,179	$	103,058

In the event the repurchase agreements exceed the estimated fair value of the pledged securities available-for-sale, the Company has unpledged securities available-for-sale that may be pledged on the repurchase agreements.

Table Of Contents

12.

Regulatory Matters

The Company and the Banks capital amounts and ratios are as follows: (dollars in thousands)

											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of March 31, 2016:
Total capital (to risk- weighted assets):
Consolidated	$	157,291		16.615	%	$	75,735		8.000	%		N/A		N/A
Boone Bank & Trust		14,675		15.281			7,683		8.000		$	9,603		10.000	%
First National Bank		75,026		15.751			38,107		8.000			47,633		10.000
Reliance State Bank		24,683		13.655			14,461		8.000			18,076		10.000
State Bank & Trust		19,861		16.720			9,503		8.000			11,878		10.000
United Bank & Trust		14,714		20.822			5,653		8.000			7,067		10.000

Tier 1 capital (to risk- weighted assets):
Consolidated	$	146,660		15.492	%	$	56,801		6.000	%		N/A		N/A
Boone Bank & Trust		13,719		14.286			5,762		6.000		$	7,683		8.000	%
First National Bank		69,982		14.692			28,580		6.000			38,107		8.000
Reliance State Bank		22,745		12.583			10,846		6.000			14,461		8.000
State Bank & Trust		18,373		15.468			7,127		6.000			9,503		8.000
United Bank & Trust		13,950		19.741			4,240		6.000			5,653		8.000

Tier 1 capital (to average- weighted assets):
Consolidated	$	146,660		11.306	%	$	51,888		4.000	%		N/A		N/A
Boone Bank & Trust		13,719		10.309			5,323		4.000		$	6,654		5.000	%
First National Bank		69,982		10.112			27,682		4.000			34,603		5.000
Reliance State Bank		22,745		10.791			8,431		4.000			10,539		5.000
State Bank & Trust		18,373		11.936			6,157		4.000			7,697		5.000
United Bank & Trust		13,950		12.527			4,454		4.000			5,568		5.000

Common equity tier 1 capital (to risk-weighted assets):
Consolidated	$	146,660		15.492	%	$	42,601		4.500	%		N/A		N/A
Boone Bank & Trust		13,719		14.286			4,321		4.500		$	6,242		6.500	%
First National Bank		69,982		14.692			21,435		4.500			30,962		6.500
Reliance State Bank		22,745		12.583			8,134		4.500			11,750		6.500
State Bank & Trust		18,373		15.468			5,345		4.500			7,721		6.500
United Bank & Trust		13,950		19.741			3,180		4.500			4,593		6.500

Table Of Contents

											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of December 31, 2015:
Total capital (to risk- weighted assets):
Consolidated	$	157,926		16.6	%	$	76,179		8.0	%		N/A		N/A
Boone Bank & Trust		14,525		15.5			7,477		8.0		$	9,346		10.0	%
First National Bank		74,210		15.3			38,859		8.0			48,574		10.0
Reliance State Bank		24,287		13.8			14,101		8.0			17,626		10.0
State Bank & Trust		19,658		16.2			9,729		8.0			12,161		10.0
United Bank & Trust		14,621		20.6			5,693		8.0			7,116		10.0

Tier 1 capital (to risk- weighted assets):
Consolidated	$	147,430		15.5	%	$	57,134		6.0	%		N/A		N/A
Boone Bank & Trust		13,569		14.5			5,608		6.0		$	7,477		8.0	%
First National Bank		69,157		14.2			29,144		6.0			38,859		8.0
Reliance State Bank		22,491		12.8			10,575		6.0			14,101		8.0
State Bank & Trust		18,135		14.9			7,297		6.0			9,729		8.0
United Bank & Trust		13,858		19.5			4,269		6.0			5,693		8.0

Tier 1 capital (to average- weighted assets):
Consolidated	$	147,430		11.3	%	$	52,657		4.0	%		N/A		N/A
Boone Bank & Trust		13,569		9.8			5,557		4.0		$	6,946		5.0	%
First National Bank		69,157		9.9			27,970		4.0			34,963		5.0
Reliance State Bank		22,491		10.7			8,380		4.0			10,476		5.0
State Bank & Trust		18,135		11.5			6,332		4.0			7,915		5.0
United Bank & Trust		13,858		12.5			4,452		4.0			5,565		5.0

Common equity tier 1 capital (to risk-weighted assets):
Consolidated	$	147,430		15.5	%	$	42,851		4.5	%		N/A		N/A
Boone Bank & Trust		13,569		14.5			4,206		4.5		$	6,075		6.5	%
First National Bank		69,157		14.2			21,858		4.5			31,573		6.5
Reliance State Bank		22,491		12.8			7,932		4.5			11,457		6.5
State Bank & Trust		18,135		14.9			5,473		4.5			7,905		6.5
United Bank & Trust		13,858		19.5			3,202		4.5			4,625		6.5

As disclosed in the Company's Form 10-K filed with the Securities and Exchange Commission on March 11, 2016, in July of 2013, the Federal Reserve Board and the FDIC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rules revise minimum capital requirements and adjust prompt corrective action thresholds. The final rules revise the regulatory capital elements, add a new common equity Tier I capital ratio, increase the minimum Tier 1 capital ratio requirements and implement a new capital conservation buffer. The rules also permit certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income. The Company and the Banks have made the election to retain the existing treatment for accumulated other comprehensive income. The final rules took effect for the Company and the Banks on January 1, 2015, subject to a transition period for certain parts of the rules.

Beginning in 2016, an additional capital conservation buffer will be added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. The capital conservation buffer will be fully phased-in on January 1, 2019 at 2.5 percent. A banking organization with a conservation buffer of less than 2.5 percent (or the required phase-in amount in years prior to 2019) will be subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. At the present time, the ratios for the Company and the Banks are sufficient to meet the fully phased-in conservation buffer.

Table Of Contents

13. Subsequent Events

Management evaluated subsequent events through the date the financial statements were issued. There were no significant events or transactions occurring after March 31, 2016, but prior to May 6, 2016, that provided additional evidence about conditions that existed at March 31, 2016. There were no other significant events or transactions that provided evidence about conditions that did not exist at March 31, 2016.

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), Reliance State Bank (Reliance Bank), and United Bank & Trust NA (United Bank). The purpose of this discussion is to focus on significant factors affecting the Company's financial condition and results of operations.

The Company does not engage in any material business activities apart from its ownership of the Banks. Products and services offered by the Banks are for commercial and consumer purposes including loans, deposits and wealth management services. The Banks also offer investment services through a third-party broker-dealer. The Company employs thirteen individuals to assist with financial reporting, human resources, audit, compliance, marketing, technology systems and the coordination of management activities, in addition to 203 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 wealth management services provided by those Banks exercising trust powers; (iv) service charges on deposit accounts maintained at the Banks and (v) Merchant and card fees. 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 Bank’s facilities; (vi) professional fees; and (vii) other real estate owned expenses. 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.

Table Of Contents

The Company had net income of $3,807,000, or $0.41 per share, for the three months ended March 31, 2016, compared to net income of $3,635,000, or $0.39 per share, for the three months ended March 31, 2015. Total equity capital as of March 31, 2016 totaled $165.5 million or 12.4% of total assets.

The increase in quarterly earnings can be primarily attributed to increased loan interest income, higher net securities gains, and lower other real estate owned expenses.

Net loan charge-offs totaled $78,000 for the three months ended March 31, 2016 and net loan recoveries totaled $10,000 for the three months ended March 31, 2015. The provision for loan losses totaled $192,000 and $77,000 for the three months ended March 31, 2016 and 2015, respectively.

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 Review 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. These challenges are addressed in the Company’s most recent Annual Report on Form 10-K filed on March 11, 2016.

Key Performance Indicators and Industry Results

Certain key performance indicators for the Company and the industry are presented in the following chart. The industry figures are compiled by the Federal Deposit Insurance Corporation (the “FDIC”) and are derived from 6,182 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.

Table Of Contents

Selected Indicators for the Company and the Industry

	Quarter Ended
	March 31,			Years Ended December 31,
	2016			2015						2014						2013
	Company			Company			Industry *			Company			Industry			Company			Industry

Return on assets		1.16	%		1.13	%		1.04	%		1.21	%		1.01	%		1.14	%		1.07	%

Return on equity		9.28	%		9.44	%		9.31	%		10.09	%		9.03	%		9.76	%		9.56	%

Net interest margin		3.36	%		3.33	%		3.07	%		3.31	%		3.14	%		3.18	%		3.26	%

Efficiency ratio		53.91	%		53.59	%		59.91	%		53.37	%		61.88	%		52.78	%		60.54	%

Capital ratio		12.50	%		12.00	%		9.59	%		12.05	%		9.46	%		11.67	%		9.41	%

*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 1.16% and 1.10% for the three months ended March 31, 2016 and 2015, respectively. The increase in this ratio in 2016 from the previous period is due to an increase in net income associated with increased loan interest income, higher net securities gains, and lower other real estate owned expenses.

● 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 remained relatively unchanged at 9.28% and 9.25% for the three months ended March 31, 2016 and 2015, respectively.

● Net Interest Margin

The net interest margin for the three months ended March 31, 2016 and 2015 was 3.36% and 3.27%, 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 increase in this ratio in 2016 is primarily the result of an increase in the average balance of loans, offset in part by a decrease in the average balances of investment securities.

● 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 remained relatively unchanged at 53.91% and 54.76% for the three months ended March 31, 2016 and 2015, respectively.

Table Of Contents

● 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 of 12.50% as of March 31, 2016 is significantly higher than the industry average as of December 31, 2015.

Industry Results

The FDIC Quarterly Banking Profile reported the following results for the fourth quarter of 2015:

Earnings and Profitability Register Year-Over-Year Improvement

Declines in expenses for litigation at a few large banks combined with moderate revenue growth to lift fourth-quarter net income at FDIC-insured institutions to $40.8 billion, an increase of $4.4 billion (11.9%) compared with fourth quarter 2014. The improving trend in earnings was widespread. More than half of all banks, or 56.6%, reported year-over-year increases in quarterly net income. Meanwhile, the percentage of banks reporting negative quarterly net income fell to 9.1%, from 9.9% in the year-ago year. The average return on assets (ROA) rose to 1.03% from 0.95% in fourth quarter 2014.

Margins Improve at Large Banks

Net operating revenue—the sum of net interest income and total noninterest income—totaled $174.3 billion in the fourth quarter, up $6.8 billion (4.1%) from a year earlier. More than two-thirds of all banks, or 68%, reported year-over-year growth in revenues. Noninterest income was $3 billion (5%) higher, as servicing income rose by $2.1 billion (178%), and gains on asset sales were $984 million (32%) higher. Net interest income increased by $3.9 billion (3.6%) compared with fourth quarter 2014. The average net interest margin (NIM) was 3.13%, slightly higher than the 3.12% average the year before. This is the first time in five years that the average quarterly NIM hasn’t been lower than the year earlier. Most of the margin improvement occurred at larger banks, whose asset portfolios were better-positioned to benefit from the increase in short-term interest rates late in the quarter. Only 45% of all banks reported year-over-year NIM improvement.

Litigation Expenses Fall 80%

Total noninterest expenses were $2.7 billion (2.5%) lower than in the year-ago quarter. Itemized litigation expenses at a few of the largest banks totaled $616 million, a decline of $2.4 billion (80%) from fourth quarter 2014. Salary and employee benefit expenses were $1.2 billion (2.5%) higher, while expenses for premises and other fixed assets rose $313 million (2.7%).

Loss Provisions Rise to Three-Year High

Provisions for loan and lease losses increased year over year for a sixth consecutive quarter, rising by $3.8 billion (45.5%). The $12 billion in provisions that banks set aside in the fourth quarter is the largest quarterly total in three years. About 37% of banks reported higher quarterly provisions, while a similar proportion reported reductions in their loss provisions.

Table Of Contents

Charge-Offs Rise in C&I, Consumer Portfolios

Net charge-offs totaled $10.6 billion in the fourth quarter, an increase of $690 million (7%) from a year earlier. This is the first year-over-year increase in quarterly charge-offs in 22 quarters. Net charge-offs of loans to commercial and industrial (C&I) borrowers rose by $512 million (43.4%), as lower oil prices adversely affected some energy sector borrowers. Credit card charge-offs were $292 million (5.6%) higher, an increase largely in line with the growth in total credit card balances. Net charge-offs of auto loans increased by $105 million (15.9%). All other major loan categories had lower charge-offs than a year ago. The average net charge-off rate in the fourth quarter was 0.49%, almost unchanged from the 0.48% average in fourth quarter 2014.

Pace of Loan Growth Accelerates

Total assets increased by $167.8 billion (1.1%) during the quarter. Total loans and leases rose by $197.3 billion (2.3%), as credit card balances had a largely seasonal $41.7 billion (5.8%) increase, C&I loans increased by $39.6 billion (2.2%), and nonfarm nonresidential real estate loans rose by $31.6 billion (2.6%). In addition, loans to nondepository financial institutions increased $17.1 billion (6.5%), and multifamily residential real estate loans rose by $15 billion (4.6%). Loans to small businesses and farms increased $7.1 billion (1.1%). Investment securities holdings grew by $49.6 billion (1.5%). Banks reduced their balances with Federal Reserve banks by $42 billion (3.4%), with most of the decline occurring at a few of the largest banks. Assets in trading accounts fell by $22.1 billion (3.8%).

Deposits Continue to Fund Asset Growth

Total deposits increased by $199.4 billion (1.7%) during the fourth quarter, as deposits in domestic offices rose by $255.9 billion (2.4%), and foreign office deposits declined by $56.5 billion (4.2%). Interest-bearing domestic deposits were up $215.1 billion (2.8%), while noninterest-bearing deposits rose by $40.7 billion (1.4%). Banks reduced their nondeposit liabilities by $35.9 billion (1.8%) during the quarter.

Problem List’ Falls Below 200 Institutions

The number of FDIC-insured commercial banks and savings institutions reporting quarterly financial results declined from 6,270 to 6,182 in the fourth quarter. Mergers absorbed 81 institutions in the three months ended December 31, while two insured institutions failed. No new charters were added in the fourth quarter. Banks reported 2,033,758 full-time equivalent employees in the quarter, down from 2,038,490 in the third quarter and 2,047,945 a year ago.

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 December 31, 2015 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” accompanying the Company’s audited financial statements. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified the allowance for loan losses, the assessment of other-than-temporary impairment for investment securities and the assessment of goodwill to be the Company’s most critical accounting policies.

Table Of Contents

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 various considerations regarding 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 changes 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.

For further discussion concerning the allowance for loan losses and the process of establishing specific reserves, see the section of this Annual Report entitled “Asset Quality Review and Credit Risk Management” and “Analysis of the Allowance for Loan Losses”.

Fair Value and Other-Than-Temporary Impairment of Investment Securities

The Company’s securities available-for-sale portfolio is carried at fair value with “fair value” being defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

Declines in the fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are 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 changes 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.

Goodwill

Goodwill arose in connection with two acquisitions. Goodwill is tested annually for impairment or more often if conditions indicate a possible impairment. For the purposes of goodwill impairment testing, determination of the fair value of a reporting unit involves the use of significant estimates and assumptions. Impairment would arise if the fair value of a reporting unit is less than its carrying value. At March 31, 2016, Company’s management has completed the goodwill impairment assessment and determined goodwill was not impaired. Actual future test results may differ from the present evaluation of impairment due to changes in the conditions used in the current evaluation.

Table Of Contents

Income Statement Review for the Three Months ended March 31, 2016

The following highlights a comparative discussion of the major components of net income and their impact for the three months ended March 31, 2016 and 2015:

AVERAGE BALANCES AND INTEREST RATES

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

AVERAGE BALANCE SHEETS AND INTEREST RATES

	Three Months Ended March 31,
	2016							2015
	Average		Revenue/		Yield/			Average		Revenue/		Yield/
	balance		expense		rate			balance		expense		rate
ASSETS
(dollars in thousands)
Interest-earning assets
Loans 1
Commercial	$	99,726	$	1,103		4.42	%	$	91,417	$	1,016		4.44	%
Agricultural		74,668		916		4.91	%		74,025		865		4.68	%
Real estate		507,753		5,642		4.44	%		479,311		5,351		4.47	%
Consumer and other		22,019		196		3.57	%		16,091		168		4.17	%

Total loans (including fees)		704,166		7,857		4.46	%		660,844		7,400		4.48	%

Investment securities
Taxable		265,529		1,495		2.25	%		272,519		1,566		2.30	%
Tax-exempt 2		257,369		2,155		3.35	%		264,869		2,286		3.45	%
Total investment securities		522,898		3,650		2.79	%		537,388		3,852		2.87	%

Interest bearing deposits with banks and federal funds sold		31,750		96		1.21	%		53,863		93		0.69	%

Total interest-earning assets		1,258,814	$	11,603		3.69	%		1,252,095	$	11,345		3.62	%

Noninterest-earning assets		54,239							64,817

TOTAL ASSETS	$	1,313,053						$	1,316,912

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%.

Table Of Contents

AVERAGE BALANCE SHEETS AND INTEREST RATES

	Three Months Ended March 31,
	2016								2015
	Average		Revenue/			Yield/			Average		Revenue/			Yield/
	balance		expense			rate			balance		expense			rate
LIABILITIES AND STOCKHOLDERS' EQUITY
(dollars in thousands)
Interest-bearing liabilities Deposits
NOW, savings accounts and money markets	$	652,629	$	310			0.19	%	$	628,094	$	267			0.17	%
Time deposits > $100,000		90,306		199			0.88	%		91,179		208			0.91	%
Time deposits < $100,000		127,918		241			0.75	%		145,100		287			0.79	%
Total deposits		870,853		750			0.34	%		864,373		762			0.35	%
Other borrowed funds		80,098		263			1.32	%		94,217		338			1.44	%

Total Interest-bearing liabilities		950,951		1,013			0.43	%		958,590		1,100			0.46	%

Noninterest-bearing liabilities
Demand deposits		191,189								194,239
Other liabilities		6,745								6,817

Stockholders' equity		164,168								157,266

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,313,053							$	1,316,912


Net interest income			$	10,588			3.36	%			$	10,245			3.27	%

Spread Analysis
Interest income/average assets	$	11,603		3.53	%				$	11,345		3.45	%
Interest expense/average assets	$	1,013		0.31	%				$	1,100		0.33	%
Net interest income/average assets	$	10,588		3.23	%				$	10,245		3.11	%

Net Interest Income

For the three months ended March 31, 2016 and 2015, the Company's net interest margin adjusted for tax exempt income was 3.36% and 3.27%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended March 31, 2016 totaled $9,835,000 compared to $9,445,000 for the three months ended March 31, 2015.

For the three months ended March 31, 2016, interest income increased $303,000, or 2.9%, when compared to the same period in 2015. The increase from 2015 was primarily attributable to higher average balance of loans, offset in part by lower average balances of investment securities. The higher average balances of loans were due primarily to favorable economic conditions that fueled loan demand over much of the past year. The lower average balances of investments were primarily due to maturities and calls.

Table Of Contents

Interest expense decreased $87,000, or 7.9%, for the three months ended March 31, 2016 when compared to the same period in 2015. The lower interest expense for the period is primarily attributable to lower average borrowed funds balances and lower average time deposit balances, offset by higher average money market and savings balances. This decrease in time deposit and corresponding increase in money market and savings accounts is due in part to the continued low market interest rate environment.

Provision for Loan Losses

The Company’s provision for loan losses was $192,000 and $77,000 for the three months ended March 31, 2016 and 2015, respectively. Net loan charge-offs were $78,000 and net loan recoveries were $10,000 for the three months ended March 31, 2016 and 2015, respectively. The additional provision was made primarily to accommodate additional loan growth at one of our affiliate banks. Credit quality factors relating to impaired loans and past due loan volume remain favorable and comparable to those at year end for the Company. However, the agricultural economy has weakened as declining grain prices have caused lower profitability for our agricultural borrowers.

Noninterest Income and Expense

Noninterest income increased $333,000 for the three months ended March 31, 2016 compared to the same period in 2015. The increase in noninterest income is primarily due to higher gains on the sale of securities and higher wealth management income. The increase in wealth management income is due primarily to increases in estate fees. Exclusive of realized securities gains, noninterest income was 8% higher in the first quarter of 2016 compared to the same period in 2015.

Noninterest expense increased $296,000 or 4.8% for the three months ended March 31, 2016 compared to the same period in 2015 primarily as a result of increases in salaries and benefits, offset in part by a decrease in other real estate owned expense. The increase in salaries and benefits is mainly due to normal salary increases and additional lending and support staff. Other real estate owned expenses decreased due to losses in 2015 with no losses in 2016. The efficiency ratio for the first quarter of 2016 was 53.91%, compared to 54.76% in 2015.

Income Taxes

The provision for income taxes expense for the three months ended March 31, 2016 and 2015 was $1,501,000 and $1,360,000, respectively, representing an effective tax rate of 28% and 27%, respectively. The increase in effective rate is due primarily to impact of a lower level of tax-exempt interest income in 2016 compared to the same quarter in 2015.

Balance Sheet Review

As of March 31, 2016, total assets were $1,334,899,000, an $8,152,000 increase compared to December 31, 2015. The increase in assets was due primarily to an increase in interest bearing deposits in other banks, offset in part by a decrease in securities and loans. The increase in interest bearing deposits in other banks was due primarily to excess liquidity from decreases in the securities and loan portfolios and increases in public fund deposits.

Investment Portfolio

The investment portfolio totaled $523,273,000 as of March 31, 2016, a decrease of $14,360,000 or 3% from the December 31, 2015 balance of $537,633,000. The decrease in the investment portfolio was primarily due to sales, maturities and pay downs of state and political subdivision bonds and U.S. government mortgage-backed securities.

Table Of Contents

On a quarterly basis, the investment portfolio is reviewed for other-than-temporary impairment. As of March 31, 2016, gross unrealized losses of $664,000, are considered to be temporary in nature due to the interest rate environment of 2016 and other general economic factors. As a result of the Company’s favorable liquidity position, the Company does not have the intent to sell securities with an unrealized loss at the present time. In addition, management believes it is more likely than not that the Company will hold these securities until recovery of their fair value to cost basis and avoid considering present unrealized loss positions to be other-than-temporary.

At March 31, 2016, the Company’s investment securities portfolio included securities issued by 282 government municipalities and agencies located within 24 states with a fair value of $270.4 million. At December 31, 2015, the Company’s investment securities portfolio included securities issued by 283 government municipalities and agencies located within 24 states with a fair value of $277.6 million. No one municipality or agency represents a concentration within this segment of the investment portfolio. The largest exposure to any one municipality or agency as of March 31, 2016 was $5.1 million (approximately 1.9 % of the fair value of the governmental municipalities and agencies) represented by the Dubuque, Iowa Community School District to be repaid by sales tax revenues and property taxes.

The Company’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates.

Table Of Contents

The following table summarizes the total general obligation and revenue bonds in the Company’s investment securities portfolios as of March 31, 2016 and December 31, 2015 identifying the state in which the issuing government municipality or agency operates. (Dollars in thousands)

	2016				2015
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Obligations of states and political subdivisions:
General Obligation bonds:
Iowa	$	73,682	$	74,556	$	77,735	$	78,255
Texas		10,128		10,432		10,712		10,967
Pennsylvania		8,845		8,935		8,389		8,448
Minnesota		5,226		5,344		8,401		8,510
Other (2016: 16 states; 2015: 16 states)		24,795		25,367		26,449		26,916

Total general obligation bonds	$	122,676	$	124,634	$	131,686	$	133,096

Revenue bonds:
Iowa	$	134,702	$	137,456	$	134,333	$	136,705
Other (2016: 9 states; 2015: 9 states)		8,246		8,304		7,752		7,796

Total revenue bonds	$	142,948	$	145,760	$	142,085	$	144,501

Total obligations of states and political subdivisions	$	265,624	$	270,394	$	273,771	$	277,597

As of March 31, 2016 and December 31, 2015, the revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as community school facilities, college and university dormitory facilities, water utilities and electrical utilities. The revenue bonds are to be paid from primarily 8 revenue sources. The revenue sources that represent 5% or more, individually, as a percent of the total revenue bonds are summarized in the following table. (in thousands)

	2016				2015
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Revenue bonds by revenue source
Sales tax	$	86,811	$	88,981	$	88,299	$	90,145
College and universities, primarily dormitory revenues		12,149		12,357		12,153		12,298
Water		10,440		10,607		10,446		10,548
Leases		9,094		9,153		9,900		9,939
Electric		8,941		9,176		8,950		9,141
Other		15,513		15,486		12,337		12,430

Total revenue bonds by revenue source	$	142,948	$	145,760	$	142,085	$	144,501

Loan Portfolio

The loan portfolio, net of the allowance for loan losses of $10,102,000, totaled $695,627,000 as of March 31, 2016, a decrease of $5,701,000, or 0.8%, from the December 31, 2015 balance of $701,328,000. The decrease in the loan portfolio is primarily due to loan payoffs of two loans in excess of loan demand for the first quarter.

Table Of Contents

Other Real Estate Owned

Other real estate owned was $1,124,000 as of March 31, 2016, nearly unchanged from $1,250,000 as of December 31, 2015, respectively. Due to potential changes in the real estate markets, it is at least reasonably possible that management’s assessments of fair value will change in the near term and that such changes could materially affect the amounts reported in the Company’s financial statements.

Deposits

Deposits totaled $1,083,854,000 as of March 31, 2016, an increase of $9,661,000, or 0.9%, from the December 31, 2015 balance of $1,074,193,000. The increase in deposits was primarily due to increases in public funds.

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase totaled $50,380,000 as of March 31, 2016, a decrease of $3,910,000, or 7%, from the December 31, 2015 balance of $54,290,000.

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, 2015.

Asset Quality Review and Credit Risk Management

The Company’s credit risk is historically centered in the loan portfolio, which on March 31, 2016 totaled $695,627,000 compared to $701,328,000 as of December 31, 2015. Net loans comprise 52.1% of total assets as of March 31, 2016. 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 nonaccrual loans and loans past due 90 days or more) as a percentage of total loans was 0.35% at March 31, 2016, as compared to 0.24% at December 31, 2015 and 0.36% at March 31, 2015. The Company’s level of problem loans as a percentage of total loans at March 31, 2016 of 0.35% is lower than the Company’s peer group (329 bank holding companies with assets of $1 billion to $3 billion) of 0.83% as of December 31, 2015.

Impaired loans, net of specific reserves, totaled $2,116,000 as of March 31, 2016 and have increased $737,000 as compared to the impaired loans of $1,379,000 as of December 31, 2015. The increase in impaired loans since December 31, 2015 is primarily due to a deterioration of one credit relationship in the commercial operating portfolio.

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.

Table Of Contents

The Company had TDRs of $806,000 as of March 31, 2016, of which all were included in impaired loans and on nonaccrual status. The Company had TDRs of $780,000 as of December 31, 2015, all of which were included in impaired and nonaccrual loans.

TDRs are monitored and reported on a quarterly basis. Certain TDRs are on nonaccrual status at the time of restructuring. These borrowings are typically returned to accrual status after the following: sustained repayment performance in accordance with the restructuring agreement for a reasonable period of at least six months; and, management is reasonably assured of future performance. If the TDR meets these performance criteria and the interest rate granted at the modification is equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk, then the loan will return to performing status.

For TDRs that were on nonaccrual status before the modification, a specific reserve may already be recorded. In periods subsequent to modification, the Company will continue to evaluate all TDRs for possible impairment and, as necessary, recognize impairment through the allowance. The Company had no charge-off related to TDRs for the three months ended March 31, 2016 and no charge-offs related to TDRs for the three months ended March 31, 2015.

Loans past due 90 days or more that are still accruing interest are reviewed 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 March 31, 2016, non-accrual loans totaled $2,486,000 and there were no loans past due 90 days and still accruing. This compares to non-accrual loans of $1,815,000 and loans past due 90 days and still accruing totaled $75,000 as of December 31, 2015. Other real estate owned totaled $1,124,000 as of March 31, 2016 and $1,250,000 as of December 31, 2015.

The allowance for loan losses as a percentage of outstanding loans as of March 31, 2016 was 1.43%, as compared to 1.40% at December 31, 2015. The allowance for loan losses totaled $10,102,000 and $9,988,000 as of March 31, 2016 and December 31, 2015, respectively. Net charge-offs of loans totaled $78,000 for the three months ended March 31, 2016 as compared to net recoveries of loans of $10,000 for the three months ended March 31, 2015.

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

Liquidity and Capital Resources

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

Liquidity is derived primarily from core deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity and prepayment of securities available-for-sale; 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.

Table Of Contents

As of March 31, 2016, the level of liquidity and capital resources of the Company remain at a satisfactory level. 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 the Company’s Current Liquidity Sources

●

Review of Statements of Cash Flows

●

Company Only Cash Flows

●

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

●

Capital Resources

Review of the Company’s Current Liquidity Sources

Liquid assets of cash and due from banks and interest-bearing deposits in financial institutions as of March 31, 2016 and December 31, 2015 totaled $81,360,000 and $50,999,000, respectively, and provide a level of liquidity.

Other sources of liquidity available to the Banks as of March 31, 2016 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $177,444,000, with $15,500,000 of outstanding FHLB advances at March 31, 2016. Federal funds borrowing capacity at correspondent banks was $106,750,000, with no outstanding federal fund purchase balances as of March 31, 2016. The Company had securities sold under agreements to repurchase totaling $50,380,000 and term repurchase agreements of $13,000,000.

Total investments as of March 31, 2016 were $523,272,000 compared to $537,633,000 as of December 31, 2015. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of March 31, 2016.

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 and payments represent a significant source of liquidity.

Review of Statements of Cash Flows

Net cash provided by operating activities for the three months ended March 31, 2016 totaled $6,342,000 compared to the $6,581,000 for the three months ended March 31, 2015. The increase of $239,000 in net cash provided by operating activities was primarily due to changes in assets and liabilities.

Net cash used in investing activities for the three months ended March 31, 2016 was $9,582,000 compared to $41,844,000 for the three months ended March 31, 2015. The decrease in cash used in investing activities of $32,262,000 was primarily due to investment activity and changes in loans.

Net cash provided by financing activities for the three months ended March 31, 2016 totaled $856,000 compared to $36,477,000 for the three months ended March 31, 2015. The decrease of $35,621,000 in net cash provided by financing activities was primarily due to the change in deposits and securities sold under repurchase agreements. As of March 31, 2016, the Company did not have any external debt financing, off-balance sheet financing arrangements, or derivative instruments linked to its stock.

Table Of Contents

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. Dividends paid by the Banks to the Company amounted to $2,150,000 and $1,900,000 for the three months ended March 31, 2016 and 2015, respectively. 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 $0.21 per share in 2016 from $0.20 per share in 2015.

The Company, on an unconsolidated basis, has interest bearing deposits and marketable investment securities totaling $8,762,000 as of March 31, 2016 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 other material capital expenditures or material changes in the capital resource mix are anticipated at this time. The primary cash flow uncertainty would be a sudden decline in deposits causing the Banks to liquidate securities. Historically, the Banks have maintained an adequate level of short-term marketable investments to fund the temporary declines in deposit balances. There are no known trends in liquidity and cash flow needs as of March 31, 2016 that are of concern to management.

Capital Resources

The Company’s total stockholders’ equity as of March 31, 2016 totaled $165,472,000 and was $4,220,000 higher than the $161,250,000 recorded as of December 31, 2015. The increase in stockholders’ equity was primarily due to net income and an increase in accumulated other comprehensive income, reduced by dividends declared. The increase in other comprehensive income is created by 2016 market interest rates trending lower, which resulted in higher fair values in the securities available-for-sale portfolio. At March 31, 2016 and December 31, 2015, stockholders’ equity as a percentage of total assets was 12.40% and 12.15%, respectively. The capital levels of the Company exceed applicable regulatory guidelines as of March 31, 2016.

Table Of Contents

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 2016 changed significantly when compared to 2015.

Item 4.

Controls and Procedures

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

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

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

Not applicable

Table Of Contents

Item 1.A. Risk Factors

None.

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

In November, 2015, the Company approved a Stock Repurchase Plan which provided for the repurchase of up to 100,000 shares of the Company’s common stock. As of March 31, 2016, there were 100,000 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 March 31, 2016.

Total

Number

Maximum

of Shares

Number of

Purchased as

Shares that

Total

Part of

May Yet Be

Number

Average

Publicly

Purchased

of Shares

Price Paid

Announced

Under

Period

Purchased

Per Share

Plans

The Plan

January 1, 2016 to January 31, 2016

100,000

February 1, 2016 to February 29, 2016

100,000

March 1, 2016 to March 31, 2016

100,000

Total

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other information

Not applicable

Table Of Contents

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)

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document (1)

(1) These interactive date files shall not be deemed filed for purposes of Section 11 or 12 of the Securities 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.

Table Of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AMES NATIONAL CORPORATION

DATE: May 6, 2016

By: /s/ Thomas H. Pohlman

Thomas H. Pohlman, Chief Executive Officer and President

By: /s/ John P. Nelson

John P. Nelson, Chief Financial Officer and Vice President

Table Of Contents

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 (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)

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document (1)