UNITED
      STATES


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-K**





Annual
      Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934




For
                the fiscal year ended December 31, 2006.
            
            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 No.)








**405
                FIFTH STREET, AMES, IOWA**
            
            **50010**(Address
                of principal executive offices)
            
            (Zip
                Code)





**(515)
      232-6251**


(Registrant's
      telephone number, including area code)





Securities
      registered pursuant to Section 12(b) of the Exchange
      Act:  **NONE**





Securities
      registered pursuant to Section 12(g) of the Exchange Act:





**COMMON
      STOCK, $2.00 PAR VALUE**


(Title
      of
      Class)





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.    Yes o    No
x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Exchange Act.    Yes
o    No
x





Note
–
      Checking the box above will not relieve any registrant required to file reports
      pursuant to Section 13 or 15(d) of the Exchange Act from their obligations
      under
      those Sections.





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





Indicate
      by check mark if disclosure of
      delinquent filers pursuant to Item 405 of Regulation S-K is not contained
      herein, and will not be contained, to the best of registrant’s knowledge, in
      definitive proxy or information statements incorporated by reference in Part
      III
      of this Form 10-K or any amendment to this Form 10-K.  x





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


Large
                  accelerated filer o
              
              Accelerated
                  filer  x
              
              Non-accelerated
                  filer o


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




As
      of June 30, 2006, the aggregate
      market value of voting stock held by non-affiliates of the registrant, based
      upon the closing sale price for the registrant’s common stock in the NASDAQ
      Capital Market, was $195,454,346.  Shares of common stock beneficially
      owned by each executive officer and director of the Company and by each person
      who beneficially owns 5% or more of the outstanding common stock have been
      excluded on the basis that such persons may be deemed to be an affiliate of
      the
      registrant.  This determination of affiliate status is not necessarily
      a conclusive determination for any other purpose.





The
      number of shares outstanding of the
      registrant’s common stock on February 28, 2007, was 9,425,013.





**DOCUMENTS
      INCORPORATED BY REFERENCE**




Portions
      of the registrant’s definitive
      proxy statement, as filed with the Securities and Exchange Commission on March
      16, 2007, are incorporated by reference into Part III of this Form
      10-K.





1




TABLE
      OF CONTENTS





**Part
                I**Item
                1.
            
            BusinessItem
                1A.
            
            Risk
                FactorsItem
                1B.
            
            Unresolved
                Staff CommentsItem
                2.
            
            PropertiesItem
                3.
            
            Legal
                ProceedingsItem
                4.
            
            Submission
                of Matters to a Vote of
                Shareholders**Part
                II**Item
                5.
            
            Market
                for Registrant’s Common Equity, Related Shareholder
                Matters, and Issuer Purchases of Equity SecuritiesItem
                6.
            
            Selected
                Financial DataItem
                7.
            
            Management’s
                Discussion and Analysis of Financial Condition and
                Results of OperationsItem
                7A.
            
            Quantitative
                and Qualitative Disclosures about Market
                RiskItem
                8.
            
            Financial
                Statements and Supplementary DataItem
                9.
            
            Changes
                in and Disagreements with Accountants on Accounting and
                Financial DisclosureItem
                9 A.
            
            Controls
                and ProceduresItem
                9 B.
            
            Other
                Information**Part
                III**Item
                10.
            
            Directors,
                Executive Officers and Corporate
                GovernanceItem
                11.
            
            Executive
                CompensationItem
                12.
            
            Security
                Ownership of Certain Beneficial Owners and Management
                and Related Shareholder MattersItem
                13.
            
            Certain
                Relationships and Related Transactions, and Director
                IndependenceItem
                14.
            
            Principal
                Accountant Fees and Services**Part
                IV**Item
                15.
            
            Exhibits
                and Financial Statement Schedules




2
 *Table
            of Contents*





**PART
      I**





**ITEM
                1.**
            **BUSINESS**





General





Ames
      National Corporation (the "Company") is an Iowa corporation and bank holding
      company registered under the Bank Holding Company Act of 1956, as
      amended.  The Company owns 100% of the stock of five banking
      subsidiaries consisting of two national banks and three state-chartered banks,
      as described below.  All of the Company’s operations are conducted in
      the State of Iowa and primarily within the central Iowa counties of Boone,
      Story
      and Marshall where the Company’s banking subsidiaries are
      located.  The Company does not engage in any material business
      activities apart from its ownership of its banking subsidiaries.  The
      principal executive offices of the Company are located at 405 Fifth Street,
      Ames, Iowa 50010 and its telephone number is (515) 232-6251.





The
      Company was organized and incorporated on January 21, 1975 under the laws of
      the
      State of Iowa to serve as a holding company for its principal banking
      subsidiary, First National Bank, Ames, Iowa ("First National") located in Ames,
      Iowa.  In 1983, the Company acquired the stock of the State Bank &
Trust Co. ("State Bank") located in Nevada, Iowa; in 1991, the Company, through
      a newly-chartered state bank known as Boone Bank & Trust Co. ("Boone Bank"),
      acquired certain assets and assumed certain liabilities of the former Boone
      State Bank & Trust Company located in Boone, Iowa; in 1995, the Company
      acquired the stock of the Randall-Story State Bank (”Randall-Story Bank”)
      located in Story City, Iowa; and in 2002, the Company chartered and commenced
      operations of a new national banking organization, United Bank & Trust NA
      (“United Bank”), located in Marshalltown, Iowa.  First National, State
      Bank, Boone Bank, Randall-Story Bank and United Bank are each operated as a
      wholly owned subsidiary of the Company.  These five financial
      institutions are referred to in this Form 10-K collectively as the “Banks” and
      individually as a “Bank”.





The
      principal sources of Company revenue are: (i) interest and fees earned on loans
      made by the Banks; (ii) service charges on deposit accounts maintained at the
      Banks; (iii) interest on fixed income investments held by the Banks; (iv) fees
      on trust services provided by those Banks exercising trust powers; and (v)
      securities gains and dividends on equity investments held by the Company and
      the
      Banks.





The
      Banks’ lending activities consist primarily of short-term and medium-term
      commercial and residential real estate loans, agricultural and business
      operating loans and lines of credit, equipment loans, vehicle loans, personal
      loans and lines of credit, home improvement loans and secondary mortgage loan
      origination.  The Banks also offer a variety of demand, savings and
      time deposits, cash management services, merchant credit card processing, safe
      deposit boxes, wire transfers, direct deposit of payroll and social security
      checks and automated teller machine access.  Four of the five Banks
      also offer trust services.





The
      Company provides various services to the Banks which include, but are not
      limited to, management assistance, internal auditing services, human resources
      services and administration, compliance management, marketing assistance and
      coordination, loan review and assistance with respect to computer systems and
      procedures.





3
 *Table
            of Contents*





Banking
      Subsidiaries





First
      National Bank, Ames, Iowa.  First National is a nationally-chartered,
      commercial bank insured by the Federal Deposit Insurance Corporation (the
“FDIC”).  It was organized in 1903 and became a wholly owned
      subsidiary of the Company in 1975 through a bank holding company reorganization
      whereby the then shareholders of First National exchanged all of their First
      National stock for stock in the Company.  First National provides
      full-service banking to businesses and residents within the Ames community
      and
      surrounding area. It provides a variety of products and services designed to
      meet the needs of the market it serves. It has an experienced staff of bank
      officers including many who have spent the majority of their banking careers
      with First National and who emphasize long-term customer relationships. First
      National conducts business out of three full-service offices and one super
      market location, all located in the city of Ames.   A new
      full-service branch office is being built in Ankeny, Iowa and is expected to
      open in the second quarter of 2007.





As
      of
      December 31, 2006, First National had capital of $41,284,000 and 88 full-time
      equivalent employees. Full-time equivalents represent the number of people
      a
      business would employ if all its employees were employed on a full-time basis.
      It is calculated by dividing the total number of hours worked by all full and
      part-time employees by the number of hours a full-time individual would work
      for
      a given period of time. First National had net income of $5,938,000 in 2006,
      $6,417,000 in 2005, and $6,949,000 in 2004. Total assets as of December 31,
      2006, 2005 and 2004 were $423,517,000, $413,412,000, and $436,074,000,
      respectively.





State
      Bank & Trust Co., Nevada, Iowa.  State Bank is an Iowa,
      state-chartered, FDIC insured commercial bank.  State Bank was
      acquired by the Company in 1983 through a stock transaction whereby the then
      shareholders of State Bank exchanged all their State Bank stock for stock in
      the
      Company.  State Bank was organized in 1939 and provides full-serve
      banking to businesses and residents within the Nevada area from its main Nevada
      location and two offices, one in McCallsburg, Iowa and the other in Colo,
      Iowa.  It is strong in agricultural, commercial and residential real
      estate lending.





As
      of
      December 31, 2006, State Bank had capital of $11,298,000 and 22 full-time
      equivalent employees. It had net income of $1,310,000 in 2006, $1,401,000 in
      2005 and $1,707,000 in 2004. Total assets as of December 31, 2006, 2005 and
      2004
      were $114,266,000, $112,626,000 and $112,599,000, respectively.





Boone
      Bank & Trust Co., Boone, Iowa.  Boone Bank is an Iowa,
      state-chartered, FDIC insured commercial bank. Boone Bank was organized in
      1992
      by the Company under a new state charter in connection with a purchase and
      assumption transaction whereby Boone Bank purchased certain assets and assumed
      certain liabilities of the former Boone State Bank & Trust Company in
      exchange for a cash payment.  It provides full service banking to
      businesses and residents within the Boone community and surrounding
      area.  It is actively engaged in agricultural, consumer and commercial
      lending, including real estate, operating and equipment loans.  It
      conducts business from its main office and a full service branch office, both
      located in Boone.





4
 *Table
            of Contents*





As
      of
      December 31, 2006, Boone Bank had capital of $12,490,000 and 26 full-time
      equivalent employees.  It had net income of $1,636,000 in 2006,
      $1,849,000 in 2005 and $2,059,000 in 2004. Total assets as of December 31,
      2006,
      2005 and 2004 were $103,225,000, $108,780,000 and $112,578,000,
      respectively.





Randall-Story
      State Bank, Story City, Iowa.  Randall-Story Bank is an Iowa,
      state-chartered, FDIC insured commercial bank.  Randall-Story Bank was
      acquired by the Company in 1995 through a stock transaction whereby the then
      shareholders of Randall-Story Bank exchanged all their Randall-Story Bank stock
      for stock in the Company.  Randall-Story Bank was organized in 1928
      and provides full-service banking to Story City and the surrounding area. While
      its primary emphasis is in agricultural lending, Randall-Story Bank also
      provides the traditional lending services typically offered by community
      banks.  The bank closed its office in Randall, Iowa in 2006 as the
      result of the community’s declining population base.





As
      of
      December 31, 2006, Randall-Story Bank had capital of $7,871,000 and 15 full-time
      equivalent employees.  It had net income of $902,000 in 2006, $869,000
      in 2005 and $1,036,000 in 2004. Total assets as of December 31, 2006, 2005
      and
      2004 were $73,777,000, $70,371,000 and $74,427,000, respectively.





United
      Bank & Trust NA,
      Marshalltown, Iowa. United Bank is a nationally-chartered, commercial bank
      insured by the FDIC. It was newly chartered in June of 2002 and offers a broad
      range of deposit and loan products, as well as Internet banking and trust
      services to customers located in the Marshalltown and surrounding Marshall
      County area.





As
      of December 31, 2006, United Bank
      had capital of $7,581,000 and 21 full-time equivalent employees. United Bank
      had
      a loss of $58,000 in 2006 and a profit in 2005 and 2004 of $124,000 and
      $105,000, respectively.  Total assets as of December 31, 2006, 2005
      and 2004 were $95,619,000, $94,684,000 and $89,653,000,
      respectively.





Business
      Strategy and Operations





As
      a
      locally owned, multi-bank holding company, the Company emphasizes strong
      personal relationships to provide products and services that meet the needs
      of
      the Banks’ customers. The Company seeks to achieve growth and maintain a strong
      return on equity. To accomplish these goals, the Banks focus on small to medium
      size businesses that traditionally wish to develop an exclusive relationship
      with a single bank. The Banks, individually and collectively, have the size
      to
      give the personal attention required by business owners, in addition to the
      credit expertise to help businesses meet their goals.





The
      Banks
      offer a full range of deposit services that are typically available in most
      financial institutions, including checking accounts, savings accounts and time
      deposits of various types, ranging from money market accounts to longer-term
      certificates of deposit. One major goal in developing the Banks' product mix
      is
      to keep the product offerings as simple as possible, both in terms of the number
      of products and the features and benefits of the individual services. The
      transaction accounts and time certificates are tailored to each Bank's principal
      market area at rates competitive in that Bank’s market.  In addition,
      retirement accounts such as IRAs (Individual Retirement Accounts) are available.
      The FDIC insures all deposit accounts up to the maximum amount. The Banks
      solicit these accounts from small-to-medium sized businesses in their respective
      primary trade areas, and from individuals who live and/or work within these
      areas.  No material portion of the Banks' deposits has been obtained
      from a single person or from a few persons.  Therefore, the Company
      does not believe that the loss of the deposits of any person or of a few persons
      would have an adverse effect on the Banks' operations or erode their deposit
      base.





5
 *Table
            of Contents*





Loans
      are
      provided to creditworthy borrowers regardless of their race, color, national
      origin, religion, sex, age, marital status, disability, receipt of public
      assistance or any other basis prohibited by law.  The Banks intend to
      fulfill this commitment while maintaining prudent credit
      standards.  In the course of fulfilling this obligation to meet the
      credit needs of the communities which they serve, the Banks give consideration
      to each credit application regardless of the fact that the applicant may reside
      in a low to moderate income neighborhood, and without regard to the geographic
      location of the residence, property or business within their market
      areas.





The
      Banks
      provide innovative, quality financial products, such as Internet banking and
      trust services that meet the banking needs of their customers and communities.
      The loan programs and acceptance of certain loans may vary from time-to-time
      depending on the funds available and regulations governing the banking industry.
      The Banks offer all basic types of credit to their local communities and
      surrounding rural areas, including commercial, agricultural and consumer
      loans.  The types of loans within these categories are as
      follows:





Commercial
      Loans. Commercial loans are typically made to sole proprietors, partnerships,
      corporations and other business entities such as municipalities and individuals
      where the loan is to be used primarily for business purposes. These loans are
      typically secured by assets owned by the borrower and often times involve
      personal guarantees given by the owners of the business.  The types of
      loans the Banks offer include:





-
            financing
                guaranteed under Small Business Administration
                programs


-
            operating
                and working capital loans


-
            loans
                to finance equipment and other capital
                purchases


-
            commercial
                real estate loans


-
            business
                lines of credit


-
            term
                loans


-
            loans
                to professionals


-
            letters
                of credit





Agricultural
      Loans.  The Banks, by nature of their location in central Iowa, are
      directly and indirectly involved in agriculture and agri-business
      lending.  This includes short-term seasonal lending associated with
      cyclical crop and livestock production, intermediate term lending for machinery,
      equipment and breeding stock acquisition and long-term real estate lending.
      These loans are typically secured by the crops, livestock, equipment or real
      estate being financed.  The basic tenet of the Banks' agricultural
      lending philosophy is a blending of strong, positive cash flow supported by
      an
      adequate collateral position, along with a demonstrated capacity to withstand
      short-term negative impact if necessary.  Applicable governmental
      subsidies and affiliated programs are utilized if warranted to accomplish these
      parameters.  Approximately 14% of the Banks' loans have been made for
      agricultural purposes.  The Banks have not experienced a material
      adverse effect on their business as a result of defaults on agricultural loans
      and do not anticipate at the present time experiencing any such effect in the
      future.





6
 *Table
            of Contents*





Consumer
      Loans. Consumer loans are typically available to finance home improvements
      and
      consumer purchases, such as automobiles, household furnishings, boats and
      education.  These loans are made on both a secured and an unsecured
      basis.  The following types of consumer loans are
      available:




-
            automobiles
                and trucks


-
            boats
                and recreational vehicles


-
            personal
                loans and lines of credit


-
            home
                equity lines of credit


-
            home
                improvement and rehabilitation
                loans


-
            consumer
                real estate loans





Other
      types of credit programs, such as loans to nonprofit organizations, to public
      entities, for community development and to other governmental offered programs
      also are available.





First
      National, Boone Bank, State Bank
      and United Bank offer trust services typically found in a commercial bank with
      trust powers, including the administration of estates, conservatorships,
      personal and corporate trusts and agency accounts.  The Banks also
      provide farm management, investment and custodial services for individuals,
      businesses and non-profit organizations.





The
      Banks
      earn income from the origination of residential mortgages that are sold in
      the
      secondary real estate market without retaining the mortgage servicing
      rights.





The
      Banks
      offer traditional banking services, such as safe deposit boxes, wire transfers,
      direct deposit of payroll and social security checks, automated teller machine
      access and automatic drafts (ACH) for various accounts.





Credit
      Management





The
      Company strives to achieve sound credit risk management. In order to achieve
      this goal, the Company has established uniform credit policies and underwriting
      criteria for the Banks’ loan portfolios. The Banks diversify in the types of
      loans offered and are subject to regular credit examinations, annual internal
      and external loan audits and annual review of large loans, as well as quarterly
      reviews of loans experiencing deterioration in credit quality. The Company
      attempts to identify potential problem loans early, charge off loans promptly
      and maintain an adequate allowance for loan losses. The Company has established
      credit guidelines for the Banks’ lending portfolios which include guidelines
      relating to the more commonly requested loan types, as follows:





Commercial
      Real Estate Loans - Commercial real estate loans, including agricultural real
      estate loans, are normally based on loan to appraisal value ratios of 80% and
      secured by a first priority lien position. Loans are typically subject to
      interest rate adjustments no less frequently than 5 years from
      origination.  Fully amortized monthly repayment terms normally do not
      exceed twenty years.  Projections and cash flows that show ability to
      service debt within the amortization period are required. Property and casualty
      insurance is required to protect the Banks’ collateral interests. Commercial and
      agricultural real estate loans represent approximately 45% of the loan
      portfolio. Major risk factors for commercial real estate loans, as well as
      the
      other loan types described below, include a geographic concentration in central
      Iowa; the dependence of the local economy upon several large governmental
      entities, including Iowa State University and the Iowa Department of
      Transportation; and the health of Iowa’s agricultural sector that is dependent
      on weather conditions and government programs.





7
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            of Contents*





Commercial
      and Agricultural Operating Lines - These loans are made to businesses and farm
      operations with terms up to twelve months. The credit needs are generally
      seasonal with the source of repayment coming from the entity’s normal business
      cycle. Cash flow reviews are completed to establish the ability to service
      the
      debt within the terms of the loan. A first priority lien on the general assets
      of the business normally secures these types of loans. Loan to value limits
      vary
      and are dependent upon the nature and type of the underlying collateral and
      the
      financial strength of the borrower. Crop and hail insurance is required for
      most
      agricultural borrowers. Loans are generally guaranteed by the
      principal(s).





Commercial
      and Agricultural Term Loans – These loans are made to businesses and farm
      operations to finance equipment, breeding stock and other capital expenditures.
      Terms are generally the lesser of five years or the useful life of the
      asset.  Term loans are normally secured by the asset being financed
      and are often additionally secured with the general assets of the business.
      Loan
      to value is generally 75% of the cost or value of the assets.  Loans
      are normally guaranteed by the principal(s). Commercial and agricultural
      operating and term loans represent approximately 20% of the loan
      portfolio.





Residential
      First Mortgage Loans – Proceeds of these loans are used to buy or refinance the
      purchase of residential real estate with the loan secured by a first lien on
      the
      real estate. Most of the residential mortgage loans originated by the Banks
      (including servicing rights) are sold in the secondary mortgage market due
      to
      the higher interest rate risk inherent in the 15 and 30 year fixed rate terms
      consumers prefer. Loans that are originated and not sold in the secondary market
      generally have higher interest rates and have rate adjustment periods of no
      longer than seven years. The maximum amortization of first mortgage residential
      real estate loans is 30 years. The loan-to-value ratios normally do not exceed
      80% without credit enhancements such as mortgage insurance. Property insurance
      is required on all loans to protect the Banks’ collateral position. Loans
      secured by one to four family residential properties represent approximately
      23%
      of the loan portfolio.





Home
      Equity Term Loans – These loans are normally for the purpose of home improvement
      or other consumer purposes and are secured by a junior mortgage on residential
      real estate. Loan-to-value ratios normally do not exceed 90% of market
      value.





Home
      Equity Lines of Credit - The Banks offer a home equity line of credit with
      a
      maximum term of 60 months. These loans are secured by a junior mortgage on
      the
      residential real estate and normally do not exceed a loan-to-market value ratio
      of 90% with the interest adjusted quarterly.





Consumer
      Loans – Consumer loans are normally made to consumers under the following
      guidelines.  Automobiles - loans on new and used automobiles generally
      will not exceed 80% and 75% of the value, respectively.  Recreational
      vehicles and boats - 66% of the value.  Mobile home - maximum term on
      these loans is 180 months with the loan-to-value ratio generally not exceeding
      66%.  Each of these loans is secured by a first priority lien on the
      assets and requires insurance to protect the Banks’ collateral
      position.  Unsecured - The term for unsecured loans generally does not
      exceed 12 months. Consumer and other loans represent approximately 7% of the
      loan portfolio.





8
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            of Contents*





Employees





At
      December 31, 2006, the Banks had a total of 172 full-time equivalent employees
      and the Company had an additional 12 full-time employees. The Company and Banks
      provide their employees with a comprehensive program of benefits, including
      comprehensive medical and dental plans, long-term and short-term disability
      coverage, and a 401(k) profit sharing plan. Management considers its relations
      with employees to be satisfactory.  Unions represent none of the
      employees.





Market
      Area





The
      Company operates five commercial banks with locations in Story, Boone and
      Marshall Counties in central Iowa.





First
      National is located in Ames, Iowa with a population of 50,731.  The
      major employers are Iowa State University, Ames Laboratories, Iowa Department
      of
      Transportation, Mary Greeley Medical Center, National Veterinary Services
      Laboratory, Ames Community Schools, City of Ames, Barilla, Sauer-Danfoss and
      McFarland Clinic.  First National’s primary business includes
      providing retail banking services and business and consumer lending. First
      National has a minimum exposure to agricultural lending.





Boone
      Bank is located in Boone, Iowa with a population of 12,800.  Boone is
      the county seat of Boone County.  The major employers are Fareway
      Stores, Inc., Patterson Dental Supply Co., Union Pacific Railroad, and
      Communication Data Services. Boone Bank provides lending services to the
      agriculture, commercial and real estate markets.





State
      Bank is located in Nevada, Iowa with a population of 6,658. Nevada is the county
      seat of Story County.  The major employers are Print Graphics, General
      Financial Supply, Central Iowa Printing, Burke Corporation and
      Almaco.  State Bank provides various types of loans with a major
      agricultural presence.  It provides a wide variety of banking services
      including trust, deposit, ATM, and merchant card processing.





Randall-Story
      Bank is located in Story City, Iowa with a population of 3,228.  The
      major employers are Pella Corporation, Bethany Manor, American Packaging,
      Precision Machine and Record Printing.  Located in a major
      agricultural area, it has a strong presence in this type of
      lending.  As a full service commercial bank it provides a full line of
      products and services.





United
      Bank is located in Marshalltown,
      Iowa with a population of 26,123. The major employers are Swift & Co.,
      Fisher Controls International, Lennox Industries and Marshalltown Medical &
Surgical Center.  The Bank offers a full line of loan, deposit, and
      trust services. Loan services include primarily commercial and consumer types
      of
      credit including operating lines, equipment loans, automobile financing and
      real
      estate loans.





9
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            of Contents*





Competition





The
      geographic market area served by the Banks is highly competitive with respect
      to
      both loans and deposits. The Banks compete principally with other commercial
      banks, savings and loan associations, credit unions, mortgage companies, finance
      divisions of auto and farm equipment companies, agricultural suppliers and
      other
      financial service providers. Some of these competitors are local, while others
      are statewide or nationwide.  The major commercial bank competitors
      include F & M Bank, U.S. Bank National Association and Wells Fargo Bank,
      each of which have a branch office or offices within the Banks’ primary trade
      areas. Among the advantages such larger banks have are their ability to finance
      extensive advertising campaigns and to allocate their investment assets to
      geographic regions of higher yield and demand. These larger banking
      organizations have much higher legal lending limits than the Banks and thus
      are
      better able to finance large regional, national and global commercial
      customers.





In
      order
      to compete with the other financial institutions in their primary trade areas,
      the Banks use, to the fullest extent possible, the flexibility which is accorded
      by independent status.  This includes an emphasis on specialized
      services, local promotional activity and personal contacts by the Banks'
      officers, directors and employees.  In particular, the Banks compete
      for deposits principally by offering depositors a wide variety of deposit
      programs, convenient office locations, hours and other services.  The
      Banks compete for loans primarily by offering competitive interest rates,
      experienced lending personnel and quality products and services.





As
      of
      December 31, 2006, there were 26 FDIC insured institutions having approximately
      65 offices or branch offices within Boone, Story and Marshall County, Iowa
      where
      the Banks' offices are located.  First National, State Bank and
      Randall-Story Bank together have the largest percentage of deposits in Story
      County and Boone Bank has the highest percentage of deposits in Boone
      County.





The
      Banks also compete with the
      financial markets for funds.  Yields on corporate and government debt
      securities and commercial paper affect the ability of commercial banks to
      attract and hold deposits.  Commercial banks also compete for funds
      with equity, money market, and insurance products offered by brokerage and
      insurance companies. This competitive trend will likely continue in the
      future.





The
      Company anticipates bank
      competition will continue to change materially over the next several years
      as
      more financial institutions, including the major regional and national banks,
      continue to consolidate.  Credit unions, which are not subject to
      income taxes, have a significant competitive advantage and provide additional
      competition in the Company’s local markets.





Supervision
      and Regulation





The
      following discussion generally
      refers to certain statutes and regulations affecting the banking industry.
      These
      references provide brief summaries and therefore do not purport to be complete
      and are qualified in their entirety by reference to those statutes and
      regulations. In addition, due to the numerous statutes and regulations that
      apply to and regulate the banking industry, many are not referenced
      below.





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USA
      Patriot Act.  The USA Patriot Act was enacted in 2001 which, together
      with regulations issued pursuant to this act, substantially broadened previously
      existing anti-money laundering law and regulation, increased compliance, due
      diligence and reporting obligations for financial institutions, created new
      crimes and penalties and required federal banking agencies, in reviewing merger
      and other acquisition transactions, to consider the effectiveness of the parties
      in combating money laundering activities.  The Act requires all
      financial institutions to establish certain anti-money laundering compliance
      and
      due diligence programs that are reasonably designed to detect and report
      instances of money laundering.  The Company believes its compliance
      policies, procedures and controls satisfy the material requirements of the
      Patriot Act and regulations.





Sarbanes-Oxley
      Act.  The Sarbanes-Oxley Act was enacted in 2002 to, among other
      things, increase corporate responsibility and to protect investors by improving
      the accuracy and reliability of corporate disclosures pursuant to the federal
      securities laws.  This act generally applies to all companies that are
      required to file periodic reports with the Securities and Exchange Commission
      under the Securities Exchange Act of 1934.  The Act implements
      significant changes in the responsibilities of officers and directors of public
      companies and makes certain changes to the corporate reporting obligation of
      those companies and their external auditors.  Among the requirements
      and prohibitions addressed by the act are certifications required by CEOs and
      CFOs of periodic reports filed with the SEC; accelerated reporting of stock
      transactions by directors, officers and large shareholders; prohibitions against
      personal loans from companies to directors and executive officers (except loans
      made in the ordinary course of business); requirements for public companies’
audit committees; requirements for auditor independence; the forfeiture of
      bonuses or other incentive-based compensation and profits from the sale of
      an
      issuer’s securities by directors and executive officers in the 12-month period
      following initial publication of any financial statements that later require
      restatement; various increased criminal penalties for violations of securities
      laws; and the creation of a public company accounting oversight
      board.  Rules adopted by the SEC to implement various provisions of
      the act include CEO and CFO certifications related to fair presentation of
      financial statements and financial information in public filings, as well as
      management’s evaluation of disclosure controls and procedures; disclosure of
      whether any audit committee members qualify as a “financial expert”; disclosures
      related to audit committee composition and auditor pre-approval policies;
      disclosure related to adoption of a written code of ethics; reconciling non-GAAP
      financial information with GAAP in public communications; disclosure of
      off-balance sheet transactions; and disclosure related to director independence
      and the director nomination process.  The Company has adopted
      modifications to its corporate governance procedures to comply with the
      provisions of the act and regulations.





The
      Company and the Banks are subject
      to extensive federal and state regulation and supervision. Regulation and
      supervision of financial institutions is primarily intended to protect
      depositors and the FDIC rather than shareholders of the Company. The laws and
      regulations affecting banks and bank holding companies have changed
      significantly over recent years, particularly with the passage of the Financial
      Services Modernization Act. There is reason to expect that similar changes
      will
      continue in the future. Any change in applicable laws, regulations or regulatory
      policies may have a material effect on the business, operations and prospects
      of
      the Company. The Company is unable to predict the nature or the extent of the
      effects on its business and earnings that any fiscal or monetary policies or
      new
      federal or state legislation may have in the future.





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The
      Company





The
      Company is a bank holding company
      by virtue of its ownership of the Banks, and is registered as such with the
      Board of Governors of the Federal Reserve System (the "Federal Reserve"). The
      Company is subject to regulation under the Bank Holding Company Act of 1956,
      as
      amended (the "BHCA"), which subjects the Company and the Banks to supervision
      and examination by the Federal Reserve. Under the BHCA, the Company files with
      the Federal Reserve annual reports of its operations and such additional
      information as the Federal Reserve may require.





Source
      of Strength to the Banks. The
      Federal Reserve takes the position that a bank holding company is required
      to
      serve as a source of financial and managerial strength to its subsidiary banks
      and may not conduct its operations in an unsafe or unsound manner. In addition,
      it is the Federal Reserve's position that in serving as a source of strength
      to
      its subsidiary banks, bank holding companies should use available resources
      to
      provide adequate capital funds to its subsidiary banks during periods of
      financial stress or adversity. It should also maintain the financial flexibility
      and capital raising capacity to obtain additional resources for providing
      assistance to its subsidiary banks. A bank holding company's failure to meet
      its
      obligations to serve as a source of strength to its subsidiary banks will
      generally be considered by the Federal Reserve to be an unsafe and unsound
      banking practice or a violation of the Federal Reserve's regulations or
      both.





Federal
      Reserve Approval. Bank holding companies must obtain the approval of the Federal
      Reserve before they: (i) acquire direct or indirect ownership or control of
      any
      voting stock of any bank if, after such acquisition, they would own or control,
      directly or indirectly, more than 5% of the voting stock of such bank; (ii)
      merge or consolidate with another bank holding company; or (iii) acquire
      substantially all of the assets of any additional banks.





Non-Banking
      Activities. With certain exceptions, the BHCA also prohibits bank holding
      companies from acquiring direct or indirect ownership or control of voting
      stock
      in any company other than a bank or a bank holding company unless the Federal
      Reserve finds the company's business to be incidental to the business of
      banking. When making this determination, the Federal Reserve in part considers
      whether allowing a bank holding company to engage in those activities would
      offer advantages to the public that would outweigh possible adverse
      effects.  A bank holding company may engage in permissible non-banking
      activities on a de novo basis, if the holding company meets certain criteria
      and
      notifies the Federal Reserve within ten (10) business days after the activity
      has commenced.





Under
      the
      Financial Services Modernization Act, eligible bank holding companies may elect
      (with the approval of the Federal Reserve) to become a "financial holding
      company."  Financial holding companies are permitted to engage in
      certain financial activities through affiliates that had previously been
      prohibited activities for bank holding companies.  Such financial
      activities include securities and insurance underwriting and merchant
      banking.  At this time, the Company has not elected to become a
      financial holding company, but may choose to do so at some time in the
      future.





Control
      Transactions. The Change in
      Bank Control Act of 1978, as amended, requires a person or group of persons
      acquiring "control" of a bank holding company to provide the Federal Reserve
      with at least 60 days prior written notice of the proposed acquisition.
      Following receipt of this notice, the Federal Reserve has 60 days to issue
      a
      notice disapproving the proposed acquisition, but the Federal Reserve may extend
      this time period for up to another 30 days. An acquisition may be completed
      before the disapproval period expires if the Federal Reserve issues written
      notice of its intent not to disapprove the action.  Under a rebuttable
      presumption established by the Federal Reserve, the acquisition of 10% or more
      of a class of voting stock of a bank holding company with a class of securities
      registered under Section 12 of the Securities Exchange Act of 1934, as amended,
      would constitute the acquisition of control. In addition, any "company" would
      be
      required to obtain the approval of the Federal Reserve under the BHCA before
      acquiring 25% (or 5% if the "company" is a bank holding company) or more of
      the
      outstanding shares of the Company, or otherwise obtain control over the
      Company.





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Affiliate
      Transactions. The Company and
      the Banks are deemed affiliates within the meaning of the Federal Reserve Act,
      and transactions between affiliates are subject to certain restrictions.
      Generally, the Federal Reserve Act: (i) limits the extent to which the financial
      institution or its subsidiaries may engage in "covered transactions" with an
      affiliate; and (ii) requires all transactions with an affiliate, whether or
      not
      "covered transactions," to be on terms substantially the same, or at least
      as
      favorable to the institution or subsidiary, as those provided to a
      non-affiliate. The term "covered transaction" includes the making of loans,
      purchase of assets, issuance of a guarantee and similar
      transactions.





State
      Law
      on Acquisitions.  Iowa law permits bank holding companies to make
      acquisitions throughout the state.  However, Iowa currently has a
      deposit concentration limit of 15% on the amount of deposits in the state that
      any one banking organization can control and continue to acquire banks or bank
      deposits (by acquisitions), which applies to all depository institutions doing
      business in Iowa.





Banking
      Subsidiaries





Applicable
      federal and state statutes
      and regulations governing a bank's operations relate, among other matters,
      to
      capital adequacy requirements, required reserves against deposits, investments,
      loans, legal lending limits, certain interest rates payable, mergers and
      consolidations, borrowings, issuance of securities, payment of dividends,
      establishment of branches and dealings with affiliated persons.





First
      National and United Bank are
      national banks subject to primary federal regulation and supervision by the
      Office of the Comptroller of the Currency (the "OCC").  The FDIC, as
      an insurer of the deposits, also has some limited regulatory authority over
      First National and United Bank. State Bank, Boone Bank and Randall-Story Bank
      are state banks subject to regulation and supervision by the Iowa Division
      of
      Banking. The three state Banks are also subject to regulation and examination
      by
      the FDIC, which insures their respective deposits to the maximum extent
      permitted by law. The federal laws that apply to the Banks regulate, among
      other
      things, the scope of their business, their investments, their reserves against
      deposits, the timing of the availability of deposited funds and the nature
      and
      amount of and collateral for loans. The laws and regulations governing the
      Banks
      generally have been promulgated to protect depositors and the deposit insurance
      fund of the FDIC and not to protect stockholders of such institutions or their
      holding companies.





The
      OCC
      and FDIC each has authority to prohibit banks under their supervision from
      engaging in what it considers to be an unsafe and unsound practice in conducting
      their business.  The Federal Deposit Insurance Corporation Improvement
      Act of 1991 ("FDICIA") requires federal banking regulators to adopt regulations
      or guidelines in a number of areas to ensure bank safety and soundness,
      including internal controls, credit underwriting, asset growth, management
      compensation, ratios of classified assets to capital and earnings. FDICIA also
      contains provisions which are intended to change independent auditing
      requirements, restrict the activities of state-chartered insured banks, amend
      various consumer banking laws, limit the ability of "undercapitalized banks"
      to
      borrow from the Federal Reserve's discount window, require regulators to perform
      periodic on-site bank examinations and set standards for real estate
      lending.





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Borrowing
      Limitations. Each of the
      Banks is subject to limitations on the aggregate amount of loans that it can
      make to any one borrower, including related entities. Subject to numerous
      exceptions based on the type of loans and collateral, applicable statutes and
      regulations generally limit loans to one borrower of 15% of total equity and
      reserves. Each of the Banks is in compliance with applicable loans to one
      borrower requirements.





FDIC
      Insurance. Generally, customer
      deposit accounts in banks are insured by the FDIC for up to a maximum amount
      of
      $100,000 for single accounts, $250,000 for self-directed retirement accounts,
      $100,000 for joint accounts, and $100,000 for qualifying revocable trust
      accounts. The FDIC has adopted a risk-based insurance assessment system under
      which depository institutions contribute funds to the FDIC insurance fund based
      on their risk classification.  The FDIC may terminate the deposit
      insurance of any insured depository institution if it determines after an
      administrative hearing that the institution has engaged or is engaging in unsafe
      or unsound practices, is in an unsafe or unsound condition to continue
      operations or has violated any applicable law.





Capital
      Adequacy Requirements. The
      Federal Reserve, the FDIC and the OCC (collectively, the "Agencies") have
      adopted risk-based capital guidelines for banks and bank holding companies
      that
      are designed to make regulatory capital requirements more sensitive to
      differences in risk profiles among banks and bank holding companies and account
      for off-balance sheet items. Failure to achieve and maintain adequate capital
      levels may give rise to supervisory action through the issuance of a capital
      directive to ensure the maintenance of required capital levels. Each of the
      Banks is in compliance with applicable capital level requirements.





The
      current guidelines require all
      federally regulated banks to maintain a minimum risk-based total capital ratio
      equal to 8%, of which at least 4% must be Tier 1 capital.  Tier 1
      capital includes common shareholders' equity, qualifying perpetual preferred
      stock and minority interests in equity accounts of consolidated subsidiaries,
      but excludes goodwill and most other intangibles and the allowance for loan
      and
      lease losses.  Tier 2 capital includes the excess of any preferred
      stock not included in Tier 1 capital, mandatory convertible securities, hybrid
      capital instruments, subordinated debt and intermediate term preferred stock,
      45% of unrealized gain of equity securities and general reserve for loan and
      lease losses up to 1.25% of risk weighted assets.  None of the Banks
      has received any notice indicating that it will be subject to higher capital
      requirements.





Under
      these guidelines, banks' assets
      are given risk weights of 0%, 20%, 50% or 100%.  Most loans are
      assigned to the 100% risk category, except for first mortgage loans fully
      secured by residential property and, under certain circumstances, residential
      construction loans (both carry a 50% rating).  Most investment
      securities are assigned to the 20% category, except for municipal or state
      revenue bonds (which have a 50% rating) and direct obligations of or obligations
      guaranteed by the United States Treasury or United States Government Agencies
      (which have a 0% rating).





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The
      Agencies have also implemented a
      leverage ratio, which is equal to Tier 1 capital as a percentage of average
      total assets less intangibles, to be used as a supplement to the risk based
      guidelines.  The principal objective of the leverage ratio is to limit
      the maximum degree to which a bank may leverage its equity capital
      base.  The minimum required leverage ratio for top rated institutions
      is 3%, but most institutions are required to maintain an additional cushion
      of
      at least 100 to 200 basis points.  Any institution operating at or
      near the 3% level is expected to be a strong banking organization without any
      supervisory, financial or operational weaknesses or deficiencies.  Any
      institutions experiencing or anticipating significant growth would be expected
      to maintain capital ratios, including tangible capital positions, well above
      the
      minimum levels.





Prompt
      Corrective Action. Regulations
      adopted by the Agencies impose even more stringent capital requirements. The
      FDIC and other Agencies must take certain "prompt corrective action" when a
      bank
      fails to meet capital requirements. The regulations establish and define five
      capital levels: (i) "well-capitalized," (ii) "adequately capitalized," (iii)
      "undercapitalized," (iv) "significantly undercapitalized" and (v) "critically
      undercapitalized." Increasingly severe restrictions are imposed on the payment
      of dividends and management fees, asset growth and other aspects of the
      operations of institutions that fall below the category of being "adequately
      capitalized".  Undercapitalized institutions are required to develop
      and implement capital plans acceptable to the appropriate federal regulatory
      agency. Such plans must require that any company that controls the
      undercapitalized institution must provide certain guarantees that the
      institution will comply with the plan until it is adequately capitalized. As
      of
      February 28, 2007, neither the Company nor any of the Banks were subject to
      any
      regulatory order, agreement or directive to meet and maintain a specific capital
      level for any capital measure. Furthermore, as of that same date, each of the
      Banks was categorized as “well capitalized” under regulatory prompt corrective
      action provisions.





Restrictions
      on Dividends. Dividends paid to the Company by the Banks is the major source
      of
      Company cash flow. Various federal and state statutory provisions limit the
      amount of dividends banking subsidiaries are permitted to pay to their holding
      companies without regulatory approval. Federal Reserve policy further limits
      the
      circumstances under which bank holding companies may declare dividends. For
      example, a bank holding company should not continue its existing rate of cash
      dividends on its common stock unless its net income is sufficient to fully
      fund
      each dividend and its prospective rate of earnings retention appears consistent
      with its capital needs, asset quality and overall financial condition. In
      addition, the Federal Reserve and the FDIC have issued policy statements which
      provide that insured banks and bank holding companies should generally pay
      dividends only out of current operating earnings.  Federal and state
      banking regulators may also restrict the payment of dividends by
      order.





First
      National Bank, as a national
      bank, generally may pay dividends, without obtaining the express approval of
      the
      Office of the Comptroller of the Currency, in amount up to its retained net
      profits for the preceding two calendar years plus retained net profits up to
      the
      date of any dividend declaration in the current calendar
      year.  Retained net profits as defined by the OCC, consists of net
      income less dividends declared during the period.  Boone Bank,
      Randall-Story Bank and State Bank are also restricted under Iowa law to paying
      dividends only out of their undivided profits.  Additionally, the
      payment of dividends by the Banks is affected by the requirement to maintain
      adequate capital pursuant to applicable capital adequacy guidelines and
      regulations, and the Banks generally are prohibited from paying any dividends
      if, following payment thereof, the Bank would be undercapitalized.





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Reserves
      Against Deposits. The Federal
      Reserve requires all depository institutions to maintain reserves against their
      transaction accounts (primarily checking accounts) and non-personal time
      deposits.  Generally, reserves of 3% must be maintained against total
      transaction accounts of $45,800,000 or less (subject to an exemption not in
      excess of the first $8,500,000 of transaction accounts).  A reserve of
      $1,374,000 plus 10% of amounts in excess of $45,800,000 must be maintained
      in
      the event total transaction accounts exceed $45,800,000. The balances maintained
      to meet the reserve requirements imposed by the Federal Reserve may be used
      to
      satisfy applicable liquidity requirements.  Because required reserves
      must be maintained in the form of vault cash or a noninterest bearing account
      at
      a Federal Reserve Bank, the effect of this reserve requirement is to reduce
      the
      earning assets of the Banks.





Regulatory
      Developments





In
      2000, the Financial Services
      Modernization Act was enacted which: (i) repealed historical restrictions on
      preventing banks from affiliating with securities firms; (ii) broadens the
      activities that may be conducted by national banks and banking subsidiaries
      of
      holding companies; and (iii) provides an enhanced framework for protecting
      the
      privacy of consumers' information. In addition, bank holding companies may
      be
      owned, controlled or acquired by any company engaged in financially related
      activities, as long as such company meets regulatory requirements. To the extent
      that this legislation permits banks to affiliate with financial services
      companies, the banking industry may experience further
      consolidation.





Regulatory
      Enforcement Authority





The
      enforcement powers available to
      federal and state banking regulators are substantial and include, among other
      things, the ability to assess civil monetary penalties, to issue
      cease-and-desist or removal orders and to initiate injunctive actions against
      banking organizations and institution-affiliated parties. In general,
      enforcement actions must be initiated for violations of laws and regulations
      and
      unsafe or unsound practices. Other actions, or inactions, may provide the basis
      for enforcement action, including misleading or untimely reports filed with
      regulatory authorities. Applicable law also requires public disclosure of final
      enforcement actions by the federal banking agencies.





National
      Monetary Policies





In
      addition to being affected by
      general economic conditions, the earnings and growth of the Banks are affected
      by the regulatory authorities’ policies, including the Federal Reserve. An
      important function of the Federal Reserve is to regulate the money supply,
      credit conditions and interest rates. Among the instruments used to implement
      these objectives are open market operations in U.S. Government securities,
      changes in reserve requirements against bank deposits and the Federal Reserve
      Discount Rate, which is the rate charged member banks to borrow from the Federal
      Reserve Bank. These instruments are used in varying combinations to influence
      overall growth and distribution of credit, bank loans, investments and deposits,
      and their use may also affect interest rates charged on loans or paid on
      deposits.





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The
      monetary policies of the Federal
      Reserve have had a material impact on the operating results of commercial banks
      in the past and are expected to have a similar impact in the future. Also
      important in terms of effect on banks are controls on interest rates paid by
      banks on deposits and types of deposits that may be offered by banks. The
      Depository Institutions Deregulation Committee, created by Congress in 1980,
      phased out ceilings on the rate of interest that may be paid on deposits by
      commercial banks and savings and loan associations, with the result that the
      differentials between the maximum rates banks and savings and loans can pay
      on
      deposit accounts have been eliminated. The effect of deregulation of deposit
      interest rates has been to increase banks' cost of funds and to make banks
      more
      sensitive to fluctuation in market rates.





Availability
      of Information on Company Website





The
      Company files periodic reports with
      the Securities and Exchange Commission (“SEC”), including annual reports on Form
      10-K, quarterly reports on Form 10-Q and current reports on Form
      8-K.  The Company makes available on or through its website free of
      charge all periodic reports filed by the Company with the SEC, including any
      amendments to such reports, as soon as reasonably practicable after such reports
      have been electronically filed with the SEC.  The address of the
      Company’s website on the Internet is: www.amesnational.com.





The
      Company will provide a paper copy
      of these reports free of charge upon written or telephonic request directed
      to
      John P. Nelson, Vice President and Secretary, 405 Fifth Street, Ames, Iowa
      50010
      or (515) 232-6251 or by email request at
info@amesnational.com.  The information found on the Company’s
      website is not part of this or any other report the Company files with the
      SEC.





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Executive
      Officers of Company and Banks





The
      following table sets forth summary information about the executive officers
      of
      the Company and certain executive officers of the Banks. Unless otherwise
      indicated, each executive officer has served in his current position for the
      past five years.





Name
            
            Age
            
            Position
                with the Company or Bank and Principal Occupation and Employment
                During
                the Past Five YearsKevin
                G. Deardorff
            
            52
            
            Vice
                President & Technology Director of the Company.Leo
                E. Herrick
            
            65
            
            President
                of United Bank commencing June, 2002. Previously, employed as Chairman
                of
                the Board and President of F&M Bank-Iowa, Marshalltown,
                Iowa.Daniel
                L. Krieger
            
            70
            
            Chairman
                of the Company since 2003 and President of Company since 1997. Previously
                served as President of First National. Also serves as a Director
                of the
                Company, Chairman of the Board and Trust Officer of First National
                and
                Chairman of the Board of Boone Bank and United Bank.Stephen
                C. McGill
            
            52
            
            President
                of State Bank since 2003.  Previously served as Senior Vice
                President of State Bank.John
                P. Nelson
            
            40
            
            Vice
                President, Secretary and Treasurer of Company. Also serves as Director
                of
                Randall-Story Bank and State Bank.Thomas
                H. Pohlman
            
            56
            
            Named
                Chief Operating Officer of the Company in 2006 and also serves as
                President of First National since 1999.Jeffrey
                K. Putzier
            
            45
            
            President
                of Boone Bank since 1999.Harold
                E. Thompson
            
            61
            
            President
                of Randall Story Bank since 2003.  Previously served as
                Executive Vice President of Randall-Story State Bank.Terrill
                L. Wycoff
            
            63
            
            Executive
                Vice President of First National since
                2000.





**ITEM
                1A.**
            **RISK
                FACTORS**





Rising
      Interest Rates





The
      Company has experienced a decrease in net income from 2004 to 2006, primarily
      as
      a result of reductions in net interest income due to rising market interest
      rates that have caused interest expense to increase more quickly than interest
      income.  Rising interest rates will again present a challenge to the
      Company in 2007.  Continued increases in interest rates may negatively
      impact the Company’s net interest margin if interest expense increases more
      quickly than interest income.  The Company’s earning assets (primarily
      its loan and investment portfolio) have longer maturities than its interest
      bearing liabilities (primarily its deposits and other
      borrowings).  Therefore, in a rising interest rate environment,
      interest expense will increase more quickly than interest income, as the
      interest bearing liabilities reprice more quickly than earning
      assets.  In response to this challenge, the Banks model quarterly the
      changes in income that would result from various changes in interest
      rates.  Management believes Bank earning assets have the appropriate
      maturity and repricing characteristics to optimize earnings and the Banks’
interest rate risk positions.





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Concentration
      of Operations




The
      Company’s operations are concentrated in central Iowa. As a result of this
      geographic concentration, the Company’s results may correlate to the economic
      conditions in this area. Deterioration in economic conditions, particularly
      in
      the industries on which this area depends (including agriculture which, in
      turn,
      is dependent upon weather conditions and government support programs), may
      adversely affect the quality of the Company’s loan portfolio and the demand for
      the Company’s products and services, and accordingly, its results of
      operations.




Risks
      Associated with Loans




A
      significant source of risk for the Company arises from the possibility that
      losses will be sustained because borrowers, guarantors and related parties
      may
      fail to perform in accordance with the terms of their loans. The Company has
      underwriting and credit monitoring procedures and credit policies, including
      the
      establishment and review of the allowance for loan losses, that management
      believes are appropriate to minimize this risk by assessing the likelihood
      of
      nonperformance, tracking loan performance and diversifying the Company’s loan
      portfolio. Such policies and procedures, however, may not prevent unexpected
      losses that could adversely affect results of operations.




Competition
      with Larger Financial Institutions





The
      banking and financial services business in the Company’s market area continues
      to be a competitive field and is becoming more competitive as a result
      of:





·
            changes
                in regulations;





·
            changes
                in technology and product delivery systems;
                and





·
            the
                accelerating pace of consolidation among financial services
                providers.





It
      may be
      difficult to compete effectively in the Company’s market, and results of
      operations could be adversely affected by the nature or pace of change in
      competition. The Company competes for loans, deposits and customers with various
      bank and non-bank financial services providers, many of which are much larger
      in
      total assets and capitalization, have greater access to capital markets and
      offer a broader array of financial services.




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Trading
        Volume


The
      trading volume in the Company’s common stock on the Nasdaq Capital Market is
      relatively limited compared to those of larger companies listed on the Nasdaq
      Capital Market, the Nasdaq Global Markets, the New York Stock Exchange or other
      consolidated reporting systems or stock exchanges. A change in the supply or
      demand for the Company’s common stock may have a more significant impact on the
      price of the Company’s stock than for more actively traded
      companies.




Technological
      Advances




The
      financial services industry is undergoing technological changes with frequent
      introductions of new technology-driven products and services. In addition to
      improving customer services, the effective use of technology increases
      efficiency and enables financial institutions to reduce costs. The Company’s
      future success will depend, in part, on its ability to address the needs of
      its
      customers by using technology to provide products and services that will satisfy
      customer demands for convenience, as well as to create additional efficiencies
      in the Company’s operations. Many of our competitors have substantially greater
      resources than the Company to invest in technological improvements.




Government
      Regulations




Current
      and future legislation and the policies established by federal and state
      regulatory authorities will affect the Company’s operations. The Company and its
      Banks are subject to extensive supervision of, and examination by, federal
      and
      state regulatory authorities which may limit the Company’s growth and the return
      to our shareholders by restricting certain activities, such as:





·
            the
                payment of dividends to the Company’s
                shareholders;





·
            the
                payment of dividends to the Company from the
                Banks;





·
            possible
                mergers with or acquisitions of or by other
                institutions;





·
            investment
                policies;





·
            loans
                and interest rates on loans;





·
            interest
                rates paid on deposits;





·
            expansion
                of branch offices; and/or





·
            the
                possibility to provide or expand securities or trust
                services.





The
      Company cannot predict what changes, if any, will be made to existing federal
      and state legislation and regulations or the effect that any changes may have
      on
      future business and earnings prospects. The cost of compliance with regulatory
      requirements may adversely affect the Company’s net income.





20
 *Table
            of Contents*





Equity
      Prices





A
      substandard performance in the
      Company’s equity portfolio could lead to a reduction in the historical level of
      realized security gains, thereby negatively impacting the Company’s
      earnings.  The Company invests capital that may be utilized for future
      expansion in a portfolio of primarily financial and utility stocks with an
      estimated fair market value of approximately $24 million as of December 31,
      2006.  The Company focuses on stocks that have historically
      paid dividends in an effort to lessen the negative effects of a bear
      market.




**ITEM
                1B.**
            **UNRESOLVED
                STAFF COMMENTS**





The
      Company has not received any written comments from the staff of the SEC
      regarding its periodic or current reports filed under the Exchange Act in
      2006.





**ITEM
                2.**
            **PROPERTIES**





The
      Company's office is housed in the
      main office of First National located at 405 Fifth Street, Ames, Iowa and
      occupies approximately 3,357 square feet. A lease agreement between the Company
      and First National provides the Company will make available for use by First
      National an equal amount of interior space at the Company’s building located at
      2330 Lincoln Way in lieu of rental payments. The main office is owned by First
      National free of any mortgage and consists of approximately 45,000 square feet
      and includes a drive-through banking facility. In addition to its main office,
      First National conducts its business through two full-service offices, the
      University office and the North Grand office, and one super-market location,
      the
      Cub Food office. A new full-service office branch is being constructed in
      Ankeny, Iowa and will occupy approximately 14,000 square feet and is expected
      to
      be opened in the second quarter of 2007.  The North Grand office is
      owned by First National free of any mortgage. The University office is located
      in a 16,000 square foot multi-tenant property owned by the Company. A 24-year
      lease agreement with the Company has been modified in 2002 to provide that
      an
      equal amount of interior space will be made available to the Company at First
      National’s main office at 405 Fifth Street in lieu of rental payments. First
      National will continue to rent the drive-up facilities of approximately 1,850
      square feet at this location for $1,200 per month. The Cub Foods office is
      leased by First National under a 20 year lease with a five year initial term
      and
      three, five year renewal options. The current annual rental payment is
      $21,000.





State
      Bank conducts its business from its main office located at 1025 Sixth Street,
      Nevada, Iowa and from two additional full-service offices located in McCallsburg
      and Colo, Iowa.  All of these properties are owned by State Bank free
      of any mortgage.





Boone
      Bank conducts its business from its main office located at 716 Eighth Street,
      Boone, Iowa and from one additional full-service office also located in Boone,
      Iowa.  All properties are owned by Boone Bank free of any
      mortgage.





Randall-Story
      Bank conducts its
      business from its main office located at 606 Broad Street, Story City, Iowa
      which is owned by Randall-Story Bank free of any mortgage.





21
 *Table
            of Contents*





United
      Bank conducts its business from
      its main office located at 2101 South Center Street, Marshalltown,
      Iowa.  The 5,200 square foot premise was constructed in
      2002.  In 2005, United Bank purchased a branch location at 29 S.
      Center Street in Marshalltown that is 1,972 square feet.  Both
      properties are owned by United Bank free of any mortgage.





The
      property the Company owns is
      located at 2330 Lincoln Way, Ames, Iowa consisting of a multi tenant building
      of
      approximately 16,000 square feet.  First National leases 5,422 square
      feet of this building to serve as its University Office.  4,131 square
      feet of the remaining space is currently leased to five tenants who occupy
      the
      space for business purposes; the remaining 3,536 square feet of rentable space
      is currently unoccupied.  The Company owns a real estate property
      adjacent to 2330 Lincoln Way at 2318 Lincoln Way which consists of a single
      story commercial building with 2,400 square feet of leased space that is
      currently occupied by one tenant for business purposes.





**ITEM
                3.**
            **LEGAL
                PROCEEDINGS**





The
      Banks are from time to time parties
      to various legal actions arising in the normal course of
      business.  The Company believes that there is no threatened or pending
      proceeding against the Company or the Banks, which, if determined adversely,
      would have a material adverse effect on the business or financial condition
      of
      the Company or the Banks.





**ITEM4.**
            **SUBMISSION
                OF MATTERS TO A VOTE OF
                SHAREHOLDERS**





There
      were no matters submitted to a
      vote of the shareholders of the Company during the fourth quarter of
      2006.





**PART
      II**





**ITEM
                5.**
            **MARKET
                FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER
                PURCHASES OF EQUITY
                SECURITIES**





On
      February 28, 2007, the Company had
      approximately 570 shareholders of record and an estimated 926 additional
      beneficial owners whose shares were held in nominee titles through brokerage
      or
      other accounts.  The Company’s common stock is traded on the NASDAQ
      Capital Market under the symbol “ATLO”.  Trading in the Company’s
      common stock is, however, relatively limited.





The
      Board
      of Directors of the Company approved a stock repurchase program on November
      8,
      2006.  The Company has a strong capital position and this program
      provides an opportunity to repurchase Company stock on the open market when
      it
      is deemed to be favorably priced for repurchase.  The program
      authorizes the repurchase of up to 100,000 shares during the calendar year
      2007,
      or approximately 1% of 9,425,013 shares of common stock presently
      outstanding.  The repurchases will be made in open market transactions
      at the discretion of management using Company cash.  The timing and
      actual number of shares purchased will depend on a variety of factors such
      as
      price, the Company’s liquidity position and other market
      conditions.  The program may be limited or discontinued at any time
      without notice.  The Company did not repurchase any shares in
      2006.





22
 *Table
            of Contents*





Based
      on
      information provided to and gathered by the Company on an informal basis, the
      Company believes that the high and low sales price for the common stock on
      a per
      share basis during the last two years is as follows:





2006
            
            2005Market
                Price
            
            Market
                PriceQuarter
            
            High
            
            
            Low
            
            Quarter
            
            High
            
            
            Low1st
            
            $
            28.57
            
            
            $
            22.85
            
            1st
            
            $
            32.67
            
            
            $
            27.572nd
            
            $
            26.00
            
            
            $
            19.75
            
            2nd
            
            $
            40.00
            
            
            $
            30.003rd
            
            $
            22.75
            
            
            $
            21.41
            
            3rd
            
            $
            42.82
            
            
            $
            25.574th
            
            $
            22.69
            
            
            $
            19.82
            
            4th
            
            $
            29.00
            
            
            $
            23.12





The
      Company declared aggregate annual
      cash dividends in 2006 and 2005 of $9,801,000 and $9,417,000, respectively,
      or
      $1.04 per share in 2006 and $1.00 per share in 2005.  In February
      2007, the Company declared an aggregate cash dividend of $2,545,000 or $.27
      per
      share.  Quarterly dividends declared during the last two years were as
      follows:





2006
            
            
            2005Quarter
            
            Cash
                dividends declared per share
            
            
            Cash
                dividends declared per share1st
            
            $
            0.26
            
            
            $
            0.252nd
            
            
            0.26
            
            
            
            0.253rd
            
            
            0.26
            
            
            
            0.254th
            
            
            0.26
            
            
            
            0.25





The
      decision to declare any such cash
      dividends in the future and the amount thereof rests within the discretion
      of
      the Board of Directors of the Company and will be subject to, among other
      things, the future earnings, capital requirements and financial condition of
      the
      Company and certain regulatory restrictions imposed on the payment of dividends
      by the Banks.  Such restrictions are discussed in greater detail in
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations - Liquidity and Capital Resources and in Note 11 of the Company’s
      financial statements included herein.





23
 *Table
            of Contents*





The
      following performance graph
      provides information regarding cumulative, five-year total return on an indexed
      basis of the Company's Common Stock as compared with the NASDAQ Composite Index,
      the SNL Midwest OTC Bulletin Board Bank Index (“Midwest OTC Bank Index”) and the
      SNL NASDAQ Bank Index prepared by SNL Financial L.C. of Charlottesville,
      Virginia. The Midwest OTC Bank Index reflects the performance of 135 bank
      holding companies operating principally in the Midwest as selected by SNL
      Financial. The SNL NASDAQ Bank Index is comprised of all 525 bank holding
      companies listed on the NASDAQ market throughout the United States. The indexes
      assume the investment of $100 on December 31, 2001 in the Common Stock, the
      NASDAQ Composite Index, Midwest OTC Bank Index and the NASDAQ Bank Index with
      all dividends reinvested. The Company’s stock price performance shown in the
      following graph is not indicative of future stock price
      performance.








24
 *Table
            of Contents*





**ITEM6.**
            **SELECTED
                FINANCIAL DATA**





The
      following financial data of the Company for the five years ended December 31,
      2002 through 2006 is derived from the Company's historical audited financial
      statements and related footnotes. The information set forth below should be
      read
      in conjunction with "Management's Discussion and Analysis of Financial Condition
      and Results of Operation" and the consolidated financial statements and related
      notes contained elsewhere in this Annual Report.





Year
                Ended December 31(dollars
                in thousands, except per share amounts)
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003
            
            
            2002STATEMENT
                OF INCOME DATAInterest
                income
            
            $
            44,296
            
            
            $
            41,306
            
            
            $
            37,354
            
            
            $
            35,314
            
            
            $
            36,270Interest
                expense
            
            
            21,306
            
            
            
            15,933
            
            
            
            10,564
            
            
            
            10,339
            
            
            
            11,663Net
                interest income
            
            
            22,990
            
            
            
            25,373
            
            
            
            26,790
            
            
            
            24,975
            
            
            
            24,607Provision
                (credit) for loan losses
            
            
            (183
            )
            
            
            331
            
            
            
            479
            
            
            
            645
            
            
            
            688Net
                interest income after provision (credit) forloan
                losses
            
            
            23,173
            
            
            
            25,042
            
            
            
            26,311
            
            
            
            24,330
            
            
            
            23,919Noninterest
                income
            
            
            6,674
            
            
            
            5,613
            
            
            
            5,269
            
            
            
            6,435
            
            
            
            5,135Noninterest
                expense
            
            
            15,504
            
            
            
            15,210
            
            
            
            14,935
            
            
            
            14,819
            
            
            
            13,276Income
                before provision for income tax
            
            
            14,343
            
            
            
            15,445
            
            
            
            16,645
            
            
            
            15,946
            
            
            
            15,778Provision
                for income tax
            
            
            3,399
            
            
            
            3,836
            
            
            
            4,255
            
            
            
            4,321
            
            
            
            4,438Net
                Income
            
            $
            10,944
            
            
            $
            11,609
            
            
            $
            12,390
            
            
            $
            11,625
            
            
            $
            11,340





2006
            
            
            2005
            
            
            2004
            
            
            2003
            
            
            2002DIVIDENDS
                AND EARNINGS PER SHARE DATACash
                dividends declared
            
            $
            9,801
            
            
            $
            9,417
            
            
            $
            7,590
            
            
            $
            7,142
            
            
            $
            6,820Cash
                dividends declared per share
            
            $
            1.04
            
            
            $
            1.00
            
            
            $
            0.81
            
            
            $
            0.76
            
            
            $
            0.73Basic
                and diluted earnings per share
            
            $
            1.16
            
            
            $
            1.23
            
            
            $
            1.32
            
            
            $
            1.24
            
            
            $
            1.21Weighted
                average shares outstanding
            
            
            9,422,402
            
            
            
            9,415,599
            
            
            
            9,405,705
            
            
            
            9,393,672
            
            
            
            9,381,855BALANCE
                SHEET DATATotal
                assets
            
            $
            838,853
            
            
            $
            819,384
            
            
            $
            839,753
            
            
            $
            752,786
            
            
            $
            677,229Net
                loans
            
            
            429,123
            
            
            
            440,318
            
            
            
            411,639
            
            
            
            355,533
            
            
            
            329,593Deposits
            
            
            680,356
            
            
            
            668,342
            
            
            
            658,176
            
            
            
            619,549
            
            
            
            550,622Stockholders'
                equity
            
            
            112,923
            
            
            
            109,227
            
            
            
            110,924
            
            
            
            107,325
            
            
            
            101,523Equity
                to assets ratio
            
            
            13.46
            %
            
            
            13.33
            %
            
            
            13.21
            %
            
            
            14.26
            %
            
            
            14.99
            %FIVE
                YEAR FINANCIAL PERFORMANCENet
                income
            
            $
            10,944
            
            
            $
            11,609
            
            
            $
            12,390
            
            
            $
            11,625
            
            
            $
            11,340Average
                assets
            
            
            818,450
            
            
            
            831,198
            
            
            
            793,076
            
            
            
            726,945
            
            
            
            635,816Average
                stockholders' equity
            
            
            109,508
            
            
            
            109,802
            
            
            
            108,004
            
            
            
            104,141
            
            
            
            98,282Return
                on assets (net income divided by average assets)
            
            
            1.34
            %
            
            
            1.40
            %
            
            
            1.56
            %
            
            
            1.60
            %
            
            
            1.78
            %Return
                on equity  (net income divided by average
                equity)
            
            
            9.99
            %
            
            
            10.57
            %
            
            
            11.47
            %
            
            
            11.16
            %
            
            
            11.54
            %Net
                interest margin (net interest income divided by average earning
                assets)
            
            
            3.29
            %
            
            
            3.56
            %
            
            
            3.97
            %
            
            
            4.02
            %
            
            
            4.51
            %Efficiency
                ratio (noninterest expense divided by noninterest income plus net
                interest
                income)
            
            
            52.27
            %
            
            
            49.09
            %
            
            
            46.59
            %
            
            
            47.18
            %
            
            
            44.64
            %Dividend
                payout ratio (dividends per share divided by net income per
                share)
            
            
            89.66
            %
            
            
            81.30
            %
            
            
            61.27
            %
            
            
            61.46
            %
            
            
            60.05
            %Dividend
                yield (dividends per share divided by closing year-end market
                price)
            
            
            4.95
            %
            
            
            3.89
            %
            
            
            3.01
            %
            
            
            3.91
            %
            
            
            4.69
            %Equity
                to assets ratio (average equity divided by average assets)
            
            
            13.38
            %
            
            
            13.21
            %
            
            
            13.62
            %
            
            
            14.33
            %
            
            
            15.46
            %




25
 *Table
            of Contents*





**ITEM
                7.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS**





**Overview**





Ames
      National Corporation (Company) is a bank holding company established in 1975
      that owns and operates five bank subsidiaries (Banks) in central
      Iowa.  The following discussion is provided for the consolidated
      operations of the Company and its Banks, First National, State Bank, Boone
      Bank,
      Randall-Story Bank and 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 and managing its own bond and equity
      portfolio.  Products and services offered by the Banks are for
      commercial and consumer purposes, including loans, deposits and trust
      services.  The Banks also offer investment services through a
      third-party broker dealer.  The Company employs twelve individuals to
      assist with financial reporting, human resources, marketing, audit, compliance,
      technology systems and the coordination of management activities, in addition
      to
      172 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 prompt
      response times and 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 improve profitability while enabling the Company to offer more
      competitive loan and deposit rates.





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





The
      Company reported net income of $10,944,000 for the year ended December 31,
      2006
      compared to $11,609,000 and $12,390,000 reported for the years ended December
      31, 2005 and 2004, respectively. This represents a decrease of 5.7% when
      comparing 2006 and 2005, and a decrease of 6.3% when comparing 2005 and 2004.
      The decline in net income in 2006 and 2005 is primarily the result of lower
      net
      interest income which in turn, has resulted from higher market interest rates
      that have caused deposit interest expense to increase more quickly than interest
      income on earning assets.  Earnings per share for 2006 were $1.16
      compared to $1.23 in 2005 and $1.32 in 2004.  Four of the Company’s
      five Banks had profitable operations during 2006. United Bank posted a loss
      of
      $58,000 in 2006.





26
 *Table
            of Contents*





The
      Company’s return on average equity for 2006 was 9.99% compared to 10.57% and
      11.47% in 2005 and 2004, respectively, and the return on average assets for
      2006
      was 1.34% compared to 1.40% in 2005 and 1.56% in 2004.  Lower net
      interest income caused both the return on average equity and return on average
      assets to decline in 2006 and 2005 compared to the previous year.





The
      following discussion will provide a summary review of important items relating
      to:





·
            Challenges


·
            Key
                Performance Indicators


·
            Industry
                Results


·
            Income
                Statement Review


·
            Balance
                Sheet Review


·
            Asset
                Quality and Credit Risk Management


·
            Liquidity
                and Capital Resources


·
            Interest
                Rate Risk


·
            Inflation


·
            Forward-Looking
                Statements





**Challenges**





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





·
            Short-term
                interest rates have increased significantly since June of 2004 while
                longer term rates (10 to 20 years) are relatively unchanged since
                2004.  This movement in short-term rates has caused the yield
                curve to be flat or slightly inverted for most of 2006.  Banks
                have historically earned higher levels of net interest income by
                investing
                in longer term loans and investments at higher yields and paying
                lower
                deposit expense rates on shorter maturity deposits.  If the
                yield curve remains flat or inverted in 2007, the Company’s net interest
                margin may continue to compress.





·
            Rising
                interest rates will present a challenge to the Company in
                2007.  Continued increases in interest rates may negatively
                impact the Company’s net interest margin if interest expense increases
                more quickly than interest income.  The Company’s earning assets
                (primarily its loan and investment portfolio) have longer maturities
                than
                its interest bearing liabilities (primarily deposits and other
                borrowings); therefore, in a rising interest rate environment, interest
                expense will increase more quickly than interest income as the interest
                bearing liabilities reprice more quickly than earning
                assets.  In response to this challenge, the Banks model
                quarterly the changes in income that would result from various changes
                in
                interest rates.  Management believes Bank earning assets have
                the appropriate maturity and repricing characteristics to optimize
                earnings and the Banks’ interest rate risk
                positions.





27
 *Table
            of Contents*





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





·
            A
                substandard performance in the Company’s equity portfolio could lead to a
                reduction in the historical level of realized security gains, thereby
                negatively impacting the Company’s earnings.  The Company
                invests capital that may be utilized for future expansion in a portfolio
                of primarily financial and utility stocks with an estimated fair
                market
                value of approximately $24 million as of December 31, 2006.  The
                Company focuses on stocks that have historically paid dividends in
                an
                effort to lessen the negative effects of a bear
                market.





**Key
      Performance Indicators**





Certain
      key performance indicators for the Company and the industry are presented in
      the
      following chart.  The industry figures are compiled by the Federal
      Deposit Insurance Corporation (FDIC) and are derived from 8,681 commercial
      banks
      and savings institutions insured by the FDIC.  Management reviews
      these indicators on a quarterly basis for purposes of comparing the Company’s
      performance from quarter to quarter against the industry as a
      whole.





Selected
      Indicators for the Company and the Industry




Year
                Ended December 31,2006
            
            
            2005
            
            
            2004Company
            
            
            Industry
            
            
            Company
            
            
            Industry
            
            
            Company
            
            
            IndustryReturn
                on assets
            
            
            1.34
            %
            
            
            1.28
            %
            
            
            1.40
            %
            
            
            1.28
            %
            
            
            1.56
            %
            
            
            1.29
            %Return
                on equity
            
            
            9.99
            %
            
            
            12.34
            %
            
            
            10.57
            %
            
            
            12.46
            %
            
            
            11.47
            %
            
            
            13.28
            %Net
                interest margin
            
            
            3.29
            %
            
            
            3.31
            %
            
            
            3.56
            %
            
            
            3.49
            %
            
            
            3.97
            %
            
            
            3.53
            %Efficiency
                ratio
            
            
            52.27
            %
            
            
            56.79
            %
            
            
            49.09
            %
            
            
            57.24
            %
            
            
            46.59
            %
            
            
            58.03
            %Capital
                ratio
            
            
            13.38
            %
            
            
            8.23
            %
            
            
            13.21
            %
            
            
            8.25
            %
            
            
            13.62
            %
            
            
            8.12
            %





28
 *Table
            of Contents*





Key
      performance 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 return on assets ratio is in line
      with that of the industry, however, this ratio has declined in 2006 as compared
      to 2005 and 2004 as the result of lower net interest income.





·
            Return
                on Equity





This
      ratio is calculated by dividing net income by average equity.  It is
      used to measure the net income or return the Company generated for the
      shareholders’ equity investment in the Company.  The Company’s return
      on equity ratio is below that of the industry primarily as a result of lower
      net
      interest income in 2006 and the higher level of capital the Company maintains
      for future growth and acquisitions.





·
            Net
                Interest Margin





The
      ratio
      is calculated by dividing net interest income by average earning
      assets.  Earning assets consist primarily 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 deposit
      accounts and other borrowings.  The Company’s net interest margin is
      in line with peer bank averages but has fallen since 2005 as rising market
      interest rates have caused interest expense to increase more quickly than
      interest income.





·
            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
      compares favorably to the industry average.





·
            Capital
                Ratio





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





**Industry
      Results**





The
      FDIC
      Quarterly Banking Profile reported the following results for the fourth quarter
      of 2006:




FDIC-insured
      institutions reported total net income of $35.7 billion in the fourth quarter
      of
      2006. This was the lowest quarterly earnings total in 2006, but it was still
      more than the industry has earned in any quarter prior to 2006. Fourth-quarter
      net income was $3.0 billion (9.3%) more than insured institutions reported
      in
      the last quarter of 2005 when large losses in credit-card portfolios hurt
      industry earnings. Fourth-quarter results were affected by accounting
      adjustments triggered by a few large corporate restructurings that occurred
      during the quarter; these adjustments had the effect of reducing a number of
      reported income and expense items. If not for these adjustments, industry net
      income probably would have set a new quarterly record, thanks to large one-time
      gains at a few big institutions. However, core earnings would have still been
      below the levels of the previous three quarters in 2006.




29
 *Table
            of Contents*




Net
      interest income was $178 million (0.2%) higher in the fourth quarter than a
      year
      earlier. This is the smallest year-over-year increase in quarterly net interest
      income in three years. Without the accounting impact of corporate
      restructurings, the underlying growth rate would have been closer to 3.3%.
      Similarly, the industry reported total noninterest income for the quarter of
      $56.1 billion, or $677 million (1.2%) more than it reported for the fourth
      quarter of 2005. Adjusted for the effect of the restructurings, the increase
      in
      noninterest income would have been approximately 13.7%. Among items that were
      not affected by the restructurings, sales of securities and other assets yielded
      net gains of $624 million in the fourth quarter, while extraordinary items
      contributed another $2.1 billion to pretax earnings. This is the largest
      quarterly amount of extraordinary gains ever reported. Most of the gains came
      from the sale of retail branches and a trust operation between insured
      institutions. One negative factor in fourth-quarter results was higher expenses
      for bad loans. The fourth-quarter loan-loss provision of $9.6 billion was $923
      million (10.6%) higher than in the fourth quarter of 2005, and was the largest
      quarterly loss provision for the industry in two and a half years. The average
      return on assets (ROA) for the fourth quarter was 1.21%, the same as in the
      fourth quarter of 2005. Year-over-year improvements in quarterly profitability
      were concentrated among the largest institutions. More than half of all
      institutions — 52.4% — reported lower ROAs in the fourth quarter compared to the
      fourth quarter of 2005. Three out of every four institutions reporting lower
      ROAs also reported lower net interest margins.




About
      two
      out of every three insured institutions (64.4%) saw their net interest margins
      decline between the third and fourth quarters of 2006. The industry’s average
      margin declined from 3.38% to 3.20%, based on reported results. Excluding the
      accounting impact of corporate restructurings, the industry’s fourth-quarter
      margin would have been closer to 3.30%.  In an environment of
      relatively stable interest rates and an inverted yield curve, insured
      institutions’ average funding costs rose more rapidly than their average asset
      yields. This development is especially problematic for smaller institutions.
      During 2006, insured institutions with assets less than $1 billion obtained
      three-quarters of their net operating revenue (total noninterest income plus
      net
      interest income) from net interest income. Larger institutions obtained only
      57.1% of their net operating revenue from net interest income.





**Income
      Statement Review**





The
      following highlights a comparative discussion of the major components of net
      income and their impact for the last three years.





Critical
      Accounting Policy





The
      discussion contained in this Item 7 and other disclosures included within this
      report are based on the Company’s audited consolidated financial
      statements.  These statements have been prepared in accordance with
      accounting principles generally accepted in the United States of
      America.  The financial information contained in these statements is,
      for the most part, based on the financial effects of transactions and events
      that have already occurred. However, the preparation of these statements
      requires management to make certain estimates and judgments that affect the
      reported amounts of assets, liabilities, revenues and expenses.





30
 *Table
            of Contents*





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 to be the Company’s most critical
      accounting policy.





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
      collectibility of the principal is unlikely. The Company has policies and
      procedures for evaluating the overall credit quality of its loan portfolio,
      including timely identification of potential problem loans.  On a
      quarterly basis, management reviews the appropriate level for the allowance
      for
      loan losses, incorporating a variety of risk considerations, both quantitative
      and qualitative.  Quantitative factors include the Company’s
      historical loss experience, delinquency and charge-off trends, collateral
      values, known information about individual loans and other
      factors.  Qualitative factors include the general economic environment
      in the Company’s market area.  To the extent actual results differ
      from forecasts and management’s judgment, the allowance for loan losses may be
      greater or lesser than future charge-offs.




31
 *Table
            of Contents*




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.





ASSETS2006
            
            
            2005
            
            
            2004Average
                balance
            
            
            Revenue
            
            
            Yield
            
            
            Average
                balance
            
            
            Revenue
            
            
            Yield
            
            
            Average
                balance
            
            
            Revenue
            
            
            Yield(dollars
                in thousands)Interest-earning
                assetsLoans
                1Commercial
            
            $
            70,581
            
            
            $
            5,490
            
            
            
            7.78
            %
            
            $
            66,581
            
            
            $
            4,286
            
            
            
            6.44
            %
            
            $
            48,775
            
            
            $
            2,548
            
            
            
            5.22
            %Agricultural
            
            
            33,054
            
            
            
            2,758
            
            
            
            8.34
            %
            
            
            29,772
            
            
            
            2,143
            
            
            
            7.20
            %
            
            
            28,406
            
            
            
            1,839
            
            
            
            6.47
            %Real
                estate
            
            
            306,991
            
            
            
            19,655
            
            
            
            6.40
            %
            
            
            310,438
            
            
            
            18,912
            
            
            
            6.09
            %
            
            
            285,087
            
            
            
            17,169
            
            
            
            6.02
            %Consumer
                and other
            
            
            27,540
            
            
            
            1,691
            
            
            
            6.14
            %
            
            
            29,206
            
            
            
            1,638
            
            
            
            5.61
            %
            
            
            23,079
            
            
            
            1,317
            
            
            
            5.71
            %Total
                loans (including fees)
            
            $
            438,166
            
            
            $
            29,594
            
            
            
            6.75
            %
            
            $
            435,997
            
            
            $
            26,979
            
            
            
            6.19
            %
            
            $
            385,347
            
            
            $
            22,873
            
            
            
            5.94
            %Investment
                securitiesTaxable
            
            $
            212,897
            
            
            $
            9,195
            
            
            
            4.32
            %
            
            $
            216,785
            
            
            $
            8,823
            
            
            
            4.07
            %
            
            $
            213,043
            
            
            $
            8,911
            
            
            
            4.18
            %Tax-exempt
                2
            
            
            123,427
            
            
            
            7,913
            
            
            
            6.41
            %
            
            
            126,323
            
            
            
            8,006
            
            
            
            6.34
            %
            
            
            127,048
            
            
            
            8,125
            
            
            
            6.40
            %Total
                investment securities
            
            $
            336,324
            
            
            $
            17,108
            
            
            
            5.09
            %
            
            $
            343,108
            
            
            $
            16,829
            
            
            
            4.90
            %
            
            $
            340,091
            
            
            $
            17,036
            
            
            
            5.01
            %Interest
                bearing deposits with banks
            
            $
            4,114
            
            
            $
            139
            
            
            
            3.38
            %
            
            $
            7,037
            
            
            $
            169
            
            
            
            2.40
            %
            
            $
            8,713
            
            
            $
            130
            
            
            
            1.49
            %Federal
                funds sold
            
            
            4,229
            
            
            
            224
            
            
            
            5.30
            %
            
            
            4,833
            
            
            
            131
            
            
            
            2.71
            %
            
            
            11,630
            
            
            
            159
            
            
            
            1.37
            %Total
                Interest-earning assets
            
            $
            782,833
            
            
            $
            47,065
            
            
            
            6.01
            %
            
            $
            790,975
            
            
            $
            44,108
            
            
            
            5.58
            %
            
            $
            745,781
            
            
            $
            40,198
            
            
            
            5.39
            %Noninterest-earning
                assetsCash
                and due from banks
            
            $
            17,056
            
            
            
            
            
            
            
            
            
            
            $
            22,885
            
            
            
            
            
            
            
            
            
            
            $
            27,581Premises
                and equipment, net
            
            
            11,005
            
            
            
            
            
            
            
            
            
            
            
            9,229
            
            
            
            
            
            
            
            
            
            
            
            8,517Other,
                less allowance for loan losses
            
            
            7,556
            
            
            
            
            
            
            
            
            
            
            
            8,109
            
            
            
            
            
            
            
            
            
            
            
            11,197Total
                noninterest-earning assets
            
            $
            35,617
            
            
            
            
            
            
            
            
            
            
            $
            40,223
            
            
            
            
            
            
            
            
            
            
            $
            47,295TOTAL
                ASSETS
            
            $
            818,450
            
            
            
            
            
            
            
            
            
            
            $
            831,198
            
            
            
            
            
            
            
            
            
            
            $
            793,076





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%.




32
 *Table
            of Contents*





Average
      Balances and Interest Rates(continued)




LIABILITIES
      AND STOCKHOLDERS' EQUITY





2006
            
            
            2005
            
            
            2004Average
              balance
            
            
            Revenue/
              expense
            
            
            Yield/
              rate
            
            
            Average
              balance
            
            
            Revenue/
              expense
            
            
            Yield/
              rate
            
            
            Average
              balance
            
            
            Revenue/
              expense
            
            
            Yield/
              rate(dollars
                in thousands)Interest-bearing
                liabilitiesDepositsSavings,
                    NOW accounts, and money markets
            
            $
            314,567
            
            
            $
            8,250
            
            
            
            2.62
            %
            
            $
            323,334
            
            
            $
            5,757
            
            
            
            1.78
            %
            
            $
            329,410
            
            
            $
            3,210
            
            
            
            0.97
            %Time
                deposits < $100,000
            
            
            182,241
            
            
            
            7,071
            
            
            
            3.88
            %
            
            
            173,966
            
            
            
            5,530
            
            
            
            3.18
            %
            
            
            173,581
            
            
            
            4,974
            
            
            
            2.87
            %Time
                deposits> $100,000
            
            
            99,123
            
            
            
            4,422
            
            
            
            4.46
            %
            
            
            90,687
            
            
            
            3,095
            
            
            
            3.41
            %
            
            
            70,076
            
            
            
            1,759
            
            
            
            2.51
            %Total
                deposits
            
            $
            595,931
            
            
            $
            19,743
            
            
            
            3.31
            %
            
            $
            587,987
            
            
            $
            14,382
            
            
            
            2.45
            %
            
            $
            573,067
            
            
            $
            9,943
            
            
            
            1.74
            %Other
                borrowed funds
            
            
            36,388
            
            
            
            1,563
            
            
            
            4.30
            %
            
            
            56,443
            
            
            
            1,551
            
            
            
            2.75
            %
            
            
            38,211
            
            
            
            620
            
            
            
            1.62
            %Total
                Interest-bearing liabilities
            
            $
            632,319
            
            
            $
            21,306
            
            
            
            3.37
            %
            
            $
            644,430
            
            
            $
            15,933
            
            
            
            2.47
            %
            
            $
            611,278
            
            
            $
            10,563
            
            
            
            1.73
            %Noninterest-bearing
                liabilitiesDemand
                deposits
            
            $
            70,095
            
            
            
            
            
            
            
            
            
            
            $
            69,577
            
            
            
            
            
            
            
            
            
            
            $
            65,785Other
                liabilities
            
            
            6,528
            
            
            
            
            
            
            
            
            
            
            
            7,389
            
            
            
            
            
            
            
            
            
            
            
            8,009Stockholders'
                equity
            
            $
            109,508
            
            
            
            
            
            
            
            
            
            
            $
            109,802
            
            
            
            
            
            
            
            
            
            
            $
            108,004TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            818,450
            
            
            
            
            
            
            
            
            
            
            $
            831,198
            
            
            
            
            
            
            
            
            
            
            $
            793,076Net
                interest income
            
            
            
            
            
            $
            25,759
            
            
            
            3.29
            %
            
            
            
            
            
            $
            28,177
            
            
            
            3.56
            %
            
            
            
            
            
            $
            29,635
            
            
            
            3.97
            %Spread
                AnalysisInterest
                income/average assets
            
            
            
            
            
            $
            47,065
            
            
            
            5.75
            %
            
            
            
            
            
            $
            44,108
            
            
            
            5.31
            %
            
            
            
            
            
            $
            40,198
            
            
            
            5.07
            %Interest
                expense/average assets
            
            
            
            
            
            
            21,306
            
            
            
            2.60
            %
            
            
            
            
            
            
            15,931
            
            
            
            1.92
            %
            
            
            
            
            
            
            10,563
            
            
            
            1.33
            %Net
                interest income/average assets
            
            
            
            
            
            
            25,759
            
            
            
            3.15
            %
            
            
            
            
            
            
            28,177
            
            
            
            3.39
            %
            
            
            
            
            
            
            29,635
            
            
            
            3.74
            %




33
 *Table
            of Contents*





Rate
      and
      Volume Analysis





The
      rate
      and volume analysis is used to determine how much of the change in interest
      income or expense is the result of a change in volume or a change in interest
      rate.  For example, commercial loan interest income increased
      $1,204,000 in 2006 compared to 2005.  An increased volume of
      commercial loans added $270,000 in income in 2006 and higher interest rates
      increased interest income in 2006 by $934,000.





The
      following table sets forth, on a tax-equivalent basis, a summary of the changes
      in net interest income resulting from changes in volume and rates.





(dollars
                in thousands)
            
            2006
                Compared to 2005
            
            
            2005
                Compared to 2004Volume
            
            
            Rate
            
            
            Total 1
            
            
            Volume
            
            
            Rate
            
            
            TotalInterest
                incomeLoansCommercial
            
            $
            270
            
            
            $
            934
            
            
            $
            1,204
            
            
            $
            1,060
            
            
            $
            678
            
            
            $
            1,738Agricultural
            
            
            253
            
            
            
            362
            
            
            
            615
            
            
            
            91
            
            
            
            213
            
            
            
            304Real
                estate
            
            
            (212
            )
            
            
            955
            
            
            
            743
            
            
            
            1,541
            
            
            
            202
            
            
            
            1,743Consumer
                and other
            
            
            (97
            )
            
            
            150
            
            
            
            53
            
            
            
            344
            
            
            
            (23
            )
            
            
            321Total
                loans (including fees)
            
            $
            214
            
            
            $
            2,401
            
            
            $
            2,615
            
            
            $
            3,036
            
            
            $
            1,070
            
            
            $
            4,106Investment
                securitiesTaxable
            
            $
            (161
            )
            
            $
            533
            
            
            $
            372
            
            
            $
            152
            
            
            $
            (240
            )
            
            $
            (88
            )Tax-exempt
            
            
            (182
            )
            
            
            89
            
            
            
            (93
            )
            
            
            (45
            )
            
            
            (74
            )
            
            
            (119
            )Total
                investment securities
            
            $
            (343
            )
            
            $
            622
            
            
            
            279
            
            
            $
            107
            
            
            $
            (314
            )
            
            $
            (207
            )Interest
                bearing deposits with banks
            
            $
            (84
            )
            
            $
            53
            
            
            $
            (31
            )
            
            $
            (29
            )
            
            $
            68
            
            
            $
            39Federal
                funds sold
            
            
            (18
            )
            
            
            112
            
            
            
            94
            
            
            
            (127
            )
            
            
            99
            
            
            
            (28
            )Total
                Interest-earning assets
            
            $
            (231
            )
            
            $
            3,188
            
            
            $
            2,957
            
            
            $
            2,987
            
            
            $
            923
            
            
            $
            3,910Interest-bearing
                liabilitiesDepositsSavings,
                NOW accounts, and money markets
            
            $
            (160
            )
            
            $
            2,653
            
            
            $
            2,493
            
            
            $
            (60
            )
            
            $
            2,605
            
            
            $
            2,545Time
                deposits < $100,000
            
            
            274
            
            
            
            1,267
            
            
            
            1,541
            
            
            
            12
            
            
            
            544
            
            
            
            556Time
                deposits> $100,000
            
            
            308
            
            
            
            1,020
            
            
            
            1,328
            
            
            
            602
            
            
            
            734
            
            
            
            1,336Total
                deposits
            
            $
            422
            
            
            $
            4,940
            
            
            $
            5,362
            
            
            $
            554
            
            
            $
            3,883
            
            
            $
            4,437Other
                borrowed funds
            
            
            (672
            )
            
            
            683
            
            
            
            11
            
            
            
            378
            
            
            
            553
            
            
            
            931Total
                Interest-bearing liabilities
            
            $
            (250
            )
            
            $
            5,623
            
            
            $
            5,373
            
            
            $
            932
            
            
            $
            4,436
            
            
            $
            5,368Net
                interest income/earning assets
            
            $
            19
            
            
            $
            (2,435
            )
            
            $
            (2,416
            )
            
            $
            2,055
            
            
            $
            (3,513
            )
            
            $
            (1,458
            )





1
            The
                change in interest due to both volume and yield/rate has been allocated
                to
                change due to volume and change ue to yield/rate in proportion to
                the
                absolute value of the change in
                each.




34
 *Table
            of Contents*





Net
      Interest Income





The
      Company’s largest component contributing to net income is net interest income,
      which is the difference between interest earned on earning assets (which are
      primarily loans and investments) and interest paid on interest bearing
      liabilities (which are primarily deposits accounts and other
      borrowings).  The volume of and yields earned on earning assets and
      the volume of and the rates paid on interest bearing liabilities determine
      net
      interest income.  Refer to the tables preceding this paragraph for
      additional detail.  Interest earned and interest paid is also affected
      by general economic conditions, particularly changes in market interest rates,
      and by government policies and the action of regulatory
      authorities.  Net interest income divided by average earning assets is
      referred to as net interest margin.  For the years December 31, 2006,
      2005 and 2004, the Company's net interest margin was 3.29%, 3.56% and 3.97%,
      respectively.





Net
      interest income during 2006, 2005 and 2004 totaled $22,990,000, $25,373,000
      and
      $26,790,000, respectively, representing a 9% decrease in 2006 from 2005 and
      a 5%
      decrease in 2005 compared to 2004.  Net interest income has fallen
      since 2004 as rising market interest rates have caused interest expense to
      increase more quickly than interest income.





The
      high
      level of competition in the local markets and increasing market interest rates
      will continue to put downward pressure on the net interest margin of the
      Company. Currently, the Company’s largest market, Ames, Iowa, has nine banks,
      two thrifts, four credit unions and several other financial investment
      companies. Multiple banks are also located in the Company’s other communities
      creating similarly competitive environments.





Provision
      for Loan Losses





The
      provision for loan losses reflects management's judgment of the expense to
      be
      recognized in order to maintain an adequate allowance for loan
      losses.  The Company’s
      credit for loan losses for the year ending December 31, 2006 was $183,000
      compared to a provision expense of $331,000 during the same period last year.
      A
      reduction in the specific reserve for a problem credit and declining loan demand
      allowed a decrease in the required level of the allowance for loan losses
      calculated by the Banks.  This decrease in estimated allowance created
      the credit for loan losses.  The $331,000 of provision expense
      for loan losses during 2005 was lower than the $479,000 recorded in 2004
      primarily as the result of a lower level of problem loans in
      2005.  Refer to the Asset Quality and Credit Risk Management
      discussion for additional details with regard to loan loss provision
      expense.





Management
      believes the allowance for loan losses to be adequate to absorb probable losses
      in the current portfolio. This statement is based upon management's continuing
      evaluation of inherent risks in the current loan portfolio, current levels
      of
      classified assets and general economic factors. The Company will continue to
      monitor the allowance and make future adjustments to the allowance as conditions
      dictate.




35
 *Table
            of Contents*




Noninterest
        Income and Expense


Total
      noninterest income is comprised
      primarily of fee-based revenues from trust and agency services, bank related
      service charges on deposit activities, net securities gains generated primarily
      by the Company’s equity holdings, merchant and ATM fees related to electronic
      processing of merchant and cash transactions and secondary market
      income.





Noninterest
      income during 2006, 2005 and 2004 totaled $6,674,000, $5,613,000 and $5,269,000,
      respectively, representing a 19% increase in 2006 from 2005 and a 7% increase
      in
      2005 from 2004.  The increase in 2006 is primarily the result of a
      first quarter $471,000 gain on the foreclosure of a commercial real estate
      property where the fair market value determined by an independent appraisal
      exceeded the loan carrying amount, an increase of $339,000 in realized gains
      on
      the sale of securities in the Company's equity portfolio, and higher trust
      department income.  The higher non-interest income in 2005 compared to
      2004 related to higher realized gains on the sale of securities and improved
      trust department income.





Noninterest
      expense for the Company
      consists of all operating expenses other than interest expense on deposits
      and
      other borrowed funds.  Historically, the Company has not had any
      material expenses relating to discontinued operations, extraordinary losses
      or
      adjustments from a change in accounting principles.  Salaries and
      employee benefits are the largest component of the Company’s operating expenses
      and comprise 61% of noninterest expenses in 2006.





Noninterest
      expense during 2006, 2005 and 2004 totaled $15,504,000, $15,210,000 and
      $14,935,000, respectively, representing a 2% increase in both 2006 and
      2005.  Lower incentive compensation for senior officers of the Company
      and Banks in 2006 and 2005 contributed to the limited increase in noninterest
      expense.  The percentage of noninterest expense to average assets was
      1.89% in 2006, compared to 1.83% and 1.88% during 2005 and 2004,
      respectively.





Provision
      for Income Taxes





The
      provision for income taxes for 2006, 2005 and 2004 was $3,399,000, $3,836,000
      and $4,255,000, respectively. This amount represents an effective tax rate
      of
      24% during 2006, compared to 25% and 26% for 2005 and 2004,
      respectively.  The Company's marginal federal tax rate is currently
      35%.  The difference between the Company's effective and marginal tax
      rate is primarily related to investments made in tax exempt
      securities.





**Balance
      Sheet Review**





The
      Company’s assets are comprised primarily of loans and investment
      securities.  Average earning asset maturity or repricing dates are
      less than five years for the combined portfolios as the assets are funded for
      the most part by short term deposits with either immediate availability or
      less
      than one year average maturities.  This exposes the Company to risk
      with regard to changes in interest rates that are more fully explained in Item
      7A of this report “Quantitative and Qualitative Disclosures about Market
      Risk”.





Total
      assets increased to $838,853,000 in 2006 compared to $819,384,000 in 2005,
      a 2%
      increase.  The securities portfolio grew $21 million and federal funds
      sold grew by $13 million, offset by a decline of $11 million in the Company’s
      loan portfolio when comparing year end 2006 and 2005.





36
 *Table
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Loan
      Portfolio





Net
      loans
      for the year ended December 31, 2006 totaled $429,123,000,downfrom the $440,318,000
      as
      of December 31, 2005, a decrease of 3%. The decrease in loan volume can be
      primarily attributed to softening loan demand in 2006 and the payoff of a large
      loan from a local municipality.  Loans are the primary contributor to
      the Company’s revenues and cash flows.  The average yield on loans was
      166 and 129 basis points higher in 2006 and 2005, respectively, in comparison
      to
      the average tax-equivalent investment portfolio yields.





Types
      of
      Loans





The
      following table sets forth the composition of the Company's loan portfolio
      for
      the past five years ending at December 31, 2006.


(dollars
                in thousands)
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003
            
            
            2002Real
                EstateConstruction
            
            $
            30,600
            
            
            $
            23,973
            
            
            $
            21,042
            
            
            $
            13,126
            
            
            $
            13,5181-4
                family residential
            
            
            103,620
            
            
            
            102,043
            
            
            
            97,612
            
            
            
            84,645
            
            
            
            81,239Commercial
            
            
            139,149
            
            
            
            153,920
            
            
            
            160,176
            
            
            
            150,723
            
            
            
            136,351Agricultural
            
            
            31,092
            
            
            
            30,606
            
            
            
            27,443
            
            
            
            24,297
            
            
            
            21,693Commercial
            
            
            73,760
            
            
            
            71,430
            
            
            
            57,189
            
            
            
            38,555
            
            
            
            40,097Agricultural
            
            
            33,434
            
            
            
            32,216
            
            
            
            30,713
            
            
            
            27,815
            
            
            
            26,022Consumer
                and other
            
            
            24,276
            
            
            
            33,340
            
            
            
            24,584
            
            
            
            23,242
            
            
            
            19,921Total
                loans
            
            
            435,931
            
            
            
            447,528
            
            
            
            418,759
            
            
            
            362,403
            
            
            
            338,841Deferred
                loan fees, net
            
            
            276
            
            
            
            445
            
            
            
            644
            
            
            
            819
            
            
            
            777Total
                loans net of deferred fees
            
            $
            435,655
            
            
            $
            447,083
            
            
            $
            418,115
            
            
            $
            361,584
            
            
            $
            338,064





The
      Company's loan portfolio consists of real estate loans, commercial loans,
      agricultural loans and consumer loans.  As of December 31, 2006, gross
      loans totaled approximately $436 million, which equals approximately 64% of
      total deposits and 52% of total assets.  The Company’s peer group
      (consisting of 413 bank holding companies with total assets of $500 to $1,000
      million) loan to deposit ratio as of September 30, 2006 was a much higher
      90%.  The primary factor relating to the lower loan to deposit ratio
      for the Company compared to peer group averages is a more conservative
      underwriting philosophy.  As of December 31, 2006, the majority of the
      loans were originated directly by the Banks to borrowers within the Banks’
principal market areas. There are no foreign loans outstanding during the years
      presented.





Real
      estate loans include various types of loans for which the Banks hold real
      property as collateral and consist of loans primarily on commercial properties
      and single family residences.  Real estate loans typically have fixed
      rates for up to five years, with the Company’s loan policy permitting a maximum
      fixed rate maturity of up to 15 years.  The majority of construction
      loan volume is to contractors to construct commercial buildings and these loans
      generally have maturities of up to 12 months.  The Banks originate
      residential real estate loans for sale to the secondary market for a
      fee.





37
 *Table
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Commercial
      loans consist primarily of loans to businesses for various purposes, including
      revolving lines to finance current operations, floor-plans, inventory and
      accounts receivable; capital expenditure loans to finance equipment and other
      fixed assets; and letters of credit. These loans generally have short
      maturities, have either adjustable or fixed rates and are unsecured or secured
      by inventory, accounts receivable, equipment and/or real estate.





Agricultural
      loans play an important part in the Banks’ loan portfolios.  Iowa is a
      major agricultural state and is a national leader in both grain and livestock
      production.  The Banks play a significant role in their communities in
      financing operating, livestock and real estate activities for area
      producers.





Consumer
      loans include loans extended to individuals for household, family and other
      personal expenditures not secured by real estate.  The majority of the
      Banks’ consumer lending is for vehicles, consolidation of personal debts,
      household appliances and improvements.





The
      interest rates charged on loans vary with the degree of risk and the amount
      and
      maturity of the loan.  Competitive pressures, market interest rates,
      the availability of funds and government regulation further influence the rate
      charged on a loan. The Banks follow a loan policy, which has been approved
      by
      both the board of directors of the Company and the Banks, and is overseen by
      both Company and Bank management.  These policies establish lending
      limits, review and grading criteria and other guidelines such as loan
      administration and allowance for loan losses.  Loans are approved by
      the Banks’ board of directors and/or designated officers in accordance with
      respective guidelines and underwriting policies of the
      Company.  Credit limits generally vary according to the type of loan
      and the individual loan officer’s experience.  Loans to any one
      borrower are limited by applicable state and federal banking laws.


38
 *Table
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Maturities
      and Sensitivities of Loans to Changes in Interest Rates as of December 31,
      2006





The
      contractual maturities of the Company's loan portfolio are as shown below.
      Actual maturities may differ from contractual maturities because individual
      borrowers may have the right to prepay loans with or without prepayment
      penalties.





Within
              one
                year
            
            
            After
                one
              year
                but
              within
              five
                years
            
            
            After
              five
                years
            
            
            Total(dollars
                in thousands)Real
                EstateConstruction
            
            $
            24,304
            
            
            $
            5,823
            
            
            $
            473
            
            
            $
            30,6001-4
                family residential
            
            
            6,129
            
            
            
            45,227
            
            
            
            52,264
            
            
            
            103,620Commercial
            
            
            23,027
            
            
            
            88,078
            
            
            
            28,044
            
            
            
            139,149Agricultural
            
            
            2,528
            
            
            
            5,105
            
            
            
            23,459
            
            
            
            31,092Commercial
            
            
            30,653
            
            
            
            34,349
            
            
            
            8,758
            
            
            
            73,760Agricultural
            
            
            22,310
            
            
            
            9,769
            
            
            
            1,355
            
            
            
            33,434Consumer
                and other
            
            
            4,212
            
            
            
            16,365
            
            
            
            3,699
            
            
            
            24,276Total
                loans
            
            $
            113,163
            
            
            $
            204,716
            
            
            $
            118,052
            
            
            $
            435,931




After
                    one
                  year
                    but
                  within
                  five
                    years
                
                
                After
                  five
                    yearsLoan
                    maturities after one year with:Fixed
                    rates
                
                $
                175,326
                
                
                $
                24,159Variable
                    rates
                
                
                29,390
                
                
                
                93,893$
                204,716
                
                
                $
                118,052


Loans
      Held For Sale





Mortgage
      origination funding awaiting delivery to the secondary market totaled $526,000
      and $981,000 as of December 31, 2006 and 2005,
      respectively.  Residential mortgage loans are originated by the Banks
      and sold to several secondary mortgage market outlets based upon customer
      product preferences and pricing considerations.  The mortgages are
      sold in the secondary market to eliminate interest rate risk and to generate
      secondary market fee income.  It is not anticipated at the present
      time that loans held for sale will become a significant portion of total
      assets.





Investment
      Portfolio





Total
      investments as of December 31, 2006 were $354,572,000, an increase of $21
      million or 6% from the prior year end.  As of December 31, 2006 and
      2005, the investment portfolio comprised 42% and 41% of total assets,
      respectively.





39
 *Table
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The
      following table presents the market values, which represent the carrying values
      due to the available-for-sale classification, of the Company’s investment
      portfolio as of December 31, 2006, 2005 and 2004, respectively.  This
      portfolio provides the Company with a significant amount of
      liquidity.


2006
            
            
            2005
            
            
            2004(dollars
                in thousands)U.S.
                treasury securities
            
            $
            509
            
            
            $
            516
            
            
            $
            531U.S.
                government agencies
            
            
            139,745
            
            
            
            134,288
            
            
            
            137,634States
                and political subdivisions
            
            
            119,908
            
            
            
            108,373
            
            
            
            113,818Corporate
                bonds
            
            
            60,624
            
            
            
            59,567
            
            
            
            77,573Equity
                securities
            
            
            33,786
            
            
            
            30,766
            
            
            
            33,904Total
            
            $
            354,572
            
            
            $
            333,510
            
            
            $
            363,460





Investments
      in states and political subdivisions represent purchases of municipal bonds
      located primarily in the state of Iowa and contiguous states.





Investment
      in other securities includes corporate debt obligations of companies located
      and
      doing business throughout the United States.  The debt obligations
      were all within the credit ratings acceptable under the Company’s investment
      policy with the exception of the corporate debt obligations of one corporation
      that has a Moody’s sub investment quality rating of Ba1 as of December 31,
      2006.  These corporate bonds had a fair market and carrying value as
      of December 31, 2006 of $1,776,000 and $1,759,000, respectively.  The
      Company does not consider the corporate bonds to be other than temporarily
      impaired as of December 31, 2006.  As of December 31, 2006, the
      Company did not have securities from a single issuer, except for the United
      States Government or its agencies, which exceeded 10% of consolidated
      stockholders’ equity. The equity securities portfolio consists primarily of
      financial and utility stocks as of December 31, 2006, 2005, and
      2004.





40
 *Table
            of Contents*





Investment
      Maturities as of December 31, 2006





The
      investments in the following table are reported by contractual maturity.
      Expected maturities may differ from contractual maturities because borrowers
      may
      have the right to call or prepay obligations with or without prepayment
      penalties.





Within
              one
                year
            
            
            After
                one
              year
                but
              within
              five
                years
            
            
            After
                five
              years
                but
              within
              ten
                years
            
            
            After
              ten
                years
            
            
            Total(dollars
                in thousands)U.S.
                treasury securities
            
            
            -
            
            
            $
            509
            
            
            
            -
            
            
            
            -
            
            
            $
            509U.S.
                government agencies
            
            $
            39,959
            
            
            
            65,484
            
            
            $
            26,273
            
            
            $
            3,441
            
            
            
            139,745States
                and political subdivisions
            
            
            15,763
            
            
            
            38,733
            
            
            
            56,692
            
            
            
            13,307
            
            
            
            124,495Corporate
                bonds
            
            
            10,246
            
            
            
            35,366
            
            
            
            15,012
            
            
            
            -
            
            
            
            60,624Total
            
            $
            65,968
            
            
            $
            140,092
            
            
            $
            97,977
            
            
            $
            16,748
            
            
            $
            320,785Weighted
                average yieldU.S.
                treasury
            
            
            -
            
            
            
            5.20
            %
            
            
            -
            
            
            
            -
            
            
            
            5.20
            %U.S.
                government agencies
            
            
            3.36
            %
            
            
            4.22
            %
            
            
            6.43
            %
            
            
            6.38
            %
            
            
            4.21
            %States
                and political subdivisions*
            
            
            5.40
            %
            
            
            6.14
            %
            
            
            6.45
            %
            
            
            6.33
            %
            
            
            6.21
            %Corporate
                bonds
            
            
            3.88
            %
            
            
            5.28
            %
            
            
            5.92
            %
            
            
            -
            
            
            
            5.20
            %Total
            
            
            3.93
            %
            
            
            5.02
            %
            
            
            6.36
            %
            
            
            6.34
            %
            
            
            5.24
            %




*
            Yields
                on tax-exempt obligations of states and political subdivisions have
                been
                computed on a tax-equivalent basis.





Deposits





Types
      of
      Deposits





Total
      deposits equaled $680,356,000 and $668,342,000 as of December 31, 2006 and
      2005,
      respectively.  The increase of $12,014,000 can be attributed to
      deposit growth at First National, Randall-Story Bank and United
      Bank.  The deposit category seeing the largest balance increases was
      demand and interest-bearing checking (NOW) accounts.





The
      Company’s primary source of funds is customer deposits. The Company attempts to
      attract noninterest-bearing deposits, which are a low-cost funding source.
      In
      addition, the Banks offer a variety of interest-bearing accounts designed to
      attract both short-term and longer-term deposits from customers.
      Interest-bearing accounts earn interest at rates established by Bank management
      based on competitive market factors and the Company’s need for funds. While
      nearly 75% of the Banks’ certificates of deposit mature in the next year, it is
      anticipated that a majority of these certificates will be
      renewed.  Rate sensitive certificates of deposits in excess of
      $100,000 are subject to somewhat higher volatility with regard to renewal volume
      as the Banks adjust rates based upon funding needs. In the event a substantial
      volume of certificates are not renewed, the Company has sufficient liquid assets
      and borrowing lines to fund significant runoff. A sustained reduction in deposit
      volume would have a significant negative impact on the Company’s operation and
      liquidity. The Company has $7,406,000 of brokered deposits as of December 31,
      2006 and did not have any brokered deposits as of December 31,
      2005.





41
 *Table
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Average
      Deposits by Type





The
      following table sets forth the average balances for each major category of
      deposit and the weighted average interest rate paid for deposits during the
      years ended December 31, 2006, 2005 and 2004.





2006
            
            
            2005
            
            
            2004Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate(dollars
                in thousands)Noninterest
                bearing demand deposits
            
            $
            70,095
            
            
            
            -
            
            
            $
            69,577
            
            
            
            -
            
            
            $
            65,785
            
            
            
            -Interest
                bearing demand deposits
            
            
            153,619
            
            
            
            2.44
            %
            
            
            154,156
            
            
            
            1.63
            %
            
            
            154,332
            
            
            
            0.80
            %Money
                market deposits
            
            
            134,078
            
            
            
            3.16
            %
            
            
            141,492
            
            
            
            2.12
            %
            
            
            146,479
            
            
            
            1.25
            %Savings
                deposits
            
            
            26,870
            
            
            
            0.99
            %
            
            
            27,686
            
            
            
            0.90
            %
            
            
            28,599
            
            
            
            0.47
            %Time
                certificates < $100,000
            
            
            182,241
            
            
            
            3.88
            %
            
            
            173,966
            
            
            
            3.18
            %
            
            
            173,581
            
            
            
            2.87
            %Time
                certificates> $100,000
            
            
            99,123
            
            
            
            4.46
            %
            
            
            90,687
            
            
            
            3.41
            %
            
            
            70,076
            
            
            
            2.51
            %$
            666,026
            
            
            
            
            
            
            $
            657,564
            
            
            
            
            
            
            $
            638,852





Deposit
      Maturity





The
      following table shows the amounts and remaining maturities of time certificates
      of deposit that had balances of $100,000 and over as of December 31, 2006,
      2005
      and 2004.





2006
            
            
            2005
            
            
            2004(dollars
                in thousands)3
                months or less
            
            $
            33,393
            
            
            $
            25,933
            
            
            $
            20,613Over
                3 through 12 months
            
            
            45,898
            
            
            
            47,279
            
            
            
            29,217Over
                12 through 36 months
            
            
            20,047
            
            
            
            26,431
            
            
            
            17,131Over
                36 months
            
            
            2,893
            
            
            
            1,399
            
            
            
            2,103Total
            
            $
            102,231
            
            
            $
            101,042
            
            
            $
            69,064





Borrowed
      Funds





Borrowed
      funds that may be utilized by the Company are comprised of Federal Home Loan
      Bank (FHLB) advances, federal funds purchased, Treasury, Tax, and Loan option
      notes, and repurchase agreements.  Borrowed funds are an alternative
      funding source to deposits and can be used to fund the Company’s assets and
      unforeseen liquidity needs.  FHLB advances are loans from the FHLB
      that can mature daily or have longer maturities for fixed or floating rates
      of
      interest.  Federal funds purchased are borrowings from other banks
      that mature daily.  Securities sold under agreement to repurchase
      (repurchase agreements) are similar to deposits as they are funds lent by
      various Bank customers; however, the bank pledges investment securities to
      secure such borrowings.  The Company’s repurchase agreements normally
      reprice daily.  Treasury, Tax, and Loan option notes consist of short
      term borrowing of tax deposits from the federal government and are not a
      significant source of borrowing for the Company.





42
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The
      following table summarizes the outstanding amount of, and the average rate
      on,
      borrowed funds as of December 31, 2006, 2005 and 2004.





2006
            
            
            2005
            
            
            2004Balance
            
            
            Average
                Rate
            
            
            Balance
            
            
            Average
                Rate
            
            
            Balance
            
            
            Average
                Rate(dollars
                in thousands)Federal
                funds purchased and repurchase agreements
            
            $
            34,728
            
            
            
            4.42
            %
            
            $
            34,660
            
            
            
            3.38
            %
            
            $
            64,072
            
            
            
            1.99
            %Other
                short-term borrowings
            
            
            1,470
            
            
            
            4.92
            %
            
            
            2,861
            
            
            
            4.52
            %
            
            $
            -
            
            
            
            -
            %FHLB
                term advances
            
            
            2,000
            
            
            
            5.03
            %
            
            
            -
            
            
            
            -
            %
            
            
            -
            
            
            
            -
            %Total
            
            $
            38,198
            
            
            
            4.47
            %
            
            $
            37,521
            
            
            
            3.46
            %
            
            $
            64,072
            
            
            
            1.99
            %




43
 *Table
            of Contents*




Average
      Annual Borrowed Funds





The
      following table sets forth the average amount of, the average rate paid and
      maximum outstanding balance on, borrowed funds for the years ended December
      31,
      2006, 2005 and 2004.




2006
            
            
            2005
            
            
            2004Average
                Balance
            
            
            Average
                Rate
            
            
            Average
                Balance
            
            
            Average
                Rate
            
            
            Average
                Balance
            
            
            Average
                Rate(dollars
                in thousands)Federal
                funds purchased & repurchase agreements
            
            $
            34,692
            
            
            
            4.24
            %
            
            $
            55,337
            
            
            
            2.72
            %
            
            $
            38,211
            
            
            
            1.62
            %Other
                short-term borrowings
            
            
            1,029
            
            
            
            5.73
            %
            
            
            1,096
            
            
            
            4.29
            %
            
            
            -
            
            
            
            -
            %FHLB
                term advances
            
            
            667
            
            
            
            5.03
            %
            
            
            -
            
            
            
            -
            %
            
            
            -
            
            
            
            -
            %Total
            
            $
            36,388
            
            
            
            4.30
            %
            
            $
            56,443
            
            
            
            2.75
            %
            
            $
            38,211
            
            
            
            1.62
            %Maximum
                Amount Outstanding during the yearFederal
                funds purchased  and repurchase agreements
            
            $
            44,928
            
            
            
            
            
            
            $
            70,489
            
            
            
            
            
            
            $
            65,391Other
                short-term borrowings
            
            
            2,415
            
            
            
            
            
            
            $
            5,000
            
            
            
            
            
            
            
            -FHLB
                term advances
            
            
            2,000
            
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            -




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 that assist customers
      with their credit needs to conduct business.  The instruments involve,
      to varying degrees, elements of credit risk in excess of the amount recognized
      in the balance sheet.  As of December 31, 2006, the financial
      instruments most likely impact on revenues, expenses, or cash flows of the
      Company would come from unidentified credit risk causing higher provision
      expense for loan losses in future periods.  These financial
      instruments are not expected to have a significant impact on the liquidity
      or
      capital resources of the Company.  For additional information, see
      footnote 10 of the “Notes to Consolidated Statements” and the “Liquidity and
      Capital Resources” section of this discussion.





44
 *Table
            of Contents*





Contractual
      Obligations





The
      following table sets forth the balance of contractual obligations
      by


maturity
      period as of December 31, 2006 (in thousands).





Payments
                due by periodContractual
                Obligations
            
            Total
            
            
            Less
                than
              1
                year
            
            
            1-3
              years
            
            
            3-5
              years
            
            
            More
                than
              5
                yearsDeposits
            
            $
            680,356
            
            
            $
            608,990
            
            
            $
            67,236
            
            
            $
            4,130
            
            
            $
            -Other
                Borrowings
            
            
            38,198
            
            
            
            36,198
            
            
            
            -
            
            
            
            2,000
            
            
            
            -Operating
                Lease Obligation
            
            
            84
            
            
            
            21
            
            
            
            42
            
            
            
            21
            
            
            
            -Purchase
                Obligations
            
            
            1,966
            
            
            
            624
            
            
            
            1,248
            
            
            
            94
            
            
            
            -Total
            
            $
            720,604
            
            
            $
            645,833
            
            
            $
            68,526
            
            
            $
            6,245
            
            
            $
            -





Purchase
      obligations include data processing and Internet banking services contracts
      that
      include termination provisions that would accelerate all future payments in
      the
      event the Company changed service providers prior to the contracts’
expirations.





**Asset
      Quality Review and Credit Risk Management**





The
      Company’s credit risk is centered in the loan portfolio, which on December 31,
      2006 totaled $429,123,000 as compared to $440,318,000 as of December 31, 2005,
      a
      decrease of 3%.  Net loans comprise 51% of total assets as of the end
      of 2006.  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.  As the following chart indicates, the Company’s credit risk
      management practices have resulted in a low level of non-performing assets
      that
      total $3,857,000 as of December 31, 2006.  The Company’s level of
      problem assets as a percentage of assets of 0.46% as December 31, 2006 compares
      favorably to the average for FDIC insured institutions as of September 30,
      2006
      of 0.55%.





Non-performing
      Assets





The
      following table sets forth information concerning the Company's non-performing
      assets for the past five years ending December 31, 2006.





(dollars
                in thousands)
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003
            
            
            2002Non-performing
                assets:Nonaccrual
                loansLoans
                90 days or more past due
            
            $
            291
            
            
            $
            606
            
            
            $
            1,896
            
            
            $
            1,756
            
            
            $
            2,015and
                still accruing
            
            
            758
            
            
            
            83
            
            
            
            80
            
            
            
            431
            
            
            
            394Total
                non-performing loans
            
            
            1,049
            
            
            
            689
            
            
            
            1,976
            
            
            
            2,187
            
            
            
            2,409Other
                real estate owned
            
            
            2,808
            
            
            
            1,742
            
            
            
            772
            
            
            
            159
            
            
            
            295Total
                non-performing assets
            
            $
            3,857
            
            
            $
            2,431
            
            
            $
            2,748
            
            
            $
            2,346
            
            
            $
            2,704




45
 *Table
            of Contents*





The
      accrual of interest on non-accrual and other impaired loans is discontinued
      at
      90 days or when, in the opinion of management, the borrower may be unable to
      meet payments as they become due. When interest accrual is discontinued, all
      unpaid accrued interest is reversed. Interest income is subsequently recognized
      only to the extent cash payments are received. Interest income on restructured
      loans is recognized pursuant to the terms of the new loan agreement. Interest
      income on other impaired loans is monitored and based upon the terms of the
      underlying loan agreement. However, the recorded net investment in impaired
      loans, including accrued interest, is limited to the present value of the
      expected cash flows of the impaired loan or the observable fair market value
      of
      the loan’s collateral.





At
      December 31, 2006 and 2005, the
      Company had impaired loans of approximately $1,049,000 and $689,000,
      respectively.  The allowance for loan losses related to these impaired
      loans was approximately $142,000 and $55,000 at December 31, 2006 and 2005,
      respectively.  The average balances of impaired loans for the years
      ended December 31, 2006 and 2005 were $1,729,000 and $1,645,000,
      respectively.  For the years ended December 31, 2006, 2005, and 2004,
      interest income which would have been recorded under the original terms of
      such
      loans was approximately $42,000, $41,000 and $239,000, respectively, with
      $1,000, none, and $211,000, respectively, recorded.  Loans greater
      than 90 days past due and still accruing interest were approximately $758,000
      and $83,000 at December 31, 2006 and 2005, respectively.  There are no
      other potential problem loans that cause management to have serious doubts
      as to
      the ability of such borrowers to comply with the present loan repayment
      terms.





Summary
      of the Allowance for Loan Losses





The
      provision for loan losses represents an expense charged against earnings to
      maintain an adequate allowance for loan losses. 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.





The
      adequacy of the allowance for loan losses is evaluated quarterly by management
      and the respective Bank boards. This evaluation focuses on specific loan
      reviews, changes in the type and volume of the loan portfolio given the current
      economic conditions and historical loss experience. Any one of the following
      conditions may result in the review of a specific loan: concern about whether
      the customer’s cash flow or collateral are sufficient to repay the loan;
      delinquent status; criticism of the loan in a regulatory examination; the
      accrual of interest has been suspended; or other reasons, including when the
      loan has other special or unusual characteristics which warrant special
      monitoring.





While
      management uses available information to recognize losses on loans, further
      reductions in the carrying amounts of loans may be necessary based on changes
      in
      local economic conditions.  In addition, regulatory agencies, as an
      integral part of their examination process, periodically review the estimated
      losses on loans.  Such agencies may require the Company to recognize
      additional losses based on their judgment about information available to them
      at
      the time of their examination.




46
 *Table
            of Contents*





Analysis
      of the Allowance for Loan Losses





The
      Company’s policy is to charge-off loans when, in management’s opinion, the loan
      is deemed uncollectible, although concerted efforts are made to maximize future
      recoveries.  The following table sets forth information regarding
      changes in the Company's allowance for loan losses for the most recent five
      years.


(dollars
                in thousands)
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003
            
            
            2002Balance
                at beginning of period
            
            $
            6,765
            
            
            $
            6,476
            
            
            $
            6,051
            
            
            $
            5,758
            
            
            $
            5,446Charge-offs:Real
                EstateConstruction
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            24
            
            
            
            -1-4
                Family Residential
            
            
            6
            
            
            
            -
            
            
            
            19
            
            
            
            5
            
            
            
            -Commercial
            
            
            -
            
            
            
            28
            
            
            
            93
            
            
            
            -
            
            
            
            40Agricultural
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Commercial
            
            
            -
            
            
            
            -
            
            
            
            3
            
            
            
            392
            
            
            
            235Agricultural
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
                and other
            
            
            99
            
            
            
            119
            
            
            
            115
            
            
            
            43
            
            
            
            155105
            
            
            
            147
            
            
            
            230
            
            
            
            464
            
            
            
            430Recoveries:Real
                EstateConstruction
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -1-4
                Family Residential
            
            
            1
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            20Commercial
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Agricultural
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Commercial
            
            
            6
            
            
            
            33
            
            
            
            13
            
            
            
            100
            
            
            
            14Agricultural
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
                and other
            
            
            49
            
            
            
            72
            
            
            
            163
            
            
            
            12
            
            
            
            2056
            
            
            
            105
            
            
            
            176
            
            
            
            112
            
            
            
            54Net
                charge-offs
            
            
            49
            
            
            
            42
            
            
            
            54
            
            
            
            352
            
            
            
            376Additions
                (deductions) charged (credited) to operations
            
            
            (183
            )
            
            
            331
            
            
            
            479
            
            
            
            645
            
            
            
            688Balance
                at end of period
            
            $
            6,533
            
            
            $
            6,765
            
            
            $
            6,476
            
            
            $
            6,051
            
            
            $
            5,758Average
                Loans Outstanding
            
            $
            438,166
            
            
            $
            435,997
            
            
            $
            385,347
            
            
            $
            349,812
            
            
            $
            317,521Ratio
                of net charge-offs during the period to average loans
                outstanding
            
            
            0.01
            %
            
            
            0.01
            %
            
            
            0.01
            %
            
            
            0.10
            %
            
            
            0.12
            %Ratio
                of allowance for loan losses to total loans net of deferred
                fees
            
            
            1.50
            %
            
            
            1.51
            %
            
            
            1.55
            %
            
            
            1.67
            %
            
            
            1.70
            %




47
 *Table
            of Contents*





The
      allowance for loan losses decreased to $6,533,000 at the end of 2006 in
      comparison to the allowance of $6,765,000 at year end 2005.  Areduction in the specific
      reserve for
      a problem credit and declining loan demand allowed for a decrease in the
      required level of the allowance for loan losses calculated by the Banks for
      year
      end 2006 compared to 2005.The increase in the reserve levels in 2005
      compared to 2004 can be attributed to the growth in the Company’s commercial
      loan portfolio at First National and United Bank.  The increase in the
      reserve levels in 2004 compared to 2003 relate primarily to general reserves
      established by First National.  The general reserve methodology has
      remained consistent for the five years presented.





General
      reserves for loan categories normally range from 1.00 to 1.40% of the
      outstanding loan balances. As loan volume increases, the general reserve levels
      increase with that growth. As the previous table indicates, loan provisions
      have
      been trending downward since 2002 as the level of net charge-offs has been
      low
      since 2004.  The allowance relating to commercial real estate, 1-4
      family residential and commercial loans are the largest reserve components.
      Commercial real estate loans have higher general reserve levels than 1-4 family
      and agricultural real estate loans as management perceives more risk in this
      type of lending. Elements contributing to the higher risk level include
      susceptibility of businesses to changing environmental factors such as the
      economic business cycle, the larger individual loan amounts, a limited number
      of
      buyers and the specialized uses for some properties.  As of December
      31, 2006, commercial real estate loans have general reserves of 1.15%. The
      estimation methods and assumptions used in determining the allowance for the
      five years presented have remained fairly consistent.  The level of
      non performing loans as of December 31, 2006 has increased since 2005 but
      remains at a manageable level.





Loans
      that the Banks have identified as having higher risk levels are reviewed
      individually in an effort to establish adequate loss reserves. These reserves
      are considered specific reserves and are directly impacted by the credit quality
      of the underlying loans. Normally, as the actual or expected level of
      non-performing loans increase, the specific reserves also increase. For December
      31, 2006 specific reserves increased $534,000 or 2% compared to year end 2005
      levels as the volume of problem credits increased in 2006.  As of
      December 31, 2005, specific reserves increased $76,000 over 2004 as the level
      of
      watch credits increased.  As of December 31, 2004, specific reserves
      decreased $431,000 or 24% over year end 2003 as the result of improved loan
      quality. As of December 31, 2003, specific reserves increased $146,000 or 9%
      over year end 2002.  The specific reserves are dependent upon
      assumptions regarding the liquidation value of collateral and the cost of
      recovering collateral including legal fees. Changing the amount of specific
      reserves on individual loans has historically had the largest impact on the
      reallocation of the reserve among different parts of the portfolio.





Other
      factors that are considered when determining the adequacy of the reserve include
      loan concentrations, loan growth, and historical losses. The Company’s
      concentration risks include geographic concentration in central Iowa; the local
      economy’s dependence upon several large governmental entity employers, including
      Iowa State University and the Iowa Department of Transportation; and the health
      of Iowa’s agricultural sector that in turn, is dependent on weather conditions
      and government programs.  However, no assurances can be made that
      losses will remain at the favorable levels experienced over the past five
      years.





48
 *Table
            of Contents*





Allocation
      of the Allowance for Loan Losses





The
      following table sets forth information concerning the Company’s allocation of
      the allowance for loan losses.





2006
            
            
            2005
            
            
            2004
            
            
            2003
            
            
            2002(dollars
                in thousands)Amount
            
            
            %*
            
            
            Amount
            
            
            %*
            
            
            Amount
            
            
            %*
            
            
            Amount
            
            
            %*
            
            
            Amount
            
            
            %*Balance
                at end of periodapplicable
                to:Real
                EstateConstruction
            
            $
            372
            
            
            
            7.02
            %
            
            $
            258
            
            
            
            5.36
            %
            
            $
            429
            
            
            
            5.02
            %
            
            $
            196
            
            
            
            3.62
            %
            
            $
            210
            
            
            
            3.99
            %1-4
                family residential
            
            
            1,231
            
            
            
            23.77
            %
            
            
            1,127
            
            
            
            22.80
            %
            
            
            1,021
            
            
            
            23.31
            %
            
            
            948
            
            
            
            23.36
            %
            
            
            892
            
            
            
            23.98
            %Commercial
            
            
            2,396
            
            
            
            31.92
            %
            
            
            2,534
            
            
            
            34.39
            %
            
            
            2,676
            
            
            
            38.25
            %
            
            
            2,663
            
            
            
            41.59
            %
            
            
            2,453
            
            
            
            40.24
            %Agricultural
            
            
            428
            
            
            
            7.13
            %
            
            
            421
            
            
            
            6.84
            %
            
            
            486
            
            
            
            6.55
            %
            
            
            458
            
            
            
            6.70
            %
            
            
            302
            
            
            
            6.40
            %Commercial
            
            
            983
            
            
            
            16.92
            %
            
            
            1,158
            
            
            
            15.96
            %
            
            
            809
            
            
            
            13.66
            %
            
            
            775
            
            
            
            10.64
            %
            
            
            910
            
            
            
            11.83
            %Agricultural
            
            
            499
            
            
            
            7.67
            %
            
            
            511
            
            
            
            7.20
            %
            
            
            360
            
            
            
            7.33
            %
            
            
            488
            
            
            
            7.68
            %
            
            
            504
            
            
            
            7.68
            %Consumer
                and other
            
            
            276
            
            
            
            5.57
            %
            
            
            390
            
            
            
            7.45
            %
            
            
            302
            
            
            
            5.87
            %
            
            
            255
            
            
            
            6.41
            %
            
            
            235
            
            
            
            5.88
            %Unallocated
            
            
            348
            
            
            
            
            
            
            
            366
            
            
            
            
            
            
            
            393
            
            
            
            
            
            
            
            268
            
            
            
            
            
            
            
            252$
            6,533
            
            
            
            100
            %
            
            $
            6,765
            
            
            
            100
            %
            
            $
            6,476
            
            
            
            100
            %
            
            $
            6,051
            
            
            
            100
            %
            
            $
            5,758
            
            
            
            100
            %





*
            Percent
                of loans in each category to total
                loans.





**Liquidity
      and Capital Resources**





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




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




As
      of December 31, 2006, the level of
      liquidity and capital resources of the Company remain at a satisfactory level
      and compare favorably to that of other FDIC insured
      institutions.  Management believes that the Company's liquidity
      sources will be sufficient to support its existing operations for the
      foreseeable future.





49
 *Table
            of Contents*





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





·
            Review
                of the Company’s Current Liquidity
                Sources


·
            Review
                of the Consolidated Statements of Cash
                Flows


·
            Review
                of 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 on hand, balances due from other banks, federal funds sold and
      interest-bearing deposits in financial institutions for December 31, 2006,
      2005
      and 2004 totaled $31,154,000, $24,376,000 and $48,199,000,
      respectively.  The higher balance of liquid assets as of December 31,
      2006 relates to a higher level of federal funds sold to other financial
      institutions.





Other
      sources of liquidity available to the Banks include outstanding lines of credit
      with the Federal Home Loan Bank of Des Moines, Iowa of $44,295,000 and federal
      funds borrowing capacity at correspondent banks of $86,500,000.  As of
      December 31, 2006, the Company had outstanding FHLB advances of $2,000,000,
      no
      federal funds purchased, and securities sold under agreement to repurchase
      totaled $34,728,000, and Treasury Tax and Loan option notes of
      $1,470,000.





Total
      investments as of December 31, 2006 were $354,572,000 compared to $333,510,000
      as of year end 2005.  As of December 31, 2006 and 2005, the investment
      portfolio as a percentage of total assets was 42% and 41%,
      respectively.  This provides the Company with a significant amount of
      liquidity since all of the investments are classified as available for sale
      as
      of December 31, 2006 and 2005 and have pretax net unrealized gains of $9,075,000
      and $5,225,000, respectively.





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





Review
      of
      the Consolidated Statements of Cash Flows





Operating
      cash flows for December 31,
      2006, 2005 and 2004 totaled $11,055,000, $9,472,000 and $13,169,000,
      respectively. The primary reason for the increase in operating cash flows in
      2006 compared to 2005 was the source of cash provided by loans held for sale
      and
      higher accrued expenses and other liabilities.  The decrease in
      operating cash flows in 2005 compared to 2004 included an increase in loans
      held
      for sale and a lower net income.





Net
      cash provided (used) in investing
      activities for December 31, 2006, 2005 and 2004 was ($15,751,000), $14,558,000
      and ($103,647,000), respectively.  The net cash used in investing
      activities in 2006 was primarily utilized to purchase investment securities
      and
      federal funds sold.  The source of cash provided by loans in 2006
      compared to the investment in loans in 2005 was the largest variance in
      comparing the two years investing activities.  The net cash provided
      from investing activities in 2005 was primarily proceeds from the sale or
      maturity of investment securities and federal funds sold that were utilized
      to
      fund a lower level of securities sold under agreements to repurchase. The
      largest investing activities in 2004 were the purchase of U.S. government agency
      and corporate bonds and the funding of commercial operating and commercial
      real
      estate loans offset by the maturities, calls, and sales of securities available
      for sale.





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Net
      cash provided by (used in)
      financing activities for December 31, 2006, 2005 and 2004 totaled $3,113,000,
      ($24,697,000) and $77,255,000, respectively.  Deposit growth was the
      primary source of cash flows for 2006.  A decline in securities sold
      under agreements to repurchase was the primary use of financing funds in 2005
      and were the primary contributing factor to increase in financing cash flows
      in
      2004.  As of December 31, 2006, the Company did not have any external
      debt financing, off balance sheet financing arrangements or derivative
      instruments linked to its stock.





Review
      of
      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. In 2006, dividends
      from the Banks amounted to $8,734,000 compared to $8,634,000 in 2005. Various
      federal and state statutory provisions limit the amount of dividends banking
      subsidiaries are permitted to pay to their holding companies without regulatory
      approval.  Federal Reserve policy further limits the circumstances
      under which bank holding companies may declare dividends. For example, a bank
      holding company should not continue its existing rate of cash dividends on
      its
      common stock unless its net income is sufficient to fully fund each dividend
      and
      its prospective rate of earnings retention appears consistent with its capital
      needs, asset quality and overall financial condition. In addition, the Federal
      Reserve and the FDIC have issued policy statements which provide that insured
      banks and bank holding companies should generally pay dividends only out of
      current operating earnings.  Federal and state banking regulators may
      also restrict the payment of dividends by order.





First
      National and United Bank, as national banks, generally may pay dividends,
      without obtaining the express approval of the Office of the Comptroller of
      the
      Currency, in an amount up to its retained net profits for the preceding two
      calendar years plus retained net profits up to the date of any dividend
      declaration in the current calendar year.  Retained net profits, as
      defined by the OCC, consists of net income less dividends declared during the
      period.  Boone Bank, Randall-Story Bank and State Bank are also
      restricted under Iowa law to paying dividends only out of their undivided
      profits.  United Bank is not expected to generate sufficient earnings
      to pay any dividends in 2007.  Additionally, the payment of dividends
      by the Banks is affected by the requirement to maintain adequate capital
      pursuant to applicable capital adequacy guidelines and regulations, and the
      Banks generally are prohibited from paying any dividends if, following payment
      thereof, the Bank would be undercapitalized.





The
      Company has unconsolidated interest bearing deposits and marketable investment
      securities totaling $36,359,000 that are presently available to provide
      additional liquidity to the Banks.





51
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            of Contents*





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





No
      material capital expenditures or material changes in the capital resource mix
      are anticipated at this time.  Commitments to extend credit totaled
      $79,629,000 as of December 31, 2006 compared to a total of $77,099,000 at the
      end of 2005.  The timing of these credit commitments varies with the
      underlying borrowers; however, the Company has satisfactory liquidity to fund
      these obligations as of December 31, 2006.  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 December 31, 2006 that are a concern to management.





Capital
      Resources





The
      Company’s total stockholders’ equity increased to $112,923,000 at December 31,
      2006, from $109,227,000 at December 31, 2005.  At December 31, 2006
      and 2005, stockholders’ equity as a percentage of total assets was 13.4% and
      13.3%, respectively.  Total equity increased due to appreciation in
      the Company and Banks’ investment portfolios and the retention of
      earnings.  The capital levels of the Company currently exceed
      applicable regulatory guidelines as of December 31, 2006.





On
      June
      15, 2005, shareholders of the Company approved an amendment to the Restated
      Articles of Incorporation increasing the Company’s authorized common stock from
      6 million to 18 million shares and reducing the par value of such common stock
      from $5.00 to $2.00 per share.  The purpose of the amendment was to
      provide a sufficient number of shares of authorized common stock to accommodate
      a 3-for-1 stock split previously approved by the Board of Directors of the
      Company on May 11, 2005.  The stock split was effective July 15, 2005
      for holders of record as of July 1, 2005.  Share and per share data
      for all periods presented have been restated to reflect the stock
      split.





The
      Board
      of Directors of the Company approved a stock repurchase program on November
      8,
      2006.  The Company has a strong capital position and this program
      provides an opportunity to repurchase Company stock on the open market when
      it
      is deemed to be favorably priced for repurchase.  The program
      authorizes the repurchase of up to 100,000 shares during the calendar year
      2007,
      or approximately 1% of 9,425,013 shares of common stock presently
      outstanding.  The repurchases will be made in open market transactions
      at the discretion of management using Company cash.  The timing and
      actual number of shares purchased will depend on a variety of factors such
      as
      price, the Company’s liquidity position and other market
      conditions.  The program may be limited or discontinued at any time
      without notice.  The Company did not repurchase any shares in
      2006.





**Interest
      Rate Risk**





Interest
      rate risk refers to the impact that a change in interest rates may have on
      the
      Company’s earnings and capital. Management’s objectives are to control interest
      rate risk and to ensure predictable and consistent growth of earnings and
      capital. Interest rate risk management focuses on fluctuations in net interest
      income identified through computer simulations to evaluate volatility, varying
      interest rate, spread and volume assumptions. The risk is quantified and
      compared against tolerance levels.





52
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The
      Company uses a third-party computer software simulation modeling program to
      measure its exposure to potential interest rate changes.  For various
      assumed hypothetical changes in market interest rates, numerous other
      assumptions are made such as prepayment speeds on loans, the slope of the
      Treasury yield curve, the rates and volumes of the Company’s deposits and the
      rates and volumes of the Company’s loans.  This analysis measures the
      estimated change in net interest income in the event of hypothetical changes
      in
      interest rates.





Another
      measure of interest rate sensitivity is the gap ratio.  This ratio
      indicates the amount of interest-earning assets repricing within a given period
      in comparison to the amount of interest-bearing liabilities repricing within
      the
      same period of time.  A gap ratio of 1.0 indicates a matched position,
      in which case the effect on net interest income due to interest rate movements
      will be minimal.  A gap ratio of less than 1.0 indicates that more
      liabilities than assets reprice within the time period and a ratio greater
      than
      1.0 indicates that more assets reprice than liabilities.





The
      simulation model process provides a dynamic assessment of interest rate
      sensitivity, whereas a static interest rate gap table is compiled as of a point
      in time. The model simulations differ from a traditional gap analysis, as a
      traditional gap analysis does not reflect the multiple effects of interest
      rate
      movement on the entire range of assets and liabilities and ignores the future
      impact of new business strategies.





**Inflation**





The
      primary impact of inflation on the Company’s operations is to increase asset
      yields, deposit costs and operating overhead. Unlike most industries, virtually
      all of the assets and liabilities of a financial institution are monetary in
      nature. As a result, interest rates generally have a more significant impact
      on
      a financial institution’s performance than they would on non-financial
      companies.  Although interest rates do not necessarily move in the
      same direction or to the same extent as the price of goods and services,
      increases in inflation generally have resulted in increased interest rates.
      The
      effects of inflation can magnify the growth of assets and, if significant,
      require that equity capital increase at a faster rate than would be otherwise
      necessary.





**Forward-Looking
      Statements and Business Risks**





The
      discussion in the foregoing Management Discussion and Analysis and elsewhere
      in
      this Report contains forward-looking statements about the Company, its business
      and its prospects.  Forward-looking statements can be identified by
      the fact that they do not relate strictly to historical or current
      facts.  They often include use of the words “believe”, “expect”,
“anticipate”, “intend”, “plan”, “estimate” or words of similar meaning, or
      future or conditional verbs such as “will”, “would”, “should”, “could” or
“may”.  Forward-looking statements, by their nature, are subject to
      risks and uncertainties.  A number of factors, many of which are
      beyond the Company's control, could cause actual conditions, events or results
      to differ significantly from those described in the forward-looking
      statements.  Such risks and uncertainties with respect to the Company
      include, but are not limited to, those related to the economic conditions,
      particularly in the concentrated geographic area in which the Company and the
      Banks operate, competitive products and pricing, adequacy of the allowance
      for
      loan losses established by the Banks, 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 and the availability of and
      costs associated with sources of liquidity.





53
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These
      factors may not constitute all factors that could cause actual results to differ
      materially from those discussed in any forward-looking
      statement.   The Company operates in a continually changing
      business environment and new facts emerge from time to time.   It
      cannot predict such factors nor can it assess the impact, if any, of such
      factors on its financial position or its results of
      operations.   Accordingly, forward-looking statements should not
      be relied upon as a predictor of actual results.  The Company
      disclaims any responsibility to update any forward-looking statement provided
      in
      this document.





**ITEM7A.**
            **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 making loans and taking
      deposits.  Interest rate risk is the risk that changes in market
      interest rates 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 that exposure was managed in 2006 changed
      when compared to 2005.





Based
      on
      a simulation modeling analysis performed as of December 31, 2006, the following
      table presents the estimated change in net interest income in the event of
      hypothetical changes in interest rates for the various rate shock
      levels:





54
 *Table
            of Contents*





Net
      Interest Income at Risk





Estimated
      Change in Net Interest Income for Year Ending December 31, 2007





$
                Change
            
            
            %
                Change(dollars
                in thousands)+200
                Basis Points
            
            
            -2,417
            
            
            
            -10.4
            %+100
                Basis Points
            
            
            -1,164
            
            
            
            -5.0
            %-100
                Basis Points
            
            
            1,664
            
            
            
            7.1
            %-200
                Basis Points
            
            
            2,832
            
            
            
            12.1
            %





As
      shown
      above, at December 31, 2006, the estimated effect of an immediate 200 basis
      point increase in interest rates would decrease the Company’s net interest
      income by 10.4% or approximately $2,417,000 in 2007. The estimated effect of
      an
      immediate 200 basis point decrease in rates would increase the Company’s net
      interest income by 12.1% or approximately $2,832,000 in 2007. The Company’s
      Asset Liability Management Policy establishes parameters for a 200 basis point
      change in interest rates. Under this policy, the Company and the Banks’
objective is to properly structure the balance sheet to prevent a 200 basis
      point change in interest rates from causing a decline in net interest income
      by
      more than 15% in one year compared to the base year that hypothetically assumes
      no change in interest rates.





Computations
      of the prospective effects of hypothetical interest rate changes are based
      on
      numerous assumptions. Actual values may differ from those projections set forth
      above. Further, the computations do not contemplate any actions the Company
      may
      undertake in response to changes in interest rates. Current interest rates
      on
      certain liabilities are at a level that does not allow for significant repricing
      should market interest rates decline considerably.





55
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Contractual
      Maturity or Repricing





The
      following table sets forth the estimated maturity or re-pricing, and the
      resulting interest sensitivity gap, of the Company's interest-earning assets
      and
      interest-bearing liabilities and the cumulative interest sensitivity gap at
      December 31, 2006. The expected maturities are presented on a contractual basis.
      Actual maturities may differ from contractual maturities because of prepayment
      assumptions, early withdrawal of deposits and competition.





Less
                than
              three
              months
            
            
            Three
              months
                to
              one
                year
            
            
            One
                to
              five
              years
            
            
            Over
              five
              years
            
            
            Cumulative
              Total(dollars
                in thousands)Interest
                - earning assetsInterest
                - bearing deposits with banks
            
            $
            1,144
            
            
            $
            400
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,544Federal
                funds sold
            
            
            13,100
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            13,100Investments
                *
            
            
            6,787
            
            
            
            59,181
            
            
            
            140,092
            
            
            
            148,512
            
            
            
            354,572Loans
            
            
            92,579
            
            
            
            62,836
            
            
            
            245,474
            
            
            
            35,043
            
            
            
            435,932Loans
                held for sale
            
            
            526
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            526Total
                interest - earning assets
            
            $
            114,136
            
            
            $
            122,417
            
            
            $
            385,566
            
            
            $
            183,555
            
            
            $
            805,674Interest
                - bearing liabilities Interest bearing demand deposits
            
            $
            158,584
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            158,584Money
                market and savings deposits
            
            
            159,402
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            159,402Time
                certificates < $100,000
            
            
            40,231
            
            
            
            93,844
            
            
            
            48,427
            
            
            
            -
            
            
            
            182,502Time
                certificates> $100,000
            
            
            33,393
            
            
            
            45,898
            
            
            
            22,940
            
            
            
            -
            
            
            
            102,231Other
                borrowed funds
            
            
            36,198
            
            
            
            -
            
            
            
            2,000
            
            
            
            -
            
            
            
            38,198Total
                interest - bearing liabilities
            
            $
            427,808
            
            
            $
            139,742
            
            
            $
            73,367
            
            
            
            -
            
            
            $
            640,917Interest
                sensitivity gap
            
            $
            (313,672
            )
            
            $
            (17,325
            )
            
            $
            312,199
            
            
            $
            183,555
            
            
            $
            164,757Cumulative
                interest sensitivity gap
            
            $
            (313,672
            )
            
            $
            (330,997
            )
            
            $
            (18,798
            )
            
            $
            164,757
            
            
            $
            164,757Cumulative
                interest sensitivity gap as a percent of total assets
            
            
            -37.39
            %
            
            
            -39.46
            %
            
            
            -2.24
            %
            
            
            19.64
            %





*
            Investments
                with maturities over 5 years include the market value of equity securities
                of $33,787.


56
 *Table
            of Contents*




As
      of December 31, 2006, the Company’s
      cumulative gap ratios for assets and liabilities repricing within three months
      and within one year were 37% and 39%, respectively, meaning more liabilities
      than assets are scheduled to reprice within these periods.  This
      situation suggests that a decrease in market interest rates may benefit net
      interest income and that an increase in interest rates may negatively impact
      the
      Company.  The liability sensitive gap position is largely the result
      of classifying the interest bearing NOW accounts, money market accounts and
      savings accounts as immediately repriceable.  Certain shortcomings are
      inherent in the method of analysis presented in the foregoing
      table.  For example, although certain assets and liabilities may have
      similar maturities and periods to repricing, they may react differently to
      changes in market interest rates.  Also, interest rates on assets and
      liabilities may fluctuate in advance of changes in market interest rates, while
      interest rates on other assets and liabilities may follow changes in market
      interest rates.  Additionally, certain assets have features that
      restrict changes in the interest rates of such assets, both on a short-term
      basis and over the lives of such assets.





57
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**ITEM
                8.**
            **FINANCIAL
                STATEMENTS AND SUPPLEMENTARY
                DATA**





**MANAGEMENT’S
      REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**





The
      management of Ames National Corporation (the
      “Company”)
      is
      responsible for establishing and maintaining adequate internal control over
      financial reporting.  The Company’s internal control system was
      designed to provide reasonable assurance to the Company’s management and board
      of directors regarding the preparation and fair presentation of published
      financial statements.  Because of its inherent limitations, internal
      control over financial reporting may not prevent or detect
      misstatements.  Also, projections of any evaluation of effectiveness
      to future periods are subject to the risk that controls may become inadequate
      because of changes in conditions, or that the degree of compliance with the
      policies or procedures may deteriorate.





The
      Company’s management assessed the effectiveness of the Company’s internal
      control over financial reporting as of December 31, 2006.   In
      making this assessment, it used the criteria set forth by the Committee of
      Sponsoring Organizations of the Treadway Commission (COSO) in Internal
      Control-Integrated Framework.   Based on our assessment we
      determined that, as of December 31, 2006, the Company’s internal control over
      financial reporting is effective based on those criteria.





Management’s
      assessment of the effectiveness of the Company’s internal control over financial
      reporting as of December 31, 2006 has been audited by Clifton Gunderson LLP,
      an
      independent registered public accounting firm, as stated in their report which
      appears herein.




/s/
                Daniel L. KriegerDaniel
                L. Krieger, Chairman and President(Principal
                Executive Officer)/s/
                John P. NelsonJohn
                P. Nelson, Vice President(Principal
                Financial Officer)




58
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            of Contents*





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








The
      Board
      of Directors


Ames
      National Corporation


Ames,
      Iowa








We
      have
      audited the accompanying consolidated balance sheet of Ames National Corporation
      and Subsidiaries as of December 31, 2006 and the related consolidated statements
      of income, stockholders’ equity and cash flows for the year then
      ended.  These consolidated financial statements are the responsibility
      of the Company’s management.  Our responsibility is to express an
      opinion of these consolidated financial statements based on our
      audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States).  Those standards require
      that we plan and perform the audit to obtain reasonable assurance about whether
      the financial statements are free of material misstatement.  An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements.  An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall financial statement
      presentation.  We believe that our audit provides a reasonable basis
      for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Ames National Corporation
      and Subsidiaries as of December 31, 2006 and the results of their operations
      and
      their cash flows for the year then ended in conformity with accounting
      principles generally accepted in the United States of America.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of Ames National Corporation
      and Subsidiaries’ internal control over financial reporting as of December 31,
      2006, based on criteria established in *Internal Control – Integrated
      Framework* issued by the Committee of Sponsoring Organizations of the
      Treadway Commission (COSO), and our report dated February 27, 2007 expressed
      an
      unqualified opinion on management’s assessment of internal control over
      financial reporting and an unqualified opinion on the effectiveness of internal
      control over financial reporting.








/s/
      *Clifton Gunderson LLP*








West
      Des
      Moines, Iowa


February
      27, 2007




59
 *Table
            of Contents*





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To
      the
      Board of Directors


Ames
      National Corporation


Ames,
      Iowa








We
      have
      audited the consolidated balance sheet of Ames National Corporation and
      subsidiaries as of December 31, 2005, and the related consolidated statements
      of
      operations, stockholders’ equity and cash flows for each of the two years in the
      period ended December 31, 2005.  These financial statements are the
      responsibility of the Company’s management.  Our responsibility is to
      express an opinion on these financial statements based on our
      audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States).  Those standards require
      that we plan and perform the audit to obtain reasonable assurance about whether
      the financial statements are free of material misstatement.  An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements.  An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall financial statement
      presentation.  We believe that our audits provide a reasonable basis
      for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Ames National Corporation
      and subsidiaries as of December 31, 2005, and the results of their operations
      and their cash flows for each of the two years in the period ended December
      31,
      2005, in conformity with U.S. generally accepted accounting
      principles.








/s/
      *McGladrey & Pullen LLP*





Des
      Moines, Iowa


January
      26, 2006




60
 *Table
            of Contents*





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**







To
      the
      Board of Directors


Ames
      National Corporation


Ames,
      Iowa





We
      have
      audited management’s assessment, included in the accompanying Management’s
      Report on Internal Control over Financial Reporting that Ames National
      Corporation maintained effective internal control over financial reporting
      as of
      December 31, 2006, based on criteria established in *Internal Control –
Integrated Framework* issued by the Committee of Sponsoring Organizations of
      the Treadway Commission (COSO).   Ames National Corporation’s
      management is responsible for maintaining effective internal control over the
      financial reporting and for its assessment of the effectiveness of internal
      control over financial reporting.   Our responsibility is to
      express an opinion on management’s assessment and an opinion on the
      effectiveness of the Company’s internal control over financial reporting based
      on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States).   Those standards
      require that we plan and perform the audit to obtain reasonable assurance about
      whether effective internal control over financial reporting was maintained
      in
      all material respects.   Our audit included obtaining an
      understanding of internal control over the financial reporting, evaluating
      management’s assessment, testing and evaluating the design and operating
      effectiveness of internal control, and performing such other procedures as
      we
      considered necessary in the circumstances.   We believe that our
      audit provides a reasonable basis for our opinion.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles.   A company’s
      internal control over financial reporting includes those policies and procedures
      that (1) pertain to the maintenance of records that, in reasonable detail,
      accurately and fairly reflect the transactions and dispositions of the assets
      of
      the company; (2) provide reasonable assurance that transactions are recorded
      as
      necessary to permit preparation of financial statements in accordance with
      generally accepted accounting principles, and that receipts and expenditures
      of
      the company are being made only in accordance with authorizations of management
      and directors of the company; and (3) provide reasonable assurance regarding
      prevention or timely detection of unauthorized acquisition, use or disposition
      of the company’s assets that could have a material effect on the financial
      statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements.  Also, projections of any evaluation
      of effectiveness to future periods are subject to the risk that controls may
      become inadequate because of changes in conditions, or that the degree of
      compliance with the policies or procedures may deteriorate.





61
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            of Contents*





In
      our
      opinion, management’s assessment that Ames National Corporation maintained
      effective internal control over financial reporting as of December 31, 2006
      is
      fairly stated, in all material respects, based on criteria established in
*Internal Control – Integrated Framework*issued by the Committee of
      Sponsoring Organizations of the Treadway Commission (COSO).  Also in
      our opinion, Ames National Corporation maintained, in all material respects,
      effective internal control over financial reporting as of December 31, 2006,
      based on criteria established in *Internal Control – Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway
      Commission (COSO).





We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheet of Ames National
      Corporation and Subsidiaries as of December 31, 2006, and the related
      consolidated statements of income, stockholders’ equity and cash flows for the
      year then ended and our report dated February 27, 2007 expressed an unqualified
      opinion.







/s/
      Clifton Gunderson LLP








West
      Des
      Moines, Iowa


February
      27, 2007




62
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            of Contents*





**AMES
      NATIONAL CORPORATION AND SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEETS**


**December
      31, 2006 and 2005**


**ASSETS**
            
            **2006**
            
            
            **2005**Cash
                and due from banks
            
            $
            16,510,082
            
            
            $
            18,092,139Federal
                funds sold
            
            
            13,100,000
            
            
            
            300,000Interest
                bearing deposits in financial institutions
            
            
            1,544,306
            
            
            
            5,983,542Securities
                available-for-sale
            
            
            354,571,864
            
            
            
            333,510,152Loans
                receivable, net
            
            
            429,122,541
            
            
            
            440,317,685Loans
                held for sale
            
            
            525,999
            
            
            
            981,280Bank
                premises and equipment, net
            
            
            12,617,741
            
            
            
            11,030,840Accrued
                income receivable
            
            
            7,871,365
            
            
            
            6,633,795Deferred
                income taxes
            
            
            -
            
            
            
            343,989Other
                assets
            
            
            2,989,090
            
            
            
            2,190,652**Total
                assets**
            
            $
            838,852,988
            
            
            $
            819,384,074**LIABILITIES
                AND STOCKHOLDERS' EQUITY**LIABILITIESDepositsDemand,
                noninterest bearing
            
            $
            77,638,264
            
            
            $
            74,155,477NOW
                accounts
            
            
            158,584,115
            
            
            
            151,680,984Savings
                and money market
            
            
            159,401,753
            
            
            
            160,998,014Time,
                $100,000 and over
            
            
            102,230,631
            
            
            
            101,042,024Other
                time
            
            
            182,501,710
            
            
            
            180,465,836**Total
                deposits**
            
            
            680,356,473
            
            
            
            668,342,335Federal
                funds purchased and securities sold under agreements to
                repurchase
            
            
            34,727,897
            
            
            
            34,659,983Other
                short-term borrowings
            
            
            1,470,116
            
            
            
            2,861,130FHLB
                term advances
            
            
            2,000,000
            
            
            
            -Dividend
                payable
            
            
            2,450,503
            
            
            
            2,354,818Deferred
                income taxes
            
            
            1,187,948
            
            
            
            -Accrued
                expenses and other liabilities
            
            
            3,736,739
            
            
            
            1,938,507**Total
                liabilities**
            
            
            725,929,676
            
            
            
            710,156,773STOCKHOLDERS'
                EQUITYCommon
                stock, $2 par value, authorized 18,000,000 shares; 9,425,013 and
                9,419,271
                shares issued and outstanding as of December 31, 2006 and 2005,
                respectively
            
            
            18,850,026
            
            
            
            18,838,542Additional
                paid-in capital
            
            
            22,498,904
            
            
            
            22,383,375Retained
                earnings
            
            
            65,856,627
            
            
            
            64,713,530Accumulated
                other comprehensive income - net unrealized gain on securities
                available-for-sale
            
            
            5,717,755
            
            
            
            3,291,854**Total
                stockholders' equity**
            
            
            112,923,312
            
            
            
            109,227,301**Total
                liabilities and stockholders' equity**
            
            $
            838,852,988
            
            
            $
            819,384,074





See
      Notes
      to Consolidated Financial Statements.




63
 *Table
            of Contents*





**AMES
      NATIONAL CORPORATION AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF INCOME**


**Years
      Ended December 31, 2006, 2005 and 2004**


**2006**
            
            
            **2005**
            
            
            **2004**Interest
                and dividend income:Loans,
                including fees
            
            $
            29,593,896
            
            
            $
            26,979,358
            
            
            $
            22,872,764Securities:Taxable
            
            
            8,830,356
            
            
            
            8,558,156
            
            
            
            8,536,759Tax-exempt
            
            
            4,226,941
            
            
            
            4,190,268
            
            
            
            4,274,033Federal
                funds sold
            
            
            224,882
            
            
            
            130,182
            
            
            
            159,438Dividends
            
            
            1,419,617
            
            
            
            1,447,663
            
            
            
            1,510,665**Total
                interest income**
            
            
            44,295,692
            
            
            
            41,305,627
            
            
            
            37,353,659Interest
                expense:Deposits
            
            
            19,742,379
            
            
            
            14,380,214
            
            
            
            9,942,250Other
                borrowed funds
            
            
            1,563,149
            
            
            
            1,552,894
            
            
            
            621,077Total
                interest expense
            
            
            21,305,528
            
            
            
            15,933,108
            
            
            
            10,563,327**Net
                interest income**
            
            
            22,990,164
            
            
            
            25,372,519
            
            
            
            26,790,332Provision
                (credit) for loan losses
            
            
            (182,686
            )
            
            
            331,282
            
            
            
            479,355**Net
                interest income after provision (credit) for loan
                losses**
            
            
            23,172,850
            
            
            
            25,041,237
            
            
            
            26,310,977Noninterest
                income:Trust
                department income
            
            
            1,462,734
            
            
            
            1,375,308
            
            
            
            1,185,681Service
                fees
            
            
            1,840,699
            
            
            
            1,796,503
            
            
            
            1,813,795Securities
                gains, net
            
            
            1,135,136
            
            
            
            795,780
            
            
            
            324,030Gain
                on sales of loans held for sale
            
            
            564,819
            
            
            
            606,277
            
            
            
            610,077Merchant
                and ATM fees
            
            
            645,517
            
            
            
            570,914
            
            
            
            534,897Gain
                on sale or foreclosure of real estate
            
            
            482,203
            
            
            
            -
            
            
            
            -Other
            
            
            542,924
            
            
            
            468,410
            
            
            
            800,835**Total
                noninterest income**
            
            
            6,674,032
            
            
            
            5,613,192
            
            
            
            5,269,315Noninterest
                expense:Salaries
                and employee benefits
            
            
            9,408,293
            
            
            
            9,208,902
            
            
            
            9,019,139Data
                processing
            
            
            2,185,478
            
            
            
            2,126,040
            
            
            
            2,241,441Occupancy
                expenses
            
            
            1,159,750
            
            
            
            1,148,738
            
            
            
            1,048,323Other
                operating expenses
            
            
            2,750,341
            
            
            
            2,726,222
            
            
            
            2,626,451**Total
                noninterest expense**
            
            
            15,503,862
            
            
            
            15,209,902
            
            
            
            14,935,354**Income
                before income taxes**
            
            
            14,343,020
            
            
            
            15,444,527
            
            
            
            16,644,938Provision
                for income taxes
            
            
            3,399,403
            
            
            
            3,835,992
            
            
            
            4,255,392**Net
                income**
            
            $
            10,943,617
            
            
            $
            11,608,535
            
            
            $
            12,389,546Basic
                earnings per share
            
            $
            1.16
            
            
            $
            1.23
            
            
            $
            1.32See
                Notes to Consolidated Financial Statements.





64
 *Table
            of Contents*





**AMES
      NATIONAL CORPORATION AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**Years
      Ended December 31, 2006, 2005 and 2004**


Comprehensive
                Income
              
              
              Common
                Stock
              
              
              Additional
                Paid-in
                Capital
              
              
              Retained
                Earnings
              
              
              Treasury
                Stock
              
              
              Accumulated
                Other
                Comprehensive
                Income
              
              
              Total
                Stockholders'
                Equity**Balance,
                  December 31, 2003**
              
              
              
              
              $
              18,919,380
              
              
              $
              22,198,749
              
              
              $
              58,400,660
              
              
              $
              (1,109,735
              )
              
              $
              8,915,941
              
              
              $
              107,324,995Comprehensive
                  income:Net
                  income
              
              $
              12,389,546
              
              
              
              -
              
              
              
              -
              
              
              
              12,389,546
              
              
              
              -
              
              
              
              -
              
              
              
              12,389,546Other
                  comprehensive income, unrealized (losses) on securities, net of
                  reclassification adjustment, net of tax benefit
              
              
              (1,448,229
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,448,229
              )
              
              
              (1,448,229
              )**Total
                  comprehensive income**
              
              $
              10,941,317Cash
                  dividends declared, $0.81 per share
              
              
              
              
              
              
              -
              
              
              
              -
              
              
              
              (7,589,854
              )
              
              
              -
              
              
              
              -
              
              
              
              (7,589,854
              )Sale
                  of 12,039 shares of treasury stock
              
              
              
              
              
              
              -
              
              
              
              26,767
              
              
              
              -
              
              
              
              220,715
              
              
              
              -
              
              
              
              247,482**Balance,
                  December 31, 2004**
              
              
              
              
              
              
              18,919,380
              
              
              
              22,225,516
              
              
              
              63,200,352
              
              
              
              (889,020
              )
              
              
              7,467,712
              
              
              
              110,923,940Comprehensive
                  income:Net
                  income
              
              $
              11,608,535
              
              
              
              -
              
              
              
              -
              
              
              
              11,608,535
              
              
              
              -
              
              
              
              -
              
              
              
              11,608,535Other
                  comprehensive income, unrealized (losses) on securities, net of
                  reclassification adjustment, net of tax benefit
              
              
              (4,175,858
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (4,175,858
              )
              
              
              (4,175,858
              )**Total
                  comprehensive income**
              
              $
              7,432,677Cash
                  dividends declared, $1.00 per share
              
              
              
              
              
              
              -
              
              
              
              -
              
              
              
              (9,417,253
              )
              
              
              -
              
              
              
              -
              
              
              
              (9,417,253
              )Retirement
                  of treasury stock
              
              
              
              
              
              
              (96,984
              )
              
              
              (113,932
              )
              
              
              (678,104
              )
              
              
              889,020
              
              
              
              
              
              
              
              -Sale
                  of 8,073 shares of common stock
              
              
              
              
              
              
              16,146
              
              
              
              271,791
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              287,937**Balance,
                  December 31, 2005**
              
              
              
              
              
              
              18,838,542
              
              
              
              22,383,375
              
              
              
              64,713,530
              
              
              
              -
              
              
              
              3,291,854
              
              
              
              109,227,301Net
                  income
              
              $
              10,943,617
              
              
              
              -
              
              
              
              -
              
              
              
              10,943,617
              
              
              
              -
              
              
              
              -
              
              
              
              10,943,617Other
                  comprehensive income, unrealized gain on securities, net of
                  reclassification adjustment, net of tax benefit
              
              
              2,425,901
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,425,901
              
              
              
              2,425,901**Total
                  comprehensive income**
              
              $
              13,369,518Cash
                  dividends declared, $1.04 per share
              
              
              
              
              
              
              -
              
              
              
              -
              
              
              
              (9,800,520
              )
              
              
              -
              
              
              
              -
              
              
              
              (9,800,520
              )Sale
                  of 5,742 shares of common stock
              
              
              
              
              
              
              11,484
              
              
              
              115,529
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              127,013**Balance,
                  December 31, 2006**
              
              
              
              
              
              $
              18,850,026
              
              
              $
              22,498,904
              
              
              $
              65,856,627
              
              
              $
              -
              
              
              $
              5,717,755
              
              
              $
              112,923,312


See
      Notes
      to Consolidated Financial Statements.





65
 *Table
          of Contents*




**AMES
      NATIONAL CORPORATION AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**Years
      Ended December 31, 2006, 2005 and 2004**





**2006**
            
            
            **2005**
            
            
            **2004**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                income
            
            $
            10,943,617
            
            
            $
            11,608,535
            
            
            $
            12,389,546Adjustments
                to reconcile net income to net cash provided by operating
                activities:Provision
                (credit) for loan losses
            
            
            (182,686
            )
            
            
            331,282
            
            
            
            479,355Amortization
                and accretion
            
            
            131,704
            
            
            
            478,244
            
            
            
            683,012Depreciation
            
            
            973,257
            
            
            
            915,213
            
            
            
            951,477Provision
                for deferred taxes
            
            
            107,200
            
            
            
            (226,170
            )
            
            
            (53,448
            )Securities
                gains, net
            
            
            (1,135,136
            )
            
            
            (795,778
            )
            
            
            (324,030
            )Change
                in assets and liabilities:Decrease
                (increase) in loans held for sale
            
            
            455,281
            
            
            
            (675,561
            )
            
            
            624,670Increase
                in accrued income receivable
            
            
            (1,237,570
            )
            
            
            (371,371
            )
            
            
            (420,177
            )Increase
                in other assets
            
            
            (798,438
            )
            
            
            (1,022,681
            )
            
            
            (835,415
            )Increase
                (decrease) in accrued expenses and other liabilities
            
            
            1,798,232
            
            
            
            (770,194
            )
            
            
            (325,969
            )**Net
                cash provided by operating activities**
            
            
            11,055,461
            
            
            
            9,471,519
            
            
            
            13,169,021CASH
                FLOWS FROM INVESTING ACTIVITIESPurchase
                of securities available-for-sale
            
            
            (69,015,999
            )
            
            
            (59,049,297
            )
            
            
            (163,349,539
            )Proceeds
                from sale of securities available-for-sale
            
            
            6,013,192
            
            
            
            24,937,433
            
            
            
            5,045,102Proceeds
                from maturities and calls of securities available-for-sale
            
            
            46,795,165
            
            
            
            57,750,361
            
            
            
            115,303,131Net
                (increase) decrease in interest bearing deposits in financial
                institutions
            
            
            4,439,236
            
            
            
            3,591,632
            
            
            
            (3,211,636
            )Net
                (increase) decrease in federal funds sold
            
            
            (12,800,000
            )
            
            
            19,565,000
            
            
            
            515,000Net
                (increase) decrease in loans
            
            
            11,377,830
            
            
            
            (29,081,652
            )
            
            
            (56,584,801
            )Purchase
                of bank premises and equipment
            
            
            (2,560,158
            )
            
            
            (3,155,417
            )
            
            
            (1,364,306
            )**Net
                cash provided by (used in) investing activities**
            
            
            (15,750,734
            )
            
            
            14,558,060
            
            
            
            (103,647,049
            )CASH
                FLOWS FROM FINANCING ACTIVITIESIncrease
                in deposits
            
            
            12,014,138
            
            
            
            10,166,496
            
            
            
            38,627,312Increase
                (decrease) in federal funds purchased and securities sold under agreements
                to repurchase
            
            
            67,914
            
            
            
            (29,412,492
            )
            
            
            45,874,072Proceeds
                from other borrowing, net
            
            
            608,986
            
            
            
            2,861,130
            
            
            
            -Dividends
                paid
            
            
            (9,704,835
            )
            
            
            (8,599,597
            )
            
            
            (7,493,896
            )Proceeds
                from issuance of stock
            
            
            127,013
            
            
            
            287,937
            
            
            
            247,482**Net
                cash provided by (used in) financing activities**
            
            
            3,113,216
            
            
            
            (24,696,526
            )
            
            
            77,254,970**Net
                decrease in cash and cash equivalents**
            
            
            (1,582,057
            )
            
            
            (666,947
            )
            
            
            (13,223,058
            )CASH
                AND DUE FROM BANKSBeginning
            
            
            18,092,139
            
            
            
            18,759,086
            
            
            
            31,982,144Ending
            
            $
            16,510,082
            
            
            $
            18,092,139
            
            
            $
            18,759,086





(Continued)




66
 *Table
            of Contents*





**AMES
                NATIONAL CORPORATION AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF CASH FLOWS (Continued)****Years
                Ended December 31, 2006, 2005 and 2004****2006**
            
            
            **2005**
            
            
            **2004**SUPPLEMENTAL
                DISCLOSURE OF CASH FLOWINFORMATIONCash
                payments for:Interest
            
            $
            21,064,363
            
            
            $
            15,154,109
            
            
            $
            10,623,125Income
                taxes
            
            
            3,461,781
            
            
            
            3,979,665
            
            
            
            4,516,823




See
      Notes
      to Consolidated Financial Statements.




67
 *Table
            of Contents*





Notes
      to
      Consolidated Financial Statements




**Note
                1.**
            **Summary
                of Significant Accounting
                Policies**




Description
      of business:  Ames National Corporation and Subsidiaries (the
      Company) operates in the commercial banking industry through its subsidiaries
      in
      Ames, Boone, Story City, Nevada and Marshalltown, Iowa.  Loan and
      deposit customers are located primarily in Story, Boone, Hamilton and Marshall
      Counties and adjacent counties in Iowa.





Segment
      information:  The Company uses the “management approach” for
      reporting information about segments in annual and interim financial
      statements.  The management approach is based on the way the chief
      operating decision-maker organizes segments within a company for making
      operating decisions and assessing performance.  Based on the
“management approach” model, the Company has determined that its business is
      comprised of one operating segment: banking.  The banking segment
      generates revenues through personal, business, agricultural and commercial
      lending, management of the investment securities portfolio, providing deposit
      account services and providing trust services.





Consolidation:  The
      consolidated financial statements include the accounts of Ames National
      Corporation (the Parent Company) and its wholly-owned subsidiaries, First
      National Bank, Ames, Iowa; State Bank & Trust Co., Nevada, Iowa; Boone Bank
& Trust Co., Boone, Iowa; Randall-Story State Bank, Story City, Iowa; and
      United Bank & Trust NA, Marshalltown, Iowa (collectively, the
      Banks).  All significant intercompany transactions and balances have
      been eliminated in consolidation.





Use
      of
      estimates:  The preparation of financial statements in conformity
      with accounting principles generally accepted in the United States of America
      requires management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and disclosure of contingent assets and
      liabilities at the date of the financial statements and the reported amounts
      of
      revenues and expenses during the reporting period.  Actual results
      could differ from those estimates.  Material estimates that are
      particularly susceptible to significant change in the near term relate to the
      determination of the allowance for loan losses and fair value of financial
      instruments.





Cash
      and cash equivalents:  For purposes of reporting cash flows, cash
      and cash equivalents include cash on hand and amounts due from
      banks.  The Company reports net cash flows for customer loan
      transactions, deposit transactions and short-term borrowings with maturities
      of
      90 days or less.





Securities
      available-for-sale:  The Company classifies all securities as
      available for sale.  Available for sale securities are those the
      Company may decide to sell if needed for liquidity, asset-liability management
      or other reasons.  Available for sale securities are reported at fair
      value, with net unrealized gains and losses reported as other comprehensive
      income or loss and as a separate component of stockholders’ equity, net of
      tax.





Gains
      and
      losses on the sale of securities are determined using the specific
      identification method based on amortized cost and are reflected in results
      of
      operation at the time of sale.  Interest and dividend income, adjusted
      by amortization of purchase premium or discount over the estimated life of
      the
      security using the level yield method, is included in income as
      earned.





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 length of time and the extent to which the fair
      value has been less than cost, (2) the financial condition and near-term
      prospects of the issuer, and (3) the intent and ability of the Company to retain
      its investment in the issuer for a period of time sufficient to allow for any
      anticipated recovery in fair value.





68
 *Table
            of Contents*





Loans
      held for sale:  Loans held for sale are the loans the Banks have
      the intent to sell in the foreseeable future.  They are carried at the
      lower of aggregate cost or market value.  Net unrealized losses, if
      any, are recognized through a valuation allowance by charges to
      income.  Gains and losses on sales of loans are recognized at
      settlement dates and are determined by the difference between the sale proceeds
      and the carrying value of the loans.





Loans:  Loans
      are stated at the principal amount outstanding, net of deferred loan fees and
      the allowance for loan losses.  Interest on loans is credited to
      income as earned based on the principal amount outstanding.  The
      Banks’ policy is to discontinue the accrual of interest income on any loan 90
      days or more past due unless the loans are well collateralized and in the
      process of collection.  Income on nonaccrual loans is subsequently
      recognized only to the extent that cash payments are received. Nonaccrual loans
      are returned to an accrual status when, in the opinion of management, the
      financial position of the borrower indicates there is no longer any reasonable
      doubt as to timely payment of principal or interest.





Allowance
      for loan losses:  The allowance for loan losses is maintained at a
      level deemed appropriate by management to provide for known and inherent risks
      in the loan portfolio.  The allowance is based upon a continuing
      review of past loan loss experience, current economic conditions, the underlying
      collateral value securing the loans and other adverse situations that may affect
      the borrower’s ability to repay.  Loans which are deemed to be
      uncollectible are charged off and deducted from the
      allowance.  Recoveries on loans charged-off and the provision for loan
      losses are added to the allowance.  This evaluation is inherently
      subjective and requires estimates that are susceptible to significant revisions
      as more information becomes available.





The
      allowance consists primarily of specific and general components.  The
      specific component relates to loans that are classified either as doubtful,
      substandard or special mention.  For such loans that are also
      classified as impaired, an allowance is established when the discounted cash
      flows (or collateral value or observable market price) of the impaired loan
      is
      lower than the carrying value of that loan.  The general component
      covers non-classified loans and is based on historical loss experience adjusted
      for qualitative factors.





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 payments
      of
      principal or 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.  Smaller balance
      homogeneous loans are evaluated for impairment in total.  Such loans
      include residential first mortgage loans secured by one-to-four family
      residences, residential construction loans, and automobile
      loans.  Commercial and agricultural loans and mortgage loans secured
      by other properties are evaluated individually for impairment when analysis
      of
      borrower operating results and financial condition indicates that underlying
      cash flows of the borrower’s business are not adequate to meet its debt service
      requirements.  Often this is associated with a delay or shortfall in
      payments of 90 days or more.  Nonaccrual loans are often also
      considered impaired.  Impaired loans, or portions thereof, are charged
      off when deemed uncollectible.





Premises
      and equipment:  Premises and equipment are stated at cost less
      accumulated depreciation.  Depreciation expense is computed using
      straight-line and accelerated methods over the estimated useful lives of the
      respective assets.  Depreciable lives range from 3 to 7 years for
      equipment and 15 to 39 years for premises.





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Trust
      department assets:  Property held for customers in fiduciary or
      agency capacities is not included in the accompanying consolidated balance
      sheets, as such items are not assets of the Banks.





Income
      taxes:  Deferred tax assets and liabilities are recognized for the
      future tax consequences attributable to differences between the financial
      statement carrying amounts of existing assets and liabilities and their
      respective tax bases and are measured using enacted tax rates expected to apply
      to taxable income in the years in which those temporary differences are expected
      to be recovered or settled.  The effect of a change in tax rates on
      deferred tax assets and liabilities is recognized in income in the period that
      includes the enactment date.





The
      Company files a consolidated federal income tax return, with each entity
      computing its taxes on a separate company basis.  For state tax
      purposes, the Banks file franchise tax returns, while the Parent Company files
      a
      corporate income tax return.





Comprehensive
      income:  Accounting principles generally require that recognized
      revenue, expenses, gains and losses be included in net
      income.  Although certain changes in assets and liabilities, such as
      unrealized gains and losses on available-for-sale securities, are reported
      as a
      separate component of the stockholders’ equity section of the consolidated
      balance sheet, such items, along with net income, are components of
      comprehensive income.  Gains and losses on available-for-sale
      securities are reclassified to net income as the gains or losses are realized
      upon sale of the securities.  Other-than-temporary impairment charges
      are reclassified to net income at the time of the charge.





Financial
      instruments with off-balance-sheet risk:  The Company, in the
      normal course of business, makes commitments to make loans which are not
      reflected in the consolidated financial statements.  A summary of
      these commitments is disclosed in Note 10.





Transfers
      of financial assets:  Transfers of financial assets are accounted
      for as sales, when control over the assets has been
      surrendered.  Control over transferred assets is deemed to be
      surrendered when (1) the assets have been isolated from the Company, (2) the
      transferee obtains the right (free of conditions that constrain it from taking
      advantage of that right) to pledge or exchange the transferred assets, and
      (3)
      the Company does not maintain effective control over the transferred assets
      through an agreement to repurchase them before their maturity.





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





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





Securities
      available-for-sale:  Fair values of securities available-for-sale
      are based on bid prices published in financial newspapers, bid quotations
      received from securities dealers, or quoted market prices of similar
      instruments, adjusted for differences between the quoted instruments and the
      instruments being valued.





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





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





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





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





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





Commitments
      to extend credit and standby letters of credit:  The fair values
      of commitments to extend credit and stand by 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 carry 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.





Earnings
      per share:  Basic earnings per share computations for the years
      ended December 31, 2006, 2005 and 2004, were determined by dividing net income
      by the weighted-average number of common shares outstanding during the years
      then ended.  The Company had no potentially dilutive securities
      outstanding during the periods presented.





The
      following information was used in the computation of basic earnings per share
      for the years ended December 31, 2006, 2005, and 2004.





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**2006**
            
            
            **2005**
            
            
            **2004**Basic
                earning per share computation:Net
                income
            
            $
            10,943,617
            
            
            $
            11,608,535
            
            
            $
            12,389,546Weighted
                average common shares outstanding
            
            
            9,422,402
            
            
            
            9,415,599
            
            
            
            9,405,705**Basic
                EPS**
            
            $
            1.16
            
            
            $
            1.23
            
            
            $
            1.32





Stock
      Split:On June 15,
      2005,
      shareholders of the Company approved an amendment to the Restated Articles
      of
      Incorporation increasing the Company’s authorized common stock from 6 million to
      18 million shares and reducing the par value of such common stock from $5.00
      to
      $2.00 per share.  The purpose of the amendment was to provide a
      sufficient number of shares of authorized common stock to accommodate a 3-for-1
      stock split previously approved by the Board of Directors of the Company on
      May
      11, 2005.  The stock split was effective July 15, 2005 for holders of
      record as of July 1, 2005.  Share and per share data for all periods
      presented have been restated to reflect the stock split.





New
      Accounting Pronouncements:  In July 2006, the FASB issued FASB
      Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN
      48).  FIN 48 prescribes a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a tax return.  The
      Interpretation also provides guidance on derecognition, classification, interest
      and penalties, accounting in interim periods, disclosure, and
      transition.  FIN 48 is effective in fiscal years beginning after
      December 15, 2006.  The provisions of FIN 48 are to be applied to all
      tax positions upon initial adoption, with the cumulative effect adjustment
      reported as an adjustment to the opening balance of retained
      earnings.  The Company is currently evaluating the potential impact,
      if any, that the adoption of FIN 48 will have on its consolidated financial
      statements.  Management believes, based on an initial evaluation, that
      the impact of FIN 48 will not be significant to the consolidated financial
      statements.




**Note
                2.**
            **Restrictions
                on Cash and Due from Banks**




The
      Federal Reserve Bank requires member banks to maintain certain cash and due
      from
      bank reserves.  The subsidiary banks’ reserve requirements totaled
      approximately $2,847,000 and $5,086,000 at December 31, 2006 and 2005,
      respectively.





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**Note
                3.**
            **Debt
                and Equity Securities**




The
      amortized cost of securities available for sale and their approximate fair
      values at December 31, 2006 and 2005, are summarized below:





**Amortized**
              **Cost**
            
            
            **Gross**
              **Unrealized**
              **Gains**
            
            
            **Gross**
              **Unrealized**
              **Losses**
            
            
            **Estimated**
              **Fair
                Value****2006:**U.S.
                treasury
            
            $
            496,493
            
            
            $
            12,199
            
            
            $
            -
            
            
            $
            508,692U.S.
                government agencies
            
            
            141,184,462
            
            
            
            467,416
            
            
            
            (1,907,201
            )
            
            
            139,744,677State
                and political subdivisions
            
            
            119,698,521
            
            
            
            969,283
            
            
            
            (759,686
            )
            
            
            119,908,118Corporate
                bonds
            
            
            60,204,400
            
            
            
            853,289
            
            
            
            (433,822
            )
            
            
            60,623,867Equity
                securities
            
            
            23,912,185
            
            
            
            9,914,125
            
            
            
            (39,800
            )
            
            
            33,786,510$
            345,496,061
            
            
            $
            12,216,312
            
            
            $
            (3,140,509
            )
            
            $
            354,571,864




**Amortized**
              **Cost**
            
            
            **Gross**
              **Unrealized**
              **Gains**
            
            
            **Gross**
              **Unrealized**
              **Losses**
            
            
            **Estimated**
              **Fair
                Value****2005:**U.S.
                treasury
            
            $
            495,748
            
            
            $
            20,600
            
            
            $
            -
            
            
            $
            516,348U.S.
                government agencies
            
            
            136,815,035
            
            
            
            251,357
            
            
            
            (2,778,021
            )
            
            
            134,288,371State
                and political subdivisions
            
            
            108,432,912
            
            
            
            1,121,566
            
            
            
            (1,181,983
            )
            
            
            108,372,495Corporate
                bonds
            
            
            59,523,220
            
            
            
            936,527
            
            
            
            (892,575
            )
            
            
            59,567,172Equity
                securities
            
            
            23,018,072
            
            
            
            7,869,194
            
            
            
            (121,500
            )
            
            
            30,765,766$
            328,284,987
            
            
            $
            10,199,244
            
            
            $
            (4,974,079
            )
            
            $
            333,510,152






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The
      amortized cost and estimated fair value of debt securities available-for-sale
      as
      of December 31, 2006, are shown below by contractual
      maturity.  Expected maturities will differ from contractual maturities
      because issuers may have the right to call or prepay obligations with or without
      call or prepayment penalties.





**Amortized**
              **Cost**
            
            
            **Estimated**
              **Fair
                Value**Due
                in one year or less
            
            $
            66,571,021
            
            
            $
            65,967,568Due
                after one year through five years
            
            
            141,056,137
            
            
            
            140,092,220Due
                after five years through ten years
            
            
            97,159,187
            
            
            
            97,977,214Due
                after ten years
            
            
            16,797,531
            
            
            
            16,748,352321,583,876
            
            
            
            320,785,354Equity
                securities
            
            
            23,912,185
            
            
            
            33,786,510$
            345,496,061
            
            
            $
            354,571,864





At
      December 31, 2006 and 2005, securities with a carrying value of approximately
      $163,497,000 and $152,169,000, respectively, were pledged as collateral on
      public deposits, securities sold under agreements to repurchase and for other
      purposes as required or permitted by law.  Securities sold under
      agreements to repurchase are held by the Company’s safekeeping
      agent.





For
      the
      years ended December 31, 2006, 2005, and 2004, proceeds from sales of
      available-for-sale securities amounted to $6,013,192, $24,937,433, and
      $5,045,102, respectively.  Gross realized gains and gross realized
      losses on sales of available-for-sale securities were $1,333,136 with no losses,
      respectively, in 2006, $1,287,962 and $236,182 respectively, in 2005, and
      $443,974 and $119,944, respectively, in 2004.  The tax provision
      applicable to the net realized gains and losses amounted to approximately
      $454,000, $318,000, and $130,000, respectively.  Other-than-temporary
      impairments recognized as a component of income were $198,000 in 2006 and
      $256,000 in 2005, with no impairments recognized in 2004.





The
      components of other comprehensive income (loss) - net unrealized gains (losses)
      on securities available-for-sale for the years ended December 31, 2006, 2005,
      and 2004, were as follows:





**2006**
            
            
            **2005**
            
            
            **2004**Unrealized
                holding gains (losses) arising during the period
            
            $
            4,985,773
            
            
            $
            (5,832,566
            )
            
            $
            (1,974,746
            )Reclassification
                adjustment for net gains realized in net income
            
            
            (1,135,136
            )
            
            
            (795,780
            )
            
            
            (324,030
            )**Net
                unrealized gains (losses) before tax effect**
            
            
            3,850,637
            
            
            
            (6,628,346
            )
            
            
            (2,298,776
            )Tax
                effect
            
            
            (1,424,736
            )
            
            
            2,452,488
            
            
            
            850,547**Other
                comprehensive income - Net unrealized gains (losses) on
                securities**
            
            $
            2,425,901
            
            
            $
            (4,175,858
            )
            
            $
            (1,448,229
            )




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Unrealized
      losses and fair value, aggregated by investment category and length of time
      that
      individual securities have been in a continuous unrealized loss position, as
      of
      December 31, 2006 and 2005 are summarized as follows:





Less
                than 12 Months
            
            
            12
                Months or More
            
            
            TotalFair
              Value
            
            
            Unrealized
              Losses
            
            
            Fair
              Value
            
            
            Unrealized
              Losses
            
            
            Fair
              Value
            
            
            Unrealized
              Losses**2006:**Securities
                available for sale:U.S.
                government agencies
            
            $
            5,314,294
            
            
            $
            (19,792
            )
            
            $
            99,623,211
            
            
            $
            (1,887,409
            )
            
            $
            104,937,505
            
            
            $
            (1,907,201
            )State
                and political subsidivisions
            
            
            13,580,743
            
            
            
            (51,720
            )
            
            
            39,705,322
            
            
            
            (707,966
            )
            
            
            53,286,065
            
            
            
            (759,686
            )Corporate
                obligations
            
            
            1,964,337
            
            
            
            (29,997
            )
            
            
            23,139,560
            
            
            
            (403,825
            )
            
            
            25,103,897
            
            
            
            (433,822
            )Equity
                securities
            
            
            960,200
            
            
            
            (39,800
            )
            
            
            -
            
            
            
            -
            
            
            
            960,200
            
            
            
            (39,800
            )$
            21,819,574
            
            
            $
            (141,309
            )
            
            $
            162,468,093
            
            
            $
            (2,999,200
            )
            
            $
            184,287,667
            
            
            $
            (3,140,509
            )





Less
                than 12 Months
            
            
            12
                Months or More
            
            
            TotalFair
              Value
            
            
            Unrealized
              Losses
            
            
            Fair
              Value
            
            
            Unrealized
              Losses
            
            
            Fair
              Value
            
            
            Unrealized
              Losses**2005:**Securities
                available for sale:U.S.
                government agencies
            
            $
            50,630,566
            
            
            $
            (845,216
            )
            
            $
            75,540,778
            
            
            $
            (1,932,805
            )
            
            $
            126,171,344
            
            
            $
            (2,778,021
            )State
                and political subsidivisions
            
            
            36,928,098
            
            
            
            (585,753
            )
            
            
            20,290,028
            
            
            
            (596,230
            )
            
            
            57,218,126
            
            
            
            (1,181,983
            )Corporate
                obligations
            
            
            6,025,437
            
            
            
            (196,195
            )
            
            
            26,460,433
            
            
            
            (696,380
            )
            
            
            32,485,870
            
            
            
            (892,575
            )Equity
                securities
            
            
            1,956,000
            
            
            
            (44,000
            )
            
            
            1,332,500
            
            
            
            (77,500
            )
            
            
            3,288,500
            
            
            
            (121,500
            )$
            95,540,101
            
            
            $
            (1,671,164
            )
            
            $
            123,623,739
            
            
            $
            (3,302,915
            )
            
            $
            219,163,840
            
            
            $
            (4,974,079
            )





At
      December 31, 2006, 320 debt securities have unrealized losses of
      $3,100,709.  These unrealized losses are generally due to changes in
      interest rates or general market conditions.  In analyzing an issuers’
financial condition, management considers whether the securities are issued
      by
      the federal government or its agencies, whether downgrades by bond rating
      agencies have occurred, and industry analysts’ reports.  As management
      has the ability for the foreseeable future to hold classified as available
      for
      sale securities, no declines are deemed to be other than
      temporary.  Unrealized losses on equity securities were not
      significant at December 31, 2006.




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**Note
                4.**
            **Loans
                Receivable**




The
      composition of loans receivable at December 31, 2006 and 2005, is as
      follows:





**2006**
            
            
            **2005**Commercial
                and agricultural
            
            $
            107,193,787
            
            
            $
            103,646,036Real
                estate - mortgage
            
            
            273,861,154
            
            
            
            286,570,239Real
                estate - construction
            
            
            30,599,880
            
            
            
            23,972,594Consumer
            
            
            11,834,070
            
            
            
            12,449,551Other
            
            
            12,442,698
            
            
            
            20,890,051435,931,589
            
            
            
            447,528,471Less:Allowance
                for loan losses
            
            
            (6,532,617
            )
            
            
            (6,765,356
            )Deferred
                loan fees
            
            
            (276,431
            )
            
            
            (445,430
            )$
            429,122,541
            
            
            $
            440,317,685





Changes
      in the allowance for loan losses for the year ended December 31, 2006, 2005
      and
      2004, are as follows:





**2006**
            
            
            **2005**
            
            
            **2004**Balance,
                beginning
            
            $
            6,765,356
            
            
            $
            6,475,530
            
            
            $
            6,050,989Provision
                (credit) for loan losses
            
            
            (182,686
            )
            
            
            331,282
            
            
            
            479,355Recoveries
                of loans charged-off
            
            
            55,055
            
            
            
            105,400
            
            
            
            174,703Loans
                charged-off
            
            
            (105,108
            )
            
            
            (146,856
            )
            
            
            (229,517
            )Balance,
                ending
            
            $
            6,532,617
            
            
            $
            6,765,356
            
            
            $
            6,475,530




Loans
      are
      made in the normal course of business to directors and executive officers of
      the
      Company and to their affiliates.  The terms of these loans, including
      interest rates and collateral, are similar to those prevailing for comparable
      transactions with others and do not involve more than a normal risk of
      collectibility.





Loan
      transactions with related parties were as follows for the years ended December
      31, 2006 and 2005:





**2006**
            
            
            **2005**Balance,
                beginning of year
            
            $
            28,505,102
            
            
            $
            28,655,993New
                loans
            
            
            9,804,923
            
            
            
            13,201,498Repayments
            
            
            (12,961,377
            )
            
            
            (13,140,392
            )Change
                in status
            
            
            (3,248,435
            )
            
            
            (211,997
            )Balance,
                end of year
            
            $
            22,100,213
            
            
            $
            28,505,102








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At
      December 31, 2006 and 2005, the Company had impaired loans of approximately
      $1,049,000 and $689,000, respectively.  The allowance for loan losses
      related to these impaired loans was approximately $142,000 and $55,000 at
      December 31, 2006 and 2005, respectively.  The average balances of
      impaired loans for the years ended December 31, 2006 and 2005, were $1,729,000
      and $1,645,000, respectively.  For the years ended December 31, 2006,
      2005, and 2004, interest income, which would have been recorded under the
      original terms of such loans, was approximately $42,000, $41,000, and $239,000,
      respectively, with $1,000, $0, and $211,000, respectively,
      recorded.  Loans greater than 90 days past due and still accruing
      interest were approximately $758,000 and $83,000 at December 31, 2006 and 2005,
      respectively.  There are no other potential problem loans that cause
      management to have serious doubts as to the ability of such borrowers to comply
      with the present loan repayment terms.





The
      amount the Company will ultimately realize from these loans could differ
      materially from their carrying value because of future developments affecting
      the underlying collateral or the borrowers’ ability to repay the
      loans.  As of December 31, 2006, there were no material commitments to
      lend additional funds to customers whose loans were classified as
      impaired.




**Note
                5.**
            **Bank
                Premises and Equipment**




The
      major
      classes of bank premises and equipment and the total accumulated depreciation
      as
      of December 31, 2006 and 2005, are as follows:





**2006**
            
            
            **2005**Land
            
            $
            3,032,448
            
            
            $
            3,000,803Buildings
                and improvements
            
            
            12,622,808
            
            
            
            10,734,396Furniture
                and equipment
            
            
            6,522,487
            
            
            
            6,378,61022,177,743
            
            
            
            20,113,809Less
                accumulated depreciation
            
            
            9,560,002
            
            
            
            9,082,969$
            12,617,741
            
            
            $
            11,030,840




**Note
                6.**
            **Deposits**




At
      December 31, 2006, the maturities of time deposits are as follows:





2007
            
            $
            213,366,0692008
            
            
            40,445,4252009
            
            
            18,930,1952010
            
            
            7,861,4412011
            
            
            4,129,211$
            284,732,341




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Interest
      expense on deposits is summarized as follows:





**2006**
            
            
            **2005**
            
            
            **2004**NOW
                accounts
            
            $
            2,362,608
            
            
            $
            2,009,186
            
            
            $
            1,237,381Savings
                and money market
            
            
            5,886,737
            
            
            
            3,745,885
            
            
            
            1,972,211Time,
                $100,000 and over
            
            
            4,421,595
            
            
            
            3,094,834
            
            
            
            1,758,187Other
                time
            
            
            7,071,439
            
            
            
            5,530,309
            
            
            
            4,974,471$
            19,742,379
            
            
            $
            14,380,214
            
            
            $
            9,942,250




**Note
                7.**
            **Borrowings**




Federal
      funds purchased are unsecured and mature daily.  Securities sold under
      repurchase agreements are short-term and are secured by investments with a
      fair
      value of $54,136,000 at December 31, 2006.  Short-term borrowings as
      of December 31, 2006 and 2005 consisted of Treasury, Tax and Loan option notes
      secured by investment securities.  Short-term borrowings as of
      December 31, 2005, also included FHLB advances, due in three months or
      less.  The FHLB advances are collateralized by certain 1-4 family
      loans.





FHLB
      term
      advances consist of fixed FHLB borrowings with a weighted average interest
      rate
      of 5.03%, and are collateralized by certain 1-4 family loans and are due in
      2010
      and 2011 of $1 million each year.  At December 31, 2006, the Banks had
      outstanding lines of credit with the Federal Home Loan Bank of Des Moines,
      Iowa
      of $44,295,000.




**Note
                8.**
            **Employee
                Benefit Plans**




The
      Company has a stock purchase plan with the objective of encouraging equity
      interests by officers, employees, and directors of the Company and its
      subsidiaries to provide additional incentive to improve banking performance
      and
      retain qualified individuals.  The purchase price of the shares is the
      fair market value of the stock based upon current market trading
      activity.  The terms of the plan provide for the issuance of up to
      42,000 shares of common stock per year for a ten-year period commencing in
      1999
      and continuing through 2008.





The
      Company has a qualified 401(k) profit-sharing plan.  The Company
      matches employee contributions up to a maximum of 2% of qualified compensation
      and also contributes an amount equal to 5% of the participating employee’s
      compensation.  In addition, contributions can be made on a
      discretionary basis by the Company on behalf of the employees.  For
      the years ended December 31, 2006, 2005 and 2004, Company contributions to
      the
      plan were approximately $579,000, $623,000, and $676,000,
      respectively.  The plan covers substantially all
      employees.





78
 *Table
            of Contents*




**Note
                9.**
            **Income
                Taxes**




The
      components of income tax expense for the years ended December 31, 2006, 2005
      and
      2004, are as follows:





2006
            
            
            2005
            
            
            2004Federal:Current
            
            $
            2,633,706
            
            
            $
            3,282,266
            
            
            $
            3,493,176Deferred
            
            
            90,186
            
            
            
            (202,533
            )
            
            
            (48,519
            )2,723,892
            
            
            
            3,079,733
            
            
            
            3,444,657State:Current
            
            
            658,497
            
            
            
            779,897
            
            
            
            815,664Deferred
            
            
            17,014
            
            
            
            (23,638
            )
            
            
            (4,929
            )675,511
            
            
            
            756,259
            
            
            
            810,735Income
                tax expense
            
            $
            3,399,403
            
            
            $
            3,835,992
            
            
            $
            4,255,392








Total
      income tax expense differed from the amounts computed by applying the U.S.
      federal income tax rate of 35% to income before income taxes as a result of
      the
      following for the years ended December 31, 2006, 2005 and 2004:





2006
            
            
            2005
            
            
            2004Income
                taxes at 35% federal tax rate
            
            $
            5,020,058
            
            
            $
            5,405,585
            
            
            $
            5,825,727Increase
                (decrease) resulting from:Tax-exempt
                interest and dividends
            
            
            (1,797,533
            )
            
            
            (1,860,143
            )
            
            
            (1,870,264
            )State
                taxes, net of federal tax benefit
            
            
            437,893
            
            
            
            460,694
            
            
            
            522,929Other
            
            
            (261,015
            )
            
            
            (170,144
            )
            
            
            (223,000
            )Total
                income tax expense
            
            $
            3,399,403
            
            
            $
            3,835,992
            
            
            $
            4,255,392




79
 *Table
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The
        tax
        effects of temporary differences that give rise to significant portions of
        the
        deferred tax assets and deferred liabilities at December 31, 2006 and 2005,
        are
        as follows:


2006
            
            
            2005Deferred
                tax assets:Allowance
                for loan losses
            
            $
            1,921,102
            
            
            $
            2,009,069Other
                items
            
            
            595,168
            
            
            
            447,0572,516,270
            
            
            
            2,456,126Deferred
                tax liabilities:Net
                unrealized gains on securities available for sale
            
            
            (3,358,048
            )
            
            
            (1,933,311
            )Other
            
            
            (346,170
            )
            
            
            (178,826
            )(3,704,218
            )
            
            
            (2,112,137
            )Net
                deferred tax assets (liabilities)
            
            $
            (1,187,948
            )
            
            $
            343,989




At
      December 31, 2006 and 2005, income taxes currently payable of approximately
      $95,000 and $264,000, respectively, are included in accrued interest and other
      liabilities.




**Note
                10.**
            **Commitments,
                Contingencies and Concentrations of Credit
                Risk**




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.





The
      Company’s exposure to credit loss in the event of nonperformance by the other
      party to the financial instrument for commitments to extend credit and standby
      letters of credit is represented by the contractual amount of those
      instruments.  The Company uses the same credit policies in making
      commitments and conditional obligations as they do for on-balance-sheet
      instruments.  A summary of the Company’s commitments at December 31,
      2006 and 2005, is as follows:





**2006**
            
            
            **2005**Commitments
                to extend credit
            
            $
            79,629,000
            
            
            $
            77,099,000Standby
                letters of credit
            
            
            1,995,000
            
            
            
            1,433,000$
            81,624,000
            
            
            $
            78,532,000





Commitments
      to extend credit are agreements to lend to a customer as long as there is no
      violation of any condition established in the contract.  Since many of
      the commitments are expected to expire without being drawn upon, the total
      commitment amounts do not necessarily represent future cash
      requirements.  The Bank evaluates each customer’s creditworthiness on
      a case-by-case basis.  The amount of collateral obtained, if deemed
      necessary by the Bank upon extension of credit, is based on management’s credit
      evaluation of the party.





Standby
      letters of credit are conditional commitments issued by the Banks to guarantee
      the performance of a customer to a third-party.  Those guarantees are
      primarily issued to support public and private borrowing
      arrangements.  The credit risk involved in issuing letters of credit
      is essentially the same as that involved in extending loan facilities to
      customers.  Collateral held varies and is required in instances which
      the Banks deem necessary.  In the event the customer does not perform
      in accordance with the terms of the agreement with the third party, the Banks
      would be required to fund the commitment.  The maximum potential
      amount of future payments the Banks could be required to make is represented
      by
      the contractual amount shown in the summary above.  If the commitments
      were funded, the Banks would be entitled to seek recovery from the
      customer.  At December 31, 2006 and 2005, no amounts have been
      recorded as liabilities for the Bank’s potential obligations under these
      guarantees.





80
 *Table
            of Contents*





In
      the
      normal course of business, the Company is involved in various legal
      proceedings.  In the opinion of management, any liability resulting
      from such proceedings would not have a material adverse effect on the Company’s
      financial statements.





Concentrations
      of credit risk:  The Banks originate real estate, consumer, and
      commercial loans, primarily in Story, Boone, Hamilton and Marshall Counties,
      Iowa, and adjacent counties.  Although the Banks have diversified loan
      portfolios, a substantial portion of their borrowers’ ability to repay loans is
      dependent upon economic conditions in the Banks’ market areas.




**Note
                11.**
            **Regulatory
                Matters**




The
      Company and its subsidiary banks are subject to various regulatory capital
      requirements administered by the federal banking agencies.  Failure to
      meet minimum capital requirements can initiate certain mandatory -and possible additional
      discretionary -actions by
      regulators that, if undertaken, could have a direct material effect on the
      Company’s and Banks’ financial statements.  Under capital adequacy
      guidelines and the regulatory framework for prompt corrective action, the
      Company and the Banks must meet specific capital guidelines that involve
      quantitative measures of their assets, liabilities and certain off-balance-sheet
      items as calculated under regulatory accounting practices.  The
      capital amounts and classification are also subject to qualitative judgments
      by
      the regulators about components, risk weightings, and other
      factors.  Prompt corrective action provisions are not applicable to
      bank holding companies.





Quantitative
      measures established by regulation to ensure capital adequacy require the
      Company and each subsidiary bank to maintain minimum amounts and ratios (set
      forth in the table below) of total and Tier I capital (as defined in the
      regulations) to risk-weighted assets (as defined), and of Tier I capital (as
      defined) to average assets (as defined).  Management believes, as of
      December 31, 2006 and 2005, that the Company and each subsidiary bank met all
      capital adequacy requirements to which they are subject.





81
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            of Contents*





As
      of
      December 31, 2006, the most recent notification from the federal banking
      regulators categorized the subsidiary banks as well capitalized under the
      regulatory framework for prompt corrective action.  To be categorized
      as adequately capitalized the banks must maintain minimum total risk-based,
      Tier
      I risk-based, and Tier I leverage ratios as set forth in the
      table.  Management believes there are no conditions or events since
      that notification that have changed the institution’s category.  The
      Company’s and each of the subsidiary bank’s actual capital amounts and ratios as
      of December 31, 2006 and 2005, are also presented in the table.





For
                Capital
            
            
            To
                Be Well
              Capitalized
                Under
              Prompt
                CorrectiveActual
            
            
            Adequacy
                Purposes
            
            
            Action
                ProvisionsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioAs
                of December 31, 2006:Total
                capital (to risk-weighted assets):Consolidated
            
            $
            113,738
            
            
            
            18.8
            %
            
            $
            48,299
            
            
            
            8.0
            %
            
            N/A
            
            
            N/ABoone
                Bank & Trust
            
            
            13,405
            
            
            
            16.3
            
            
            
            6,594
            
            
            
            8.0
            
            
            $
            8,243
            
            
            
            10.0
            %First
                National Bank
            
            
            44,420
            
            
            
            15.3
            
            
            
            23,247
            
            
            
            8.0
            
            
            
            29,059
            
            
            
            10.0Randall-Story
                State Bank
            
            
            8,497
            
            
            
            15.8
            
            
            
            4,302
            
            
            
            8.0
            
            
            
            5,378
            
            
            
            10.0State
                Bank & Trust
            
            
            12,449
            
            
            
            15.0
            
            
            
            6,625
            
            
            
            8.0
            
            
            
            8,282
            
            
            
            10.0United
                Bank & Trust
            
            
            8,729
            
            
            
            12.5
            
            
            
            5,609
            
            
            
            8.0
            
            
            
            7,011
            
            
            
            10.0Tier
                1 capital (to risk-weighted assets):Consolidated
            
            $
            107,205
            
            
            
            17.8
            %
            
            $
            24,149
            
            
            
            4.0
            %
            
            
            N/A
            
            
            
            N/ABoone
                Bank & Trust
            
            
            12,477
            
            
            
            15.1
            
            
            
            3,297
            
            
            
            4.0
            
            
            $
            4,946
            
            
            
            6.0
            %First
                National Bank
            
            
            41,106
            
            
            
            14.1
            
            
            
            11,623
            
            
            
            4.0
            
            
            
            17,435
            
            
            
            6.0Randall-Story
                State Bank
            
            
            7,874
            
            
            
            14.6
            
            
            
            2,151
            
            
            
            4.0
            
            
            
            3,227
            
            
            
            6.0State
                Bank & Trust
            
            
            11,538
            
            
            
            13.9
            
            
            
            3,313
            
            
            
            4.0
            
            
            
            4,969
            
            
            
            6.0United
                Bank & Trust
            
            
            7,842
            
            
            
            11.2
            
            
            
            2,804
            
            
            
            4.0
            
            
            
            4,207
            
            
            
            6.0Tier
                1 capital (to average-weighted assets):Consolidated
            
            $
            107,205
            
            
            
            13.0
            %
            
            $
            33,103
            
            
            
            4.0
            %
            
            
            N/A
            
            
            
            N/ABoone
                Bank & Trust
            
            
            12,477
            
            
            
            12.0
            
            
            
            4,167
            
            
            
            4.0
            
            
            $
            5,209
            
            
            
            5.0
            %First
                National Bank
            
            
            41,106
            
            
            
            9.9
            
            
            
            16,662
            
            
            
            4.0
            
            
            
            20,830
            
            
            
            5.0Randall-Story
                State Bank
            
            
            7,874
            
            
            
            11.2
            
            
            
            2,824
            
            
            
            4.0
            
            
            
            3,530
            
            
            
            5.0State
                Bank & Trust
            
            
            11,538
            
            
            
            10.2
            
            
            
            4,538
            
            
            
            4.0
            
            
            
            5,673
            
            
            
            5.0United
                Bank & Trust
            
            
            7,842
            
            
            
            8.0
            
            
            
            3,946
            
            
            
            4.0
            
            
            
            4,932
            
            
            
            5.0




82




To
                Be Well
              Capitalized
                UnderFor
                Capital
            
            
            Prompt
                CorrectiveActual
            
            
            Adequacy
                Purposes
            
            
            Action
                ProvisionsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioAs
                of December 31, 2005:Total
                capital (to risk-weighted assets):Consolidated
            
            $
            112,700
            
            
            
            18.9
            %
            
            $
            47,680
            
            
            
            8.0
            %
            
            N/A
            
            
            N/ABoone
                Bank & Trust
            
            
            13,399
            
            
            
            17.3
            
            
            
            6,221
            
            
            
            8.0
            
            
            $
            7,776
            
            
            
            10.0
            %First
                National Bank
            
            
            43,903
            
            
            
            14.7
            
            
            
            23,868
            
            
            
            8.0
            
            
            
            29,835
            
            
            
            10.0Randall-Story
                State Bank
            
            
            8,367
            
            
            
            16.2
            
            
            
            4,130
            
            
            
            8.0
            
            
            
            5,163
            
            
            
            10.0State
                Bank & Trust
            
            
            12,336
            
            
            
            15.2
            
            
            
            6,490
            
            
            
            8.0
            
            
            
            8,113
            
            
            
            10.0United
                Bank & Trust
            
            
            8,558
            
            
            
            13.1
            
            
            
            5,233
            
            
            
            8.0
            
            
            
            6,541
            
            
            
            10.0Tier
                1 capital (to risk-weighted assets):Consolidated
            
            $
            105,935
            
            
            
            17.8
            %
            
            $
            23,840
            
            
            
            4.0
            %
            
            
            N/A
            
            
            
            N/ABoone
                Bank & Trust
            
            
            12,441
            
            
            
            16.0
            
            
            
            3,111
            
            
            
            4.0
            
            
            $
            4,666
            
            
            
            6.0
            %First
                National Bank
            
            
            40,352
            
            
            
            13.5
            
            
            
            11,934
            
            
            
            4.0
            
            
            
            17,901
            
            
            
            6.0Randall-Story
                State Bank
            
            
            7,721
            
            
            
            15.0
            
            
            
            2,065
            
            
            
            4.0
            
            
            
            3,098
            
            
            
            6.0State
                Bank & Trust
            
            
            11,428
            
            
            
            14.1
            
            
            
            3,245
            
            
            
            4.0
            
            
            
            4,868
            
            
            
            6.0United
                Bank & Trust
            
            
            7,740
            
            
            
            11.8
            
            
            
            2,617
            
            
            
            4.0
            
            
            
            3,925
            
            
            
            6.0Tier
                1 capital (to average-weighted assets):Consolidated
            
            $
            105,935
            
            
            
            12.9
            %
            
            $
            32,803
            
            
            
            4.0
            %
            
            
            N/A
            
            
            
            N/ABoone
                Bank & Trust
            
            
            12,441
            
            
            
            11.4
            
            
            
            4,374
            
            
            
            4.0
            
            
            $
            5,467
            
            
            
            5.0
            %First
                National Bank
            
            
            40,352
            
            
            
            9.8
            
            
            
            16,406
            
            
            
            4.0
            
            
            
            20,508
            
            
            
            5.0Randall-Story
                State Bank
            
            
            7,721
            
            
            
            11.0
            
            
            
            2,810
            
            
            
            4.0
            
            
            
            3,513
            
            
            
            5.0State
                Bank & Trust
            
            
            11,428
            
            
            
            9.8
            
            
            
            4,643
            
            
            
            4.0
            
            
            
            5,803
            
            
            
            5.0United
                Bank & Trust
            
            
            7,740
            
            
            
            8.2
            
            
            
            3,778
            
            
            
            4.0
            
            
            
            4,722
            
            
            
            5.0





Federal
      and state banking regulations place certain restrictions on dividends paid
      and
      loans or advances made by the Banks’ to the Company.  Dividends paid
      by each Bank to the Company would be prohibited if the effect thereof would
      cause the Bank’s capital to be reduced below applicable minimum capital
      requirements.  Management believes that these restrictions currently
      do not have a significant impact on the Company.




83
 *Table
            of Contents*




**Note
                12.**
            **Fair
                Value of Financial
                Instruments**




The
      estimated fair values of the Company’s financial instruments (as described in
      Note 1) as of December 31, 2006 and 2005, were as follows:





**2006**
            
            
            **2005****Carrying**
              **Amount**
            
            
            **Fair**
              **Value**
            
            
            **Carrying**
              **Amount**
            
            
            **Fair**
              **Value**Financial
                assets:Cash
                and due from banks
            
            $
            16,510,082
            
            
            $
            16,510,082
            
            
            $
            18,092,139
            
            
            $
            18,092,139Federal
                funds sold
            
            
            13,100,000
            
            
            
            13,100,000
            
            
            
            300,000
            
            
            
            300,000Interest-bearing
                deposits
            
            
            1,544,306
            
            
            
            1,544,306
            
            
            
            5,983,542
            
            
            
            5,983,542Securities
                available-for-sale
            
            
            354,571,864
            
            
            
            354,571,864
            
            
            
            333,510,152
            
            
            
            333,510,152Loans,
                net
            
            
            429,122,541
            
            
            
            418,432,339
            
            
            
            440,317,685
            
            
            
            431,056,183Loans
                held for sale
            
            
            525,999
            
            
            
            525,999
            
            
            
            981,280
            
            
            
            981,280Accrued
                income receivable
            
            
            7,871,365
            
            
            
            7,871,365
            
            
            
            6,633,795
            
            
            
            6,633,795Financial
                liabilities:Deposits
            
            $
            680,356,473
            
            
            $
            679,713,963
            
            
            $
            668,342,335
            
            
            $
            667,871,250Other
                borrowings
            
            
            38,198,013
            
            
            
            38,198,013
            
            
            
            37,521,113
            
            
            
            37,521,113Accrued
                interest payable
            
            
            2,322,185
            
            
            
            2,322,185
            
            
            
            2,081,020
            
            
            
            2,081,020




84
 *Table
            of Contents*




**Note
                13.**
            **Ames
                National Corporation (Parent Company Only) Financial
                Statements**




Information
      relative to the Parent Company’s balance sheets at December 31, 2006 and 2005,
      and statements of income and cash flows for each of the years in the three-year
      period ended December 31, 2006, is as follows:





**CONDENSED
      BALANCE SHEETS**


**December
      31, 2006 and 2005**





**2006**
            
            
            **2005****ASSETS**Cash
                and due from banks
            
            $
            35,174
            
            
            $
            8,153Interest-bearing
                deposits in banks
            
            
            299,654
            
            
            
            1,616,488Securities
                available-for-sale
            
            
            36,059,486
            
            
            
            32,673,908Investment
                in bank subsidiaries
            
            
            80,524,802
            
            
            
            78,120,998Loans
                receivable, net
            
            
            1,247,000
            
            
            
            1,247,000Premises
                and equipment, net
            
            
            751,992
            
            
            
            781,431Accrued
                income receivable
            
            
            247,502
            
            
            
            237,888Other
                assets
            
            
            10,000
            
            
            
            235,584**Total
                assets**
            
            $
            119,175,610
            
            
            $
            114,921,450**LIABILITIES**Dividends
                payable
            
            $
            2,450,503
            
            
            $
            2,354,818Deferred
                income taxes
            
            
            3,358,619
            
            
            
            2,689,836Accrued
                expenses and other liabilities
            
            
            443,176
            
            
            
            649,495**Total
                liabilities**
            
            
            6,252,298
            
            
            
            5,694,149**STOCKHOLDERS'
                EQUITY**Common
                stock
            
            
            18,850,026
            
            
            
            18,838,542Additional
                paid-in capital
            
            
            22,498,904
            
            
            
            22,383,375Retained
                earnings
            
            
            65,856,627
            
            
            
            64,713,530Accumulated
                other comprehensive income
            
            
            5,717,755
            
            
            
            3,291,854**Total
                stockholders' equity**
            
            
            112,923,312
            
            
            
            109,227,301**Total
                liabilities and stockholders' equity**
            
            $
            119,175,610
            
            
            $
            114,921,450




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**CONDENSED
      STATEMENTS OF INCOME**


**Years
      Ended December 31, 2006, 2005 and 2004**





**2006**
            
            
            **2005**
            
            
            **2004**Operating
                income:Equity
                in net income of bank subsidiaries
            
            $
            9,728,640
            
            
            $
            10,660,583
            
            
            $
            11,857,298Interest
            
            
            690,704
            
            
            
            570,325
            
            
            
            473,375Dividends
            
            
            919,039
            
            
            
            993,460
            
            
            
            1,063,203Rents
            
            
            81,306
            
            
            
            35,665
            
            
            
            70,425Securities
                gains, net
            
            
            1,333,136
            
            
            
            1,130,072
            
            
            
            308,27312,752,825
            
            
            
            13,390,105
            
            
            
            13,772,574Provision
                for loan losses
            
            
            -
            
            
            
            -
            
            
            
            16,000**Operating
                income after provision for loan losses**
            
            
            12,752,825
            
            
            
            13,390,105
            
            
            
            13,756,574Operating
                expenses
            
            
            1,609,208
            
            
            
            1,696,570
            
            
            
            1,517,028**Income
                before income taxes**
            
            
            11,143,617
            
            
            
            11,693,535
            
            
            
            12,239,546Income
                tax expense (benefit)
            
            
            200,000
            
            
            
            85,000
            
            
            
            (150,000
            )**Net
                income**
            
            $
            10,943,617
            
            
            $
            11,608,535
            
            
            $
            12,389,546




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**CONDENSED
      STATEMENTS OF CASH FLOWS**


**Years
      Ended December 31, 2006, 2005 and 2004**





**2006**
            
            
            **2005**
            
            
            **2004**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                income
            
            $
            10,943,617
            
            
            $
            11,608,535
            
            
            $
            12,389,546Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
            
            
            65,498
            
            
            
            64,216
            
            
            
            66,473Provision
                for loan losses
            
            
            -
            
            
            
            -
            
            
            
            16,000Amortization
                and accretion, net
            
            
            (18,575
            )
            
            
            (5,757
            )
            
            
            (6,004
            )Provision
                for deferred taxes
            
            
            (22,320
            )
            
            
            (50,652
            )
            
            
            -Securities
                gains, net
            
            
            (1,333,136
            )
            
            
            (1,130,072
            )
            
            
            (308,273
            )Equity
                in net income of bank subsidiaries
            
            
            (9,728,640
            )
            
            
            (10,660,583
            )
            
            
            (11,857,299
            )Dividends
                received from bank subsidiaries
            
            
            8,734,000
            
            
            
            8,634,000
            
            
            
            8,384,000Increase
                in accrued income receivable
            
            
            (9,614
            )
            
            
            (77,351
            )
            
            
            (9,202
            )Decrease
                (increase) in other assets
            
            
            225,584
            
            
            
            (92,646
            )
            
            
            (135,740
            )Increase
                (decrease) in accrued expense payable and other
                liabilities
            
            
            (206,319
            )
            
            
            311,454
            
            
            
            (350,540
            )**Net
                cash provided by operating activities**
            
            $
            8,650,095
            
            
            $
            8,601,144
            
            
            $
            8,188,961CASH
                FLOWS FROM INVESTING ACTIVITIESPurchase
                of securities available-for-sale
            
            
            (7,130,088
            )
            
            
            (8,893,910
            )
            
            
            (1,454,604
            )Proceeds
                from sale of securities available-for-sale
            
            
            4,629,061
            
            
            
            7,830,546
            
            
            
            4,200,716Proceeds
                from maturities and calls of securities available-for-sale
            
            
            2,335,000
            
            
            
            800,000
            
            
            
            519,223Decrease
                (increase) in interest bearing deposits in banks
            
            
            1,316,834
            
            
            
            1,101,638
            
            
            
            (1,129,131
            )Increase
                in loans
            
            
            -
            
            
            
            (170,000
            )
            
            
            (1,093,000
            )Purchase
                of bank premises and equipment
            
            
            (36,059
            )
            
            
            (406,588
            )
            
            
            (29,981
            )Investment
                in bank subsidiaries
            
            
            (160,000
            )
            
            
            (550,000
            )
            
            
            (1,950,000
            )**Net
                cash provided by (used in) investing activities**
            
            $
            954,748
            
            
            $
            (288,314
            )
            
            $
            (936,777
            )CASH
                FLOWS FROM FINANCING ACTIVITIESDividends
                paid
            
            
            (9,704,835
            )
            
            
            (8,599,597
            )
            
            
            (7,493,896
            )Proceeds
                from issuance of stock
            
            
            127,013
            
            
            
            287,937
            
            
            
            247,482**Net
                cash used in financing activities**
            
            $
            (9,577,822
            )
            
            $
            (8,311,660
            )
            
            $
            (7,246,414
            )**Net
                increase in cash and cash equivalents**
            
            
            27,021
            
            
            
            1,170
            
            
            
            5,770CASH
                AND DUE FROM BANKSBeginning
            
            
            8,153
            
            
            
            6,983
            
            
            
            1,213Ending
            
            $
            35,174
            
            
            $
            8,153
            
            
            $
            6,983




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**Note
                14.**
            **Selected
                Quarterly Financial Data
                (Unaudited)**




**2006****March
                31**
            
            
            **June
                30**
            
            
            **September
                30**
            
            
            **December
                31**Total
                interest income
            
            $
            10,629,614
            
            
            $
            10,977,629
            
            
            $
            11,264,945
            
            
            $
            11,423,504Total
                interest expense
            
            
            4,778,803
            
            
            
            5,225,682
            
            
            
            5,608,475
            
            
            
            5,692,568Net
                interest income
            
            
            5,850,811
            
            
            
            5,751,947
            
            
            
            5,656,470
            
            
            
            5,730,936Provision
                (credit) for loan losses
            
            
            29,624
            
            
            
            (302,854
            )
            
            
            45,859
            
            
            
            44,685Net
                income
            
            
            2,912,368
            
            
            
            2,764,818
            
            
            
            2,545,572
            
            
            
            2,720,859Basic
                and diluted earnings per common share
            
            
            0.31
            
            
            
            0.29
            
            
            
            0.27
            
            
            
            0.29





**2005****March
                31**
            
            
            **June
                30**
            
            
            **September
                30**
            
            
            **December
                31**Total
                interest income
            
            $
            9,943,736
            
            
            $
            10,227,074
            
            
            $
            10,534,838
            
            
            $
            10,599,979Total
                interest expense
            
            
            3,348,899
            
            
            
            3,862,127
            
            
            
            4,174,670
            
            
            
            4,547,412Net
                interest income
            
            
            6,594,837
            
            
            
            6,364,947
            
            
            
            6,360,168
            
            
            
            6,052,567Provision
                for loan losses
            
            
            53,725
            
            
            
            74,882
            
            
            
            118,431
            
            
            
            84,244Net
                income
            
            
            3,013,924
            
            
            
            2,968,312
            
            
            
            2,917,376
            
            
            
            2,708,923Basic
                and diluted earnings per common share
            
            
            0.32
            
            
            
            0.32
            
            
            
            0.31
            
            
            
            0.29




**Note
                15.**
            **Stock
                Repurchase Program**




The
      Board
      of Directors of the Company approved a stock repurchase program on November
      8,
      2006.  The Company has a strong capital position and this program
      provides an opportunity to repurchase Company stock on the open market when
      it
      is deemed to be favorably priced for repurchase.  The program
      authorizes the repurchase of up to 100,000 shares during the calendar year
      2007,
      or approximately 1% of 9,425,013 shares of common stock presently
      outstanding.  The repurchases will be made in open market transactions
      at the discretion of management using Company cash.  The timing and
      actual number of shares purchased will depend on a variety of factors such
      as
      price, the Company’s liquidity position and other market
      conditions.  The program may be limited or discontinued at any time
      without notice.  The Company did not repurchase any shares in
      2006.




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**ITEM
                9.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE**





On
      February 8, 2006, the Audit Committee of the Company approved the dismissal
      of
      McGladrey & Pullen, LLP (“McGladrey”) as the Company’s independent
      accountants.  The dismissal was later ratified by the Board of
      Directors of the Company.  The dismissal was effective upon the
      issuance of McGladrey’s report on the consolidated financial statements of the
      Company for the year ended December 31, 2005.





The
      audit reports of McGladrey on the
      consolidated financial statements of the Company for the years ended December
      31, 2005 and 2004 do not contain an adverse opinion or disclaimer of opinion,
      nor were they qualified or modified as to uncertainty, audit scope or accounting
      principles.





During
      the audits of the financial
      statements for the years ended December 31, 2005 and 2004, there were no
      disagreements with McGladrey on any matter of accounting principles or
      practices, financial statement disclosure or auditing scope or procedure, which
      agreement, if not resolved to McGladrey’s satisfaction, would have caused
      McGladrey to make reference to the subject matter of the disagreement in
      connection with its reports.





The
      Company requested that McGladrey
      furnish it with a letter addressed to the Securities and Exchange Commission
      (“SEC”) stating whether or not McGladrey agreed with the above
      statements.  A copy of McGladrey’s letter to the SEC dated February
      13, 2006 is filed as Exhibit 16 to a Form 8-K filed with the SEC on February
      13,
      2006.





The
      Audit Committee of the Company
      approved the engagement of Clifton Gunderson LLP as the Company’s new
      independent accountants effective with the completion of December 31, 2005
      audit.  The engagement of Clifton Gunderson LLP was later ratified by
      the Board of Directors.





**ITEM9A.**
            **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 Chief Executive Officer
      and Chief Financial Officer of the effectiveness of the Company’s disclosure
      controls and procedures (as defined in Exchange Act Rule 240.13a-15
      (e)).  Based on that evaluation, the Chief Executive Officer and the
      Chief Financial Officer have concluded that the Company’s current 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 the
      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.





Management’s
      annual report on internal control over financial reporting is contained in
      Item
      8 of this Report.





The
      attestation report of the Company’s registered public accounting firm on
      management’s assessment of the Company’s internal control over financial
      reporting is contained in Item 8 of this Report.





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There
      were no changes in the Company’s internal control over financial reporting that
      occurred during the quarter ended December 31, 2006 that have materially
      affected, or are reasonably likely to materially affect, the Company’s internal
      control over financial reporting.





**ITEM9B.**
            **OTHER
                INFORMATION**





None.





**PART
      III**





**ITEM
                10.**
            **DIRECTORS,
                EXECUTIVE OFFICERS AND CORPORATE
                GOVERNANCE**





Directors





Refer
      to
      the information under the caption "Information Concerning Nominees for Election
      as Directors" and "Information Concerning Directors Other Than Nominees"
      contained in the Company's definitive proxy statement prepared in connection
      with its Annual Meeting of Shareholders to be held April 25, 2007, as filed
      with
      the SEC on March 16, 2007 (the "Proxy Statement"), which information is
      incorporated herein by this reference.





Executive
      Officers





The
      information required by Item 10 regarding the executive officers appears in
      Item
      1 of Part I of this Report under the heading “Executive Officers of the Company
      and Banks”.





Section
      16(a) Beneficial Ownership Reporting Compliance





Refer
      to the information under the
      caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy
      Statement, which information is incorporated herein by this
      reference.





Audit
      Committee





The
      Company has established an Audit
      Committee as a standing committee of the Board of Directors.  Refer to
      the information under the caption “Information Concerning the Board of Directors
– Board Committees” in the Proxy Statement, which information is incorporated
      herein by this reference.





Audit
      Committee Financial Expert





The
      Board
      of Directors of the Company has determined that Warren R. Madden, a member
      of
      the Audit Committee, qualifies as an "audit committee financial expert" under
      applicable SEC rules.  The Board of Directors has further determined
      that Mr. Madden qualifies as an "independent" director under applicable SEC
      rules and the corporate governance rules of the NASDAQ stock
      market.  The Board's affirmative determination was based, among other
      things, upon Mr. Madden's experience as Vice President of Finance and Business
      of Iowa State University, a position in which he functions as the principal
      financial officer of the University.





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Code
      of
      Ethics





The
      Company has adopted an Ethics and Confidentiality Policy that applies to all
      directors, officers and employees of the Company, including the Chief Executive
      Officer and the Chief Financial Officer of the Company. A copy of this policy
      is
      posted on the Company's website at www.amesnational.com.  In
      the event that the Company makes any amendments to, or grants any waivers of,
      a
      provision of the Ethics and Confidentiality Policy that requires disclosure
      under applicable SEC rules, the Company intends to disclose such amendments
      or
      waiver and the reasons therefore on its website.





**ITEM
                11.**
            **EXECUTIVE
                COMPENSATION**





Refer
      to the information under the
      caption “Executive Compensation” in the Proxy Statement, which information is
      incorporated herein by this reference.





**ITEM12.**
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                SHAREHOLDER MATTERS**





Refer
      to the information under the
      caption “Security Ownership of Management and Certain Beneficial Owners” in the
      Proxy Statement, which information is incorporated herein by this
      reference.  The Company does not maintain any equity compensation
      plans covering its officers or employees or the officers or employees of the
      Banks.





**ITEM13.**
            **CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                INDEPENDENCE**





Refer
      to the information under the
      caption “Loans to Directors and Executive Officers and Related Party
      Transactions” and “Information Concerning the Board of Directors – Director
      Independence” in the Proxy Statement, which information is incorporated herein
      by this reference.





**ITEM
                14.**
            **PRINCIPAL
                ACCOUNTANT FEES AND
                SERVICES**





Refer
      to
      the information under the caption "Relationship with Registered Public
      Accounting Firm" in the Proxy Statement, which information is incorporated
      herein by this reference.





**PART
      IV**





**ITEM15.**
            **EXHIBITS
                AND FINANCIAL STATEMENT
                SCHEDULES**





(a)
            List
                of Financial Statements and
                Schedules.





1.
            Financial
                Statements





Reports
                of Clifton Gunderson LLP, Independent Registered Public Accounting
                Firm


Report
                of McGladrey & Pullen LLP, Independent Registered Public Accounting
                Firm


Consolidated
                Balance Sheets, December 31, 2006 and
                2005


Consolidated  Statements
                of Income for the Years ended December 31, 2006, 2005 and
                2004


Consolidated
                Statements of Stockholders' Equity for the Years ended December 31,
                2006,
                2005 and 2004


Consolidated
                Statements of Cash Flows for the Years ended December 31, 2006, 2005
                and
                2004


Notes
                to Consolidated Financial
                Statements





91


2.
            Financial
                Statement Schedules





All
      schedules are omitted because they are not applicable or not required, or
      because the required information is included in the consolidated financial
      statements or notes thereto.





(b)
            List
                of Exhibits.





3.1
            -
            Restated
                Articles of Incorporation of the Company, as amended (incorporated
                by
                reference to Exhibit 3.1 to Form 8-K as filed June 16,
                2005)


3.2
            -
            Bylaws
                of the Company, as amended (incorporated by reference to Exhibit
                3.2 to
                Form 8-K as filed June 16, 2005)


10.1
            -
            Management
                Incentive Compensation Plan (incorporated by reference to Exhibit
                10 filed
                with the Company’s Annual Report on Form 10K for the year ended December
                31, 2002)*


16
            -
            Letter
                regarding change in certifying Accountant (incorporated by reference
                to
                Exhibit 16 to Form 8-K as filed February 13,
                2006)


21
            -
            Subsidiaries
                of the Registrant


23.1
            -
            Consent
                of Independent Registered Public Accounting
                Firm


23.2
            -
            Consent
                of Independent Registered Public Accounting
                Firm


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


*
            Indicates
                a management compensatory plan or
                arrangement.




92
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SIGNATURES





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, as amended, the registrant has duly caused this report to be signed on
      its
      behalf by the undersigned, thereunto duly authorized.





AMES
                NATIONAL CORPORATIONMarch
                15, 2007
            
            By:
            /s/
                Daniel L. KriegerDaniel
                L. Krieger, Chairman and President(Principal
                Executive Officer)March
                15, 2007
            
            By:
            /s/
                John P. NelsonJohn
                P. Nelson, Vice President(Principal
                Financial and Accounting Officer)




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Pursuant
      to the requirements of the Securities Exchange Act of 1934, as amended, this
      report has been signed below by the following persons on behalf of the
      registrant and in the capacities indicated and on March 15, 2007.





*/s/
              Betty A. Baudler Horras*Betty
                A. Baudler Horras, Director*/s/
              Robert L. Cramer*Robert
                L. Cramer, Director*/s/
              Douglas C. Gustafson*Douglas
                C. Gustafson, Director*/s/
              Charles D. Jons*Charles
                D. Jons, Director*/s/
              Jami R. Larson II*Jami
                R. Larson II, Director*/s/
              Warren R. Madden*Warren
                R. Madden, Director*/s/
              Fred C. Samuelson*Fred
                C. Samuelson, Director*/s/
              Marvin J. Walter*Marvin
                J. Walter, Director




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EXHIBIT
      INDEX





The
      following exhibits are filed herewith:





Exhibit
                No.
            
            Description21
            
            -Subsidiaries
                of the Registrant23.1
            
            -Consent
                of Independent Registered Public Accounting Firm.23.2
            
            -Consent
                of Independent Registered Public Accounting Firm.31.1
            
            -Certification
                of Principal Executive Officer pursuant to Section 302 of the Sarbanes
                Oxley Act of 200231.2
            
            -Certification
                of Principal Financial Officer pursuant to Section 302 of the Sarbanes
                Oxley Act of 200232.1
            
            -Certification
                of Principal Executive Officer pursuant to 18 U.S.C. Section
                135032.2
            
            -Certification
                of Principal Financial Officer pursuant to 18 U.S.C. Section
                1350






95