**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, 2005.
            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 Act: **NONE**





Securities
      registered pursuant to Section 12(g) of the 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  *  No  T





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  *  No  T





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  T No  *





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





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. *





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  *  _   Accelerated
      filer  T _   Non-accelerated
      filer  *










As
      of
      June 30, 2005, 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 market, was $259,242,857. Shares of common stock
      beneficially owned by each executive officer and director of the Company and
      by
      each person who 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,
      2006, was 9,419,271.





**DOCUMENTS
      INCORPORATED BY REFERENCE**




Portions
      of the registrant’s definitive proxy statement, as filed with the Securities and
      Exchange Commission on March 16, 2006, are incorporated by reference into Part
      III of this Form 10-K.




2





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 Stock, Related Shareholder
                Matters and Issuer Purchases of Common StockItem
                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
                and Executive Officers of the
                RegistrantItem
                11.
            Executive
                CompensationItem
                12.
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Shareholder MattersItem
                13.
            Certain
                Relationships and Related
                TransactionsItem
                14.
            Principal
                Accounting Fees and Services**Part
                IV**Item
                15.
            Exhibits
                and Financial Statement
                Schedules


3
 *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.


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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.





As
      of
      December 31, 2005, First National had capital of $39,745,000 and 89 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 $6,417,000 in 2005,
      $6,949,000 in 2004 and $6,621,000 in 2003. Total assets as of December 31,
      2005,
      2004 and 2003 were $413,412,000, $436,074,000 and $381,086,000, 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, 2005, State Bank had capital of $11,035,000 and 21 full-time
      equivalent employees. It had net income of $1,401,000 in 2005, $1,707,000 in
      2004 and $1,554,000 in 2003. Total assets as of December 31, 2005, 2004 and
      2003
      were $112,626,000, $112,599,000 and $100,712,000, 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.





As
      of
      December 31, 2005, Boone Bank had capital of $12,419,000 and 28 full-time
      equivalent employees. It had net income of $1,849,000 in 2005, $2,059,000 in
      2004 and $1,920,000 in 2003. Total assets as of December 31, 2005, 2004 and
      2003
      were $108,780,000, $112,578,000 and $110,712,000, respectively.


5
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          of Contents*


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 from its main location in Story City and
      a
      full service office in Randall, Iowa. While its primary emphasis is in
      agricultural lending, Randall-Story Bank also provides the traditional lending
      services typically offered by community banks.





As
      of
      December 31, 2005, Randall-Story Bank had capital of $7,687,000 and 15 full-time
      equivalent employees. It had net income of $869,000 in 2005, $1,036,000 in
      2004
      and $810,000 in 2003. Total assets as of December 31, 2005, 2004 and 2003 were
      $70,371,000, $74,427,000 and $72,581,000, 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, 2005, United Bank had capital of $7,236,000 and 19 full-time
      equivalent employees. United Bank had a profit in 2005 and 2004 of $124,000
      and
      $105,000, respectively; and posted a net loss in 2003 of $465,000. Total assets
      as of December 31, 2005, 2004 and 2003 were $94,684,000, $89,653,000 and
      $68,397,000, 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.


6
 *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.





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:


7
 *Table
          of Contents*


-
            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.





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).


8
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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.





Employees





At
      December 31, 2005, the Banks had a total of 172 full-time equivalent employees
      and the Company had an additional 10 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.


9
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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.





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.


10
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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, 2005, there were 28 FDIC insured institutions having approximately
      62 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 operation of the banking
      industry, many are not referenced below.





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; however, changes are being proposed by Congress that will likely
      change some of the Act’s requirements in 2006.


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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.





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.


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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.





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.


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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.





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. 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.


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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).





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, 2006, 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.


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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.





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 $47,600,000 or less (subject
      to
      an exemption not in excess of the first $7,000,000 of transaction accounts).
      A
      reserve of $1,428,000 plus 10% of amounts in excess of $47,600,000 must be
      maintained in the event total transaction accounts exceed $47,600,000. 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.


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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.





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
            
            51
            
            Vice
                President & Technology Director of the Company.Leo
                E. Herrick
            
            64
            
            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
            
            69
            
            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
            
            51
            
            President
                of State Bank since 2003. Previously served as Senior Vice President
                of
                State Bank.John
                P. Nelson
            
            39
            
            Vice
                President, Secretary and Treasurer of Company. Also serves as Director
                of
                Randall-Story Bank and State Bank.Thomas
                H. Pohlman
            
            55
            
            President
                of First National since 1999. Previously served as Senior Vice President
                of First National.Jeffrey
                K. Putzier
            
            44
            
            President
                of Boone Bank since 1999.Harold
                E. Thompson
            
            60
            
            President
                of Randall Story Bank since 2003. Previously served as Executive
                Vice
                President of Randall-Story State Bank.Terrill
                L. Wycoff
            
            62
            
            Executive
                Vice President of First National since 2000. Previously served as
                served
                as Senior Vice President of First
                National.





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





Rising
      Interest Rates





Rising
      interest rates will present a challenge to the Company in 2006. 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, 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:





Ÿ
            changes
                in regulations;





Ÿ
            changes
                in technology and product delivery systems;
                and





Ÿ
            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.





Trading
      Volume





The
      trading volume in the Company’s common stock on the Nasdaq Small Cap Market is
      relatively limited compared to those of larger companies listed on the Nasdaq
      Small Cap Market, the Nasdaq National Market System, 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.


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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 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:





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





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





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





Ÿ
            investment
                policies;





Ÿ
            loans
                and interest rates on loans;





Ÿ
            interest
                rates paid on deposits;





Ÿ
            expansion
                of branch offices; and/or





Ÿ
            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.





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 $22 million as
      of
      December 31, 2005. The Company focuses on stocks that have historically paid
      dividends in an effort to lessen the negative effects of a bear
      market.


20
 *Table
          of Contents*


**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
      2005.





**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. All offices are presently located
      within the city of Ames; however, land was purchased in 2005 in Ankeny, Iowa
      to
      open a new full-service branch office in 2006. 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 and from one additional full-service office located in Randall,
      Iowa. All of these properties are owned by Randall-Story Bank free of any
      mortgage.





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 purchased real estate
      adjacent to 2330 Lincoln Way at 2318 Lincoln Way for a total purchase price
      of
      $400,000 in 2005. The 2318 Lincoln Way property 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.


21
 *Table
          of Contents*


**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.





**ITEM
                4.**
            **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 2005.


22
 *Table
          of Contents*


**PART
      II**


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





On
      February 28, 2006, the Company had approximately 577 shareholders of record.
      The
      Company’s common stock is traded on the NASDAQ SmallCap Market under the symbol
“ATLO”. Trading in the Company’s common stock is, however, relatively limited.





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
      9,
      2005. 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 90,000 shares during the calendar year 2006, or approximately 1% of 9,419,271
      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 2005.





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:





2005
            
            2004Market
                Price
            
            Market
                PriceQuarter
            
            High
            
            Low
            
            Quarter
            
            High
            
            Low1st
            
            $
            32.67
            
            $
            27.57
            
            
            1st
            
            $
            20.33
            
            $
            19.422nd
            
            $
            40.00
            
            $
            30.00
            
            
            2nd
            
            $
            21.17
            
            $
            20.003rd
            
            $
            42.82
            
            $
            25.57
            
            
            3rd
            
            $
            23.83
            
            $
            20.754th
            
            $
            29.00
            
            $
            23.12
            
            
            4th
            
            $
            35.00
            
            $
            23.50





The
      Company declared aggregate annual cash dividends in 2005 and 2004 of $9,417,000
      and $7,590,000, respectively, or $1.00 per share in 2005 and $0.81 per share
      in
      2004. In February 2006, the Company declared an aggregate cash dividend of
      $2,355,000 or $.25 per share. Quarterly dividends declared during the last
      two
      years were as follows:


23
 *Table
          of Contents*





2005
            
            2004Quarter
            
            Cash
                dividends
              declared
                per share
            
            Cash
                dividends
              declared
                per share1st
            
            $
            0.25
            
            $
            0.1532nd
            
            
            0.25
            
            
            0.3273rd
            
            
            0.25
            
            
            0.1634th
            
            
            0.25
            
            
            0.163





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.





**ITEM
                6.**
            **SELECTED
                FINANCIAL DATA**





The
      following financial data of the Company for the five years ended December 31,
      2005 through 2001 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.


24
 *Table
          of Contents*




Year
                      Ended December 31(dollars
                      in thousands, except per share amounts)2005
                  
                  2004
                  
                  2003
                  
                  2002
                  
                  2001STATEMENT
                      OF INCOME DATAInterest
                      income
                  
                  $
                  41,306
                  
                  $
                  37,354
                  
                  $
                  35,314
                  
                  $
                  36,270
                  
                  $
                  41,474Interest
                      expense
                  
                  
                  15,933
                  
                  
                  10,564
                  
                  
                  10,339
                  
                  
                  11,663
                  
                  
                  18,883Net
                      interest income
                  
                  
                  25,373
                  
                  
                  26,790
                  
                  
                  24,975
                  
                  
                  24,607
                  
                  
                  22,591Provision
                      for loan losses
                  
                  
                  331
                  
                  
                  479
                  
                  
                  645
                  
                  
                  688
                  
                  
                  898Net
                      interest income after provision forloan
                      losses
                  
                  
                  25,042
                  
                  
                  26,311
                  
                  
                  24,330
                  
                  
                  23,919
                  
                  
                  21,693Noninterest
                      income
                  
                  
                  5,613
                  
                  
                  5,269
                  
                  
                  6,435
                  
                  
                  5,135
                  
                  
                  5,080Noninterest
                      expense
                  
                  
                  15,210
                  
                  
                  14,935
                  
                  
                  14,819
                  
                  
                  13,276
                  
                  
                  11,587Income
                      before provision for income tax
                  
                  
                  15,445
                  
                  
                  16,645
                  
                  
                  15,946
                  
                  
                  15,778
                  
                  
                  15,186Provision
                      for income tax
                  
                  
                  3,836
                  
                  
                  4,255
                  
                  
                  4,321
                  
                  
                  4,438
                  
                  
                  4,639Net
                      Income
                  
                  $
                  11,609
                  
                  $
                  12,390
                  
                  $
                  11,625
                  
                  $
                  11,340
                  
                  $
                  10,547DIVIDENDS
                      AND EARNINGS PER SHARE DATACash
                      dividends declared
                  
                  $
                  9,417
                  
                  $
                  7,590
                  
                  $
                  7,142
                  
                  $
                  6,820
                  
                  $
                  5,187Cash
                      dividends declared per share
                  
                  $
                  1.00
                  
                  $
                  0.81
                  
                  $
                  0.76
                  
                  $
                  0.73
                  
                  $
                  0.55Basic
                      and diluted earnings per share
                  
                  $
                  1.23
                  
                  $
                  1.32
                  
                  $
                  1.24
                  
                  $
                  1.21
                  
                  $
                  1.13Weighted
                      average shares outstanding
                  
                  
                  9,415,599
                  
                  
                  9,405,705
                  
                  
                  9,393,672
                  
                  
                  9,381,855
                  
                  
                  9,371,655BALANCE
                      SHEET DATATotal
                      assets
                  
                  $
                  819,444
                  
                  $
                  839,753
                  
                  $
                  752,786
                  
                  $
                  677,229
                  
                  $
                  622,280Net
                      loans
                  
                  
                  440,318
                  
                  
                  411,639
                  
                  
                  355,533
                  
                  
                  329,593
                  
                  
                  323,043Deposits
                  
                  
                  668,342
                  
                  
                  658,176
                  
                  
                  619,549
                  
                  
                  550,622
                  
                  
                  511,509Stockholders'
                      equity
                  
                  
                  109,227
                  
                  
                  110,924
                  
                  
                  107,325
                  
                  
                  101,523
                  
                  
                  93,622Equity
                      to assets ratio
                  
                  
                  13.33
                  %
                  
                  13.21
                  %
                  
                  14.26
                  %
                  
                  14.99
                  %
                  
                  15.04
                  %FIVE
                      YEAR FINANCIAL PERFORMANCENet
                      income
                  
                  $
                  11,609
                  
                  $
                  12,390
                  
                  $
                  11,625
                  
                  $
                  11,340
                  
                  $
                  10,547Average
                      assets
                  
                  
                  831,198
                  
                  
                  793,076
                  
                  
                  726,945
                  
                  
                  635,816
                  
                  
                  616,971Average
                      stockholders' equity
                  
                  
                  109,802
                  
                  
                  108,004
                  
                  
                  104,141
                  
                  
                  98,282
                  
                  
                  91,373Return
                      on assets (net income divided by average assets)
                  
                  
                  1.40
                  %
                  
                  1.56
                  %
                  
                  1.60
                  %
                  
                  1.78
                  %
                  
                  1.71
                  %Return
                      on equity (net income divided by average equity)
                  
                  
                  10.57
                  %
                  
                  11.47
                  %
                  
                  11.16
                  %
                  
                  11.54
                  %
                  
                  11.54
                  %Net
                      interest margin (net interest income divided by average earning
                      assets)
                  
                  
                  3.56
                  %
                  
                  3.97
                  %
                  
                  4.02
                  %
                  
                  4.51
                  %
                  
                  4.19
                  %Efficiency
                      ratio (noninterest expense divided by noninterest income plus
                      net interest
                      income)
                  
                  
                  49.09
                  %
                  
                  46.59
                  %
                  
                  47.18
                  %
                  
                  44.64
                  %
                  
                  41.87
                  %Dividend
                      payout ratio (dividends per share divided by net income per
                      share)
                  
                  
                  81.30
                  %
                  
                  61.46
                  %
                  
                  60.05
                  %
                  
                  49.11
                  %
                  
                  54.11
                  %Dividend
                      yield (dividends per share divided by closing year-end market
                      price)
                  
                  
                  3.89
                  %
                  
                  3.91
                  %
                  
                  4.69
                  %
                  
                  4.15
                  %
                  
                  2.87
                  %Equity
                      to assets ratio (average equity divided by average assets)
                  
                  
                  13.21
                  %
                  
                  14.33
                  %
                  
                  15.46
                  %
                  
                  14.81
                  %
                  
                  12.78
                  %


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 ten
      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 provide better 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 $11,609,000 for the year ended December 31,
      2005
      compared to $12,390,000 and $11,625,000 reported for the years ended December
      31, 2004 and 2003, respectively. This represents a decrease of 6.3% when
      comparing 2005 and 2004, and an increase of 6.6% when comparing 2004 and 2003.
      The decline in net income in 2005 is primarily the result of lower net interest
      income as the result of higher market interest rates causing deposit interest
      expense to increase more quickly than interest income on earning assets. The
      improvement in net income for 2004 can be attributed primarily to higher net
      interest income resulting from a higher volume of loans and investments
      partially offset by lower secondary market income and security gains. Earnings
      per share for 2005 were $1.23 compared to a record $1.32 in 2004 and $1.24
      in
      2003. Each of the Banks had profitable operations during 2005.


26
 *Table
          of Contents*


The
      Company’s return on average equity for 2005 was 10.57% compared to 11.47% and
      11.16% in 2004 and 2003, respectively, and the return on average assets for
      2005
      was 1.40% compared to 1.56% in 2004 and 1.60% in 2003.





Lower
      net
      interest income caused both the return on average equity and return on average
      assets to decline in 2005 compared to 2004. Higher net income and lower capital
      levels relating to the average net unrealized gain on securities available
      for
      sale contributed to the improved return on average equity in 2004. The decline
      in the return on average assets in 2004 can be attributed to growth in assets
      at
      slightly lower profitability margins.





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





Ÿ
            Challenges


Ÿ
            Key
                Performance Indicators and Industry
                Results


Ÿ
            Income
                Statement Review


Ÿ
            Balance
                Sheet Review


Ÿ
            Asset
                Quality and Credit Risk Management


Ÿ
            Liquidity
                and Capital Resources


Ÿ
            Interest
                Rate Risk





**Challenges**





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





Ÿ
            Rising
                interest rates will present a challenge to the Company in 2006. 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.





Ÿ
            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.


27
 *Table
          of Contents*


Ÿ
            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 $22 million as of December 31, 2005. 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 and Industry Results**





Certain
      key performance indicators for the Company and the industry are presented in
      the
      following chart. The industry figures are compiled by the Federal Deposit
      Insurance Corporation (FDIC) and are derived from 8,832 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 31,2005
            
            2004
            
            2003Company
            
            Industry
            
            Company
            
            Industry
            
            Company
            
            IndustryReturn
                on assets
            
            
            1.40
            %
            
            1.28
            %
            
            1.56
            %
            
            1.29
            %
            
            1.60
            %
            
            1.38
            %Return
                on equity
            
            
            10.57
            %
            
            12.46
            %
            
            11.47
            %
            
            13.28
            %
            
            11.16
            %
            
            15.04
            %Net
                interest margin
            
            
            3.56
            %
            
            3.49
            %
            
            3.97
            %
            
            3.53
            %
            
            4.02
            %
            
            3.73
            %Efficiency
                ratio
            
            
            49.09
            %
            
            57.24
            %
            
            46.59
            %
            
            58.03
            %
            
            47.18
            %
            
            56.59
            %Capital
                ratio
            
            
            13.21
            %
            
            8.25
            %
            
            13.62
            %
            
            8.12
            %
            
            14.33
            %
            
            7.88
            %





Key
      performance indicators include:





Ÿ
            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. Although the Company’s return on assets ratio compares
      favorably to that of the industry, this ratio declined in 2005 as compared
      to
      2004 as the result of lower net interest income.





Ÿ
            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
      2005
      and the higher level of capital the Company maintains for future growth and
      acquisitions.


28
 *Table
          of Contents*


Ÿ
            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
      2004
      as rising market interest rates have caused interest expense to increase more
      quickly than interest income.





Ÿ
            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.





Ÿ
            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 2005:





Challenged
      by a flattening yield curve and softening loan demand, FDIC-insured institutions
      managed to post their fourth-best earnings quarter ever in the fourth quarter
      of
      2005. Net income of the 8,832 insured banks and thrifts was $1.7 billion (5.4%)
      higher than in the fourth quarter of 2004, thanks primarily to a $3.2-billion
      (4.0%) increase in net interest income. Noninterest income made a modest $373
      million (0.7%) pretax contribution to the improvement in earnings. Against
      these
      positive factors, expenses for loan-loss provisions were $893 million (11.6%)
      higher, and gains on sales of securities and other assets were $624 million
      (56.4%) lower. Noninterest expenses registered a small increase, rising by
      $824
      million (1.0%) from a year earlier. The average return on assets (ROA) in the
      fourth quarter was 1.22%, the lowest quarterly level since the fourth quarter
      of
      2002. The average ROA in the fourth quarter of 2004 was 1.25%. Almost half
      of
      all insured institutions (49.7%) reported a fourth-quarter ROA of one percent
      or
      better, slightly above the 48.0% of institutions that achieved that benchmark
      in
      the fourth quarter of 2004. At the other end of the performance spectrum, the
      share of unprofitable institutions declined slightly to 9.4%, from 9.5% a year
      earlier. More than half of all institutions reported higher quarterly earnings
      (58.6%), and higher quarterly ROAs (51.2%) than a year ago.





The
      average net interest margin in the fourth quarter was 3.49%, down slightly
      from
      3.50% in the third quarter, and matching the fourteen-year low level reached
      in
      the second quarter. The average margin in the fourth quarter of 2004 was 3.63%.
      A combination of rising short-term interest rates and relatively stable
      longer-term rates has caused the spread between these rates to diminish
      considerably throughout 2005. For insured banks and thrifts, which have
      traditionally lent "long" and borrowed "short," the narrowing of this spread
      has
      put downward pressure on the relative profitability of their lending and
      deposit-taking. The effect has been less pronounced at smaller institutions
      during 2005. They obtain most of their funding from smaller denomination "core"
      deposits, which tend to reprice upward more slowly when short-term interest
      rates rise. Large institutions fund a larger share of their assets with
      short-term nondeposit liabilities, which reprice more quickly when rates rise.
      A
      majority of institutions (54.9%) reported higher net interest margins for the
      full year in 2005 than they reported for 2004, but most of the improvements
      occurred prior to the fourth quarter, and they were concentrated among smaller
      institutions. The 4.0% increase in net interest income between the fourth
      quarter of 2004 and the fourth quarter of 2005 was made possible by 7.9% growth
      in interest-earning assets during that period which outweighed the negative
      effect of the narrower average margin.


29
 *Table
          of Contents*


**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.





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 and the
      expected trend of the economic conditions. 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.


30
 *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.


ASSETS2005
                
                2004
                
                2003Average
                  balance
                
                Revenue/
                  expense
                
                Yield/
                  rate
                
                Average
                  balance
                
                Revenue/
                  expense
                
                Yield/
                  rate
                
                Average
                  balance
                
                Revenue/
                  expense
                
                Yield/
                  rate(dollars
                    in thousands)Interest-earning
                    assetsLoansCommercial
                
                $
                66,581
                
                $
                4,286
                
                
                6.44
                %
                $
                48,775
                
                $
                2,548
                
                
                5.22
                %
                $
                38,288
                
                $
                2,163
                
                
                5.65
                %Agricultural
                
                
                29,772
                
                
                2,143
                
                
                7.20
                %
                
                28,406
                
                
                1,839
                
                
                6.47
                %
                
                25,962
                
                
                1,783
                
                
                6.87
                %Real
                    estate
                
                
                310,438
                
                
                18,912
                
                
                6.09
                %
                
                285,087
                
                
                17,169
                
                
                6.02
                %
                
                264,494
                
                
                16,909
                
                
                6.39
                %Consumer
                    and other
                
                
                29,206
                
                
                1,638
                
                
                5.61
                %
                
                23,079
                
                
                1,317
                
                
                5.71
                %
                
                21,068
                
                
                1,342
                
                
                6.37
                %Total
                    loans (including fees)
                
                $
                435,997
                
                $
                26,979
                
                
                6.19
                %
                $
                385,347
                
                $
                22,873
                
                
                5.94
                %
                $
                349,812
                
                $
                22,197
                
                
                6.35
                %Investment
                    securitiesTaxable
                
                $
                216,785
                
                $
                8,823
                
                
                4.07
                %
                $
                213,043
                
                $
                8,911
                
                
                4.18
                %
                $
                162,273
                
                $
                7,925
                
                
                4.88
                %Tax-exempt
                
                
                126,323
                
                
                8,006
                
                
                6.34
                %
                
                127,048
                
                
                8,125
                
                
                6.40
                %
                
                101,482
                
                
                6,820
                
                
                6.72
                %Total
                    investment securities
                
                $
                343,108
                
                $
                16,829
                
                
                4.90
                %
                $
                340,091
                
                $
                17,036
                
                
                5.01
                %
                $
                263,755
                
                $
                14,745
                
                
                5.59
                %Interest
                    bearing deposits with banks
                
                $
                7,037
                
                $
                169
                
                
                2.40
                %
                $
                8,713
                
                $
                130
                
                
                1.49
                %
                $
                4,511
                
                $
                62
                
                
                1.37
                %Federal
                    funds sold
                
                
                4,833
                
                
                131
                
                
                2.71
                %
                
                11,630
                
                
                159
                
                
                1.37
                %
                
                60,293
                
                
                628
                
                
                1.04
                %Total
                    Interest-earning assets
                
                $
                790,975
                
                $
                44,108
                
                
                5.58
                %
                $
                745,781
                
                $
                40,198
                
                
                5.39
                %
                $
                678,371
                
                $
                37,632
                
                
                5.55
                %Noninterest-earning
                    assetsCash
                    and due from banks
                
                $
                22,885
                
                
                
                
                
                
                
                $
                27,581
                
                
                
                
                
                
                
                $
                27,733Premises
                    and equipment, net
                
                
                9,229
                
                
                
                
                
                
                
                
                8,517
                
                
                
                
                
                
                
                
                8,599Other,
                    less allowance for loan losses
                
                
                8,109
                
                
                
                
                
                
                
                
                11,197
                
                
                
                
                
                
                
                
                12,242Total
                    noninterest-earning assets
                
                $
                40,223
                
                
                
                
                
                
                
                $
                47,295
                
                
                
                
                
                
                
                $
                48,574TOTAL
                    ASSETS
                
                $
                831,198
                
                
                
                
                
                
                
                $
                793,076
                
                
                
                
                
                
                
                $
                726,945





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%.




31
 *Table
          of Contents*




Average
      Balances and Interest Rates(continued)





LIABILITIES
                AND STOCKHOLDERS' EQUITY2005
            
            2004
            
            2003Average
              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
            
            $
            323,334
            
            $
            5,755
            
            
            1.78
            %
            $
            329,410
            
            $
            3,210
            
            
            0.97
            %
            $
            298,885
            
            $
            2,758
            
            
            0.92
            %Time
                deposits < $100,000
            
            
            173,966
            
            
            5,530
            
            
            3.18
            %
            
            173,581
            
            
            4,974
            
            
            2.87
            %
            
            170,534
            
            
            5,480
            
            
            3.21
            %Time
                deposits > $100,000
            
            
            90,687
            
            
            3,095
            
            
            3.41
            %
            
            70,076
            
            
            1,759
            
            
            2.51
            %
            
            65,759
            
            
            1,807
            
            
            2.75
            %Total
                deposits
            
            $
            587,987
            
            $
            14,380
            
            
            2.45
            %
            $
            573,067
            
            $
            9,943
            
            
            1.74
            %
            $
            535,178
            
            $
            10,045
            
            
            1.88
            %Other
                borrowed funds
            
            
            56,443
            
            
            1,551
            
            
            2.75
            %
            
            38,211
            
            
            620
            
            
            1.62
            %
            
            19,588
            
            
            293
            
            
            1.50
            %Total
                Interest-bearing liabilities
            
            $
            644,430
            
            $
            15,931
            
            
            2.47
            %
            $
            611,278
            
            $
            10,563
            
            
            1.73
            %
            $
            554,766
            
            $
            10,338
            
            
            1.86
            %Noninterest-bearing
                liabilitiesDemand
                deposits
            
            $
            69,577
            
            
            
            
            
            
            
            $
            65,785
            
            
            
            
            
            
            
            $
            59,614Other
                liabilities
            
            
            7,389
            
            
            
            
            
            
            
            
            8,009
            
            
            
            
            
            
            
            
            8,424Stockholders'
                equity
            
            $
            109,802
            
            
            
            
            
            
            
            $
            108,004
            
            
            
            
            
            
            
            $
            104,141TOTAL
                LIABILITIES ANDSTOCKHOLDERS' EQUITY
            
            $
            831,198
            
            
            
            
            
            
            
            $
            793,076
            
            
            
            
            
            
            
            $
            726,945Net
                interest income
            
            
            
            
            $
            28,177
            
            
            3.56
            %
            
            
            
            $
            29,635
            
            
            3.97
            %
            
            
            
            $
            27,294
            
            
            4.02
            %Spread
                AnalysisInterest
                income/average assets
            
            
            
            
            $
            44,108
            
            
            5.31
            %
            
            
            
            $
            40,198
            
            
            5.07
            %
            
            
            
            $
            37,632
            
            
            5.18
            %Interest
                expense/average assets
            
            
            
            
            
            15,931
            
            
            1.92
            %
            
            
            
            
            10,563
            
            
            1.33
            %
            
            
            
            
            10,334
            
            
            1.42
            %Net
                interest income/average assets
            
            
            
            
            
            28,177
            
            
            3.39
            %
            
            
            
            
            29,635
            
            
            3.74
            %
            
            
            
            
            27,294
            
            
            3.76
            %


32
 *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, real estate interest income increased $1,743,000 in 2005
      compared to 2004. An increased volume of real estate loans added $1,541,000
      in
      income in 2005 and higher interest rates increased interest income in 2005
      by
      $202,000.





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)
            
            2005
                Compared to 2004
            
            2004
                Compared to 2003Volume
            
            Rate
            
            Total
            
            Volume
            
            Rate
            
            TotalInterest
                incomeLoansCommercial
            
            $
            1,060
            
            $
            678
            
            $
            1,738
            
            $
            559
            
            $
            (174
            )
            $
            385Agricultural
            
            
            91
            
            
            213
            
            
            304
            
            
            163
            
            
            (107
            )
            
            56Real
                estate
            
            
            1,541
            
            
            202
            
            
            1,743
            
            
            1,272
            
            
            (1,012
            )
            
            260Consumer
                and other
            
            
            344
            
            
            (23
            )
            
            321
            
            
            121
            
            
            (146
            )
            
            (25
            )Total
                loans (including fees)
            
            $
            3,036
            
            $
            1,070
            
            $
            4,106
            
            $
            2,115
            
            $
            (1,439
            )
            $
            676Investment
                securitiesTaxable
            
            $
            152
            
            $
            (240
            )
            $
            (88
            )
            $
            2,234
            
            $
            (1,248
            )
            $
            986Tax-exempt
            
            
            (45
            )
            
            (74
            )
            
            (119
            )
            
            1,644
            
            
            (339
            )
            
            1,305Total
                investment securities
            
            $
            107
            
            $
            (314
            )
            $
            (207
            )
            $
            3,878
            
            $
            (1,587
            )
            $
            2,291$
            (29
            )
            $
            68
            
            $
            39
            
            $
            62
            
            $
            6
            
            $
            68Interest
                bearing deposits with banks
            
            
            (127
            )
            
            99
            
            
            (28
            )
            
            (622
            )
            
            153
            
            
            (469
            )Federal
              funds sold
            
            $
            2,987
            
            $
            923
            
            $
            3,910
            
            $
            5,433
            
            $
            (2,867
            )
            $
            2,566Total
                Interest-earning assetsInterest-bearing
                liabilitiesDepositsSavings,
                NOW accounts, and money markets
            
            $
            (60
            )
            $
            2,605
            
            $
            2,545
            
            $
            285
            
            $
            167
            
            $
            452Time
                deposits < $100,000
            
            
            12
            
            
            544
            
            
            556
            
            
            96
            
            
            (602
            )
            
            (506
            )Time
                deposits > $100,000
            
            
            602
            
            
            734
            
            
            1,336
            
            
            119
            
            
            (167
            )
            
            (48
            )Total
                deposits
            
            $
            554
            
            $
            3,883
            
            $
            4,437
            
            $
            500
            
            $
            (602
            )
            $
            (102
            )Other
                borrowed funds
            
            
            378
            
            
            553
            
            
            931
            
            
            281
            
            
            46
            
            
            327Total
                Interest-bearing liabilities
            
            $
            932
            
            $
            4,436
            
            $
            5,368
            
            $
            781
            
            $
            (556
            )
            $
            225Net
                interest income/earning assets
            
            $
            2,055
            
            $
            (3,513
            )
            $
            (1,458
            )
            $
            4,652
            
            $
            (2,311
            )
            $
            2,341





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


33
 *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, 2005, 2004 and
      2003, the Company's net interest margin was 3.56%, 3.97% and 4.02%,
      respectively.





Net
      interest income during 2005, 2004 and 2003 totaled $25,373,000, $26,790,000
      and
      $24,975,000, respectively, representing a 5% decrease in 2005 from 2004 and
      a 7%
      increase in 2004 compared to 2003. Net interest income has fallen since 2004
      as
      rising market interest rates have caused interest expense to increase more
      quickly than interest income. A higher volume of earning assets was the primary
      reason for the increase in net interest income in 2004.





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 eight banks,
      three 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 recorded a $331,000 provision for loan losses during 2005 compared
      to
      $479,000 in 2004 and $645,000 in 2003. Lower problem loans in 2005 compared
      to
      2004 was the primary reason for the lower provision expense in 2005. A lower
      level of charge-offs in 2004 led the reduction in provision expense in 2004
      compared to 2003. 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.





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.


34
 *Table
          of Contents*


Noninterest
      income during 2005, 2004 and 2003 totaled $5,613,000, $5,269,000 and $6,435,000,
      respectively, representing a 7% increase in 2005 from 2004 and an 18% decrease
      in 2004 from 2003. The increase in 2005 is the result of higher trust and net
      securities gains with the decrease in 2004 the result of lower secondary market
      income and net securities gains. The lower secondary market income in 2004
      was
      primarily attributed to a slow down in refinancing activity compared to 2003.
      Trust income has increased as the result of additional assets under
      management.





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 2005.





Noninterest
      expense during 2005, 2004 and 2003 totaled $15,210,000, $14,935,000 and
      $14,820,000, respectively, representing a 2% increase in 2005 versus 2004 and
      a
      1% increase in 2004 compared to 2003. Lower incentive compensation for senior
      officers of the Company and Banks in 2005 contributed to the limited increase
      in
      noninterest expense. The retirement of several higher paid senior officers
      allowed for stable non-interest expense for the year ended December 31, 2004
      compared to the same period in 2003. The percentage of noninterest expense
      to
      average assets was 1.83% in 2005, compared to 1.88% and 2.04% during 2004 and
      2003, respectively.





Provision
      for Income Taxes





The
      provision for income taxes for 2005, 2004 and 2003 was $3,836,000, $4,255,000
      and $4,321,000, respectively. This amount represents an effective tax rate
      of
      25% during 2005, compared to 26% and 27% for 2004 and 2003, 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. The average balance of tax exempt securities
      in
      2005, 2004, and 2003 totaled $126,323,000, $127,048,000, and $101,482,000,
      respectively.





**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 decreased to $819,384,000 in 2005 compared to $839,753,000 in 2004,
      a 2%
      decrease. The mix of assets changed as maturing investments were reinvested
      in
      higher yielding loans. First National had a decline of $22,662,000 in total
      assets that was anticipated as a local company had a significant level of
      temporary construction funds invested with the bank as securities sold under
      an
      agreement to repurchase as of December 31, 2004 that were withdrawn in 2005.





Loan
      Portfolio





Net
      loans
      for the year ended December 31, 2005, increased to $440,318,000 from
      $411,639,000 as of December 31, 2004, an increase of 7%. The increase in loan
      volume can be primarily attributed to growth in the commercial loan portfolio
      resulting primarily from the combination of new borrowers and the purchase
      of
      commercial loans from other Iowa banks. Consumer and other loans increased
      primarily as the result of several large loans to a municipality. Loans are
      the
      primary contributor to the Company’s revenues and cash flows. The average yield
      on loans was 129 and 93 basis points higher in 2005 and 2004, respectively,
      in
      comparison to the average tax-equivalent investment portfolio yields.


35
 *Table
          of Contents*


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, 2005.


2005
            
            2004
            
            2003
            
            2002
            
            2001(dollars
                in thousands)Real
                EstateConstruction
            
            $
            23,973
            
            $
            21,042
            
            $
            13,126
            
            $
            13,518
            
            $
            12,6771-4
                family residential
            
            
            102,043
            
            
            97,612
            
            
            84,645
            
            
            81,239
            
            
            84,379Commercial
            
            
            153,920
            
            
            160,176
            
            
            150,723
            
            
            136,351
            
            
            117,211Agricultural
            
            
            30,606
            
            
            27,443
            
            
            24,297
            
            
            21,693
            
            
            21,029Commercial
            
            
            71,430
            
            
            57,189
            
            
            38,555
            
            
            40,097
            
            
            45,631Agricultural
            
            
            32,216
            
            
            30,713
            
            
            27,815
            
            
            26,022
            
            
            27,367Consumer
                and other
            
            
            33,340
            
            
            24,584
            
            
            23,242
            
            
            19,921
            
            
            20,920Total
                loans
            
            
            447,528
            
            
            418,759
            
            
            362,403
            
            
            338,841
            
            
            329,214Deferred
                loan fees, net
            
            
            445
            
            
            644
            
            
            819
            
            
            777
            
            
            725Total
                loans net of deferred fees
            
            $
            447,083
            
            $
            418,115
            
            $
            361,584
            
            $
            338,064
            
            $
            328,489





The
      Company's loan portfolio consists of real estate loans, commercial loans,
      agricultural loans and consumer loans. As of December 31, 2005, gross loans
      totaled approximately $447 million, which equals approximately 67% of total
      deposits and 55% of total assets. The Company’s peer group (consisting of 393
      bank holding companies with total assets of $500 to $1,000 million) loan to
      deposit ratio as of September 30, 2005 was a much higher 88%. 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, 2005, 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.





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.


36
 *Table
          of Contents*


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.


37
 *Table
          of Contents*


Maturities
      and Sensitivities of Loans to Changes in Interest Rates as of December 31,
      2005





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
            
            $
            16,375
            
            $
            7,119
            
            $
            479
            
            $
            23,9731-4
                family residential
            
            
            6,237
            
            
            44,011
            
            
            51,795
            
            
            102,043Commercial
            
            
            5,157
            
            
            119,340
            
            
            29,423
            
            
            153,920Agricultural
            
            
            1,433
            
            
            5,406
            
            
            23,767
            
            
            30,606Commercial
            
            
            36,881
            
            
            27,210
            
            
            7,339
            
            
            71,430Agricultural
            
            
            21,860
            
            
            7,475
            
            
            2,881
            
            
            32,216Consumer
                and other
            
            
            7,716
            
            
            20,132
            
            
            5,492
            
            
            33,340Total
                loans
            
            $
            95,659
            
            $
            230,693
            
            $
            121,176
            
            $
            447,528





After
                one
              year
                but
              within
              five
                years
            
            After
              five
                yearsLoan
                maturities after one year with:Fixed
                rates
            
            $
            193,838
            
            $
            23,905Variable
                rates
            
            
            36,855
            
            
            97,271$
            230,693
            
            $
            121,176





Loans
      Held For Sale





Mortgage
      origination funding awaiting delivery to the secondary market totaled $981,000
      and $234,000 as of December 31, 2005 and 2004, 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, 2005 were $333,510,000, a decrease of $29,949,000
      or 8% from the prior year end. As of December 31, 2005 and 2004, the investment
      portfolio comprised 41% and 43% of total assets, respectively.


38
 *Table
          of Contents*





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, 2005, 2004 and 2003, respectively. This portfolio
      provides the Company with a significant amount of liquidity.


2005
            
            2004
            
            2003(dollars
                in thousands)U.S.
                treasury securities
            
            $
            516
            
            $
            531
            
            $
            2,229U.S.
                government agencies
            
            
            134,288
            
            
            137,634
            
            
            118,637States
                and political subdivisions
            
            
            108,373
            
            
            113,818
            
            
            105,963Corporate
                bonds
            
            
            59,567
            
            
            77,573
            
            
            63,586Equity
                securities
            
            
            30,766
            
            
            33,904
            
            
            32,701Total
            
            $
            333,510
            
            $
            363,460
            
            $
            323,116





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, 2005. These
      corporate bonds had a fair market and book value as of December 31, 2005 of
      $1,865,000 and $2,165,000, respectively. The Company does not consider the
      corporate bonds to be other than temporarily impaired as of December 31, 2005.
      As of December 31, 2005, 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, 2005,
      2004, and 2003.


39
 *Table
          of Contents*


Investment
      Maturities as of December 31, 2005





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
            
            $
            -
            
            $
            -
            
            $
            516
            
            $
            -
            
            $
            516U.S.
                government agencies
            
            
            13,050
            
            
            104,057
            
            
            13,803
            
            
            3,378
            
            
            134,288States
                and political subdivisions
            
            
            6,192
            
            
            35,105
            
            
            47,989
            
            
            19,087
            
            
            108,373Corporate
                bonds
            
            
            13,894
            
            
            38,218
            
            
            7,455
            
            
            -
            
            
            59,567Total
            
            $
            33,136
            
            $
            177,380
            
            $
            69,763
            
            $
            22,465
            
            $
            302,744Weighted
                average yieldU.S.
                treasury
            
            
            -
            
            
            -
            
            
            5.20
            %
            
            -
            
            
            5.20
            %U.S.
                government agencies
            
            
            2.83
            %
            
            3.66
            %
            
            4.96
            %
            
            3.51
            %
            
            3.71
            %States
                and political subdivisions*
            
            
            4.18
            %
            
            5.61
            %
            
            6.64
            %
            
            6.33
            %
            
            6.12
            %Corporate
                bonds
            
            
            4.19
            %
            
            4.78
            %
            
            6.43
            %
            
            -
            
            
            4.84
            %Total
            
            
            3.66
            %
            
            4.29
            %
            
            6.27
            %
            
            5.90
            %
            
            4.80
            %





*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 $668,342,000 and $658,176,000 as of December 31, 2005 and
      2004,
      respectively. The nominal increase of $10,166,000 can be attributed to deposit
      growth at First National and State Bank. The deposit category seeing the largest
      balance increases were time certificates of deposits over $100,000 as depositors
      moved money from lower yielding non-maturing deposit accounts to higher yielding
      certificates of deposit.





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 59% 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 traditionally has not relied upon brokered deposits and does not
      anticipate utilizing such funds at the present time.


40
 *Table
          of Contents*


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, 2005, 2004 and 2003.


2005
            
            2004
            
            2003Amount
            
            Rate
            
            Amount
            
            Rate
            
            Amount
            
            Rate(dollars
                in thousands)Noninterest
                bearing demand deposits
            
            $
            69,577
            
            
            -
            
            $
            65,785
            
            
            -
            
            $
            59,614
            
            
            -Interest
                bearing demand deposits
            
            
            154,156
            
            
            1.63
            %
            
            154,332
            
            
            0.80
            %
            
            130,138
            
            
            0.70
            %Money
                market deposits
            
            
            141,492
            
            
            2.12
            %
            
            146,479
            
            
            1.25
            %
            
            143,478
            
            
            1.20
            %Savings
                deposits
            
            
            27,686
            
            
            0.90
            %
            
            28,599
            
            
            0.47
            %
            
            25,269
            
            
            0.50
            %Time
                certificates < $100,000
            
            
            173,966
            
            
            3.18
            %
            
            173,581
            
            
            2.87
            %
            
            170,534
            
            
            3.21
            %Time
                certificates > $100,000
            
            
            90,687
            
            
            3.41
            %
            
            70,076
            
            
            2.51
            %
            
            65,759
            
            
            2.75
            %$
            657,564
            
            
            
            
            $
            638,852
            
            
            
            
            $
            594,792





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, 2005,
      2004
      and 2003.





2005
            
            2004
            
            2003(dollars
                in thousands)3
                months or less
            
            $
            25,933
            
            $
            20,613
            
            $
            23,801Over
                3 through 12 months
            
            
            47,279
            
            
            29,217
            
            
            29,896Over
                12 through 36 months
            
            
            26,431
            
            
            17,131
            
            
            11,374Over
                36 months
            
            
            1,399
            
            
            2,103
            
            
            4,416Total
            
            $
            101,042
            
            $
            69,064
            
            $
            69,487





Borrowed
      Funds





Borrowed
      funds that may be utilized by the Company are comprised of Federal Home Loan
      Bank (FHLB) advances, federal funds purchased 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.


41
 *Table
          of Contents*


The
      following table summarizes the outstanding amount of, and the average rate
      on,
      borrowed funds as of December 31, 2005, 2004 and 2003.





2005
            
            2004
            
            2003Balance
            
            Average
              Rate
            
            Balance
            
            Average
              Rate
            
            Balance
            
            Average
              Rate(dollars
                in thousands)Other
                short-term borrowings
            
            $
            2,861
            
            
            4.52
            %
            $
            -
            
            
            -
            
            $
            -
            
            
            -Federal
                funds purchased and repurchase agreements
            
            
            34,660
            
            
            3.38
            %
            
            64,072
            
            
            1.99
            %
            
            18,199
            
            
            1.39
            %Total
            
            $
            37,521
            
            
            3.46
            %
            $
            64,072
            
            
            1.99
            %
            $
            18,199
            
            
            1.39
            %





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,
      2005, 2004 and 2003.





2005
            
            2004
            
            2003Average
              Balance
            
            Average
              Rate
            
            Average
              Balance
            
            Average
              Rate
            
            Average
              Balance
            
            Average
              Rate(dollars
                in thousands)Other
                short-term borrowings
            
            $
            1,096
            
            
            4.29
            %
            $
            -
            
            
            -
            
            $
            -
            
            
            -Federal
                funds purchased & repurchase agreements
            
            
            56,433
            
            
            2.72
            %
            
            38,211
            
            
            1.62
            %
            
            19,588
            
            
            1.48
            %Total
            
            $
            57,529
            
            
            2.75
            %
            $
            38,211
            
            
            1.62
            %
            $
            19,588
            
            
            1.48
            %Maximum
                Amount Outstanding during the yearOther
                short-term borrowings
            
            $
            5,000
            
            
            
            
            $
            -
            
            
            
            
            $
            -Federal
                funds purchased and repurchase agreements
            
            
            70,489
            
            
            
            
            
            65,391
            
            
            
            
            
            22,728





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. The instruments involve, to varying
      degrees, elements of credit risk in excess of the amount recognized in the
      balance sheet. For additional information, see footnote 10 of the “Notes to
      Consolidated Statements”.





Contractual
      Obligations





The
      following table sets forth the balance of contractual obligations by maturity
      period as of December 31, 2005 (in thousands).


42
 *Table
          of Contents*





Payments
                due by periodContractual
                Obligations
            
            Total
            
            Less
                than
              1
                year
            
            1-3
              years
            
            3-5
              years
            
            More
                than
              5
                yearsFHLB
                Advances
            
            $
            2,000
            
            $
            2,000
            
            $
            -
            
            $
            -
            
            $
            -Operating
                LeaseObligation
            
            
            105
            
            
            21
            
            
            42
            
            
            42
            
            
            -Purchase
                Obligations
            
            
            3,661
            
            
            875
            
            $
            1,830
            
            
            956Total
            
            $
            5,766
            
            $
            2,896
            
            $
            1,872
            
            $
            998
            
            $
            -





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,
      2005 totaled $440,318,000 as compared to $411,639,000 as of December 31, 2004,
      an increase of 7%. Loans comprise 54% of total assets as of the end of 2005.
      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 $2,431,000 as of December 31, 2005.
      The Company’s level of problem assets as a percentage of assets of 0.30% as
      December 31, 2005 compares favorably to the average for FDIC insured
      institutions as of September 30, 2005 of 0.44%.





Non-performing
      Assets





The
      following table sets forth information concerning the Company's non-performing
      assets for the past five years ending December 31, 2005.


2005
            
            2004
            
            2003
            
            2002
            
            2001(dollars
                in thousands)Non-performing
                assets:Nonaccrual
                loans
            
            $
            606
            
            $
            1,896
            
            $
            1,756
            
            $
            2,015
            
            $
            2,692Loans
                90 days or more past due and still accruing
            
            
            83
            
            
            80
            
            
            431
            
            
            394
            
            
            797Total
                non-performing loans
            
            
            689
            
            
            1,976
            
            
            2,187
            
            
            2,409
            
            
            3,489Other
                real estate owned
            
            
            1,742
            
            
            772
            
            
            159
            
            
            295
            
            
            159Total
                non-performing assets
            
            $
            2,431
            
            $
            2,748
            
            $
            2,346
            
            $
            2,704
            
            $
            3,648





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.


43
 *Table
          of Contents*


At
      December 31, 2005 and 2004, the Company had impaired loans of approximately
      $689,000 and $1,976,000, respectively. The allowance for loan losses related
      to
      these impaired loans was approximately $55,000 and $158,000 at December 31,
      2005
      and 2004, respectively. The average balances of impaired loans for the years
      ended December 31, 2005 and 2004 were $1,644,708 and $2,373,465, respectively.
      For the years ended December 31, 2005, 2004, and 2003 interest income which
      would have been recorded under the original terms of such loans was
      approximately $41,000, $239,000, and $179,000, respectively, with none, $211,000
      and $177,000, respectively, recorded. Loans greater than 90 days past due and
      still accruing interest were approximately $83,000 and $80,000 at December
      31,
      2005 and 2004, respectively. First National obtained title in 2005 to a
      commercial property securing a large problem credit that accounts for the
      decrease in nonaccrual loans and the increase in other real estate
      owned.





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
      and forecasted 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 net worth 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.


44
 *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.


2005
            
            2004
            
            2003
            
            2002
            
            2001(dollars
                in thousands)Balance
                at beginning of period
            
            $
            6,476
            
            $
            6,051
            
            $
            5,758
            
            $
            5,446
            
            $
            5,373Charge-offs:Real
                EstateConstruction
            
            
            -
            
            
            -
            
            
            24
            
            
            -
            
            
            -1-4
                Family Residential
            
            
            -
            
            
            19
            
            
            5
            
            
            -
            
            
            -Commercial
            
            
            28
            
            
            93
            
            
            -
            
            
            40
            
            
            -Agricultural
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Commercial
            
            
            -
            
            
            3
            
            
            392
            
            
            235
            
            
            768Agricultural
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Consumer
                and other
            
            
            119
            
            
            115
            
            
            43
            
            
            155
            
            
            83Total
                Charge-offs
            
            
            147
            
            
            230
            
            
            464
            
            
            430
            
            
            852Recoveries:Real
                EstateConstruction
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -1-4
                Family Residential
            
            
            -
            
            
            -
            
            
            -
            
            
            20
            
            
            -Commercial
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Agricultural
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Commercial
            
            
            33
            
            
            13
            
            
            100
            
            
            14
            
            
            8Agricultural
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Consumer
                and other
            
            
            72
            
            
            163
            
            
            12
            
            
            20
            
            
            19Total
                Recoveries
            
            
            105
            
            
            176
            
            
            112
            
            
            54
            
            
            27Net
                charge-offs
            
            
            42
            
            
            54
            
            
            352
            
            
            376
            
            
            825Additions
                charged to operations
            
            
            331
            
            
            479
            
            
            645
            
            
            688
            
            
            898Balance
                at end of period
            
            $
            6,765
            
            $
            6,476
            
            $
            6,051
            
            $
            5,758
            
            $
            5,446Average
                Loans Outstanding
            
            $
            435,997
            
            $
            385,347
            
            $
            349,812
            
            $
            317,521
            
            $
            341,440Ratio
                of net charge-offs during the period to average loans
                outstanding
            
            
            0.01
            %
            
            0.01
            %
            
            0.11
            %
            
            0.12
            %
            
            0.24
            %Ratio
                of allowance for loan losses to total loans net of deferred
                fees
            
            
            1.51
            %
            
            1.55
            %
            
            1.67
            %
            
            1.70
            %
            
            1.65
            %


45
 *Table
          of Contents*


The
      allowance for loan losses increased to $6,765,000 at the end of 2005 in
      comparison to the allowance of $6,476,000 at year end 2004. The increase can
      be
      primarily attributed to the growth in the 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 2001 as the level of net charge-offs has declined.
      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, 2005, 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 has improved considerably in
      2005
      compared to 2004 as the result of one large credit being reclassified as other
      real estate.





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, 2005 specific reserves increased $76,000 or 5% compared to year end 2004
      levels as the volume of watch credits increased in 2005. 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. In 2003, specific allocations
      to
      problem agricultural real estate loans was the largest contributor to the
      increase in the specific reserve level when compared to 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, the economic outlook 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.


46
 *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.


2005
            
            
            
            2004
            
            
            
            2003
            
            
            
            2002
            
            
            
            2001(dollars
                in thousands)Amount
            
            %
                *
            
            Amount
            
            %
                *
            
            Amount
            
            %
                *
            
            Amount
            
            %
                *
            
            Amount
            
            %
                *Balance
                at end of period applicable to:Real
                EstateConstruction
            
            $
            258
            
            
            5.36
            %
            $
            429
            
            
            5.02
            %
            $
            196
            
            
            3.62
            %
            $
            210
            
            
            3.99
            %
            $
            178
            
            
            3.99
            %1-4
                family residential
            
            
            1,127
            
            
            22.80
            %
            
            1,021
            
            
            23.31
            %
            
            948
            
            
            23.36
            %
            
            892
            
            
            23.98
            %
            
            980
            
            
            23.98
            %Commercial
            
            
            2,534
            
            
            34.39
            %
            
            2,676
            
            
            38.25
            %
            
            2,663
            
            
            41.59
            %
            
            2,453
            
            
            40.24
            %
            
            1,704
            
            
            40.24
            %Agricultural
            
            
            421
            
            
            6.84
            %
            
            486
            
            
            6.55
            %
            
            458
            
            
            6.70
            %
            
            302
            
            
            6.40
            %
            
            279
            
            
            6.40
            %Commercial
            
            
            1,158
            
            
            15.96
            %
            
            809
            
            
            13.66
            %
            
            775
            
            
            10.64
            %
            
            910
            
            
            11.83
            %
            
            938
            
            
            11.83
            %Agricultural
            
            
            511
            
            
            7.20
            %
            
            360
            
            
            7.33
            %
            
            488
            
            
            7.68
            %
            
            504
            
            
            7.68
            %
            
            457
            
            
            7.68
            %Consumer
                and other
            
            
            390
            
            
            7.45
            %
            
            302
            
            
            5.87
            %
            
            255
            
            
            6.41
            %
            
            235
            
            
            5.88
            %
            
            258
            
            
            5.88
            %Unallocated
            
            
            366
            
            
            
            
            
            393
            
            
            
            
            
            268
            
            
            
            
            
            252
            
            
            
            
            
            652$
            6,765
            
            
            100
            %
            $
            6,476
            
            
            100
            %
            $
            6,051
            
            
            100
            %
            $
            5,758
            
            
            100
            %
            $
            5,446
            
            
            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, 2005, 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.


47
 *Table
          of Contents*


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





Ÿ
            Review
                of the Company’s Current Liquidity
                Sources


Ÿ
            Review
                of the Consolidated Statements of Cash Flows


Ÿ
            Review
                of Company Only Cash Flows


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


Ÿ
            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, 2005,
      2004
      and 2003 totaled $24,376,000, $48,199,000 and $58,725,000, respectively. The
      lower balance of liquid assets as of December 31, 2005 relates to a lower 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 $43,425,000 and federal
      funds borrowing capacity at correspondent banks of $86,500,000. As of December
      31, 2005, the Company had outstanding FHLB advances of $2,000,000, federal
      funds
      purchased of $13,000,000 and securities sold under agreement to repurchase
      totaled $21,660,000, and treasury tax and loan option notes of $861,000.





Total
      investments as of December 31, 2005 were $333,510,000 compared to $363,459,000
      as of year end 2004. As of December 31, 2005 and 2004, the investment portfolio
      as a percentage of total assets was 41% and 43%, 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, 2005 and 2004 and have
      net
      unrealized gains of $5,225,000 and $11,854,000, 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, 2005, 2004 and 2003 totaled $11,472,000, $13,169,000
      and $14,828,000, respectively. The primary reason for the decrease in operating
      cash flows in 2005 compared to 2004 was the use of cash to fund loans held
      for
      sale and lower net income. The decrease in operating cash flows in 2004 compared
      to 2003 included a reduction in loans held for sale and an increase in other
      assets in 2004. These decreases were offset by security gains realized in 2004
      as compared to 2003 and an increase net income.





Net
      cash
      provided (used) in investing activities for December 31, 2005, 2004 and 2003
      was
      $14,558,000, ($103,647,000) and ($96,479,000), respectively. 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. U.S. government agency bonds, municipal bonds and commercial real
      estate loans were the most significant investing activities in
      2003.


48
 *Table
          of Contents*


Net
      cash
      (used in) provided by financing activities for December 31, 2005, 2004 and
      2003
      totaled ($26,697,000), $77,255,000 and $61,944,000, respectively. 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. Deposit growth was the primary source of cash flows for
      2003. As of December 31, 2005, 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 2005, dividends
      from the Banks amounted to $8,634,000 compared to $8,384,000 in 2004. 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 retain 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 2006.
      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 $34,290,000 that are presently available to provide
      additional liquidity to the Banks.





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





No
      material capital expenditures or material changes in the capital resource mix
      are anticipated at this time. Commitments to extend credit totaled $77,099,000
      as of December 31, 2005 compared to a total of $65,894,000 at the end of 2004.
      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, 2005. 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, 2005 that are a concern to
      management.


49
 *Table
          of Contents*


Capital
      Resources





The
      Company’s total stockholders’ equity decreased to $109,227,000 at December 31,
      2005, from $110,924,000 at December 31, 2004. At December 31, 2005 and 2004,
      stockholders’ equity as a percentage of total assets was 13.3% and 13.2%,
      respectively. Total equity decreased due to depreciation in the Banks’
investment portfolios and higher dividends declared which was partially offset
      by the retention of earnings. The capital levels of the Company currently exceed
      applicable regulatory guidelines as of December 31, 2005.





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
      9,
      2005. 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 90,000 shares during the calendar year 2006, or approximately 1% of 9,419,271
      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 2005.





**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.





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.


50
 *Table
          of Contents*


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 areas in which the Company and the Banks operate, competitive products
      and pricing, 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.





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.


51
 *Table
          of Contents*


**ITEM
                7A.**
            **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 2005 changed
      when compared to 2004.





Based
      on
      a simulation modeling analysis performed as of December 31, 2005, 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:


52
 *Table
          of Contents*


Net
      Interest Income at Risk





Estimated
      Change in Net Interest Income for Year Ending December 31, 2006





$
                Change
            
            %
                Change(dollars
                in thousands)+200
                Basis Points
            
            
            (3,042
            )
            
            (12.6
            )%+100
                Basis Points
            
            
            (1,431
            )
            
            (6.0
            )%-100
                Basis Points
            
            
            1,307
            
            
            5.5
            %-200
                Basis Points
            
            
            2,160
            
            
            9.1
            %





As
      shown
      above, at December 31, 2005, the estimated effect of an immediate 200 basis
      point increase in interest rates would decrease the Company’s net interest
      income by 12.6% or approximately $3,042,000 in 2006. The estimated effect of
      an
      immediate 200 basis point decrease in rates would increase the Company’s net
      interest income by 9.1% or approximately $2,160,000 in 2006. 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.


53
 *Table
          of Contents*





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, 2005. 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
              
              $
              4,383
              
              $
              1,500
              
              $
              100
              
              
              -
              
              $
              5,983Federal
                  funds sold
              
              
              300
              
              
              -
              
              
              -
              
              
              -
              
              
              300Investments
                  *
              
              
              3,429
              
              
              29,707
              
              
              177,380
              
              
              122,994
              
              
              333,510Loans
              
              
              121,063
              
              
              26,078
              
              
              260,141
              
              
              40,247
              
              
              447,529Loans
                  held for sale
              
              
              981
              
              
              
              
              
              
              
              
              
              
              
              981Total
                  interest - earning assets
              
              $
              130,156
              
              $
              57,285
              
              $
              437,621
              
              $
              163,241
              
              $
              788,303Interest
                  - bearing liabilitiesInterest
                  bearing demand deposits
              
              $
              151,681
              
              
              -
              
              
              -
              
              
              -
              
              $
              151,681Money
                  market and savings deposits
              
              
              160,998
              
              
              -
              
              
              -
              
              
              -
              
              
              160,998Time
                  certificates < $100,000
              
              
              25,552
              
              
              66,550
              
              
              88,364
              
              
              -
              
              
              180,466Time
                  certificates > $100,000
              
              
              25,933
              
              
              47,279
              
              
              27,830
              
              
              -
              
              
              101,042Other
                  borrowed funds
              
              
              35,521
              
              
              -
              
              
              -
              
              
              -
              
              
              35,521Total
                  interest - bearing liabilities
              
              $
              399,685
              
              $
              113,829
              
              $
              116,194
              
              $
              0
              
              $
              629,708Interest
                  sensitivity gap
              
              
              ($269,529
              )
              
              ($56,544
              )
              $
              321,427
              
              $
              163,241
              
              $
              158,595Cumulative
                  interest sensitivity gap
              
              
              ($269,529
              )
              
              ($326,073
              )
              
              ($4,646
              )
              $
              158,595
              
              $
              158,595Cumulative
                  interest sensitivity gap as a percent of total assets
              
              
              -32.89
              %
              
              -39.79
              %
              
              -0.57
              %
              
              19.35
              %





*Investments
      with maturities over 5 years include the market value of equity securities
      of
      $30,766.


54
 *Table
          of Contents*


As
      of
      December 31, 2005, the Company’s cumulative gap ratios for assets and
      liabilities repricing within three months and within one year were 33% and
      40%,
      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.


55
 *Table
          of Contents*





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





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





The
      management of Ames National Corporation is responsible for establishing and
      maintaining adequate internal control over financial reporting. Ames National
      Corporation’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.





Ames
      National Corporation’s management assessed the effectiveness of the company’s
      internal control over financial reporting as of December 31, 2005. 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, 2005,
      the company’s internal control over financial reporting is effective based on
      those criteria.





Our
      management’s assessment of the effectiveness of the Company’s internal control
      over financial reporting as of December 31, 2005 has been audited by McGladrey
      & Pullen, 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)


*Table
          of Contents*


**REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 The
          Board
          of Directors
 Ames
          National Corporation and Subsidiaries
 Ames,
          Iowa
 
 
 We
          have
          audited the accompanying consolidated balance sheets of Ames National
          Corporation and Subsidiaries as of December 31, 2005 and 2004, and the
          related
          consolidated statements of income, stockholders’ equity and cash flows for each
          of the three 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 of 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 audits 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 2004, and the results of their
          operations and their cash flows for each of the three years in the period
          ended
          December 31, 2005, in conformity with U.S. generally accepted accounting
          principles.
 
 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,
          2005, 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 January 20, 2006 expressed an unqualified
          opinion.
   /s/
          McGladrey & Pullen, LLP.
 
 
 Des
          Moines, Iowa
 January
          20, 2006
  *Table
              of Contents*
  **REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 
 To
          the
          Board of Directors
 Ames
          National Corporation and Subsidiaries
 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, 2005, 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.
  *Table
              of Contents*
  In
          our
          opinion, management’s assessment that Ames National Corporation maintained
          effective internal control over financial reporting as of December 31,
          2005 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,
          2005, 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 balance sheets of Ames National Corporation
          as of December 31, 2005 and 2004, and the related statements of income,
          stockholders’ equity and cash flows for each of the years in the three-year
          period ended December 31, 2005, and our report dated January 20, 2006,
          expressed
          an unqualified opinion.
   /s/
          McGladrey & Pullen, LLP.
 
 
 Des
          Moines, Iowa
 January
          20, 2006
  *Table
              of Contents*
  **AMES
        NATIONAL CORPORATION AND SUBSIDIARIES**
  **CONSOLIDATED
        BALANCE SHEETS**
 **December
        31, 2005 and 2004**
 
 **ASSETS**
              
              **2005**
              
              **2004**Cash
                  and due from banks (Note 2)
              
              $
              18,092,139
              
              $
              18,759,086Federal
                  funds sold
              
              
              300,000
              
              
              19,865,000Interest
                  bearing deposits in financial institutions
              
              
              5,983,542
              
              
              9,575,174Securities
                  available-for-sale (Note 3 and 7)
              
              
              333,510,152
              
              
              363,459,462Loans
                  receivable, net (Note 4 and 7)
              
              
              440,317,685
              
              
              411,638,565Loans
                  held for sale
              
              
              981,280
              
              
              234,469Bank
                  premises and equipment, net (Note 5)
              
              
              11,030,840
              
              
              8,790,636Accrued
                  income receivable
              
              
              6,633,795
              
              
              6,262,424Deferred
                  income taxes (Note 9)
              
              
              343,989
              
              
              -Other
                  assets
              
              
              2,190,652
              
              
              1,167,971**Total
                  assets**
              
              $
              819,384,074
              
              $
              839,752,787**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**LIABILITIESDeposits
                  (Note 6)Demand,
                  noninterest bearing
              
              $
              74,155,477
              
              $
              71,666,385NOW
                  accounts
              
              
              151,680,984
              
              
              172,313,429Savings
                  and money market
              
              
              160,998,014
              
              
              174,358,165Time,
                  $100,000 and over
              
              
              101,042,024
              
              
              69,063,977Other
                  time
              
              
              180,465,836
              
              
              170,773,883**Total
                  deposits**
              
              
              668,342,335
              
              
              658,175,839Federal
                  funds purchased and securities sold under agreements to
                  repurchase
              
              
              34,659,983
              
              
              64,072,475Other
                  short-term borrowings (Note 7)
              
              
              2,861,130
              
              
              -Dividend
                  payable
              
              
              2,354,818
              
              
              1,537,162Deferred
                  income taxes (Note 9)
              
              
              -
              
              
              2,334,670Accrued
                  expenses and other liabilities
              
              
              1,938,507
              
              
              2,708,701**Total
                  liabilities**
              
              
              710,156,773
              
              
              728,828,847COMMITMENTS
                  AND CONTINGENCIES (Note 10)STOCKHOLDERS'
                  EQUITY (Note 11)Common
                  stock, $2 par value, authorized 18,000,000 shares; 9,419,271 issued
                  and
                  outstanding at December 31, 2005 9,459,690 and 9,411,198 shares
                  issued and
                  outstanding 2004
              
              
              18,838,542
              
              
              18,919,380Additional
                  paid-in capital
              
              
              22,383,375
              
              
              22,225,516Retained
                  earnings
              
              
              64,713,530
              
              
              63,200,352Treasury
                  stock, at cost; 48,492 shares at December 31, 2004
              
              
              -
              
              
              (889,020
              )Accumulated
                  other comprehensive income, net unrealized gain on securities
                  available-for-sale
              
              
              3,291,854
              
              
              7,467,712**Total
                  stockholders' equity**
              
              
              109,227,301
              
              
              110,923,940**Total
                  liabilities and stockholders' equity**
              
              $
              819,384,074
              
              $
              839,752,787
 
 See
        Notes
        to Consolidated Financial Statements.
  *Table
            of Contents*
 
 **AMES
        NATIONAL CORPORATION AND SUBSIDIARIES**
 
 **CONSOLIDATED
        STATEMENTS OF INCOME**
 **Years
        Ended December 31, 2005, 2004 and 2003**
 
 **2005**
              
              **2004**
              
              **2003**Interest
                  and dividend income:Loans,
                  including fees
              
              $
              26,979,358
              
              $
              22,872,764
              
              $
              22,197,335Securities:Taxable
              
              
              8,558,156
              
              
              8,536,759
              
              
              7,510,671Tax-exempt
              
              
              4,190,268
              
              
              4,274,033
              
              
              3,604,641Federal
                  funds sold
              
              
              130,182
              
              
              159,438
              
              
              628,203Dividends
              
              
              1,447,663
              
              
              1,510,665
              
              
              1,372,89041,305,627
              
              
              37,353,659
              
              
              35,313,740Interest
                  expense:Deposits
              
              
              14,380,214
              
              
              9,942,250
              
              
              10,045,178Other
                  borrowed funds
              
              
              1,552,894
              
              
              621,077
              
              
              293,60415,933,108
              
              
              10,563,327
              
              
              10,338,782**Net
                  interest income**
              
              
              25,372,519
              
              
              26,790,332
              
              
              24,974,958Provision
                  for loan losses (Note 4)
              
              
              331,282
              
              
              479,355
              
              
              645,447**Net
                  interest income after provision for loan losses**
              
              
              25,041,237
              
              
              26,310,977
              
              
              24,329,511Noninterest
                  income:Trust
                  department income
              
              
              1,375,308
              
              
              1,185,681
              
              
              1,225,099Service
                  fees
              
              
              1,796,503
              
              
              1,813,795
              
              
              1,513,964Securities
                  gains, net (Note 3)
              
              
              795,780
              
              
              324,030
              
              
              1,395,320Gain
                  on sales of loans held for sale
              
              
              606,277
              
              
              610,077
              
              
              1,155,311Merchant
                  and ATM fees
              
              
              570,914
              
              
              534,897
              
              
              513,832Other
              
              
              468,410
              
              
              800,835
              
              
              631,949**Total
                  noninterest income**
              
              
              5,613,192
              
              
              5,269,315
              
              
              6,435,475Noninterest
                  expense:Salaries
                  and employee benefits (Note 8)
              
              
              9,208,902
              
              
              9,019,139
              
              
              9,044,896Data
                  processing
              
              
              2,126,040
              
              
              2,241,441
              
              
              2,188,488Occupancy
                  expenses
              
              
              1,148,738
              
              
              1,048,323
              
              
              1,088,438Other
                  operating expenses
              
              
              2,726,222
              
              
              2,626,451
              
              
              2,497,692**Total
                  noninterest expense**
              
              
              15,209,902
              
              
              14,935,354
              
              
              14,819,514**Income
                  before income taxes**
              
              
              15,444,527
              
              
              16,644,938
              
              
              15,945,472Provision
                  for income taxes (Note 9)
              
              
              3,835,992
              
              
              4,255,392
              
              
              4,320,787**Net
                  income**
              
              $
              11,608,535
              
              $
              12,389,546
              
              $
              11,624,685Basic
                  earnings per share (Note 1)
              
              $
              1.23
              
              $
              1.32
              
              $
              1.24
 
 See
        Notes
        to Consolidated Financial Statements.
  *Table
            of Contents*
 
 **AMES
        NATIONAL CORPORATION AND SUBSIDIARIES**
 
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS’ EQUITY**
 **Years
        Ended December 31, 2005, 2004 and 2003**
 
 Comprehensive
                Income
              
              Common
                Stock
              
              Additional
                Paid-in
                Capital
              
              Retained
                Earnings
              
              Treasury
                Stock
              
              Accumulated
                Other
                Comprehensive
                Income
                  (Loss)
              
              Total
                Stockholders'
                Equity**Balance,
                  December 31, 2002**
              
              
              
              
              $
              18,919,380
              
              $
              22,200,784
              
              $
              53,917,544
              
              $
              (1,333,640
              )
              $
              7,818,788
              
              $
              101,522,856Comprehensive
                  income:Net
                  income
              
              $
              11,624,685
              
              
              -
              
              
              -
              
              
              11,624,685
              
              
              -
              
              
              -
              
              
              11,624,685Other
                  comprehensive income, unrealized gains on securities ,net of
                  reclassification adjustment, net of tax (Note 3)
              
              
              1,097,153
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,097,153
              
              
              1,097,153**Total
                  comprehensive income**
              
              $
              12,721,838Cash
                  dividends declared, $0.76 per share
              
              
              
              
              
              -
              
              
              -
              
              
              (7,141,569
              )
              
              -
              
              
              -
              
              
              (7,141,569
              )Sale
                  of 12,213 shares of treasury stock
              
              
              
              
              
              -
              
              
              (2,035
              )
              
              -
              
              
              223,905
              
              
              -
              
              
              221,870**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 (Note 3)
              
              
              (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 (Note 3)
              
              
              (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
              
              $
              109,227,301
 
 See
        Notes
        to Consolidated Financial Statements.
  *Table
            of Contents*
 
 **AMES
        NATIONAL CORPORATION AND SUBSIDIARIES**
 
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **Years
        Ended December 31, 2005, 2004 and 2003**
 
 **2005**
              
              **2004**
              
              **2003**CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  income
              
              $
              11,608,535
              
              $
              12,389,546
              
              $
              11,624,685Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Provision
                  for loan losses
              
              
              331,282
              
              
              479,355
              
              
              645,447Amortization
                  and accretion
              
              
              478,244
              
              
              683,012
              
              
              563,612Depreciation
              
              
              915,213
              
              
              951,477
              
              
              1,030,377Provision
                  for deferred taxes
              
              
              (226,170
              )
              
              (53,448
              )
              
              (284,751
              )Securities
                  gains, net
              
              
              (795,778
              )
              
              (324,030
              )
              
              (1,395,320
              )Change
                  in assets and liabilities:(Increase)
                  decrease in loans held for sale
              
              
              (675,561
              )
              
              624,670
              
              
              1,854,307(Increase)
                  decrease in accrued income receivable
              
              
              (371,371
              )
              
              (420,177
              )
              
              6,770(Increase)
                  decrease in other assets
              
              
              (1,022,681
              )
              
              (835,415
              )
              
              250,293Increase
                  (decrease) in accrued expenses and other liabilities
              
              
              (770,194
              )
              
              (325,969
              )
              
              532,718**Net
                  cash provided by operating activities**
              
              
              9,471,519
              
              
              13,169,021
              
              
              14,828,138CASH
                  FLOWS FROM INVESTING ACTIVITIESPurchase
                  of securities available-for-sale
              
              
              (59,049,297
              )
              
              (163,349,539
              )
              
              (194,136,066
              )Proceeds
                  from sale of securities available-for-sale
              
              
              24,937,433
              
              
              5,045,102
              
              
              9,299,986Proceeds
                  from maturities and calls of securities available-for-sale
              
              
              57,750,361
              
              
              115,303,131
              
              
              108,868,412Net
                  (increase) decrease in interest bearing deposits in financial
                  institutions
              
              
              3,591,632
              
              
              (3,211,636
              )
              
              (5,363,538
              )Net
                  decrease in federal funds sold
              
              
              19,565,000
              
              
              515,000
              
              
              12,120,000Net
                  (increase) in loans
              
              
              (29,081,652
              )
              
              (56,584,801
              )
              
              (26,585,515
              )Purchase
                  of bank premises and equipment
              
              
              (3,155,417
              )
              
              (1,364,306
              )
              
              (681,787
              )**Net
                  cash provided (used in) investing activities**
              
              
              14,558,060
              
              
              (103,647,049
              )
              
              (96,478,508
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESIncrease
                  in deposits
              
              
              10,166,496
              
              
              38,627,312
              
              
              68,926,148Increase
                  (decrease) in federal funds purchased and securities sold under
                  agreements
                  to repurchase
              
              
              (29,412,492
              )
              
              45,874,072
              
              
              (127,171
              )Proceeds
                  from other borrowing, net
              
              
              2,861,130
              
              
              -
              
              
              -Dividends
                  paid
              
              
              (8,599,597
              )
              
              (7,493,896
              )
              
              (7,077,117
              )Proceeds
                  from issuance of stock
              
              
              287,937
              
              
              247,482
              
              
              221,870**Net
                  cash (used in) provided by financing activities**
              
              
              (24,696,526
              )
              
              77,254,970
              
              
              61,943,730**Net
                  decrease in cash and cash equivalents**
              
              
              (666,947
              )
              
              (13,223,058
              )
              
              (19,706,640
              )CASH
                  AND DUE FROM BANKSBeginning
              
              
              18,759,086
              
              
              31,982,144
              
              
              51,688,784Ending
              
              $
              18,092,139
              
              $
              18,759,086
              
              $
              31,982,144
 
 (Continued)
  *Table
            of Contents*
 
 **AMES
        NATIONAL CORPORATION AND SUBSIDIARIES**
 
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS (Continued)**
 **Years
        Ended December 31, 2005, 2004 and 2003**
 
 **2005**
              
              **2004**
              
              **2003**SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATIONCash
                  payments for:Interest
              
              $
              15,154,109
              
              $
              10,623,125
              
              $
              10,504,715Income
                  taxes
              
              
              3,979,665
              
              
              4,516,823
              
              
              4,553,669
 
 See
        Notes
        to Consolidated Financial Statements.




*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 shareholders 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.


*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.





The
      allowance consists of specific, general and unallocated 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.





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, the loan is
      evaluated for impairment. 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.





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.


*Table
          of Contents*


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 equity section of the
      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 8.





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 costs, 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.





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.


*Table
          of Contents*


Other
      borrowings :
      The
      carrying amounts of federal funds purchased and securities sold under agreements
      to repurchase approximate fair value because of the 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, 2005, 2004
      and
      2003, 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.





Stock
      Split: On June
      15, 2005, shareholders of the Company approved an amendment to the Restated
      Articles 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
      following information was used in the computation of basic earnings per share
      for the years ended December 31, 2005, 2004, and 2003.


**2005**
              
              **2004**
              
              **2003**Basic
                  earning per share computation:Net
                  income
              
              $
              11,608,535
              
              $
              12,389,546
              
              $
              11,624,685Weighted
                    average commonshares outstanding
              
              
              9,415,599
              
              
              9,405,705
              
              
              9,393,672**Basic
                  EPS**
              
              $
              1.23
              
              $
              1.32
              
              $
              1.24





New
      Accounting Pronouncements





The
      Financial Accounting Standards Board has issued Statement No. 154, Accounting
      Changes and Error Corrections, a replacement of Accounting Principles Board
      Opinion No. 20 and FASB Statement No. 3. The statement applies to all voluntary
      changes in accounting principles, and modifies the requirements for the
      accounting for and reporting of a change in accounting principle. FASB believes
      that Statement 154 improves financial reporting because its requirements enhance
      the consistency of financial information between periods. The statement is
      effective for accounting changes and corrections of errors made in fiscal years
      beginning after December 15, 2005 though earlier application is permitted.
      The
      adoption of these standards will only impact the Company’s financial statements
      in the event there is a voluntary change in accounting principles that is not
      anticipated as of December 31, 2005.




*Table
          of Contents*




**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
        $5,086,000 and $7,562,000 at December 31, 2005 and 2004,
        respectively.
 
 **Note
                  3.**
              **Debt
                  and Equity
                  Securities**




The
      amortized cost of securities available for sale and their approximate fair
      values at December 31, 2005 and 2004, are summarized below:





**Amortized**
              **Cost**
            
            **Gros**
              **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




**Amortized**
                **Cost**
              
              **Gross**
                **Unrealized**
                **Gains**
              
              **Gross**
                **Unrealized**
                **(Losses)**
              
              **Estimated**
                **Fair
                  Value****2004:**U.S.
                  treasury
              
              $
              495,040
              
              $
              35,859
              
              $
              -
              
              $
              530,899U.S.
                  government agencies
              
              
              138,024,045
              
              
              627,981
              
              
              (1,017,948
              )
              
              137,634,078State
                  and political subdivisions
              
              
              112,004,478
              
              
              2,391,038
              
              
              (577,902
              )
              
              113,817,614Corporate
                  bonds
              
              
              75,510,784
              
              
              2,471,332
              
              
              (408,929
              )
              
              77,573,187Equity
                  securities
              
              
              25,571,604
              
              
              8,332,080
              
              
              -
              
              
              33,903,684$
              351,605,951
              
              $
              13,858,290
              
              $
              (2,004,779
              )
              $
              363,459,462




The
      amortized cost and estimated fair value of debt securities available-for-sale
      as
      of December 31, 2004, 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
              
              $
              33,385,260
              
              $
              33,136,380Due
                  after one year through five years
              
              
              179,946,679
              
              
              177,380,246Due
                  after five years through ten years
              
              
              69,234,539
              
              
              69,762,559Due
                  after ten years
              
              
              22,700,437
              
              
              22,465,201305,266,915
              
              
              302,744,386Equity
                  securities
              
              
              23,018,072
              
              
              30,765,766$
              328,284,987
              
              $
              333,510,152





At
      December 31, 2005 and 2004, securities with a carrying value of approximately
      $152,169,000 and $173,765,000, 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.





Gross
      realized gains and gross realized losses on sales of available-for-sale
      securities were $1,287,962 and $236,182 respectively, in 2005, $443,974 and
      $119,944 respectively, in 2004, and $1,395,320 and none, respectively, in
      2003.





Other-than-temporary
      impairments recognized as a component of income were $256,000 in 2005 with
      no
      impairments recognized in 2004 and 2003.





The
      components of other comprehensive income (loss) - net unrealized gains (losses)
      on securities available-for-sale for the years ended December 31, 2005, 2004,
      and 2003, were as follows:


**2005**
              
              **2004**
              
              **2003**Unrealized
                  holding gains (losses) arising during the period
              
              $
              (5,832,566
              )
              $
              (1,974,746
              )
              $
              3,136,832Reclassification
                          adjustment for net gains realized in net
                          income
              
              
              (795,780
              )
              
              (324,030
              )
              
              (1,395,320
              )**Net
                            unrealized gains (losses)  before tax
                            effect**
              
              
              (6,628,346
              )
              
              (2,298,776
              )
              
              1,741,512Tax
                  effect
              
              
              2,452,488
              
              
              850,547
              
              
              (644,359
              )**Other
                  comprehensive income****Net
                        unrealized gains (losses) on
                        securities**
              
              $
              (4,175,858
              )
              $
              (1,448,229
              )
              $
              1,097,153





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, 2005 and 2004 are summarized as follows:


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
              
              
              (1,188,509
              )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
              
              $
              (4,980,605
              )




Less
                  than 12 Months
              
              12
                  Months or More
              
              TotalFair
                Value
              
              Unrealized
                Losses
              
              Fair
                Value
              
              Unrealized
                Losses
              
              Fair
                Value
              
              Unrealized
                Losses**2004:**Securities
                  available for sale:U.S.
                  government agencies
              
              $
              81,532,939
              
              $
              (775,150
              )
              $
              9,849,426
              
              $
              (242,798
              )
              $
              91,382,365
              
              $
              (1,017,948
              )State
                  and political subsidivisions
              
              
              24,844,595
              
              
              (296,117
              )
              
              10,701,463
              
              
              (281,785
              )
              
              35,546,058
              
              
              (577,902
              )Corporate
                  obligations
              
              
              36,136,660
              
              
              (408,929
              )
              
              -
              
              
              -
              
              
              36,136,660
              
              
              (408,929
              )$
              142,514,194
              
              $
              (1,480,196
              )
              $
              20,550,889
              
              $
              (524,583
              )
              $
              163,065,083
              
              $
              (2,004,779
              )


For
      all
      of the above investment securities, the unrealized losses are generally due
      to
      changes in interest rates or general market conditions, as such, are considered
      to be temporary, by the Company.




*Table
          of Contents*




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




The
      composition of loans receivable at December 31, 2005 and 2004 is as
      follows:


**2005**
              
              **2004**Commercial
                  and agricultural
              
              $
              103,646,036
              
              $
              87,901,970Real
                  estate
              
              
              310,542,833
              
              
              306,272,605Consumer
              
              
              12,449,551
              
              
              14,244,501Other
              
              
              20,890,051
              
              
              10,339,393447,528,471
              
              
              418,758,469Less:Allowance
                  for loan losses
              
              
              (6,765,356
              )
              
              (6,475,530
              )Deferred
                  loan fees
              
              
              (445,430
              )
              
              (644,374
              )$
              440,317,685
              
              $
              411,638,565




Changes
      in the allowance for loan losses for the year ended December 31, 2005, 2004
      and
      2003 are as follows:


**2005**
              
              **2004**
              
              **2003**Balance,
                  beginning
              
              $
              6,475,530
              
              $
              6,050,989
              
              $
              5,757,694Provision
                  for loan losses
              
              
              331,282
              
              
              479,355
              
              
              645,447Recoveries
                  of loans charged-off
              
              
              105,400
              
              
              174,703
              
              
              111,926Loans
                  charged-off
              
              
              (146,856
              )
              
              (229,517
              )
              
              (464,078
              )Balance,
                  ending
              
              $
              6,765,356
              
              $
              6,475,530
              
              $
              6,050,989





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, 2005 and 2004:


**2005**
              
              **2004**Balance,
                  beginning of year
              
              $
              28,655,993
              
              $
              10,991,284New
                  loans
              
              
              13,201,498
              
              
              17,173,833Repayments
              
              
              (13,140,392
              )
              
              (13,297,861
              )Change
                  in status
              
              
              (211,997
              )
              
              13,788,737Balance,
                  end of year
              
              $
              28,505,102
              
              $
              28,655,993





At
      December 31, 2005 and 2004, the Company had impaired loans of approximately
      $689,000 and $1,977,000, respectively. The allowance for loan losses related
      to
      these impaired loans was approximately $55,000 and $158,000 at December 31,
      2005
      and 2004, respectively. The average balances of impaired loans for the years
      ended December 31, 2005 and 2004 were $1,644,708 and $2,373,465, respectively.
      For the years ended December 31, 2005, 2004, and 2003 interest income which
      would have been recorded under the original terms of such loans was
      approximately $41,000, $239,000, and $179,000 respectively, with $0, $211,000
      and $177,000, respectively, recorded. Loans greater than 90 days past due and
      still accruing interest were approximately $83,000 and $80,000 at December
      31,
      2005 and 2004, respectively.





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, 2005, 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, 2005 and 2004, are as follows:


**2005**
              
              **2004**Land
              
              $
              3,000,803
              
              $
              1,284,771Buildings
                  and improvements
              
              
              10,734,396
              
              
              9,889,939Furniture
                  and equipment
              
              
              6,378,610
              
              
              6,041,31720,113,809
              
              
              17,216,027Less
                  accumulated depreciation
              
              
              9,082,969
              
              
              8,425,391$
              11,030,840
              
              $
              8,790,636




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




At
      December 31, 2005, the maturities of time deposits are as follows:


Years
                  ended December 31,2006
              
              $
              165,368,0972007
              
              
              74,360,8482008
              
              
              27,453,0292009
              
              
              6,643,2822010
              
              
              7,682,604$
              281,507,860





Interest
      expense on deposits is summarized as follows:


**2005**
              
              **2004**
              
              **2003**NOW
                  accounts
              
              $
              2,009,186
              
              $
              1,237,381
              
              $
              909,137Savings
                  and money market
              
              
              3,745,885
              
              
              1,972,211
              
              
              1,849,238Time,
                  $100,000 and over
              
              
              3,094,834
              
              
              1,758,187
              
              
              1,807,047Other
                  time
              
              
              5,530,309
              
              
              4,974,471
              
              
              5,479,756$
              14,380,214
              
              $
              9,942,250
              
              $
              10,045,178




*Table
          of Contents*


**Note
                  7.**
              **Short-Term
                  Borrowings**
 
 Short-term
        borrowings as of December 31, 2005 consisted of FHLB Advances, due in three
        months or less, at an interest rate of 4.32%, and Treasury, Tax and Loan
        option
        notes. The FHLB advances are collateralized by certain 1-4 family loans and
        the
        option notes are secured by investment securities.
 
 **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 combined
      Company on behalf of the employees. For the years ended December 31, 2005,
      2004
      and 2003, Company contributions to the merged plans were approximately $623,000,
      $676,000, and $659,000, respectively. The plan covered substantially all
      employees.


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




The
      components of income tax expense for the year ended December 31, 2005, 2004
      and
      2003 are as follows:


2005
              
              2004
              
              2003Federal:Current
              
              $
              3,282,266
              
              $
              3,493,176
              
              $
              3,752,585Deferred
              
              
              (202,533
              )
              
              (48,519
              )
              
              (266,898
              )3,079,733
              
              
              3,444,657
              
              
              3,485,687State:Current
              
              
              779,897
              
              
              815,664
              
              
              852,953Deferred
              
              
              (23,638
              )
              
              (4,929
              )
              
              (17,853
              )756,259
              
              
              810,735
              
              
              835,100Income
                  tax expense
              
              $
              3,835,992
              
              $
              4,255,392
              
              $
              4,320,787




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 is a result of
      the
      following for the years ended December 31, 2005, 2004 and 2003:


2005
              
              2004
              
              2003Income
                  taxes at 35% federal tax rate
              
              $
              5,405,585
              
              $
              5,825,727
              
              $
              5,580,915Increase
                  (decrease) resulting from:Tax-exempt
                  interest and dividends
              
              
              (1,860,143
              )
              
              (1,870,264
              )
              
              (1,577,116
              )State
                  taxes, net of federal tax benefit
              
              
              460,694
              
              
              522,929
              
              
              548,897Other
              
              
              (170,144
              )
              
              (223,000
              )
              
              (231,909
              )Total
                  income tax expense
              
              $
              3,835,992
              
              $
              4,255,392
              
              $
              4,320,787




*Table
          of Contents*


The
      tax
      effects of temporary differences that give rise to significant portions of
      the
      deferred tax assets and deferred liabilities at December 31, 2005 and 2004,
      are
      as follows:


2005
              
              2004Deferred
                  tax assets:Allowance
                  for loan losses
              
              $
              2,009,069
              
              $
              1,901,776Other
                  items
              
              
              447,057
              
              
              333,7922,456,126
              
              
              2,235,568Deferred
                  tax liabilities:Net
                  unrealized gains on securities available for sale
              
              
              (1,933,311
              )
              
              (4,385,799
              )Other
              
              
              (178,826
              )
              
              (184,439
              )(2,112,137
              )
              
              (4,570,238
              )Net
                  deferred tax assets (liabilities)
              
              $
              343,989
              
              $
              (2,334,670
              )





At
      December 31, 2005 and 2004, income taxes currently payable of approximately
      $264,000 and $182,000, 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, 2005 and 2004 is as follows:


**2005**
              
              **2004**Commitments
                  to extend credit
              
              $
              77,099,000
              
              $
              65,894,000Standby
                  letters of credit
              
              
              1,433,000
              
              
              2,717,000$
              78,532,000
              
              $
              68,611,000





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, 2005 and 2004, no amounts have been recorded as liabilities for
      the
      Bank’s potential obligations under these guarantees.





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.




*Table
          of Contents*


**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 financial statements. Under capital adequacy guidelines and the
      regulatory framework for prompt corrective action, the Company must meet
      specific capital guidelines that involve quantitative measures of the Company’s
      assets, liabilities and certain off-balance-sheet items as calculated under
      regulatory accounting practices. The Company’s capital amounts and
      classification are also subject to regulatory accounting practices. The
      Company’s capital amounts and classification are also subject to qualitative
      judgments by the regulators about components, risk weightings, and other
      factors.





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,
      2005 and 2004, that the Company and each subsidiary bank met all capital
      adequacy requirements to which they are subject.


*Table
          of Contents*


As
      of
      December 31, 2005, 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, 2005 and 2004 are
      also presented in the table.




Actual
              
              For
                    Capital
                Adequacy
                    Purposes
              
              To
                    Be Well
                Capitalized
                    Under
                Prompt
                    Corrective
                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
              %Boone
                  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
              %Boone
                  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
              %Boone
                  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




Actual
              
              For
                  Capital
                Adequacy
                  Purposes
              
              To
                  Be Well
                Capitalized
                  Under
                Prompt
                  Corrective
                Action
                  ProvisionsAmount
              
              Ratio
              
              Amount
              
              Ratio
              
              Amount
              
              RatioAs
                  of December 31, 2004:Total
                    capital (to risk-weighted assets):Consolidated
              
              $
              109,931
              
              
              18.6
              %
              $
              47,274
              
              
              8.0
              %Boone
                  Bank & Trust
              
              
              13,047
              
              
              15.0
              
              
              6,966
              
              
              8.0
              
              $
              8,707
              
              
              10.0
              %First
                  National Bank
              
              
              42,473
              
              
              14.6
              
              
              23,196
              
              
              8.0
              
              
              28,995
              
              
              10.0Randall-Story
                  State Bank
              
              
              8,262
              
              
              15.7
              
              
              4,220
              
              
              8.0
              
              
              5,275
              
              
              10.0State
                  Bank & Trust
              
              
              12,114
              
              
              15.2
              
              
              6,370
              
              
              8.0
              
              
              7,962
              
              
              10.0United
                  Bank & Trust
              
              
              7,700
              
              
              12.6
              
              
              4,897
              
              
              8.0
              
              
              6,122
              
              
              10.0Tier
                    1 capital ( to risk-weighted assets):Consolidated
              
              $
              103,456
              
              
              17.5
              %
              $
              23,637
              
              
              4.0
              %Boone
                  Bank & Trust
              
              
              12,092
              
              
              13.9
              
              
              3,483
              
              
              4.0
              
              $
              5,224
              
              
              6.0
              %First
                  National Bank
              
              
              39,119
              
              
              13.5
              
              
              11,598
              
              
              4.0
              
              
              17,397
              
              
              6.0Randall-Story
                  State Bank
              
              
              7,602
              
              
              14.4
              
              
              2,110
              
              
              4.0
              
              
              3,165
              
              
              6.0State
                  Bank & Trust
              
              
              11,227
              
              
              14.1
              
              
              3,185
              
              
              4.0
              
              
              4,777
              
              
              6.0United
                  Bank & Trust
              
              
              7,065
              
              
              11.5
              
              
              2,449
              
              
              4.0
              
              
              3,673
              
              
              6.0Tier
                    1 capital ( to average-weighted assets):Consolidated
              
              $
              103,456
              
              
              12.3
              %
              $
              33,654
              
              
              4.0
              %Boone
                  Bank & Trust
              
              
              12,092
              
              
              10.6
              
              
              4,580
              
              
              4.0
              
              $
              5,726
              
              
              5.0
              %First
                  National Bank
              
              
              39,119
              
              
              9.3
              
              
              16,911
              
              
              4.0
              
              
              21,139
              
              
              5.0Randall-Story
                  State Bank
              
              
              7,602
              
              
              10.5
              
              
              2,892
              
              
              4.0
              
              
              3,614
              
              
              5.0State
                  Bank & Trust
              
              
              11,227
              
              
              9.4
              
              
              4,794
              
              
              4.0
              
              
              5,992
              
              
              5.0United
                  Bank & Trust
              
              
              7,065
              
              
              8.2
              
              
              3,458
              
              
              4.0
              
              
              4,322
              
              
              5.0




*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, 2005 and 2004 were as follows:
 **2005**
                
                **2004****Carrying**
                  **Amount**
                
                **Fair**
                  **Value**
                
                **Carrying**
                  **Amount**
                
                ****Fair****
                  **Value**Financial
                    assets:Cash
                    and due from banks
                
                $
                18,092,139
                
                $
                18,092,139
                
                $
                18,759,086
                
                $
                18,759,086Federal
                    funds sold
                
                
                300,000
                
                
                300,000
                
                
                19,865,000
                
                
                19,865,000Interest-bearing
                    deposits
                
                
                5,983,542
                
                
                5,983,542
                
                
                9,575,174
                
                
                9,575,174Securities
                    available-for-sale
                
                
                333,510,152
                
                
                333,510,152
                
                
                363,459,462
                
                
                363,459,462Loans,
                    net
                
                
                440,317,685
                
                
                431,056,183
                
                
                411,638,565
                
                
                413,071,863Loans
                    held for sale
                
                
                981,280
                
                
                981,280
                
                
                234,469
                
                
                234,469Accrued
                    income receivable
                
                
                6,633,795
                
                
                6,633,795
                
                
                6,262,424
                
                
                6,262,424Financial
                    liabilities:Deposits
                
                $
                668,342,335
                
                $
                667,871,250
                
                $
                658,175,839
                
                $
                659,865,147Other
                    borrowings
                
                
                37,521,113
                
                
                37,521,113
                
                
                64,072,475
                
                
                64,072,475Accrued
                    interest
                
                
                2,081,020
                
                
                2,081,020
                
                
                1,302,021
                
                
                1,302,021
  *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, 2005 and 2004,
        and statements of income and cash flows for each of the years in the three-year
        period ended December 31, 2005, is as follows:
 **CONDENSED
          BALANCE SHEETS**
 **December
          31, 2005 and 2004**
 
 **2005**
                
                **2004****ASSETS**Cash
                    and due from banks
                
                $
                8,153
                
                $
                6,983Interest-bearing
                    deposits in banks
                
                
                1,616,488
                
                
                2,718,126Securities
                    available-for-sale
                
                
                32,673,908
                
                
                32,177,363Investment
                    in bank subsidiaries
                
                
                78,120,998
                
                
                79,151,605Loans
                    receivable, net
                
                
                1,247,000
                
                
                1,077,000Premises
                    and equipment, net
                
                
                781,431
                
                
                439,059Accrued
                    income receivable
                
                
                237,888
                
                
                160,537Other
                    assets
                
                
                235,584
                
                
                142,938**Total
                    assets**
                
                $
                114,921,450
                
                $
                115,873,611**LIABILITIES**Dividends
                    payable
                
                $
                2,354,818
                
                $
                1,537,162Deferred
                    income taxes
                
                
                2,689,836
                
                
                3,074,468Accrued
                    expenses and other liabilities
                
                
                649,495
                
                
                338,041**Total
                    liabilities**
                
                
                5,694,149
                
                
                4,949,671**STOCKHOLDERS'
                    EQUITY**Common
                    stock
                
                
                18,838,542
                
                
                18,919,380Additional
                    paid-in capital
                
                
                22,383,375
                
                
                22,225,516Retained
                    earnings
                
                
                64,713,530
                
                
                63,200,352Treasury
                    stock, at costAccumulated
                      other comprehensive income
                
                
                3,291,854
                
                
                7,467,712**Total
                    equity**
                
                
                109,227,301
                
                
                110,923,940**Total
                    liabilities and stockholders' equity**
                
                $
                114,921,450
                
                $
                115,873,611
  
 **CONDENSED
            STATEMENTS OF INCOME**
 **Years
            Ended December 31, 2005, 2004 and 2003**
 
 **2005**
                  
                  **2004**
                  
                  **2003**Operating
                      income:Equity
                      in net income of bank subsidiaries
                  
                  $
                  10,660,583
                  
                  $
                  11,857,298
                  
                  $
                  10,440,180Interest
                  
                  
                  570,325
                  
                  
                  473,375
                  
                  
                  542,640Dividends
                  
                  
                  993,460
                  
                  
                  1,063,203
                  
                  
                  962,049Rents
                  
                  
                  35,665
                  
                  
                  70,425
                  
                  
                  140,147Securities
                      gains, net
                  
                  
                  1,130,072
                  
                  
                  308,273
                  
                  
                  1,207,73513,390,105
                  
                  
                  13,772,574
                  
                  
                  13,292,751Provision
                      for loan losses
                  
                  
                  -
                  
                  
                  16,000
                  
                  
                  (16,000
                  )**Operating
                        income after provision forloan
                        losses**
                  
                  
                  13,390,105
                  
                  
                  13,756,574
                  
                  
                  13,308,751Operating
                      expenses:
                  
                  
                  1,696,570
                  
                  
                  1,517,028
                  
                  
                  1,379,066**Income
                      before income taxes**
                  
                  
                  11,693,535
                  
                  
                  12,239,546
                  
                  
                  11,929,685Income
                      tax expense (benefit)
                  
                  
                  85,000
                  
                  
                  (150,000
                  )
                  
                  305,000**Net
                      income**
                  
                  $
                  11,608,535
                  
                  $
                  12,389,546
                  
                  $
                  11,624,685
  **CONDENSED
            STATEMENTS OF CASH FLOWS**
 **Years
            Ended December 31, 2005, 2004 and 2003**
 
 **2005**
                  
                  **2004**
                  
                  **2003**CASH
                      FLOWS FROM OPERATING ACTIVITIESNet
                      income
                  
                  $
                  11,608,535
                  
                  $
                  12,389,546
                  
                  $
                  11,624,685Adjustments
                      to reconcile net income to net cash provided by operating
                      activities:Depreciation
                  
                  
                  64,216
                  
                  
                  66,473
                  
                  
                  77,132Provision
                      for loan losses
                  
                  
                  -
                  
                  
                  16,000
                  
                  
                  (16,000
                  )Amortization
                      and accretion, net
                  
                  
                  (5,757
                  )
                  
                  (6,004
                  )
                  
                  (8,014
                  )Provision
                      for deferred taxes
                  
                  
                  (50,652
                  )
                  
                  -
                  
                  
                  (36,385
                  )Securities
                      gains, net
                  
                  
                  (1,130,072
                  )
                  
                  (308,273
                  )
                  
                  (1,207,735
                  )Equity
                      in net income of bank subsidiaries
                  
                  
                  (10,660,583
                  )
                  
                  (11,857,299
                  )
                  
                  (10,440,180
                  )Dividends
                      received from bank subsidiaries
                  
                  
                  8,634,000
                  
                  
                  8,384,000
                  
                  
                  7,868,000(Increase)
                      decrease in accrued income receivable
                  
                  
                  (77,351
                  )
                  
                  (9,202
                  )
                  
                  61,798(Increase)
                      decrease in other assets
                  
                  
                  (92,646
                  )
                  
                  (135,740
                  )
                  
                  148,587Increase
                        (decrease) in accrued expense payable and other
                        liabilities
                  
                  
                  311,454
                  
                  
                  (350,540
                  )
                  
                  336,997**Net
                      cash provided by operating activities**
                  
                  $
                  8,601,144
                  
                  $
                  8,188,961
                  
                  $
                  8,408,885CASH
                      FLOWS FROM INVESTING ACTIVITIESPurchase
                      of securities available-for-sale
                  
                  
                  (8,893,910
                  )
                  
                  (1,454,604
                  )
                  
                  (7,292,720
                  )Proceeds
                      from sale of securities available-for-sale
                  
                  
                  7,830,546
                  
                  
                  4,200,716
                  
                  
                  4,067,605Proceeds
                        from maturities and calls of securitiesavailable-for-sale
                  
                  
                  800,000
                  
                  
                  519,223
                  
                  
                  2,170,435(Increase)
                        decrease in interest bearing deposits in banks
                  
                  
                  1,101,638
                  
                  
                  (1,129,131
                  )
                  
                  (192,339
                  )(Increase)
                      decrease in loans
                  
                  
                  (170,000
                  )
                  
                  (1,093,000
                  )
                  
                  722,968Purchase
                      of bank premises and equipment
                  
                  
                  (406,588
                  )
                  
                  (29,981
                  )
                  
                  (34,976
                  )Investment
                      in bank subsidiaries
                  
                  
                  (550,000
                  )
                  
                  (1,950,000
                  )
                  
                  (1,000,000
                  )**Net
                      cash (used in) investing activities**
                  
                  $
                  (288,314
                  )
                  $
                  (936,777
                  )
                  $
                  (1,559,027
                  )CASH
                      FLOWS FROM FINANCING ACTIVITIESDividends
                      paid
                  
                  
                  (8,599,597
                  )
                  
                  (7,493,896
                  )
                  
                  (7,077,117
                  )Proceeds
                      from issuance of stock
                  
                  
                  287,937
                  
                  
                  247,482
                  
                  
                  221,870**Net
                      cash (used in) financing activities**
                  
                  $
                  (8,311,660
                  )
                  $
                  (7,246,414
                  )
                  $
                  (6,855,247
                  )**Net
                        increase (decrease) in cash andcash
                        equivalents**
                  
                  
                  1,170
                  
                  
                  5,770
                  
                  
                  (5,389
                  )CASH
                      AND DUE FROM BANKSBeginning
                  
                  
                  6,983
                  
                  
                  1,213
                  
                  
                  6,602Ending
                  
                  $
                  8,153
                  
                  $
                  6,983
                  
                  $
                  1,213
 *Table
                of Contents*
 **Note
                  14.**
              **Selected
                  Quarterly Financial Data
                  (Unaudited)**
 **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
  **2004****March
                    31**
                
                **June
                    30**
                
                **September
                    30**
                
                **December
                    31**Total
                    interest income
                
                $
                8,914,804
                
                $
                9,109,031
                
                $
                9,323,847
                
                $
                10,005,977Total
                    interest expense
                
                
                2,391,174
                
                
                2,451,952
                
                
                2,662,249
                
                
                3,057,952Net
                    interest income
                
                
                6,523,630
                
                
                6,657,079
                
                
                6,661,598
                
                
                6,948,025Provision
                    for loan losses
                
                
                58,355
                
                
                210,353
                
                
                (63,820
                )
                
                274,467Net
                    income
                
                
                2,964,542
                
                
                2,862,039
                
                
                3,372,387
                
                
                3,190,578Basic
                    and diluted earnings per common share
                
                
                0.32
                
                
                0.30
                
                
                0.36
                
                
                0.34
  *Table
            of Contents*


**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 will be 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.





**ITEM
                9A.**
            **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.


57
 *Table
          of Contents*


There
      were no changes in the Company’s internal control over financial reporting that
      occurred during the quarter ended December 31, 2005 that have materially
      affected, or are reasonably likely to materially affect, the Company’s internal
      control over financial reporting.





**ITEM
                9B.**
            **OTHER
                INFORMATION**





None.





**PART
      III**





**ITEM
                10.**
            **DIRECTORS
                AND EXECUTIVE OFFICERS OF THE
                REGISTRANT**





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 26, 2006, as filed
      with
      the SEC on March 17, 2006 (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 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.





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.


58
 *Table
          of Contents*


**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.





**ITEM
                12.**
            **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.





**ITEM
                13.**
            **CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS**





Refer
      to
      the information under the caption “Loans to Directors and Executive Officers and
      Related Party Transactions” 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 Independent Public
      Accountants" in the Proxy Statement, which information is incorporated herein
      by
      this reference.





**PART
      IV**





**ITEM
                15.**
            **EXHIBITS
                AND FINANCIAL STATEMENT SCHEDULES**





(a)
            List
                of Financial Statements and
                Schedules.





1.
            Financial
                Statements





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


Consolidated
      Balance Sheets, December 31, 2005 and 2004


Consolidated
      Statements of Income for the Years ended December 31, 2005, 2004 and
      2003


Consolidated
      Statements of Stockholders' Equity for the Years ended December 31, 2005, 2004
      and 2003


Consolidated
      Statements of Cash Flows for the Years ended December 31, 2005, 2004 and
      2003


Notes
      to
      Consolidated Financial Statements





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.


59
 *Table
          of Contents*


(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)*10.2
            -
            Stock
                Purchase Plan, as Amended16
            -
            Letter
                regarding change in certifying Accountant (incorporated by reference
                to
                Exhibit 16 included with Form 8-K filed on February 13,
                2006)21
            -
            Subsidiaries
                of the Registrant23.1
            -
            Consent
                of Independent Registered Public Accounting Firm31.1
            -
            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*
            Indicates
                a management compensatory plan or
                arrangement.


60
 *Table
          of Contents*





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, 2006
            By*:*
            */s/
                Daniel L. Krieger*Daniel
                L. Krieger, Chairman and President(Principal
                Executive Officer)March
                15, 2006
            By:
            */s/
              John P. Nelson*John
                P. Nelson, Vice President(Principal
                Financial and Accounting Officer)




61
 *Table
          of Contents*




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, 2006.





*/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


62
 *Table
          of Contents*


EXHIBIT
      INDEX





The
      following exhibits are filed herewith:





Exhibit
                No.
            
            Description10.2
            
            -Stock
                Purchase Plan, as amended21
            
            -Subsidiaries
                of the Registrant23.1
            
            -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 Section 906 of the
                Sarbanes-Oxley Act of 200232.2
            
            -Certification
                of Principal Financial Officer pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002




63