UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[Mark One]

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

For the quarterly period ended ~~September 30, 2017~~March 31, 2019

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

	For the transition period from ____________ to ____________

~~For the transition period from ____________ to ____________~~

Commission File Number 0-32637

AMES NATIONAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

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

405 FIFTH STREET

AMES, IOWA 50010

(Address of Principal Executive Offices)

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

Not Applicable

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

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

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

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

Large accelerated ~~filer~~ filer____ Accelerated filer X ~~(Do not check if a smaller reporting company)~~ Non-accelerated ~~filer~~ filer____ Smaller reporting company X Emerging growth ~~company~~ company____

If an emerging growth company, indicate by check mark if the registrant has elected notnot to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section ~~13(1)~~13(a) of the Exchange Act. ____

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

~~Indicate the number~~As of April 26, 2019 there were 9,241,916 shares ~~outstanding of each of the issuer's classes~~ of common stock, as$2 par value, outstanding.

Securities registered pursuant to Section 12(b) of the ~~latest practicable date.~~Act:

~~COMMON STOCK, $2.00 PAR VALUE~~Title of each class	9,310,~~913~~ Trading Symbol(s)	Name of each exchange on which registered
Common stock	~~(Class)~~ATLO	~~(Shares Outstanding at October 27, 2017)~~ NASDAQ

Table of Contents

AMES NATIONAL CORPORATION

INDEX

		Page

Part I.	Financial Information

Item 1.	Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018	3

	Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018	4

	Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018	5

	Consolidated Statements of ~~Stockholders~~’Stockholders’ Equity for the ~~nine~~ three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018	65

	Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018	76

	Notes to Consolidated Financial Statements	98

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3028

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4944

Item 4.	Controls and Procedures	4945

Part II.	Other Information

Item 1.	Legal Proceedings	5045

Item 1.A.	Risk Factors	5045

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5045

Item 3.	Defaults Upon Senior Securities	5046

Item 4.	Mine Safety Disclosures	5046

Item 5.	Other Information	5146

Item 6.	Exhibits	5146

	Signatures	5247

Table of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

~~CONSOLIDATED BALANCE SHEETS~~

~~(unaudited)~~

	March 31,		December 31,
	2019		2018
ASSETS

Cash and due from banks	$	24,133,336	$	30,384,066
Interest bearing deposits in financial institutions		58,738,001		26,057,513
Securities available-for-sale		455,553,634		458,971,162
Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock, at cost		2,661,600		3,191,200
Loans receivable, net		886,556,795		890,461,479
Loans held for sale		256,500		401,287
Bank premises and equipment, net		15,698,236		15,813,196
Accrued income receivable		9,101,698		9,415,570
Other real estate owned		564,667		829,603
Bank-owned life insurance		2,789,711		2,773,729
Deferred income taxes, net		2,355,018		3,848,713
Intangible assets, net		2,514,220		2,677,884
Goodwill		9,744,472		9,744,472
Other assets		1,649,475		1,117,477

Total assets	$	1,472,317,363	$	1,455,687,351

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits
Demand, noninterest bearing	$	221,211,912	$	230,113,170
NOW accounts		386,717,224		366,178,715
Savings and money market		424,084,571		418,384,284
Time, $250,000 and over		49,058,130		40,014,550
Other time		171,442,325		166,393,120
Total deposits		1,252,514,162		1,221,083,839

Securities sold under agreements to repurchase		32,396,757		40,674,486
Federal Home Loan Bank (FHLB) advances		2,000,000		14,600,000
Dividends payable		2,218,277		2,137,460
Accrued expenses and other liabilities		5,411,409		4,326,502
Total liabilities		1,294,540,605		1,282,822,287

STOCKHOLDERS' EQUITY
Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 9,242,822 and 9,293,305 shares as of March 31, 2019 and December 31, 2018, respectively		18,485,644		18,586,610
Additional paid-in capital		19,276,388		20,461,724
Retained earnings		139,910,979		137,891,821
Accumulated other comprehensive income (loss) - net unrealized income (loss) on securities available-for-sale		103,747		(4,075,091	)
Total stockholders' equity		177,776,758		172,865,064

Total liabilities and stockholders' equity	$	1,472,317,363	$	1,455,687,351

September 30,

December 31,

ASSETS

2017

2016

Cash and due from banks
$ 23,087,890 $ 29,478,068
Interest bearing deposits in financial institutions
35,486,284 31,737,259
Securities available-for-sale
506,610,435 516,079,506
Loans receivable, net
764,228,850 752,181,730
Loans held for sale
279,800 242,618
Bank premises and equipment, net
15,595,418 16,049,379
Accrued income receivable
8,423,038 7,768,689
Other real estate owned
385,509 545,757
Deferred income taxes
1,817,543 3,485,689
Intangible assets, net
1,133,736 1,352,812
Goodwill
6,732,216 6,732,216
Other assets
1,159,533 799,306

Total assets
$ 1,364,940,252 $ 1,366,453,029

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Deposits

Demand, noninterest bearing
$ 202,368,921 $ 212,074,792
NOW accounts
337,062,117 310,427,812
Savings and money market
380,454,650 381,852,433
Time, $250,000 and over
36,776,010 39,031,663
Other time
157,876,361 166,022,165
Total deposits
1,114,538,059 1,109,408,865

Securities sold under agreements to repurchase
39,001,050 58,337,367
Federal Home Loan Bank (FHLB) advances
19,000,000 14,500,000
Other borrowings
13,000,000 13,000,000
Dividends payable
2,048,401 1,955,292
Accrued expenses and other liabilities
4,023,858 4,146,262
Total liabilities
1,191,611,368 1,201,347,786

STOCKHOLDERS' EQUITY

Common stock, $2 par value, authorized 18,000,000 shares; issued and outstanding 9,310,913 shares as of September 30, 2017 and December 31, 2016
18,621,826 18,621,826
Additional paid-in capital
20,878,728 20,878,728
Retained earnings
131,047,038 126,181,376
Accumulated other comprehensive income (loss) - net unrealized gain (loss) on securities available-for-sale
2,781,292 (576,687 )
Total stockholders' equity
173,328,884 165,105,243

Total liabilities and stockholders' equity
$ 1,364,940,252 $ 1,366,453,029

See Notes to Consolidated Financial Statements.

Table of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three Months Ended
	March 31,
	2019		2018

Interest income:
Loans, including fees	$	10,701,429	$	8,888,855
Securities:
Taxable		1,488,852		1,529,122
Tax-exempt		1,100,574		1,186,346
Interest bearing deposits and federal funds sold		237,568		193,035
Total interest income		13,528,423		11,797,358

Interest expense:
Deposits		2,358,832		1,362,481
Other borrowed funds		199,214		248,390
Total interest expense		2,558,046		1,610,871

Net interest income		10,970,377		10,186,487

Provision for loan losses		98,094		29,000

Net interest income after provision for loan losses		10,872,283		10,157,487

Noninterest income:
Wealth management income		784,614		751,000
Service fees		370,296		338,242
Gain on sale of loans held for sale		172,726		177,200
Merchant and card fees		361,141		309,659
Other noninterest income		236,931		187,901
Total noninterest income		1,925,708		1,764,002

Noninterest expense:
Salaries and employee benefits		4,715,828		4,568,045
Data processing		891,381		781,032
Occupancy expenses, net		599,005		494,946
FDIC insurance assessments		100,229		105,995
Professional fees		388,846		345,407
Business development		268,597		254,548
Intangible asset amortization		163,664		87,535
Other operating expenses, net		329,206		227,629
Total noninterest expense		7,456,756		6,865,137

Income before income taxes		5,341,235		5,056,352

Provision for income taxes		1,103,800		1,019,600

Net income	$	4,237,435	$	4,036,752

Basic and diluted earnings per share	$	0.46	$	0.43

Dividends declared per share	$	0.24	$	0.48

~~CONSOLIDATED STATEMENTS OF INCOME~~

~~(unaudited)~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Interest income:

Loans, including fees
$ 8,729,702 $ 8,236,401 $ 25,345,116 $ 24,124,973
Securities:

Taxable
1,557,872 1,425,366 4,637,498 4,392,602
Tax-exempt
1,210,510 1,329,071 3,819,380 4,117,893
Interest bearing deposits and federal funds sold
114,820 86,869 365,346 296,925
Total interest income
11,612,904 11,077,707 34,167,340 32,932,393

Interest expense:

Deposits
1,169,296 753,642 3,204,115 2,259,140
Other borrowed funds
292,054 274,297 862,798 796,006
Total interest expense
1,461,350 1,027,939 4,066,913 3,055,146

Net interest income
10,151,554 10,049,768 30,100,427 29,877,247

Provision for loan losses
57,277 234,703 1,221,620 440,787

Net interest income after provision for loan losses
10,094,277 9,815,065 28,878,807 29,436,460

Noninterest income:

Wealth management income
747,634 684,908 2,180,941 2,210,229
Service fees
401,237 426,711 1,126,122 1,228,416
Securities gains, net
37,881 64,917 498,560 296,110
Gain on sale of loans held for sale
179,553 339,501 544,095 773,512
Merchant and card fees
348,847 350,488 1,017,362 1,051,378
Other noninterest income
144,953 137,153 598,791 469,138
Total noninterest income
1,860,105 2,003,678 5,965,871 6,028,783

Noninterest expense:

Salaries and employee benefits
4,026,932 3,977,495 12,058,903 11,883,696
Data processing
807,419 824,429 2,481,331 2,366,293
Occupancy expenses, net
527,071 449,775 1,546,657 1,461,201
FDIC insurance assessments
111,987 109,289 326,958 434,808
Professional fees
307,484 296,720 919,157 889,721
Business development
262,408 239,917 722,869 696,033
Other real estate owned (income), net
(3,200 ) (91,173 ) (2,396 ) (87,564 )
Intangible asset amortization
89,861 86,492 280,837 273,206
Other operating expenses, net
166,026 219,283 837,810 750,244
Total noninterest expense
6,295,988 6,112,227 19,172,126 18,667,638

Income before income taxes
5,658,394 5,706,516 15,672,552 16,797,605

Provision for income taxes
1,729,987 1,902,636 4,661,687 5,087,253

Net income
$ 3,928,407 $ 3,803,880 $ 11,010,865 $ 11,710,352

Basic and diluted earnings per share
$ 0.42 $ 0.41 $ 1.18 $ 1.26

Dividends declared per share
$ 0.22 $ 0.21 $ 0.66 $ 0.63

See Notes to Consolidated Financial Statements.

Table of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

	Three Months Ended
	March 31,
	2019			2018


Net income	$	4,237,435		$	4,036,752
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities before tax:
Unrealized holding gains (losses) arising during the period		5,571,784			(5,033,043	)
Less: reclassification adjustment for gains realized in net income		-			-
Other comprehensive income (loss), before tax		5,571,784			(5,033,043	)
Tax effect related to other comprehensive income (loss)		(1,392,946	)		1,258,605
Other comprehensive income (loss), net of tax		4,178,838			(3,774,438	)
Comprehensive income	$	8,416,273		$	262,314

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~

~~(unaudited)~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Net income
$ 3,928,407 $ 3,803,880 $ 11,010,865 $ 11,710,352
Other comprehensive income (loss), before tax:

Unrealized gains (losses) on securities before tax:

Unrealized holding gains (losses) arising during the period
(270,853 ) (1,838,831 ) 5,828,684 6,077,365
Less: reclassification adjustment for gains realized in net income
37,881 64,917 498,560 296,110
Other comprehensive income (loss), before tax
(308,734 ) (1,903,748 ) 5,330,124 5,781,255
Tax effect related to other comprehensive income (loss)
114,233 704,387 (1,972,145 ) (2,139,064 )
Other comprehensive income (loss), net of tax
(194,501 ) (1,199,361 ) 3,357,979 3,642,191
Comprehensive income
$ 3,733,906 $ 2,604,519 $ 14,368,844 $ 15,352,543

See Notes to Consolidated Financial Statements.

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

Three Months Ended March 31, 2019 and 2018

	Common Stock			Additional Paid- in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Taxes				Total Stockholders' Equity

Balance, December 31, 2017	$	18,621,826		$	20,878,728		$	131,684,961		$	(432,373	)		$	170,753,142
Net income		-			-			4,036,752			-				4,036,752
Other comprehensive income		-			-			-			(3,774,438	)			(3,774,438	)
The cumulative effect from change in accounting policy (1)		-			-			82,700			(82,700	)			-
Cash dividends declared, $0.48 per share					-			(4,469,238	)		-				(4,469,238	)
Balance, March 31, 2018	$	18,621,826		$	20,878,728		$	131,335,175		$	(4,289,511	)	��	$	166,546,218

Balance, December 31, 2018	$	18,586,610		$	20,461,724		$	137,891,821		$	(4,075,091	)		$	172,865,064
Net income		-			-			4,237,435			-				4,237,435
Other comprehensive income		-			-			-			4,178,838				4,178,838
Retirement of 50,483 shares of stock		(100,966	)		(1,185,336	)		-			-				(1,286,302	)
Cash dividends declared, $0.24 per share		-			-			(2,218,277	)		-				(2,218,277	)
Balance, March 31, 2019	$	18,485,644		$	19,276,388		$	139,910,979		$	103,747			$	177,776,758

(1) The cumulative effect for the year ended December 31, 2018, reflects adoption in first quarter 2018 of ASU 2018-02.

See Notes to Consolidated Financial Statements.

Table of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

~~CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY~~

~~(unaudited)~~

~~Nine Months Ended September 30, 2017 and 2016~~

Common Stock

Additional Paid-in Capital

Retained Earnings

Accumulated Other Comprehensive Income (Loss), Net of Taxes

Total Stockholders' Equity

Balance, December 31, 2015
$ 18,621,826 $ 20,878,728 $ 118,267,767 $ 3,481,736 $ 161,250,057
Net income
- - 11,710,352 - 11,710,352
Other comprehensive income
- - - 3,642,191 3,642,191
Cash dividends declared, $0.63 per share
- - (5,865,875 ) - (5,865,875 )
Balance, September 30, 2016
$ 18,621,826 $ 20,878,728 $ 124,112,244 $ 7,123,927 $ 170,736,725

Balance, December 31, 2016
$ 18,621,826 $ 20,878,728 $ 126,181,376 $ (576,687 ) $ 165,105,243
Net income
- - 11,010,865 - 11,010,865
Other comprehensive income
- - - 3,357,979 3,357,979
Cash dividends declared, $0.66 per share
- - (6,145,203 ) - (6,145,203 )
Balance, September 30, 2017
$ 18,621,826 $ 20,878,728 $ 131,047,038 $ 2,781,292 $ 173,328,884

~~See Notes to Consolidated Financial Statements.~~

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Three Months Ended March 31, 2019 and 2018

	2019			2018

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	4,237,435		$	4,036,752
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		98,094			29,000
Provision for off-balance sheet commitments		-			(4,000	)
Amortization, net		389,806			515,844
Amortization of intangible asset		163,664			87,535
Depreciation		283,521			260,358
Deferred income taxes		100,750			(48,299	)
(Gain) on sales of loans held for sale		(172,726	)		(177,200	)
Proceeds from loans held for sale		6,681,879			7,516,348
Originations of loans held for sale		(6,364,366	)		(7,488,054	)
Loss on sale of premises and equipment, net		-			115
Loss on sale and foreclosure of other real estate owned, net		11,106			-
Change in assets and liabilities:
Decrease in accrued income receivable		313,872			652,135
(Increase) decrease in other assets		(543,520	)		104,485
Increase in accrued expenses and other liabilities		1,084,907			867,498
Net cash provided by operating activities		6,284,422			6,352,517

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale		(3,781,499	)		(7,854,442	)
Proceeds from maturities and calls of securities available-for-sale		12,251,722			8,364,369
Purchase of FHLB stock		(2,112,500	)		(227,700	)
Proceeds from the redemption of FHLB stock		2,642,100			691,500
Net (increase) in interest bearing deposits in financial institutions		(32,680,488	)		(25,810,886	)
Net (increase) decrease in loans		3,927,737			(802,576	)
Net proceeds from the sale of other real estate owned		253,830			-
Purchase of bank premises and equipment, net		(163,999	)		(204,726	)
Other		(15,982	)		(14,960	)
Net cash (used in) investing activities		(19,679,079	)		(25,859,421	)

CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits		31,445,418			36,032,857
(Decrease) in securities sold under agreements to repurchase		(8,277,729	)		(890,601	)
Payments on FHLB borrowings and other borrowings		-			(17,500,000	)
Payments on short-term borrowings		(12,600,000	)		-
Dividends paid		(2,137,460	)		(2,048,401	)
Stock repurchases		(1,286,302	)		-
Net cash provided by financing activities		7,143,927			15,593,855
Net (decrease) in cash and due from banks		(6,250,730	)		(3,913,049	)

CASH AND DUE FROM BANKS
Beginning		30,384,066			26,397,550
Ending	$	24,133,336		$	22,484,501

Table of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(unaudited)

Three Months Ended March 31, 2019 and 2018

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(unaudited)~~

~~Nine Months Ended September 30, 2017 and 2016~~

	2019		2018

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for:
Interest	$	2,405,437	$	1,538,837
Income taxes		-		-

2017

2016

CASH FLOWS FROM OPERATING ACTIVITIES

Net income
$ 11,010,865 $ 11,710,352
Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses
1,221,620 440,787
Provision for off-balance sheet commitments
4,000 12,000
Amortization, net
2,129,648 2,327,654
Amortization of intangible asset
280,837 273,206
Depreciation
861,700 885,202
Deferred income taxes
(303,999 ) 176,658
Securities gains, net
(498,560 ) (296,110 )
(Gain) on sales of loans held for sale
(544,095 ) (773,511 )
Proceeds from loans held for sale
22,668,307 34,782,288
Originations of loans held for sale
(22,161,394 ) (34,657,822 )
Loss on sale of premises and equipment, net
56,168 2,769
Impairment of other real estate owned
- 28,039
(Gain) on sale of other real estate owned, net
(14,648 ) (131,127 )
Change in assets and liabilities:

(Increase) in accrued income receivable
(654,349 ) (805,127 )
(Increase) decrease in other assets
(377,095 ) 286,238
Increase (decrease) in accrued expenses and other liabilities
(126,404 ) 323,605
Net cash provided by operating activities
13,552,601 14,585,101

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of securities available-for-sale
(51,271,943 ) (49,668,267 )
Proceeds from sale of securities available-for-sale
11,756,963 18,738,154
Proceeds from maturities and calls of securities available-for-sale
52,588,102 54,611,331
Net (increase) decrease in interest bearing deposits in financial institutions
(3,749,025 ) 994,573
Net (increase) in loans
(13,190,423 ) (39,394,414 )
Net proceeds from the sale of other real estate owned
191,564 755,906
Purchase of bank premises and equipment, net
(447,039 ) (218,081 )
Other
(61,761 ) -
Net cash (used in) investing activities
(4,183,562 ) (14,180,798 )

CASH FLOWS FROM FINANCING ACTIVITIES

Increase (decrease) in deposits
5,129,194 (12,358,477 )
(Decrease) in securities sold under agreements to repurchase
(19,336,317 ) (4,431,520 )
Payments on FHLB borrowings and other borrowings
(1,000,000 ) (1,542,203 )
Proceeds from short-term FHLB borrowings, net
5,500,000 21,000,000
Dividends paid
(6,052,094 ) (5,772,766 )
Net cash (used in) financing activities
(15,759,217 ) (3,104,966 )

Net (decrease) in cash and due from banks
(6,390,178 ) (2,700,663 )

CASH AND DUE FROM BANKS

Beginning
29,478,068 24,005,801
Ending
$ 23,087,890 $ 21,305,138

See Notes to Consolidated Financial Statements.

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~~AMES NATIONAL CORPORATION AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)~~

~~(unaudited)~~

~~Nine Months Ended September 30, 2017 and 2016~~

2017

2016

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash payments for:

Interest
$ 4,027,782 $ 3,145,519
Income taxes
5,050,220 4,223,653

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES

Transfer of loans receivable to other real estate owned
$ 16,668 $ 56,587

~~See Notes to Consolidated Financial Statements.~~

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AMES NATIONAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

1. Significant Accounting Policies

The consolidated financial statements for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 are unaudited. In the opinion of the management of Ames National Corporation (the "Company"), these financial statements reflect all adjustments, consisting only of normal recurring accruals, necessary to present fairly these consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of results which may be expected for an entire year. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with the requirements for interim financial statements. The interim financial statements and notes thereto should be read in conjunction with the year-end audited financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2016~~2018 (the “Annual Report”). The consolidated financial statements include the accounts of the Company and its wholly-owned banking subsidiaries (the “Banks”). All significant intercompany balances and transactions have been eliminated in consolidation.

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

Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. At ~~September 30, 2017,~~March 31, 2019, Company management has performed a goodwill impairment assessment and determined goodwill was not impaired.

New and Pending Accounting ~~Pronouncements:~~Pronouncements ~~In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-01, Financial Instruments—Overall (Subtopic 825-10)~~:~~Recognition and Measurement of Financial Assets and Financial Liabilities.~~ The update enhances the reporting model for financial instruments to provide users of financial statements with more decision-useful information by updating certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Among other changes, the update includes requiring changes in fair value of equity securities with readily determinable fair value to be recognized in net income and clarifies that entities should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entities' other deferred tax assets. Among other items the ASC requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2017, and is to be applied on a modified retrospective basis. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires a lessee to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Unlike current GAAP, which requires that only capital leases be recognized on the balance sheet, the ASC requires that both types of leases by recognized on the balance sheet. In July 2018, the FASB issued ASU No. 2018-11, Targeted Improvements, which amends ASC 842, Leases. This update provides for an adoption option that will not require earlier periods to be restated at the adoption date. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018. Early application is permitted. The adoption of this guidance isdid not ~~expected to~~ have a material impact on the ~~Company~~’sCompany’s consolidated financial statements.

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In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019. The Company is currently planning for the implementation of this accounting ~~standard.~~standard and has chosen a vendor for a software solution and has begun implementation of the software. It is too early to assess the impact that the guidance will have on the ~~Company~~’sCompany’s consolidated financial statements.

~~In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606):~~ ~~Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40)~~ ~~. The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics~~

Table of the Codification. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2017. The guidance does not apply to revenues associated with financial instruments, including loans and securities that are accounted for under U.S. GAAP. Based upon management’s revenue recognition analysis, the Company does not expect the guidance to have a material impact on the Company's consolidated financial statements.

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In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The guidance in this update eliminates the Step 2 from the goodwill impairment test. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual goodwill impairment test with a measurement date after January 1, 2017. The Company does not expect the guidance to have a material impact on the Company's consolidated financial statements.

2~~. Dividends~~In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The update is effective for interim and annual periods in fiscal years beginning after December 15, 2019, with early adoption permitted for the removed disclosures and delayed adoption until fiscal year 2020 permitted for the new disclosures. The removed and modified disclosures will be adopted on a retrospective basis, and the new disclosures will be adopted on a prospective basis. The adoption will not have a material effect on the Company’s consolidated financial statements.

Reclassifications: Certain amounts in prior year financial statements have been reclassified, with no effect on net income, comprehensive income or stockholder’s equity, to conform to current period presentation.

2. Bank Acquisition

On ~~August~~ September 14, 2018, First National Bank (FNB) completed the purchase and merger of Clarke County State Bank (CCSB) located in Osceola and Murray, Iowa (the “Acquisition”). The Acquisition was consistent with the Bank’s strategy to strengthen and expand its Iowa market share. The acquired assets and liabilities are recorded at fair value at the date of acquisition and were reflected in the September 30, 2018 financial statements as such. 100% of the stock of CCSB was purchased for cash consideration of $14.8 million. As a result of this acquisition, the Company recorded a core deposit intangible asset of $2.0 million and goodwill of $3.0 million. The results of operations for this acquisition have been included since the transaction date of September 14, 2018. The fair value of purchased credit deteriorated loans related to the Acquisition is $386,000. These purchased loans are included in the impaired loan category in the financial statements.

9 ~~2017,~~

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The following table summarizes the fair value of the total consideration transferred as a part of the Acquisition as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transaction.

Cash consideration transferred	$	14,806,981

Recognized amounts of identifiable assets acquired and liabilities assumed:

Cash and due from banks	$	1,363,762
Federal funds sold		1,154,000
Interest bearing deposits in financial institutions		1,475,000
Securities available-for-sale		17,196,715
Federal Home Loan Bank stock		129,600
Loans receivable		76,041,470
Accrued interest receivable		862,895
Bank premises and equipment		924,400
Other real estate owned		120,000
Deferred income taxes		49,150
Bank owned life insurance		2,754,798
Core deposit intangible asset		2,002,000
Other assets		13,996
Deposits		(83,169,311	)
Federal funds purchased		(9,000,000	)
Accrued interest payable and other liabilities		(123,749	)

Total identifiable net assets		11,794,726

Goodwill	$	3,012,255

On September 14, 2018, the contractual balance of loans receivable acquired was $77.2 million and the contractual balance of deposits assumed was $83.1 million. Loans receivable acquired include commercial real estate, 1-4 family real estate agricultural real estate, commercial operating, agricultural operating and consumer loans.

The acquired loans at contractual values as of September 14, 2018 were determined to be risk rated as follows:

Pass	$	63,220,130
Watch		9,430,540
Special Mention		2,733,940
Substandard		1,426,137
Deteriorated credit		385,884

Total loans acquired at book value	$	77,196,631

Loans acquired as deteriorated credit loans will be included with impaired loans.

The core deposit intangible asset is amortized to expense on a declining basis over a period of ten years. The loan market valuation is accreted to income on the effective yield method over a ten year period. The time deposits market valuation is amortized to expense on a declining basis over a two year period.

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3. Dividends

On February 13, 2019, the Company declared a cash dividend on its common stock, payable on ~~November~~May 15, ~~2017~~2019 to stockholders of record as of ~~November~~May 1, ~~2017,~~2019, equal to ~~$0.22~~$0.24 per ~~share.~~share

3.4. Earnings Per Share

Earnings per share amounts were calculated using the weighted average shares outstanding during the periods presented. The weighted average outstanding shares for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 were ~~9,310,913.~~9,258,047 and 9,310,913, respectively. The Company had no potentially dilutive securities outstanding during the periods presented.

4.5. Off-Balance Sheet Arrangements

The Company is party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, ~~2016.~~2018.

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5.6. Fair Value Measurements

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

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

Level 2: Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatility, prepayment speeds, credit risk); or inputs derived principally from or can be corroborated by observable market data by correlation or other means.

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

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The following table presents the balances of assets measured at fair value on a recurring basis by level as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016.~~2018. (in thousands)

Description

Total

Level 1

Level 2

Level 3

2017

U.S. government treasuries
$ 4,449 $ 4,449 $ - $ -
U.S. government agencies
112,657 - 112,657 -
U.S. government mortgage-backed securities
81,956 - 81,956 -
State and political subdivisions
243,438 - 243,438 -
Corporate bonds
60,834 - 60,834 -
Equity securities, other
3,276 34 3,242 -

$ 506,610 $ 4,483 $ 502,127 $ -

2016

U.S. government treasuries
$ 4,368 $ 4,368 $ - $ -
U.S. government agencies
110,209 - 110,209 -
U.S. government mortgage-backed securities
82,858 - 82,858 -
State and political subdivisions
264,448 - 264,448 -
Corporate bonds
51,184 - 51,184 -
Equity securities, other
3,013 - 3,013 -

$ 516,080 $ 4,368 $ 511,712 $ -

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Description	Total		Level 1		Level 2		Level 3

2019

U.S. government treasuries	$	7,904	$	7,904	$	-	$	-
U.S. government agencies		109,818		-		109,818		-
U.S. government mortgage-backed securities		68,493		-		68,493		-
State and political subdivisions		214,558		-		214,558		-
Corporate bonds		54,781		-		54,781		-

	$	455,554	$	7,904	$	447,650	$	-

2018

U.S. government treasuries	$	7,800	$	7,800	$	-	$	-
U.S. government agencies		110,268		-		110,268		-
U.S. government mortgage-backed securities		70,382		-		70,382		-
State and political subdivisions		215,955		-		215,955		-
Corporate bonds		54,566		-		54,566		-

	$	458,971	$	7,800	$	451,171	$	-

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

The Company's policy is to recognize transfers between levels at the end of each reporting period, if applicable. There were no transfers between levels of the fair value hierarchy during the three ~~or nine~~ months ended ~~September 30, 2017.~~March 31, 2019.

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Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the assets carried on the balance sheet (after specific reserves) by caption and by level within the valuation hierarchy as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016.~~2018. (in thousands)

Description	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3

2017
2019

Loans receivable	$	2,439	$	-	$	-	$	2,439	$	2,297	$	-	$	-	$	2,297
Other real estate owned		386		-		-		386		565		-		-		565

Total	$	2,825	$	-	$	-	$	2,825	$	2,862	$	-	$	-	$	2,862

2016
2018

Loans receivable	$	683	$	-	$	-	$	683	$	2,030	$	-	$	-	$	2,030
Other real estate owned		546		-		-		546		830		-		-		830

Total	$	1,229	$	-	$	-	$	1,229	$	2,860	$	-	$	-	$	2,860

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

Other Real Estate Owned: Other real estate owned in the table above consists of real estate obtained through foreclosure. Other real estate owned is recorded at fair value less estimated selling costs, at the date of transfer, with any impairment amount charged to the allowance for loan losses. Subsequent to the transfer, other real estate owned is carried at the lower of cost or fair value, less estimated selling costs, with any impairment amount recorded as a noninterest expense. The carrying value of other real estate owned is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value exceeds the fair value less estimated selling costs. Management uses appraised values and adjusts for trends observed in the market and for disposition costs in determining the value of other real estate owned. A valuation allowance was recorded for the excess of the asset’s recorded investment over the amount determined by the fair value, less estimated selling costs. This valuation allowance is a component of the allowance for other real estate owned. The ~~valuation allowance was $287,000 as of September 30, 2017 and $331,000 as of December 31, 2016. The~~ Company considers these fair value measurements as level 3.

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TheThe significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 are as follows: (in thousands)

2019

2017

Estimated

Valuation

Unobservable

Range

Estimated

Fair Value

Valuation

Techniques

Unobservable Inputs

Range

(Average)

Fair Value

Techniques

Inputs

(Average)

Impaired Loans

2,439

Evaluation of collateral

Estimation of value

NM*

2,297

Evaluation of collateral

Estimation of value

NM*

Other real estate owned

386

Appraisal

Appraisal adjustment

(7%)

565

Appraisal

Appraisal adjustment

(7%

)

2018

2016

Estimated

Valuation

Unobservable

Range

Estimated

Fair Value

Valuation

Techniques

Unobservable Inputs

Range

(Average)

Fair Value

Techniques

Inputs

(Average)

Impaired Loans

683

Evaluation of collateral

Estimation of value

NM*

2,030

Evaluation of collateral

Estimation of value

NM*

Other real estate owned

546

Appraisal

Appraisal adjustment

10%

(8%)

830

Appraisal

Appraisal adjustment

(7%

)

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

GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below.

Fair value of financial instruments:

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

The following disclosures represent financial instruments in which the ending balances at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 are not carried at fair value in their entirety on the consolidated balance sheets.

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

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

~~Loans receivable: The fair value~~

Table 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.

Contents

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

~~Deposit~~s: 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.

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

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

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

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

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

~~Table of Contents~~

The estimated fair values of the ~~Company~~’sCompany’s financial instruments as described above as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 are as follows: (in thousands)

		2017				2016					2019				2018
	Fair Value			Estimated				Estimated		Fair Value			Estimated				Estimated
	Hierarchy	Carrying		Fair		Carrying		Fair		Hierarchy	Carrying		Fair		Carrying		Fair
	Level	Amount		Value		Amount		Value		Level	Amount		Value		Amount		Value

Financial assets:
Cash and due from banks	Level 1	$	23,088	$	23,088	$	29,478	$	29,478	Level 1	$	24,133	$	24,133	$	30,384	$	30,384
Interest bearing deposits	Level 1		35,486		35,486		31,737		31,737	Level 1		58,738		58,738		26,058		26,058
Securities available-for-sale	See previous table		506,610		506,610		516,080		516,080	See previous table		455,554		455,554		458,971		458,971
FHLB and FRB stock										Level 2		2,662		2,662		3,191		3,191
Loans receivable, net	Level 2		764,229		753,977		752,182		746,580	Level 2		886,557		861,710		890,461		864,417
Loans held for sale	Level 2		280		280		243		243	Level 2		257		257		401		401
Accrued income receivable	Level 1		8,423		8,423		7,769		7,769	Level 1		9,102		9,102		9,416		9,416
Financial liabilities:
Deposits	Level 2	$	1,114,538	$	1,115,076	$	1,109,409	$	1,110,211	Level 2	$	1,252,514	$	1,251,841	$	1,221,084	$	1,219,643
Securities sold under agreements to repurchase	Level 1		39,001		39,001		58,337		58,337	Level 1		32,397		32,397		40,674		40,674
FHLB advances	Level 2		19,000		19,046		14,500		14,681	Level 2		2,000		1,970		14,600		14,559
Other borrowings	Level 2		13,000		13,159		13,000		13,386
Accrued interest payable	Level 1		447		447		408		408	Level 1		816		816		649		649

The ~~methodologies~~methodologies used to determine fair value as of ~~September 30, 2017~~March 31, 2019 did not change from the methodologies described in the December 31, ~~2016~~2018 Annual Financial Statements.

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6.7. Debt and Equity Securities

The amortized cost of securities ~~available-for-sale~~available-for-sale and their fair values as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 are summarized below: (in thousands)

2017:			Gross		Gross
2019:												Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated		Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value		Cost		Gains		Losses			Fair Value

U.S. government treasuries	$	4,412	$	37	$	-		$	4,449	$	7,935	$	-	$	(31	)	$	7,904
U.S. government agencies		112,011		807		(161	)		112,657		109,834		446		(462	)		109,818
U.S. government mortgage-backed securities		80,948		1,091		(83	)		81,956		68,531		279		(317	)		68,493
State and political subdivisions		241,150		2,684		(396	)		243,438		214,333		944		(719	)		214,558
Corporate bonds		60,417		560		(143	)		60,834		54,783		271		(273	)		54,781
Equity securities, other		3,257		19		-			3,276
	$	502,195	$	5,198	$	(783	)	$	506,610	$	455,416	$	1,940	$	(1,802	)	$	455,554

2016:			Gross		Gross
2018:												Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated		Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value		Cost		Gains		Losses			Fair Value

U.S. government treasuries	$	4,396	$	18	$	(46	)	$	4,368	$	7,925	$	-	$	(125	)	$	7,800
U.S. government agencies		110,372		540		(703	)		110,209		111,759		73		(1,564	)		110,268
U.S. government mortgage-backed securities		82,279		1,018		(439	)		82,858		71,596		88		(1,302	)		70,382
State and political subdivisions		265,204		1,660		(2,416	)		264,448		217,247		465		(1,757	)		215,955
Corporate bonds		51,731		147		(694	)		51,184		55,877		2		(1,313	)		54,566
Equity securities, other		3,013		-		-			3,013
	$	516,995	$	3,383	$	(4,298	)	$	516,080	$	464,404	$	628	$	(6,061	)	$	458,971

~~The~~There were no proceeds, gains and losses from securities available-for-sale ~~are summarized~~ ~~as follows:~~ ~~(in thousands)~~for the quarter ended March 31, 2019 and 2018.

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Proceeds from sales of securities available-for-sale
$ 933 $ 5,852 $ 11,757 $ 18,738
Gross realized gains on securities available-for-sale
38 66 501 303
Gross realized losses on securities available-for-sale
- (1 ) (2 ) (7 )
Tax provision applicable to net realized gains on securities available-for-sale
14 29 175 110

Table of Contents

Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are summarized as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 are as follows: (in thousands)

	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More					Total
2017:	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
2019:																Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses

Securities available-for-sale:
U.S. government treasuries																$	-	$	-		$	6,412	$	(31	)	$	6,412	$	(31	)
U.S. government agencies	$	28,424	$	(125	)	$	3,773	$	(36	)	$	32,197	$	(161	)		-		-			68,294		(462	)		68,294		(462	)
U.S. government mortgage-backed securities		10,639		(71	)		1,997		(12	)		12,636		(83	)		615		(4	)		40,260		(313	)		40,875		(317	)
State and political subdivisions		22,029		(81	)		21,739		(315	)		43,768		(396	)		11,054		(5	)		69,439		(714	)		80,493		(719	)
Corporate bonds		5,619		(11	)		7,310		(132	)		12,929		(143	)		246		(1	)		33,107		(272	)		33,353		(273	)
	$	66,711	$	(288	)	$	34,819	$	(495	)	$	101,530	$	(783	)	$	11,915	$	(10	)	$	217,512	$	(1,792	)	$	229,427	$	(1,802	)

	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More					Total
2016:	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
2018:																Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Securities available-for-sale:
U.S. government treasuries	$	2,893	$	(46	)	$	-	$	-		$	2,893	$	(46	)	$	2,962	$	(11	)	$	4,838	$	(114	)	$	7,800	$	(125	)
U.S. government agencies		48,225		(703	)		-		-			48,225		(703	)		26,099		(218	)		73,192		(1,346	)		99,291		(1,564	)
U.S. government mortgage-backed securities		33,753		(439	)		-		-			33,753		(439	)		25,037		(277	)		37,632		(1,025	)		62,669		(1,302	)
State and political subdivisions		125,558		(2,226	)		6,512		(190	)		132,070		(2,416	)		60,600		(302	)		83,494		(1,455	)		144,094		(1,757	)
Corporate bonds		35,703		(694	)		-		-			35,703		(694	)		19,239		(256	)		34,254		(1,057	)		53,493		(1,313	)
	$	246,132	$	(4,108	)	$	6,512	$	(190	)	$	252,644	$	(4,298	)	$	133,937	$	(1,064	)	$	233,410	$	(4,997	)	$	367,347	$	(6,061	)

Gross unrealized losses on debt securities totaled ~~$783,000~~$1,802,000 as of ~~September 30, 2017.~~March 31, 2019. These unrealized losses are generally due to changes in interest rates or general market conditions. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, state or political subdivision, or corporations. Management then determines whether downgrades by bond rating agencies have occurred, and reviews industry analysts’ reports. The Company’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates. Management concluded that the gross unrealized losses on debt securities were temporary. Due to potential changes in conditions, it is at least reasonably possible that changes in fair values and management’s assessments will occur in the near term and that such changes could materially affect the amounts reported in the Company’s financial statements.

Table of Contents

8.	7. Loans Receivable and Credit Disclosures

The composition of loans receivable as of March 31, 2019 and ~~Credit Disclosures~~December 31, 2018 is as follows (inthousands):

	2019			2018

Real estate - construction	$	53,533		$	51,364
Real estate - 1 to 4 family residential		167,909			169,722
Real estate - commercial		386,730			389,532
Real estate - agricultural		105,709			103,652
Commercial		84,082			86,194
Agricultural		84,027			85,202
Consumer and other		16,458			16,566
		898,448			902,232
Less:
Allowance for loan losses		(11,812	)		(11,684	)
Deferred loan fees		(79	)		(87	)
	$	886,557		$	890,461

Activity in the allowance for loan losses, on a disaggregated basis, for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 is as follows: (in thousands)

	Three Months Ended September 30, 2017																					Three Months Ended March 31, 2019
				1-4 Family																				1-4 Family
	Construction			Residential		Commercial		Agricultural								Consumer						Construction		Residential		Commercial		Agricultural							Consumer
	Real Estate			Real Estate		Real Estate		Real Estate		Commercial			Agricultural			and Other			Total			Real Estate		Real Estate		Real Estate		Real Estate		Commercial			Agricultural		and Other			Total
Balance, June 30, 2017	$	780		$	1,713	$	4,437	$	907	$	2,071		$	1,154		$	126		$	11,188
Balance, December 31, 2018																						$	699	$	1,820	$	4,615	$	1,198	$	1,777		$	1,384	$	191		$	11,684
Provision (credit) for loan losses		(74	)		15		155		36		(80	)		(34	)		39			57			26		28		155		60		(190	)		8		11			98
Recoveries of loans charged-off		-			4		-		-		2			-			4			10			11		2		-		-		28			-		-			41
Loans charged-off		-			-		-		-		(109	)		-			(6	)		(115	)		-		-		-		-		(5	)		-		(6	)		(11	)
Balance, September 30, 2017	$	706		$	1,732	$	4,592	$	943	$	1,884		$	1,120		$	163		$	11,140
Balance, March 31, 2019																						$	736	$	1,850	$	4,770	$	1,258	$	1,610		$	1,392	$	196		$	11,812

Nine Months Ended September 30, 2017

1-4 Family

Construction

Residential

Commercial

Agricultural

Consumer

Real Estate

Real Estate

Real Estate

Real Estate

Commercial

Agricultural

and Other

Total

Balance, December 31, 2016
$ 908 $ 1,711 $ 3,960 $ 861 $ 1,728 $ 1,216 $ 123 $ 10,507
Provision (credit) for loan losses
(202 ) 12 632 82 735 (96 ) 59 1,222
Recoveries of loans charged-off
- 9 - - 30 - 8 47
Loans charged-off
- - - - (609 ) - (27 ) (636 )
Balance, September 30, 2017
$ 706 $ 1,732 $ 4,592 $ 943 $ 1,884 $ 1,120 $ 163 $ 11,140

Three Months Ended September 30, 2016

1-4 Family

Construction

Residential

Commercial

Agricultural

Consumer

Real Estate

Real Estate

Real Estate

Real Estate

Commercial

Agricultural

and Other

Total

Balance, June 30, 2016
$ 758 $ 1,742 $ 3,890 $ 834 $ 1,439 $ 1,219 $ 253 $ 10,135
Provision (credit) for loan losses
121 32 (89 ) - 169 12 (10 ) 235
Recoveries of loans charged-off
15 1 - - 75 - 2 93
Loans charged-off
- - - - (1 ) - (11 ) (12 )
Balance, September 30, 2016
$ 894 $ 1,775 $ 3,801 $ 834 $ 1,682 $ 1,231 $ 234 $ 10,451

	Nine Months Ended September 30, 2016																						Three Months Ended March 31, 2018
				1-4 Family																					1-4 Family
	Construction			Residential			Commercial		Agricultural								Consumer						Construction		Residential		Commercial		Agricultural									Consumer
	Real Estate			Real Estate			Real Estate		Real Estate		Commercial			Agricultural			and Other			Total			Real Estate		Real Estate		Real Estate		Real Estate			Commercial			Agricultural			and Other			Total
Balance, December 31, 2015	$	999		$	1,806		$	3,557	$	760	$	1,371		$	1,256		$	239		$	9,988
Balance, December 31, 2017																							$	796	$	1,716	$	4,734	$	997		$	1,739		$	1,171		$	168		$	11,321
Provision (credit) for loan losses		(135	)		(34	)		244		74		308			(25	)		9			441			8		26		29		(20	)		(6	)		(3	)		(5	)		29
Recoveries of loans charged-off		30			3			-		-		81			-			7			121			-		2		-		-			18			-			8			28
Loans charged-off		-			-			-		-		(78	)		-			(21	)		(99	)		-		-		-		-			(1	)		-			(54	)		(55	)
Balance, September 30, 2016	$	894		$	1,775		$	3,801	$	834	$	1,682		$	1,231		$	234		$	10,451
Balance, March 31, 2018																							$	804	$	1,744	$	4,763	$	977		$	1,750		$	1,168		$	117		$	11,323

Table of Contents

Allowance for loan losses disaggregated on the basis of impairment analysis method as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 is as follows: (in thousands)

2017			1-4 Family
2019																			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer				Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total		Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	28	$	-	$	-	$	747	$	-	$	48	$	823	$	-	$	52	$	-	$	-	$	295	$	-	$	13	$	360
Collectively evaluated for impairment		706		1,704		4,592		943		1,137		1,120		115		10,317		736		1,798		4,770		1,258		1,315		1,392		183		11,452
Balance September 30, 2017	$	706	$	1,732	$	4,592	$	943	$	1,884	$	1,120	$	163	$	11,140
Balance March 31, 2019																	$	736	$	1,850	$	4,770	$	1,258	$	1,610	$	1,392	$	196	$	11,812

2016			1-4 Family
2018																			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer				Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total		Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	76	$	-	$	-	$	644	$	-	$	-	$	720	$	-	$	53	$	-	$	-	$	430	$	-	$	18	$	501
Collectively evaluated for impairment		908		1,635		3,960		861		1,084		1,216		123		9,787		699		1,767		4,615		1,198		1,347		1,384		173		11,183
Balance December 31, 2016	$	908	$	1,711	$	3,960	$	861	$	1,728	$	1,216	$	123	$	10,507
Balance December 31, 2018																	$	699	$	1,820	$	4,615	$	1,198	$	1,777	$	1,384	$	191	$	11,684

Loans receivable disaggregated on the basis of impairment analysis method as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 is as follows (in thousands):

2017			1-4 Family
2019																			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer				Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total		Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	692	$	703	$	-	$	3,250	$	-	$	85	$	4,730	$	-	$	350	$	133	$	71	$	2,773	$	-	$	13	$	3,340
Collectively evaluated for impairment		44,041		148,148		350,508		79,181		70,916		67,711		10,201		770,706		53,533		167,559		386,597		105,638		81,309		84,027		16,445		895,108

Balance September 30, 2017	$	44,041	$	148,840	$	351,211	$	79,181	$	74,166	$	67,711	$	10,286	$	775,436
Balance March 31, 2019																	$	53,533	$	167,909	$	386,730	$	105,709	$	84,082	$	84,027	$	16,458	$	898,448

2016			1-4 Family
2018																			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer				Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total		Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	660	$	399	$	-	$	3,942	$	-	$	76	$	5,077	$	-	$	365	$	128	$	74	$	2,648	$	-	$	19	$	3,234
Collectively evaluated for impairment		61,042		148,847		315,303		73,032		70,436		76,994		12,054		757,708		51,364		169,357		389,404		103,578		83,546		85,202		16,547		898,998

Balance December 31, 2016	$	61,042	$	149,507	$	315,702	$	73,032	$	74,378	$	76,994	$	12,130	$	762,785
Balance December 31, 2018																	$	51,364	$	169,722	$	389,532	$	103,652	$	86,194	$	85,202	$	16,566	$	902,232

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payment of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The Company will apply its normal loan review procedures to identify loans that should be evaluated for impairment.

Table of Contents

~~The following is a recap of impaired~~Impaired loans,, on a disaggregated basis, as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016:~~2018: (in thousands)

	2017						2016						2019						2018
			Unpaid						Unpaid						Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related		Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance		Investment		Balance		Allowance		Investment		Balance		Allowance
With no specific reserve recorded:
Real estate - construction	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Real estate - 1 to 4 family residential		610		750		-		452		473		-		241		248		-		252		277		-
Real estate - commercial		703		1,369		-		399		1,025		-		133		585		-		128		601		-
Real estate - agricultural		-		-		-		-		-		-		71		86		-		74		88		-
Commercial		127		150		-		2,747		2,672		-		238		251		-		248		258		-
Agricultural		-		-		-		-		-		-		-		-		-		-		-		-
Consumer and other		28		30		-		76		81		-		-		-		-		1		2		-
Total loans with no specific reserve:		1,468		2,299		-		3,674		4,251		-		683		1,170		-		703		1,226		-

With an allowance recorded:
Real estate - construction		-		-		-		-		-		-		-		-		-		-		-		-
Real estate - 1 to 4 family residential		82		104		28		208		360		76		109		136		52		113		139		53
Real estate - commercial		-		-		-		-		-		-		-		-		-		-		-		-
Real estate - agricultural		-		-		-		-		-		-		-		-		-		-		-		-
Commercial		3,123		3,392		747		1,195		1,286		644		2,535		2,537		295		2,400		2,506		430
Agricultural		-		-		-		-		-		-		-		-		-		-		-		-
Consumer and other		57		60		48		-		-		-		13		17		13		18		22		18
Total loans with specific reserve:		3,262		3,556		823		1,403		1,646		720		2,657		2,690		360		2,531		2,667		501

Total
Real estate - construction		-		-		-		-		-		-		-		-		-		-		-		-
Real estate - 1 to 4 family residential		692		854		28		660		833		76		350		384		52		365		416		53
Real estate - commercial		703		1,369		-		399		1,025		-		133		585		-		128		601		-
Real estate - agricultural		-		-		-		-		-		-		71		86		-		74		88		-
Commercial		3,250		3,542		747		3,942		3,958		644		2,773		2,788		295		2,648		2,764		430
Agricultural		-		-		-		-		-		-		-		-		-		-		-		-
Consumer and other		85		90		48		76		81		-		13		17		13		19		24		18

	$	4,730	$	5,855	$	823	$	5,077	$	5,897	$	720	$	3,340	$	3,860	$	360	$	3,234	$	3,893	$	501

Table of Contents

~~The following is a recap of~~ ~~the average~~Average recorded investment and interest income recognized on impaired loans for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016:~~2018: (in thousands)

	Three Months Ended September 30,								Three Months Ended March 31,
	2017				2016				2019				2018
	Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
With no specific reserve recorded:
Real estate - construction	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Real estate - 1 to 4 family residential		631		18		481		-		247		20		570		23
Real estate - commercial		716		-		450		-		131		31		409		258
Real estate - agricultural		-		-		-		-		73		-		-		-
Commercial		139		2		67		-		243		-		95		-
Agricultural		-		-		11		-		-		-		-		-
Consumer and other		46		-		88		6		1		-		13		-
Total loans with no specific reserve:		1,532		20		1,097		6		695		51		1,087		281

With an allowance recorded:
Real estate - construction		-		-		-		-		-		-		-		-
Real estate - 1 to 4 family residential		128		-		626		-		111		-		226		-
Real estate - commercial		-		-		-		-		-		-		225		-
Real estate - agricultural		-		-		-		-		-		-		-		-
Commercial		3,263		-		1,003		2		2,468		-		2,965		-
Agricultural		-		-		-		-		-		-		-		-
Consumer and other		29		-		1		-		16		1		44		1
Total loans with specific reserve:		3,420		-		1,630		2		2,595		1		3,460		1

Total
Real estate - construction		-		-		-		-		-		-		-		-
Real estate - 1 to 4 family residential		759		18		1,107		-		358		20		796		23
Real estate - commercial		716		-		450		-		131		31		634		258
Real estate - agricultural		-		-		-		-		73		-		-		-
Commercial		3,402		2		1,070		2		2,711		-		3,060		-
Agricultural		-		-		11		-		-		-		-		-
Consumer and other		75		-		89		6		17		1		57		1

	$	4,952	$	20	$	2,727	$	8	$	3,290	$	52	$	4,547	$	282

~~Table of Contents~~

Nine Months Ended September 30,

2017

2016

Average

Interest

Average

Interest

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized

With no specific reserve recorded:

Real estate - construction
$ - $ - $ - $ 31
Real estate - 1 to 4 family residential
535 27 438 1
Real estate - commercial
648 - 465 22
Real estate - agricultural
- - - -
Commercial
1,457 3 39 -
Agricultural
- - 11 -
Consumer and other
60 - 66 6
Total loans with no specific reserve:
2,700 30 1,019 60

With an allowance recorded:

Real estate - construction
16 2 - -
Real estate - 1 to 4 family residential
162 - 663 5
Real estate - commercial
- - 26 -
Real estate - agricultural
- - - -
Commercial
2,193 - 732 2
Agricultural
- - - -
Consumer and other
15 1 1 -
Total loans with specific reserve:
2,386 3 1,422 7

Total

Real estate - construction
16 2 - 31
Real estate - 1 to 4 family residential
697 27 1,101 6
Real estate - commercial
648 - 491 22
Real estate - agricultural
- - - -
Commercial
3,650 3 771 2
Agricultural
- - 11 -
Consumer and other
75 1 67 6

$ 5,086 $ 33 $ 2,441 $ 67

The interest foregone on nonaccrual loans for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 was approximately ~~$88,000~~$58,000 and ~~$46,000,~~$83,000, respectively. ~~The interest foregone on nonaccrual loans for the nine months ended September 30, 2017 and 2016 was approximately $289,000 and $124,000, respectively.~~

TheNonaccrual loans at March 31, 2019 and December 31, 2018 were $3,339,000 and $3,234,000 respectively.

The Company had loans meeting the definition of a troubled debt restructuring (TDR) of ~~$3,098,000~~$2,662,000 as of ~~September 30, 2017,~~March 31, 2019, all of which were included in impaired and nonaccrual loans. The Company had TDRs of ~~$3,672,000~~$2,350,000 as of December 31, ~~2016,~~2018, all of which were included in impaired and nonaccrual loans.

~~Table of Contents~~

T~~he following table sets forth information on the Company’s TDRs, on a disaggregated basis, occurring in the three and nine months ended September 30, 2017 and 2016:~~ (~~dollars~~~~in thousands)~~

Three Months Ended September 30,

2017

2016

Pre-Modification

Post-Modification

Pre-Modification

Post-Modification

Outstanding

Outstanding

Outstanding

Outstanding

Number of

Recorded

Recorded

Number of

Recorded

Recorded

Contracts

Investment

Investment

Contracts

Investment

Investment

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

- $ - $ - - $ - $ -

Nine Months Ended September 30,

2017

2016

Pre-Modification

Post-Modification

Pre-Modification

Post-Modification

Outstanding

Outstanding

Outstanding

Outstanding

Number of

Recorded

Recorded

Number of

Recorded

Recorded

Contracts

Investment

Investment

Contracts

Investment

Investment

Real estate - construction
- $ - $ - - $ - $ -
Real estate - 1 to 4 family residential
- - - - - -
Real estate - commercial
- - - - - -
Real estate - agricultural
- - - - - -
Commercial
2 93 99 3 702 705
Agricultural
- - - - - -
Consumer and other
- - - 3 70 70

2 $ 93 $ 99 6 $ 772 $ 775

~~During the~~ three and nine months ended September 30, 2017, the Company granted concessions to two borrowers that were experiencing financial difficulties. The loans were extended beyond their normal terms and on one loan the interest was capitalized.

During the three months ended ~~September 30, 2016,~~March 31, 2019 and 2018, the Company did not grant ~~any~~ concessions to any ~~borrowers facing financial difficulties.~~ During the nine months ended September 30, 2016, the Company granted concessions to two borrowers experiencing financial difficulties with six loans. The three consumer loans were extended beyond normal terms at an interest rate below a market interest rate. The three commercial operating loans were extended beyond normal terms.borrowers.

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

No TDR modified during the three months ended March 31, 2019 had payment defaults. One TDR modified during the twelve months ended ~~September 30, 2017 and 2016~~March 31, 2018 had payment defaults.

~~A $5~~30,000 specific reserve was established in the nine months ended September 30, 2017 on two TDR loans. There were $257,000 of net charge-offs related to TDRs for the nine months ended September 30, 2017. There were no charge-offs related to TDRs for the three ~~and nine~~ months ended ~~September 30, 2016.~~March 31, 2019 and 2018. No additional specific reserve were provided for the three months ended March 31, 2019. A $12,000 specific reserve was established in the three months ended March 31, 2018.

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AnAn aging analysis of the recorded investments in loans, on a disaggregated basis, as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, is as follows: (in thousands)

2017			90 Days								90 Days
2019															90 Days								90 Days
	30-89		or Greater		Total						or Greater		30-89		or Greater		Total						or Greater
	Past Due		Past Due		Past Due		Current		Total		Accruing		Past Due		Past Due		Past Due		Current		Total		Accruing

Real estate - construction	$	205	$	-	$	205	$	43,836	$	44,041	$	-	$	-	$	-	$	-	$	53,533	$	53,533	$	-
Real estate - 1 to 4 family residential		1,065		476		1,541		147,299		148,840		81		1,095		370		1,465		166,444		167,909		20
Real estate - commercial		312		398		710		350,501		351,211		-		1,065		-		1,065		385,665		386,730		-
Real estate - agricultural		377		-		377		78,804		79,181		-		1,290		-		1,290		104,419		105,709		-
Commercial		129		429		558		73,608		74,166		-		545		12		557		83,525		84,082		-
Agricultural		207		-		207		67,504		67,711		-		3,201		30		3,231		80,796		84,027		30
Consumer and other		43		32		75		10,211		10,286		-		106		13		119		16,339		16,458		-

	$	2,338	$	1,335	$	3,673	$	771,763	$	775,436	$	81	$	7,302	$	425	$	7,727	$	890,721	$	898,448	$	50

2016			90 Days								90 Days
2018															90 Days								90 Days
	30-89		or Greater		Total						or Greater		30-89		or Greater		Total						or Greater
	Past Due		Past Due		Past Due		Current		Total		Accruing		Past Due		Past Due		Past Due		Current		Total		Accruing

Real estate - construction	$	-	$	-	$	-	$	61,042	$	61,042	$	-	$	376	$	-	$	376	$	50,988	$	51,364	$	-
Real estate - 1 to 4 family residential		1,577		35		1,612		147,895		149,507		19		1,032		302		1,334		168,388		169,722		150
Real estate - commercial		1,420		-		1,420		314,282		315,702		-		-		-		-		389,532		389,532		-
Real estate - agricultural		-		-		-		73,032		73,032		-		-		-		-		103,652		103,652		-
Commercial		84		747		831		73,547		74,378		-		595		248		843		85,351		86,194		-
Agricultural		-		-		-		76,994		76,994		-		89		-		89		85,113		85,202		-
Consumer and other		36		3		39		12,091		12,130		3		76		-		76		16,490		16,566		-

	$	3,117	$	785	$	3,902	$	758,883	$	762,785	$	22	$	2,168	$	550	$	2,718	$	899,514	$	902,232	$	150

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The credit risk profile by internally assigned grade, on a disaggregated basis, asas of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 is as follows: (in thousands)

2017	Construction		Commercial		Agricultural
2019													Construction		Commercial		Agricultural
	Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total

Pass	$	41,032	$	329,263	$	57,569	$	59,420	$	42,695	$	529,979	$	46,979	$	337,461	$	74,011	$	59,708	$	53,670	$	571,829
Watch		3,009		17,927		18,984		10,020		23,828		73,768		6,554		30,086		23,268		17,510		27,799		105,217
Special Mention		-		189		1,234		-		-		1,423		-		4,727		303		-		52		5,082
Substandard		-		3,129		1,394		1,478		1,188		7,189		-		14,323		8,056		4,091		2,506		28,976
Substandard-Impaired		-		703		-		3,248		-		3,951		-		133		71		2,773		-		2,977

	$	44,041	$	351,211	$	79,181	$	74,166	$	67,711	$	616,310	$	53,533	$	386,730	$	105,709	$	84,082	$	84,027	$	714,081

2016	Construction		Commercial		Agricultural
2018													Construction		Commercial		Agricultural
	Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total

Pass	$	57,420	$	288,107	$	51,720	$	59,506	$	57,415	$	514,168	$	45,991	$	345,262	$	72,562	$	64,850	$	58,818	$	587,483
Watch		3,245		22,833		15,251		9,512		18,938		69,779		5,373		26,177		22,758		13,998		22,628		90,934
Special Mention		-		204		4,228		96		75		4,603		-		4,775		1,675		264		747		7,461
Substandard		377		4,159		1,833		1,322		566		8,257		-		13,221		6,583		4,434		3,009		27,247
Substandard-Impaired		-		399		-		3,942		-		4,341		-		97		74		2,648		-		2,819

	$	61,042	$	315,702	$	73,032	$	74,378	$	76,994	$	601,148	$	51,364	$	389,532	$	103,652	$	86,194	$	85,202	$	715,944

The credit risk profile based on payment activity, on a disaggregated basis, asas of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 is as follows:

2017	1-4 Family
2019							1-4 Family
	Residential		Consumer				Residential		Consumer
	Real Estate		and Other		Total		Real Estate		and Other		Total

Performing	$	148,069	$	10,202	$	158,271	$	167,539	$	16,445	$	183,984
Non-performing		771		84		855		370		13		383

	$	148,840	$	10,286	$	159,126	$	167,909	$	16,458	$	184,367

2016	1-4 Family
2018							1-4 Family
	Residential		Consumer				Residential		Consumer
	Real Estate		and Other		Total		Real Estate		and Other		Total

Performing	$	148,828	$	12,051	$	160,879	$	169,206	$	16,547	$	185,753
Non-performing		679		79		758		516		19		535

	$	149,507	$	12,130	$	161,637	$	169,722	$	16,566	$	186,288

Goodwill

8. As of September 14, 2018, as a result of the acquisition of CCSB, FNB recognized $3.0 million of goodwill. Goodwill

G~~oodwill~~ recognized in the Acquisition was primarily attributable to an expanded market share and economies of scale expected from combining the operations of CCSB branches with FNB. Goodwill is not amortized but is evaluated for impairment at least annually. For income tax purposes, goodwill associated with CCSB is not amortized and goodwill associated with previous acquisition is amortized over fifteen years.

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~~9. Intangible assets~~

10.	Intangible assets

In conjunction with the acquisition of CCSB in 2018, the Company recorded $2.0 million in core deposit intangible assets. The following sets forth the carrying amounts and accumulated amortization of the intangible assets at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016:~~2018: (in thousands)

	2017				2016				2019				2018
	Gross		Accumulated		Gross		Accumulated		Gross		Accumulated		Gross		Accumulated
	Amount		Amortization		Amount		Amortization		Amount		Amortization		Amount		Amortization

Core deposit intangible asset	$	2,518	$	1,793	$	2,518	$	1,563	$	4,520	$	2,358	$	4,520	$	2,212
Customer list		474		65		412		14		535		183		535		165

Total	$	2,992	$	1,858	$	2,930	$	1,577	$	5,055	$	2,541	$	5,055	$	2,377

The weighted average life of the intangible assets is 33.4 years as of ~~September 30, 2017~~March 31, 2019 and 3.5 years as of December 31, ~~2016.~~2018.

The following sets forth the activity related to the intangible assets for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016:~~2018: (in thousands)

	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2017			2016			2017			2016			2019			2018

Beginning intangible asset, net	$	1,212		$	1,122		$	1,353		$	1,309		$	2,678		$	1,091
Adjustment to intangible asset		12			-			62			-			-			15
Amortization		(90	)		(86	)		(281	)		(273	)		(164	)		(87	)

Ending intangible asset, net	$	1,134		$	1,036		$	1,134		$	1,036		$	2,514		$	1,019

Table of Contents

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

2017
$ 85
2018
319
2019
196
2020
139
2021
139
2022
133
2023
123

$ 1,134

~~Table of Contents~~

2019	$	376
2020		440
2021		402
2022		368
2023		315
2024		166
After		447

Intangible asset, net	$	2,514

11.	~~10.~~ Pledged Collateral Related to Securities Sold Under Repurchase Agreements

The repurchase agreements mature daily and the following sets forth the following sets forth the pledged collateral at estimated fair value related to securities sold under repurchase agreements ~~and term repurchase agreements~~ as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016:~~2018: (in thousands)

	2017						2016
	Remaining Contractual Maturity of the Agreements
	Overnight		Greater than		Total		Overnight		Greater than		Total
			90 days						90 days				2019		2018

Securities sold under agreements to repurchase:
U.S. government treasuries	$	1,485	$	-	$	1,485	$	1,476	$	-	$	1,476	$	4,463	$	4,406
U.S. government agencies		48,363		-		48,363		46,557		-		46,557		39,179		41,375
U.S. government mortgage-backed securities		24,514		-		24,514		30,376		-		30,376		20,022		19,893

Total	$	74,362	$	-	$	74,362	$	78,409	$	-	$	78,409

Term repurchase agreements (Other borrowings):
U.S. government agencies	$	-	$	15,174	$	15,174	$	-	$	15,068	$	15,068
U.S. government mortgage-backed securities		-		-		-		-		354		354

Total	$	-	$	15,174	$	15,174	$	-	$	15,422	$	15,422

Total pledged collateral	$	74,362	$	15,174	$	89,536	$	78,409	$	15,422	$	93,831	$	63,664	$	65,674

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

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12.	~~11.~~ Regulatory Matters

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

To Be Well

Capitalized Under

For Capital

Prompt Corrective

Actual

Adequacy Purposes *

Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of September 30, 2017:

Total capital (to risk- weighted assets):

Consolidated
$ 175,203 17.7 % $ 91,324 9.25 % N/A N/A
Boone Bank & Trust
15,325 16.7 8,486 9.25 $ 9,174 10.0 %
First National Bank
81,177 15.4 48,867 9.25 52,829 10.0
Reliance State Bank
26,957 15.9 15,661 9.25 16,931 10.0
State Bank & Trust
20,217 16.5 11,337 9.25 12,256 10.0
United Bank & Trust
14,903 20.4 6,741 9.25 7,288 10.0

Tier 1 capital (to risk- weighted assets):

Consolidated
$ 163,536 16.6 % $ 71,578 7.25 % N/A N/A
Boone Bank & Trust
14,419 15.7 6,651 7.25 $ 7,339 8.0 %
First National Bank
75,221 14.2 38,301 7.25 42,263 8.0
Reliance State Bank
24,947 14.7 12,275 7.25 13,545 8.0
State Bank & Trust
18,680 15.2 8,886 7.25 9,805 8.0
United Bank & Trust
14,084 19.3 5,284 7.25 5,830 8.0

Tier 1 capital (to average- weighted assets):

Consolidated
$ 163,536 12.1 % $ 53,995 4.00 % N/A N/A
Boone Bank & Trust
14,419 10.5 5,484 4.00 $ 6,855 5.0 %
First National Bank
75,221 10.0 29,942 4.00 37,428 5.0
Reliance State Bank
24,947 12.2 8,147 4.00 10,184 5.0
State Bank & Trust
18,680 11.9 6,297 4.00 7,871 5.0
United Bank & Trust
14,084 12.9 4,372 4.00 5,465 5.0

Common equity tier 1 capital (to risk-weighted assets):

Consolidated
$ 163,536 16.6 % $ 56,769 5.75 % N/A N/A
Boone Bank & Trust
14,419 15.7 5,275 5.75 $ 5,963 6.5 %
First National Bank
75,221 14.2 30,377 5.75 34,339 6.5
Reliance State Bank
24,947 14.7 9,735 5.75 11,005 6.5
State Bank & Trust
18,680 15.2 7,047 5.75 7,967 6.5
United Bank & Trust
14,084 19.3 4,190 5.75 4,737 6.5

* These ratios for September 30, 2017 include a capital conservation buffer of 1.25%, except for the Tier 1 capital to average weighted assets ratios.

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

As of March 31, 2019:
Total capital (to risk-weighted assets):
Consolidated	$	178,441		16.3	%	$	115,240		10.50	%		N/A		N/A
Boone Bank & Trust		15,627		16.5			9,945		10.50		$	9,472		10.0	%
First National Bank		82,776		13.5			64,310		10.50			61,247		10.0
Reliance State Bank		28,032		15.5			18,997		10.50			18,093		10.0
State Bank & Trust		20,360		15.9			13,461		10.50			12,820		10.0
United Bank & Trust		14,801		18.6			8,333		10.50			7,936		10.0

Tier 1 capital (to risk-weighted assets):
Consolidated	$	166,088		15.1	%	$	93,290		8.50	%		N/A		N/A
Boone Bank & Trust		14,688		15.5			8,051		8.50		$	7,577		8.0	%
First National Bank		76,249		12.4			52,060		8.50			48,998		8.0
Reliance State Bank		25,779		14.2			15,379		8.50			14,474		8.0
State Bank & Trust		18,755		14.6			10,897		8.50			10,256		8.0
United Bank & Trust		13,983		17.6			6,746		8.50			6,349		8.0

Tier 1 capital (to average-weighted assets):
Consolidated	$	166,088		11.5	%	$	57,549		4.00	%		N/A		N/A
Boone Bank & Trust		14,688		11.4			5,158		4.00		$	6,447		5.0	%
First National Bank		76,249		9.2			33,042		4.00			41,302		5.0
Reliance State Bank		25,779		11.9			8,687		4.00			10,859		5.0
State Bank & Trust		18,755		11.5			6,485		4.00			8,106		5.0
United Bank & Trust		13,983		12.9			4,345		4.00			5,432		5.0

Common equity tier 1 capital (to risk-weighted assets):
Consolidated	$	166,088		15.1	%	$	76,827		7.00	%		N/A		N/A
Boone Bank & Trust		14,688		15.5			6,630		7.00		$	6,156		6.5	%
First National Bank		76,249		12.4			42,873		7.00			39,811		6.5
Reliance State Bank		25,779		14.2			12,665		7.00			11,760		6.5
State Bank & Trust		18,755		14.6			8,974		7.00			8,333		6.5
United Bank & Trust		13,983		17.6			5,555		7.00			5,159		6.5

* These ratios for March 31, 2019 include a capital conservation buffer of 2.5%, except for the Tier 1 capital to average weighted assets ratios.

Table of Contents

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

As of December 31, 2016:
Total capital (to risk- weighted assets):
As of December 31, 2018:
Total capital (to risk-weighted assets):
Consolidated	$	170,358		17.2	%	$	85,241		8.625	%		N/A		N/A		$	177,405		16.1	%	$	109,082		9.875	%		N/A		N/A
Boone Bank & Trust		15,044		17.2			7,534		8.625		$	8,735		10.0	%		15,632		17.0			9,092		9.875		$	9,207		10.0	%
First National Bank		78,322		15.3			44,279		8.625			51,338		10.0			81,419		13.1			61,312		9.875			62,088		10.0
Reliance State Bank		26,095		14.1			15,927		8.625			18,466		10.0			27,880		14.8			18,576		9.875			18,811		10.0
State Bank & Trust		20,170		16.4			10,590		8.625			12,278		10.0			20,358		16.2			12,427		9.875			12,585		10.0
United Bank & Trust		14,897		19.2			6,684		8.625			7,749		10.0			14,790		19.5			7,489		9.875			7,583		10.0

Tier 1 capital (to risk- weighted assets):
Tier 1 capital (to risk-weighted assets):
Consolidated	$	159,325		16.1	%	$	65,475		6.625	%		N/A		N/A		$	165,181		15.0	%	$	86,989		7.875	%		N/A		N/A
Boone Bank & Trust		14,132		16.2			5,787		6.625		$	6,988		8.0	%		14,722		16.0			7,251		7.875		$	7,366		8.0	%
First National Bank		72,750		14.2			34,011		6.625			41,070		8.0			74,995		12.1			48,894		7.875			49,671		8.0
Reliance State Bank		24,139		13.1			12,234		6.625			14,773		8.0			25,622		13.6			14,813		7.875			15,049		8.0
State Bank & Trust		18,633		15.2			8,134		6.625			9,822		8.0			18,783		14.9			9,910		7.875			10,068		8.0
United Bank & Trust		14,078		18.2			5,134		6.625			6,199		8.0			13,974		18.4			5,972		7.875			6,067		8.0

Tier 1 capital (to average- weighted assets):
Tier 1 capital (to average-weighted assets):
Consolidated	$	159,325		12.0	%	$	53,316		4.000	%		N/A		N/A		$	165,181		11.3	%	$	58,635		4.000	%		N/A		N/A
Boone Bank & Trust		14,132		10.2			5,529		4.000		$	6,911		5.0	%		14,722		11.2			5,277		4.000		$	6,596		5.0	%
First National Bank		72,750		10.0			29,077		4.000			36,347		5.0			74,995		9.1			33,034		4.000			41,292		5.0
Reliance State Bank		24,139		11.5			8,374		4.000			10,467		5.0			25,622		11.7			8,730		4.000			10,913		5.0
State Bank & Trust		18,633		11.6			6,449		4.000			8,061		5.0			18,783		11.8			6,384		4.000			7,980		5.0
United Bank & Trust		14,078		12.5			4,523		4.000			5,654		5.0			13,974		12.7			4,402		4.000			5,503		5.0

Common equity tier 1 capital (to risk-weighted assets):
Consolidated	$	159,325		16.1	%	$	50,650		5.125	%		N/A		N/A		$	165,181		15.0	%	$	70,420		6.375	%		N/A		N/A
Boone Bank & Trust		14,132		16.2			4,477		5.125		$	5,678		6.5	%		14,722		16.0			5,870		6.375		$	5,985		6.5	%
First National Bank		72,750		14.2			26,311		5.125			33,370		6.5			74,995		12.1			39,581		6.375			40,357		6.5
Reliance State Bank		24,139		13.1			9,464		5.125			12,003		6.5			25,622		13.6			11,992		6.375			12,227		6.5
State Bank & Trust		18,633		15.2			6,292		5.125			7,981		6.5			18,783		14.9			8,023		6.375			8,180		6.5
United Bank & Trust		14,078		18.2			3,972		5.125			5,037		6.5			13,974		18.4			4,834		6.375			4,929		6.5

* These ratios for December 31, 2018 include a capital conservation buffer of 1.875%, except for the Tier 1 capital to average weighted assets ratios.

* These ratios for December 31, 2016 include a capital conservation buffer of 0.625%, except for the Tier 1 capital to average weighted assets ratios.

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

~~Table of Contents~~

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

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12.

13. Subsequent Events

Management evaluated subsequent events through the date the financial statements were issued. There were no significant events or transactions occurring after ~~September 30, 2017,~~March 31, 2019, but prior to ~~November 8, 2017,~~May 7, 2019, that provided additional evidence about conditions that existed at ~~September 30, 2017.~~March 31, 2019. There were no other significant events or transactions that provided evidence about conditions that did not exist at ~~September 30, 2017.~~March 31, 2019.

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

Overview

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

The Company does not engage in any material business activities apart from its ownership of the Banks. Products and services offered by the Banks are for commercial and consumer purposes including loans, deposits and wealth management services. ~~The Banks also offer~~Wealth management services includes financial planning and managing trust, agencies, estates and investment ~~services through a third-party broker-dealer.~~brokerage accounts. The Company employs ~~fourteen~~thirteen individuals to assist with financial reporting, human resources, audit, compliance, marketing, technology systems, training and the coordination of management activities, in addition to ~~205~~230 full-time equivalent individuals employed by the ~~Banks.~~Banks, including employees from the Acquisition.

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

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

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On September 14, 2018, FNB purchased the stock of CCSB for approximately $14.8 million. First National will operate all three bank offices previously owned by Clarke County as branches of First National.

The Company had net income of ~~$3,928,000,~~$4,237,000, or ~~$0.42~~$0.46 per share, for the three months ended ~~September 30, 2017,~~March 31, 2019, compared to net income of ~~$3,804,000,~~$4,037,000, or ~~$0.41~~$0.43 per share, for the three months ended ~~September 30, 2016.~~March 31, 2018.

The increase in quarterly earnings can be primarily attributed to ~~an increase in~~improved loan interest income, ~~and a lower provision for loan losses,~~ offset in part by ~~increases in~~elevated deposit interest ~~expense.~~expense, higher salary and employee benefits, data processing and occupancy expenses.

NetNet loan charge-offs (recoveries) totaled ~~$105,000~~$(30,000) and ~~$(81,000)~~$27,000 for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, respectively. The provision for loan losses totaled ~~$57,000~~$98,000 and ~~$235,000~~$29,000 for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, respectively.

~~The Company had net income of $~~11,011,000, or $1.18 per share, for the nine months ended September 30, 2017, compared to net income of $11,710,000, or $1.26 per share, for the nine months ended September 30, 2016. The decrease in nine month earnings can be primarily attributed to a higher provision for loan losses and increases in interest expense, offset in part by an increase in loan interest income.

~~Net~~ loan charge-offs (recoveries) totaled $589,000 and $(22,000) for the nine months ended September 30, 2017 and 2016, respectively. The provision for loan losses totaled $1,222,000 and $441,000 for the nine months ended September 30, 2017 and 2016, respectively.

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

● Challenges

● Key Performance Indicators and Industry Results

● Critical Accounting Policies

● Income Statement Review

● Balance Sheet Review

● Asset Quality Review and Credit Risk Management

● Liquidity and Capital Resources

● Forward-Looking Statements and Business Risks

● Non-GAAP Financial Measures

~~Challenges~~

●	~~Key Performance Indicators and Industry Results~~

●	~~Critical Accounting Policies~~

●	~~Income Statement Review~~

●	~~Balance Sheet Review~~

●	~~Asset Quality~~ ~~Review and Credit Risk Management~~

●	~~Liquidity and Capital Resources~~

●	~~Forward-Looking Statements and Business Risks~~

Challenges

Management has identified certain events or circumstances that may negatively impact the ~~Company~~’sCompany’s financial condition and results of operations in the future and is attempting to position the Company to best respond to those challenges. These challenges are addressed in the Company’s most recent Annual Report on Form 10-K filed on March ~~13, 2017.~~12, 2019.

~~Table of Contents~~

Key Performance Indicators and Industry Results

Certain key performance indicators for the Company and the industry are presented in the following chart. The industry figures are compiled by the Federal Deposit Insurance Corporation (the “FDIC”) and are derived from ~~5,787~~5,406 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.

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Selected Indicators for the Company and the Industry

																									3 Months
	3 Months			9 Months																					Ended
	Ended			Ended			3 Months Ended						Years Ended December 31,												March 31,			Years Ended December 31,
	September 30, 2017						June 30, 2017						2016						2015						2019			2018						2017
	Company						Company			Industry*			Company			Industry			Company			Industry			Company			Company			Industry*			Company			Industry

Return on assets		1.15	%		1.07	%		1.01	%		1.14	%		1.18	%		1.04	%		1.13	%		1.04	%		1.17	%		1.23	%		1.35	%		1.00	%		0.97	%

Return on equity		9.08	%		8.64	%		8.17	%		10.11	%		9.38	%		9.32	%		9.44	%		9.31	%		9.73	%		10.09	%		11.98	%		8.02	%		8.64	%

Net interest margin		3.29	%		3.25	%		3.25	%		3.22	%		3.36	%		3.13	%		3.33	%		3.07	%		3.23	%		3.23	%		3.40	%		3.25	%		3.25	%

Efficiency ratio		52.42	%		53.16	%		52.93	%		56.32	%		51.95	%		58.28	%		53.59	%		59.91	%		57.82	%		55.90	%		56.27	%		52.70	%		57.94	%

Capital ratio		12.70	%		12.41	%		12.37	%		9.69	%		12.60	%		9.48	%		12.00	%		9.59	%		12.05	%		12.18	%		9.70	%		12.48	%		9.62	%

*Latest available data

Key performances indicators include:

●	● Return on Assets

This ratio is calculated by dividing net income by average assets. It is used to measure how effectively the assets of the Company are being utilized in generating income. The Company's annualized return on a~~verage~~average assets was ~~1.15%~~1.17% and 1.19% for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016.~~2018, respectively. This ratio remained consistent when comparing 2019 to 2018, as net income increased in proportion to the increase in average assets.

●	● Return on Equity

This ratio is calculated by dividing net income by average equity. It is used to measure the net income or return the Company generated for the shareholders’ equity investment in the Company. The Company's return on average equity was ~~at 9.08%~~9.73% and ~~8.91%~~9.55% for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, respectively. ~~The~~This ratio remained consistent when comparing 2019 to 2018, as net income increased in proportion to the increase in ~~this ratio in 2017 from the previous period is primarily due to an increase in net income.~~average equity.

●	● Net Interest Margin

The net interest margin for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 was ~~3.29%~~3.23% and ~~3.38%~~3.19%, respectively. The ratio is calculated by dividing net interest income by average earning assets. Earning assets are primarily made up of loans and investments that earn interest. This ratio is used to measure how well the Company is able to maintain interest rates on earning assets above those of interest-bearing liabilities, which is the interest expense paid on deposits and other borrowings. ~~The decrease in this ratio in 2017 is primarily the result of an increase in the interest rates on deposits.~~

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●	● Efficiency Ratio

This ratio is calculated by dividing noninterest expense by net interest income and noninterest income. The ratio is a measure of the Company’s ability to manage noninterest expenses. The Company’s efficiency ratio was ~~52.42%~~57.82% and ~~50.71%~~57.45% for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, respectively. ~~The efficiency~~This ratio remained consistent ~~with prior periods.~~when comparing 2019 to 2018.

●	30 Table of Contents ● Capital Ratio

The average capital ratio is calculated by dividing average total equity capital by average total assets. It measures the level of average assets that are funded by shareholders’ equity. Given an equal level of risk in the financial condition of two companies, the higher the capital ratio, generally the more financially sound the company. The Company’s capital ratio of ~~12.70%~~12.05% as of ~~September 30, 2017~~March 31, 2019 is significantly higher than the industry average of ~~9.69%~~9.70% as of ~~June 30, 2017.~~December 31, 2018.

Industry Results

The FDIC Quarterly Banking Profile reported the following results for the ~~second~~fourth quarter of ~~2017:~~2018:

~~Higher~~ Net ~~Interest~~ Income ~~Lifts Industry Earnings~~Rises $33.8 Billion Over Fourth Quarter 2017 to $59.1 Billion

~~Higher net interest income and restrained growth in operating expenses helped lift banking industry profits in second quarter 2017.~~ The ~~5,787~~5,406 FDIC-insured commercial banks and savings institutions ~~insured by the FDIC~~ reported quarterly net income of ~~$48.3~~$59.1 billion ~~for~~in the fourth quarter, an increase of ~~$4.7~~$33.8 billion ~~(10.7%~~(133.4%) ~~compared with the second quarter of 2016. Almost two out of every three banks, 63.4% reported year-over-year earnings improvement, while only 4.1% were unprofitable, down~~ from ~~4.6%~~ a year earlier. ~~The average return on assets (ROA) rose~~Improvement in quarterly net income was attributable to ~~1.14% from 1.06% the year before. This is the highest quarterly ROA for the industry since second quarter 2007.~~

~~Net Interest Margins Improve~~

~~Net~~higher net operating revenue~~—the~~ (the sum of net interest income and ~~total~~ noninterest ~~income—rose~~income) and lower income tax expenses. Assuming the effective tax rate before the new tax law, quarterly net income would have totaled an estimated $50.3 billion, up $7.9 billion (18.5%) from 12 months ago. The average return on assets was 1.33% for the quarter, up from 0.58% in fourth quarter 2017. The percentage of unprofitable banks in the fourth quarter declined to ~~$190.5~~6.5% from 16.6% a year ago.

Full-Year 2018 Net Income Grows to $236.7 Billion

Growth in net operating revenue (up $53.1 billion, or 7%), coupled with lower income tax expenses (down $36.9 billion, or 37.7%) and loan-loss provisions (down $1.1 billion, or 2.2%), lifted full-year 2018 net income to $236.7 billion, an improvement of $72.4 billion (44.1%) from 2017. Assuming the effective tax rate before the new tax law, full-year 2018 net income would have totaled an estimated $207.9 billion, compared with $183.1 billion in ~~the second quarter, an $11 billion (6.1%) increase from second quarter 2016. Most of the improvement consisted of higher net interest income, which was $10.3 billion (9.1%) higher than a year earlier.~~2017. The ~~increase in net interest income helped lift the industry’s~~average net interest margin (NIM) rose from 3.25% in 2017 to ~~3.22%~~3.40%, as average asset yields (up 43 basis points) exceeded average funding costs (up 28 basis points). The average return on assets for 2018 was 1.35%, up from 3.08% in second quarter 2016. This is the highest quarterly NIM since fourth quarter 2013. While 57.7% of all banks reported higher NIMs, the improvement was greatest at larger institutions. More of their assets reprice or mature in the short term, and they are better-positioned0.97% for 2017.

Net Interest Income Increases 8.1% From a Year Earlier

Quarterly net interest income rose to ~~benefit from rising short-term interest rates. Noninterest income totaled $66.8~~$140.2 billion, up ~~$654 million (1%~~$10.5 billion (8.1%) from a year ~~earlier. Income~~earlier, owing to growth in interest-bearing assets and wider net interest margins (NIM). More than four out of five banks (82.6%) reported year-over-year increases in net interest income. NIM was 3.48% for the quarter, an improvement from the 3.31% margin reported a year ago, as average asset ~~servicing was $1~~yields grew more rapidly than average funding costs. Banks with assets of $10 billion ~~(93.9%) higher, while gains on~~to $250 billion reported the largest annual increases in average asset ~~sales were $1.6 billion (31.7%) lower. Trading income fell $313 million (4.5%)~~yields (up 58 basis points) and average funding costs (up 40 basis points).

~~Noninterest Expense Growth Is Moderate~~Loan-Loss Provisions Increase Modestly

Banks set aside ~~$12~~$14 billion in loan-loss provisions during the ~~second~~fourth quarter, ~~up $273~~the highest level since fourth quarter 2012. Loan-loss provisions rose by $397.3 million ~~(2.3~~%(2.9%) from ~~the previous year. Slightly more than one-third~~fourth quarter 2017, with close to 40% of all ~~banks—36.5%—increased their loss~~banks reporting increases. Loan-loss provisions ~~versus second quarter 2016, while 32.2% reported lower provisions. Noninterest expenses totaled $108.6 billion, an increase~~as a percent of ~~$3.5 billion (3.3%)~~net operating revenue declined from 8.3% at year-end 2017 to 8.2%. ~~Expenses for salaries and employee benefits were $2.1 billion (4.3%) higher than a year earlier, as the total number of employees rose by 48,019 (2.3%).~~

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~~Noncurrent Loan Balances Decline Further~~Noninterest Income Expands From a Year Earlier

Noninterest income increased $1.6 billion (2.6%) from a year earlier, as all other noninterest income grew by $3.5 billion (11.9%) and net gains on sales of other assets rose by $393 million (120.3%). Despite the overall increase in noninterest income, trading revenue declined by $1.5 billion (25.9%) and servicing fees fell by $850.9 million (36.1%). Slightly more than half of all banks (53.6%) reported increases in noninterest income compared with the year-ago quarter.

Noninterest Expense Increases From Fourth Quarter 2017

Noninterest expense posted a modest increase of $194.9 million (0.2%) over the past 12 months. Increases in other noninterest expense (up $2.6 billion, or 5%) and salary and employee benefits (up $717 million, or 1.3%) were partially offset by a decline in premises and fixed asset expense (down $2.7 billion, or 22.5%). The ~~amount~~average assets per employee increased from $8.4 million in fourth quarter 2017 to $8.7 million.

Net Charge-Offs Decline 4.6% From a Year Ago

Banks charged off $12.6 billion in uncollectable loans during the quarter, a decline of $ 605.9 million (4.6%) from a year ago. This marks the first time since third quarter 2015 that net charge-offs registered a year-over-year decline. Credit card balances registered the largest annual dollar increase in net-charge offs (up $347.7 million, or 4.4%), while commercial and industrial loans ~~and leases that were noncurrent—90~~had the largest annual dollar decline (down $522.6 million, or 23.4%). The average net charge-off rate declined from 0.55% in fourth quarter 2017 to 0.50%.

Noncurrent Loan Rate Falls Below 1%

Noncurrent loan balances (90 days or more past due or in nonaccrual ~~status—fell for~~status) were $1 billion (1%) lower than the ~~28th time~~previous quarter. More than half of all banks (53.3%) reported lower noncurrent loan balances. The quarter-over-quarter decline was reflected in ~~the last 29 quarters, declining~~residential mortgages balances, which declined by ~~$8.4~~$2 billion ~~(6.7%~~(4.4%) ~~in the three months ended June 30. Noncurrent~~, and commercial and industrial loan balances, ~~declined in all major loan categories during the quarter. Noncurrent residential mortgage loans~~which fell by ~~$4.8~~$554.3 million (3.6%). Credit card balances continued to register the largest quarterly dollar increase, growing by $1.6 billion ~~(7.9%), while noncurrent C&I loans declined by $2.2 billion (9.5%~~(13.8%). The average noncurrent ~~loan~~ rate ~~fell from 1.34% to 1.23%~~was 0.99% during the current quarter, down 3 basis points from the ~~lowest~~previous quarter. This is the first time since second quarter 2007 that the noncurrent rate was below 1%.

Loan-Loss Reserves Increase From Third Quarter 2018

Loan-loss reserves totaled $124.7 billion at the end of the fourth quarter, an increase of $1 billion (0.8%) from third quarter ~~2007.~~

2018. The banking industry continued to build reserves, as loan-loss provisions of $14 billion exceeded net charge-offs of $12.6 billion. More than half of all banks (57.8%) reported a quarterly increase in loan-loss reserves. Banks ~~Shift Their Reserve Allocations~~

~~Total~~that itemize their loan-loss reserves ~~posted a modest ($197~~ million, 0.2%) decline during the second quarter. The industry’s coverage ratio of reserves to noncurrent loans and leases rose from 97.5% to 104.3%, the highest level since third quarter 2007. Banks(banks with assets greater than $1 billion ~~which account for 90%~~and representing 93% of ~~the industry’s loss reserves, increased their~~total industry assets) reported higher reserves for credit card losses ~~by $1.4 billion (4.3%), while reducing their reserves for commercial loan losses by $1.1 billion (3.3%~~(up $997.4 million, or 2.5%) and ~~their~~lower reserves for residential real estate ~~loan~~ losses ~~by $922~~(down $556 million, ~~(5.5%~~or 4.4%). After declining for the past nine consecutive quarters, itemized reserves for losses on commercial loans reported quarterly growth of $409 million (1.3%).

~~Retained Earnings Drive~~Equity Capital ~~Growth~~Increases From the Third Quarter

Equity capital increased by ~~$38.7~~$25.3 billion (2%(1.3%) during the ~~quarter.~~fourth quarter, led by accumulated other comprehensive income. Retained earnings ~~contributed $20~~rose by $70.8 billion ~~to the growth in capital, $322 million (1.6%~~(10.3%) ~~less than in second quarter 2016. Banks declared $28.3 billion in~~from a year ago. Declared dividends in the fourth quarter ~~up $5~~totaled $52.7 billion, ~~(21.4%) from~~ the ~~year-earlier quarter. Lower long-term interest rates contributed to an $8 billion improvement in accumulated other comprehensive income, which was reflected in~~highest level ever reported by the ~~equity capital increase.~~banking industry. At ~~the end of the quarter, 99.4%~~year-end 2018, 99.6% of all ~~FDIC-insured~~insured institutions, ~~representing 99.96%~~which account for 99.98% of total industry assets, met or exceeded the requirements for the well-capitalized ~~banks,~~category, as defined for Prompt Corrective Action purposes.

~~Banks Reduce~~ ~~Their Federal Reserve Bank Balances~~

~~Industry assets surpassed $17 trillion for the first time at the end of the second quarter, rising by $100.8 billion (0.6~~%) during the three months ended June 30. Banks reduced their balances at Federal Reserve banks by $102.4 billion (8%). They also reduced their investment securities by $15 billion (0.4%), as U.S. Treasury securities fell by $49.9 billion (9.7%), and mortgage-backed securities rose by $38 billion (1.9%). Securities held in available-for-sale accounts declined by $59 billion (9.7%), while securities in held-to-maturity accounts increased by $44 billion (4.7%). Assets in trading accounts increased by $18.7 billion (3.2%) during the quarter. The percentage of industry assets maturing or repricing in more than three years remained unchanged from the first quarter, at 35.4%. The all-time high level for this percentage—35.5%—occurred at the end of fourth quarter 2016.

~~The Annual Loan Growth Rate Slows for a Third Consecutive Quarter~~

~~Total loans and lease~~s increased by $161.2 billion (1.7%) during the second quarter. All major loan categories posted increases, led by residential mortgage loans (up $35.1 billion, 1.8%), credit card balances (up $23.6 billion, 3.1%), and C&I loans (up $22.1 billion, 1.1%). Unused loan commitments increased by $25.9 billion (0.4%). For the 12 months ended June 30, total loans and leases increased by $337.6 billion (3.7%), while unused loan commitments rose by $274.8 billion (3.9%). The 12-month growth rate for total loans and leases has slowed in each of the last three quarters. A year ago, the 12-month loan growth rate was 6.7%. The 12-month growth rate in unused loan commitments has slowed for six consecutive quarters. In 2015, unused commitments increased 6.6%.

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Total Assets Increase 1.5% During the Fourth Quarter

Total assets rose by $270.4 billion (1.5%) during the fourth quarter. Cash and balances due from depository institutions declined by $144.4 billion (7.9%) and total securities holdings grew by $93 billion (2.6%). U.S. Treasury securities increased $55.4 billion (11.2%) during the quarter, the largest quarterly dollar increase since fourth quarter 2014.

Total Loan and Lease Balances Rise 4.4% Over 12 Months

Total loan and lease balances were $213 billion (2.1%) higher compared with the previous quarter. All major loan categories registered quarterly increases. Commercial and industrial loans increased by $80.7 billion (3.9%), and consumer loans (including credit card balances) rose by $52.2 billion (3.1%). During the 12 months ended December 31, total loan and lease balances rose by $431.2 billion (4.4%), a slight increase from the 4% annual grow rate reported last quarter. All major loan categories reported year-over-year increases, led by commercial and industrial loans, which increased by $156.2 billion (7.8%), and consumer loans (including credit card balances), which rose by $64.9 billion (3.9%).

Deposits Increase 2.2% From the Previous Quarter

Total deposits increased by $292.6 billion (2.2%) from the third quarter, the largest quarterly dollar increase since fourth quarter 2012. Interest-bearing deposits grew by $296.5 billion (3.2%), while noninterest-bearing deposits fell by $ 5.4 billion (0.2%). Reliance on nondeposit liabilities declined by $47.5 billion (2.3%) from the previous quarter, as trade liabilities were reduced by $23.1 billion (8.9%) and other liabilities fell by $24.4 billion (6%).

The Number of ~~Banking Employees Rises 2.3% Over~~Banks on the ~~Past Year~~“Problem Bank List” Declines to 60

The number of ~~FDIC-insured commercial~~ banks ~~and savings institutions reporting financial results~~on the FDIC’s “Problem Bank List” declined from 71 to 60 at year-end 2018, the fewest since first quarter 2007. Total assets of problem banks fell from $53.3 billion to ~~5,787 in the second quarter, from 5,856 in the first quarter.~~$48.5 billion. During the ~~second~~fourth quarter, ~~three insured institutions failed, while 62~~two new charters were added, 70 institutions were absorbed by ~~mergers. No~~mergers, and there were no bank failures. For full-year 2018, eight new ~~reporters~~charters were added, ~~during the quarter. The number of~~259 institutions ~~on the FDIC’s Problem Bank List declined for a 25th consecutive quarter, from 112 to 105. This is the smallest number of problem banks since March 31, 2008,~~were absorbed by mergers, and is almost 90% below the peak of 888 at the end of March 2011. The number of full-time equivalent employees rose by 11,663 (0.6%) to 2,093,278 during the quarter, which was 48,019 higher than second quarter 2016 (2.3%). This is still 5.9% below the peak of 2,223,383 employees in first quarter 2007.there were no bank failures.

Critical Accounting Policies

The discussion contained in this Item 2 and other disclosures included within this report are based,, in part, on the Company’s audited December 31, ~~2016~~2018 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~~’sCompany’s significant accounting policies are described in the “Notes to Consolidated Financial Statements” accompanying the Company’s audited financial statements. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified the allowance for loan losses, the assessment of other-than-temporary impairment for investment securities and the assessment of goodwill to be the Company’s most critical accounting policies.

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Allowance for Loan Losses

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

For further discussion concerning the allowance for loan losses and the process of establishing specific reserves, see the section of thethe Annual Report on Form 10-K entitled “Asset Quality Review and Credit Risk Management” and “Analysis of the Allowance for Loan Losses”.

~~Table of Contents~~

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

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

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

Goodwill

Goodwill arose in connection with twothree acquisitions consummated in previous periods. Goodwill is tested annually for impairment or more often if conditions indicate a possible impairment. For the purposes of goodwill impairment testing, determination of the fair value of a reporting unit involves the use of significant estimates and assumptions. Impairment would arise if the fair value of a reporting unit is less than its carrying value. At ~~September 30, 2017,~~March 31, 2019, Company’s management has completed the goodwill impairment assessment and determined goodwill was not impaired. Actual future test results may differ from the present evaluation of impairment due to changes in the conditions used in the current evaluation.

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Non-GAAP Financial Measures

This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis. Management believes these non-GAAP financial measures provide useful information to both management and investors to analyze and evaluate the Company’s financial performance. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently. These non-GAAP disclosures should not be considered an alternative to the Company’s GAAP results. The following table reconciles the non-GAAP financial measures of net interest income and net interest margin on an FTE basis to GAAP. (dollars in thousands)

	Three Months Ended March 31,
	2019			2018
Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP:
Net interest income (GAAP)	$	10,970		$	10,186
Tax-equivalent adjustment ⁽¹⁾		293			316
Net interest income on an FTE basis (non-GAAP)		11,263			10,502
Average interest-earning assets	$	1,393,813		$	1,318,775
Net interest margin on an FTE basis (non-GAAP)		3.23	%		3.19	%

(1) Computed on a tax-equivalent basis using an incremental federal income tax rate of 21 percent, adjusted to reflect the effect of the tax-exempt interest income associated with owning tax-exempt securities and loans.

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Income Statement Review for the Three Months ended ~~September~~ 30March 31, 20179 and 20168

The following highlights a comparative discussion of the major components of net income and their impact for the three ~~month~~smonths ended ~~September 30, 2017~~March 31, 2019 and ~~2016:~~2018:

AVERAGE BALANCES AND INTEREST RATES

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

AVERAGE BALANCE SHEETS AND INTEREST RATES

Three Months Ended September 30,

2017

2016

Average

Revenue/

Yield/

Average

Revenue/

Yield/

balance

expense

rate

balance

expense

rate

ASSETS

(dollars in thousands)

Interest-earning assets

Loans 1

Commercial
$ 77,788 $ 920 4.73 % $ 88,265 $ 1,014 4.59 %
Agricultural
67,951 922 5.43 % 73,879 900 4.87 %
Real estate
623,214 6,756 4.34 % 555,002 6,131 4.42 %
Consumer and other
10,514 132 5.03 % 21,513 191 3.56 %

Total loans (including fees)
779,467 8,730 4.48 % 738,659 8,236 4.46 %

Investment securities

Taxable
275,498 1,558 2.26 % 259,212 1,425 2.20 %
Tax-exempt 2
230,249 1,862 3.23 % 249,400 2,045 3.28 %
Total investment securities
505,747 3,420 2.70 % 508,612 3,470 2.73 %

Interest bearing deposits with banks and federal funds sold
27,183 115 1.69 % 25,533 87 1.36 %

Total interest-earning assets
1,312,397 $ 12,265 3.74 % 1,272,804 $ 11,793 3.71 %

Noninterest-earning assets
49,366 55,732

TOTAL ASSETS
$ 1,361,763 $ 1,328,536

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

AVERAGE BALANCE SHEETS AND INTEREST RATES

	Three Months Ended March 31,

	2019							2018

	Average		Revenue/		Yield/			Average		Revenue/		Yield/
	balance		expense		rate			balance		expense		rate
ASSETS
(dollars in thousands)
Interest-earning assets
Loans 1
Commercial	$	84,182	$	1,120		5.32	%	$	73,424	$	868		4.73	%
Agricultural		81,216		1,284		6.32	%		68,557		968		5.65	%
Real estate		714,021		8,092		4.53	%		632,041		6,941		4.39	%
Consumer and other		16,686		205		4.90	%		8,827		112		5.08	%

Total loans (including fees)		896,105		10,701		4.78	%		782,849		8,889		4.54	%

Investment securities
Taxable		251,145		1,489		2.37	%		272,013		1,529		2.25	%
Tax-exempt 2		209,071		1,393		2.67	%		226,429		1,502		2.65	%
Total investment securities		460,216		2,882		2.50	%		498,442		3,031		2.43	%

Other interest-earning assets		37,492		238		2.53	%		37,484		193		2.06	%

Total interest-earning assets		1,393,813	$	13,821		3.97	%		1,318,775	$	12,113		3.67	%

Noninterest-earning assets		52,602							41,368

TOTAL ASSETS	$	1,446,415						$	1,360,143

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

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 21%.

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AVERAGE BALANCE SHEETS AND INTEREST RATES

Three Months Ended September 30,

2017

2016

Average

Revenue/

Yield/

Average

Revenue/

Yield/

balance

expense

rate

balance

expense

rate

LIABILITIES AND STOCKHOLDERS' EQUITY

(dollars in thousands)

Interest-bearing liabilities

Deposits

NOW, savings accounts and money markets
$ 712,550 $ 685 0.38 % $ 658,522 $ 325 0.20 %
Time deposits > $100,000
83,793 240 1.15 % 84,034 196 0.93 %
Time deposits < $100,000
113,112 244 0.86 % 123,648 233 0.75 %
Total deposits
909,455 1,169 0.51 % 866,204 754 0.35 %
Other borrowed funds
71,266 292 1.64 % 94,504 274 1.16 %

Total Interest-bearing liabilities
980,721 1,461 0.60 % 960,708 1,028 0.43 %

Noninterest-bearing liabilities

Demand deposits
200,934 188,419
Other liabilities
7,132 8,710

Stockholders' equity
172,976 170,699

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 1,361,763 $ 1,328,536

Net interest income
$ 10,804 3.29 % $ 10,765 3.38 %

Spread Analysis

Interest income/average assets
$ 12,265 3.60 % $ 11,793 3.55 %
Interest expense/average assets
$ 1,461 0.43 % $ 1,028 0.31 %
Net interest income/average assets
$ 10,804 3.17 % $ 10,765 3.24 %

AVERAGE BALANCE SHEETS AND INTEREST RATES

	Three Months Ended March 31,

	2019								2018

	Average		Revenue/			Yield/			Average		Revenue/			Yield/
	balance		expense			rate			balance		expense			rate
LIABILITIES AND STOCKHOLDERS' EQUITY
(dollars in thousands)
Interest-bearing liabilities
Deposits
NOW, savings accounts and money markets	$	786,677	$	1,517			0.77	%	$	721,246	$	830			0.46	%
Time deposits		213,970		842			1.57	%		195,073		531			1.09	%
Total deposits		1,000,647		2,359			0.94	%		916,319		1,362			0.59	%
Other borrowed funds		43,460		199			1.83	%		59,626		248			1.67	%

Total Interest-bearing liabilities		1,044,107		2,558			0.98	%		975,945		1,611			0.66	%

Noninterest-bearing liabilities
Demand deposits		220,155								206,726
Other liabilities		7,863								8,423

Stockholders' equity		174,290								169,049

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,446,415							$	1,360,143


Net interest income			$	11,263			3.23	%			$	10,502			3.19	%

Spread Analysis
Interest income/average assets	$	13,821		3.82	%				$	12,113		3.56	%
Interest expense/average assets	$	2,558		0.71	%				$	1,611		0.47	%
Net interest income/average assets	$	11,263		3.11	%				$	10,502		3.09	%

Net Interest Income

For the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, the Company's net interest margin adjusted for tax exempt income was ~~3.29%~~3.23% and ~~3.38%~~3.19%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended ~~September 30, 2017~~March 31, 2019 totaled ~~$10,152,000~~$10,970,000 compared to ~~$10,050,000~~$10,186,000 for the three months ended ~~September 30, 2016.~~March 31, 2018.

For the three months ended ~~September 30, 2017,~~March 31, 2019, interest income increased ~~$535,000,~~$1,731,000, or 5%15%, when compared to the same period in ~~2016.~~2018. The increase from ~~2016~~2018 was primarily attributable to ~~higher average balance~~increased loan volume and rates, offset in part by recognition of ~~loans.~~nonaccrual interest income in 2018. The ~~higher average balances of loans were~~increase in loan volume was due ~~primarily~~ to the Acquisition and a favorable ~~economic conditions~~lending environment in our market ~~areas.~~areas since March 31, 2018. Nonaccrual interest income recognized in the three months ended March 31, 2019 was $52,000 as compared to $282,000 for the same period in 2018. Loan interest rates increased in conjunction with general market interest rates, as the Federal Reserve Bank increased short term interest rate targets by 1.00% since March 31, 2018.

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Interest expense increased ~~$433,000,~~$947,000, or ~~42%~~59%, for the three months ended ~~September 30, 2017~~March 31, 2019 when compared to the same period in ~~2016.~~2018. The higher interest expense for the period is primarily attributable to higher rates on ~~core~~ deposits due to market interest rates and competitive pressures.

~~Table of Contents~~

Provision for Loan Losses

The ~~Company~~’sCompany’s provision for loan losses was ~~$57,000~~$98,000 and ~~$235,000~~$29,000 for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, respectively. ~~The decrease in the provision for loan losses was due primarily to an increase in specific reserves for one loan in 2016.~~ Net loan charge-offs (recoveries) were ~~$105,000~~$(30,000) and ~~$(81,000)~~$27,000 for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, respectively. ~~The increase net charge-offs related primarily to one commercial operating customer relationship.~~ While the current provision for loan losses are not related to agricultural loans, ~~Company management is seeing weakness in~~ the Iowa agricultural economy remains challenged as athe result of the current low grain ~~prices; however, initial crop yield reports have been favorable in the Company’s market area as of the end of the quarter.~~prices and potential tariff concerns on Iowa exports.

~~Noninterest~~ ~~Income and Expense~~

Noninterest income decreased $144,000 for the three months ended September 30, 2017 compared to the same period in 2016. The decrease in noninterest income is primarily due to a slowdown in the refinance of home loans held for sale resulting in lower gains on the sale of loans, offset in part by a 9% increase in wealth management income. The increase in wealth management income is primarily due to an revenue increases associated with an acquisition and higher revenues related to increases in assets under management, offset in part by lower one time estate fees. Exclusive of realized securities gains, noninterest income was 6% lower in the third quarter of 2017 compared to the same period in 2016.

~~Non~~interest expense increased $184,000 or 3% for the three months ended September 30, 2017 compared to the same period in 2016 primarily as a result of lower other real estate owned income and higher occupancy costs. The decrease in other real estate income was due to the continuing lower levels of other real estate owned. The higher occupancy costs were primarily related to an increase in property tax expense. The efficiency ratio was 52.42% for the third quarter of 2017 as compared to 50.71% in 2016.

~~Income Taxes~~

~~The provision for income taxes~~ expense for the three months ended September 30, 2017 and 2016 was $1,730,000 and $1,903,000, respectively, representing an effective tax rate of 31% and 33%, respectively. The lower effective tax rate than the expected tax rate of 35% for both periods is primarily due to tax-exempt interest income. The initial recording of a valuation allowance on a deferred tax asset resulted in a higher effective tax rate in 2016.

~~Table of Contents~~

~~Income Statement Review~~ ~~for the~~ ~~Nine~~ ~~Months ended~~ ~~September~~ 30~~, 2017 and 2016~~

~~The following highlights a comparative discussion of the major components of net income and their impact for the~~ ~~nine months ended September 30, 2017 and 2016:~~

~~AVERAGE BALANCES AND INTEREST RATES~~

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

AVERAGE BALANCE SHEETS AND INTEREST RATES

Nine Months Ended September 30,

2017

2016

Average

Revenue/

Yield/

Average

Revenue/

Yield/

balance

expense

rate

balance

expense

rate

ASSETS

(dollars in thousands)

Interest-earning assets

Loans 1

Commercial
$ 77,471 $ 2,613 4.50 % $ 94,121 $ 3,192 4.52 %
Agricultural
69,093 2,703 5.22 % 75,211 2,754 4.88 %
Real estate
612,845 19,620 4.27 % 528,179 17,595 4.44 %
Consumer and other
11,121 411 4.92 % 21,897 584 3.56 %

Total loans (including fees)
770,530 25,347 4.39 % 719,408 24,125 4.47 %

Investment securities

Taxable
271,913 4,637 2.27 % 262,604 4,393 2.23 %
Tax-exempt 2
241,160 5,875 3.25 % 253,688 6,335 3.33 %
Total investment securities
513,073 10,512 2.73 % 516,292 10,728 2.77 %

Interest bearing deposits with banks and federal funds sold
36,633 365 1.33 % 34,930 297 1.13 %

Total interest-earning assets
1,320,236 $ 36,224 3.66 % 1,270,630 $ 35,150 3.69 %

Noninterest-earning assets
49,268 54,989

TOTAL ASSETS
$ 1,369,504 $ 1,325,619

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

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

~~Table of Contents~~

AVERAGE BALANCE SHEETS AND INTEREST RATES

Nine Months Ended September 30,

2017

2016

Average

Revenue/

Yield/

Average

Revenue/

Yield/

balance

expense

rate

balance

expense

rate

LIABILITIES AND STOCKHOLDERS' EQUITY

(dollars in thousands)

Interest-bearing liabilities

Deposits

NOW, savings accounts and money markets
$ 717,946 $ 1,819 0.34 % $ 663,891 $ 965 0.19 %
Time deposits > $100,000
82,956 671 1.08 % 86,632 590 0.91 %
Time deposits < $100,000
115,646 714 0.82 % 125,745 704 0.75 %
Total deposits
916,548 3,204 0.47 % 876,268 2,259 0.34 %
Other borrowed funds
75,662 863 1.52 % 84,261 796 1.26 %

Total Interest-bearing liabilities
992,210 4,067 0.55 % 960,529 3,055 0.42 %

Noninterest-bearing liabilities

Demand deposits
200,020 190,176
Other liabilities
7,319 7,606

Stockholders' equity
169,955 167,308

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 1,369,504 $ 1,325,619

Net interest income
$ 32,157 3.25 % $ 32,095 3.37 %

Spread Analysis

Interest income/average assets
$ 36,224 3.53 % $ 35,150 3.54 %
Interest expense/average assets
$ 4,067 0.40 % $ 3,055 0.31 %
Net interest income/average assets
$ 32,157 3.13 % $ 32,095 3.23 %

~~Net Interest Income~~

~~For the~~ nine months ended September 30, 2017 and 2016, the Company's net interest margin adjusted for tax exempt income was 3.25% and 3.37%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the nine months ended September 30, 2017 totaled $30,100,000 compared to $29,877,000 for the nine months ended September 30, 2016.

~~For the~~ nine months ended September 30, 2017, interest income increased $1,235,000, or 4%, when compared to the same period in 2016. The increase from 2016 was primarily attributable to higher average balance of loans, offset in part by lower yields on loans. The higher average balances of loans were due primarily to favorable economic conditions in our market areas. The lower yields on loans were due primarily to competitive pressures.

~~Table of Contents~~

~~Interest~~ expense increased $1,012,000, or 33%, for the nine months ended September 30, 2017 when compared to the same period in 2016. The higher interest expense for the period is primarily attributable to higher rates on core deposits due to competitive pressures.

~~Provision for Loan Losses~~

~~The Company~~’s provision for loan losses was $1,222,000 and $441,000 for the nine months ended September 30, 2017 and 2016, respectively. The increase in the provision for loan losses was due primarily to the increase in the specific reserve for one commercial credit and growth in the loan portfolio. Net loan charge-offs (recoveries) were $589,000 and $(22,000) for the nine months ended September 30, 2017 and 2016, respectively. The increase in the net loan charge-offs were related primarily to commercial operating loans with construction contractors. While the current provision for loan losses are not related to agricultural loans, Company management is seeing weakness in the Iowa agricultural economy as a result of the current low grain prices; however, initial crop yield reports have been favorable in the Company’s market area as of the end of the quarter.

Noninterest Income and Expense

Noninterest income ~~decreased $63,000~~increased $162,000 for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 compared to the same period in ~~2016.~~2018. The ~~decrease~~increase in noninterest income is primarily due to ~~decreases in gain on sale of loans~~the Acquisition and ~~service fees, offset in part by an increase in security gains and other noninterest~~higher wealth management income. ~~The decrease in the gain on the sale of loans is primarily due to a slowdown in the refinance of home loans held for sale resulting in lower revenue.~~ The increase in other noninterest income is primarily due to the collection of $73,000 on a court judgement previously deemed uncollectible by First Bank prior to the Company’s acquisition in 2014. Exclusive of realized securities gains, noninterestwealth management income was ~~5% lower~~primarily related to growth in the assets under management, fueled by a growing equity market and new account relationships.

Noninterest expense increased $592,000 or 9% for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 compared to the same period in ~~2016.~~

~~Noninterest expense~~ ~~increased $504,000 or 3% for the nine months ended September 30, 2017 compared to the same period in 2016~~2018 primarily as a result of the Acquisition. Salaries and benefits was the largest component of the increase in noninterest expense which also includes normal salary and employee benefit increases, ~~and higher data processing costs. Data processing increases were due~~offset in part by a one-time $1,000 bonus paid to ~~increasing technology costs.~~full-time employees in 2018. The efficiency ratio was ~~53.16%~~57.8% for the ~~nine months ended September 30, 2017~~first quarter of 2019 as compared to ~~51.99%~~57.4% in ~~same period in 2016.~~2018.

Income Taxes

The provision for income taxes expense for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 was ~~$4,662,000~~$1,104,000 and ~~$5,087,000,~~$1,020,000, respectively, representing an effective tax rate of ~~30%~~21% and ~~30%~~20%, respectively. The lower than expected effective tax rate ~~than the expected income tax rate of 35%~~ for both periods is primarily due to tax-exempt interest income.

Balance Sheet Review

As of ~~September 30, 2017,~~March 31, 2019, total assets were ~~$1,364,940,000,~~$1,472,317,000, a ~~$1,513,000 decrease~~$16,630,000 increase compared to December 31, ~~2016.~~2018. The ~~decrease~~increase in assets, primarily interest bearing deposits, was ~~due~~funded primarily ~~to a decrease in cash and due from banks and securities available for sale, offset~~ by ~~an increase in loans.~~deposits.

Investment Portfolio

The ~~investment~~investment portfolio totaled ~~$506,610,000~~$455,554,000 as of ~~September 30, 2017,~~March 31, 2019, a decrease of ~~$9,469,000~~$3,418,000 from the December 31, ~~2016~~2018 balance of ~~$516,080,000.~~$458,971,000. The decrease in securities available-for-sale is primarily due to payments and maturities on the entire portfolio, offset in part by increases in the unrealized gain on the investment portfolio ~~was primarily due to sales, calls and maturities~~as market interest rates caused an increase in the fair value of ~~state and political subdivision bonds.~~the investment portfolio.

~~Table of Contents~~

On a quarterly basis, the investment portfolio is reviewed for other-than-temporary impairment. As of ~~September 30, 2017,~~March 31, 2019, gross unrealized losses of ~~$783,000,~~$1,802,000, are considered to be temporary in nature due to the interest rate environment of ~~2017~~2019 and other general economic factors. As a result of the Company’s favorable liquidity position, the Company does not have the intent to sell securities with an unrealized loss at the present time. In addition, management believes it is more likely than not that the Company will hold these securities until recovery of their fair value to cost basis and avoid considering present unrealized loss positions to be other-than-temporary.

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At ~~September 30, 2017,~~March 31, 2019, the Company’s investment securities portfolio included securities issued by ~~266~~249 government municipalities and agencies located within 2417 states with a fair value of ~~$243.4~~$214.6 million. At December 31, ~~2016,~~2018, the Company’s investment securities portfolio included securities issued by ~~286~~263 government municipalities and agencies located within 2516 states with a fair value of ~~$264.4~~$216.0 million. No one municipality or agency represents a concentration within this segment of the investment portfolio. The largest exposure to any one municipality or agency as of ~~September 30, 2017~~March 31, 2019 was ~~$4.4~~$3.9 million (approximately 2.0% of the fair value of the governmental municipalities and agencies) represented by the ~~Dubuque,~~West Des Moines, Iowa Community School District to be repaid by sales tax revenues and property taxes.

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

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The following table summarizes the total general obligation and revenue bonds in the ~~Company~~’sCompany’s investment securities portfolios as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 identifying the state in which the issuing government municipality or agency operates. (Dollars in thousands)

	2017				2016				2019				2018
			Estimated				Estimated				Estimated				Estimated
	Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value		Cost		Value

Obligations of states and political subdivisions:
General Obligation bonds:
Iowa	$	60,493	$	60,732	$	75,142	$	74,408	$	62,217	$	62,304	$	59,935	$	59,481
Texas		12,188		12,359		11,091		11,065		10,803		10,880		11,822		11,803
Pennsylvania		8,720		8,795		8,728		8,654		9,171		9,235		9,167		9,144
Washington		6,640		6,609		7,221		6,957		6,878		6,842		6,905		6,762
Other (2017: 16 states; 2016: 17 states)		24,150		24,601		28,064		28,258
Other (2019: 12 states; 2018: 12 states)										16,966		17,118		17,138		17,198

Total general obligation bonds	$	112,191	$	113,096	$	130,246	$	129,342	$	106,035	$	106,379	$	104,967	$	104,388

Revenue bonds:
Iowa	$	118,886	$	120,175	$	126,750	$	126,964	$	101,017	$	100,873	$	104,589	$	103,925
Other (2017: 9 states; 2016: 10 states)		10,073		10,167		8,208		8,142
Other (2019: 6 states; 2018: 7 states)										7,281		7,306		7,691		7,642

Total revenue bonds	$	128,959	$	130,342	$	134,958	$	135,106	$	108,298	$	108,179	$	112,280	$	111,567

Total obligations of states and political subdivisions	$	241,150	$	243,438	$	265,204	$	264,448	$	214,333	$	214,558	$	217,247	$	215,955

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As of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, the revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as community school facilities, college and university dormitory facilities, water utilities and electrical utilities. The revenue bonds are to be paid from primarily 5 revenue sources. The revenue sources that represent 5% or more, individually, as a percent of the total revenue bonds are summarized in the following table. (in thousands)

	2017				2016				2019				2018
			Estimated				Estimated				Estimated				Estimated
	Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value		Cost		Value

Revenue bonds by revenue source
Sales tax	$	72,894	$	73,917	$	77,586	$	78,085	$	58,482	$	58,648	$	60,422	$	60,322
Water		14,139		14,218		11,283		11,296		13,856		13,767		13,863		13,644
College and universities, primarily dormitory revenues		10,457		10,538		14,105		13,907		7,610		7,593		8,183		8,139
Leases		9,062		9,098		9,106		8,960		9,112		9,080		8,958		8,861
Electric		8,428		8,545		8,446		8,459
Other		13,979		14,026		14,432		14,399		19,238		19,091		20,854		20,601

Total revenue bonds by revenue source	$	128,959	$	130,342	$	134,958	$	135,106	$	108,298	$	108,179	$	112,280	$	111,567

Loan Portfolio

The l~~oan~~loan portfolio, net of the allowance for loan losses, totaled ~~$764,229,000, $768,208,000~~$886,557,000, $890,461,000 and ~~$752,182,000~~$772,495,000 as of ~~September 30, 2017, June 30, 2017 and~~March 31, 2019, December 31, ~~2016,~~2018 and March 31, 2018, respectively. Loan demand has moderated since year end. The increase in the loan portfolio since ~~December~~March 31, ~~2016~~2018 is primarily due to ~~steady loan demand, in~~ the ~~Ames and Des Moines markets. Loan demand has softened in the third quarter of 2017.~~Acquisition.

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Deposits

Deposits totaled $~~1,114,538,000, $1,126,771,000~~$1,252,514,000, $1,221,084,000 and ~~$1,109,409,000~~$1,170,424,000 as of ~~September 30, 2017, June 30, 2017 and~~March 31, 2019, December 31, ~~2016,~~2018 and March 31, 2018, respectively. The increase in deposits since December 31, ~~2016~~2018 was primarily due to ~~increases~~public fund balances in ~~public funds~~ NOW ~~account balances.~~accounts. The ~~decrease~~increase in deposits since ~~June 30, 2017 was~~March 31, 2018 is primarily due to ~~decreases in retail NOW and public funds money market account balances.~~the Acquisition.

S~~ecurities~~Securities Sold Under Agreements to Repurchase

S~~ecurities~~Securities sold under agreements to repurchase totaled ~~$39,001,000~~$32,397,000 as of ~~September 30, 2017,~~March 31, 2019, a decrease of ~~$19,336,000,~~$8,278,000, or ~~33%~~20%, from the December 31, ~~2016~~2018 balance of ~~$58,337,000.~~$40,674,000. The decrease was due primarily to a decrease in ~~primarily due to withdrawals from three commercial accounts.~~the balances of one existing customer.

Off-Balance Sheet Arrangements

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, ~~2016.~~2018.

Asset Quality Review and Credit Risk Management

The ~~Company~~’sCompany’s credit risk is historically centered in the loan portfolio, which on ~~September 30, 2017~~March 31, 2019 totaled ~~$764,229,000~~$886,557,000 compared to ~~$752,182,000~~$890,461,000 as of December 31, ~~2016.~~2018. Net loans comprise ~~56%~~60% of total assets as of ~~September 30, 2017.~~March 31, 2019. 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~~an agreement and to quantify and manage credit risk on a portfolio basis. The Company’s level of problem loans (consisting of nonaccrual loans and loans past due 90 days or more) as a percentage of total loans was ~~0.62%~~0.38% at ~~September 30, 2017,~~March 31, 2019, as compared to ~~0.67%~~0.38% at December 31, ~~2016~~2018 and ~~0.40%~~0.55% at ~~September 30, 2016.~~March 31, 2018. The Company’s level of problem loans as a percentage of total loans at ~~September 30, 2017~~March 31, 2019 of ~~0.62%~~0.38% is lower than the ~~Company’s~~Iowa State Average peer group ~~(339 bank holding companies with assets~~ of ~~$1 billion to $3 billion) of 0.72%~~FDIC insured institutions as of ~~June 30, 2017.~~December 31, 2018, of 0.58%.

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I~~mpaired~~

Impaired loans, net of specific reserves, totaled ~~$3,907,000~~$2,980,000 as of ~~September 30, 2017~~March 31, 2019 and have ~~decreased $450,000~~increased $247,000 as compared to the impaired loans of ~~$4,357,000~~$2,733,000 as of December 31, ~~2016.~~2018.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payment of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The Company applies its normal loan review procedures to identify loans that should be evaluated for impairment.

The Company had TDRs of $~~3,098,000~~$2,662,000 as of ~~September 30, 2017,~~March 31, 2019, all of which were included in impaired and nonaccrual loans. The Company had TDRs of ~~$3,672,000~~$2,350,000 as of December 31, ~~2016,~~2018, all of which were included in impaired and nonaccrual loans.

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

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For TDRs that were on nonaccrual status before the modification, a specific reserve may already be recorded. In periods subsequent to modification, the Company will continue to evaluate all TDRs for possible impairment and, as necessary, recognize impairment through the allowance. There were no charge-offs related to TDRs for the three months ended March 31, 2019 and 2018. No additional specific reserves were provided for the three months ended March 31, 2019. A ~~$530,000~~$12,000 specific reserve was established in the ~~nine~~three months ended ~~September 30, 2017 on a TDR loan. The Company had $257,000 of net charge-offs related to TDRs for the nine months ended September 30, 2017 and none for the same period in 2016.~~March 31, 2018.

Loans past due 90 days or more that are still accruing interest are reviewed no less frequently than quarterly to determine if there iscontinues to be a strong reason that the credit should not be placed on non-accrual. As of ~~September 30, 2017,~~March 31, 2019, non-accrual loans totaled ~~$4,726,000~~$3,339,000 and there ~~was one loan in the amount~~were $50,000 of ~~$81,000~~loans past due 90 days and still accruing. This compares to non-accrual loans of ~~$5,077,000~~$3,234,000 and loans past due 90 days and still accruing totaled ~~$22,000~~$150,000 as of December 31, ~~2016.~~2018. Other real estate owned totaled ~~$385,000~~$565,000 and $830,000 as of ~~September 30, 2017~~March 31, 2019 and ~~$546,000 as of~~ December 31, ~~2016.~~2018, respectively.

The agricultural real estate and agricultural operating loan portfolio classifications remain inelevated as a ~~weakened position.~~result of lower grain prices. The watch and special mention loans in these categories totaled ~~$44,046,000~~$51,422,000 as of ~~September 30, 2017~~March 31, 2019 as compared to ~~$38,492,000~~$47,808,000 as of December 31, ~~2016.~~2018. The substandard loans in these categories totaled ~~$2,582,000~~$10,633,000 as of ~~September 30, 2017~~March 31, 2019 as compared to ~~$2,399,000~~$9,592,000 as of December 31, ~~2016.~~2018. The ~~increase in these categories is primarily due to~~Iowa agricultural economy remains challenged as the ~~impact on agricultural loans~~result of the current low grain prices ~~mitigated by indications of favorable yields in 2017.~~and tariff concerns on Iowa exports.

The allowance for loan losses as a percentage of outstanding loans as of ~~September 30, 2017~~March 31, 2019 was ~~1.44%~~1.31%, as compared to ~~1.38%~~1.30% at December 31, ~~2016.~~2018. The allowance for loan losses totaled ~~$11,140,000~~$11,812,000 and ~~$10,507,000~~$11,684,000 as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, respectively. Net charge-offs (recoveries) of loans totaled ~~$589,000~~$(30,000) and ~~$(22,000)~~$27,000 for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, respectively.

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

Liquidity and Capital Resources

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

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

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As of ~~September 30, 2017,~~March 31, 2019, the level of liquidity and capital resources of the Company remain at a satisfactory level. Management believes that the Company's liquidity sources will be sufficient to support its existing operations for the foreseeable future.

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

●	Review of the Company’s Current Liquidity Sources

●	~~Review of Statements of Cash Flows~~

●	~~Company Only Cash Flows~~

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

●	~~Capital Resources~~

~~Review of the Company’s Current Liquidity Sources~~

~~Liquid assets of cash~~ and due from banks and interest-bearing deposits in financial institutions as of September 30, 2017 and December 31, 2016 totaled $58,574,000 and $61,215,000, respectively, and provide an adequate level of liquidity given current economic conditions.

~~Other sources of~~ liquidity available to the Banks as of September 30, 2017 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $183,824,000, with $19,000,000 of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $108,571,000, with no outstanding federal fund purchase balances as of September 30, 2017. The Company had securities sold under agreements to repurchase totaling $39,001,000 and term repurchase agreements of $13,000,000 as of September 30, 2017.

~~Total investments as of~~ September 30, 2017 were $506,610,000 compared to $516,080,000 as of December 31, 2016. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of September 30, 2017.

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

Review of Statements of Cash Flows

●

~~Net c~~ash provided by operating activities for the nine months ended September 30, 2017 totaled $13,553,000 compared to $14,585,000 for the nine months ended September 30, 2016. The decrease in cash provided by operating activities was primarily due to lower net income.

~~Net~~ cash used in investing activities for the nine months ended September 30, 2017 was $4,184,000 compared to $14,181,000 for the nine months ended September 30, 2016. The decrease of $9,997,000 in cash used in investing activities was primarily due to a net decrease in the change in the loan portfolio of $26,204,000, offset in part by lower levels of proceeds from the sale of securities of $6,981,000 and a net increase in the change in the interest bearing deposits.

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~~Net cash~~ used in financing activities for the nine months ended September 30, 2017 totaled $15,759,000 compared to $3,105,000 for the nine months ended September 30, 2016. The change of $12,654,000 in net cash used in financing activities was primarily due to a decrease in securities sold under agreements to repurchase in 2017 of $19,336,000 as compared to a decrease of $4,432,000 in 2016 and a decrease in proceeds from short-term FHLB borrowings of $15,500,000, offset in part by an increase in deposits in 2017 of $5,129,000 as compared to a decrease of $12,358,000 in 2016. As of September 30, 2017, the Company did not have any external debt financing, off-balance sheet financing arrangements, or derivative instruments linked to its stock.

Company Only Cash Flows

●

~~The Company~~’s liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. The Banks provide adequate liquidity to pay the Company’s expenses and stockholder dividends. Dividends paid by the Banks to the Company amounted to $7,655,000 and $6,825,000 for the nine months ended September 30, 2017 and 2016, respectively. Various federal and state statutory provisions limit the amounts of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements, which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order. The quarterly dividend declared by the Company increased to $0.22 per share in 2017 from $0.21 per share in 2016.

~~The Company, on an unconsolidated basis, has interest bearing deposits totaling $13,287,000 as of September 30, 2017 that are presently available to provide additional liquidity to the Banks.~~

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

●

No other material capital expenditures or material changes in the capital resource mix are anticipated at this time. The primary cash flow uncertainty would be a sudden decline in deposits causing the Banks to liquidate securities. Historically, the Banks have maintained an adequate level of short-term marketable investments to fund the temporary declines in deposit balances. There are no known trends in liquidity and cash flow needs as of September 30, 2017 that are of concern to management.

Capital Resources

~~The Company~~’s total stockholders’ equity as of September 30, 2017 totaled $173,329,000 and was $8,224,000 higher than the $165,105,000 recorded as of December 31, 2016. The increase in stockholders’ equity was primarily due to net income and an increase in accumulated other comprehensive income, reduced by dividends declared. The increase in other comprehensive income is created by lower market interest rates on the longer end of the interest yield curve compared to December 31, 2016, which resulted in higher fair values in the securities available-for-sale portfolio. At September 30, 2017 and December 31, 2016, stockholders’ equity as a percentage of total assets was 12.70% and 12.08%, respectively. The capital levels of the Company exceed applicable regulatory guidelines as of September 30, 2017.

Review of the Company’s Current Liquidity Sources

Liquid assets of cash and due from banks and interest-bearing deposits in financial institutions as of March 31, 2019 and December 31, 2018 totaled $82,871,000 and $56,442,000, respectively, and provide an adequate level of liquidity given current economic conditions.

Other sources of liquidity available to the Banks as of March 31, 2019 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $197,066,000, with $2,000,000 of outstanding FHLB advances. Federal funds borrowing capacity at correspondent banks was $108,739,000, with no outstanding federal fund purchase balances as of March 31, 2019. The Company had securities sold under agreements to repurchase totaling $32,397,000 as of March 31, 2019.

Total investments as of March 31, 2019 were $455,554,000 compared to $458,971,000 as of December 31, 2018. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of March 31, 2019.

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

Review of Statements of Cash Flows

Net cash provided by operating activities for the three months ended March 31, 2019 totaled $6,284,000 compared to $6,353,000 for the three months ended March 31, 2018. The cash flow from operations in 2019 is comparable to the same period in 2018.

Net cash used in investing activities for the three months ended March 31, 2019 was $19,679,000 compared to $25,859,000 for the three months ended March 31, 2018. The decrease of $6,180,000 in cash used in investing activities was primarily due to a lower level of purchases of investments; greater maturities and calls of investments; and a decrease in loan balances; offset in part by higher balances in interest bearing deposits in financial institutions.

Net cash provided by financing activities for the three months ended March 31, 2019 totaled $7,144,000 compared to $15,594,000 for the three months ended March 31, 2018. The decrease in cash provided by financing activities was $8,450,000. The decrease was primarily due to smaller increases in deposit balances and larger decreases in repurchase balances; offset in part by a lessor amount of repayments on FHLB advances. As of March 31, 2019, the Company did not have any external debt financing, off-balance sheet financing arrangements, or derivative instruments linked to its stock.

Company Only Cash Flows

The Company’s liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. The Banks provide adequate liquidity to pay the Company’s expenses and stockholder dividends. Dividends paid by the Banks to the Company amounted to $3,198,000 and $2,570,000 for the three months ended March 31, 2019 and 2018, respectively. Various federal and state statutory provisions limit the amounts of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements, which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order. The quarterly dividend declared by the Company increased to $0.24 per share in 2019 from $0.23 per share in 2018.

The Company, on an unconsolidated basis, has interest bearing deposits totaling $14,671,000 as of March 31, 2019 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

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Capital Resources

The Company’s total stockholders’ equity as of March 31, 2019 totaled $177,777,000 and was $4,912,000 higher than the $172,865,000 recorded as of December 31, 2018. The increase in stockholders’ equity was primarily due to net income and an increase in other comprehensive income, offset in part by dividends declared. The increase in other comprehensive income is created by lower market interest rates compared to December 31, 2018, which resulted in higher fair values in the securities available-for-sale portfolio. At March 31, 2019 and December 31, 2018, stockholders’ equity as a percentage of total assets was 12.07% and 11.88%, respectively. The capital levels of the Company exceed applicable regulatory guidelines as of March 31, 2019.

Forward-Looking Statements and Business Risks

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The Company's market risk is comprised primarily of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk results from the changes in market interest rates which may adversely affect the Company's net interest income. Management continually develops and applies strategies to mitigate this risk. Management does not believe that the Company's primary market risk exposure and how it has been managed year-to-date in 2019 changed significantly when compared to 2018.

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~~Forward-Looking Statements and Business Risks~~

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

~~Item 3.~~ ~~Quantitative and Qualitative Disclosures About Market Risk~~

~~The Company's market risk is comprised primarily of interest rate risk arising from its core banking~~ activities of lending and deposit taking. Interest rate risk results from the changes in market interest rates which may adversely affect the Company's net interest income. Management continually develops and applies strategies to mitigate this risk. Management does not believe that the Company's primary market risk exposure and how it has been managed year-to-date in 2017 changed significantly when compared to 2016.

Item 4.

Controls and Procedures

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

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

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

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

~~Table of Contents~~

PART II.

OTHER INFORMATION

Item 1.	Legal Proceedings

	Not applicable

~~Not applicable~~

~~Item 1.A~~.Item 1.A.

Risk Factors

~~None.~~

~~Item 2.~~

~~Unregistered Sales of Equity Securities and Use of Proceeds~~

In November, 2016, the Company approved a Stock Repurchase Plan which provided for the repurchase of up to 100,000 shares of the Company’s common stock. As of September 30, 2017, there were 100,000 shares remaining to be purchased under the plan.

The following table provides information with respect to purchase made by or on behalf of the Company or any “affiliated purchases” (as defined in rule 10b-18(a)(3) under the Securities Exchange Act ~~of 1934), of the Company’s common stock during the three months ended September 30, 2017.~~

~~Total~~

~~Number~~

~~Maximum~~

~~of Shares~~

~~Number of~~

~~Purchased as~~

~~Shares that~~

~~Total~~

~~Part of~~

~~May Yet Be~~

~~Number~~

~~Average~~

~~Publicly~~

~~Purchased~~

~~of Shares~~

~~Price Paid~~

~~Announced~~

~~Under~~

~~Period~~

~~Purchased~~

~~Per Share~~

~~Plans~~

~~The Plan~~

~~July 1, 2017 to July 31, 2017~~

~~100,000~~

~~August 1, 2017 to August 31, 2017~~

~~100,000~~

~~September 1, 2017 to September 30, 2017~~

~~100,000~~

~~Total~~

None.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

In November, 2018, the Company approved a Stock Repurchase Plan which provided for the repurchase of up to 100,000 shares of the Company’s common stock. As of March 31, 2019, there were 31,909 shares remaining to be purchased under the plan.

Table of Contents

The following table provides information with respect to purchase made by or on behalf of the Company or any “affiliated purchases” (as defined in rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended March 31, 2019.

Total

Number

Maximum

of Shares

Number of

Purchased as

Shares that

Total

Part of

May Yet Be

Number

Average

Publicly

Purchased

of Shares

Price Paid

Announced

Under

Period

Purchased

Per Share

Plans

The Plan

January 1, 2019 to January 31, 2019

31,034

25.43

31,034

51,358

February 1, 2019 to February 28, 2019

19,449

25.57

19,449

31,909

March 1, 2019 to March 31, 2019

31,909

Total

50,483

Item 3.	Defaults Upon Senior Securities

	Not applicable

~~Not applicable~~

Item 4.

Mine Safety Disclosures

Not applicable

~~Table of Contents~~

Item 5.	Other information

	Not applicable

~~Not applicable~~

Item 6.

Exhibits

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

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

~~31.1~~

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

~~31.2~~

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

~~32.1~~

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

~~32.2~~

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

101.INS

XBRL Instance Document (1)

101.SCH

XBRL Taxonomy Extension Schema Document (1)

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document (1)

101.LAB

XBRL Taxonomy Extension Label Linkbase Document (1)

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document (1)

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document (1)

~~101.LAB~~

~~XBRL Taxonomy Extension Label Linkbase Document (1)~~

~~101.PRE~~

~~XBRL Taxonomy Extension Presentation Linkbase Document (1)~~

1~~01.DEF~~

~~XBRL Taxonomy Extension Definition Linkbase Document (1)~~

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

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

Table of Contents

SIGNATURES

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

~~AMES NATIONAL CORPORATION~~

~~DATE:~~ ~~November 8, 2017~~

AMES NATIONAL CORPORATION

~~By:~~

~~/s/ Thomas H. Pohlman~~

~~Thomas H. Pohlman,~~

DATE: May 7, 2019	By: /s/ John P. Nelson

	John P. Nelson, Chief Executive Officer and President


	~~By:~~	~~/s/ John P. Nelson~~

	~~John P. Nelson, Chief Financial Officer and Executive Vice President~~

~~Table of Contents~~

~~EXHIBIT INDEX~~

~~The following exhibits are filed herewith:~~

~~Exhibit No.~~

~~Description~~

~~-----------~~

~~-------------------------------------------------------------------------------------------~~

~~31.1~~

~~Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002~~

~~31.2~~

~~Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002~~

~~32.1~~

~~Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350~~

~~32.2~~

~~Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350~~

~~101.INS~~

~~XBRL Instance Document (1)~~

~~101.SCH~~

~~XBRL Taxonomy Extension Schema Document (1)~~

~~101.CAL~~

~~XBRL Taxonomy Extension Calculation Linkbase Document (1)~~

~~101.LAB~~

~~XBRL Taxonomy Extension Label Linkbase Document (1)~~

~~101.PRE~~

~~XBRL Taxonomy Extension Presentation Linkbase Document (1)~~

~~101.DEF~~

~~XBRL Taxonomy Extension Definition Linkbase Document (1)~~

53John L. Pierschbacher. Chief Financial Officer

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2017		2016			2017			2016
Proceeds from sales of securities available-for-sale	$	933	$	5,852		$	11,757		$	18,738
Gross realized gains on securities available-for-sale		38		66			501			303
Gross realized losses on securities available-for-sale		-		(1	)		(2	)		(7	)
Tax provision applicable to net realized gains on securities available-for-sale		14		29			175			110

	Nine Months Ended September 30,
	2017				2016
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no specific reserve recorded:
Real estate - construction	$	-	$	-	$	-	$	31
Real estate - 1 to 4 family residential		535		27		438		1
Real estate - commercial		648		-		465		22
Real estate - agricultural		-		-		-		-
Commercial		1,457		3		39		-
Agricultural		-		-		11		-
Consumer and other		60		-		66		6
Total loans with no specific reserve:		2,700		30		1,019		60

With an allowance recorded:
Real estate - construction		16		2		-		-
Real estate - 1 to 4 family residential		162		-		663		5
Real estate - commercial		-		-		26		-
Real estate - agricultural		-		-		-		-
Commercial		2,193		-		732		2
Agricultural		-		-		-		-
Consumer and other		15		1		1		-
Total loans with specific reserve:		2,386		3		1,422		7

Total
Real estate - construction		16		2		-		31
Real estate - 1 to 4 family residential		697		27		1,101		6
Real estate - commercial		648		-		491		22
Real estate - agricultural		-		-		-		-
Commercial		3,650		3		771		2
Agricultural		-		-		11		-
Consumer and other		75		1		67		6

	$	5,086	$	33	$	2,441	$	67