Ameriana Bancorp (ASBI) 10-Q 2012 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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, 2012

OR

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

For the transition period from             to            

Commission File Number: 0-18392

AMERIANA BANCORP

(Exact name of registrant as specified in its charter)

Indiana	35-1782688
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
2118 Bundy Avenue, New Castle, Indiana	47362-1048
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (765) 529-2230

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (l) 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 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, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “ accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	x

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

At November 8, 2012, the registrant had 2,988,952 shares of its common stock outstanding.

AMERIANA BANCORP

Table of Contents

		Page No.
Part I. Financial Information
Item 1.	Financial Statements (Unaudited)		3
	Consolidated Condensed Balance Sheets at September 30, 2012 and December 31, 2011		3
	Consolidated Condensed Statements of Income for the Three and Nine Months Ended September 30, 2012 and 2011		4
	Consolidated Condensed Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011		5
	Consolidated Condensed Statement of Shareholders’ Equity for the Nine Months Ended September 30, 2012		6
	Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011		7
	Notes to Consolidated Condensed Financial Statements		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3.	Quantitative and Qualitative Disclosure about Market Risk		43
Item 4.	Controls and Procedures		43
Part II. Other Information
Item 1.	Legal Proceedings		43
Item 1A.	Risk Factors		44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		44
Item 3.	Defaults upon Senior Securities		44
Item 4.	Mine Safety Disclosures		44
Item 5.	Other Information		44
Item 6.	Exhibits		44
Signatures			45

(2)

PART I - FINANCIAL INFORMATION

ITEM I - FINANCIAL STATEMENTS

Ameriana Bancorp

Consolidated Condensed Balance Sheets

(In thousands, except share data)

	September 30, 2012 (Unaudited)			December 31, 2011
Assets
Cash on hand and in other institutions	$	6,307		$	6,204
Interest-bearing demand deposits		18,415			3,505
Cash and cash equivalents		24,722			9,709
Interest-bearing time deposits		5,704			—
Investment securities available for sale		44,266			43,847
Loans held for sale		197			252
Loans, net of allowance for loan losses of $4,236 and $4,132		308,928			312,509
Premises and equipment		14,536			14,650
Stock in Federal Home Loan Bank		4,472			4,472
Goodwill		656			656
Cash value of life insurance		26,826			26,248
Other real estate owned		7,865			7,545
Other assets		9,662			9,903
Total assets	$	447,834		$	429,791
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Noninterest-bearing	$	52,383		$	40,197
Interest-bearing		305,539			297,053
Total deposits		357,922			337,250
Borrowings		45,810			49,810
Drafts payable		1,506			2,532
Other liabilities		6,406			5,694
Total liabilities		411,644			395,286
Commitments and contingencies
Shareholders’ equity
Preferred stock—5,000,000 shares authorized and unissued		—			—
Common stock, $1.00 par value
Authorized 15,000,000 shares
Issued – 3,213,952 shares		3,214			3,214
Outstanding – 2,988,952 shares
Additional paid-in capital		1,052			1,051
Retained earnings		34,045			32,871
Accumulated other comprehensive income		877			367
Treasury stock at cost – 225,000 shares		(2,998	)		(2,998	)
Total shareholders’ equity		36,190			34,505
Total liabilities and shareholders’ equity	$	447,834		$	429,791

See notes to consolidated condensed financial statements

(3)

Ameriana Bancorp

Consolidated Condensed Statements of Income

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September  30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Interest Income
Interest and fees on loans	$	4,090		$	4,341		$	12,538		$	13,175
Interest on mortgage-backed securities		209			272			684			863
Interest on investment securities		52			15			144			85
Other interest and dividend income		57			45			156			139
Total interest income		4,408			4,673			13,522			14,262
Interest Expense
Interest on deposits		564			802			1,845			2,522
Interest on borrowings		383			385			1,157			1,257
Total interest expense		947			1,187			3,002			3,779
Net Interest Income		3,461			3,486			10,520			10,483
Provision for loan losses		255			255			890			870
Net Interest Income After Provision for Loan Losses		3,206			3,231			9,630			9,613
Other Income
Other fees and service charges		604			578			1,718			1,577
Brokerage and insurance commissions		377			380			1,169			1,153
Net realized and recognized gains on available-for-sale investment securities		—			206			89			706
Gains on sales of loans and servicing rights		73			62			339			181
Net loss from sales and write-downs of other real estate owned		(6	)		(487	)		(177	)		(1,142	)
Other real estate owned income		72			290			212			648
Increase in cash value of life insurance		187			208			577			632
Other		18			71			30			191
Total other income		1,325			1,308			3,957			3,946
Other Expense
Salaries and employee benefits		2,240			2,360			6,761			7,120
Net occupancy expense		393			400			1,202			1,240
Furniture and equipment expense		201			197			572			629
Legal and professional fees		63			82			373			371
FDIC insurance premiums and assessments		148			145			441			505
Data processing expense		211			216			591			600
Printing and office supplies		66			58			211			188
Marketing expense		110			90			283			288
Other real estate owned expense		29			305			210			822
Other		453			374			1,324			1,175
Total other expense		3,914			4,227			11,968			12,938
Income Before Income Taxes		617			312			1,619			621
Income tax (benefit)		152			14			356			(68	)
Net Income	$	465		$	298		$	1,263		$	689
Basic Earnings Per Share	$	0.16		$	0.10		$	0.42		$	0.23
Diluted Earnings Per Share	$	0.16		$	0.10		$	0.42		$	0.23
Dividends Declared Per Share	$	0.01		$	0.01		$	0.03		$	0.03

See notes to consolidated condensed financial statements

(4)

Ameriana Bancorp

Consolidated Condensed Statements of Comprehensive Income

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September  30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Net Income	$	465	$	298	$	1,263	$	689
Unrealized appreciation on available-for-sale securities, net of taxes of $130 and $306 for the three months ended September 30, 2012 and September 30, 2011, respectively, and net of taxes of $293 and $420 for the nine months ended September 30, 2012 and September 30, 2011, respectively		253		594		569		815
Less: reclassification adjustment for realized gains included in net income, net of taxes of $70 for the three months ended September 30, 2011 and net of taxes of $30 and $240 for the nine months ended September 30, 2012 and September 30, 2011, respectively		—		136		59		466
Other comprehensive income		253		458		510		349
Comprehensive Income	$	718	$	756	$	1,773	$	1,038

See notes to consolidated condensed financial statements

(5)

Ameriana Bancorp

Consolidated Condensed Statement of Shareholders’ Equity

For the Nine Months Ended September 30, 2012

(In thousands, except per share data)

(Unaudited)

	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income		Treasury Stock			Total
Balance at December 31, 2011	$	3,214	$	1,051	$	32,871		$	367	$	(2,998	)	$	34,505
Net Income		—		—		1,263			—		—			1,263
Other comprehensive income		—		—		—			510		—			510
Share-based compensation		—		1		—			—		—			1
Dividends declared ($0.03 per share)		—		—		(89	)		—		—			(89	)
Balance at September 30, 2012	$	3,214	$	1,052	$	34,045		$	877	$	(2,998	)	$	36,190

See notes to consolidated condensed financial statement.

(6)

Ameriana Bancorp

Consolidated Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2012			2011
Operating Activities
Net income	$	1,263		$	689
Items not requiring (providing) cash
Provision for losses on loans		890			870
Depreciation and amortization		1,045			937
Increase in cash value of life insurance		(577	)		(631	)
Gain from sale of available-for-sale securities		(89	)		(706	)
Loss on sale or write-down of other real estate owned		177			1,142
Mortgage loans originated for sale		(12,925	)		(7,251	)
Proceeds from sales of mortgage loans originated for sale		13,151			6,899
Gains on sales of mortgage loans and servicing rights		(339	)		(181	)
Increase in accrued interest payable		368			478
Other adjustments		(180	)		1,725
Net cash provided by operating activities		2,784			3,971
Investing Activities
Purchase of securities		(10,064	)		(42,830	)
Proceeds/principal from the sale of securities		4,850			38,766
Purchase of FDIC insured bank certificates of deposit		(5,704	)		—
Principal collected on mortgage-backed securities		5,366			3,222
Net change in loans		1,023			9,213
Proceeds from sales of other real estate owned		1,185			2,561
Net purchases and construction of premises and equipment		(615	)		(354	)
Proceeds from stock repurchased by Federal Home Loan Bank		—			629
Other investing activities		1			—
Net cash (used) provided by investing activities		(3,958	)		11,207
Financing Activities
Net change in demand and savings deposits		28,640			15,064
Net change in brokered certificates of deposit		—			(1,989	)
Net change in other certificates of deposit		(7,968	)		(8,167	)
(Decrease) increase in drafts payable		(1,026	)		379
Proceeds from long-term borrowings		10,000			—
Repayment of long-term borrowings		(14,000	)		(6,000	)
Net change in advances by borrowers for taxes and insurance		630			318
Cash dividends paid		(89	)		(90	)
Net cash provided (used) by financing activities		16,187			(485	)
Change in Cash and Cash Equivalents		15,013			14,693
Cash and Cash Equivalents at Beginning of Year		9,709			11,747
Cash and Cash Equivalents at End of Quarter	$	24,722		$	26,440
Supplemental information:
Interest paid on deposits	$	1,504		$	2,017
Interest paid on borrowings	$	1,177		$	1,284
Non-cash supplemental information:
Transfers from loans to other real estate owned	$	1,682		$	3,300

See notes to consolidated condensed financial statements.

(7)

AMERIANA BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

NOTE A — BASIS OF PRESENTATION

The consolidated condensed financial statements include the accounts of Ameriana Bancorp (the “Company”) and its wholly-owned subsidiary Ameriana Bank (the “Bank”). The Bank has two wholly-owned subsidiaries, Ameriana Insurance Agency and Ameriana Financial Services, Inc.

The unaudited interim consolidated condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and disclosures required by generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, the financial statements reflect all adjustments (comprised only of normal recurring adjustments and accruals) necessary to present fairly the Company’s financial position and results of operations and cash flows. The consolidated condensed balance sheet of the Company as of December 31, 2011 has been derived from the audited consolidated balance sheet of the Company as of that date. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected in the full year or for any other period. These statements should be read in conjunction with the consolidated financial statements and related notes which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

NOTE B— SHAREHOLDERS’ EQUITY

On September 24, 2012, the Board of Directors declared a quarterly cash dividend of $0.01 per share. This dividend, totaling approximately $30,000, was accrued for payment to shareholders of record on October 5, 2012 and was paid on October 26, 2012.

No stock options were granted or exercised during the third quarter of 2012.

NOTE C— EARNINGS PER SHARE

Earnings per share were computed as follows:

	(In thousands, except share data) Three Months Ended September 30,
	2012						2011
	Net Income		Weighted Average Shares		Per Share Amount		Net Income		Weighted Average Shares		Per Share Amount
Basic Earnings Per Share: Income available to common shareholders	$	465		2,988,952	$	0.16	$	298		2,988,952	$	0.10
Effect of dilutive stock options		—		—				—		—
Diluted Earnings Per Share: Income available to common shareholders	$	465		2,988,952	$	0.16	$	298		2,988,952	$	0.10

	(In thousands, except share data) Nine Months Ended September 30,
	2012						2011
	Net Income		Weighted Average Shares		Per Share Amount		Net Income		Weighted Average Shares		Per Share Amount
Basic Earnings Per Share: Income available to common shareholders	$	1,263		2,988,952	$	0.42	$	689		2,988,952	$	0.23
Effect of dilutive stock options		—		—				—		—
Diluted Earnings Per Share: Income available to common shareholders	$	1,263		2,988,952	$	0.42	$	689		2,988,952	$	0.23

(8)

Options to purchase 158,482 and 167,982 shares of common stock at exercise prices of $9.25 to $15.56 per share were outstanding at September 30, 2012 and 2011, respectively, but were not included in the computation of diluted earnings per share because the options were anti-dilutive, in that the exercise prices of the options exceeded the market value of the Company’s stock for the periods presented.

NOTE D— INVESTMENT SECURITIES

The following tables provide the composition of investment securities at September 30, 2012 and December 31, 2011 (dollars in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale at September 30, 2012
Ginnie Mae and GSE mortgage-backed pass-through securities	$	36,290	$	1,186	$	—	$	37,476
Ginnie Mae collateralized mortgage obligations		2,599		—		9		2,590
Municipal securities		2,323		27		—		2,350
Mutual fund		1,723		127		—		1,850
	$	42,935	$	1,340	$	9	$	44,266

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale at December 31, 2011
Ginnie Mae and GSE mortgage-backed pass-through securities	$	39,280	$	443	$	9	$	39,714
Municipal securities		2,322		29		—		2,351
Mutual fund		1,689		93		—		1,782
	$	43,291	$	565	$	9	$	43,847

The amortized cost and fair value of securities available for sale at September 30, 2012 by contractual maturity are shown below (dollars in thousands). Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale
	Amortized Cost		Fair Value
Within one year	$	—	$	—
One to five years		163		166
Five to ten years		421		426
After ten years		1,739		1,758
Municipal securities		2,323		2,350
Ginnie Mae and GSE mortgage-backed pass-through securities		36,290		37,476
Ginnie Mae collateralized mortgage obligations		2,599		2,590
Mutual fund		1,723		1,850
	$	42,935	$	44,266

(9)

Mortgage-backed pass-through securities: The contractual cash flows of these investments are guaranteed by either Ginnie Mae, a U.S. Government agency, or by Fannie Mae and Freddie Mac, U.S. Government-sponsored entities, institutions which the U.S. Government has affirmed its commitment to support. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment.

Collateralized mortgage obligations: The contractual cash flows of these investments are guaranteed by Ginnie Mae, a U.S. Government agency. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment.

Municipal Securities:The municipal securities at September 30, 2012 consisted of non-rated local issue tax increment revenue bonds that were issued during the third quarter of 2011.

Mutual fund:The mutual fund balance at September 30, 2012 consisted of an investment in the CRA Qualified Investment mutual fund, whose portfolio composition is primarily in debt securities with an average credit quality rating of AAA.

Certain investment securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at September 30, 2012 and December 31, 2011 were $2,618,000 and $4,199,000, respectively, which was approximately 5.9% and 9.6%, respectively, of the Company’s investment portfolio at these dates.

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2012 and December 31, 2011 (dollars in thousands):

At September 30, 2012	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Ginnie Mae collateralized mortgage obligations	$	2,590	$	9	$	—	$	—	$	2,590	$	9

At December 31, 2011	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Ginnie Mae and GSE mortgage-backed pass-through securities	$	4,180	$	8	$	19	$	1	$	4,199	$	9

Investment securities with a total market value of $9,303,000 and $9,369,000 were pledged at September 30, 2012 and December 31, 2011, respectively, to secure a repurchase agreement.

There were no sales of available-for-sale securities during the three-month period ended September 30, 2012, compared to sales resulting in a gross gain of $206,000 for the three-month period ended September 30, 2011, with a tax expense of $70,000.

A gross gain of $89,000 resulting from sales of available-for-sale securities was realized during the nine-month period ended September 30, 2012, with a tax expense of $30,000, compared to a gross gain of $721,000 and a gross loss of $15,000 for the nine-month period ended September 30, 2011, with a net tax expense of $240,000.

(10)

NOTE E— LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

(Dollars in Thousands)

	At September 30,		At December 31,
	2012		2011
Real estate loans:
Commercial	$	103,428	$	100,126
Residential		164,879		164,420
Construction		15,717		17,980
Commercial loans and leases		26,522		30,961
Municipal loans		1,179		740
Consumer loans		2,343		2,860
Total loans		314,068		317,087
Less:
Undisbursed loan proceeds		220		12
Deferred loan fees, net		684		434
Allowance for loan losses		4,236		4,132
		5,140		4,578
Total loans—net	$	308,928	$	312,509

The risk characteristics of each loan portfolio segment are as follows:

Commercial Real Estate:These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Bank’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral and risk grade criteria. As a general rule, the Bank avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Construction Real Estate:Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, timely completion and sale of the property, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Commercial Loans and Leases:Commercial loans and leases are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a

(11)

personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Residential and Consumer: With respect to residential loans that are secured by one-to four-family residences and are generally owner occupied, the Bank generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in one-to four-family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Municipal:Municipal loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. Most municipal loans are secured by the full faith and credit of the municipality. The availability of funds for the repayment of these loans may be substantially dependent on the ability of the municipality to collect taxes or other revenue.

Allowance for Loan and Lease Losses Methodology:

Bank policy is designed to ensure that an adequate allowance for loan and lease losses (“ALLL”) will be maintained. Primary responsibility for ensuring that the Bank has processes in place to consistently assess the adequacy of the ALLL rests with the Board. The Board has charged the Chief Credit Officer (“CCO”) with responsibility for establishing the methodology to be used and to assess the adequacy of the ALLL quarterly. The methodology will be reviewed and affirmed by the Loan Review Officer. Quarterly the Board will review recommendations from the CCO to adjust the allowance as appropriate.

The methodology employed by the CCO for each portfolio segment will at a minimum contain the following:

1) Loans will be segmented by type of loan.

2) Loans will be further segmented by risk grades.

3) The required ALLL for types of performing homogeneous loans which do not have a specific reserve will be determined by applying a factor based on historical losses averaged over the twelve quarters prior to the most recent quarter. In those instances, where the Bank’s historical experience is not available, the CCO will develop factors based on industry experience and best practices.

4) All criticized and classified loans will be tested for impairment by applying one of three methodologies:

a. Present value of future cash flows;

b. Fair value of collateral less cost to sell; or

c. The loan’s observable market price

5) All troubled debt restructurings (“TDR”) are considered impaired loans.

6) Loans tested for impairment will be removed from other pools to prevent layering (double-counting).

7) The required ALLL for each group of loans will be added together to determine the total required ALLL for the Bank. The required ALLL will be compared to the current ALLL to determine the required provision to increase the ALLL or credit to decrease the ALLL.

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Bank over the twelve quarters prior to the most recent quarter. Management believes the historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed.

We also factor in the following qualitative considerations:

1) Changes in policies and procedures;

2) Changes in national, regional and local economic and business conditions;

3) Changes in the composition and size of the portfolio and in the terms of loans;

4) Changes in the experience, ability and depth of lending management and other relevant staff;

(12)

5) Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans;

6) Changes in the quality of the Bank’s loan review system;

7) Changes in the value of underlying collateral for collateral-dependent loans;

8) The existence and effect of any concentration of credit, and changes in the level of such concentrations; and

9) The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.

The following table presents the balance and activity in allowance for loan losses as of September 30, 2012 (dollars in thousands):

Allowance for Loan Losses

For Three Months Ended September 30, 2012

	Commercial Real Estate Loans			Residential Real Estate Loans			Construction Real Estate Loans		Commercial Loans and Leases			Municipal Loans		Consumer Loans			Total
Balance at beginning of quarter	$	773		$	1,418		$	954	$	847		$	—	$	111		$	4,103
Provision (credit) for losses		(234	)		165			57		253			—		14			255
Charge-offs (1)		—			(50	)		—		(65	)		—		(18	)		(133	)
Recoveries		—			2			1		1			—		7			11
Balance at end of quarter	$	539		$	1,535		$	1,012	$	1,036		$	—	$	114		$	4,236

The following table presents the balance and activity in allowance for loan losses and the recorded investment in loans and impairment methods as of September 30, 2012 (dollars in thousands):

Allowance for Loan Losses and Recorded Investment in Loans

For Nine Months Ended September 30, 2012

	Commercial Real Estate Loans			Residential Real Estate Loans			Construction Real Estate Loans			Commercial Loans and Leases			Municipal Loans		Consumer Loans			Total
Balance at beginning of year	$	584		$	1,539		$	1,150		$	760		$	—	$	99		$	4,132
Provision for losses		8			356			51			427			—		48			890
Charge-offs (1)		(53	)		(367	)		(196	)		(154	)		—		(52	)		(822	)
Recoveries		—			7			7			3			—		19			36
Balance at end of period	$	539		$	1,535		$	1,012		$	1,036		$	—	$	114		$	4,236
Ending allowance balance:
Individually evaluated for impairment	$	426		$	462		$	334		$	453		$	—	$	15		$	1,690
Collectively evaluated for impairment		113			1,073			678			583			—		99			2,546
Total	$	539		$	1,535		$	1,012		$	1,036		$	—	$	114		$	4,236
Ending loan balance:
Individually evaluated for impairment	$	5,819		$	6,675		$	4,887		$	1,242		$	—	$	49		$	18,672
Collectively evaluated for impairment		97,609			158,204			10,830			25,280			1,179		2,294			295,396
Total	$	103,428		$	164,879		$	15,717		$	26,522		$	1,179	$	2,343		$	314,068

(13)

The following tables present the balance and activity in allowance for loan losses as of September 30, 2011 (dollars in thousands):

Allowance for Loan Losses

For Three Months Ended September 30, 2011

	Commercial Real Estate Loans			Residential Real Estate Loans			Construction Real Estate Loans			Commercial Loans and Leases			Municipal Loans		Consumer Loans			Total
Balance at beginning of quarter	$	674		$	1,693		$	859		$	824			—	$	69		$	4,119
Provision (credit) for losses		66			56			179			(54	)		—		8			255
Charge-offs (1)		(10	)		(107	)		(13	)		—			—		(21	)		(151	)
Recoveries		—			2			—			—			—		4			6
Balance at end of quarter	$	730		$	1,644		$	1,025		$	770			—	$	60		$	4,229

Allowance for Loan Losses

For Nine Months Ended September 30, 2011

	Commercial Real Estate Loans			Residential Real Estate Loans			Construction Real Estate Loans			Commercial Loans and Leases		Municipal Loans		Consumer Loans			Total
Balance at beginning of year	$	639		$	1,584		$	1,254		$	657		—	$	78		$	4,212
Provision for losses		101			329			306			112		—		22			870
Charge-offs (1)		(11	)		(298	)		(535	)		—		—		(52	)		(896	)
Recoveries		1			29			—			1		—		12			43
Balance at end of period	$	730		$	1,644		$	1,025		$	770		—	$	60		$	4,229

The following table presents the balance in allowance for loan losses and the recorded investment in loans and impairment methods as of December 31, 2011 (dollars in thousands):

Allowance for Loan Losses and Recorded Investment in Loans

For Year Ended December 31, 2011

	Commercial Real Estate Loans		Residential Real Estate Loans		Construction Real Estate Loans		Commercial Loans and Leases		Municipal Loans		Consumer Loans		Total
Ending allowance balance:
Individually evaluated for impairment	$	445	$	707	$	435	$	142	$	—	$	8	$	1,737
Collectively evaluated for impairment		139		832		715		618		—		91		2,395
Total	$	584	$	1,539	$	1,150	$	760		—	$	99	$	4,132
Ending loan balance:
Individually evaluated for impairment	$	4,891	$	6,440	$	3,672	$	935	$	—	$	44	$	15,982
Collectively evaluated for impairment		95,235		157,980		14,308		30,026		740		2,816		301,105
Total	$	100,126	$	164,420	$	17,980	$	30,961	$	740	$	2,860	$	317,087

(14)

(1) Policy for Charging Off Loans:

A loan should be charged off at any point in time when it no longer can be considered a bankable asset, meaning collectable within the parameters of policy. The Bank shall not renew any loan, or put a loan on a demand basis, only to defer a problem, nor is it appropriate to attempt long-term recoveries while reporting loans as assets. An unsecured loan generally should be charged off no later than when it is 120 days past due as to principal or interest. For loans in the legal process of foreclosure against collateral of real and/or liquid value, the 120-day rule does not apply. Such charge-offs can be deferred until the foreclosure process progresses to the point where the Bank can adequately determine whether or not any ultimate loss will result. In similar instances where other legal actions will cause extraordinary delays, such as the settlement of an estate, yet collateral of value is realizable, the 120-day period could be extended. When a loan is unsecured or not fully collateralized, the loan should be charged off or written down to the documented collateral value rather than merely being placed on non-accrual status.

All charge-offs and forgiveness of debt greater than $50,000 must be approved by the Loan Committee upon recommendation by the CCO. The Loan Committee consists of the Bank’s Chief Executive Officer, Chief Risk Officer, Chief Credit Officer, Chief Marketing Officer and Loan Review Officer. Charge-offs between $10,000 and $50,000 must be approved by the CCO. Decisions to defer the charge-off of a loan must be approved by the CCO.

Narrative Description of Borrower Rating:

Grade 1 — Highest Quality (Pass)

This loan represents a credit extension of the highest quality. The borrower’s historic (at least five years) cash flows manifest extremely large and stable margins of coverage. Balance sheets are conservative, well capitalized, and liquid. After considering debt service for proposed and existing debt, projected cash flows continue to be strong and provide ample coverage. The borrower typically reflects broad geographic and product diversification and has broad access to alternative financial markets. Also included in this category may be loans secured by U.S. government securities, U.S. government agencies, highly rated municipal bonds, insured savings accounts, and insured certificates of deposit drawn on high quality banks.

Grade 2 — Excellent Quality (Pass)

This loan has a sound primary and secondary source of repayment. The borrower has proven access to alternative sources of financing. This loan carries a low level of risk, with minimal loss exposure. The borrower has the ability to perform according to the terms of the credit facility. The margins of cash flow coverage are strong. This category also includes loans secured by high quality traded stocks and lower grade municipal bonds (must still be investment grade).

Grade 3 — Good Quality (Pass)

This loan has a sound primary source of repayment. The borrower may have access to alternative sources of financing, but sources are not as widely available as they are to a higher graded borrower. This loan carries a normal level of risk, with minimal loss exposure. The borrower has the ability to perform according to the terms of the credit facility. The margins of cash flow coverage are satisfactory but vulnerable to more rapid deterioration than the higher quality loans. Real estate loans in this category display advance rates below the suggested maximum, debt coverage well in excess of the suggested level, or are leased beyond the loan term by a “credit” tenant.

Grade 4 — Acceptable Quality (Pass)

The borrower is a reasonable credit risk and demonstrates the ability to repay the debt from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of management, or limited access to alternative financing sources. Historic financial information may indicate erratic performance, but current trends are positive. Quality of financial information is adequate, but is not as detailed and sophisticated as information found on higher graded loans. If adverse circumstances arise, the impact on the borrower may be significant. All small business loans extended based upon credit scoring should be classified in this category unless deterioration occurs, in which case they should bear one of the below mentioned grades.

Grade 5—Marginal Quality (Pass)

The borrower is an acceptable credit risk and while it can demonstrate it has the ability to repay the debt from normal business operations, the coverage is not as strong as an Acceptable Quality loan. Weakness in one or more areas are defined. Risk factors would typically include a higher leverage position than desirable, low liquidity, weak or sporadic cash flow, the lack of reasonably current and complete financial information, and/or overall financial trends are erratic.

(15)

Grade 6 – Elevated Risk, Management Attention (Watch)

While the borrower at origination was not considered a high risk potential, there are characteristics related to the financial condition, and/or a level of concern regarding either or both the primary and secondary source of repayment, that may preclude this from being a pass credit. These credit facilities are considered “pass” credits but exhibit the potential of developing a more serious weakness in their operation going forward. Usually, a credit in this category will be upgraded or downgraded on further analysis within a short period of time.

Grade 7 — Special Mention

These credit facilities have developing weaknesses that deserve extra attention from the loan officer and other management personnel. If the developing weakness is not corrected or mitigated, there may be deterioration in the ability of the borrower to repay the Bank’s debt in the future. This grade should not be assigned to loans which bear certain peculiar risks normally associated with the type of financing involved, unless circumstances have caused the risk to increase to a level higher than would have been acceptable when the credit was originally approved. Loans where actual, not potential, weaknesses or problems are clearly evident and significant should generally be graded in one of the grade categories below.

Grade 8 — Substandard

Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions which have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that some future loss will be sustained by the Bank if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual assets classified as substandard.

Grade 9 — Doubtful

Loans and other credit extensions graded “9” have all the weaknesses inherent in those graded “8,” with the added characteristic that the severity of the weaknesses make collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. The probability of some loss is extremely high, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral. Loans in this classification should be placed in nonaccrual status, with collections applied to principal on the Bank’s books.

Grade 10 — Loss

Loans in this classification are considered uncollectible and cannot be justified as a viable asset of the Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future.

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of September 30, 2012 and December 31, 2011 (dollars in thousands):

Loan Portfolio Quality Indicators

At September 30, 2012

	Commercial Real Estate Loans		Residential Real Estate Loans		Construction Real Estate Loans		Commercial Loans and Leases		Municipal Loans		Consumer Loans		Total
Rating:
Pass (Grades 1-5)	$	86,915	$	158,121	$	10,830	$	25,110	$	1,179	$	2,294	$	284,449
Watch (Grade 6)		4,660		83		—		16		—		—		4,759
Special Mention (Grade 7)		6,034		—		—		154		—		—		6,188
Substandard (Grade 8)		5,198		2,672		2,345		89		—		—		10,304
Doubtful (Grade 9)		621		4,003		2,542		1,153		—		49		8,368
Loss (Grade 10)		—		—		—		—		—		—		—
Total	$	103,428	$	164,879	$	15,717	$	26,522	$	1,179	$	2,343	$	314,068

(16)

Loan Portfolio Quality Indicators

At December 31, 2011

	Commercial Real Estate Loans		Residential Real Estate Loans		Construction Real Estate Loans		Commercial Loans and Leases		Municipal Loans		Consumer Loans		Total
Rating:
Pass (Grades 1-5)	$	82,701	$	156,783	$	12,204	$	28,513	$	740	$	2,860	$	283,801
Watch (Grade 6)		7,257		1,100		2,210		1,200		—		—		11,767
Special Mention (Grade 7)		5,037		90		135		318		—		—		5,580
Substandard (Grade 8)		5,131		1,940		—		286		—		—		7,357
Doubtful (Grade 9)		—		4,507		3,431		644		—		—		8,582
Loss (Grade 10)		—		—		—		—		—		—		—
Total	$	100,126	$	164,420	$	17,980	$	30,961	$	740	$	2,860	$	317,087

For all loan classes, the entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.

The following tables present the Company’s loan portfolio aging analysis as of September 30, 2012 and December 31, 2011 (dollars in thousands):

Loan Portfolio Aging Analysis

At September 30, 2012

	30-59 Days Past Due (A)		60-89 Days Past Due		90 Days and Greater		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 days & Accruing
Real estate loans:
Commercial	$	270	$	—	$	443	$	713	$	102,715	$	103,428	$	—
Residential		3,415		458		3,008		6,881		157,998		164,879		233
Construction		2,120		—		284		2,404		13,313		15,717		—
Commercial loans and leases		281		—		780		1,061		25,461		26,522		—
Municipal loans		—		—		—		—		1,179		1,179		—
Consumer loans		33		3		—		36		2,307		2,343		—
Total	$	6,119	$	461	$	4,515	$	11,095	$	302,973	$	314,068	$	233

(A) Includes $3,602,000 in loans classified as nonaccrual that are less than 30 days past due, of which $2,120,000 are construction loans, $1,195,000 are residential real estate loans, $280,000 are commercial loans, $7,000 are commercial real estate loans and $8,000 are consumer loans.

(17)

Loan Portfolio Aging Analysis

At December 31, 2011

	30-59 Days Past Due (A)		60-89 Days Past Due (B)		90 Days and Greater		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 days & Accruing
Real estate loans:
Commercial	$	—	$	—	$	—	$	—	$	100,126	$	100,126	$	—
Residential		1,204		417		4,398		6,019		158,401		164,420		243
Construction		4,908		—		1,126		6,034		11,946		17,980		—
Commercial loans and leases		434		554		219		1,207		29,754		30,961		—
Municipal loans		—		—		—		—		740		740		—
Consumer loans		8		2		9		19		2,841		2,860		9
Total	$	6,554	$	973	$	5,752	$	13,279	$	303,808	$	317,087	$	252

(A) Includes $3,049,000 in loans classified as nonaccrual that are less than 30 days past due, of which $2,306,000 are construction loans, $425,000 are commercial loans, and $318,000 are residential real estate loans.

(B) Includes a $27,000 residential real estate loan 68 days delinquent that is classified as non-accrual.

Impaired Loans:For all loan classes, a loan is designated as impaired when, based on current information or events, it is probable that the Bank will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with insignificant delays not exceeding 90 days outstanding are not considered impaired. Certain non-accrual and substantially delinquent loans may be considered to be impaired. Generally, loans are placed on non-accrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well-secured and in the process of collection. The accrual of interest on impaired and non-accrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due.

For all loan classes, when interest accrual is discontinued all unpaid accrued interest is reversed when considered uncollectible. When a loan is in a non-accrual status, all cash payments of interest are applied to loan principal. Should the loan be reinstated to accrual status, all cash payments of interest received while in non-accrual status will be taken into income over the remaining life of the loan using the level yield accounting method.

The following table presents impaired loans as of September 30, 2012 (dollars in thousands):

Impaired Loans

At September 30, 2012

							Three Months Ended September 30, 2012				Nine Months Ended September 30, 2012
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment  in Impaired Loans (1)		Interest Income Recognized (2)		Average Investment in  Impaired Loans (1)		Interest Income Recognized (2)
Loans without a specific valuation allowance:
Real estate loans:
Commercial		—		—		N/A		—		—		—		—
Residential		—		—		N/A		—		—		—		—
Construction		—		—		N/A		—		—		—		—
Commercial loans and leases		—		—		N/A		—		—		—		—
Municipal loans		—		—		N/A		—		—		—		—
Consumer loans		—		—		N/A		—		—		—		—
Total		—		—		N/A		—		—		—		—
Loans with a specific valuation allowance:
Real estate loans:
Commercial	$	5,819	$	5,819	$	426	$	5,864	$	51	$	5,497	$	121
Residential		6,675		6,932		462		6,627		19		6,340		59
Construction		4,887		5,142		334		4,838		33		4,220		40
Commercial loans and leases		1,242		1,273		453		1,335		3		1,121		11
Municipal loans		0		0		0		0		0		0		0
Consumer loans		49		49		15		54		0		48		0
Total	$	18,672	$	19,215	$	1,690	$	18,718	$	106	$	17,226	$	231
All Impaired Loans	$	18,672	$	19,215	$	1,690	$	18,718	$	106	$	17,226	$	231

(18)

(1) Includes all loans that were classified as impaired at any time during the three-month and nine-month periods (not just impaired loans at September 30, 2012), and their average balance for only the period during which they were classified as impaired.

(2) Interest recorded in income during only the period the loans were classified as impaired, for all loans that were classified as impaired at any time during the three and nine months ended September 30, 2012.

For all loan classes, interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

The following table presents impaired loan activity as of September 30, 2011 (dollars in thousands):

Impaired Loans

At September 30, 2011

	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
	Average Investment in Impaired Loans (1)		Interest  Income Recognized (2)		Average Investment in Impaired Loans (1)		Interest  Income Recognized (2)
Loans without a specific valuation allowance:
Real estate loans:
Commercial		—		—		—		—
Residential		—		—		—		—
Construction		—		—		—		—
Commercial loans and leases		—		—		—		—
Municipal loans		—		—		—		—
Consumer loans		—		—		—		—
Total		—		—		—		—
Loans with a specific valuation allowance:
Real estate loans:
Commercial	$	4,800	$	93	$	5,462	$	280
Residential		5,922		20		6,099		80
Construction		3,320		25		4,057		54
Commercial loans and leases		973		2		965		11
Municipal loans		—		—		—		—
Consumer loans		48		—		52		—
Total	$	15,063	$	140	$	16,635	$	425
All Impaired Loans	$	15,063	$	140	$	16,635	$	425

(19)

(1) Includes all loans that were classified as impaired at any time during the three-month and nine-month periods (not just impaired loans at September 30, 2011), and their average balance for only the period during which they were classified as impaired.

(2) Interest recorded in income during only the period the loans were classified as impaired, for all loans that were classified as impaired at any time during the three months and nine months ended September 30, 2011.

For all loan classes, interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

The following table presents impaired loans for the year ended December 31, 2011 (dollars in thousands):

Impaired Loans

At December 31, 2011

							Year Ended December 31, 2011
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans (1)		Interest Income Recognized (2)
Loans without a specific valuation allowance:
Real estate loans:
Commercial		—		—		N/A		—		—
Residential		—		—		N/A		—		—
Construction		—		—		N/A		—		—
Commercial loans and leases		—		—		N/A		—		—
Municipal loans		—		—		N/A		—		—
Consumer loans		—		—		N/A		—		—
Total		—		—		N/A		—		—
Loans with a specific valuation allowance:
Real estate loans:
Commercial	$	4,891	$	4,891	$	445	$	5,318	$	181
Residential		6,440		6,494		707		6,142		100
Construction		3,672		3,842		435		3,962		57
Commercial loans and leases		935		955		142		952		16
Municipal loans		—		—		—		—		—
Consumer loans		44		44		8		50		—
Total	$	15,982	$	16,226	$	1,737	$	16,424	$	354
All Impaired Loans	$	15,982	$	16,226	$	1,737	$	16,424	$	354

(1) Includes all loans that were classified as impaired at any time during 2011 (not just impaired loans at December 31, 2011), and their average balance for only the period during which they were classified as impaired.

(2) Interest recorded in income during only the period the loans were classified as impaired, for all loans that were classified as impaired at any time during 2011.

(20)

For all loan classes, interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

Non-Accrual Loans: Any loan which becomes 90 days delinquent, or has the full collection of principal and interest in doubt, or a portion of principal has been charged off will immediately be placed on non-accrual status. The loan does not have to be placed on non-accrual if the charge-off is part of a Chapter 13 reaffirmation. At the time a loan is placed on non-accrual, all accrued but unpaid interest will be reversed from interest income. Placing the loan on non-accrual does not relieve the borrower of the obligation to repay interest.

For all loan classes, when a loan is in a non-accrual status all cash payments of interest are applied to loan principal.

A loan placed on non-accrual may be restored to accrual status when all delinquent principal and interest has been brought current, and the Bank expects full payment of the remaining contractual principal and interest including any previous charge-offs. The Bank requires a period of satisfactory performance of not less than six months before returning a non-accrual loan to accrual status. Should the loan be reinstated to accrual status, all cash payments of interest received while in non-accrual status will be taken into income over the remaining life of the loan using the level yield accounting method.

The following table presents the Company’s non-accrual loans at September 30, 2012 and December 31, 2011 (dollars in thousands):

Loans Accounted for on a Non-Accrual Basis

	At September 30, 2012		At December 31, 2011
Real estate loans:
Commercial	$	713	$	—
Residential		4,139		4,500
Construction		2,404		3,432
Commercial loans and leases		1,061		644
Municipal loans		—		—
Consumer loans		7		—
Total	$	8,324	$	8,576

Total non-accrual loans at September 30, 2012 and December 31, 2011 included $2,473,000 and $1,706,000 of TDRs, respectively.

Troubled Debt Restructurings:Our loan and lease portfolio includes certain loans that have been modified as a TDR, where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation efforts and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six consecutive months.

When we modify loans and leases as a TDR, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded balance of the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through a specific allowance or charge-off to the allowance. In periods subsequent to modification, we evaluate all TDRs, including those that have payment defaults, for possible impairment and recognize impairment through the allowance.

(21)

Loans classified as a TDR during the three and nine-month periods ended September 30, 2012, segregated by class, are shown in the table below (dollars in thousands). These modifications consisted primarily of interest rate concessions.

	Three Months Ended September 30, 2012						Nine Months Ended September 30, 2012
	Modifications						Modifications
	Number		Recorded Balance Before		Recorded Balance After		Number		Recorded Balance Before		Recorded Balance After
Real estate loans:
Commercial		1	$	31	$	31		2	$	172	$	172
Residential		1		79		79		5		1,712		1,712
Construction		—		—		—		1		1,940		1,940
Commercial loans and leases		1		58		58		2		268		268
Municipal loans		—		—		—		—		—		—
Consumer loans		—		—		—		3		9		9
Total		3	$	168	$	168		13	$	4,101	$	4,101

TDRs that had payment defaults during the three and nine-month periods ended September 30, 2012, segregated by class, are shown in the table below (dollars in thousands). Default occurs when a loan or lease is 90 days or more past due or transferred to nonaccrual and is within 12 months of restructuring.

	Three Months Ended September 30, 2012				Nine Months Ended September 30, 2012
	Number of Defaults		Recorded Balance		Number of Defaults		Recorded Balance
Real estate loans:
Commercial		—	$	—		—	$	—
Residential		—		—		—		—
Construction		—		—		—		—
Commercial loans and leases		—		—		2		123
Municipal loans		—		—		—		—
Consumer loans		—		—		—		—
Total		—	$	—		2	$	123

(22)

Loans classified as a TDR during the three and nine month periods ended September 30, 2011, segregated by class, are shown in the table below (dollars in thousands). These modifications consisted primarily of interest rate concessions.

	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
	Modifications						Modifications
	Number		Recorded Balance Before		Recorded Balance After		Number		Recorded Balance Before		Recorded Balance After
Real estate loans:
Commercial		1	$	197	$	197		1	$	197	$	197
Residential		2		86		86		13		1,101		1,101
Construction		—		—		—		—		—		—
Commercial loans and leases		1		240		240		1		240		240
Municipal loans		—		—		—		—		—		—
Consumer loans		—		—		—		—		—		—
Total		4	$	523	$	523		15	$	1,538	$	1,538

Troubled debt restructured loans which had payment defaults during the three and nine month periods ended September 30, 2011, segregated by class, are shown in the table below (dollars in thousands). Default occurs when a loan or lease is 90 days or more past due or transferred to nonaccrual and is within 12 months of restructuring.

	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
	Number of Defaults		Recorded Balance		Number of Defaults		Recorded Balance
Real estate loans:
Commercial		—		—		—		—
Residential		3	$	223		3	$	223
Construction		—		—		—		—
Commercial loans and leases		—		—		—		—
Municipal loans		—		—		—		—
Consumer loans		—		—		—		—
Total		3	$	223		3	$	223

NOTE F — CURRENT AND FUTURE ACCOUNTING MATTERS

• Financial Accounting Standards Board (“FASB”)

• ASU No. 2011-03; Reconsideration of Effective Control for Repurchase Agreements. In April, 2011, FASB issued ASU No. 2011-03. The amendments in this ASU remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. The amendments in this ASU also eliminate the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company adopted the methodologies prescribed by this ASU effective January 1, 2012. Adoption of this ASU did not have a material effect on the Company’s financial position or results of operations.

• ASU No. 2011-04; Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. In May, 2011, FASB issued ASU No. 2011-04. The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The Company has included the required disclosure in the Consolidated Financial Statements in the Quarterly Reports on Form 10-Q beginning with the quarter ended March 31, 2012.

• ASU No. 2011-05; Amendments to Topic 220, Comprehensive Income. In June, 2011, FASB issued ASU No. 2011-05. Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other

(23)

comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has included the required disclosure in the Consolidated Financial Statements in the Quarterly Reports on Form 10-Q beginning with the quarter ended March 31, 2012.

• ASU No. 2011-08; Testing Goodwill for Impairment. In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The amendments in this ASU will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company adopted the methodologies prescribed by this ASU effective January 1, 2012. Adoption of this ASU did not have a material effect on the Company’s financial position or results of operations.

• ASU No. 2011-12; Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU No. 2011-12 defers the effective date of the requirement to present separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income for all periods presented. The ASU does not change the other requirements of FASB ASU No. 2011-05, Presentation of Comprehensive Income. Entities are still required to present reclassification adjustments within other comprehensive income either on the face of the statement that reports other comprehensive income or in the notes to the financial statements. The requirement to present comprehensive income in either a single continuous statement or two consecutive condensed statements remains for both annual and interim reporting. The deferral of the requirement for the presentation of reclassification adjustments is intended to be temporary until the FASB reconsiders the operational concerns and needs of financial statement users. The Company adopted the amendments in this Update at the same time as ASU 2011-05, which became effective beginning in the interim period ended March 31, 2012. As the Company had no reclassifications adjustments within other comprehensive income, this Update had no impact on its financial statements.

• ASU No. 2011-11—Balance Sheet (Topic 210). In December 2011, FASB issued ASU 2011-11. The objective of this Update is to provide enhanced disclosures that will enable users of financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. This includes the effect or potential effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities within the scope of this Update. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45.

An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

NOTE G — RETIREMENT PLAN

The Company entered into separate agreements with certain officers and directors that provide retirement benefits. The Company records an expense equal to the projected present value of the payment due at the full eligibility date. The liability for the plan at September 30, 2012 and December 31, 2011 was $2,020,000 and $1,949,000, respectively. The expense for the plan was $56,000 and $49,000 for the three-month periods ended September 30, 2012 and September 30, 2011, respectively. The expense for the plan was $168,000 and $148,000 for the nine-month periods ended September 30, 2012 and September 30, 2011, respectively.

(24)

NOTE H – DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy has been established that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1Quoted prices in active markets for identical assets or liabilities.

Level 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Recurring Measurements: Available-for-sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The security valued in Level 1 is a mutual fund.

Level 2 securities include U.S. Government agency and U.S. Government-sponsored enterprise pass-through mortgage-backed securities and collateralized mortgage obligations. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs, and the values are reviewed by the Bank’s management. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping and matrix pricing. In addition, model processes, such as an option adjusted spread model is used to develop prepayment and interest rate scenarios for securities with prepayment features. The Company has reviewed the methodologies used by the third party and has determined that the securities are properly classified as Level 2.

Level 3 securities consist of municipal securities and are valued by a third party who uses a discounted cash flow model to determine the price, and the values are reviewed by the Bank’s management. Management challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United States. The key inputs to the discounted cash flow model are the coupon, yield, and expected maturity date. Appropriate market yields are determined based on credit, structure, and related Wall Street trades, quotes, and issuances.

(25)

The following table presents the fair value measurements of assets recognized in the accompanying balance sheet measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2012 and December 31, 2011 (dollars in thousands):

			Fair Value Measurements Using
Available-for-sale securities:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
At September 30, 2012:
Ginnie Mae and GSE mortgage-backed pass-through securities	$	37,476	$	—	$	37,476	$	—
Ginnie Mae collateralized mortgage obligations		2,590				2,590
Municipal securities		2,350		—		—		2,350
Mutual fund		1,850		1,850		—		—
	$	44,266	$	1,850	$	40,066	$	2,350
At December 31, 2011:
Ginnie Mae and GSE mortgage-backed pass-through securities	$	39,714	$	—	$	39,714	$	—
Municipal securities		2,351		—		—		2,351
Mutual fund		1,782		1,782		—		—
	$	43,847	$	1,782	$	39,714	$	2,351

Transfers between Levels

Transfers between levels did not occur during the three months and nine months ended September 30, 2012.

Level 3 Reconciliation

The following is a reconciliation of the beginning and ending balance for the three months and nine months ended September 30, 2012 of fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs (dollars in thousands):

	Three Months Ended September 30, 2012			Three Months Ended September 30, 2011		Nine Months Ended September 30, 2012			Nine Months Ended September 30, 2011
Beginning balance	$	2,362		$	—	$	2,351		$	—
Total realized and unrealized gains and losses
Included in net income		—			—		—			—
Included in other comprehensive income		(12	)		78		(1	)		78
Purchases, issuances and settlements		—			2,321		—			2,321
Transfers in or out of Level 3		—			—		—			—
Ending balance	$	2,350		$	2,399	$	2,350		$	2,399

(26)

Nonrecurring Measurements:

Following is a description of valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Impaired Loans (Collateral Dependent)

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Other Real Estate Owned

The fair value of the Company’s other real estate owned is determined using Level 3 inputs, which include current and prior appraisals and estimated costs to sell.

The following table presents the fair value measurements of assets recognized in the accompanying balance sheet measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2012 and December 31, 2011. The totals represent only those impaired loans and other real estate owned as of that date that experienced a change in fair value since the beginning of the year (dollars in thousands):

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
At September 30, 2012:
Impaired loans	$	15,824	$	—	$	—	$	15,824
Other real estate owned		233		—		—		233
At December 31, 2011:
Impaired loans	$	10,442	$	—	$	—	$	10,442
Other real estate owned		2,486		—		—		2,486

Unobservable (Level 3) Inputs:

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at September 30, 2012 (dollars in thousands):

	Fair Value		Valuation Technique		Unobservable Inputs	Rate/Rate Range (Weighted Average)
Municipal securities	$	2,350		Discounted cash flow model	Unrated security yield adjustment Liquidity yield adjustment Extension risk yield adjustment	2.0%                 2.0%                 1.0%
Impaired loans		15,824		Third party valuations	Discount to reflect realizable value	0.1% - 46.5%                 (8.7%)
Other real estate owned		233		Third party valuations	Discount to reflect realizable value	9.1% -9.1%                 (9.1%)

(27)

Sensitivity of Significant Unobservable Inputs

The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

Municipal Securities

The significant unobservable inputs used in the fair value measurement of the Company’s municipal securities are premiums for unrated securities and marketability yield adjustments. Significant increases (decreases) in either of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, changes in either of those inputs will not affect the other input.

Fair Value of Financial Instruments

Fair values are based on estimates using present value and other valuation techniques in instances where quoted market prices are not available. These techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. As such, the derived fair value estimates may not be realized upon an immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent, and should not be construed to represent, the underlying value of the Company.

The following table presents the estimates of fair value of financial instruments (dollars in thousands):

	December 31, 2011
	Carrying Value		Fair Value
Assets
Cash and cash equivalents	$	9,709	$	9,709
Investment securities available for sale		43,847		43,847
Loans held for sale		252		252
Loans		312,509		322,066
Stock in FHLB		4,472		4,472
Mortgage servicing rights		577		577
Interest and dividends receivable		1,089		1,089
Liabilities
Deposits		337,250		339,930
Borrowings		49,810		46,780
Drafts payable		2,532		2,532
Interest and dividends payable		107		107

The following table presents the estimates of fair value of financial instruments and the level within the fair value hierarchy in which the fair value measurements fall (dollars in thousands):

	Fair Value Measurements Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
At September 30, 2012
Assets
Cash and cash equivalents	$	24,722	$	24,722	$	—	$	—
Interest-bearing time deposits		5,704		5,704
Investment securities available for sale		44,266		1,850		40,066		2,350
Loans held for sale		197		—		197		—
Loans		308,928		—		307,513		15,417
Stock in FHLB		4,472		—		4,472		—
Mortgage servicing rights		542		—		—		542
Interest and dividends receivable		774		—		774		—
Liabilities
Deposits		357,922		215,596		144,597		—
Borrowings		45,810		—		38,164		4,488
Drafts payable		1,506		—		1,506		—
Interest and dividends payable		475		—		475		—

(28)

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and Cash Equivalents and Stock in FHLB: The carrying amounts reported in the consolidated balance sheets approximate those assets’ fair values.

Interest-bearing time deposits: The carrying amounts reported in the consolidated balance sheets approximate those assets’ fair values.

Loans Held for Sale:The carrying amounts reported in the consolidated balance sheets approximate those assets’ fair values.

Loans: The fair values for loans are estimated using a discounted cash flow calculation that applies external interest rates used to price new similar loans to a schedule of aggregated expected monthly maturities on loans.

Mortgage Servicing Rights:The initial amount recorded is an estimate of the fair value of the streams of net servicing revenues that will occur over the estimated life of the servicing arrangement, and the initial amount recorded is then amortized over the estimated life. Annually, a valuation of the servicing rights is performed by an independent third party and reviewed by the Bank’s management, with impairment, if any, recognized through a valuation allowance. The valuation is based on the discounted cash flow method utilizing Bloomberg’s Median Forecasted Prepayment Speeds for mortgage-backed securities assumed to possess enough similarities to the Bank’s servicing portfolio to facilitate a comparison.

Interest and Dividends Receivable/Payable: The fair value of accrued interest and dividends receivable/payable approximates carrying values.

Deposits: The fair values of non-maturity demand, savings, and money market accounts are equal to the amount payable on demand at the balance sheet date. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on deposits to a schedule of aggregated expected monthly maturities on deposits.

Borrowings: The fair value of borrowings is estimated using a discounted cash flow calculation, based on borrowing rates for periods comparable to the remaining terms to maturity of the borrowings.

Drafts Payable: The fair value approximates carrying value.

NOTE I – COLLATERAL FOR LETTERS OF CREDIT

As of September 30, 2012, there were three outstanding letters of credit from the Federal Home Loan Bank of Indianapolis totaling $21.1 million that the Company had collateralized with residential mortgage loans.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) is designed to provide a narrative on our financial condition, results of operations, liquidity, critical accounting policies, off-balance sheet arrangements and the future impact of accounting standards. It is useful to read our MD&A in

(29)

conjunction with the consolidated financial statements contained in Part I in this Quarterly Report on Form 10-Q (this “Form 10-Q”), our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the “Form 10-K”), and our other reports on Forms 10-Q and current reports on Forms 8-K and other publicly available information.

FORWARD-LOOKING STATEMENTS

This Form 10-Q may contain certain “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts, rather statements based on Ameriana Bancorp’s (the “Company”) current expectations regarding its business strategies, intended results and future performance. Forward-looking statements are generally preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, the outcome of litigation, fluctuations in interest rates and real estate property values in our market area, demand for loans and deposits in the Company’s market area, changes in the quality or composition of our loan portfolio, changes in accounting principles, laws and regulations, and competition that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Additional factors that may affect our results are discussed in the Form 10-K under Part I, Item 1A- “Risk Factors” and in other reports filed with the Securities and Exchange Commission. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Who We Are

Ameriana Bancorp is an Indiana chartered bank holding company subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) under the Bank Holding Company Act of 1956, as amended. The Company became the holding company for Ameriana Bank, an Indiana chartered commercial bank headquartered in New Castle, Indiana (the “Bank”), in 1990. The Company also holds a minority interest in a limited partnership organized to acquire and manage real estate investments, which qualify for federal tax credits.

The Bank began operations in 1890. Since 1935, the Bank has been a member of the Federal Home Loan Bank (the “FHLB”) System. Its deposits are insured to applicable limits by the Deposit Insurance Fund, administered by the Federal Deposit Insurance Corporation (the “FDIC”). The Bank conducts business through its main office at 2118 Bundy Avenue, New Castle, Indiana and through eleven branch offices located in New Castle, Middletown, Knightstown, Morristown, Greenfield, Anderson, Avon, Carmel, Fishers, Westfield and New Palestine, Indiana. On October 13, 2012, the Bank closed the banking center at its McCordsville location. The facility continues to house lending personnel who were moved to that location at the end of the first quarter of 2012.

The Bank has two wholly-owned subsidiaries, Ameriana Insurance Agency (“AIA”) and Ameriana Financial Services, Inc. (“AFS”). AIA provides insurance sales from offices in New Castle, Greenfield and Avon, Indiana. AFS operates a brokerage facility in conjunction with LPL Financial that provides non-bank investment product alternatives to its customers and the general public.

What We Do

The Bank is a community-oriented financial institution. Our principal business consists of attracting deposits from the general public and investing those funds along with borrowed funds primarily in mortgage loans on single-

(30)

family residences, multi-family loans, construction loans, commercial real estate loans, commercial and industrial loans and leases, and, to a lesser extent, consumer loans and loans to municipalities. We have from time to time purchased loans and loan participations in the secondary market. We also invest in various federal and government agency obligations and other investment securities permitted by applicable laws and regulations, including mortgage-backed, municipal and equity securities. We offer customers in our market area time deposits with terms ranging from three months to seven years, interest-bearing and noninterest-bearing checking accounts, savings accounts and money market accounts. Our primary source of borrowings is FHLB advances. Through our subsidiaries, we engage in insurance and investment and brokerage activities.

Our primary source of income is net interest income, which is the difference between the interest income earned on our loan and investment portfolios and the interest expense incurred on our deposits and borrowings. Our loan portfolio typically earns more interest than the investment portfolio, and our deposits typically have a lower average rate than FHLB advances and other borrowings. Several factors affect our net interest income. These factors include loan, investment, deposit, and borrowing portfolio balances, their composition, the length of their maturity, re-pricing characteristics, liquidity, credit, and interest rate risk, as well as market and competitive conditions and the current interest rate environment.

Executive Overview of the Third Quarter of 2012

The Company recorded net income of $465,000, or $0.16 per share, for the three-month period ended September 30, 2012, its thirteenth consecutive profitable quarter.

• Consistent with its capital contingency plan, the Company paid a de minimis quarterly dividend of $0.01 per share.

• All three of the Bank’s capital ratios at September 30, 2012 were considerably above the levels required under regulatory guidelines to be considered “well capitalized,” and exceeded the higher standards as established in the Board resolution addressed below.

• Net interest income on a fully tax-equivalent basis for the third quarter of 2012 decreased by $22,000, or 0.6%, from the same quarter in 2011, notwithstanding a 2.6% increase in average interest-earning assets over the same period a year earlier.

• Net interest margin of 3.59% on a fully tax-equivalent basis for the third quarter of 2012 represented a decrease of ten basis points from the second quarter of 2012, and was ten basis points lower than the same period in 2011. The decrease was due primarily to market conditions that continue to put pressure on the average yield from interest-earning assets.

• The Bank recorded a $255,000 provision for loan losses in the third quarter of 2012, which was equal to the provision for the third quarter of 2011, and $125,000 less than the $380,000 provision recorded for the second quarter of 2012.

• Other income of $1.3 million for the third quarter of 2012 represented a $17,000 increase from the same quarter of 2011, and included a $481,000 decrease in the net loss from sales and write-downs of other real estate owned, partially offset by a $206,000 reduction in realized gains on available-for-sale investment securities and a $218,000 decrease in income on other real estate owned.

• Net losses in other real estate owned in the third quarter of 2012 totaled $6,000, compared with $487,000 in the same quarter a year earlier that included a $277,000 write-down of an uncompleted apartment project and a $167,000 write-down of a strip commercial center.

• There were no sales of available-for-sale securities in the third quarter of 2012.

• Other real estate owned income decreased to $72,000 from $290,000 for the third quarter of 2011 that included $222,000 of gross operating revenue from a golf course that was sold in December of 2011.

• Other expense for the third quarter of 2012 of $3.9 million was $313,000, or 7.4%, lower than the same quarter in 2011, primarily as a result of a $120,000 decrease in salaries and employee benefits that

(31)

included a $104,000 reduction in medical insurance expense, which is based on the Company’s claims experience, and a $276,000 reduction in other real estate owned expense due mostly to the sale of the golf course and a $61,000 refund of real estate taxes paid on the golf course in the prior year.

• The Company had income before income taxes of $617,000 for the third quarter of 2012, but recorded income tax expense of only $152,000, which was due primarily to a significant amount of tax-exempt income from bank-owned life insurance.

For the third quarter of 2012, total assets decreased by $2.1 million, or 0.5%, to $447.8 million from $449.9 million at June 30, 2012:

• Investments in interest-bearing demand deposits decreased $13.0 million from $31.4 million at June 30, 2012 to $18.4 million at September 30, 2012, of which $18.2 million was invested at the Federal Reserve Bank of Chicago and $243,000 at the Federal Home Loan Bank of Indianapolis.

• At September 30, 2012, the Bank held $5.7 million in FDIC insured bank certificates of deposit, all of which were added during the third quarter, which had a weighted-average rate of 0.76% and a weighted-average remaining life of about 1.6 years.

• A $762,000 increase in the investment securities available-for-sale portfolio during the third quarter of 2012 to $44.3 million resulted from a $2.6 million Ginnie Mae CMO purchase, coupled with a $383,000 increase in unrealized gains, exceeding principal payments on mortgage-backed securities of $2.1 million.

• Net loans receivable of $308.9 million at September 30, 2012 represented an increase of $5.2 million, or 1.7%, for the third quarter of 2012, which resulted primarily from $3.4 million growth in commercial real estate loans and $2.9 million growth in the commercial loan and lease portfolio, partially offset by a $1.1 million decline in residential real estate loans.

• Total non-performing loans of $8.6 million, or 2.7% of total net loans at September 30, 2012, represented a decrease of $33,000 from June 30, 2012.

• The allowance for loan losses of $4.2 million at September 30, 2012 was 1.35% of total loans and 49.5% of non-performing loans, compared to 1.33% and 47.8%, respectively, at June 30, 2012.

• Other real estate owned of $7.9 million at September 30, 2012 represented a $603,000 decrease from June 30, 2012 that resulted from the sale of eight properties with a total book value of $844,000, including an uncompleted apartment project with a book value of $500,000, offset by the addition of five properties totaling $241,000.

• During the third quarter of 2012, total deposits decreased by $3.2 million, or 0.9%, to $357.9 million, as the Bank maintained its strong focus on nurturing existing and attracting new core deposit relationships, while allowing the more rate-sensitive accounts to run off. This strategy resulted in a $4.1 million increase in checking, money market and savings balances, and a $7.3 million decrease in certificates of deposit during the quarter ended September 30, 2012.

• During September of 2012, the Bank prepaid a $10.0 million FHLB note that had an interest rate of 3.42% and maturity date of June 24, 2015, using the proceeds from a new $10.0 million FHLB borrowing with an interest rate of 0.96% and maturity date of September 20, 2017. The related prepayment penalty of $775,000 is being amortized over the life of the replacement borrowing.

Regulatory Action

On July 26, 2010, following a joint examination by and discussions with the FDIC and the Indiana Department of Financial Institutions, the Board of Directors of the Bank adopted a resolution agreeing to, among other things:

• Adopt a capital plan to increase its Tier 1 Leverage Ratio to 8.50% by June 30, 2010 and to maintain a Total Risk-Based Capital Ratio of 12.00%;

• Adopt a written plan to lower classified assets;

• Formulate and implement a written profit plan;

(32)

• Receive prior written consent from the FDIC and the Indiana Department of Financial Institutions before declaring or paying any dividends;

• Strive to reduce total holdings of bank-owned life insurance; and

• Furnish quarterly progress reports regarding the Bank’s compliance with all provisions of the resolution.

The Bank is currently in compliance with the provisions of the resolution.

Strategic Issues

To diversify the balance sheet and provide new avenues for loan and deposit growth, the Bank further expanded into Indianapolis, adding three full-service offices in 2008 and 2009 in the suburban markets of Carmel, Fishers and Westfield. As a result, half of our banking centers are located in Indianapolis. These banking centers are focused on generating commercial lending and relationship business, where significant opportunities exist to win market share from smaller institutions lacking capital strength and resources, and large institutions that have concentrated on large business customers.

Although the expansion strategy initially negatively affected earnings, the Bank’s expansion into new markets is critical for its long-term sustainable growth. Additional expansion in Indianapolis, including construction of a new full-service banking center in Plainfield on property purchased by the Bank in early 2008, was put on hold primarily due to the economic environment. On October 13, 2012, the Bank closed the McCordsville Banking Center. The opening of the Fishers Banking Center in 2008, which is in close proximity to the McCordsville and Geist communities, allowed Ameriana to serve the financial needs of its McCordsville customers from a new convenient location. Ameriana is committed to developing a branch network that meets the changing needs of customers while maximizing profitability for its shareholders.

The economic climate became progressively difficult through most of 2008, as the world-wide financial crisis reached a peak in the second half of the year, and the subsequent economic recovery continued to move slowly through the third quarter of 2012. The severity of this environment and its consequences to the industry created many new formidable challenges for bankers.

Earnings pressure is expected to continue as the uncertain economy continues to cause stress on credit quality. Deposit acquisition remains competitive; however, the Bank’s disciplined pricing has resulted in a significant reduction in its cost of deposits. The Bank’s pricing strategies, combined with the low interest rate environment, has positively impacted interest rate spread and net interest income. Reducing noninterest expense has been a priority of the Bank, and management has utilized aggressive cost control measures including freezing hiring, job restructuring and eliminating certain discretionary expenditures.

With the Bank’s mantra of “Soundness. Profitability. Growth – in that order, no exceptions,” the priorities, culture and risk strategy of the Bank are focused on asset quality and credit risk management. Despite the current economic pressures, as well as the industry’s challenges related to compliance and regulatory requirements, tightened credit standards, and capital preservation, management remains cautiously optimistic that business conditions will improve over the longer term and is steadfast in the belief that the Company is well positioned to grow and enhance shareholder value as this recovery occurs.

With a community banking history stretching over 120 years, the Bank has built its strong reputation with community outreach programs and being a workplace of choice. By combining its rich tradition with its ability to provide its customers with financial advice and solutions, the Bank will accomplish its mission by:

• being our customer’s first choice for financial advice and solutions;

• informing and educating customers on the basics of money management; and

• understanding and meeting customer’s financial needs throughout their life cycle.

Serving customers requires the commitment of all Ameriana Bank associates to provide exceptional service and sound financial advice. We believe these qualities will differentiate us from our competitors and increase profitability and shareholder value.

(33)

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company are maintained in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The Company’s significant accounting policies are described in detail in the Notes to the Company’s Consolidated Financial Statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations of the Company can be affected by these estimates and assumptions, and such estimates and assumptions are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective or complex, and subject to change if actual circumstances differ from those that were assumed. The following are the Company’s critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses provides coverage for probable losses in the Company’s loan portfolio. Management evaluates the adequacy of the allowance for loan losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, including the level of non-performing, delinquent and classified loans, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management’s estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.

The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for noncommercial loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences and historical losses, adjusted for current trends, for each loan category or group of loans. The allowance for loan losses relating to impaired loans is based on the loan’s observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan’s effective interest rate.

Regardless of the extent of the Company’s analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors, including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions, the subjective nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger, non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company’s evaluation of risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment.

Mortgage Servicing Rights. Mortgage servicing rights (“MSRs”) associated with loans originated and sold, where servicing is retained, are capitalized and included in other assets in the consolidated balance sheet. The value of the capitalized servicing rights represents the present value of the future servicing fees arising from the right to service loans in the portfolio. Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of MSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance. Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the MSRs is periodically reviewed for impairment based on a determination of fair value. Impairment, if any, is recognized through a valuation allowance and is recorded as amortization of intangible assets.

Valuation Measurements. Valuation methodologies often involve a significant degree of judgment, particularly when there are no observable active markets for the items being valued. Investment securities and residential mortgage loans held for sale are carried at fair value, as defined by FASB fair value guidance, which requires key judgments affecting how fair value for such assets and liabilities is determined. In addition, the outcomes of valuations have a direct bearing on the carrying amounts for goodwill and intangible assets. To determine the values of these assets and liabilities, as well as the extent to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment rates and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect the Company’s results of operations.

Income Tax Accounting. We file a consolidated federal income tax return. The provision for income taxes is based upon income in our consolidated financial statements. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and

(34)

liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.

Under U.S. GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax asset is highly subjective and dependent upon judgment concerning our evaluation of both positive and negative evidence, our forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Positive evidence includes the existence of taxes paid in available carry-back years as well as the probability that taxable income will be generated in future periods, while negative evidence includes any cumulative losses in the current year and prior two years and general business and economic trends. At September 30, 2012 and December 31, 2011, we determined that our existing valuation allowance was adequate, largely based on available tax planning strategies and our projections of future taxable income. Any reduction in estimated future taxable income may require us to increase the valuation allowance against our deferred tax assets. Any required increase to the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

Positions taken in our tax returns may be subject to challenge by the taxing authorities upon examination. The benefit of an uncertain tax position is initially recognized in the financial statements only when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is more likely than not of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Differences between our position and the position of tax authorities could result in a reduction of a tax benefit or an increase to a tax liability, which could adversely affect our future income tax expense.

We believe our tax policies and practices are critical accounting policies because the determination of our tax provision and current and deferred tax assets and liabilities have a material impact our net income and the carrying value of our assets. We believe our tax liabilities and assets are adequate and are properly recorded in the consolidated financial statements at September 30, 2012.

FINANCIAL CONDITION

Total assets of $447.8 million at September 30, 2012 represented an increase of $18.0 million, or 4.2%, from the December 31, 2011 total of $429.8 million, and was due primarily to an increase in cash and cash equivalents resulting mostly from the Bank’s growth in deposit accounts.

Cash and cash equivalents increased $15.0 million to $24.7 million at September 30, 2012 from the December 31, 2011 total of $9.7 million. Included in the total at September 30, 2012 was $18.2 million of interest-bearing demand deposits at the Federal Reserve Bank of Chicago. Cash and cash equivalents represent an immediate source of liquidity to fund loans or meet deposit outflows.

At September 30, 2012, the Bank held $5.7 million in FDIC insured bank certificates of deposit, all of which were added during the third quarter, which had a weighted-average rate of 0.76% and a weighted-average remaining life of approximately 1.6 years.

Investment securities available-for-sale increased by $419,000 to $44.3 million at September 30, 2012 from $43.8 million at December 31, 2011. This increase resulted primarily from $10.0 million in purchases of mortgage-backed securities and a $742,000 increase in unrealized gains mostly offset by $4.9 million in sales and $5.4 million of principal repayments on mortgage-backed securities. All mortgage-backed securities in the portfolio, which totaled $40.1 million at September 30, 2012, are insured by either Ginnie Mae, a U.S. Government agency, or by Fannie Mae or Freddie Mac, each a U.S. Government sponsored enterprise (“GSE”).

Net loans receivable decreased by $3.6 million, or 1.1%, to $308.9 million at September 30, 2012 from $312.5 million at December 31, 2011, due mostly to a $4.4 million decrease in the commercial loan and lease portfolio to $26.5 million that resulted primarily from the payoff of several large loans during the first half of the year. During the third quarter, the Bank experienced a $5.2 million increase in loans receivable, which resulted primarily from $3.4 million growth in commercial real estate loans and $2.9 million growth in the commercial loan and lease portfolio, partially offset by a $1.1 million decline in residential real estate loans. The Bank’s mortgage-banking strategy is reviewed regularly to ensure that it remains consistent with the Bank’s overall balance sheet management objectives.

(35)

Premises and equipment of $14.5 million at September 30, 2012 represented a $114,000 decrease from $14.7 million at December 31, 2011. The net decrease was a result of $708,000 of depreciation and $43,000 in dispositions for the nine months ended September 30, 2012 exceeding capital expenditures of $637,000 for the period.

Goodwill was $656,000 at September 30, 2012, unchanged from December 31, 2011. Goodwill of $457,000 relates to deposits associated with a banking center acquired in 1998, and $199,000 is the result of three separate insurance business acquisitions. The Bank’s impairment tests reflected no impairment as of September 30, 2012.

We have investments in life insurance on employees and directors with a balance or cash surrender value of $26.8 million and $26.2 million at September 30, 2012 and December 31, 2011, respectively. The non-taxable increase in cash surrender value of this life insurance was $577,000 for the first nine months of 2012, compared to $632,000 for the same period a year earlier.

Other real estate owned of $7.9 million at September 30, 2012 represented a $320,000 increase over the total of $7.5 million at December 31, 2011. Twenty-three additions to other real estate owned totaling $1.7 million and the sale of fourteen properties with an aggregate book value of $1.1 million occurred during the nine-month period ended September 30, 2012. The additions included twelve single-family properties, a multi-family property, eight residential building lots and two parcels of undeveloped land. The sales resulted in a net gain of $45,000, and consisted of eight single-family properties, four residential building lots, a four unit commercial property and an uncompleted apartment project. Write-downs of other real estate owned during the nine-month period ended September 30, 2012 totaled $222,000, with $130,000 related to the uncompleted apartment project. Each of the write-downs was due to further deterioration of the property’s market value evidenced by updated appraisals or valuations received during the period.

Other assets of $9.7 million at September 30, 2012 represented a $241,000 decrease from December 31, 2011, that resulted primarily from a $421,000 reduction in prepaid FDIC insurance premiums, a $178,000 reduction in the deferred tax asset, and a $160,000 decrease in accrued interest and dividends receivable, partially offset by a $421,000 increase in prepaid expense related primarily to a prepayment penalty on a FHLB borrowing that is being amortized over the life of the replacement FHLB borrowing.

Total deposits of $357.9 million at September 30, 2012 represented an increase of $20.7 million, or 6.1%, from $337.2 million at December 31, 2011, as the Bank maintained its strong focus on nurturing existing and attracting new core deposit relationships. During the first nine months of 2012, checking, money market and savings balances increased $28.7 million, while certificate of deposit balances decreased $8.0 million. The Bank has concentrated on strategies designed to grow total balances in multi-product deposit relationships, and continues to utilize pricing strategies designed to produce growth with an acceptable marginal cost for both existing and new deposits.

Borrowings declined by $4.0 million during the first nine months of 2012 to $45.8 million, as the Bank repaid a Federal Home Loan Bank note that had been on the books for the first week of fiscal 2012 to meet a short-term funding need. Additionally, in September, the Bank prepaid a $10.0 million FHLB note that had an interest rate of 3.42% and maturity date of June 24, 2015, using the proceeds from a $10.0 million FHLB borrowing with an interest rate of 0.96% and maturity date of September 20, 2017. This restructuring strategy allowed the Bank to extend the debt during a low interest rate environment, and reduce the amount of interest expense that will be recorded during the period from the restructuring date to the original maturity date of the replaced borrowing. Wholesale funding options and strategies are continuously analyzed to ensure that we retain sufficient sources of credit to fund all of the Bank’s needs, and to control funding costs by using this alternative to organic deposit account funding when appropriate.

Drafts payable of $1.5 million at September 30, 2012 decreased $1.0 million from $2.5 million at December 31, 2011. This difference will vary and is a function of the dollar amount of checks issued near period end and the time required for those checks to clear.

Total shareholders’ equity of $36.2 million at September 30, 2012 represented a $1.7 million increase over the total of $34.5 million at December 31, 2011. The increase resulted from net income of $1.3 million and a $510,000 increase in unrealized gains net of income tax related to the Bank’s available-for-sale investment securities portfolio, reduced by $89,000 in dividends declared during the nine-month period. The Company and the Bank’s regulatory capital ratios were all considerably above the levels required under regulatory guidelines to be considered “well capitalized,” and exceeded the higher standards as established in the July 26, 2010 Board resolution.

(36)

RESULTS OF OPERATIONS

Third Quarter of 2012 compared to the Third Quarter of 2011

The Company recorded net income of $465,000, or $0.16 per diluted share, for the third quarter of 2012, compared to net income of $298,000, or $0.10 per diluted share, for the third quarter of 2011.

Credit costs associated with a high level of non-performing assets that resulted from an extended period of weak economic conditions continued to adversely affect earnings during the third quarter of 2012, but to a lesser degree than they did in the same quarter of 2011. The earnings growth for the third quarter of 2012 compared to the same quarter a year earlier was related primarily to a $481,000 reduction in the net loss from sales and write-downs of other real estate owned coupled with a $58,000 increase in other real estate income net of expense, partially offset by $206,000 in net realized gains from sales of available-for-sale investment securities in the third quarter of 2011 compared with none in the third quarter of 2012.

Net Interest Income

Net interest income on a fully tax-equivalent basis of $3.5 million for the third quarter of 2012 represented a decrease of $22,000, or 0.6%, compared to the same period of 2011, notwithstanding that average interest-earning assets totaled $385.7 million, a 2.6% increase over the same period of 2011. Net interest margin on a fully tax-equivalent basis for the third quarter of 2012 of 3.59% was ten basis points lower than the year earlier period. The Bank was able to stabilize net interest income as it benefited from the growth in interest-earning assets, coupled with certain market conditions that allowed it to decrease its cost of funds, primarily through the re-pricing of deposit accounts in a relatively stable low interest rate environment, while market conditions also contributed to a decrease in average yield on interest-earning assets.

Tax-exempt interest was $37,000 for the third quarter of 2012 compared to $28,000 for the same period of 2011, and resulted from municipal securities and municipal loans. Tax-equivalent adjustments were $16,000 and $12,000 for the third quarter of 2012 and 2011, respectively.

“Net interest income on a fully tax-equivalent basis” is calculated by increasing net interest income by an amount that represents the additional taxable interest income that would be needed to produce the same amount of after-tax income as the tax-exempt interest income included in net interest income for the period.

“Net interest margin on fully tax-equivalent basis” is calculated by dividing annualized “net interest income on a fully tax-equivalent basis” by average interest-earning assets for the period.

Our “fully tax-equivalent basis” calculations are based on a federal income tax rate of 34%.

Provision for Loan Losses

The following table sets forth an analysis of the Bank’s allowance for loan losses for the periods indicated:

	(Dollars in thousands) Three Months Ended September 30,
	2012			2011
Balance at beginning of quarter	$	4,103		$	4,119
Provision for loan losses		255			255
Charge-offs		(133	)		(151	)
Recoveries		11			6
Net charge-offs		(122	)		(145	)
Balance at end of period	$	4,236		$	4,229
Allowance to total loans		1.35	%		1.39	%
Allowance to non-performing loans		49.50	%		46.70	%

We recorded a provision for loan losses of $255,000 for the second quarter of both 2012 and 2011, which is reflective of the continuing pressure of economic conditions on credit quality, including an elevated amount of non-performing loans. Total charge-offs of $133,000 for the third quarter of 2012 included loans with specific reserves totaling $129,000 at June 30, 2012.

(37)

The following table summarizes the Company’s non-performing loans:

	(Dollars in thousands) September 30,
	2012			2011
Loans accounted for on a non-accrual basis	$	8,324		$	8,619
Accruing loans contractually past due 90 days or more		233			436
Total of non-accrual and 90 days or more past due loans (1)	$	8,557		$	9,055
Percentage of total net loans		2.77	%		3.02	%
Other non-performing assets (2)	$	7,866		$	8,758
Total non-performing assets	$	16,423		$	17,813
Percentage of total assets		3.67	%		4.13	%
Troubled debt restructurings in total of nonaccrual and 90 days or more past due loans (1)	$	2,473		$	1,353
Total troubled debt restructurings	$	11,757		$	8,696

(1) Total non-accrual loans and accruing loans 90 days or more past due at September 30, 2012 included $2.5 million of troubled debt restructurings, which consisted of a $1.1 million residential construction loan, six residential non- construction loans totaling $1.0 million, four commercial loans totaling $362,000, and three consumer loans totaling $7,000.

(2) Other non-performing assets represent property acquired through foreclosure or repossession. This property is carried at the lower of its fair market value or its carrying value.

The allowance for loan losses of $4.2 million at September 30, 2012 was $7,000 higher than a year earlier, and the allowance for loan losses to non-performing loans ratio increased from 46.70% at September 30, 2011 to 49.50% at September 30, 2012 due primarily to a lower total of non-performing loans. Non-performing loans of $8.6 million at September 30, 2012 represented a $498,000 decrease from the total of $9.1 million at September 30, 2011, and a $33,000 decrease from the end of the prior quarter. It is management’s opinion that the allowance for loan losses at September 30, 2012 is adequate based on measurements of the credit risk in the entire portfolio as of that date.

Total charge-offs of $133,000 for the third quarter of 2012 included $47,000 related to two residential properties acquired through foreclosure during the quarter, and a $65,000 full charge-off of a commercial loan.

At September 30, 2012, the Bank had $11.8 million in loans categorized as troubled debt restructurings, with fourteen loans for $2.5 million also included in the table above in the total for loans accounted for on a non-accrual basis. The total of $11.8 million included a $4.4 million loan on a hotel in northern Indiana, two other commercial real estate loans totaling $40,000, a $1.1 million loan on a residential condominium project, twenty-one single-family residential property loans totaling $2.7 million, a land development loan for $1.9 million, three other land loans totaling $1.2 million, four commercial loans totaling $362,000, and three consumer loans totaling $7,000.

Other Income

The Company recorded other income of $1.3 million for the third quarter of 2012, an increase of $17,000 from the total for the same period a year earlier that resulted primarily from the net of the following changes:

• A $481,000 reduction in the net loss from sales and write-downs of other real estate owned to $6,000 for the third quarter of 2012 from a net loss of $487,000 for the third quarter of 2011 that included a $277,000 write-down of an uncompleted apartment project and a $167,000 write-down of a strip commercial center;

• No sales of available-for-sale investment securities in the second quarter of 2012, compared to sales in the year earlier quarter with net realized gains of $206,000; and

• A $218,000 decrease in other real estate owned income to $72,000 from $290,000 for the third quarter of 2011 that included $222,000 of gross operating revenue from a golf course that was sold in the fourth quarter of 2011.

(38)

Other Expense

Total other expense of $3.9 million for the third quarter of 2012 was $313,000, or 7.4%, lower than the third quarter of 2011, with the following major differences:

• A $120,000 decrease in salaries and employee benefits resulting primarily from a $104,000 reduction in the cost of medical insurance expense, which is based on the Company’s claims experience; and

• A $276,000 decrease in other real estate owned expense that resulted primarily from the December 2011 sale of a golf course, and a $61,000 refund in the third quarter of 2012 of real estate taxes paid on the golf course, which was sold in the prior year.

Income Tax Expense

The Company had income before income taxes of $617,000, but recorded an income tax expense of only $152,000 for the third quarter of 2012 due to a significant amount of tax-exempt income, primarily from bank-owned life insurance. For the same quarter of 2011, the Company had income before income taxes of $312,000 and recorded an income tax expense of only $14,000 that also resulted primarily from tax-exempt BOLI income.

We have a deferred state tax asset that is primarily the result of operating losses sustained since 2003. We started recording a valuation allowance against our current period state income tax benefit in 2005 due to our concern that we may not be able to use more than the tax asset already recorded on the books without modifying the use of AIMI, our investment subsidiary, which was liquidated effective December 31, 2009. Operating income from AIMI was not subject to state income taxes under state law, and as a result was also a major factor in the growth of the deferred state tax asset.

The Company also has a deferred federal tax asset that is composed of tax benefit from a net operating loss carry-forward and purchased tax credits. The federal loss carry-forward expires in 2026, and the tax credits begin to expire in 2023. The tax credits include alternative minimum tax credits, which have no expiration date. Management believes that the Company will be able to utilize the benefits recorded for loss carry-forwards and credits within the allotted time periods.

In addition to the liquidation of AIMI, the Bank has initiated several strategies designed to expedite the use of both the deferred state tax asset and the deferred federal tax asset. Through sales of $34.5 million of municipal securities and only one purchase since December 31, 2006, that segment of the investment securities portfolio has been reduced to $2.4 million. The proceeds from these sales have been reinvested in taxable financial instruments. The Bank has periodically evaluated a sale/leaseback transaction that could result in a taxable gain on its office properties, and also allow the Bank to convert nonearning assets to assets that will produce taxable income. Additionally, the Bank is exploring options related to reducing its current investment in tax-exempt bank owned life insurance policies that involve the reinvestment of the proceeds in taxable financial instruments with a similar or greater risk-adjusted after-tax yield. Sales of banking centers not important to long-term growth objectives that would result in taxable gains and reduced operating expenses could be considered by the Bank.

Nine Months Ended September 30, 2012 compared to the Nine Months Ended September 30, 2011

The Company recorded net income of $1.3 million, or $0.42 per diluted share, for the first nine months of 2012, an increase of $574,000 from net income of $689,000, or $0.23 per diluted share, for the first nine months of 2011.

The primary factor in the earnings improvement was a decrease in other expense of $970,000, or 7.5%, compared to the first nine months of 2011 that resulted mostly from a $359,000 reduction in salaries and employee benefits, and a $612,000 reduction in other real estate owned expense.

Net Interest Income

Net interest income on a fully tax-equivalent basis increased $27,000, or 0.3%, to $10.6 million for the first nine months of 2012 compared with $10.5 million for the same period of 2011, primarily as a result of a $5.9 million, or 1.6%, increase in the Bank’s average interest-earning assets to $383.8 million for the nine months of 2012. The Company’s net interest margin on a fully tax-equivalent basis decreased 5 basis points to 3.68% for the first nine months of 2012 from 3.73% for the first nine months of 2011.

(39)

Tax-exempt interest was $111,000 for the first nine months of 2012 compared to $125,000 for the same period of 2011. Our tax-exempt interest results from holdings of bank-qualified municipal securities and municipal loans. The tax-equivalent adjustments were $47,000 and $56,000 for the first nine months of 2012 and 2011, respectively.

Provision for Loan Losses

The following table sets forth an analysis of the Bank’s allowance for loan losses for the periods indicated:

	(Dollars in thousands) Nine Months Ended September 30,
	2012			2011
Balance at beginning of year	$	4,132		$	4,212
Provision for loan losses		890			870
Charge-offs		(822	)		(896	)
Recoveries		36			43
Net charge-offs		(786	)		(853	)
Balance at end of period	$	4,236		$	4,229

We had a provision for loan losses of $890,000 for the first nine months of 2012, compared to $870,000 for the same period in 2011. The 2012 provision represents a $20,000, or 2.3%, increase from the nine-month period a year earlier. The similar provision is reflective of the continuing pressure of economic conditions on credit quality, including an elevated amount of non-performing loans and charge-offs. The allowance to total loans percentage was 1.35% at September 30, 2012 and 1.30% at December 31, 2011, compared with 1.39% at September 30, 2011 and 1.33% at December 31, 2010.

Other Income

Although the increase of $11,000, or 0.3%, in other income to $4.0 million for the nine months of 2012 compared to the same period of 2011 was not material, it resulted primarily from the net of the following major differences:

• A $965,000 decrease in the net loss from sales and write-downs of other real estate owned to $177,000 for the nine months of 2012, compared to $1.1 million for the same period a year earlier that included a $678,000 write-down of a strip commercial center and a $277,000 write-down of an uncompleted apartment project. The total for the first nine months of 2012 included a $130,000 write-down of the uncompleted apartment project that was sold during the third quarter of 2012;

• A $617,000 decrease in net gains on sales of available-for-sale securities from $706,000 for the first nine months of 2011 from nineteen sales totaling $38.8 million, to $89,000 in net gains for the nine months of 2012 from two sales totaling $4.9 million;

• A $436,000 decrease in rental income from OREO, that resulted primarily from the sale of an apartment complex in June 2011 and the sale of a golf course in December 2011;

• A $158,000 increase in gains on sales of loans and servicing rights to $339,000 for the nine months of 2012 from $181,000 for the same period a year earlier, that resulted from increased residential mortgage lending sales activity; and

• A $141,000, or 8.9%, increase to $1.7 million in fees and service charges on deposit accounts that was due primarily to a 10.8% increase in the number of checking accounts since the end of the third quarter of 2011 that resulted from the Bank’s continuing focus on growing core deposit relationships.

(40)

Other Expense

The Company recorded a $970,000, or 7.5%, decrease in total other expense to $12.0 million for the first nine months of 2012, compared to $12.9 million for the first nine months of 2011, due primarily to the following major differences:

• A $359,000 decrease in salaries and employee benefits resulting from the elimination of positions primarily through attrition, and a $233,000 reduction in the cost of medical insurance expense, partially offset by a $59,000 increase in funding costs for the frozen multi-employer defined benefit retirement plan; and

• A $612,000 decrease in other real estate owned expense that resulted primarily from the sale of an apartment complex in late June 2011 and the sale of a golf course in December 2011, and lower real estate expense than the year earlier nine-month period. During the nine months ended September 30, 2011, the Bank paid and expensed $130,000 in real estate taxes at the time of acquisition of the golf course and residential real estate project, while during 2012 the Bank received a $61,000 refund of the taxes paid in the prior year on this property.

Income Tax Expense

The Company had income before income taxes of $1.6 million for the first nine months of 2012, but recorded income tax expense of only $356,000, a result of tax-exempt income. The Company had income before income taxes of $621,000 for the same period of 2011, but recorded a $68,000 income tax benefit that was also a result of tax-exempt income. For both nine month periods, the Bank had a significant amount of tax-exempt income from BOLI, in addition to tax-exempt income from municipal loans and municipal securities.

OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.

We do not have any off-balance-sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is the ability to meet current and future obligations of a short-term nature. Historically, funds provided by operations, loan repayments and new deposits have been our principal sources of liquid funds. In addition, we have the ability to obtain funds through the sale of investment securities and mortgage loans, through borrowings from the FHLB system, and through the brokered certificates market. We regularly adjust the investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability program.

The Company is a separate entity and apart from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for the payment of dividends declared for its shareholders and the payment of interest on its subordinated debentures. At times, the Company has repurchased its stock. Substantially all of the Company’s operating cash is obtained from subsidiary dividends. Payment of such dividends to the Company by the Bank is limited under Indiana law. Additionally, as part of a resolution adopted by the Board of Directors of the Bank on July 26, 2010, the Bank cannot declare or pay any dividends without the prior written consent of the FDIC and the Indiana Department of Financial Institutions. See “Regulatory Action.” The Company believes that such restriction will not have an impact on the Company’s ability to meet its ongoing cash obligations.

At September 30, 2012, we had $23.5 million in loan commitments outstanding and $50.4 million of additional commitments for line of credit receivables. Certificates of deposit due within one year of September 30, 2012 totaled $76.6 million, or 21.4% of total deposits. If these maturing certificates of deposit do not remain with us, other sources of funds must be used, including other certificates of deposit, brokered CDs, and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than currently paid on the certificates of deposit due on or before September 30, 2013. However, based on past experiences we believe that a significant portion of the certificates of deposit will remain. We have the ability to attract and retain deposits by adjusting the interest rates offered. We held no brokered CDs at September 30, 2012 and at December 31, 2011.

Our primary investing activity, the origination and purchase of loans, is offset by the sale of loans and principal repayments. In the first nine months of 2012, net loans receivable decreased by $3.6 million, or 1.1%.

(41)

Financing activities consist primarily of activity in deposit accounts and FHLB advances. Deposit flows are affected by the overall level of interest rates, the interest rates and products we offer, and our local competitors and other factors. Total deposits increased by $20.7 million, or 6.1%, and total FHLB advances were reduced by $4.0 million, or 12.5%, during the first nine months of 2012.

The Bank is subject to various regulatory capital requirements set by the FDIC, including a risk-based capital measure. The Company is also subject to similar capital requirements set by the Federal Reserve Board. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. In addition, as part of a resolution adopted by the Board of Directors of the Bank on July 26, 2010, the Bank adopted a capital plan to increase its Tier 1 Leverage Ratio to 8.50% by June 30, 2010 and maintain a Total Risk-Based Capital Ratio of 12.00%, both of which the Bank has accomplished. See “Regulatory Action.”

There are five capital categories defined in the regulations, ranging from well capitalized to critically under-capitalized. Classification in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank’s operations. At September 30, 2012 and December 31, 2011, the Bank was categorized as “well capitalized” and met all subject capital adequacy requirements. There are no conditions or events since September 30, 2012 that management believes have changed this classification.

Actual, required, and well capitalized amounts and ratios for the Bank are as follows:

September 30, 2012
	Actual Capital					Required For Adequate Capital					To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital ratio (risk based capital to risk-weighted assets)	$	44,233		14.30	%	$	24,751		8.00	%	$	30,939		10.00	%
Tier 1 risk-based capital ratio (tier 1 capital to risk-weighted assets)	$	40,305		13.03	%	$	12,376		4.00	%	$	18,563		6.00	%
Tier 1 leverage ratio (tier 1 capital to adjusted average total assets)	$	40,305		9.14	%	$	13,223		3.00	%	$	22,039		5.00	%

December 31, 2011
	Actual Capital					Required For Adequate Capital					To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital ratio (risk based capital to risk-weighted assets)	$	42,874		13.58	%	$	25,258		8.00	%	$	31,573		10.00	%
Tier 1 risk-based capital ratio (tier 1 capital to risk-weighted assets)	$	38,883		12.32	%	$	12,629		4.00	%	$	18,944		6.00	%
Tier 1 leverage ratio (tier 1 capital to adjusted average total assets)	$	38,883		9.23	%	$	12,633		3.00	%	$	21,055		5.00	%

Actual, required, and well capitalized amounts and ratios for the Company are as follows:

September 30, 2012
	Actual Capital					Required For Adequate Capital					To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital ratio (risk based capital to risk-weighted assets)	$	44,480		14.24	%	$	24,996		8.00	%	$	31,245		10.00	%
Tier 1 risk-based capital ratio (tier 1 capital to risk-weighted assets)	$	40,552		12.98	%	$	12,498		4.00	%	$	18,747		6.00	%
Tier 1 leverage ratio (tier 1 capital to adjusted average total assets)	$	40,552		9.19	%	$	13,233		3.00	%	$	22,054		5.00	%

(42)

December 31, 2011
	Actual Capital					Required For Adequate Capital					To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital ratio (risk based capital to risk-weighted assets)	$	43,229		13.56	%	$	25,495		8.00	%	$	31,868		10.00	%
Tier 1 risk-based capital ratio (tier 1 capital to risk-weighted assets)	$	39,238		12.31	%	$	12,747		4.00	%	$	19,121		6.00	%
Tier 1 leverage ratio (tier 1 capital to adjusted average total assets)	$	39,238		9.31	%	$	12,642		3.00	%	$	21,069		5.00	%

AVAILABLE INFORMATION

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge on our website,www.ameriana.com, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission. Information on our website should not be considered a part of this Form 10-Q.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not applicable as issuer is a smaller reporting company.

ITEM 4 – CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, (1) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to our management, including our principal executive and principal financial officers as appropriate to allow timely discussions regarding required disclosures. It should be noted that the design of our disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no assurance that any design of disclosure controls and procedures will succeed in achieving its stated goals under all potential future conditions, but our principal executive and financial officers have concluded that our disclosure controls and procedures are, in fact, effective at a reasonable assurance level.

There were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

Neither the Company nor the Bank is involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the financial condition and results of operations of the Company.

(43)

ITEM 1A – RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company did not repurchase any of its common stock during the quarter ended September 30, 2012, and at September 30, 2012 had no approved repurchase plans or programs.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4 – MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5 – OTHER INFORMATION

Not Applicable

ITEM 6 – EXHIBITS

No.	Description
31	Rule 13a-14(a)/15d-14(a) Certifications
32	Section 1350 Certifications
101 *	The following materials from Ameriana Bancorp’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Income, (iii) the Consolidated Condensed Statements of Comprehensive Income, (iv) the Consolidated Condensed Statement of Shareholders’ Equity, (v) the Consolidated Condensed Statements of Cash Flows and (vi) related Notes.

* Furnished, not filed.

(44)

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.

	AMERIANA BANCORP
DATE: November 8, 2012	/s/ Jerome J. Gassen
	Jerome J. Gassen
	President and Chief Executive Officer (Duly Authorized Representative)
DATE: November 8, 2012	/s/ John J. Letter
	John J. Letter
	Senior Vice President-Treasurer and Chief Financial Officer (Principal Financial Officer and Accounting Officer)