Ameriana Bancorp (ASBI) 10-Q 2013 Q1 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 March 31, 2013

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 May 8, 2013, 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 March 31, 2013 and December 31, 2012		3
	Consolidated Condensed Statements of Income for the Three Months Ended March 31, 2013 and 2012		4
	Consolidated Condensed Statements of Comprehensive Income for the Three Months Ended March 31, 2013 and 2012		6
	Consolidated Condensed Statement of Shareholders’ Equity for the Three Months Ended March 31, 2013		7
	Consolidated Condensed Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012		8
	Notes to Consolidated Condensed Financial Statements		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		31
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)

	March 31, 2013 (Unaudited)			December 31, 2012
Assets
Cash on hand and in other institutions	$	5,871		$	6,589
Interest-bearing demand deposits		17,897			14,264
Cash and cash equivalents		23,768			20,853
Interest-bearing time deposits		4,463			5,704
Investment securities available for sale, at fair value		35,257			39,296
Investment securities held to maturity, at amortized cost		2,348			2,349
Loans held for sale		954			797
Loans, net of allowance for loan losses of $3,926 and $4,239		319,547			313,205
Premises and equipment, net		14,355			14,540
Stock in Federal Home Loan Bank		4,472			4,472
Goodwill		656			656
Cash value of life insurance		27,194			27,011
Other real estate owned		6,120			6,326
Other assets		9,885			10,554
Total assets	$	449,019		$	445,763
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Noninterest-bearing	$	56,591		$	53,024
Interest-bearing		302,146			303,679
Total deposits		358,737			356,703
Borrowings		45,810			45,810
Drafts payable		1,319			1,243
Other liabilities		6,232			5,461
Total liabilities		412,098			409,217
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			1,052
Retained earnings		35,177			34,592
Accumulated other comprehensive income		476			686
Treasury stock at cost – 225,000 shares		(2,998	)		(2,998	)
Total shareholders’ equity		36,921			36,546
Total liabilities and shareholders’ equity	$	449,019		$	445,763

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 March 31,
	2013			2012
Interest Income
Interest and fees on loans	$	4,021		$	4,221
Interest on mortgage-backed securities		168			244
Interest on investment securities		44			46
Other interest and dividend income		58			48
Total interest income		4,291			4,559
Interest Expense
Interest on deposits		432			654
Interest on borrowings		330			388
Total interest expense		762			1,042
Net Interest Income		3,529			3,517
Provision for loan losses		255			255
Net Interest Income After Provision for Loan Losses		3,274			3,262
Other Income
Other fees and service charges		538			522
Brokerage and insurance commissions		449			412
Net realized and recognized gains on available-for-sale investment securities (includes $92 and $89 for the three months ended March 31, 2013 and 2012, respectively, related to accumulated other comprehensive income reclassifications)		92			89
Gains on sales of loans and servicing rights		157			132
Net loss from sales and write-downs of other real estate owned		(1	)		(156	)
Other real estate owned income		58			80
Increase in cash value of life insurance		183			193
Other		36			8
Total other income		1,512			1,280
Other Expense
Salaries and employee benefits		2,192			2,282
Net occupancy expense		402			418
Furniture and equipment expense		211			203
Legal and professional fees		161			148
FDIC insurance premiums and assessments		147			145
Data processing expense		206			188
Printing and office supplies		63			77
Marketing expense		88			92
Other real estate owned expense		80			145
Other		410			421
Total other expense		3,960			4,119
Income Before Income Taxes		826			423
Income tax (includes $31 and $30 for the three months ended March 31, 2013 and 2012, respectively, related to income tax expense from reclassification items)		212			78
Net Income	$	614		$	345

See notes to consolidated condensed financial statements

(4)

Ameriana Bancorp

Consolidated Condensed Statements of Income

(In thousands, except per share data)

(Unaudited)

	Three Months Ended March 31,
	2013		2012
Basic Earnings Per Share	$	0.21	$	0.12
Diluted Earnings Per Share	$	0.21	$	0.12
Dividends Declared Per Share	$	0.01	$	0.01

See notes to consolidated condensed financial statements

(5)

Ameriana Bancorp

Consolidated Condensed Statements of Comprehensive Income

(In thousands, except per share data)

(Unaudited)

	Three Months Ended March 31,
	2013			2012
Net Income	$	614		$	345
Unrealized appreciation on available-for-sale securities, net of tax benefit of $77 and tax expenses of $19 for the three months ended March 31, 2013 and March 31, 2012, respectively		(149	)		37
Less: reclassification adjustment for realized gains included in net income, net of taxes of $31 and $30 for the three months ended March 31, 2013 and March 31, 2012, respectively		61			59
Other comprehensive loss		(210	)		(22	)
Comprehensive Income	$	404		$	323

See notes to consolidated condensed financial statements

(6)

Ameriana Bancorp

Consolidated Condensed Statement of Shareholders’ Equity

For the Three Months Ended March 31, 2013

(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, 2012	$	3,214	$	1,052	$	34,592		$	686		$	(2,998	)	$	36,546
Net Income		—		—		614			—			—			614
Other comprehensive loss		—		—		—			(210	)		—			(210	)
Dividends declared ($0.01 per share)		—		—		(29	)		—			—			(29	)
Balance at March 31, 2013	$	3,214	$	1,052	$	35,177		$	476		$	(2,998	)	$	36,921

See notes to consolidated condensed financial statement.

(7)

Ameriana Bancorp

Consolidated Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2013			2012
Operating Activities
Net income	$	614		$	345
Items not requiring (providing) cash
Provision for losses on loans		255			255
Depreciation and amortization		389			344
Increase in cash value of life insurance		(183	)		(193	)
Gain from sale of available-for-sale securities		(92	)		(89	)
Loss on sale or write-down of other real estate owned		1			156
Mortgage loans originated for sale		(4,574	)		(5,138	)
Proceeds from sales of mortgage loans originated for sale		4,522			5,075
Gains on sales of mortgage loans and servicing rights		(157	)		(132	)
Increase in accrued interest payable		316			469
Other adjustments		836			(199	)
Net cash provided by operating activities		1,927			893
Investing Activities
Purchase of securities		(2,371	)		(4,830	)
Proceeds/principal from the sale of securities		3,690			4,850
Net change in interest-bearing time deposits		1,241			—
Principal collected on mortgage-backed securities		2,373			1,637
Net change in loans		(6,666	)		2,080
Proceeds from sales of other real estate owned		229			180
Net purchases and construction of premises and equipment		(66	)		(84	)
Other investing activities		—			1
Net cash (used in) provided by investing activities		(1,570	)		3,834
Financing Activities
Net change in demand and savings deposits		8,232			13,680
Net change in other certificates of deposit		(6,198	)		3,942
Increase (decrease) in drafts payable		76			(1,214	)
Repayment of long-term borrowings		—			(4,000	)
Net change in advances by borrowers for taxes and insurance		477			406
Cash dividends paid		(29	)		(29	)
Net cash provided by financing activities		2,558			12,785
Change in Cash and Cash Equivalents		2,915			17,512
Cash and Cash Equivalents at Beginning of Year		20,853			9,709
Cash and Cash Equivalents at End of Quarter	$	23,768		$	27,221
Supplemental information:
Interest paid on deposits	$	119		$	185
Interest paid on borrowings	$	327		$	388
Income tax paid	$	—		$	250
Non-cash supplemental information:
Transfers from loans to other real estate owned	$	69		$	336

See notes to consolidated condensed financial statements.

(8)

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. All significant intercompany accounts and transactions have been eliminated in consolidation.

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, 2012 has been derived from the audited consolidated balance sheet of the Company as of that date. The results of operations for the three months ended March 31, 2013 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, 2012.

NOTE B — SHAREHOLDERS’ EQUITY

On March 26, 2013, the Board of Directors declared a quarterly cash dividend of $0.01 per share. This dividend, totaling approximately $29,000, was accrued for payment to shareholders of record on April 5, 2013 and was paid on April 26, 2013.

No stock options were granted or exercised during the first quarter of 2013.

NOTE C — EARNINGS PER SHARE

Earnings per share were computed as follows:

	(In thousands, except share data)
	Three Months Ended March 31,
	2013						2012
	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	$	614		2,988,952	$	0.21	$	345		2,988,952	$	0.12
Effect of dilutive stock options		—		—				—		—
Diluted Earnings Per Share: Income available to common shareholders	$	614		2,988,952	$	0.21	$	345		2,988,952	$	0.12

Options to purchase 141,982 and 163,482 shares of common stock at exercise prices of $9.25 to $15.56 per share were outstanding at March 31, 2013 and 2012, 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.

(9)

NOTE D — INVESTMENT SECURITIES

The following tables provide the composition of investment securities at March 31, 2013 and December 31, 2012 (dollars in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale at March 31, 2013
Ginnie Mae and GSE mortgage-backed pass-through securities	$	30,288	$	619	$	2	$	30,905
Ginnie Mae collateralized mortgage obligations		2,518		—		12		2,506
Mutual fund		1,754		92		—		1,846
	$	34,560	$	711	$	14	$	35,257

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held to Maturity at March 31, 2013
Municipal securities	$	2,348	$	25	$	—	$	2,373

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale at December 31, 2012
Ginnie Mae and GSE mortgage-backed pass-through securities	$	33,977	$	917	$	1	$	34,893
Ginnie Mae collateralized mortgage obligations		2,562		—		8		2,554
Mutual fund		1,744		105		—		1,849
	$	38,283	$	1,022	$	9	$	39,296

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held to Maturity at December 31, 2012
Municipal securities	$	2,349	$	—	$	—	$	2,349

(10)

The amortized cost and fair value of securities at March 31, 2013 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		—		—
Five to ten years		—		—
After ten years		—		—
		—		—
Ginnie Mae and GSE mortgage-backed pass-through securities		30,288		30,905
Ginnie Mae collateralized mortgage obligations		2,518		2,506
Mutual fund		1,754		1,846
	$	34,560	$	35,257

	Held to Maturity
	Amortized Cost		Fair Value
Within one year	$	—	$	—
One to five years		200		202
Five to ten years		446		450
After ten years		1,702		1,721
Municipal securities	$	2,348	$	2,373

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 March 31, 2013 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 March 31, 2013 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 March 31, 2013 and December 31, 2012 was $7,112,000 and $2,605,000, respectively, which was approximately 18.9% and 6.3%, 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.

(11)

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 March 31, 2013 and December 31, 2012 (dollars in thousands):

At March 31, 2013	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	$	4,606	$	2	$	—	$	—	$	4,606	$	2
Ginnie Mae collateralized mortgage obligations		2,506		12		—		—		2,506		12
	$	7,112	$	14	$	—	$	—	$	7,112	$	14

At December 31, 2012	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	$	51	$	1	$	—	$	—	$	51	$	1
Ginnie Mae collateralized mortgage obligations		2,554		8		—		—		2,554		8
	$	2,605	$	9	$	—	$	—	$	2,605	$	9

Investment securities with a total market value of $9,320,000 and $9,185,000 were pledged at March 31, 2013 and December 31, 2012, respectively, to secure a repurchase agreement.

A gross gain of $92,000 resulting from sales of available-for-sale securities during the three-month period ended March 31, 2013, with a tax expenses of $31,000, compared to sales resulting in a gross gain of $89,000 for the three-month period ended March 31, 2012, with a tax expense of $30,000.

NOTE E — LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

(Dollars in Thousands)
	At March 31,		At December 31,
	2013		2012
Real estate loans:
Commercial	$	107,967	$	101,106
Residential		166,613		167,998
Construction		14,959		14,886
Commercial loans and leases		31,907		30,934
Municipal loans		1,177		1,187
Consumer loans		1,950		2,176
Total loans		324,573		318,287
Less:
Undisbursed loan proceeds		397		214
Deferred loan fees, net		703		629
Allowance for loan losses		3,926		4,239
		5,026		5,082
Total loans - net	$	319,547	$	313,205

(12)

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 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.

(13)

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;

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.

(14)

The following table presents the balance and activity in allowance for loan losses and the recorded investment in loans and impairment methods as of March 31, 2013 (dollars in thousands):

Allowance for Loan Losses and Recorded Investment in Loans

For Three Months Ended March 31, 2013

	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	$	789		$	1,504		$	785		$	1,080		$	—	$	81		$	4,239
Provision (credit) for losses		(7	)		206			(85	)		83			—		58			255
Charge-offs (1)		(479	)		(71	)		—			(4	)		—		(71	)		(625	)
Recoveries		—			34			8			2			—		13			57
Balance at end of period	$	303		$	1,673		$	708		$	1,161		$	—	$	81		$	3,926
Ending allowance balance:
Individually evaluated for impairment	$	129		$	634		$	307		$	330		$	—	$	11		$	1,411
Collectively evaluated for impairment		174			1,039			401			831			—		70			2,515
Total	$	303		$	1,673		$	708		$	1,161		$	—	$	81		$	3,926
Ending loan balance:
Individually evaluated for impairment	$	4,996		$	7,136		$	4,075		$	944		$	—	$	48		$	17,199
Collectively evaluated for impairment		102,971			159,477			10,884			30,963			1,177		1,902			307,374
Total	$	107,967		$	166,613		$	14,959		$	31,907		$	1,177	$	1,950		$	324,573

The following table presents the balance and activity in allowance for loan losses as of March 31, 2012 (dollars in thousands):

Allowance for Loan Losses

For Three Months Ended March 31, 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 (credit) for losses		(60	)		184			(74	)		184			—		21			255
Charge-offs (1)		—			(250	)		(10	)		(89	)		—		(16	)		(365	)
Recoveries		—			3			—			1			—		6			10
Balance at end of period	$	524		$	1,476		$	1,066		$	856		$	—	$	110		$	4,032

(15)

The following table presents the balance in allowance for loan losses and the recorded investment in loans and impairment methods as of December 31, 2012 (dollars in thousands):

Allowance for Loan Losses and Recorded Investment in Loans

For Year Ended December 31, 2012

	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	$	626	$	523	$	338	$	319	$	—	$	12	$	1,818
Collectively evaluated for impairment		163		981		447		761		—		69		2,421
Total	$	789	$	1,504	$	785	$	1,080		—	$	81	$	4,239
Ending loan balance:
Individually evaluated for impairment	$	5,483	$	7,430	$	4,282	$	1,047	$	—	$	63	$	18,305
Collectively evaluated for impairment		95,623		160,568		10,604		29,887		1,187		2,113		299,982
Total	$	101,106	$	167,998	$	14,886	$	30,934	$	1,187	$	2,176	$	318,287

(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.

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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.

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.

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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 March 31, 2013 and December 31, 2012 (dollars in thousands):

Loan Portfolio Quality Indicators

At March 31, 2013

	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)	$	100,233	$	156,556	$	11,124	$	30,868	$	1,177	$	1,902	$	301,860
Watch (Grade 6)		4,068		—		—		10		—		—		4,078
Special Mention (Grade 7)		2,295		3,737		—		85		—		—		6,117
Substandard (Grade 8)		1,017		2,673		1,651		—		—		—		5,341
Doubtful (Grade 9)		354		3,647		2,184		944		—		48		7,177
Loss (Grade 10)		—		—		—		—		—		—		—
Total	$	107,967	$	166,613	$	14,959	$	31,907	$	1,177	$	1,950	$	324,573

Loan Portfolio Quality Indicators

At December 31, 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)	$	90,422	$	157,654	$	10,604	$	29,784	$	1,187	$	2,113	$	291,764
Watch (Grade 6)		2,745		—		—		12		—		—		2,757
Special Mention (Grade 7)		2,456		3,767		—		91		—		—		6,314
Substandard (Grade 8)		5,129		2,701		1,907		80		—		—		9,817
Doubtful (Grade 9)		354		3,876		2,375		967		—		63		7,635
Loss (Grade 10)		—		—		—		—		—		—		—
Total	$	101,106	$	167,998	$	14,886	$	30,934	$	1,187	$	2,176	$	318,287

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.

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The following tables present the Company’s loan portfolio aging analysis as of March 31, 2013 and December 31, 2012 (dollars in thousands):

Loan Portfolio Aging Analysis

At March 31, 2013

	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	$	—	$	—	$	354	$	354	$	107,613	$	107,967	$	—
Residential		1,528		258		2,805		4,591		162,022		166,613		—
Construction		1,996		—		188		2,184		12,775		14,959		—
Commercial loans and leases		213		—		732		945		30,962		31,907		—
Municipal loans		—		—		—		—		1,177		1,177		—
Consumer loans		4		—		—		4		1,946		1,950		—
Total	$	3,741	$	258	$	4,079	$	8,078	$	316,495	$	324,573	$	—

(A) Includes $2,639,000 in loans classified as nonaccrual that are less than 30 days past due, of which $1,996,000 are construction loans, $480,000 are residential real estate loans, $160,000 are commercial loans, $3,000 are consumer loans.

Loan Portfolio Aging Analysis

At December 31, 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	$	2	$	—	$	352	$	354	$	100,752	$	101,106	$	—
Residential		1,437		267		3,256		4,960		163,038		167,998		—
Construction		2,091		—		284		2,375		12,511		14,886		—
Commercial loans and leases		223		—		744		967		29,967		30,934		—
Municipal loans		—		—		—		—		1,187		1,187		—
Consumer loans		13		1		1		15		2,161		2,176		1
Total	$	3,766	$	268	$	4,637	$	8,671	$	309,616	$	318,287	$	1

(A) Includes $2,967,000 in loans classified as nonaccrual that are less than 30 days past due, of which $2,091,000 are construction loans, $647,000 are residential real estate loans, $223,000 are commercial loans, $4,000 are consumer loans and $2,000 is a commercial real estate loans.

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.

(19)

The following table presents impaired loans as of March 31, 2013 (dollars in thousands):

Impaired Loans

At March 31, 2013

	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	$	3,625	$	4,104		N/A	$	3,865	$	16
Residential		—		—		N/A		—		—
Construction		240		240		N/A		240		1
Commercial loans and leases		—		—		N/A		—		—
Municipal loans		—		—		N/A		—		—
Consumer loans		—		—		N/A		—		—
Total	$	3,865	$	4,344		N/A	$	4,105	$	17
Loans with a specific valuation allowance:
Real estate loans:
Commercial	$	1,371	$	1,371	$	129	$	1,375	$	17
Residential		7,136		7,444		634		7,284		39
Construction		3,835		4,158		307		3,939		26
Commercial loans and leases		944		982		330		955		—
Municipal loans		—		—		—		—		—
Consumer loans		48		48		11		55		—
Total	$	13,334	$	14,003	$	1,411	$	13,608	$	82
All Impaired Loans	$	17,199	$	18,347	$	1,411	$	17,713	$	99

(1) Includes all loans that were classified as impaired at any time during the three-month period (not just impaired loans at March 31, 2013), 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 ended March 31, 2013.

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.

(20)

The following table presents impaired loans as of March 31, 2012 (dollars in thousands):

Impaired Loans

At March 31, 2012

	Three Months Ended March 31, 2012
	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	$	4,953	$	44
Residential		6,162		21
Construction		3,632		3
Commercial loans and leases		844		5
Municipal loans		—		—
Consumer loans		41		—
Total	$	15,632	$	73
All Impaired Loans	$	15,632	$	73

(1) Includes all loans that were classified as impaired at any time during the three-month period (not just impaired loans at March 31, 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 months ended March 31, 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.

(21)

The following table presents impaired loans for the year ended December 31, 2012 (dollars in thousands):

Impaired Loans

At December 31, 2012

							Year Ended December 31, 2012
	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	$	5,483	$	5,483	$	626	$	5,483	$	172
Residential		7,430		7,698		523		6,953		174
Construction		4,282		4,566		338		4,242		72
Commercial loans and leases		1,047		1,082		319		1,126		12
Municipal loans		—		—		—		—		—
Consumer loans		63		63		12		42		—
Total	$	18,305	$	18,892	$	1,818	$	17,846	$	430
All Impaired Loans	$	18,305	$	18,892	$	1,818	$	17,846	$	430

(1) Includes all loans that were classified as impaired at any time during 2012 (not just impaired loans at December 31, 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 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.

(22)

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 March 31, 2013 and December 31, 2012 (dollars in thousands):

Loans Accounted for on a Non-Accrual Basis

	At March 31,		At December 31,
	2013		2012
Real estate loans:
Commercial	$	354	$	354
Residential		3,647		3,903
Construction		2,185		2,375
Commercial loans and leases		944		967
Municipal loans		—		—
Consumer loans		3		4
Total	$	7,133	$	7,603

Total non-accrual loans at March 31, 2013 and December 31, 2012 included $2,877,000 and $2,750,000 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.

(23)

Loans classified as a TDR during the three month periods ended March 31, 2013 and March 31, 2012, respectively, segregated by class, are shown in the table below (dollars in thousands). These modifications consisted primarily of interest rate concessions.

	Three Months Ended March 31, 2013						Three Months Ended March 31, 2012
	Modifications						Modifications
	Number		Recorded Balance  Before		Recorded Balance  After		Number		Recorded Balance Before		Recorded Balance After
Real estate loans:
Commercial		0	$	—	$	—		1	$	141	$	141
Residential		1		230		230		1		522		522
Construction		0		—		—		—		—		—
Commercial loans and leases		0		—		—		1		210		210
Municipal loans		0		—		—		—		—		—
Consumer loans		0		—		—		2		7		7
Total		0	$	230	$	230		5	$	880	$	880

There were no TDRs that had payment defaults during the three month periods ended March 31, 2013 and March 31, 2012, respectively. 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.

NOTE F — ACCOUNTING DEVELOPMENTS

• Financial Accounting Standards Board (“FASB”)

• Accounting Standards Update No. 2013-02; Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.In February 2013, the FASB issued ASU 2013-02 to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in the Update do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this Update requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP.

The new amendments will require an organization to:

• Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income–but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period; and

• Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.

The amendments are effective for reporting periods beginning after December 15, 2012. The Company has adopted the methodologies prescribed by this ASU by the date required, and the ASU did not have a material effect on its financial position or results of operations.

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• Accounting Standards Update No. 2013-01; Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. In January 2013, the FASB issued ASU 2013-01, which clarifies the scope of transactions that are subject to the disclosures about offsetting. The Update clarifies that ordinary trade receivables and receivables are not in the scope of Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Specifically, Update 2011-11 applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in FASB Accounting Standards Codification^® or subject to a master netting arrangement or similar agreement. Issued in December 2011, Update 2011-11 was the result of a joint project with the International Accounting Standards Board. Its objective was to improve transparency and comparability between U.S. GAAP and International Financial Reporting Standards by requiring enhanced disclosures about financial instruments and derivative instruments that are either (1) offset on the statement of financial position or (2) subject to an enforceable master netting arrangement or similar agreement. The Board undertook this clarification project in response to concerns expressed by U.S. stakeholders about the standard’s broad definition of financial instruments. After the standard was finalized, companies realized that many contracts have standard commercial provisions that would equate to a master netting arrangement. An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The effective date is the same as the effective date of Update 2011-11. The Company has adopted the methodologies prescribed by this ASU by the date required, and the ASU did not have a material effect on its financial position or results of operations.

• Accounting Standards Update No. 2013-04 — Liabilities (Topic 405). On February 28, 2013, FASB issued ASU 2013-04. The amendments in this Update provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this Update is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The amendments in this Update are effective for fiscal years beginning after December 31, 2013. Early adoption is permitted. 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 March 31, 2013 and December 31, 2012 was $1,944,000 and $1,921,000, respectively. The expense for the plan was $55,000 and $56,000 for the three-month periods ended March 31, 2013 and March 31, 2012, respectively.

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

Level 2    Observable 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 3    Unobservable 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.

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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.

The Company held no Level 3 securities in its available-for-sale portfolio on either March 31, 2013 or December 31, 2012.

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 March 31, 2013 and December 31, 2012 (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 March 31, 2013:
Ginnie Mae and GSE mortgage-backed pass-through securities	$	30,905	$	—	$	30,905	$	—
Ginnie Mae collateralized mortgage obligations		2,506		—		2,506
Mutual fund		1,846		1,846		—		—
	$	35,257	$	1,846	$	33,411	$	—
At December 31, 2012:
Ginnie Mae and GSE mortgage-backed pass-through securities	$	34,893	$	—	$	34,893	$	—
Ginnie Mae collateralized mortgage obligations		2,554		—		2,554		—
Mutual fund		1,849		1,849		—		—
	$	39,296	$	1,849	$	37,447	$	—

Transfers between Levels

Transfers between levels did not occur during the three months ended March 31, 2013.

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Level 3 Reconciliation

The following is a reconciliation of the beginning and ending balance for the three month periods ending March 31, 2013 and March 31, 2012 of fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs (dollars in thousands):

	Three Months Ended		Three Months Ended
	March 31, 2013		March 31, 2012
Beginning balance	$	—	$	2,351
Total realized and unrealized gains and losses:
Included in net income		—		—
Included in other comprehensive income		—		13
Purchases, issuances and settlements		—		—
Transfers in or out of Level 3		—		—
Ending balance	$	—	$	2,364

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:

Collateral-Dependent Impaired Loans

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by management. Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by management by comparison to historical results.

Other Real Estate Owned

Other real estate owned (“OREO”) is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of OREO is based on appraisals or evaluations. OREO is classified within Level 3 of the fair value hierarchy.

Appraisals of OREO are obtained when the real estate is acquired and subsequently as deemed necessary by management. Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved appraisers maintained by management.

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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 ASC 820 fair value hierarchy in which the fair value measurements fall at March 31, 2013 and December 31, 2012:

			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 March 31, 2013:
Impaired loans	$	7,936	$	—	$	—	$	7,936
Other real estate owned		—		—		—		—
At December 31, 2012:
Impaired loans	$	7,407	$	—	$	—	$	7,407
Other real estate owned		1,165		—		—		1,165

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at March 31, 2013 (dollars in thousands):

	Fair Value		Valuation Technique		Unobservable Inputs		Rate/Rate Range
Impaired loans	$	7,936		Third party valuations		Discount to reflect realizable value	7.0% - 50.0%
Other real estate owned		—		Third party valuations		Discount to reflect realizable value	—

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at December 31, 2012 (dollars in thousands):

	Fair Value		Valuation Technique		Unobservable Inputs		Rate/Rate Range
Impaired loans	$	7,407		Third party valuations		Discount to reflect realizable value	7.0% - 50.0%
Other real estate owned		1,165		Third party valuations		Discount to reflect realizable value	7.0% - 16.2%

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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 and the level within the fair value hierarchy in which the fair value measurements fall (dollars in thousands) at March 31, 2013:

	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)
Assets
Cash and cash equivalents	$	23,768	$	23,768	$	—	$	—
Interest-bearing time deposits		4,463		4,483
Investment securities available for sale		35,257		1,846		33,411		—
Investment securities held to maturity		2,348		—		—		2,373
Loans held for sale		954		—		954		—
Loans		319,547		—		312,861		17,199
Stock in FHLB		4,472		—		4,472		—
Mortgage servicing rights		579		—		—		579
Interest and dividends receivable		966		—		966		—
Liabilities
Deposits		358,737		226,453		133,907		—
Borrowings		45,810		—		36,904		4,489
Drafts payable		1,319		—		1,319		—
Interest and dividends payable		390		—		390		—

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) at December 31, 2012:

	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)
Assets
Cash and cash equivalents	$	20,853	$	20,853	$	—	$	—
Interest-bearing time deposits		5,704		5,740		—		—
Investment securities available for sale		39,296		1,849		37,447		—
Investment securities held to maturity		2,349		—		—		2,349
Loans held for sale		797		—		797		—
Loans		313,205		—		306,948		18,305
Stock in FHLB		4,472		—		4,472		—
Mortgage servicing rights		576		—		—		576
Interest and dividends receivable		995		—		995		—
Liabilities
Deposits		356,703		218,220		140,412		—
Borrowings		45,810		—		37,139		4,726
Drafts payable		1,243		—		1,243		—
Interest and dividends payable		74		—		74		—

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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 condensed consolidated balance sheets approximate those assets’ fair values.

Held to maturity securities:The carrying amount reported in the condensed consolidated balance sheets for December 31, 2012, the date the securities were reclassified from available for sale, represents the approximate fair value and became the new amortized cost basis as of that date. The carrying amount for March 31, 2013 represents the amortized cost balance as of that date.

Loans Held for Sale:The carrying amounts reported in the condensed 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 March 31, 2013, 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.

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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 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, 2012 (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.

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-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

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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 First Quarter of 2013

The Company recorded net income of $614,000, or $0.21 per share, for the three-month period ended March 31, 2013, which represented a $269,000, or 78.0%, improvement over the first quarter of 2012.

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

• At March 31, 2013 the Bank’s tier 1 leverage ratio was 9.31%, the tier 1 risk-based capital ratio was 13.04%, and the total risk-based capital ratio was 14.30%. All three ratios 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 first quarter of 2013 represented an increase of $28,000, or 0.8%, over the same quarter of 2012, that resulted from a $8.1 million, or 2.1%, growth in average interest-earning assets over the same period a year earlier.

• Net interest margin of 3.73% on a fully tax-equivalent basis for the first quarter of 2013 was 3 basis points lower than the same period in 2012. 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 first quarter of 2013, which was equal to both the provision for the prior quarter and the provision for the first quarter of 2012.

• Other income of $1.5 million for the first quarter of 2013 represented a $232,000 increase from the same quarter of 2012.

• Net losses on other real estate owned in the first quarter of 2013 totaled $1,000, compared with $156,000 in the same quarter a year earlier that included a $130,000 write-down of an uncompleted apartment project.

• A $37,000 increase in brokerage and insurance commissions related primarily to a $42,000 increase over the same quarter a year earlier in the contingency bonus received by the Bank’s insurance subsidiary that resulted from better claims loss experience on insured properties.

• A $25,000 increase in gains on sales of loans and servicing rights resulted from better pricing received, notwithstanding a lower dollar amount of total sales than the year earlier quarter.

• Other expense for the first quarter of 2013 of $4.0 million was $159,000, or 3.9%, lower than the same quarter in 2012, primarily as a result of a $90,000 decrease in salaries and employee benefits that included a $74,000 reduction in the cost of the frozen defined benefit pension plan, and a $65,000 reduction in other real estate owned expense.

• The Company had income before income taxes of $826,000 for the first quarter of 2013, but recorded income tax expense of $212,000, an effective rate of only 25.7% that was due primarily to a significant amount of tax-exempt income from bank-owned life insurance.

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For the first quarter of 2013, total assets increased by $3.2 million, or 0.7%, to $449.0 million from $445.8 million at December 31, 2012:

• Investments in interest-bearing demand deposits increased $3.6 million from $14.3 million at December 31, 2012 to $17.9 million at March 31, 2013, of which $17.7 million was invested at the Federal Reserve Bank of Chicago and $151,000 at the Federal Home Loan Bank of Indianapolis.

• At March 31, 2013, the Bank held $4.5 million in FDIC insured bank certificates of deposit, all of which were added during the third quarter of 2012, which had a weighted-average rate of 0.86% and a weighted-average remaining life of about 1.5 years.

• There was essentially no change in the $2.3 million investment securities held to maturity portfolio, which consists of local municipal securities, with only amortization of $1,000 during the quarter.

• A $4.0 million decrease in the investment securities available-for-sale portfolio during the first quarter of 2013 to $35.3 million, which consisted almost totally of mortgage-backed securities insured by either Ginnie Mae, FNMA or FHLMC, resulted primarily from sales of $3.7 million, $2.4 million of principal repayments, and a $316,000 decrease in unrealized gains, partly offset by one $2.4 million purchase.

• Net loans receivable of $319.5 million at March 31, 2013 represented an increase of $6.3 million, or 2.0%, for the first quarter of 2013, which resulted primarily from $6.9 million growth in commercial real estate loans and a $973,000 increase in other commercial loans, partially offset by a $1.4 million decline in residential real estate loans related primarily to the Bank’s mortgage banking strategy for the quarter.

• Total non-performing loans of $7.1 million, or 2.2% of total net loans at March 31, 2013, represented a decrease of $471,000 from December 31, 2012.

• The allowance for loan losses of $3.9 million at March 31, 2013 was 1.21% of total loans and 55.04% of non-performing loans, compared to 1.33% and 55.75%, respectively, at December 31, 2012.

• The recorded value of Bank owned life insurance was $27.2 million at March 31, 2013, with the $183,000 change for the quarter representing the increase in cash surrender value.

• Other real estate owned of $6.1 million at March 31, 2013 represented a $206,000 decrease from December 31, 2012 that was primarily the net result of three sales and one addition of single-family properties.

• During the first quarter of 2013, total deposits increased by $2.0 million, or 0.6%, to $358.7 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, coupled with customers continuing to migrate to more liquid deposit products due primarily to the low interest rate environment, resulted in an $8.2 million increase in checking, money market and savings balances, and a $6.2 million decrease in certificates of deposit.

• There was no change in the total amount or weighted average cost of borrowed money at March 31, 2013 from December 31, 2012.

• Total shareholders’ equity of $36.9 million at March 31, 2013 represented an increase of $375,000 over the total for December 31, 2012.

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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;

• 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 the Indianapolis metropolitan area. These banking centers are focused on generating new deposits and lending relationships, where significant opportunities exist to win market share from smaller institutions lacking the depth of financial products and services, 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 the Indianapolis metropolitan area, 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 first quarter of 2013. 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 maintains stress on credit quality and new loan rates. Deposit acquisition remains competitive; however, the Bank’s disciplined pricing has resulted in further reduction of its cost of deposits. The Bank’s pricing strategies, combined with the low interest rate environment, has positively impacted 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.

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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.

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. Future adjustments to the allowance for loan losses may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, various regulatory agencies periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments at the time of their examination.

(35)

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 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 March 31, 2013 and December 31, 2012, 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 condensed consolidated financial statements at March 31, 2013.

(36)

FINANCIAL CONDITION

Total assets of $449.0 million at March 31, 2013 represented an increase of $3.2 million, or 0.7%, from the December 31, 2012 total of $445.8 million. The increase resulted primarily from growth in loans with additional funds provided through the Bank’s growth in deposit accounts.

Cash and cash equivalents increased $2.9 million to $23.8 million at March 31, 2013 from the December 31, 2012 total of $20.9 million. Included in the total at March 31, 2013 was $17.7 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 March 31, 2013, the Bank held $4.5 million in FDIC insured bank certificates of deposit which had a weighted-average rate of 0.86% and a weighted-average remaining life of approximately 1.5 years. $5.7 million of certificates of deposit had been added in the third quarter of 2012, with the initial maturities in the first quarter of 2013. The matured certificates of deposit were not replaced due to low reinvestment rates.

Investment securities available-for-sale decreased by $4.0 million to $35.3 million at March 31, 2013 from $39.3 million at December 31, 2012. The decrease resulted primarily from two sales of mortgage-backed securities totaling $3.7 million, $2.4 million of principal repayments on mortgage-backed securities, and a $316,000 decrease in unrealized gains, partly offset by one mortgage-backed securities purchase of $2.4 million. All mortgage-backed securities, which totaled $33.4 million at March 31, 2013, 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”).

There was essentially no change in the $2.3 million investment securities held to maturity portfolio, which consists of local municipal securities, with only amortization of $1,000 during the quarter.

Net loans receivable increased by $6.3 million, or 2.0%, to $319.5 million at March 31, 2013 from $313.2 million at December 31, 2012. This growth was due mostly to a $6.9 million, or 6.8%, increase in commercial real estate loans and a $973,000 increase in other commercial loans, which was partially offset by a $1.4 million decline in residential real estate loans that resulted primarily from sales of new production loans into the secondary market totaling $4.5 million. The Bank’s mortgage-banking strategy is reviewed regularly to ensure that it remains consistent with the Bank’s overall balance sheet management objectives.

Premises and equipment of $14.4 million at March 31, 2013 represented a $185,000 decrease from $14.5 million at December 31, 2012. The net decrease was a result of $251,000 of depreciation for the three months ended March 31, 2013 exceeding capital expenditures of $66,000 for the period.

Goodwill was $656,000 at March 31, 2013, unchanged from December 31, 2012. 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 March 31, 2013.

We have investments in life insurance on employees and directors with a balance or cash surrender value of $27.2 million and $27.0 million at March 31, 2013 and December 31, 2012, respectively. The non-taxable increase in cash surrender value of this life insurance was $183,000 for the three months of 2013, compared to $193,000 for the same period a year earlier.

Other real estate owned totaled $6.1 million at March 31, 2013, a $206,000 decrease from $6.3 million at December 31, 2012. Sales of three single-family properties with an aggregate book value of $232,000 and one $69,000 addition of a single-family property occurred during the three-month period ended March 31, 2013. The sales together with a small recovery on a prior year sale resulted in a net loss of $1,000, and there were no write-downs of other real estate owned during the three-month period ended March 31, 2013.

Other assets of $9.9 million at March 31, 2013 represented a $669,000 reduction from December 31, 2012, that included a $141,000 decrease in prepaid FDIC insurance premiums, and the return of a $128,000 reserve related to the Company’s employee health insurance program.

(37)

Total deposits of $358.7 million at March 31, 2013 represented an increase of $2.0 million, or 0.6%, from $356.7 million at December 31, 2012, as the Bank maintained its strong focus on nurturing existing and attracting new core deposit relationships. During the first three months of 2013, checking, money market and savings balances increased $8.2 million, while certificate of deposit balances decreased $6.2 million, as customers continued to migrate to more liquid deposit products, due primarily to the ongoing economic uncertainty and related low interest rate environment. 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.

Total borrowed money of $45.8 million at March 31, 2013 was unchanged from December 31, 2012. 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 $1.3 million at March 31, 2013 increased $76,000 from $1.2 million at December 31, 2012. 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 $36.9 million at March 31, 2013 represented a $375,000 increase over the total of $36.5 million at December 31, 2012. The increase resulted from net income of $614,000 partly offset by a $210,000 decrease in unrealized gains net of income tax related to the Bank’s available-for-sale investment securities portfolio, and by $29,000 in dividends declared during the three-month period ended March 31, 2013. 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.

RESULTS OF OPERATIONS

First Quarter of 2013 compared to the First Quarter of 2012

The Company recorded net income of $614,000, or $0.21 per diluted share, for the first quarter of 2013, compared to net income of $345,000, or $0.12 per diluted share, for the first quarter of 2012.

The earnings growth of $269,000, or 78.0%, for the first quarter of 2013 compared to the same quarter a year earlier was related primarily to a $155,000 reduction in the net loss from sales and write-downs of other real estate owned, and a $159,000 decrease in non-interest expense.

Net Interest Income

Net interest income on a fully tax-equivalent basis of $3.5 million for the first quarter of 2013 represented an increase of $28,000, or 0.8%, compared to the same period of 2012, that resulted from $8.1 million growth in average interest-earning assets to $385.6 million, a 2.1% increase over the same period of 2011. Net interest margin on a fully tax-equivalent basis for the first quarter of 2013 of 3.73% was 3 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. This was offset by a decrease in the average yield on interest-earning assets due to market conditions.

Tax-exempt interest was $40,000 for the first quarter of 2013 compared to $37,000 for the same period of 2012, and resulted from municipal securities and municipal loans. Tax-equivalent adjustments were $17,000 and $16,000 for the first quarter of 2013 and 2012, 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%.

(38)

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 March 31,
	2013			2012
Balance at beginning of quarter	$	4,239		$	4,132
Provision for loan losses		255			255
Charge-offs		(625	)		(365	)
Recoveries		57			10
Net charge-offs		(568	)		(355	)
Balance at end of period	$	3,926		$	4,032
Allowance to total loans		1.21	%		1.28	%
Allowance to non-performing loans		55.04	%		46.78	%

We recorded a provision for loan losses of $255,000 for the first quarter of both 2013 and 2012, 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 $625,000 for the first quarter of 2013 included loans with specific reserves totaling $572,000 at December 31, 2012.

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

	(Dollars in thousands)
	March 31,
	2013			2012
Loans accounted for on a non-accrual basis	$	7,133		$	8,507
Accruing loans contractually past due 90 days or more		—			113
Total of non-accrual and 90 days or more past due loans (1)	$	7,133		$	8,620
Percentage of total net loans		2.23	%		2.74	%
Other non-performing assets (2)	$	6,120		$	7,545
Total non-performing assets	$	13,253		$	16,165
Percentage of total assets		2.95	%		3.65	%
Troubled debt restructurings in total of nonaccrual and 90 days or more past due loans (1)	$	2,877		$	2,322
Total troubled debt restructurings	$	11,739		$	9,325

(1) Total non-accrual loans and accruing loans 90 days or more past due at March 31, 2013 included $2.9 million of troubled debt restructurings, which consisted of a $1.0 million residential construction loan, a loan of $949,000 on developed commercial land, four residential non-construction loans totaling $556,000, four commercial loans totaling $322,000, and two consumer loans totaling $3,000.

(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 $3.9 million at March 31, 2013 was $106,000 lower than a year earlier, but the allowance for loan losses to non-performing loans ratio increased from 46.78% at March 31, 2012 to 55.04% at March 31, 2013 due to a lower total of non-performing loans. Non-performing loans of $7.1 million at March 31, 2013 represented a $1.5 million decrease from the total of $8.6 million at March 31, 2012, and a $471,000 decrease from the end of the prior quarter. It is management’s opinion that the allowance for loan losses at March 31, 2013 is adequate based on measurements of the credit risk in the entire portfolio as of that date.

(39)

Total charge-offs of $625,000 for the first quarter of 2013 included $479,000, fully reserved at December 31, 2012, related to a hotel in northern Indiana.

At March 31, 2013, the Bank had $11.7 million in loans categorized as troubled debt restructurings, with twelve loans for $2.9 million also included in the table above in the total for loans accounted for on a non-accrual basis. The total of $11.7 million included $3.9 million related to the hotel in northern Indiana, twenty-three loans on single-family residential properties totaling $4.0 million, two loans totaling $2.4 million for developed commercial land, a $1.0 million construction loan on a residential condominium project, four commercial loans totaling $322,000, a commercial real estate loan for $28,000, and two consumer loans totaling $3,000.

Other Income

The Company recorded other income of $1.5 million for the first quarter of 2013, an increase of $232,000, or 18.1%, from the total for the same period a year earlier that resulted primarily from the following changes:

• A $155,000 reduction in the net loss from sales and write-downs of other real estate owned to $1,000 for the first quarter of 2013 from a net loss of $156,000 for the first quarter of 2012 that included a $130,000 write-down of an uncompleted apartment project;

• A $37,000 increase in brokerage and insurance commissions to $449,000 for the first quarter of 2013 from $412,000 for the year earlier quarter, that was due primarily to a $42,000 increase in the contingency bonus received by the Bank’s insurance subsidiary that resulted from better claims loss experience on insured properties; and

• A $25,000 increase in gains on sales of loans and servicing rights to $157,000 from $132,000 for the first quarter of 2012 that resulted from better pricing received, notwithstanding a lower dollar amount of total sales than the year earlier quarter.

Other Expense

Total other expense of $4.0 million for the first quarter of 2013 was $159,000, or 3.9%, lower than the first quarter of 2012, with the following major differences:

• A $90,000 decrease in salaries and employee benefits to $2.2 million that resulted primarily from a $74,000 reduction in the cost of the Company’s frozen defined benefit pension plan;

• A $65,000 decrease in other real estate owned expense to $80,000 that resulted primarily from a lower average dollar amount of foreclosed properties than the year earlier quarter, and additional costs recorded in the quarter ended March 31, 2012 related to the sale of a foreclosed golf course in December of 2011.

Income Tax Expense

The Company recorded income tax expense of $212,000 on pre-tax income of $826,000 for the three-month period ended March 31, 2013, compared to income tax expense of $78,000 on pre-tax income of $423,000 for the same period a year earlier. Both quarters had a significant amount of tax-exempt income, primarily from bank-owned life insurance.

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.

(40)

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 $2.3 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.

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 March 31, 2013, we had $23.6 million in loan commitments outstanding and $50.1 million of additional commitments for line of credit receivables. Certificates of deposit due within one year of March 31, 2013 totaled $68.2 million, or 19.0% 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 March 31, 2014. 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 March 31, 2013 or at December 31, 2012.

Our primary investing activity, the origination and purchase of loans, is offset by the sale of loans and principal repayments. In the first three months of 2013, net loans receivable increased by $6.3 million, or 2.0%.

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 $2.0 million, or 0.6%, and total FHLB advances were unchanged during the first three months of 2013.

(41)

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 March 31, 2013 and December 31, 2012, the Bank was categorized as “well capitalized” and met all subject capital adequacy requirements. There are no conditions or events since March 31, 2013 that management believes have changed this classification.

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

March 31, 2013
	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)	$	45,101		14.30	%	$	25,224		8.00	%	$	31,530		10.00	%
Tier 1 risk-based capital ratio (tier 1 capital to risk-weighted assets)	$	41,119		13.04	%	$	12,612		4.00	%	$	18,918		6.00	%
Tier 1 leverage ratio (tier 1 capital to adjusted average total assets)	$	41,119		9.31	%	$	13,245		3.00	%	$	22,075		5.00	%

December 31, 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)	$	44,797		14.45	%	$	24,798		8.00	%	$	30,998		10.00	%
Tier 1 risk-based capital ratio (tier 1 capital to risk-weighted assets)	$	40,870		13.18	%	$	12,399		4.00	%	$	18,599		6.00	%
Tier 1 leverage ratio (tier 1 capital to adjusted average total assets)	$	40,870		9.31	%	$	13,167		3.00	%	$	21,945		5.00	%

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

March 31, 2013
	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)	$	45,456		14.27	%	$	25,491		8.00	%	$	31,864		10.00	%
Tier 1 risk-based capital ratio (tier 1 capital to risk-weighted assets)	$	41,474		13.02	%	$	12,746		4.00	%	$	19,118		6.00	%
Tier 1 leverage ratio (tier 1 capital to adjusted average total assets)	$	41,474		9.39	%	$	13,254		3.00	%	$	22,090		5.00	%

(42)

December 31, 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)	$	45,072		14.39	%	$	25,058		8.00	%	$	31,322		10.00	%
Tier 1 risk-based capital ratio (tier 1 capital to risk-weighted assets)	$	41,145		13.14	%	$	12,529		4.00	%	$	18,793		6.00	%
Tier 1 leverage ratio (tier 1 capital to adjusted average total assets)	$	41,145		9.37	%	$	13,176		3.00	%	$	21,960		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 principal 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 March 31, 2013 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.

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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, 2012, 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 March 31, 2013, and at March 31, 2013 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
10	Standstill Agreement, dated March 26, 2013, by and among Ameriana Bancorp, Financial Edge Fund, L.P., Financial Edge – Strategic Fund, L.P., PL Capital/Focused Fund, L.P., Goodbody/PL Capital L.P., PL Capital, LLC, PL Capital Advisers, LLC, Goodbody/PL Capital, LLC, John W. Palmer and Richard J. Lashley (1)
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 March 31, 2013 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.

(1) Incorporated herein by reference to Exhibit 10.1 to the Form 8-K filed with the Securities and Exchange Commission on March 26, 2013

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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:	May 8, 2013	/s/ Jerome J. Gassen
		Jerome J. Gassen
		President and Chief Executive Officer
		(Duly Authorized Representative)
DATE:	May 8, 2013	/s/ John J. Letter
		John J. Letter
		Senior Vice President-Treasurer and Chief Financial Officer
		(Principal Financial Officer and Accounting Officer)

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