Ameriana Bancorp (ASBI) 10-Q 2015 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM10-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 June 30, 2015

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 August 7, 2015, the registrant had 3,030,162 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 June 30, 2015 and December 31, 2014		3
		Consolidated Condensed Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014		4
		Consolidated Condensed Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2015 and 2014		6
		Consolidated Condensed Statement of Shareholders’ Equity for the Six Months Ended June 30, 2015		7
		Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014		8
		Notes to Consolidated Condensed Financial Statements		10
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
	Item 3.	Quantitative and Qualitative Disclosure about Market Risk		49
	Item 4.	Controls and Procedures		49
Part II.	Other Information
	Item 1.	Legal Proceedings		49
	Item 1A.	Risk Factors		49
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		50
	Item 3.	Defaults upon Senior Securities		50
	Item 4.	Mine Safety Disclosures		50
	Item 5.	Other Information		50
	Item 6.	Exhibits		50
Signatures				51

2

PART I - FINANCIAL INFORMATION

ITEM I - FINANCIAL STATEMENTS

Ameriana Bancorp

Consolidated Condensed Balance Sheets

(In thousands, except share data)

	June 30, 2015 (Unaudited)			December 31, 2014
Assets
Cash on hand and in other institutions	$	6,707		$	6,020
Interest-bearing demand deposits		14,780			27,122
Cash and cash equivalents		21,487			33,142
Interest-bearing time deposits		3,916			4,164
Investment securities available for sale, at fair value		47,820			48,084
Investment securities held to maturity, at amortized cost		17,141			7,082
Loans held for sale		339			332
Loans, net of allowance for loan losses of $3,904 and $3,903		327,422			316,113
Premises and equipment, net		15,896			15,511
Stock in Federal Home Loan Bank, at cost		2,693			3,753
Goodwill		656			656
Cash value of life insurance		27,824			28,446
Other real estate owned		6,682			6,639
Other assets		8,823			8,896
Total assets	$	480,699		$	472,818
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Noninterest-bearing	$	67,711		$	61,063
Interest-bearing		321,692			317,884
Total deposits		389,403			378,947
Borrowings		42,810			45,810
Drafts payable		1,179			1,298
Other liabilities		5,868			5,711
Total liabilities		439,260			431,766
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 – 3,254,662 and 3,245,684 shares		3,254			3,246
Outstanding – 3,029,662 and 3,020,684 shares
Additional paid-in capital		1,816			1,657
Retained earnings		39,233			38,785
Accumulated other comprehensive income		134			362
Treasury stock at cost – 225,000 shares		(2,998	)		(2,998	)
Total shareholders’ equity		41,439			41,052
Total liabilities and shareholders’ equity	$	480,699		$	472,818

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 June 30,					Six Months Ended June 30,
	2015			2014		2015			2014
Interest Income
Interest and fees on loans	$	3,883		$	4,008	$	7,651		$	8,122
Interest on mortgage-backed securities		269			257		537			479
Interest on investment securities		64			43		127			87
Other interest and dividend income		62			77		132			171
Total interest income		4,278			4,385		8,447			8,859
Interest Expense
Interest on deposits		368			414		741			834
Interest on borrowings		263			341		536			679
Total interest expense		631			755		1,277			1,513
Net Interest Income		3,647			3,630		7,170			7,346
Provision for loan losses		—			150		105			300
Net Interest Income After Provision for Loan Losses		3,647			3,480		7,065			7,046
Other Income
Other fees and service charges		697			698		1,331			1,286
Brokerage and insurance commissions		365			384		932			802
Gains on sales of loans and servicing rights		125			25		180			41
Net gain (loss) from sales and write-downs of other real estate owned		(35	)		7		(3	)		7
Other real estate owned income		119			57		183			144
Increase in cash value of life insurance		182			175		359			357
Other		60			37		90			110
Total other income		1,513			1,383		3,072			2,747
Other Expense
Salaries and employee benefits		2,470			2,316		4,826			4,571
Net occupancy expense		337			339		793			759
Furniture and equipment expense		218			184		428			373
Legal and professional fees		666			166		847			328
FDIC deposit insurance premiums and assessments		94			91		185			180
Data processing expense		301			251		581			484
Printing and office supplies		79			61		155			126
Marketing expense		113			109		205			218
Other real estate owned expense		121			67		245			106
Other		456			453		908			809
Total other expense		4,855			4,037		9,173			7,954
Income Before Income Taxes		305			826		964			1,839
Income tax		117			223		274			507
Net Income	$	188		$	603	$	690		$	1,332

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 June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Basic Earnings Per Share	$	0.06	$	0.20	$	0.23	$	0.45
Diluted Earnings Per Share	$	0.06	$	0.20	$	0.23	$	0.45
Dividends Declared Per Share	$	0.04	$	0.02	$	0.08	$	0.04

See notes to consolidated condensed financial statements

5

Ameriana Bancorp

Consolidated Condensed Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2015			2014		2015			2014
Net Income	$	188		$	603	$	690		$	1,332
Unrealized appreciation (depreciation) on available-for-sale securities, net of tax benefit of $160 and tax expense of $178 for the three months ended June 30, 2015 and June 30, 2014, respectively, and net of tax benefit of $118 and tax expense of $293 for the six months ended June 30, 2015 and June 30, 2014, respectively		(309	)		349		(228	)		563
Other comprehensive income (loss)		(309	)		349		(228	)		563
Comprehensive Income (Loss)	$	(121	)	$	952	$	462		$	1,895

See notes to consolidated condensed financial statements

6

Ameriana Bancorp

Consolidated Condensed Statement of Shareholders’ Equity

For the Six Months Ended June 30, 2015

(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, 2014	$	3,246	$	1,657	$	38,785		$	362		$	(2,998	)	$	41,052
Net Income		—		—		690			—			—			690
Other comprehensive loss		—		—		—			(228	)		—			(228	)
Share-based compensation		—		42		—			—			—			42
Exercise of stock options		8		106		—			—			—			114
Tax benefit realized from exercise of stock options		—		11		—			—			—			11
Dividends declared ($0.08 per share)		—		—		(242	)		—			—			(242	)
Balance at June 30, 2015	$	3,254	$	1,816	$	39,233		$	134		$	(2,998	)	$	41,439

See notes to consolidated condensed financial statements.

7

Ameriana Bancorp

Consolidated Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2015			2014
Operating Activities
Net income	$	690		$	1,332
Items not requiring (providing) cash
Provision for losses on loans		105			300
Depreciation and amortization		773			595
Increase in cash value of life insurance		(359	)		(357	)
Net loss (gain) from sales and write-downs of other real estate owned		3			(7	)
Share-based compensation		42			40
Mortgage loans originated for sale		(5,625	)		(948	)
Proceeds from sales of mortgage loans originated for sale		5,717			974
Gains on sales of mortgage loans and servicing rights		(180	)		(41	)
Gain on split-dollar bank-owned life insurance death benefit		(20	)		—
Increase in accrued interest and dividends payable		55			26
Other adjustments		580			89
Net cash provided by operating activities		1,781			2,003
Investing Activities
Purchase of available for sale securities		(4,780	)		(16,242	)
Purchase of held to maturity securities		(10,529	)		—
Proceeds/principal from the maturity of held to maturity securities		35			—
Principal collected on available for sale mortgage-backed securities		4,514			2,778
Principal collected on held to maturity mortgage-backed securities		419			—
Net change in loans		(11,565	)		(1,749	)
Proceeds from stock repurchased by Federal Home Loan Bank		1,060			—
Proceeds from split-dollar bank-owned life insurance death benefit		998			—
Proceeds from sales of other real estate owned		105			74
Net purchases and construction of premises and equipment		(937	)		(316	)
Net cash used in investing activities		(20,680	)		(15,455	)
Financing Activities
Net change in demand and savings deposits		13,269			21,908
Net change in certificates of deposit		(2,813	)		(7,374	)
Decrease in drafts payable		(119	)		(395	)
Repayment of borrowings		(3,000	)		—
Net change in advances by borrowers for taxes and insurance		(26	)		40
Proceeds from exercise of stock options		114			47
Cash dividends paid		(181	)		(89	)
Net cash provided by financing activities		7,244			14,137
Change in Cash and Cash Equivalents		(11,655	)		685
Cash and Cash Equivalents at Beginning of Year		33,142			40,867
Cash and Cash Equivalents at End of Quarter	$	21,487		$	41,552

8

Ameriana Bancorp

Consolidated Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2015		2014
Supplemental information:
Interest paid on deposits	$	741	$	836
Interest paid on borrowings	$	542	$	682
Income tax paid	$	450	$	95
Non-cash supplemental information:
Transfers from loans to other real estate owned	$	151	$	569

See notes to consolidated condensed financial statements.

9

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, 2014 has been derived from the audited consolidated balance sheet of the Company as of that date. The results of operations for the three and six months ended June 30, 2015 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, 2014.

NOTE B — SHAREHOLDERS’ EQUITY

On May 14, 2015, the Board of Directors declared a quarterly cash dividend of $0.04 per share. This dividend, totaling approximately $121,000, was accrued for payment to shareholders of record on June 12, 2015 and was paid on July 2, 2015.

Cash received from options exercised under all share-based compensation arrangements for the second quarter of 2015 was $62,000, with a tax benefit realized of $5,000. No stock options were granted during the second quarter of 2015.

NOTE C — EARNINGS PER SHARE

Earnings per share were computed as follows:

	(In thousands, except share data)
	Three Months Ended June 30,
	2015						2014
	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	$	188		3,026,772	$	0.06	$	603		2,992,134	$	0.20
Effect of dilutive stock options		—		14,076				—		5,341
Diluted Earnings Per Share: Income available to common shareholders and assumed conversions	$	188		3,040,848	$	0.06	$	603		2,997,475	$	0.20

10

	(In thousands, except share data)
	Six Months Ended June 30,
	2015						2014
	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	$	690		3,023,983	$	0.23	$	1,332		2,991,447	$	0.45
Effect of dilutive stock options		—		14,721				—		4,588
Diluted Earnings Per Share: Income available to common shareholders and assumed conversions	$	690		3,038,704	$	0.23	$	1,332		2,996,035	$	0.45

All options to purchase common stock outstanding at June 30, 2015 were included in the computation of diluted earnings per share, because the option’s exercise price was less than the average market price of the common shares for the period presented.

Options to purchase 15,232 shares of common stock at exercise prices of $15.35 to $15.56 per share were outstanding at June 30, 2014, but were not included in the computation of diluted earnings per share because the options were anti-dilutive, in that the option’s exercise price was greater than the average market price of the common shares for the period presented.

NOTE D — INVESTMENT SECURITIES

The following tables provide the composition of investment securities at June 30, 2015 and December 31, 2014 (dollars in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale at June 30, 2015
Ginnie Mae and GSE mortgage-backed pass-through securities	$	43,887	$	304	$	123	$	44,068
Ginnie Mae collateralized mortgage obligations		1,901		—		29		1,872
Mutual fund		1,846		34		—		1,880
	$	47,634	$	338	$	152	$	47,820

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held to maturity at June 30, 2015
GSE mortgage-backed pass-through securities	$	11,736	$	4	$	6	$	11,734
Municipal securities		5,405		14		—		5,419
	$	17,141	$	18	$	6	$	17,153

11

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale at December 31, 2014
Ginnie Mae and GSE mortgage-backed pass-through securities	$	43,675	$	566	$	43	$	44,198
Ginnie Mae collateralized mortgage obligations		2,053		—		34		2,019
Mutual fund		1,826		41		—		1,867
	$	47,554	$	607	$	77	$	48,084
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held to maturity at December 31, 2014
GSE mortgage-backed pass-through securities	$	4,736	$	20	$	—	$	4,756
Municipal securities		2,346		8		—		2,354
	$	7,082	$	28	$	—	$	7,110

The amortized cost and fair value of securities at June 30, 2015 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		43,887		44,068
Ginnie Mae collateralized mortgage obligations		1,901		1,872
Mutual fund		1,846		1,880
	$	47,634	$	47,820

	Held to Maturity
	Amortized Cost		Fair Value
Within one year	$	360	$	361
One to five years		1,559		1,563
Five to ten years		2,262		2,268
After ten years		1,224		1,227
Municipal securities		5,405		5,419
GSE mortgage-backed pass-through securities		11,736		11,734
	$	17,141	$	17,153

12

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 consisted of non-rated local issue revenue bonds.

Mutual fund:The mutual fund balance 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 June 30, 2015 and December 31, 2014 was $19,775,000 and $12,122,000, respectively, which was approximately 30.4% and 22.0%, respectively, of the Company’s investment portfolio at these dates.

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

The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2015 and December 31, 2014 (dollars in thousands):

	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available for sale at June 30, 2015
Ginnie Mae and GSE mortgage-backed pass-through securities	$	17,859	$	122	$	44	$	1	$	17,903	$	123
Ginnie Mae collateralized mortgage obligations		—		—		1,872		29		1,872		29
	$	17,859	$	122	$	1,916	$	30	$	19,775	$	152
	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available for sale at December 31, 2014
Ginnie Mae and GSE mortgage-backed pass-through securities	$	5,540	$	5	$	4,563	$	38	$	10,103	$	43
Ginnie Mae collateralized mortgage obligations		—		—		2,019		34		2,019		34
	$	5,540	$	5	$	6,582	$	72	$	12,122	$	77

Investment securities with a total market value of $8,508,000 and $8,499,000 were pledged at June 30, 2015 and December 31, 2014, respectively, to secure a repurchase agreement.

There were no sales of available for sale securities during the three-month and six-month periods ended June 30, 2015 and June 30, 2014.

13

NOTE E — LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

(Dollars in Thousands)

	At June 30,		At December 31,
	2015		2014
Real estate loans:
Commercial	$	116,472	$	111,455
Residential		163,467		163,839
Construction		18,637		13,570
Commercial loans and leases		30,196		29,358
Municipal loans		1,895		785
Consumer loans		1,875		2,018
Total loans		332,542		321,025
Less:
Undisbursed loan proceeds		594		302
Deferred loan fees, net		622		707
Allowance for loan losses		3,904		3,903
		5,120		4,912
Total loans - net	$	327,422	$	316,113

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, sale of the property at a price commensurate with the initial estimate, 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.

14

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 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 Chief Credit Officer to adjust the allowance as appropriate.

The methodology employed by the Bank 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, management 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.

Management also factors 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;

15

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

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

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

The following table presents the balance and activity in allowance for loan losses as of June 30, 2015 (dollars in thousands):

Allowance for Loan Losses

For Three Months Ended June 30, 2015

	Commercial Real Estate Loans			Residential Real Estate Loans			Construction Real Estate Loans			Commercial Loans and Leases			Municipal Loans		Consumer Loans			Total
Balance at beginning of quarter	$	1,133		$	1,983		$	225		$	512		$	—	$	131		$	3,984
Provision (credit) for losses		(46	)		70			(23	)		—			—		(1	)		—
Charge-offs (1)		—			(58	)		—			(48	)		—		(15	)		(121	)
Recoveries		—			26			—			5			—		10			41
Balance at end of quarter	$	1,087		$	2,021		$	202		$	469		$	—	$	125		$	3,904

The following table presents the balance and activity in allowance for loan losses and the recorded investment in loans and impairment methods as of June 30, 2015 (dollars in thousands):

Allowance for Loan Losses and Recorded Investment in Loans

For Six Months Ended June 30, 2015

	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	$	1,059	$	1,934		$	156	$	637		$	—	$	117		$	3,903
Provision (credit) for losses		28		139			45		(128	)		—		21			105
Charge-offs (1)		—		(83	)		—		(48	)		—		(28	)		(159	)
Recoveries		—		31			1		8			—		15			55
Balance at end of period	$	1,087	$	2,021		$	202	$	469		$	—	$	125		$	3,904
Ending allowance balance:
Individually evaluated for impairment	$	70	$	649		$	—	$	139		$	—	$	28		$	886
Collectively evaluated for impairment		1,017		1,372			202		330			—		97			3,018
Total	$	1,087	$	2,021		$	202	$	469		$	—	$	125		$	3,904
Ending loan balance:
Individually evaluated for impairment	$	4,263	$	7,275		$	1,948	$	435		$	—	$	88		$	14,009
Collectively evaluated for impairment		112,209		156,192			16,689		29,761			1,895		1,787			318,533
Total	$	116,472	$	163,467		$	18,637	$	30,196		$	1,895	$	1,875		$	332,542

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The following tables present the balance and activity in allowance for loan losses as of June 30, 2014 (dollars in thousands):

Allowance for Loan Losses

For Three Months Ended June 30, 2014

	Commercial Real Estate Loans			Residential Real Estate Loans			Construction Real Estate Loans			Commercial Loans and Leases			Municipal Loans		Consumer Loans			Total
Balance at beginning of quarter	$	1,273		$	1,747		$	332		$	629		$	—	$	119		$	4,100
Provision for losses		73			13			65			(19	)		—		18			150
Charge-offs (1)		(101	)		(80	)		(6	)		(58	)		—		(18	)		(263	)
Recoveries		3			3			1			6			—		4			17
Balance at end of quarter	$	1,248		$	1,683		$	392		$	558		$	—	$	123		$	4,004

Allowance for Loan Losses

For Six Months Ended June 30, 2014

	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	$	1,165		$	1,743			$	356		$	623		$	—	$	106		$	3,993
Provision for losses		181			14				80			(17	)		—		42			300
Charge-offs (1)		(101	)		(80	)			(46	)		(59	)		—		(34	)		(320	)
Recoveries		3			6				2			11			—		9			31
Balance at end of period	$	1,248		$	1,683		��	$	392		$	558		$	—	$	123		$	4,004

The following table presents the balance in allowance for loan losses and recorded investment in loans and impairment methods as of December 31, 2014 (dollars in thousands):

Allowance for Loan Losses and Recorded Investment in Loans

For Year Ended December 31, 2014

	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	$	—	$	319	$	—	$	166	$	—	$	12	$	497
Collectively evaluated for impairment		1,059		1,615		156		471		—		105		3,406
Total	$	1,059	$	1,934	$	156	$	637	$	—	$	117	$	3,903
Ending loan balance:
Individually evaluated for impairment	$	4,263	$	3,967	$	2,004	$	516	$	—	$	89	$	10,839
Collectively evaluated for impairment		107,192		159,872		11,566		28,842		785		1,929		310,186
Total	$	111,455	$	163,839	$	13,570	$	29,358	$	785	$	2,018	$	321,025

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(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, if the loan is well collateralized, the 120-day period may be extended. On loans where the Bank 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 equal to or greater than $100,000 must be approved by the Loan Committee upon recommendation by the Chief Credit Officer. The Loan Committee consists of the Bank’s Chief Executive Officer, Chief Credit Officer, Chief Banking Officer and Loan Review Officer. Charge-offs less than $100,000 and greater than $10,000 and decisions to defer the charge-off of a loan must be approved by the Chief Credit Officer.

Narrative Description of Borrower Rating:

Grade 1 — Highest Quality (Pass)

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

Grade 2 — Excellent Quality (Pass)

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

Grade 3 — Good Quality (Pass)

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

Grade 4 — Acceptable Quality (Pass)

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

Grade 5 - Marginal Quality (Pass)

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

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Grade 6 – Elevated Risk, Management Attention (Watch)

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

Grade 7 — Special Mention

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

Grade 8 — Substandard

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

Grade 9 — Doubtful

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

Grade 10 — Loss

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

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of June 30, 2015 and December 31, 2014 (dollars in thousands):

Loan Portfolio Quality Indicators

At June 30, 2015

	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)	$	108,312	$	153,754	$	15,874	$	29,513	$	1,895	$	1,788	$	311,136
Watch (Grade 6)		3,897		3,633		1,703		248		—		—		9,481
Special Mention (Grade 7)		—		—		—		—		—		—		—
Substandard (Grade 8)		3,451		423		224		—		—		—		4,098
Doubtful (Grade 9)		812		5,657		836		435		—		87		7,827
Loss (Grade 10)		—		—		—		—		—		—		—
Total	$	116,472	$	163,467	$	18,637	$	30,196	$	1,895	$	1,875	$	332,542

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Loan Portfolio Quality Indicators

At December 31, 2014

	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)	$	100,095	$	157,518	$	10,786	$	28,516	$	785	$	1,929	$	299,629
Watch (Grade 6)		7,097		327		1,721		325		—		—		9,470
Special Mention (Grade 7)		—		3,355		—		—		—		—		3,355
Substandard (Grade 8)		3,451		427		228		—		—		—		4,106
Doubtful (Grade 9)		812		2,212		835		517		—		89		4,465
Loss (Grade 10)		—		—		—		—		—		—		—
Total	$	111,455	$	163,839	$	13,570	$	29,358	$	785	$	2,018	$	321,025

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

The following tables present the Company’s loan portfolio aging analysis as of June 30, 2015 and December 31, 2014 (dollars in thousands):

Loan Portfolio Aging Analysis

At June 30, 2015

	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	$	200	$	—	$	812	$	1,012	$	115,460	$	116,472	$	—
Residential		4,189		175		1,852		6,216		157,251		163,467		110
Construction		—		888		836		1,724		16,913		18,637		—
Commercial loans and leases		368		—		67		435		29,761		30,196		—
Municipal loans		—		—		—		—		1,895		1,895		—
Consumer loans		1		1		4		6		1,869		1,875		5
Total	$	4,758	$	1,064	$	3,571	$	9,393	$	323,149	$	332,542	$	115

(A) Includes $924,000 in loans classified as nonaccrual that are less than 30 days past due, of which $556,000 are residential real estate loans and $368,000 are commercial loans.

Loan Portfolio Aging Analysis

At December 31, 2014

	30-59 Days Past Due (A)		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 days & Accruing
Real estate loans:
Commercial	$	—	$	—	$	812	$	812	$	110,643	$	111,455	$	—
Residential		1,346		212		1,598		3,156		160,683		163,839		14
Construction		—		—		836		836		12,734		13,570		—
Commercial loans and leases		80		320		117		517		28,841		29,358		—
Municipal loans		—		—		—		—		785		785		—
Consumer loans		10		4		1		15		2,003		2,018		1
Total	$	1,436	$	536	$	3,364	$	5,336	$	315,689	$	321,025	$	15

(A) Includes $667,000 in loans classified as nonaccrual that are less than 30 days past due, of which $587,000 are residential real estate loans and $80,000 are commercial loans.

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

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

The following table presents impaired loans as of June 30, 2015 (dollars in thousands):

Impaired Loans At June 30, 2015
							Three Months Ended June 30, 2015				Six Months Ended June 30, 2015
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans (1)		Interest Income Recognized (2)		Average Investment in Impaired Loans (1)		Interest Income Recognized (2)
Loans without a specific valuation allowance:
Real estate loans:
Commercial	$	3,451	$	3,929		N/A	$	3,451	$	43	$	3,451	$	86
Residential		2,819		3,120		N/A		2,706		14		2,684		28
Construction		1,948		1,948		N/A		1,962		17		1,976		33
Commercial loans and leases		67		95		N/A		69		—		70		—
Municipal loans		—		—		N/A		—		—		—		—
Consumer loans		—		—		N/A		—		—		—		—
Total	$	8,285	$	9,092		N/A	$	8,188	$	74	$	8,181	$	147
Loans with a specific valuation allowance:
Real estate loans:
Commercial	$	812	$	812	$	70	$	812	$	—	$	812	$	—
Residential		4,456		4,467		649		1,180		4		1,161		8
Construction		—		—		—		—		—		—		—
Commercial loans and leases		368		431		139		396		—		415		—
Municipal loans		—		—		—		—		—		—		—
Consumer loans		88		88		28		71		—		72		—
Total	$	5,724	$	5,798	$	886	$	2,459	$	4	$	2,460	$	8
All Impaired Loans	$	14,009	$	14,890	$	886	$	10,647	$	78	$	10,641	$	155

(1) Includes all loans that were classified as impaired at any time during the three-month and six-month periods (not just impaired loans at June 30, 2015), and their average balance for only the period during which they were classified as impaired.

(2) Interest recorded in income during only the period the loans were classified as impaired, for all loans that were classified as impaired at any time during the three months and six months ended June 30, 2015.

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

The following table presents impaired loans as of June 30, 2014 (dollars in thousands):

Impaired Loans At June 30, 2014
							Three Months Ended June 30, 2014				Six Months Ended June 30, 2014
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans (1)		Interest Income Recognized (2)		Average Investment in Impaired Loans (1)		Interest Income Recognized (2)
Loans without a specific valuation allowance:
Real estate loans:
Commercial	$	4,339	$	4,817		N/A	$	4,471	$	59	$	4,435	$	110
Residential		2,655		2,920		N/A		3,273		17		3,014		35
Construction		1,222		2,057		N/A		1,389		18		1,329		36
Commercial loans and leases		70		98		N/A		564		—		399		—
Municipal loans		—		—		N/A		—		—		—		—
Consumer loans		—		—		N/A		—		—		—		—
Total	$	8,286	$	9,892		N/A	$	9,697	$	94	$	9,177	$	181
Loans with a specific valuation allowance:
Real estate loans:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential		2,589		2,662		381		2,609		21		2,602		42
Construction		3,149		3,149		245		2,901		25		3,025		51
Commercial loans and leases		148		192		109		163		—		161		—
Municipal loans		—		—		—		—		—		—		—
Consumer loans		95		95		8		66		—		78		—
Total	$	5,981	$	6,098	$	743	$	5,739	$	46	$	5,866	$	93
All Impaired Loans	$	14,267	$	15,990	$	743	$	15,436	$	140	$	15,043	$	274

(1) Includes all loans that were classified as impaired at any time during the three-month and six-month periods (not just impaired loans at June 30, 2014), and their average balance for only the period during which they were classified as impaired.

(2) Interest recorded in income during only the period the loans were classified as impaired, for all loans that were classified as impaired at any time during the three months and six months ended June 30, 2014.

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

The following table presents impaired loans as of December 31, 2014 (dollars in thousands):

Impaired Loans At December 31, 2014
							Year Ended December 31, 2014
	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	$	4,263	$	4,742		N/A	$	4,025	$	176
Residential		2,686		2,923		N/A		2,342		58
Construction		2,004		2,004		N/A		1,744		72
Commercial loans and leases		70		99		N/A		221		—
Municipal loans		—		—		N/A		—		—
Consumer loans		—		—		N/A		—		—
			��
Total	$	9,023	$	9,768		N/A	$	8,332	$	306
Loans with a specific valuation allowance:
Real estate loans:
Commercial	$	—	$	—	$	—	$	481	$	22
Residential		1,281		1,340		319		2,806		78
Construction		—		—		—		2,368		55
Commercial loans and leases		446		495		166		222		—
Municipal loans		—		—		—		—		—
Consumer loans		89		89		12		81		—
Total	$	1,816	$	1,924	$	497	$	5,958	$	155
All Impaired Loans	$	10,839	$	11,692	$	497	$	14,290	$	461

(1) Includes all loans that were classified as impaired at any time during 2014 (not just impaired loans at December 31, 2014), 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 2014.

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.

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Non-Accrual Loans: Any loan which becomes 90 days delinquent, the full collection of principal and interest is in doubt, or a portion of principal has been charged off, should 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 on non-accrual status all payments 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. Should the loan be reinstated to accrual status, all 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. Restoring a non-accrual loan to accrual status requires the approval of the CCO. All loans placed on non-accrual status require the approval of the CCO and must be documented on the loan system and in the file.

The following table presents the Company’s non-accrual loans at June 30, 2015 and December 31, 2014 (dollars in thousands):

Loans Accounted for on a Non-Accrual Basis

	At June 30,		At December 31,
	2015		2014
Real estate loans:
Commercial	$	812	$	812
Residential		2,344		2,212
Construction		836		836
Commercial loans and leases		435		516
Municipal loans		—		—
Consumer loans		—		—
Total	$	4,427	$	4,376

Total non-accrual loans at June 30, 2015 and December 31, 2014 included $1,411,000 and $1,082,000 of TDRs, respectively.

Troubled Debt Restructurings:Our loan and lease portfolio includes certain loans that have been modified as a TDR, where 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.

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There were two loans classified as a TDR during the three-month and six month periods ended June 30, 2015, and they are shown in the table below identified by class (dollars in thousands). The modifications were both payment concessions, one extending the amortization period to reduce the monthly payment amount and the other allowing the borrower to make interest only payments for a period of time.

	Three Months Ended June 30, 2015						Six Months Ended June 30, 2015
	Modifications						Modifications
	Number		Recorded Balance Before		Recorded Balance After		Number		Recorded Balance Before		Recorded Balance After
Real estate loans:
Commercial		—	$	—	$	—		—	$	—	$	—
Residential		1		3,311		3,311		1		3,311		3,311
Construction		—		—		—		—		—		—
Commercial loans and leases		1		308		308		1		308		308
Municipal loans		—		—		—		—		—		—
Consumer loans		—		—		—		—		—		—
Total		2	$	3,619	$	3,619		2	$	3,619	$	3,619

There were no loans classified as a TDR during either the three-month period or the six-month period ended June 30, 2014.

There were no TDRs that had payment defaults during the three-month and six-month periods ended June 30, 2015 and June 30, 2014, 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”)

The FASB has issuedASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” Existing GAAP does not include explicit guidance about a customer’s accounting for fees paid in a cloud computing arrangement. Examples of cloud computing arrangements include:(a) software as a service;(b) platform as a service;(c) infrastructure as a service; and(d) other similar hosting arrangements. The amendments add guidance to Subtopic 350-40,Intangibles - Goodwill and Other - Internal-Use Software, which will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The guidance already exists in theFASB Accounting Standards Codification™ in paragraphs 985-605-55-121 through 55-123, but it is included in a Subtopic applied by cloud service providers to determine whether an arrangement includes the sale or license of software. The amendments provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments do not change the accounting for a customer’s accounting for service contracts. As a result of the amendments, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. For public business entities, the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted for all entities. An entity can elect to adopt the amendments either: (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. For prospective transition, the only disclosure requirements at transition are the nature of and reason for the change in accounting principle, the transition method, and a qualitative description of the financial statement line items affected by the change. For retrospective transition, the disclosure requirements at transition include the requirements for prospective transition and quantitative information about the effects of the accounting change. The Company will adopt the methodologies prescribed by this ASU by the date required, and is still evaluating the impact the ASU will have on its financial position or results of operation.

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The FASB has issued anASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,” which is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The ASU focuses on the consolidation evaluation for reporting organizations (public and private companies and not-for-profit organizations) that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies theFASB Accounting Standards Codification™ (Codification) and improves current GAAP by:

• Placing more emphasis on risk of loss when determining a controlling financial interest. A reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met.

• Reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (“VIE”).

• Changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs.

The ASU will be effective for periods beginning after December 15, 2015, for public companies. Early adoption is permitted, including adoption in an interim period. The Company will adopt the methodologies prescribed by this ASU by the date required, and is still evaluating the impact the ASU will have on its financial position or results of operation.

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 June 30, 2015 and December 31, 2014 was $2,099,000 and $2,102,000, respectively. The expense for the plan was $31,000 and $55,000 for the three-month periods ended June 30, 2015 and June 30, 2014, respectively. The expense for the plan was $61,000 and $109,000 for the six-month periods ended June 30, 2015 and June 30, 2014, 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 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 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.

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.

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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 June 30, 2015 or December 31, 2014.

The following table presents the fair value measurements of assets recognized in the accompanying consolidated condensed 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 June 30, 2015 and December 31, 2014 (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 June 30, 2015:
Ginnie Mae and GSE mortgage-backed pass-through securities	$	44,068	$	—	$	44,068	$	—
Ginnie Mae collateralized mortgage obligations		1,872		—		1,872		—
Mutual fund		1,880		1,880		—		—
	$	47,820	$	1,880	$	45,940	$	—
At December 31, 2014:
Ginnie Mae and GSE mortgage-backed pass-through securities	$	44,198	$	—	$	44,198	$	—
Ginnie Mae collateralized mortgage obligations		2,019		—		2,019		—
Mutual fund		1,867		1,867		—		—
	$	48,084	$	1,867	$	46,217	$	—

Transfers between Levels

Transfers between levels did not occur during the three months and six months ended June 30, 2015.

Level 3 Reconciliation

There is no reconciliation for the three-month and six-month periods ended June 30, 2015 and June 30, 2014, respectively, as there were no fair value measurements using significant unobservable (Level 3) inputs for the available-for-sale portfolio during those periods.

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 consolidated condensed 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.

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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.

Loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. If the carrying amount exceeds fair value, impairment is recorded so that the servicing asset is carried at fair value. Fair value is determined based on market prices for comparable mortgage servicing contracts, when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data.

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 June 30, 2015 and December 31, 2014:

			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 June 30, 2015:
Impaired loans	$	1,514	$	—	$	—	$	1,514
Other real estate owned		379		—		—		379
At December 31, 2014:
Impaired loans	$	940	$	—	$	—	$	940
Other real estate owned		1,166		—		—		1,166
Mortgage servicing rights		530						530

Unobservable (Level 3) Inputs:

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at June 30, 2015 (dollars in thousands):

	Fair Value		Valuation Technique		Unobservable Inputs	Rate/Rate Range
Impaired loans	$	1,514		Third party valuations	Discount to reflect realizable value		0.0% - 100.0%
Other real estate owned		379		Third party valuations	Discount to reflect realizable value		7.0% - 11.0%

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The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at December 31, 2014 (dollars in thousands):

	Fair Value		Valuation Technique	Unobservable Inputs	Rate/Rate Range
Impaired loans	$	940	Third party valuations	Discount to reflect realizable value		0.6% - 64.9%
Other real estate owned		1,166	Third party valuations	Discount to reflect realizable value		6.4% - 7.0%
Mortgage servicing rights		530	Third party valuations	Discount rate		5.06% - 6.08%
				Prepayment speed		10.22% - 22.74%

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 June 30, 2015:

Fair Value Measurements Using
	Carrying Value		Fair 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	$	21,487	$	21,487	$	21,487	$	—	$	—
Interest-bearing time deposits		3,916		3,930		3,930		—		—
Investment securities held to maturity		17,141		17,153		—		11,734		5,419
Loans held for sale		339		339		—		339		—
Loans		327,422		333,305		—		319,296		14,009
Stock in FHLB		2,693		2,693		—		2,693		—
Mortgage servicing rights		537		537		—		—		537
Interest and dividends receivable		1,255		1,255		—		1,255		—
Liabilities
Deposits		389,403		389,801		255,188		134,613		—
Borrowings		42,810		39,105		—		32,520		6,585
Drafts payable		1,179		1,179		—		1,179		—
Interest and dividends payable		151		151		—		151		—

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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, 2014:

Fair Value Measurements Using
	Carrying Value		Fair 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	$	33,142	$	33,142	$	33,142	$	—	$	—
Interest-bearing time deposits		4,164		4,162		4,162		—		—
Investment securities held to maturity		7,082		7,110		—		4,756		2,354
Loans held for sale		332		332		—		332		—
Loans		316,113		322,035		—		311,196		10,839
Stock in FHLB		3,753		3,753		—		3,753		—
Mortgage servicing rights		530		530		—		—		530
Interest and dividends receivable		1,179		1,179		—		1,179		—
Liabilities
Deposits		378,947		379,339		241,918		137,421		—
Borrowings		45,810		41,605		—		35,543		6,062
Drafts payable		1,298		1,298		—		1,298		—
Interest and dividends payable		97		97		—		97		—

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 condensed 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 for June 30, 2015 and December 31, 2014 represents the amortized cost balance as of that date. Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans held for sale:The carrying amount approximates fair value due to the insignificant time between originations and date of sale. The carrying amount is the amount funded.

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.

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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 June 30, 2015, there were two outstanding letters of credit from the Federal Home Loan Bank of Indianapolis totaling $5,014,000 that the Company had collateralized with residential mortgage loans.

NOTE J - AGREEMENT AND PLAN OF REORGANIZATION AND MERGER

On June 26, 2015, First Merchants Corporation, an Indiana corporation, and the Company, entered into an Agreement and Plan of Reorganization and Merger (the “Merger Agreement”), pursuant to which, the Company will, subject to the terms and conditions of the Merger Agreement, merge with and into First Merchants (the “Merger”), whereupon the separate corporate existence of the Company will cease and First Merchants will survive. Immediately following the Merger, Ameriana Bank will be merged with and into First Merchants Bank, National Association, a national bank and wholly-owned subsidiary of First Merchants, with First Merchants Bank, National Association as the surviving bank. Based on the closing price of First Merchants’ common stock on June 26, 2015 of $25.13 per share, the transaction value is estimated at approximately $68.8 million. The transaction is expected to be a tax-free stock exchange for the Company’s shareholders who will be receiving First Merchants’ common stock pursuant to the Merger. Subject to the Company’s shareholders’ approval of the Merger, regulatory approvals and other customary closing conditions, the parties anticipate completing the Merger in the fourth quarter of 2015 or the first quarter of 2016.

Subject to the terms and conditions of the Merger Agreement, upon the completion of the Merger, each share of outstanding Company common stock, $1.00 par value per share, will be converted into 0.9037 shares (the “Exchange Ratio”) of First Merchants common stock, $0.125 stated value per share. The Exchange Ratio is subject to adjustments for stock splits, stock dividends, recapitalization, or similar transactions, or as otherwise described in the Merger Agreement. Fractional shares of First Merchants common stock in book entry form will be issued in respect of fractional interests arising from the Exchange Ratio. Immediately prior to the Merger, each outstanding stock option to purchase Company common stock will be converted into the right to receive cash in an amount equal to the average closing price of Company common stock for the ten (10) trading days preceding the fourth calendar day prior to the date of the Merger less the applicable exercise price.

Consummation of the Merger is subject to various conditions, including, among others, (i) requisite approvals of the holders of Company common stock; (ii) effectiveness of a Form S-4 registration statement relating to the First Merchants common stock to be issued in the Merger and listing of the First Merchants common stock to be issued in the Merger on the NASDAQ Global Select Market; and (iii) receipt of regulatory approvals.

The Merger Agreement contains certain termination rights for both First Merchants and the Company. Under certain circumstances, termination of the Merger Agreement may result in the payment of a termination fee to First Merchants, all as more fully described in the Merger Agreement.

The foregoing description of the Merger Agreement is not complete and is qualified in its entirety by reference to the Merger Agreement which is filed as Exhibit 2.1.

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NOTE K – SUBSEQUENT EVENT

The Bank began soliciting offers after making a decision in July to sell its wholly-owned subsidiary Ameriana Insurance Agency, a full-service property, casualty, personal lines and healthcare insurance agency located in New Castle, Indiana. Management believes that this sale will allow for a greater allocation of time for and stronger focus on the core bank products and services that are critical to the Bank’s future growth.

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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, 2014 (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, 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, competition and the Company’s pending merger with First Merchants Corporation 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 thirteen branch offices located throughout Central Indiana. Our primary markets are in Hamilton, Hancock, Hendricks, Henry, Madison, Marion and Shelby counties.

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, and commercial and industrial

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loans, and, to a lesser extent, consumer loans, leases and loans to municipalities. We have from time to time purchased loans and loan participations in the secondary market. We also invest in various federal and government agency obligations and other investment securities permitted by applicable laws and regulations, including mortgage-backed, municipal and equity securities. We offer customers in our market area time deposits with terms ranging from three months to seven years, interest-bearing and noninterest-bearing checking accounts, savings accounts and money market accounts. Our primary source of borrowings is FHLB advances. Through our subsidiaries, we engage in insurance, 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 maturities, 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 Second Quarter of 2015

The Company recorded net income of $188,000, or $0.06 per diluted share, for the three-month period ended June 30, 2015, which represented a $415,000 decrease from the same period a year earlier that was due primarily to $407,000 in legal and investment banking fees, as well as other costs related to our recently announced merger with Muncie, Indiana-based First Merchants Corporation, and approximately $130,000 related to two new banking centers opened during the last half of 2014.

• The Company declared a quarterly dividend of $0.04 per share, which represented a $0.02 per share increase over the same quarter a year earlier.

• At June 30, 2015, the Bank’s tier 1 leverage ratio was 9.41%, the common equity tier 1 risk-based capital ratio and the tier 1 risk-based capital ratio were both 13.44%, and the total risk-based capital ratio was 14.62%. All four ratios were considerably above the levels required under regulatory guidelines to be considered “well capitalized.” The new Basel III capital rules did not have a significant impact on the Bank’s capital ratios.

• Net interest income on a fully-tax equivalent basis for the second quarter of 2015 represented an increase of $26,000, or 0.7%, over the same quarter of 2014. The improvement was the net result of the benefit from a $9.8 million, or 2.4%, increase in average interest-earning assets to $420.4 million being partly offset by a decrease in net interest margin.

• Net interest margin of 3.50% on a fully tax-equivalent basis for the second quarter of 2015 was six basis points lower than the same period in 2014.

• The Bank did not record a provision for loan losses in the second quarter of 2015, compared to a $150,000 provision in the year earlier quarter, which reflected the declining pressure of economic conditions on credit quality, and a decrease in loan charge-offs.

• Other income of $1.5 million for the second quarter of 2015 represented an increase of $130,000, or 9.4%, from the year earlier quarter that resulted primarily from the following changes:

• A $100,000 increase in gains on sales of loans and servicing rights compared to the same quarter a year earlier that resulted from a larger percentage of new loans being sold in the secondary market compared to the same quarter a year earlier, when a strategy was in place to put most new residential mortgage loan originations into the Bank’s portfolio; and

• A $62,000 increase in OREO income that related primarily to the receipt in the second quarter of rental income from a recently acquired residential condominium project, partly offset by

• $35,000 in write-downs of OREO, compared with a $7,000 net gain in the same quarter a year earlier.

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• $4.9 million in other expense for the second quarter of 2015 was $818,000, or 20.3%, higher than the same quarter in 2014 and resulted primarily from the following changes:

• A $500,000 increase in legal and professional fees, which included $407,000 in legal and investment banking fees related to the recently announced merger with First Merchants Corporation;

• A $154,000, or 6.6%, increase in salaries and employee benefits that was due primarily to a $109,000 cost for personnel hired for the two new banking centers opened in the last half of 2014, and normal annual salary increases, partly offset by a $16,000 decrease in expense related to our frozen defined benefit plan and a $24,000 decrease in the expense related to the retirement plan for certain officers;

• A $54,000 increase in OREO expense to $121,000, of which $70,000 related to a residential condominium project acquired in December 2014;

• A $50,000 increase in data processing expense that related primarily to our cost to support greater use of new technology by our customers; and

• A $34,000 increase in furniture and equipment expense, with $22,000 related to the two new banking centers opened in the last half of 2014.

• Income before income taxes was $305,000 for the second quarter of 2015 and income tax expense was $117,000, which resulted in an effective rate of 38.4% that was higher than the statutory rate due primarily to a significant amount of non-deductible merger related expense, partly offset by a significant amount of tax-exempt income from bank owned life insurance.

For the second quarter of 2015, total assets decreased by $2.0 million, or 0.4%, to $480.7 million:

• Investments in interest-bearing demand deposits decreased $14.9 million to $14.8 million at June 30, 2015, of which $14.6 million was invested at the Federal Reserve Bank of Chicago. The deposits withdrawn from the Federal Reserve Bank were used primarily to fund loan portfolio and investment portfolio growth during the quarter.

• The $65.0 million total at June 30, 2015 for available-for-sale and held-to-maturity investment securities represented a $6.4 million increase for the quarter that resulted primarily from $9.6 million in purchases of Fannie Mae and Freddie Mac pass-through mortgage-backed securities reduced by principal payments. The portfolio consists primarily of mortgage-backed securities insured by either Ginnie Mae, Fannie Mae or Freddie Mac.

• Net loans receivable increased $7.5 million, or 2.4%, during the quarter to $327.4 million, and the Bank had a strong loan pipeline at June 30, 2015.

• Total non-performing loans of $4.5 million, or 1.4% of total net loans at June 30, 2015, represented a decrease of $29,000 for the quarter.

• The allowance for loan losses of $3.9 million at June 30, 2015 was 1.17% of total loans and 86.0% of non-performing loans, compared to 1.23% and 87.2%, respectively, at March 31, 2015.

• The Federal Home Loan Bank repurchased $1.1 million of its stock in the second quarter, reducing our investment to $2.7 million at June 30, 2015.

• $27.8 million cash value of life insurance at June 30, 2015 represented an $800,000 decrease that resulted from the receipt of a death benefit exceeding the increase in cash value of other policies during the quarter. The Bank realized a $20,000 gain from its share of the death benefit from the split-dollar BOLI policy.

• OREO of $6.7 million at June 30, 2015 represented a $76,000 increase from March 31, 2015, as the Bank acquired two single-family residential properties with a total book value of $111,000, and had write-downs totaling $35,000 for four properties that were based on new appraisals.

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• During the second quarter of 2015, total deposits decreased by $1.2 million, or 0.3%, to $389.4 million and resulted from a $473,000 decrease in non-maturity deposits, coupled with a $701,000 decline in certificate of deposit balances.

• Total shareholders’ equity of $41.4 million at June 30, 2015 represented a decrease of $149,000 for the quarter, and resulted from a $309,000 reduction to a $134,000 unrealized gain net of income tax related to the Company’s available-for-sale investment securities portfolio and $121,000 in shareholder dividends declared during the quarter, partly offset by net income of $188,000, $67,000 from the exercise of stock options and $26,000 of share-based compensation related to stock options.

Strategic Issues

On June 26, 2015, First Merchants Corporation, an Indiana corporation, and the Company, entered into an Agreement and Plan of Reorganization and Merger (the “Merger Agreement”), pursuant to which, the Company will, subject to the terms and conditions of the Merger Agreement, merge with and into First Merchants (the “Merger”), whereupon the separate corporate existence of the Company will cease and First Merchants will survive. Immediately following the Merger, Ameriana Bank will be merged with and into First Merchants Bank, National Association, a national bank and wholly-owned subsidiary of First Merchants, with First Merchants Bank, National Association as the surviving bank. Based on the closing price of First Merchants’ common stock on June 26, 2015 of $25.13 per share, the transaction value is estimated at approximately $68.8 million. The transaction is expected to be a tax-free stock exchange for the Company’s shareholders who will be receiving First Merchants’ common stock pursuant to the Merger. Subject to the Company’s shareholders’ approval of the Merger, regulatory approvals and other customary closing conditions, the parties anticipate completing the Merger in the fourth quarter of 2015 or the first quarter of 2016.

Subject to the terms and conditions of the Merger Agreement, upon the completion of the Merger, each share of outstanding Company common stock, $1.00 par value per share, will be converted into 0.9037 shares (the “Exchange Ratio”) of First Merchants common stock, $0.125 stated value per share. The Exchange Ratio is subject to adjustments for stock splits, stock dividends, recapitalization, or similar transactions, or as otherwise described in the Merger Agreement. Fractional shares of First Merchants common stock in book entry form will be issued in respect of fractional interests arising from the Exchange Ratio. Immediately prior to the Merger, each outstanding stock option to purchase Company common stock will be converted into the right to receive cash in an amount equal to the average closing price of Company common stock for the ten (10) trading days preceding the fourth calendar day prior to the date of the Merger less the applicable exercise price.

Consummation of the Merger is subject to various conditions, including, among others, (i) requisite approvals of the holders of Company common stock; (ii) effectiveness of a Form S-4 registration statement relating to the First Merchants common stock to be issued in the Merger and listing of the First Merchants common stock to be issued in the Merger on the NASDAQ Global Select Market; and (iii) receipt of regulatory approvals.

The Merger Agreement contains certain termination rights for both First Merchants and the Company. Under certain circumstances, termination of the Merger Agreement may result in the payment of a termination fee to First Merchants, all as more fully described in the Merger Agreement.

The foregoing description of the Merger Agreement is not complete and is qualified in its entirety by reference to the Merger Agreement which is filed as Exhibit 2.1.

To diversify the balance sheet and provide new avenues for loan and deposit growth, the Bank further expanded into the greater Indianapolis area, adding three full-service offices in 2008 and 2009 in the suburban markets of Carmel, Fishers and Westfield. As a result, more than half of our banking centers are located in the Indianapolis metropolitan area. These banking centers are focused on generating new deposit 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.

In 2012, the Bank closed its McCordsville Banking Center. The Fishers Banking Center, which is in close proximity to the McCordsville and Geist communities, allowed Ameriana to serve the financial needs of its McCordsville customers from a consolidated and still convenient location. In 2013, the Bank purchased two vacant banking centers in Hamilton County. The Noblesville Banking Center opened in September 2014, and the Fishers Crossing Banking Center in November 2014. With the addition of these two offices, Ameriana has five locations in

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Hamilton County. A Broad Ripple Banking Center, the Bank’s first brick and mortar location in Marion County, is scheduled to open in the second half of 2015. The Bank is in the process of determining the appropriate time to construct a banking center building on its Plainfield property, based on its long-term expansion strategy. Although implementation of the expansion strategy has resulted in an initial negative effect on earnings, management believes that the Bank’s expansion into new markets is extremely important to its long-term sustainable growth.

On July 6, 2015, Ameriana consolidated the Downtown New Castle Banking Center with the Bundy Avenue Banking Center, also located in New Castle, where customers are provided full access to services and amenities that were not available at the Downtown Banking Center. Ameriana is committed to developing a branch network that meets the changing needs of customers while maximizing profitability for its shareholders.

Earnings pressure is expected to continue as the uncertain economy maintains stress on efforts to grow the loan portfolio, and also due to the current interest rate environment that has proven to be difficult for the financial institution industry, including pressure on net interest margins. 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, along with an increase in the size of the investment portfolio, have mitigated the negative effect of the low interest rate environment. Managing noninterest expense prudently has been a priority of the Bank, and management has utilized aggressive cost control measures including job restructuring and eliminating certain discretionary expenditures, to limit growth in noninterest expense as new banking centers are added.

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 continue to improve over the longer term and is steadfast in the belief that the Company is well positioned to grow and enhance shareholder value as this recovery occurs.

With a community banking history stretching over 125 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 contained in the Company’s annual report on Form 10-K. 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

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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 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.

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.

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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 June 30, 2015 and December 31, 2014, 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 on 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 June 30, 2015.

FINANCIAL CONDITION

The balance sheet totals of $480.7 million at June 30, 2015 represented an increase of $7.9 million, or 1.7%, from the December 31, 2014 totals of $472.8 million. The increase resulted primarily from $10.5 million, or 2.8%, growth in the Bank’s deposit accounts, partly offset by a $3.0 million reduction in borrowings. The growth in total assets for the period included an $11.3 million increase in net loans receivable, a $9.8 million increase in investment securities, partly offset by a $12.3 million reduction in interest-bearing demand deposits and a $1.1 million decrease in Federal Home Loan Bank Stock.

Cash and cash equivalents decreased $11.7 million during the first half of 2015 to $21.5 million at June 30, 2015. Included in the total at June 30, 2015 was $14.6 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. The decrease for the first six months of 2015 resulted primarily from the total use of funds for growth in the loan portfolio, growth in the investment securities portfolio and repayment of an FHLB advance exceeding funds provided by growth in deposit accounts.

At June 30, 2015, the Bank held $3.9 million in FDIC insured bank certificates of deposit, which had a weighted-average rate of 1.29% and a weighted-average remaining life of 1.5 years. There were no purchases and one $248,000 maturity during the first half of 2015.

Investment securities available-for-sale decreased by $264,000 to $47.8 million at June 30, 2015 from $48.1 million at December 31, 2014. The decrease resulted primarily from $4.5 million in principal repayments on mortgage-backed pass-through and collateralized mortgage obligation securities, partly offset by purchases of a Fannie Mae and a Freddie Mac pass-through mortgage-backed security totaling $4.8 million.

Investment securities held-to-maturity increased by $10.0 million to $17.1 million at June 30, 2015 from $7.1 million at December 31, 2014, primarily the result of the purchase of $7.4 million of Fannie Mae mortgage-backed pass through securities and $3.1 million of tax-exempt local municipal bonds, partly offset by $419,000 of principal repayments on mortgage-backed pass-through securities and the maturity of a $35,000 local municipal bond.

All mortgage-backed pass-through securities and collateralized mortgage obligations in the available-for-sale and held-to-maturity portfolios, with a total fair value of $57.7 million at June 30, 2015, 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.

Net loans receivable increased by $11.3 million to $327.4 million at June 30, 2015 from $316.1 million at December 31, 2014, as construction loans increased $5.1 million to $18.6 million, commercial real estate loans increased $5.0 million to $116.5 million, commercial loans and leases increased $838,000 to $30.2 million and we

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added a $1.1 million municipal loan, increasing total municipal loans to $1.9 million. Consumer loans totaling $1.9 million at June 30, 2015, represented a $143,000 decline for the six-month period. Residential mortgage loans originated for sale into the secondary market totaled $5.6 million, and new originations retained in the portfolio were less than repayments during the first six months of 2015. As a result total residential real estate loans declined $372,000 to $163.5 million at June 30, 2015. 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 $15.9 million at June 30, 2015 represented a $385,000 increase from $15.5 million at December 31, 2014. The net increase resulted from capital expenditures totaling $937,000, partly offset by $544,000 of depreciation and an $8,000 disposition during the period. $500,000 of the capital expenditure total was for the purchase of replacement ATMs that are compatible with a new operating system and capable of supporting chip card technology, and $239,000 represented initial expenditures related to the new Broad Ripple Banking Center that is expected to open in the fourth quarter of 2015.

The Federal Home Loan Bank repurchased $1.1 million of its stock in the second quarter, reducing our investment from $3.8 million at December 31, 2014 to $2.7 million at June 30, 2015.

Goodwill was $656,000 at June 30, 2015, unchanged from December 31, 2014. 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 of the goodwill as of June 30, 2015.

We have investments in life insurance on employees and directors, which had a balance or cash surrender value of $27.8 million and $28.4 million at June 30, 2015 and December 31, 2014, respectively. The reduction of $622,000 for the six month period was the result of a $1.0 million death benefit received by the Bank from a split-dollar BOLI policy with a $981,000 cash surrender value. The non-taxable increase in cash surrender value of this life insurance was $359,000 for the first six months of 2015, compared to $357,000 for the same period a year earlier.

OREO totaled $6.7 million at June 30, 2015, a $43,000 increase from December 31, 2014. There were three single-family properties with a total book value of $151,000 transferred to OREO, two sales of properties with book values totaling $73,000 that resulted in gains totaling $32,000, and four write-downs totaling $35,000 during the six-month period ended June 30, 2015.

Other assets of $8.8 million at June 30, 2015 represented a $73,000 decrease from December 31, 2014, which resulted primarily from a $447,000 net decrease in total prepaid expense, partly offset by a $304,000 increase in the income tax asset and a $76,000 increase in interest and dividends receivable.

Total liabilities increased $7.5 million, or 1.7%, from $431.8 million at December 31, 2014 to $439.3 million at June 30, 2015, primarily due to the increase in deposits.

Total deposits of $389.4 million at June 30, 2015 represented an increase of $10.5 million, or 2.8%, from December 31, 2014. The Bank has maintained a strong focus on nurturing existing and attracting new core deposit relationships, while limiting its efforts related to highly rate-sensitive deposits. During the first six months of 2015, money market, savings and checking balances, exclusive of public funds checking accounts, increased $12.6 million, as customers continued to choose more liquid deposit products, due primarily to the ongoing economic uncertainty and related low interest rate environment. Public funds checking balances increased $706,000 to $43.4 million at June 30, 2015. Total certificates of deposit balances declined $2.8 million during the same period to $134.2 million, due mostly to a migration of maturing balances to the Bank’s non-maturity deposit products. 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 $42.8 million at June 30, 2015 was down $3.0 million from December 31, 2014 as a result of the maturity of a Federal Home Loan Bank advance with an interest rate of 2.70%. Wholesale funding options and strategies are continuously analyzed to ensure that the Bank retains sufficient sources of credit to fund all of its needs, and to control funding costs by using this alternative to organic deposit account funding when appropriate.

Drafts payable of $1.2 million at June 30, 2015 decreased $119,000 from $1.3 million at December 31, 2014. 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.

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Total shareholders’ equity of $41.4 million at June 30, 2015 represented a $387,000 increase over the total of $41.1 million at December 31, 2014. The increase resulted from net income of $690,000, $125,000 from exercises of stock options and $42,000 in share-based compensation related to stock options, partly offset by $242,000 in dividends declared and a $228,000 decrease to a $134,000 unrealized gain net of income tax related to the Company’s available-for-sale investment securities portfolio, during the six-month period ended June 30, 2015. The Company’s and the Bank’s regulatory capital ratios were all considerably above the levels required under regulatory guidelines to be considered “well capitalized.”

RESULTS OF OPERATIONS

Second Quarter of 2015 compared to the Second Quarter of 2014

The Company recorded net income of $188,000, or $0.06 per diluted share, for the second quarter of 2015, compared to net income of $603,000, or $0.20 per diluted share, for the first quarter of 2014.

The earnings decline of $415,000, or $0.14 per diluted share, for the second quarter of 2015 compared to the same quarter a year earlier was due primarily to $407,000 in legal and investment banking fees, as well as other costs related to our recently announced merger with Muncie, Indiana-based First Merchants Corporation, and approximately $130,000 related to two new banking centers opened during the last half of 2014.

Net Interest Income

Net interest income on a fully tax-equivalent basis of $3.7 million for the second quarter of 2015 represented an increase of $26,000, or 0.7%, compared to the same period of 2014. Net interest income on a fully tax-equivalent basis was positively affected by the benefit from a $9.8 million, or 2.4%, increase in average interest-earning assets to $420.4 million, partly offset by a decrease in net interest margin. Net interest margin on a fully tax-equivalent basis for the second quarter of 2015 of 3.50% was six basis points lower than the year earlier period.

Tax-exempt interest was $54,000 for the second quarter of 2015 compared to $36,000 for the same period of 2014, and resulted from municipal securities and municipal loans. Tax-equivalent adjustments were $23,000 and $15,000 for the three months ended June 30, 2015 and June 30, 2014, respectively.

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

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

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

Provision for Loan Losses

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

	(Dollars in thousands)
	Three Months Ended June 30,
	2015			2014
Balance at beginning of quarter	$	3,984		$	4,100
Provision for loan losses		—			150
Charge-offs		(121	)		(263	)
Recoveries		41			17
Net charge-offs		(80	)		(246	)
Balance at end of period	$	3,904		$	4,004
Allowance to total loans		1.17	%		1.26	%
Allowance to non-performing loans		85.95	%		87.58	%

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We did not record a provision for loan losses for the second quarter of 2015, compared to a $150,000 provision for the year earlier quarter, which was reflective of the declining pressure of economic conditions on credit quality, including a decrease in loan charge-offs. Net charge-offs decreased from $246,000 for the second quarter of 2014 to $80,000 for the second quarter of 2015. Total charge-offs of $121,000 for the second quarter of 2015 included loans with specific reserves totaling $53,000 at March 31, 2015.

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

	(Dollars in thousands)
	June 30,
	2015			2014
Loans accounted for on a non-accrual basis	$	4,427		$	4,551
Accruing loans contractually past due 90 days or more		115			21
Total of non-accrual and 90 days or more past due loans (1)	$	4,542		$	4,572
Percentage of total net loans		1.39	%		1.46	%
Other non-performing assets (2)	$	6,682		$	5,666
Total non-performing assets	$	11,224		$	10,238
Percentage of total assets		2.34	%		2.16	%
Troubled debt restructurings in total of nonaccrual and 90 days or more past due loans (1)	$	1,411		$	2,466
Total troubled debt restructurings	$	10,904		$	11,918

(1) Total non-accrual loans and accruing loans 90 days or more past due at June 30, 2015 included $1.4 million of TDRs, which consisted of four residential real estate loans totaling $976,000 and three commercial loans totaling $435,000.

(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 June 30, 2015 was $100,000 lower than a year earlier, but the allowance for loan losses to non-performing loans ratio remained relatively stable at 85.95% at June 30, 2015 compared to 87.58% at June 30, 2014, due to a lower total of non-performing loans. Non-performing loans of $4.5 million at June 30, 2015 represented a $30,000 decrease from the total of $4.6 million at June 30, 2014. It is management’s opinion that the allowance for loan losses at June 30, 2015 is adequate based on measurements of the credit risk in the entire portfolio as of that date.

At June 30, 2015, the Bank had $10.9 million in loans categorized as TDRs, with seven loans totaling $1.4 million also included in the table above in the total for loans accounted for on a non-accrual basis. The total of $10.9 million included $3.7 million related to a hotel in northern Indiana, a $3.3 million hotel loan to another creditor, 20 loans on residential properties totaling $2.6 million, a $888,000 loan for developed commercial land and three commercial loans totaling $435,000.

Other Income

The Company recorded other income of $1.5 million for the second quarter of 2015, an increase of $130,000, or 9.4%, from the same period a year earlier that resulted primarily from the following changes:

• A $100,000 increase in gains on sales of loans and servicing rights to $125,000 from $25,000 that resulted from a larger percentage of new loans being sold in the secondary market in the first quarter of 2015 compared with the same quarter a year earlier, when a strategy was in place to put most new loan originations into the Bank’s portfolio; and

• A $62,000 increase in OREO income that related primarily to the receipt of rental income from a recently acquired residential condominium project; partly offset by

• $35,000 in OREO write-downs, compared with a $7,000 net gain in the year earlier quarter.

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Other Expense

Total other expense of $4.9 million for the second quarter of 2015 was $818,000, or 20.3%, higher than the second quarter of 2014, with the following major differences:

• A $500,000 increase in legal and professional fees for the second quarter of 2015 compared to the same quarter a year earlier that resulted primarily from $407,000 in legal and investment banking fees related to the recently announced merger with First Merchants Corporation, $68,000 in consulting fees for an information technology systems evaluation and a $33,000 increase in fees related to successful appeals of real estate tax assessments;

• A $154,000, or 6.6%, increase in salaries and employee benefits to $2.5 million that was due primarily to $163,000 in increased compensation costs, of which $86,000 related to personnel hired for the two new banking centers opened in the last half of 2014 and the difference being related primarily to normal annual salary increases, partly offset by a $9,000 net reduction in benefits that resulted primarily from a $16,000 decrease in retirement benefits expense related to our frozen defined benefit plan and a $24,000 decrease in the expense related to the retirement plan for certain officers;

• A $54,000 increase in OREO expense to $121,000, due primarily to $70,000 of expense related to a residential condominium project acquired in December 2014;

• A $50,000 increase in data processing expense to $301,000 that related primarily to our cost to support greater use of new technology by our customers; and

• A $34,000 increase in furniture and equipment expense, with $22,000 related to the opening of two new banking centers during the last half of 2014.

Income Tax Expense

The Company recorded income tax expense of $117,000 on pre-tax income of $305,000 for the three-month period ended June 30, 2015, compared to income tax expense of $223,000 on pre-tax income of $826,000 for the same period a year earlier. The second quarter of 2015 had a significant amount of non-deductible merger related expense. 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 Ameriana Investment Management, Inc. (“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 tax credits. The federal loss carry-forward expires in 2026, and the tax credits begin to expire in 2023. The tax credits include alternative minimum tax credits, which have no expiration date. Management believes that the Company will be able to utilize the benefits recorded for loss carry-forwards and credits within the allotted time periods.

In addition to the liquidation of AIMI, the Bank has initiated several strategies designed to expedite the use of both the deferred state tax asset and the deferred federal tax asset. Through sales of $34.5 million of municipal securities and only two purchases since December 31, 2006, that segment of the investment securities portfolio has been reduced to $5.4 million. The proceeds from these sales have been reinvested in taxable financial instruments. The Bank has periodically evaluated a sale/leaseback transaction that could result in a taxable gain on its office properties, and also allow the Bank to convert nonearning assets to assets that will produce taxable income. Additionally, the Bank periodically considers 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.

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Six Months Ended June 30, 2015 compared to the Six Months Ended June 30, 2014

The Company recorded net income of $690,000, or $0.23 per diluted share, for the first six months of 2015, a decrease of $642,000, or 48.20%, from net income of $1.3 million, or $0.45 per diluted share, for the first six months of 2014.

The earnings decline of $642,000, or $0.22 per diluted share, for the first six months of 2015 compared to the same period a year earlier was due primarily to $432,000 in legal and investment banking fees, as well as other costs related to our recently announced merger with First Merchants Corporation, approximately $307,000 related to two new banking centers opened during the last half of 2014, and a total of $235,000 in interest income and expense reversal related to the repurchase of a non-performing loan by the servicer in the first six months of 2014.

Net Interest Income

Net interest income on a fully tax-equivalent basis of $7.2 million for the first half of 2015 represented a decrease of $160,000, or 2.2%, compared to the same period of 2014, and was related primarily to $173,000 in interest income recognized on the repurchase of a non-performing loan by the servicer in the first six months of 2014, and a $120,000 decrease in loan prepayment fee income. The Company experienced a $10.1 million, or 2.5%, increase in average interest-earning assets to $418.8 million for the first half of 2015, compared with the same period a year earlier. The Company’s net interest margin on a fully tax-equivalent basis for the first half of 2015 of 3.47% was sixteen basis points lower than the year earlier period.

Tax-exempt interest was $108,000 for the first six months of 2015 compared to $72,000 for the same period of 2014. Our tax exempt interest results from holdings of bank-qualified municipal securities and municipal loans. The tax-equivalent adjustments were $46,000 and $30,000 for the first six months of 2015 and 2014, respectively.

Provision for Loan Losses

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

	(Dollars in thousands)
	Six Months Ended June 30,
	2015			2014
Balance at beginning of year	$	3,903		$	3,993
Provision for loan losses		105			300
Charge-offs		(159	)		(320	)
Recoveries		55			31
Net charge-offs		(104	)		(289	)
Balance at end of period	$	3,904		$	4,004

We recorded a provision for loan losses of $105,000 for the first six months of 2015, compared with $300,000 for the same period in 2014. The 2015 provision represents a $195,000, or 65.0%, decrease from the six-month period a year earlier. The lower provision is also reflective of the effect of slowly improving economic conditions on credit quality, including a reduced amount of loan charge-offs. Charge-offs of $159,000 for the six-month period ended June 30, 2015 included $83,000 for a residential real estate loan, $48,000 for a commercial loan and $28,000 for consumer loans. Charge-offs of $320,000 for the six-month period a year earlier included $101,000 for two commercial real estate loans, $80,000 for four residential real estate loans, $59,000 for two commercial loans, and $46,000 for two construction loans. The allowance to total loans was 1.17% at June 30, 2015, compared with 1.26% at June 30, 2014.

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Other Income

The Company recorded other income of $3.1 million for the first half of 2015, an increase of $325,000, or 11.8%, from the same period a year earlier that resulted primarily from the following changes:

• A $139,000 increase in gains on sales of loans and servicing rights to $180,000 from $41,000 that resulted from a larger percentage of new loans being sold in the secondary market in the first half of 2015 compared with the same period a year earlier, when a strategy was in place to put most new loan originations into the Bank’s portfolio;

• A $130,000, or 16.2%, increase in brokerage and insurance commissions to $932,000 for the first six months of 2015 from $802,000 for the same period a year earlier that resulted primarily from a $138,000 increase in the contingent bonus received by the Bank’s insurance subsidiary related to the claims loss experience on insured properties;

• A $45,000 increase in other fees and service charges on deposit accounts to $1.3 million for the first half of 2015 compared to the year earlier period, that was due primarily to an increase in the number of checking accounts that resulted from the Bank’s continuing focus on growing core deposit relationships; and

• A $39,000 increase in OREO income that related primarily to the receipt of rental income from a recently acquired residential condominium project.

Other Expense

The net increase of $1.2 million, or 15.3%, in other expense to $9.2 million for the first six months of 2015 compared with the same period of 2014 resulted primarily from the net of the following differences:

• A $519,000 increase in legal and professional fees for the first half of 2015 compared to the year earlier period that resulted primarily from $432,000 in legal and investment banking fees related to the recently announced merger with First Merchants Corporation, $68,000 in consulting fees for an information technology systems evaluation and a $29,000 increase in fees related to successful appeals of real estate tax assessments;

• A $255,000, or 5.6%, increase in salaries and employee benefits to $4.8 million that was due primarily to $271,000 in increased compensation costs, of which $175,000 related to personnel hired for the two new banking centers opened in the last half of 2014 and the difference being related primarily to normal annual salary increases, partly offset by a $16,000 net reduction in benefits that resulted primarily from a $31,000 decrease in retirement benefits expense related to our frozen defined benefit plan and a $48,000 decrease in the expense related to the retirement plan for certain officers;

• A $139,000 increase in OREO expense to $245,000 of which $132,000 related to a residential condominium project acquired in December 2014;

• A $99,000 increase in other expense that related primarily to the reversal of $62,000 of loan expense in the first half of 2014 as a result of the repurchase of a non-performing loan by the servicer;

• A $97,000 increase in data processing expense to $581,000 that related primarily to our cost to support greater use of new technology by our customers;

• A $55,000 increase in furniture and equipment expense, with $42,000 related to the opening of two new banking centers during the last half of 2014; and

• A $34,000 increase in net occupancy expense due primarily to a $34,000 reduction in rental income that resulted from the loss of a tenant in a building housing one of our banking centers.

Income Tax Expense

The Company had income before income taxes of $1.0 million for the first six months of 2015, and recorded income tax expense of $274,000, an effective tax rate of 28.4% that resulted from a large amount of tax-exempt income, partly offset by a significant amount of non-deductible merger related expense. The Company had income before income taxes of $1.8 million for the same period of 2014, and recorded income tax expense of $507,000, an effective rate of 27.6% that was also a result of a large amount of tax-exempt income. For both six-month periods, the Bank had a significant amount of tax-exempt income from BOLI, in addition to tax-exempt income from municipal loans and municipal securities.

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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.

At June 30, 2015, we had $47.8 million in loan commitments outstanding and $59.3 million of additional commitments for line of credit receivables. Certificates of deposit due within one year of June 30, 2015 totaled $68.8 million, or 17.7% 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 June 30, 2016. 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 June 30, 2015 or at December 31, 2014.

Our primary investing activity, the origination and purchase of loans, is offset by the sale of loans and principal repayments. In the first six months of 2015, net loans receivable increased by $11.3 million, or 3.6%.

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 $10.5 million, or 2.8%, during the first six months of 2015. We had FHLB advances of $25.0 million and $28.0 million at June 30, 2015 and December 31, 2014, respectively.

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.

Basel III. On July 9, 2013, the federal bank regulatory agencies issued a final rule that revised their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”) and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 billion or more and top-tier savings and loan holding companies.

The rule established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increased the minimum Tier 1 capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets) and assigned a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property.

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The rule also includes changes in what constitutes regulatory capital, some of which are subject to a two-year transition period. These changes include the phasing-out of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock will be required to be deducted from capital, subject to a two-year transition period. Finally, Tier 1 capital will include accumulated other comprehensive income (“AOCI”), (which includes all unrealized gains and losses on available for sale debt and equity securities), subject to a two-year transition period. A key provision of the new rules permits all non-advanced approaches institutions, generally those institutions with less than $250 billion in total assets, to make a one-time, irrevocable election to opt out of the requirement to include most components of AOCI in Tier 1 capital. With the filing of their respective March 31, 2015 regulatory reports, the Bank and the Company made the one-time, irrevocable election to opt out.

The new capital requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and non-residential mortgage loans that are 90 days past due or otherwise on nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250% risk weight (up from 100%) for mortgage servicing rights and deferred tax assets that are not deducted from capital; and increased risk-weights (from 0% to up to 600%) for equity exposures.

Finally, the rule limits capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.

The final rule became effective on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing each year until fully implemented at 2.5% on January 1, 2019. It is management’s belief that, as of June 30, 2015, the Company and the Bank have met all capital adequacy requirements under Basel III on a fully phased-in basis if such requirements were currently effective.

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 June 30, 2015 and December 31, 2014, the Bank was categorized as “well capitalized” and met all subject capital adequacy requirements. There are no conditions or events since June 30, 2015 that management believes have changed this classification.

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

June 30, 2015
	Actual Capital					Required For Adequate Capital					To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital ratio (total capital to risk-weighted assets)	$	48,841		14.62	%	$	26,721		8.00	%	$	33,402		10.00	%
Tier 1 risk-based capital ratio (tier 1 capital to risk-weighted assets)	$	44,897		13.44	%	$	20,041		6.00	%	$	26,721		8.00	%
Common equity tier 1 risk-based capital ratio (common equity tier 1 capital to risk-weighted assets)	$	44,897		13.44	%	$	15,030		4.50	%	$	21,711		6.50	%
Tier 1 leverage ratio (tier 1 capital to adjusted average total assets)	$	44,897		9.41	%	$	19,077		4.00	%	$	23,847		5.00	%

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December 31, 2014
	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)	$	48,737		15.64	%	$	24,933		8.00	%	$	31,167		10.00	%
Tier 1 risk-based capital ratio (tier 1 capital to risk-weighted assets)	$	44,823		14.38	%	$	12,467		4.00	%	$	18,700		6.00	%
Tier 1 leverage ratio (tier 1 capital to adjusted average total assets)	$	44,823		9.49	%	$	14,175		3.00	%	$	23,626		5.00	%

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

June 30, 2015
	Actual Capital					Required For Adequate Capital					To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital ratio (total capital to risk-weighted assets)	$	51,116		15.17	%	$	26,964		8.00	%	$	33,705		10.00	%
Tier 1 risk-based capital ratio (tier 1 capital to risk-weighted assets)	$	47,172		14.00	%	$	20,223		6.00	%	$	26,964		8.00	%
Common equity tier 1 risk-based capital ratio (common equity tier 1 capital to risk-weighted assets)	$	39,241		11.64	%	$	15,167		4.50	%	$	21,908		6.50	%
Tier 1 leverage ratio (tier 1 capital to adjusted average total assets)	$	47,172		9.85	%	$	19,149		4.00	%	$	23,937		5.00	%

December 31, 2014
	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)	$	49,983		15.85	%	$	25,233		8.00	%	$	31,541		10.00	%
Tier 1 risk-based capital ratio (tier 1 capital to risk-weighted assets)	$	46,069		14.61	%	$	12,617		4.00	%	$	18,925		6.00	%
Tier 1 leverage ratio (tier 1 capital to adjusted average total assets)	$	46,069		9.74	%	$	14,149		3.00	%	$	23,644		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.

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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 June 30, 2015 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

On March 18, 2014, the City of Noblesville filed action seeking to take title of the real estate purchased by Ameriana Bank that was used to open a banking center in September 2014. The suit seeks to acquire title pursuant to condemnation proceedings and the City has made an offer to acquire the real estate for $375,000. That offer has been rejected by the Bank. The City has agreed not to take action before July 1, 2016, during which time the Bank can continue to operate its banking center. The Court has now entered its order approving the agreement.

On July 8, 2015, a class action complaint, captioned Shiva Stein v. Ameriana Bancorp, et al., was filed under Case No. 49D01-1507-PL-022566 in the Marion Circuit Court, Indiana, against the Company, its directors and First Merchants Corporation challenging the merger of the Company with and into First Merchants. The complaint alleges, among other things, that the Company’s directors breached their fiduciary duties to the Company and its stockholders by agreeing to the proposed merger at an unfair price and by agreeing with First Merchants to unreasonable deal protection provisions that discourage other bidders. The plaintiff further alleges that the Company’s directors and officers were not independent or disinterested with respect to the merger. The plaintiff also alleges that First Merchants aided and abetted the Company directors’ breaches of fiduciary duties. The complaint seeks, among other things, an order enjoining the defendants from consummating the merger, as well as attorneys’ and experts’ fees and certain other damages. The Company, its directors, and First Merchants believe this action is without merit and intend to vigorously defend against the lawsuit.

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, 2014, 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.

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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 June 30, 2015, and at June 30, 2015 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
2.1	Agreement and Plan of Reorganization and Merger between First Merchants Corporation and Ameriana Bancorp, dated June 26, 2015 (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed with the SEC on June 29, 2015)
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 June 30, 2015 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 (Loss), (iv) the Consolidated Condensed Statement of Shareholders’ Equity, (v) the Consolidated Condensed Statements of Cash Flows and (vi) related Notes.

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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:August 7, 2015	/s/ Jerome J. Gassen
	Jerome J. Gassen
	President and Chief Executive Officer
	(Principal Executive Officer)
DATE:August 7, 2015	/s/ John J. Letter
	John J. Letter
	Executive Vice President-Treasurer and Chief Financial Officer
	(Principal Financial Officer and Accounting Officer)

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