News Column

AMERIANA BANCORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 7, 2014

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, 2013 (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, and competition that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Additional factors that may affect our results are discussed in the Form 10-K under Part I, Item 1A- "Risk Factors" and in other reports filed with the Securities and Exchange Commission. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Who We Are Ameriana Bancorp is an Indiana chartered bank holding company subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act of 1956, as amended. The Company became the holding company for Ameriana Bank, an Indiana chartered commercial bank headquartered in New Castle, Indiana (the "Bank"), in 1990. The Company also holds a minority interest in a limited partnership organized to acquire and manage real estate investments, which qualify for federal tax credits. The Bank began operations in 1890. Since 1935, the Bank has been a member of the Federal Home Loan Bank (the "FHLB") System. Its deposits are insured to applicable limits by the Deposit Insurance Fund, administered by the Federal Deposit Insurance Corporation (the "FDIC"). The Bank conducts business through its main office at 2118 Bundy Avenue, New Castle, Indiana and through eleven branch offices located in New Castle, Middletown, Knightstown, Morristown, Greenfield, Anderson, Avon, Carmel, Fishers, Westfield and New Palestine, Indiana. The Bank has two wholly-owned subsidiaries, Ameriana Insurance Agency ("AIA") and Ameriana Financial Services, Inc. ("AFS"). AIA provides insurance sales from offices in New Castle, Greenfield and Avon, Indiana. AFS operates a brokerage facility in conjunction with LPL Financial that provides non-bank investment product alternatives to its customers and the general public. (30)



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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 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 2014

The Company recorded net income of $603,000, or $0.20 per diluted share, for the three-month period ended June 30, 2014, which was a $72,000, or 13.6%, improvement over the second quarter of 2013.

The Company declared a quarterly dividend of $0.02 per share, which

represented a $0.01 per share increase over the same quarter a year earlier.



At June 30, 2014, the Bank's tier 1 leverage ratio was 9.44%, the tier

1 risk-based capital ratio was 14.46%, and the total risk-based capital ratio was 15.72%. All three ratios were considerably above the levels required under regulatory guidelines to be considered "well capitalized." Net interest income on a fully tax-equivalent basis for the second quarter of 2014 represented an increase of $116,000, or 3.3%, from the same quarter of 2013, primarily due to a $21.1 million, or 5.4%, increase in average interest-earning assets and a $50,000 increase in loan prepayment penalties. Net interest margin of 3.56% on a fully tax-equivalent basis for the second quarter of 2014 was seven basis points lower than the same period in 2013. The Bank recorded a $150,000 provision for loan losses in the second quarter of 2014, which reflected a $60,000 reduction from the same quarter a year earlier, primarily as a result of improved credit quality. Other income of $1.4 million for the second quarter of 2014 represented a decrease of $86,000, or 5.9%, from the year earlier quarter that resulted primarily from the following changes: A $138,000, or 84.7%, decrease in gains on sales of loans and servicing rights compared to the same quarter a year earlier that resulted from both a reduction in refinance volume and from a decision to retain most of the new residential mortgage loan production in the Bank's portfolio; partly offset by A $55,000, or 8.6%, increase in other fees and service charges on deposit accounts to $698,000, primarily due to an 8.0% increase in the number of checking accounts since the end of the second quarter of 2013 that resulted from the Bank's continuing focus on growing core deposit relationships. (31)



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$4.0 million in other expense for the second quarter of 2014 was $37,000, or 0.9%, lower than the same quarter in 2013 and resulted primarily from the following changes: A $57,000 decrease in FDIC deposit insurance premiums that resulted from a reduction in the Bank's assessment rate; A $48,000 reduction in furniture and equipment expense that related mostly to reduced ATM maintenance expense and lower depreciation; and A $36,000 decrease in OREO expense that was primarily the result of real estate tax refunds from successful appeals of assessments, partly offset by An $89,000, or 4.0%, increase in salaries and employee benefits that was due primarily to a $51,000 increase related to our frozen defined benefit retirement plan, $20,000 in share-based compensation from the granting of stock options and $13,000 initial funding costs for health savings accounts associated with the offering of a high-deductible employee health insurance plan; and A $37,000 increase in marketing expense that related primarily to media advertising to build brand awareness in the greater Indianapolis metropolitan area. The Company had income before income taxes of $826,000 for the second quarter of 2014 and recorded income tax expense of $223,000, an effective rate of 27.0% that was lower than the statutory rate due primarily to a significant amount of tax-exempt income from bank-owned life insurance.



For the second quarter of 2014, total assets increased by $4.2 million, or 0.9%, to $474.4 million from $470.2 million at March 31, 2014:

Investments in interest-bearing demand deposits decreased $4.9 million

from $40.1 million at March 31, 2014 to $35.2 million at June



30,

2014, of which $34.9 million was invested at the Federal Reserve Bank of Chicago.



The $52.0 million total for investment securities available-for-sale

represented a $7.4 million increase from March 31, 2014, due primarily to purchases of $8.4 million of 15-year mortgage-backed securities exceeding principal payments for the portfolio during the



quarter. The

portfolio consists primarily of mortgage-backed securities



insured by

either Ginnie Mae, Fannie Mae or Freddie Mac. Net loans receivable increased $803,000 during the quarter to $312.9 million at June 30, 2014. Construction loans increased $2.3



million to

$16.0 million and residential real estate loans experienced



growth of

$3.0 million, that resulted primarily from a decision to



temporarily

modify the mortgage banking strategy and put most new



production into

the portfolio. Balances for all other loan categories declined during the second quarter. Total non-performing loans of $4.6 million, or 1.5% of total net loans, at June 30, 2014, represented a decrease of $2.0 million from June 30, 2013. The allowance for loan losses of $4.0 million at June 30, 2014 was

1.26% of total loans and 87.6% of non-performing loans,



compared to

1.24% and 60.1%, respectively, at June 30, 2013. OREO of $5.7 million at June 30, 2014 represented a $404,000 increase from March 31, 2014 that was the net result of the addition of five properties and sale of two properties during the quarter.



During the second quarter of 2014, total deposits increased by $4.2

million, or 1.1%, to $377.2 million, as the Bank maintained



its strong

focus on nurturing existing and attracting new core deposit relationships, while allowing the more rate-sensitive accounts



to run

off. All of the growth for the quarter occurred in



non-maturity

deposits, which typically are lower-cost than certificates of deposit. There was no change in the total amount or weighted average cost of borrowed money at June 30, 2014 from March 31, 2014. Total shareholders' equity of $39.6 million at June 30, 2014 represented an increase of $959,000 over March 31, 2014, as $603,000 of net income, a $349,000 improvement to a $223,000 unrealized gain net of income tax related to the Company's available-for-sale investment securities portfolio, $47,000 from an exercise of stock options and $20,000 of share-based compensation related to the granting of stock options was partly offset by $60,000 in



shareholder

dividends declared during the quarter. (32)



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Strategic Issues

To diversify the balance sheet and provide new avenues for loan and deposit growth, the Bank further expanded into Indianapolis, adding three full-service offices in 2008 and 2009 in the suburban markets of Carmel, Fishers and Westfield. As a result, half of our banking centers are located in the Indianapolis metropolitan area. These banking centers are focused on generating new 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. Although the expansion strategy initially negatively affected earnings, the Bank's expansion into new markets is critical for its long-term sustainable growth. In 2012, the Bank closed its McCordsville Banking Center. The opening of the Fishers Banking Center in 2008, which is in close proximity to the McCordsville and Geist communities, allowed Ameriana to serve the financial needs of its McCordsville customers from a new convenient location. The Bank purchased two vacant banking centers in the Hamilton County Indianapolis metropolitan area in 2013, and has scheduled an opening of the Noblesville Banking Center for September 2014 and expects to open the Fishers Crossing Banking Center in the fourth quarter of 2014. 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. 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. 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 mortgage-backed securities, have mitigated the negative effect of the low interest rate environment resulting in net interest income growth. Reducing noninterest expense has been a priority of the Bank, and management has utilized aggressive cost control measures including job restructuring and eliminating certain discretionary expenditures. With the Bank's mantra of "Soundness. Profitability. Growth - in that order, no exceptions," the priorities, culture and risk strategy of the Bank are focused on asset quality and credit risk management. Despite the current economic pressures, as well as the industry's challenges related to compliance and regulatory requirements, tightened credit standards, and capital preservation, management remains cautiously optimistic that business conditions will 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 124 years, the Bank has built its strong reputation with community outreach programs and being a workplace of choice. By combining its rich tradition with its ability to provide its customers with financial advice and solutions, the Bank will accomplish its mission by:



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

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

understanding and meeting customer's financial needs



throughout

their life cycle. Serving customers requires the commitment of all Ameriana Bank associates to provide exceptional service and sound financial advice. We believe these qualities will differentiate us from our competitors and increase profitability and shareholder value. (33)



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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 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. (34)



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Valuation Measurements. Valuation methodologies often involve a significant degree of judgment, particularly when there are no observable active markets for the items being valued. Investment securities and residential mortgage loans held for sale are carried at fair value, as defined by FASB fair value guidance, which requires key judgments affecting how fair value for such assets and liabilities is determined. In addition, the outcomes of valuations have a direct bearing on the carrying amounts for goodwill and intangible assets. To determine the values of these assets and liabilities, as well as the extent to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment rates and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect the Company's results of operations. Income Tax Accounting. We file a consolidated federal income tax return. The provision for income taxes is based upon income in our consolidated financial statements. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. Under U.S. GAAP, a valuation allowance is required to be recognized if it is "more likely than not" that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax asset is highly subjective and dependent upon judgment concerning our evaluation of both positive and negative evidence, our forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Positive evidence includes the existence of taxes paid in available carry-back years as well as the probability that taxable income will be generated in future periods, while negative evidence includes any cumulative losses in the current year and prior two years and general business and economic trends. At June 30, 2014 and December 31, 2013, 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, 2014.



FINANCIAL CONDITION

Total assets of $474.4 million at June 30, 2014 represented an increase of $15.8 million, or 3.4%, from $458.6 million at December 31, 2013. The increase in total assets for the six-month period resulted primarily from a $14.2 million increase in investment securities that was funded by $14.5 million, or 4.0%, growth in the Bank's deposit accounts. Cash and cash equivalents increased $685,000 to $41.6 million at June 30, 2014 from $40.9 million at December 31, 2013. Included in the total at June 30, 2014 was $34.9 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 increase for the first half of 2014 resulted primarily from the growth in deposit accounts and shareholders' equity exceeding the growth in the loan portfolio and the investment securities available for sale portfolio. (35)



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At June 30, 2014, the Bank held $3.0 million in FDIC insured bank certificates of deposit, which had a weighted-average rate of 1.07% and a weighted-average remaining life of approximately 1.3 years. There were no maturities or new certificates added during the first half of 2014. Investment securities available-for-sale increased by $14.2 million to $52.0 million at June 30, 2014 from $37.8 million at December 31, 2013. The increase resulted primarily from seven purchases of mortgage-backed securities totaling $16.2 million and an $856,000 increase in the market value of the portfolio that resulted from a decrease in market interest rates, partly offset by $2.8 million in principal repayments on mortgage-backed pass-through securities. All purchases consisted of Ginnie Mae and Fannie Mae mortgage-backed securities with final maturities of less than fifteen years, as the Company is focused on limiting interest rate risk and credit risk in its portfolio. All mortgage-backed securities, which totaled $50.2 million at June 30, 2014, 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. There was essentially no change in the $2.3 million investment securities held to maturity portfolio, which consists of local municipal securities, with only amortization of about $1,000 during the six-month period ended June 30, 2014. Net loans receivable increased by $880,000 to $312.9 million at June 30, 2014 from $312.0 million at December 31, 2013. Construction loans increased $4.6 million to $16.0 million, while all other loan categories declined during the six-month period. Sales of new production residential mortgage loans into the secondary market totaled only $974,000, as most originations during the first six months of 2014 were retained in the portfolio. The Bank's mortgage-banking strategy is reviewed regularly to ensure that it remains consistent with the Bank's overall balance sheet management objectives. Premises and equipment of $14.5 million at June 30, 2014 represented a $162,000 decrease from $14.7 million at December 31, 2013. The net decrease resulted from $478,000 of depreciation, partly offset by capital expenditures totaling $316,000 during the period.



Goodwill was $656,000 at June 30, 2014, unchanged from December 31, 2013. 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, 2014.

We have investments in life insurance on employees and directors, which had a balance or cash surrender value of $28.1 million and $27.7 million at June 30, 2014 and December 31, 2013, respectively. The non-taxable increase in cash surrender value of this life insurance was $357,000 for the first six months of 2014, compared to $368,000 for the same period a year earlier. OREO totaled $5.7 million at June 30, 2014, a $495,000 increase from $5.2 million at December 31, 2013. There were six transfers to OREO with book values totaling $569,000, two sales of properties with book values totaling $67,000 and no write-downs during the six-month period ended June 30, 2014. Other assets of $9.2 million at June 30, 2014 represented a $650,000 reduction from December 31, 2013. This decrease resulted primarily from a $701,000 reduction in deferred tax assets related primarily to taxable income for the six-month period and a $266,000 reduction in total prepaid expense, partly offset by a $497,000 increase in accrued interest and dividends receivable.



Total liabilities increased $14.0 million, or 3.3%, from $420.9 million at December 31, 2013 to $434.9 million at June 30, 2014, primarily due to the increase in deposits.

Total deposits of $377.2 million at June 30, 2014 represented an increase of $14.5 million, or 4.0%, from $362.7 million at December 31, 2013. 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 2014, money market, savings and checking balances, exclusive of public funds checking, increased $10.0 million, as customers continued to choose the more liquid deposit products, due primarily to the ongoing economic uncertainty and related low interest rate environment. Public funds checking balances increased $11.9 million, due primarily to a $10.5 million deposit near the end of the second quarter that represented construction funds that are projected to be withdrawn over an eighteen-month period beginning in July 2014. Total certificates of deposit balances (36)



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declined $7.4 million, due mostly to the Bank's decision not to accept the renewal of a $7.5 millionState of Indiana six-month certificate. 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 $50.8 million at June 30, 2014 was unchanged from December 31, 2013. Wholesale funding options and strategies are continuously analyzed to ensure that the Bank retains sufficient sources of credit to fund all of the its needs, and to control funding costs by using this alternative to organic deposit account funding when appropriate. Drafts payable of $1.1 million at June 30, 2014 decreased $395,000 from $1.5 million at December 31, 2013. This difference will vary and is a function of the dollar amount of checks issued near period end and the time required for those checks to clear. Total shareholders' equity of $39.6 million at June 30, 2014 represented a $1.9 million increase over the total of $37.7 million at December 31, 2013. The increase resulted from net income of $1.3 million, a $563,000 improvement to a $223,000 unrealized gain net of income tax related to the Company's available-for-sale investment securities portfolio, $47,000 from an exercise of stock options and $40,000 in share-based compensation related to stock options, partly offset by $119,000 in dividends declared during the six-month period ended June 30, 2014. 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 2014 compared to the Second Quarter of 2013

The Company recorded net income of $603,000, or $0.20 per diluted share, for the second quarter of 2014, compared to net income of $531,000, or $0.18 per diluted share, for the second quarter of 2013.



The earnings growth of $72,000, or 13.6%, for the second quarter of 2014 compared to the same quarter a year earlier was related primarily to an increase in interest on mortgage-backed securities and a reduced provision for loan losses related to improved credit quality, partly offset by a reduction in mortgage banking revenue.

Net Interest Income

Net interest income on a fully tax-equivalent basis of $3.6 million for the second quarter of 2014 represented an increase of $116,000, or 3.3%, compared to the same period of 2013, primarily due to a $21.1 million, or 5.4%, increase in average interest-earning assets to $410.6 million and a $50,000 increase in loan prepayment penalties. Net interest margin on a fully tax-equivalent basis for the second quarter of 2014 of 3.56% was seven basis points lower than the year earlier period. Tax-exempt interest was $36,000 for the second quarter of 2014 compared to $32,000 for the same period of 2013, and resulted from municipal securities and municipal loans. Tax-equivalent adjustments were $15,000 and $14,000 for the second quarter of 2014 and 2013, 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%.

(37)



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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, 2014 2013



Balance at beginning of quarter $ 4,100$ 3,926

Provision for loan losses 150

210 Charge-offs (263 ) (209 ) Recoveries 17 27 Net charge-offs (246 ) (182 ) Balance at end of period $ 4,004 $



3,954

Allowance to total loans 1.26 %



1.24 %

Allowance to non-performing loans 87.58 %



60.10 %

We recorded a provision for loan losses of $150,000 for the second quarter of 2014, a $60,000 reduction from the year earlier quarter that was reflective of the declining pressure of economic conditions on credit quality, including a decrease in non-performing loans. Total charge-offs of $263,000 for the second quarter of 2014 included loans with specific reserves totaling $209,000 at March 31, 2014.



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

(Dollars in thousands) June 30, 2014 2013 Loans accounted for on a non-accrual basis $ 4,551



$ 6,579

Accruing loans contractually past due 90 days or more 21 - Total of non-accrual and 90 days or more past due loans (1) $ 4,572$ 6,579 Percentage of total net loans 1.46 % 2.07 % Other non-performing assets (2) $ 5,666$ 6,130 Total non-performing assets $ 10,238$ 12,709 Percentage of total assets 2.16 % 2.85 %



Troubled debt restructurings in total of nonaccrual and 90 days or more past due loans (1)

$ 2,466$ 2,786 Total troubled debt restructurings $ 11,918$ 11,374



(1) Total non-accrual loans and accruing loans 90 days or more past due at

June 30, 2014 included $2.5 million of TDRs, which consisted of a $1.5

million residential construction loan, three residential non-construction

loans totaling $733,000, and three commercial loans totaling $218,000.

(2) Other non-performing assets represent property acquired through foreclosure

or repossession. This property is carried at the lower of its fair market

value or its carrying value.

The allowance for loan losses of $4.0 million at June 30, 2014 was $50,000 higher than a year earlier, and the allowance for loan losses to non-performing loans ratio increased from 60.10% at June 30, 2013 to 87.58% at June 30, 2014, due primarily to a lower total of non-performing loans. Non-performing loans of $4.6 million at June 30, 2014 represented a $2.0 million decrease from the total of $6.6 million at June 30, 2013, and a $657,000 decrease from the end of the prior quarter. It is management's opinion that the allowance for loan losses at June 30, 2014 is adequate based on measurements of the credit risk in the entire portfolio as of that date. (38)



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At June 30, 2014, the Bank had $11.9 million in loans categorized as TDRs, with seven loans totaling $2.5 million also included in the table above in the total for loans accounted for on a non-accrual basis. The total of $11.9 million included $3.8 million related to a hotel in northern Indiana, a $1.5 million construction loan on a residential condominium project, twenty-three loans on other residential properties totaling $3.9 million, two loans totaling $2.5 million for developed commercial land, three commercial loans totaling $218,000, and a commercial real estate loan for $8,000.



Other Income

The Company recorded other income of $1.4 million for the second quarter of 2014, a decrease of $86,000, or 5.9%, from the same period a year earlier that resulted primarily from the following changes:

A $138,000, or 84.7%, decrease in gains on sales of loans and servicing

rights to $25,000 from $163,000 for the second quarter of 2013 that

resulted from both a reduction in refinance volume and from a decision to

put most of the new production in the Bank's portfolio; partly offset by

A $55,000, or 8.6%, increase in other fees and service charges on deposit

accounts to $698,000 for the second quarter of 2014 from $643,000 for the year earlier quarter, that was due primarily to an 8.0% increase in the number of checking accounts since the end of the second quarter of 2013 that resulted from the Bank's continuing focus on growing core deposit relationships. Other Expense



Total other expense of $4.0 million for the second quarter of 2014 was $37,000, or 0.9%, lower than the second quarter of 2013, with the following major differences:

A $57,000 decrease in FDIC deposit insurance premiums that resulted from a

reduction in the Bank's assessment rate;



A $48,000 decrease in furniture and equipment expense that related mostly

to reduced ATM maintenance expense and lower depreciation; and A $36,000 decrease in OREO expense that was primarily the result of real



estate tax refunds from successful appeals of assessments, partly offset

by An $89,000, or 4.0%, increase in salaries and employee benefits to $2.3



million that was due primarily to a $51,000 increase in retirement

benefits expense related to our frozen defined benefit plan, a $24,000

increase in employee health insurance expense related primarily to the

offering of a high-deductible plan with the initial funding of health

savings accounts, and $20,000 in share-based compensation related to the

granting of stock options in the third quarter of 2013, compared to no

share-based compensation in the second quarter of 2013; and A $37,000 increase in marketing expense that related primarily to media



advertising to build brand awareness in the greater Indianapolis

metropolitan area.

Income Tax Expense

The Company recorded income tax expense of $223,000 on pre-tax income of $826,000 for the three-month period ended June 30, 2014, compared to income tax expense of $168,000 on pre-tax income of $699,000 for the same period a year earlier. Both quarters had a significant amount of tax-exempt income, primarily from bank-owned life insurance. We have a deferred state tax asset that is primarily the result of operating losses sustained since 2003. We started recording a valuation allowance against our current period state income tax benefit in 2005 due to our concern that we may not be able to use more than the tax asset already recorded on the books without modifying the use of 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. (39)



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The Company also has a deferred federal tax asset that is composed of tax benefit from a net operating loss carry-forward and purchased tax credits. The federal loss carry-forward expires in 2026, and the tax credits begin to expire in 2023. The tax credits include alternative minimum tax credits, which have no expiration date. Management believes that the Company will be able to utilize the benefits recorded for loss carry-forwards and credits within the allotted time periods. In addition to the liquidation of AIMI, the Bank has initiated several strategies designed to expedite the use of both the deferred state tax asset and the deferred federal tax asset. Through sales of $34.5 million of municipal securities and only one purchase since December 31, 2006, that segment of the investment securities portfolio has been reduced to $2.3 million. The proceeds from these sales have been reinvested in taxable financial instruments. The Bank has periodically evaluated a sale/leaseback transaction that could result in a taxable gain on its office properties, and also allow the Bank to convert nonearning assets to assets that will produce taxable income. Additionally, the Bank is exploring options related to reducing its current investment in tax-exempt bank owned life insurance policies that involve the reinvestment of the proceeds in taxable financial instruments with a similar or greater risk-adjusted after-tax yield. Sales of banking centers not important to long-term growth objectives that would result in taxable gains and reduced operating expenses could be considered by the Bank.



Six Months Ended June 30, 2014 compared to the Six Months Ended June 30, 2013

The Company recorded net income of $1.3 million, or $0.45 per diluted share, for the first six months of 2014, an increase of $187,000, or 16.3%, from net income of $1.1 million, or $0.38 per diluted share, for the first six months of 2013.



The earnings improvement for the period was related primarily to revenue enhancement and expense reduction from improved credit quality, including a decrease in the provision for loan losses, an increase in interest on mortgage-backed securities, an increase in loan prepayment penalties and an increase in fees and service charges on deposit accounts, partly offset by a reduction in mortgage banking revenue and gains from investment securities sales.

Net Interest Income

Net interest income on a fully tax-equivalent basis of $7.4 million for the first half of 2014 represented an increase of $302,000, or 4.3%, compared to the same period of 2013, and was primarily due to a $21.1 million, or 5.5%, increase in average interest-earning assets to $408.7 million, an $89,000 increase in loan prepayment penalties and the recognition of $173,000 of interest income as a result of the repurchase of a non-performing loan by the servicer. The Company's net interest margin on a fully tax-equivalent basis for the first half of 2014 of 3.64% was four basis points lower than the year earlier period. Tax-exempt interest was $72,000 for the first six months of 2014 compared to $73,000 for the same period of 2013. Our tax exempt interest results from holdings of bank-qualified municipal securities and municipal loans. The tax-equivalent adjustments were $30,000 and $31,000 for the first six months of 2014 and 2013, 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, 2014 2013 Balance at beginning of year $ 3,993$ 4,239 Provision for loan losses 300 465 Charge-offs (320 ) (834 ) Recoveries 31 84 Net charge-offs (289 ) (750 ) Balance at end of period $ 4,004$ 3,954 We recorded a provision for loan losses of $300,000 for the first six months of 2014, compared with $465,000 for the same period in 2013. The 2014 provision represents a $165,000, or 35.5%, decrease from the six-month period (40)



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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 non-performing loans and charge-offs. Charge offs of $320,000 for the six- month period ended June 30, 2014 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. Charge-offs of $834,000 for the six-month period a year earlier included a charge-off of $479,000 related to a hotel in northern Indiana, which was fully-reserved at December 31, 2012. The allowance to total loans was 1.26% at June 30, 2014, compared with 1.24% at June 30, 2013.



Other Income

The Company recorded other income of $2.7 million for the first half of 2014, a decrease of $234,000, or 7.8%, from the same period a year earlier that resulted primarily from the following changes:



A $34,000, or 4.1%, decrease in brokerage and insurance commissions to

$802,000 for the first six months of 2014 from $836,000 for the same

period a year earlier, that was due primarily to a lower contingency bonus

received by the Bank's insurance subsidiary that resulted from a higher claims loss experience on insured properties;



No sales of investment securities, compared to $92,000 in gains from $3.7

million in sales of investment securities for the same period a year earlier; and



A $279,000, or 87.2%, decrease in gains on sales of loans and servicing

rights to $41,000 from $320,000 for the first six months of 2013 that

resulted from both a reduction in refinance volume and from a decision to

put most of the new production in the Bank's portfolio; partly offset by

A $105,000, or 8.9%, increase in other fees and service charges on deposit

accounts to $1.3 million for the first half of 2014 from $1.2 million for

the year earlier period, that was due primarily to a 6.9% increase in the

number of checking accounts since the end of the second quarter of 2013

that resulted from the Bank's continuing focus on growing core deposit

relationships;



A $29,000 increase in other real estate owned income to $144,000, that

resulted primarily from the January 2014 collection of $26,000 in delinquent rent from a tenant of a commercial strip center; and A $39,000 increase in other that related primarily to $36,000 in claim proceeds received in excess of the planned replacement cost for landscaping damage at a banking center.



Other Expense

The net decrease of $80,000, or 1.0%, in other expense to $8.0 million for the first six months of 2014 compared with the same period of 2013 resulted primarily from the net of the following differences:

A $115,000 decrease in FDIC deposit insurance premiums that resulted from

a reduction in the Bank's assessment rate;



A $70,000 decrease in furniture and equipment expense that related mostly

to reduced ATM maintenance expense and lower depreciation;



A $77,000 decrease in OREO expense to $106,000 that related primarily to

real estate tax refunds from successful appeals of assessments that resulted in a $44,000 expense reduction; and



A $56,000 reduction in other expense that resulted primarily from the

reversal of $62,000 of loan expense as a result of the repurchase of a non-performing loan by the servicer; partly offset by



A $152,000, or 3.4%, increase in salaries and employee benefits to $4.6

million that was due primarily to a $102,000 increase in retirement

benefits expense related to our frozen defined benefit plan, a $24,000

increase in employee health insurance expense related primarily to the

offering of a high deductible plan with the initial funding of health

savings accounts, and $40,000 in share-based compensation related to the

granting of stock options in the third quarter of 2013, compared to no

share-based compensation in the first six months of 2013; A $58,000 increase in marketing expense that related primarily to media

advertising to build brand awareness in the greater Indianapolis metropolitan area; and



A $44,000 increase in data processing expense to $484,000 that related

primarily to our cost to support greater use of new technology by our customers. (41)



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Income Tax Expense

The Company had income before income taxes of $1.8 million for the first six months of 2014, and recorded income tax expense of $507,000, an effective tax rate of 27.6% that resulted from a large amount of tax-exempt income. The Company had income before income taxes of $1.5 million for the same period of 2013, and recorded income tax expense of $380,000, an effective rate of 24.9% 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.



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, 2014, we had $34.1 million in loan commitments outstanding and $53.0 million of additional commitments for line of credit receivables. Certificates of deposit due within one year of June 30, 2014 totaled $67.5 million, or 17.9% 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, 2015. 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, 2014 or at December 31, 2013. 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 2014, net loans receivable increased by $880,000, or 0.3%. 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 $14.5 million, or 4.0%, and total FHLB advances were unchanged during the first six months of 2014. (42)



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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. 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, 2014 and December 31, 2013, the Bank was categorized as "well capitalized" and met all subject capital adequacy requirements. There are no conditions or events since June 30, 2014 that management believes have changed this classification. Actual, required, and well capitalized amounts and ratios for the Bank are as follows: June 30, 2014 Required For To Be Actual Capital Adequate Capital Well Capitalized Amount Ratio Amount Ratio Amount Ratio Total risk-based capital ratio (risk based capital to risk-weighted assets) $ 47,600 15.72 % $ 24,226 8.00 % $ 30,282 10.00 % Tier 1 risk-based capital ratio (tier 1 capital to risk-weighted assets) $ 43,798 14.46 % $ 12,113 4.00 % $ 18,169 6.00 % Tier 1 leverage ratio (tier 1 capital to adjusted average total assets) $ 43,798 9.44 % $ 13,926 3.00 % $ 23,209 5.00 % December 31, 2013 Required For To Be Actual Capital Adequate Capital Well Capitalized Amount Ratio Amount Ratio Amount Ratio Total risk-based capital ratio (risk based capital to risk-weighted assets) $ 45,897 15.16 % $ 24,219 8.00 % $ 30,274 10.00 % Tier 1 risk-based capital ratio (tier 1 capital to risk-weighted assets) $ 42,110 13.91 % $ 12,109 4.00 % $ 18,164 6.00 % Tier 1 leverage ratio (tier 1 capital to adjusted average total assets) $ 42,110 9.47 % $



13,334 3.00 % $ 22,223 5.00 %

Actual, required, and well capitalized amounts and ratios for the Company are as follows: June 30, 2014 Required For To Be Actual Capital Adequate Capital Well Capitalized Amount Ratio Amount Ratio Amount Ratio Total risk-based capital ratio (risk based capital to risk-weighted assets) $ 48,529 15.84 % $ 24,509 8.00 % $ 30,636 10.00 % Tier 1 risk-based capital ratio (tier 1 capital to risk-weighted assets) $ 44,727 14.60 % $ 12,254 4.00 % $ 18,382 6.00 % Tier 1 leverage ratio (tier 1 capital to adjusted average total assets) $ 44,727 9.63 % $ 13,938 3.00 % $ 23,230 5.00 % (43)



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Table of Contents December 31, 2013 Required For To Be Actual Capital Adequate Capital Well Capitalized Amount Ratio Amount Ratio Amount Ratio Total risk-based capital ratio (risk based capital to risk-weighted assets) $ 46,477 15.17 % $ 24,503 8.00 % $ 30,628 10.00 % Tier 1 risk-based capital ratio (tier 1 capital to risk-weighted assets) $ 42,690 13.94 % $ 12,251 4.00 % $ 18,377 6.00 % Tier 1 leverage ratio (tier 1 capital to adjusted average total assets) $ 42,690 9.60 % $ 13,343 3.00 % $ 22,238 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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