UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
DC  20549
 
 FORM
10-K
  (Mark
One)
 x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
the fiscal year ended December 31, 2009
 OR
   ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  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
                  
                  (I.R.S.
      Employerincorporation
      or organization)
                  
                  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
 
 Securities
registered pursuant to Section 12(b) of the Act:
  Title of each class
                
                Name of each exchange on which
      registeredCommon
      Stock, par value $1.00 per share
                
                The
      NASDAQ Stock Market LLC
 
 Securities
registered pursuant to Section 12(g) of the Act:  None
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  YES  ̈  NO
x
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of  the Act.  YES  ̈  NO
x
 
 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  ̈  NO
 ̈
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   ̈
  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 the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):
  Large accelerated filer   ̈
                  Accelerated filer                    ̈Non-accelerated filer     ̈
                  Smaller reporting company  x(Do not check if a smaller reporting company)
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  YES  ̈  NO
x
 
 The
aggregate market value of the registrant’s common stock held by nonaffiliates of
the registrant at June 30, 2009 was approximately $11.6 million.  For
purposes of this calculation, shares held by the directors and executive
officers of the registrant are deemed to be held by affiliates.
  At March
30, 2010, the registrant had 2,988,952 shares of its common stock
outstanding.
 DOCUMENTS
INCORPORATED BY REFERENCE
  Portions
of Proxy Statement for the 2010 Annual Meeting of Shareholders are incorporated
by reference in Part III of this Form 10-K.
  
  INDEX
 
 PagePART
      IItem
      1.
                            Business
                            1Item
      1A.
                            Risk
      Factors
                            26Item
      1B.
                            Unresolved
      Staff Comments
                            30Item
      2.
                            Properties
                            31Item
      3.
                            Legal
      Proceedings
                            32Item
      4.
                            [Reserved]
                            32PART
      IIItem
      5.
                            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                            33Item
      6.
                            Selected
      Financial Data
                            34Item
      7.
                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                            35Item
      7A.
                            Quantitative
      and Qualitative Disclosures About Market Risk
                            54Item
      8.
                            Financial
      Statements and Supplementary Data
                            55Item
      9.
                            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                            90Item
      9A(T).
                            Controls
      and Procedures
                            90Item
      9B.
                            Other
      Information
                            90PART
      IIIItem
      10.
                            Directors,
      Executive Officers and Corporate Governance
                            91Item
      11.
                            Executive
      Compensation
                            91Item
      12.
                            Security
      Ownership of Certain Beneficial Owners and Management and
      Related   Stockholder Matters
                            91Item
      13.
                            Certain
      Relationships and Related Transactions, and Director
      Independence
                            92Item
      14.
                            Principal
      Accountant Fees and Services
                            92PART
      IVItem
      15.
                            Exhibits
      and Financial Statement Schedules
                            93
  i
 
 Forward-Looking
Statements
  This
report contains 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 current expectations regarding its
business strategies, intended results and future
performance.  Forward-looking statements are preceded by terms such as
“expects,” “believes,” “anticipates,” “intends” and similar
expressions.  Such statements are subject to certain risks and
uncertainties including changes in economic conditions in the Company’s market
area, changes in policies by regulatory agencies, the outcome of litigation,
fluctuations in interest rates, demand for loans in the Company’s market area,
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 this annual report on Form 10-K under “Item 1A.  Risk
Factors.”  The Company cautions readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date
made.  The Company advises readers that 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, which 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.
  PART
I
  Item
1.  Business
  General
  The
Company.  Ameriana Bancorp (the “Company”) 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 (the “BHCA”).  The Company
became the holding company for Ameriana Bank (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.  Reference to “we,” “us” and “our”
refer to Ameriana Bancorp and/or the Bank, as appropriate.
  The Bank.  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”).  On June 29, 2002,
the Bank converted to an Indiana savings bank and adopted the name “Ameriana
Bank and Trust, SB.  On July 31, 2006, the Bank closed its Trust
Department and adopted the name “Ameriana Bank, SB.”  On June 1, 2009,
the Indiana Department of Financial Institutions approved the Bank’s application
to convert its charter from an Indiana savings bank to an Indiana commercial
bank and adopted its present name, “Ameriana Bank.”  The charter
conversion did not involve significant financial or regulatory changes and will
not affect the Bank’s activities.  The Bank is subject to regulation
by the Indiana Department of Financial Institutions (the “DFI”) and the
FDIC.  The Bank conducts business through its main office at 2118
Bundy Avenue, New Castle, Indiana and through twelve branch offices located in
New Castle, Middletown, Knightstown, Morristown, Greenfield, Anderson, Avon,
McCordsville, Carmel, Fishers, Westfield and New Palestine, Indiana and a loan
production office in Carmel, Indiana.  The Bank offers a wide range of
consumer and commercial banking services, including:  (1) accepting
deposits; (2) originating commercial, mortgage, consumer and construction loans;
and (3) through its subsidiaries, providing investment and brokerage services
and insurance services.
  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.  On
July 1, 2009, AIA purchased the book of business of Chapin-Hayworth Insurance
Agency, Inc., a multi-line property and casualty insurance agency located in New
Castle, Indiana.  AFS operates a brokerage facility in conjunction
with LPL Financial.  A third wholly-owned subsidiary, Ameriana
Investment Management, Inc. (“AIMI”), had been responsible for managing
investment securities for the Bank.  AIMI was liquidated by the Bank
effective December 31, 2009, and the investment securities were merged into the
bank.
  1
  The
principal sources of funds for the Bank’s lending activities include deposits
received from the general public, funds borrowed from the FHLB of Indianapolis,
principal amortization and prepayment of loans.  The Bank’s primary
sources of income are interest and fees on loans and interest on
investments.  The Bank has from time to time purchased loans and loan
participations in the secondary market.  The Bank also invests in
various federal and government agency obligations and other investment
securities permitted by applicable laws and regulations, including
mortgage-backed, municipal and mutual fund securities.  The Bank’s
principal expenses are interest paid on deposit accounts and borrowed funds and
operating expenses incurred in the operation of the Bank.
  Competition.The
geographic markets we serve are highly competitive for deposits, loans and other
financial services, including retail brokerage services and insurance.  Our direct
competitors include traditional banking and savings institutions, as well as
other non-bank providers of financial services, such as insurance companies,
brokerage firms, mortgage companies and credit unions located in the Bank’s
market area.  Additional significant competition for deposits comes
from money market mutual funds and corporate and government debt securities, and
internet banks.
  The
primary factors in competing for loans are interest rates and loan origination
fees, and the range of services offered by the various financial
institutions.  Competition for origination of loans normally comes
from commercial banks, savings institutions, mortgage bankers, mortgage brokers
and insurance companies.
  The Bank
has banking offices in Henry, Hancock, Hendricks, Shelby, Madison, and Hamilton
Counties in Indiana.  The Bank competes with several commercial banks
and savings institutions in the Bank’s primary service area and in surrounding
counties, many of which have capital and assets that are substantially larger
than the Bank.
  The
Company expects competition to increase in the future as a result of
legislative, regulatory and technological changes and the continuing trend of
consolidation in the financial services industry.  Technological
advances, for example, have lowered barriers to entry into the industry, allowed
banks to expand their geographic reach by providing services over the Internet
and made it possible for non-depository institutions to offer products and
services that traditionally have been provided by banks.  Changes in
federal law permit affiliation among banks, securities firms and insurance
companies, which promotes a competitive environment in the financial services
industry.  Competition for deposits and the origination of loans could
limit the Company’s growth in the future.
  Available
Information
  The
Company’s 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 the Company’s 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
the Company’s website should not be considered a part of this Form
10-K.
  Lending
Activities
  General.  The
principal lending activity of the Bank has been the origination of conventional
first mortgage loans secured by residential property and commercial real estate,
commercial loans and consumer loans.  The residential mortgage loans
have been predominantly secured by single-family homes and have included
construction loans.
  The Bank
may originate or purchase whole loans or loan participations secured by real
estate located in any part of the United States.  Notwithstanding this
nationwide lending authority, the majority of the Bank’s mortgage loan portfolio
is secured by real estate located in Henry, Hancock, Hamilton, Hendricks,
Madison, Shelby, Delaware and Marion counties in the State of
Indiana.
  2
  The
following table sets forth information concerning the Bank’s loans by type of
loan at the dates indicated.
 
 At December 31,2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Amount
                  
                  
                  %
                  
                  
                  Amount
                  
                  
                  %
                  
                  
                  Amount
                  
                  
                  %
                  
                  
                  Amount
                  
                  
                  %
                  
                  
                  Amount
                  
                  
                  %(Dollars
      in thousands)Real
      estate loans:Commercial
                  
                  $
                  104,231
                  
                  
                  
                  31.92
                  %
                  
                  $
                  98,173
                  
                  
                  
                  30.13
                  %
                  
                  $
                  83,282
                  
                  
                  
                  27.88
                  %
                  
                  $
                  62,112
                  
                  
                  
                  24.48
                  %
                  
                  $
                  68,484
                  
                  
                  
                  30.58
                  %Residential
                  
                  
                  161,035
                  
                  
                  
                  49.31
                  
                  
                  
                  160,553
                  
                  
                  
                  49.27
                  
                  
                  
                  139,980
                  
                  
                  
                  46.86
                  
                  
                  
                  125,424
                  
                  
                  
                  49.43
                  
                  
                  
                  98,495
                  
                  
                  
                  43.99Construction
                  
                  
                  30,943
                  
                  
                  
                  9.47
                  
                  
                  
                  39,281
                  
                  
                  
                  12.05
                  
                  
                  
                  48,880
                  
                  
                  
                  16.36
                  
                  
                  
                  47,984
                  
                  
                  
                  18.91
                  
                  
                  
                  44,803
                  
                  
                  
                  20.01Commercial
      loans and leases
                  
                  
                  23,580
                  
                  
                  
                  7.22
                  
                  
                  
                  21,215
                  
                  
                  
                  6.51
                  
                  
                  
                  18,665
                  
                  
                  
                  6.25
                  
                  
                  
                  12,446
                  
                  
                  
                  4.90
                  
                  
                  
                  7,962
                  
                  
                  
                  3.56Municipal
      loans
                  
                  
                  2,781
                  
                  
                  
                  0.85
                  
                  
                  
                  2,218
                  
                  
                  
                  0.68
                  
                  
                  
                  2,945
                  
                  
                  
                  0.99
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Consumer
      loans
                  
                  
                  4,003
                  
                  
                  
                  1.23
                  
                  
                  
                  4,424
                  
                  
                  
                  1.36
                  
                  
                  
                  4,959
                  
                  
                  
                  1.66
                  
                  
                  
                  5,789
                  
                  
                  
                  2.28
                  
                  
                  
                  4,174
                  
                  
                  
                  1.86Total
                  
                  
                  326,573
                  
                  
                  
                  100.00
                  %
                  
                  
                  325,864
                  
                  
                  
                  100.00
                  %
                  
                  
                  298,711
                  
                  
                  
                  100.00
                  %
                  
                  
                  253,755
                  
                  
                  
                  100.00
                  %
                  
                  
                  223,918
                  
                  
                  
                  100.00
                  %Less:Undisbursed
      loan proceeds
                  
                  
                  1,005
                  
                  
                  
                  
                  
                  
                  
                  386
                  
                  
                  
                  
                  
                  
                  
                  1,892
                  
                  
                  
                  
                  
                  
                  
                  1,769
                  
                  
                  
                  
                  
                  
                  
                  2,485Deferred
      loan fees (expenses), net
                  
                  
                  19
                  
                  
                  
                  
                  
                  
                  
                  (48
                  )
                  
                  
                  
                  
                  
                  
                  (131
                  )
                  
                  
                  
                  
                  
                  
                  98
                  
                  
                  
                  
                  
                  
                  
                  307Allowance
      for loan losses
                  
                  
                  4,005
                  
                  
                  
                  
                  
                  
                  
                  2,991
                  
                  
                  
                  
                  
                  
                  
                  2,677
                  
                  
                  
                  
                  
                  
                  
                  2,616
                  
                  
                  
                  
                  
                  
                  
                  2,835Subtotal
                  
                  
                  5,029
                  
                  
                  
                  
                  
                  
                  
                  3,329
                  
                  
                  
                  
                  
                  
                  
                  4,438
                  
                  
                  
                  
                  
                  
                  
                  4,483
                  
                  
                  
                  
                  
                  
                  
                  5,627Total
                  
                  $
                  321,544
                  
                  
                  
                  
                  
                  
                  $
                  322,535
                  
                  
                  
                  
                  
                  
                  $
                  294,273
                  
                  
                  
                  
                  
                  
                  $
                  249,272
                  
                  
                  
                  
                  
                  
                  $
                  218,291
  3
  The
following table shows, at December 31, 2009, the Bank’s loans based on their
contractual terms to maturity.  Demand loans, loans having no stated
schedule of repayments and no stated maturity and overdrafts are reported as due
in one year or less.  Contractual principal repayments of loans do not
necessarily reflect the actual term of the loan portfolio.  The
average life of mortgage loans is substantially less than their contractual
terms because of loan prepayments and because of enforcement of due-on-sale
clauses, which give the Bank the right to declare a loan immediately due and
payable if, among other things, the borrower sells the real property subject to
the mortgage and the loan is not repaid.  The average life of mortgage
loans tends to increase, however, when current mortgage loan rates substantially
exceed rates on existing mortgage loans.
  Amounts of Loans Which Mature in2015 and2010
                        
                        
                        2011 – 2014
                        
                        
                        Thereafter
                        
                        
                        Total(In thousands)Type
      of Loan:Residential
      and commercial real estate mortgage
                        
                        $
                        6,522
                        
                        
                        $
                        21,735
                        
                        
                        $
                        237,009
                        
                        
                        $
                        265,266Real
      estate construction
                        
                        
                        17,984
                        
                        
                        
                        5,047
                        
                        
                        
                        7,912
                        
                        
                        
                        30,943Other
                        
                        
                        11,015
                        
                        
                        
                        12,206
                        
                        
                        
                        7,143
                        
                        
                        
                        30,364Total
                        
                        $
                        35,521
                        
                        
                        $
                        38,988
                        
                        
                        $
                        252,064
                        
                        
                        $
                        326,573
 
 The
following table sets forth the dollar amount of the Company’s aggregate loans
due after one year from December 31, 2009, which have predetermined interest
rates and which have floating or adjustable interest rates.
  Fixed
                      Rate_
                    
                    
                    Adjustable
                      Rate
                    
                    
                    Total(In thousands)Residential
      and commercial real estate mortgage
                    
                    $
                    153,143
                    
                    
                    $
                    105,601
                    
                    
                    $
                    258,744Real
      estate construction
                    
                    
                    8,480
                    
                    
                    
                    4,479
                    
                    
                    
                    12,959Other
      loans
                    
                    
                    16,809
                    
                    
                    
                    2,540
                    
                    
                    
                    19,349Total
                    
                    $
                    178,432
                    
                    
                    $
                    112,620
                    
                    
                    $
                    291,052
 
 Residential Real Estate and
Residential Construction Lending.  The Bank originates loans on
one-to four-family residences.  The original contractual loan payment
period for residential mortgage loans originated by the Bank generally ranges
from ten to 30 years.  Because borrowers may refinance or prepay their
loans, they normally remain outstanding for a shorter period.  The
Bank sells a portion of its newly originated fixed-rate mortgage loans in the
secondary market and retains all adjustable-rate loans in its
portfolio.  The decision to sell fixed-rate mortgage loans is
determined by management based on available pricing and balance sheet
considerations.  The Bank also originates hybrid mortgage
loans.  Hybrid mortgage loans carry a fixed-rate for the first three
to ten years, and then convert to an adjustable-rate thereafter.  The
residential mortgage loans originated and retained by the Bank in 2009 were
composed primarily of fixed-rate loans and, to a lesser extent, hybrid loans
that have a fixed-rate for five or seven years and adjust annually to the
one-year constant maturity treasury rate thereafter.  The overall
strategy is to maintain a low risk mortgage portfolio that helps to diversify
the Bank’s overall asset mix.
  The Bank
makes construction/permanent loans to borrowers to build one-to four-family
owner-occupied residences with terms of up to 30 years.  These loans
are made as interest-only loans for a period typically of 12 months, at which
time the loan converts to an amortized loan for the remaining
term.  The loans are made typically as adjustable-rate mortgages,
which may be converted to a fixed-rate loan for sale in the secondary market at
the request of the borrower if secondary market guidelines have been
met.  Residential real estate construction loans were $7.9 million, or
25.7% of the construction loan portfolio at December 31, 2009 compared to $6.7
million, or 17.0% at December 31, 2008.
  Loans
involving construction financing present a greater level of risk than loans for
the purchase of existing homes since collateral value and construction costs can
only be estimated at the time the loan is approved.  The Bank has
sought to minimize this risk by limiting construction lending to qualified
borrowers in its market area and by limiting the number of construction loans
outstanding at any time to individual builders.  In addition, many of
the Bank’s construction loans are made on homes that are pre-sold, for which
permanent financing is already arranged.
  4
  In 2009,
the Bank originated $56.8 million in residential real estate loans, including
home equity loans,  and acquired $9.5 million of in-market loans
through a broker, for a total of $66.3 million.  The total included
$5.4  million in adjustable-rate residential first mortgage loans,
including hybrids, $49.6 million of fixed-rate first mortgage loans, with $9.5
million from the broker, and $10.7 million of home equity credit lines and
$585,000 of closed end second mortgage loans.  Sales of fixed-rate
residential mortgage loans into the secondary market in 2009 and 2008 were $19.2
million and $1.8 million, respectively.  Gains on residential loan
sales, including imputed gains on servicing rights, were $408,000 in 2009
compared with $51,000 in 2008.
  Commercial Real Estate and Commercial
Real Estate Construction Lending.  The Bank originates loans
secured by both owner-occupied and nonowner-occupied properties.  The
Bank originates commercial real estate loans and purchases loan participations
from other financial institutions.  These participations are reviewed
and approved based upon the same credit standards as commercial real estate
loans originated by the Bank.  At December 31, 2009, the Bank’s
individual commercial real estate loan balances ranged from $5,000 to $5.2
million.  The Bank’s commercial real estate loans may have a fixed or
variable interest rate.
  Loans
secured by commercial real estate properties are generally larger and involve a
greater degree of credit risk than one-to four-family residential mortgage
loans.  Because payments on loans secured by commercial real estate
properties are often dependent on the successful operation or management of the
properties, repayment of such loans may be subject to adverse conditions in the
real estate market or by general economic conditions.  If the cash
flow from the project is reduced (for example, if leases are not obtained or
renewed), the borrower’s ability to repay the loan may be
impaired.  To minimize the risks involved in originating such loans,
the Bank considers, among other things, the creditworthiness of the borrower,
the location of the real estate, the condition and occupancy levels of the
security, the projected cash flows of the business, the borrower’s ability to
service the debt and the quality of the organization managing the
property.
  Commercial
real estate construction loans are made to developers for the construction of
commercial properties, owner-occupied facilities, non-owner occupied facilities
and for speculative purposes.  These construction loans are granted
based on a reasonable estimate of the time to complete the
projects.  Commercial real estate construction loans made up $23.0
million, or 74.3% of the construction loan portfolio at December 31, 2009
compared to $36.2 million, or 92.2% at December 31, 2008.  As these
loans mature they will either pay-off or roll to a permanent commercial real
estate loan.
  The
Bank’s underwriting criteria are designed to evaluate and minimize the risks of
each construction loan.  Among other things, the Bank considers
evidence of the availability of permanent financing or a takeout commitment to
the borrower; the reputation of the borrower and his or her financial condition;
the amount of the borrower’s equity in the project; independent appraisal and
review of cost estimates; pre-construction sale and leasing information; and
cash flow projections of the borrower.
  At
December 31, 2009, the largest commercial real estate lending relationship
included 3 creditssecured bycommercial office space
and a property held for future commercial development, with total commitments of
$5.8 million and outstanding balances totaling $5.7 million.  All of
the individual credits were performing according to their original terms at
December 31, 2009.
  Municipal
Lending.At December 31, 2009, the Bank’s loan portfolio
included three municipal loans with approved credit limits totaling $4.1 million
and outstanding balances totaling $2.8 million.  The largest loan had
a credit limit of $3.2 million and had an outstanding balance of $2.0 million at
December 31, 2009.  This loan has a fixed-rate of interest, is
non-amortizing, and has a maturity date in 2012.  This loan was
performing according to its original terms at December 31, 2009.
  Consumer
Lending.  The consumer lending portfolio includes automobile
loans and other consumer products.  The collateral is generally the
asset defined in the purpose of the request.  The policies of the Bank
are adhered to in our underwriting of consumer loans.
  5
  Management
believes that the shorter terms and the normally higher interest rates available
on various types of consumer loans have been helpful in maintaining profitable
spreads between average loan yields and costs of funds.  Consumer
loans may entail greater risk than do residential mortgage loans, particularly
in the case of consumer loans that are unsecured or secured by assets that
depreciate rapidly.  In such cases, repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower.  In addition,
consumer loan collections depend on the borrower’s continuing financial
stability, and therefore, are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy.  Furthermore, the application
of various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount that can be recovered on such
loans.  The Bank has sought to reduce this risk by primarily granting
secured consumer loans.
  Commercial
Lending.  The Bank lends to business entities for the purposes
of short-term working capital, inventory financing, equipment purchases and
other business financing needs.  The loans can be in the form of
revolving lines of credit, commercial lines of credit, or term
debt.  The Bank also matches the term of the debt to the estimated
useful life of the assets.
  At
December 31, 2009, the largest commercial relationship included nine credits
with total commitments of $5.0 million and outstanding balances totaling $4.8
million that were secured by manufacturing equipment, inventory, andaccountsreceivable.  All
of the individual credits were performing according to their original terms at
December 31, 2009.
  Unlike
residential mortgage loans, which generally are made on the basis of the
borrower’s ability to make repayment from his or her employment or other income,
and which are secured by real property the value of which tends to be more
easily ascertainable, commercial loans are of higher risk and typically are made
on the basis of the borrower’s ability to make repayment from the cash flow of
the borrower’s business.  As a result, the availability of funds for
the repayment of commercial loans may depend substantially on the success of the
business itself.  Further, any collateral securing such loans may
depreciate over time, may be difficult to appraise and may fluctuate in
value.
  Originations, Purchases and
Sales.  Historically, most residential and commercial real
estate loans have been originated directly by the Bank through salaried and
commissioned loan officers.  Residential loan originations have been
attributable to referrals from real estate brokers and builders, banking center
staff, and commissioned loan agents.  The Bank has also obtained
residential loans and commercial loans from other financial institutions, and in
2009 purchased one commercial real estate loan for $2.0 million and two
commercial loans secured by business assets for $2.6 million.At December 31, 2009,
balances outstanding for all loans acquired as participations or whole loan
purchases totaled $29.1 million.  Commercial real estate and
construction loan originations have also been obtained by direct
solicitation.  Consumer loan originations are attributable to walk-in
customers who have been made aware of the Bank’s programs by advertising as well
as direct solicitation.
  The Bank
has previously sold whole loans and loan participations to other financial
institutions and institutional investors, and sold $19.2 million of loans in
2009.  Sales of loans generate income (or loss) at the time of sale,
produce future servicing income and provide funds for additional lending and
other purposes.  When the Bank retains the servicing of loans it
sells, the Bank retains responsibility for collecting and remitting loan
payments, inspecting the properties, making certain insurance and tax payments
on behalf of borrowers and otherwise servicing those loans.  The Bank
typically receives a fee of between 0.25% and 0.375% per annum of the loan’s
principal amount for performing these services.  The right to service
a loan has economic value and the Bank carries capitalized servicing rights on
its books based on comparable market values and expected cash
flows.  At December 31, 2009, the Bank was servicing $115.5 million of
loans for others.  The aggregate book value of capitalized servicing
rights at December 31, 2009 was $707,000.
  Management
believes that purchases of loans and loan participations are desirable when
local mortgage demand is less than the local supply of funds available for
mortgage originations or when loan terms available outside the Bank’s local
lending areas are favorable to those available locally.  Additionally,
purchases of loans may be made to diversify the Bank’s lending
portfolio.  The Bank’s loan purchasing activities fluctuate
significantly.  The seller generally performs the servicing of
purchased loans.  The Bank utilizes the same underwriting and
monitoring processes and standards for loans it purchases as it would for
internally generated loans.  To cover servicing costs, the service
provider retains a portion of the interest being paid by the
borrower.  In addition to whole loan purchases, the Bank also
purchases participation interests in loans.  Both whole loans and
participations are purchased on a yield basis.
  6
  For
additional information, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included in Item 7 of this Form
10-K.
  Loan
Underwriting.During the loan approval process, the Bank
assesses both the borrower’s ability to repay the loan and the adequacy of the
underlying security.  Potential residential borrowers complete an
application that is submitted to a commissioned loan originator.  As
part of the loan application process, the Bank obtains information concerning
the income, financial condition, employment and credit history of the
applicant.  In addition, qualified appraisers inspect and appraise the
property that is offered to secure the loan.  The Bank’s underwriter
or the Senior Vice President of Mortgage Banking approves or denies the loan
request.
  Consumer
loan applications are evaluated using a multi-factor based scoring system or by
direct underwriting.
  Commercial
loans that are part of a lending relationship exceeding $250,000 are submitted
to the Bank’s credit analysts for review, financial analysis and for preparation
of a Loan Approval Memorandum.  The Loan Committee, consisting of
members of the Board or management appointed by the Board of Directors, must
approve collateralized and unsecured loans between $1.0 million and $3.0
million, and $100,000 and $1.0 million, respectively.  The Board of
Directors approves all loans that exceed Loan Committee authority and those that
have an exception to the loan policy, and the Loan Committee approves all loans
that have a variance to loan procedure.
  In
connection with the origination of single-family, residential adjustable-rate
loans with the initial rate fixed for three years or less, borrowers are
qualified at a rate of interest equal to the new rate at the first re-pricing
date, assuming the maximum increase.  It is the policy of management
to make loans to borrowers who not only qualify at the low initial rate of
interest, but who would also qualify following an upward interest rate
adjustment.
  Loan Fee and Servicing
Income.  In addition to interest earned on loans, the Bank
receives income through servicing of loans, and fees in connection with loan
originations, loan modifications, late payments, changes of property ownership
and for other miscellaneous services related to the loan.  Income from
these activities is volatile and varies from period to period with the volume
and type of loans made.
  When
possible, the Bank charges loan origination fees on commercial loans that are
calculated as a percentage of the amount borrowed and are charged to the
borrower at the time of origination of the loan.  These fees generally
range up to one point (one point being equivalent to 1% of the principal amount
of the loan).  In accordance with Accounting Standards Codification
310, loan origination and commitment fees and certain direct loan origination
costs are deferred and the net amount amortized as an adjustment of yield over
the contractual life of the related loans.
  For
additional information, see Note 4to the “Consolidated
Financial Statements” included under Item 8 of this Form 10-K.
  Delinquencies.  When
a borrower defaults on a required payment on a non-commercial loan, the Bank
contacts the borrower and attempts to induce the borrower to cure the
default.  A late payment notice is mailed to the borrower and a
telephone contact is made after a payment is fifteen days past
due.  If the delinquency on a mortgage loan exceeds 90 days and is not
cured through the Bank’s normal collection procedures or an acceptable
arrangement is not worked out with the borrower, the Bank will institute
measures to remedy the default, including commencing foreclosure
action.  In the case of default related to a commercial loan, the
contact is initiated by the commercial lender after a payment is ten days past
due.  The Loan Committee reviews delinquency reports weekly and the
Criticized Assets Committee reviews classified loans monthly.
  The Bank
follows the collection processes required by Freddie Mac, Fannie Mae and the
Federal Home Loan Bank of Indianapolis to manage residential loans underwritten
for the secondary market.  The collection practices for all other
loans adhere with the Bank’s loan policies and regulatory
requirements.  It is the Bank’s intention to be proactive in its
collection of delinquent accounts while adhering to state and federal
guidelines.
  7
  Nonperforming Assets and Asset
Classification.  Loans are reviewed regularly and are placed on
nonaccrual status when, in the opinion of management, the collection of
additional interest is doubtful.  Residential mortgage loans are
placed on nonaccrual status when principal or interest payments are 90 days or
more past due unless it is adequately secured and there is reasonable assurance
of full collection of principal and interest.  Consumer loans
generally are charged off when the loan delinquency exceeds 120
days.  Commercial real estate loans and commercial loans are generally
placed on nonaccrual status when the loan is 90 days or more past
due.  Interest accrued and unpaid at the time a loan is placed on
nonaccrual status is charged against interest income.  Subsequent
payments are applied to the outstanding principal balance.
  Real
estate acquired by the Bank as a result of foreclosure or by deed-in-lieu of
foreclosure is classified as real estate owned until such time as it is
sold.  When such property is acquired, it is recorded at its fair
value.  Any subsequent deterioration of the property is charged off
directly to income, reducing the value of the asset.
  The
following table sets forth information with respect to the Company’s aggregate
nonperforming assets at the dates indicated.
  At December 31,2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005(Dollars in thousands)Loans
      accounted for on a nonaccrual basis:Real
      Estate:Residential
                  
                  $
                  3,810
                  
                  
                  $
                  2,960
                  
                  
                  $
                  1,465
                  
                  
                  $
                  657
                  
                  
                  $
                  494Commercial
                  
                  
                  841
                  
                  
                  
                  1,766
                  
                  
                  
                  303
                  
                  
                  
                  —
                  
                  
                  
                  —Construction
                  
                  
                  4,219
                  
                  
                  
                  1,454
                  
                  
                  
                  870
                  
                  
                  
                  2,616
                  
                  
                  
                  1,960Commercial
      and leases
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  14Consumer
                  
                  
                  12
                  
                  
                  
                  38
                  
                  
                  
                  —
                  
                  
                  
                  53
                  
                  
                  
                  —Total
                  
                  
                  8,882
                  
                  
                  
                  6,218
                  
                  
                  
                  2,638
                  
                  
                  
                  3,326
                  
                  
                  
                  2,468Accruing
      loans contractually past due 90 days or more:Real
      Estate:Residential
                  
                  
                  170
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  71
                  
                  
                  
                  90Consumer
                  
                  
                  1
                  
                  
                  
                  1
                  
                  
                  
                  —
                  
                  
                  
                  13
                  
                  
                  
                  —Total
                  
                  
                  171
                  
                  
                  
                  1
                  
                  
                  
                  —
                  
                  
                  
                  84
                  
                  
                  
                  90Total
      of nonaccrual and 90 days past due or more loans (1)
                  
                  $
                  9,053
                  
                  
                  $
                  6,219
                  
                  
                  $
                  2,638
                  
                  
                  $
                  3,410
                  
                  
                  $
                  2,558Percentage
      of total loans
                  
                  
                  2.78
                  %
                  
                  
                  1.91
                  %
                  
                  
                  0.88
                  %
                  
                  
                  1.35
                  %
                  
                  
                  1.16
                  %Other
      nonperforming assets (2)
                  
                  $
                  5,517
                  
                  
                  $
                  4,169
                  
                  
                  $
                  2,517
                  
                  
                  $
                  610
                  
                  
                  $
                  1,413
 
 (1)
              The
      Company had no troubled debt restructurings at the dates
      indicated.
 (2)
              Other
      nonperforming assets represent property acquired through foreclosure or
      repossession.  This property is carried at the lower of its fair
      market value or the principal balance of the related
  loan.
 
 The
Company’s nonperforming loans increased by $2.8 million in 2009.  The
increase was due primarily to the classifications of a retail center loan in
Fishers, Indiana, and a warehouse/office building and adjoining land loan in
Indianapolis totaling $3.5 million, and an increase in our single-family
residential nonperforming loans.   Nonaccrual residential real
estate loans increased to $3.8 million at December 31, 2009 from $3.0 million at
December 31, 2008 due to continued weakness in the economy and value of the real
estate in the markets that we serve.  We have analyzed our collateral
position on these nonperforming loans using current appraisals and valuations,
and have established reserves accordingly.  Nonperforming loans
increased $3.6 million for the year ended December 31, 2008.  The
increase was due primarily to the classification of a multi-family loan of $1.7
million in Anderson, Indiana, and the classification of two land development
loans totaling $1.1 million as nonperforming, and an increase in our
single-family residential nonperforming loans.
  Interest
income that would have been recorded for 2009 had nonaccruing loans been current
in accordance with their original terms and had been outstanding throughout the
period was $713,000.  The amount of interest related to nonaccrual
loans included in interest income for 2009 was $212,000.
  For
additional information regarding the Bank’s problem assets and loss provisions
recorded thereon, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in Item 7 of
this Form 10-K.
  8
  Reserves
for Losses on Loans and Real Estate
  In making
loans, management recognizes that credit losses will be experienced and that the
risk of loss will vary with, among other things, the type of loan being made,
the creditworthiness of the borrower over the term of the loan and, in the case
of a secured loan, the quality of the security for the loan.
  It is
management’s policy to maintain reserves for estimated incurred losses on
loans.  The Bank’s management establishes general loan loss reserves
based on, among other things, historical loan loss experience, evaluation of
economic conditions in general and in various sectors of the Bank’s customer
base, and periodic reviews of loan portfolio quality.  Specific
reserves are provided for individual loans where the ultimate collection is
considered questionable by management after reviewing the current status of
loans that are contractually past due and considering the net realizable value
of the security of the loan or guarantees, if applicable.  It is
management’s policy to establish specific reserves for estimated inherent losses
on delinquent loans when it determines that losses are anticipated to be
incurred on the underlying properties.  At December 31, 2009, the
Bank’s allowance for loan losses amounted to $4.0 million.
  Future
reserves may be necessary if economic conditions or other circumstances differ
substantially from the assumptions used in making the initial
determinations.  There can be no assurance that regulators, in
reviewing the Bank’s loan portfolio in the future, will not ask the Bank to
increase its allowance for loan losses, thereby negatively affecting its
financial condition and earnings.
  9
  The
following table sets forth an analysis of the Bank’s aggregate allowance for
loan losses for the periods indicated.
  Year Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005(Dollars in thousands)Balance
      at beginning of period
                  
                  $
                  2,991
                  
                  
                  $
                  2,677
                  
                  
                  $
                  2,616
                  
                  
                  $
                  2,835
                  
                  
                  $
                  3,128Charge-offs:Real
      estate loans:Commercial
                  
                  
                  127
                  
                  
                  
                  —
                  
                  
                  
                  1
                  
                  
                  
                  540
                  
                  
                  
                  34Residential
                  
                  
                  200
                  
                  
                  
                  413
                  
                  
                  
                  14
                  
                  
                  
                  36
                  
                  
                  
                  237Construction
                  
                  
                  637
                  
                  
                  
                  —
                  
                  
                  
                  488
                  
                  
                  
                  —
                  
                  
                  
                  1,165Commercial
      loans
                  
                  
                  212
                  
                  
                  
                  503
                  
                  
                  
                  538
                  
                  
                  
                  16
                  
                  
                  
                  31Consumer
      loans
                  
                  
                  54
                  
                  
                  
                  135
                  
                  
                  
                  72
                  
                  
                  
                  87
                  
                  
                  
                  65Total
      charge-offs
                  
                  
                  1,230
                  
                  
                  
                  1,051
                  
                  
                  
                  1,113
                  
                  
                  
                  679
                  
                  
                  
                  1,532Recoveries:Real
      estate loans:Residential
                  
                  
                  1
                  
                  
                  
                  9
                  
                  
                  
                  1
                  
                  
                  
                  9
                  
                  
                  
                  97Commercial
                  
                  
                  —
                  
                  
                  
                  75
                  
                  
                  
                  —
                  
                  
                  
                  4
                  
                  
                  
                  552Construction
                  
                  
                  1
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Commercial
      loans and leases
                  
                  
                  47
                  
                  
                  
                  —
                  
                  
                  
                  2,772
                  
                  
                  
                  108
                  
                  
                  
                  3,515Consumer
      loans
                  
                  
                  15
                  
                  
                  
                  31
                  
                  
                  
                  28
                  
                  
                  
                  39
                  
                  
                  
                  43Total
      recoveries
                  
                  
                  64
                  
                  
                  
                  115
                  
                  
                  
                  2,801
                  
                  
                  
                  160
                  
                  
                  
                  4,207Net
      (charge-offs) recoveries
                  
                  
                  (1,166
                  )
                  
                  
                  (936
                  )
                  
                  
                  1,688
                  
                  
                  
                  (519
                  )
                  
                  
                  2,675Transfer
      to allowance for unfunded commitments
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (116
                  )Provision
      (credit) for loan losses
                  
                  
                  2,180
                  
                  
                  
                  1,250
                  
                  
                  
                  (1,627
                  )
                  
                  
                  300
                  
                  
                  
                  (2,852
                  )Balance
      at end of period
                  
                  $
                  4,005
                  
                  
                  $
                  2,991
                  
                  
                  $
                  2,677
                  
                  
                  $
                  2,616
                  
                  
                  $
                  2,835Ratio
      of net charge-offs (recoveries) to average loan outstanding during the
      period
                  
                  
                  0.35
                  %
                  
                  
                  0.30
                  %
                  
                  
                  (0.62
                  )%
                  
                  
                  0.22
                  %
                  
                  
                  (1.30
                  )%Allowance
      for loan losses to loans
                  
                  
                  1.23
                  %
                  
                  
                  0.92
                  %
                  
                  
                  0.90
                  %
                  
                  
                  1.04
                  %
                  
                  
                  1.28
                  %
 
 The
Company had a provision for loan losses of $2.2 million for 2009 compared to a
provision of $1.3 million in 2008.  The 2009 provision was primarily a
result of the increase in nonperforming loans due to increasing pressure of
current economic conditions on credit quality and continued
charge-offs.  Total charge-offs of $1.2 million for 2009 included the
charge-off of $461,000 on one development loan for single-family building lots,
a partial charge-off of $176,000 on a single-family residential subdivision
development loan, charge-offs totaling $124,000 for two commercial loans, and a
$189,000 charge-off on a credit secured by both commercial real estate and
business assets.  These charge-offs resulted from further
deterioration of general economic conditions that occurred in 2009 and decreased
real estate values as reflected by new appraisals or new
valuations.  Total charge-offs of $1.1 million for 2008 included a
partial charge-off of $259,000 of one commercial loan, and smaller charge-off
amounts to various other loans.  See also“Item 7.  Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Loans
– Credit Quality.”
  10
  The
following table sets forth a breakdown of the Company’s aggregate allowance for
loan losses by loan category at the dates indicated.  Management
believes that the allowance can be allocated by category only on an approximate
basis.  The allocation of the allowance to each category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
  At December 31,2009
                  
                  
                  2008
                  
                  
                  2007Amount
                  
                  
                  Percent of
                    Loans in Each
                    Category to
                    Total Loans
                  
                  
                  Amount
                  
                  
                  Percent of
                    Loans in Each
                    Category to
                    Total Loans
                  
                  
                  Amount
                  
                  
                  Percent of
                    Loans in Each
                    Category to
                    Total Loans(Dollars in thousands)Real
      estate loans:Commercial
                  
                  $
                  688
                  
                  
                  
                  31.92
                  %
                  
                  $
                  760
                  
                  
                  
                  30.13
                  %
                  
                  $
                  550
                  
                  
                  
                  27.88
                  %Residential
                  
                  
                  1,557
                  
                  
                  
                  49.31
                  
                  
                  
                  521
                  
                  
                  
                  49.27
                  
                  
                  
                  348
                  
                  
                  
                  46.86Construction
                  
                  
                  966
                  
                  
                  
                  9.47
                  
                  
                  
                  686
                  
                  
                  
                  12.05
                  
                  
                  
                  999
                  
                  
                  
                  16.36Commercial
      loans
                  
                  
                  685
                  
                  
                  
                  7.22
                  
                  
                  
                  729
                  
                  
                  
                  6.51
                  
                  
                  
                  571
                  
                  
                  
                  6.25Municipal
      loans
                  
                  
                  —
                  
                  
                  
                  0.85
                  
                  
                  
                  —
                  
                  
                  
                  0.68
                  
                  
                  
                  —
                  
                  
                  
                  0.99Consumer
      loans
                  
                  
                  109
                  
                  
                  
                  1.23
                  
                  
                  
                  295
                  
                  
                  
                  1.36
                  
                  
                  
                  209
                  
                  
                  
                  1.66Total
      allowance for loan losses
                  
                  $
                  4,005
                  
                  
                  
                  100.00
                  %
                  
                  $
                  2,991
                  
                  
                  
                  100.00
                  %
                  
                  $
                  2,677
                  
                  
                  
                  100.00
                  %
 
 At December 31,2006
                      
                      
                      2005Amount
                      
                      
                      Percent of
                        Loans in Each
                        Category to
                        Total Loans
                      
                      
                      Amount
                      
                      
                      Percent of
                        Loans in Each
                        Category to
                        Total Loans(Dollars in thousands)Real
      estate loans:Commercial
                      
                      $
                      716
                      
                      
                      
                      24.28
                      %
                      
                      $
                      1,545
                      
                      
                      
                      30.58
                      %Residential
                      
                      
                      245
                      
                      
                      
                      49.43
                      
                      
                      
                      502
                      
                      
                      
                      43.99Construction
                      
                      
                      1,524
                      
                      
                      
                      18.91
                      
                      
                      
                      697
                      
                      
                      
                      20.01Commercial
      loans
                      
                      
                      75
                      
                      
                      
                      4.90
                      
                      
                      
                      27
                      
                      
                      
                      3.56Municipal
      loans
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Consumer
      loans
                      
                      
                      56
                      
                      
                      
                      2.28
                      
                      
                      
                      64
                      
                      
                      
                      1.86Total
      allowance for loan losses
                      
                      $
                      2,616
                      
                      
                      
                      100.00
                      %
                      
                      $
                      2,835
                      
                      
                      
                      100.00
                      %
 
 Investment
Activities
  Interest
and dividends on investment securities, mortgage-backed securities, FHLB stock
and other investments provide the second largest source of income for the Bank
(after interest on loans), constituting 13.3% of the Bank’s total interest
income (and dividends) for 2009.  The Bank maintains its liquid assets
at levels believed adequate to meet requirements of normal banking activities
and potential savings outflows.
  As an
Indiana commercial bank, the Bank is authorized to invest without limitation in
direct or indirect obligations of the United States, direct obligations of a
United States territory, and direct obligations of the state or a municipal
corporation or taxing district in Indiana.  The Bank is also permitted
to invest in bonds or other securities of a national mortgage association and
the stock and obligations of a Federal Home Loan Bank.  Indiana
commercial banks may also invest in collateralized mortgage obligations to the
same extent as national banks.  An Indiana commercial bank may also
purchase for its own account other investment securities under such limits as
the Department of Financial Institutions prescribes by rule, provided that the
commercial bank may not invest more than 10% of its equity capital in the
investment securities of any one issuer.  An Indiana commercial bank
may not invest in speculative bonds, notes or other indebtedness that are
defined as securities and that are rated below the first four rating categories
by a generally recognized rating service, or are in default.  An
Indiana commercial bank may purchase an unrated security if it obtains financial
information adequate to document the investment quality of the
security.
  11
  The
Bank’s investment portfolio consists primarily of mortgage-backed securities
issued by Ginnie Mae, Fannie Mae and Freddie Mac.The Bank has also
invested in municipal securities and mutual funds and maintains interest-bearing
deposits in other financial institutions (primarily the Federal Reserve Bank of
Chicago and the Federal Home Loan Bank of Indianapolis).  As
a member of the FHLB System, the Bank is also required to hold stock in the FHLB
of Indianapolis.  The Bank did not own any security of a single issuer
that had an aggregate book value in excess of 10% of its equity at December 31,
2009.
  The
following table sets forth the market value of the Bank’s investments in
mortgage-backed securities, municipal securities and mutual funds at the dates
indicated.  All of these investments were available for
sale.
  At December 312009
                    
                    
                    2008(In thousands)Ginnie
      Mae and GSE mortgage-backed pass-through securities
                    
                    $
                    24,992
                    
                    
                    $
                    55,289Ginnie
      Mae collateralized mortgage obligations
                    
                    
                    5,820
                    
                    
                    
                    —Municipal
      securities
                    
                    
                    3,431
                    
                    
                    
                    18,557Mutual
      funds
                    
                    
                    1,598
                    
                    
                    
                    1,525Total
      investment
                    
                    $
                    35,841
                    
                    
                    $
                    75,371
 
 The
following table sets forth information regarding maturity distribution and
average yields for the Bank’s investment securities portfolio at December 31,
2009.
  Within 1 Year
                        
                        
                        1-5 Years
                        
                        
                        5-10 Years
                        
                        
                        Over 10 Years
                        
                        
                        TotalAmount
                        
                        
                        Yield
                        
                        
                        Amount
                        
                        
                        Yield
                        
                        
                        Amount
                        
                        
                        Yield
                        
                        
                        Amount
                        
                        
                        Yield
                        
                        
                        Amount
                        
                        
                        Yield(Dollars in thousands)Municipal
      securities (1)
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        $
                        343
                        
                        
                        
                        5.00
                        %
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        $
                        3,088
                        
                        
                        
                        6.11
                        %
                        
                        $
                        3,431
                        
                        
                        
                        6.11
                        %Mutual
      funds (2)
                        
                        $
                        1,598
                        
                        
                        
                        3.61
                        %
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,598
                        
                        
                        
                        3.61
                        %
 
 (1)
              Presented
      on a tax equivalent basis using a tax rate of
  34%.
 (2)
              Mutual
      funds have no stated maturity date.
 
 The
Bank’s Ginnie Mae and GSE mortgage-backed pass-through securities, and Ginnie
Mae collateralized mortgage obligations, include both fixed and adjustable-rate
securities.  At December 31, 2009, the Bank’s mortgage-backed
securities consisted of the following:
 
 Carrying
                          
                          
                          AverageAmount
                          
                          
                          Yield(Dollars in thousands)Adjustable-rate:Repricing
      in one year or less
                          
                          $
                          6,582
                          
                          
                          
                          3.52
                          %Repricing
      in more than one year
                          
                          
                          —
                          
                          
                          
                          —Fixed-rate:Maturing
      in five years or less
                          
                          
                          1,450
                          
                          
                          
                          4.69
                          %Maturing
      in five to ten years
                          
                          
                          10,036
                          
                          
                          
                          4.61
                          %Maturing
      in more than ten years
                          
                          
                          12,744
                          
                          
                          
                          4.53
                          %Total
                          
                          $
                          30,812
                          
                          
                          
                          4.35
                          %
 
 Sources
of Funds
  General.  Checking
and savings accounts, certificates of deposit and other types of deposits have
traditionally been an important source of the Bank’s funds for use in lending
and for other general business purposes.  In addition to deposit
accounts, the Bank derives funds from loan repayments, loan sales, borrowings
and operations.  The availability of funds from loan sales and
repayments is influenced by general interest rates and other market
conditions.  Borrowings may be used on a short-term basis to
compensate for reductions in deposits or deposit inflows at less than projected
levels and may be used on a longer-term basis to support expanded lending
activities.
  12
  Deposits.  The Bank
attracts both short-term and long-term retail deposits from the general public
by offering a wide assortment of deposit accounts and interest
rates.  The Bank offers regular savings accounts, interest-bearing
(NOW) and noninterest-bearing checking accounts, money market accounts, fixed
interest rate certificates with varying maturities and negotiated rate jumbo
certificates with various maturities.  The Bank also offers
tax-deferred individual retirement, Keogh retirement and simplified employer
plan retirement accounts.
  As of
December 31, 2009, approximately 46.0%, or $155.5 million, of the Bank’s
aggregate deposits consisted of various savings and demand deposit accounts from
which customers are permitted to withdraw funds at any time without
penalty.
  Interest
earned on statement accounts is paid from the date of deposit to the date of
withdrawal and compounded semi-annually for the Bank.  Interest earned
on NOW and money market deposit accounts is paid from the date of deposit to the
date of withdrawal and compounded and credited monthly.  Management
establishes the interest rate on these accounts weekly.
  The Bank
also makes available to its depositors a number of certificates of deposit with
various terms and interest rates to be competitive in its market
area.  These certificates have minimum deposit requirements as
well.
  In
addition to retail deposits, the Bank may obtain certificates of deposit from
the brokered market.  The Bank held no brokered certificates at
December 31, 2009 and December 31, 2008.
  The
following table sets forth the change in dollar amount of deposits in the
various types of deposit accounts offered by the Bank between the dates
indicated.
  IncreaseBalance at
                      
                      
                      Balance at
                      
                      
                      (Decrease)December 31,
                      
                      
                      December 31,
                      
                      
                      from Prior2009
                      
                      
                      2008
                      
                      
                      Year(Dollars
      in thousands)Noninterest-bearing
      deposits
                      
                      $
                      29,531
                      
                      
                      
                      8.73
                      %
                      
                      $
                      22,071
                      
                      
                      
                      6.80
                      %
                      
                      $
                      7,460
                      
                      
                      
                      33.80
                      %NOW
      deposits
                      
                      
                      74,851
                      
                      
                      
                      22.12
                      
                      
                      
                      62,402
                      
                      
                      
                      19.23
                      
                      
                      
                      12,449
                      
                      
                      
                      19.95Money
      Market deposits
                      
                      
                      26,584
                      
                      
                      
                      7.85
                      
                      
                      
                      25,645
                      
                      
                      
                      7.91
                      
                      
                      
                      939
                      
                      
                      
                      3.66Savings
      deposits
                      
                      
                      24,522
                      
                      
                      
                      7.25
                      
                      
                      
                      21,884
                      
                      
                      
                      6.75
                      
                      
                      
                      2,638
                      
                      
                      
                      12.05Certificate
      accounts:Certificates
      of $100,000 and more
                      
                      
                      52,515
                      
                      
                      
                      15.52
                      
                      
                      
                      64,492
                      
                      
                      
                      19.88
                      
                      
                      
                      (11,977
                      )
                      
                      
                      (18.57
                      )Fixed-rate
      certificates:12
      months or less
                      
                      
                      86,346
                      
                      
                      
                      25.52
                      
                      
                      
                      84,714
                      
                      
                      
                      26.11
                      
                      
                      
                      1,632
                      
                      
                      
                      1.9313-24
      months
                      
                      
                      22,123
                      
                      
                      
                      6.54
                      
                      
                      
                      27,864
                      
                      
                      
                      8.59
                      
                      
                      
                      (5,741
                      )
                      
                      
                      (20.60
                      )25-36
      months
                      
                      
                      9,197
                      
                      
                      
                      2.72
                      
                      
                      
                      5,651
                      
                      
                      
                      1.74
                      
                      
                      
                      3,546
                      
                      
                      
                      62.7537
      months or greater
                      
                      
                      12,096
                      
                      
                      
                      3.57
                      
                      
                      
                      8,850
                      
                      
                      
                      2.73
                      
                      
                      
                      3,246
                      
                      
                      
                      36.68Variable-rate
      certificates:18
      months
                      
                      
                      616
                      
                      
                      
                      0.18
                      
                      
                      
                      833
                      
                      
                      
                      0.26
                      
                      
                      
                      (217
                      )
                      
                      
                      (26.05
                      )Total
                      
                      $
                      338,381
                      
                      
                      
                      100.00
                      %
                      
                      $
                      324,406
                      
                      
                      
                      100.00
                      %
                      
                      $
                      13,975
                      
                      
                      
                      4.31
                      %
  13
  The
variety of deposit accounts offered by the Bank has permitted it to be
competitive in obtaining funds and has allowed it to respond with flexibility
to, but not eliminate, disintermediation (the flow of funds away from depository
institutions such as savings institutions into direct investment vehicles such
as government and corporate securities).  In addition, the Bank has
become increasingly subject to short-term fluctuation in deposit flows, as
customers have become more interest rate conscious.  The ability of
the Bank to attract and maintain deposits and its costs of funds have been, and
will continue to be, significantly affected by money market
conditions.  The Bank currently offers a variety of deposit products
to the customer.  They include noninterest-bearing and
interest-bearing NOW accounts, savings accounts, money market deposit accounts
(“MMDA”) and certificates of deposit ranging in terms from three months to seven
years.
  The
following table sets forth the Bank’s average aggregate balances and interest
rates.  Average balances in 2009, 2008 and 2007 are calculated from
actual daily balances.
  For the Years Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Average
                    
                    
                    
                    
                    
                    Average
                    
                    
                    
                    
                    
                    AverageAverage
                    
                    
                    Rate
                    
                    
                    Average
                    
                    
                    Rate
                    
                    
                    Average
                    
                    
                    RateBalance
                    
                    
                    Paid
                    
                    
                    Balance
                    
                    
                    Paid
                    
                    
                    Balance
                    
                    
                    Paid(Dollars in thousands)NOW
      deposits
                    
                    $
                    79,064
                    
                    
                    
                    0.82
                    %
                    
                    $
                    62,438
                    
                    
                    
                    1.43
                    %
                    
                    $
                    61,754
                    
                    
                    
                    2.48
                    %Money
      market deposits
                    
                    
                    29,259
                    
                    
                    
                    0.74
                    
                    
                    
                    30,951
                    
                    
                    
                    1.82
                    
                    
                    
                    32,349
                    
                    
                    
                    3.55Savings
      deposits
                    
                    
                    23,983
                    
                    
                    
                    0.13
                    
                    
                    
                    22,048
                    
                    
                    
                    0.25
                    
                    
                    
                    22,568
                    
                    
                    
                    0.39Time
      deposits
                    
                    
                    194,046
                    
                    
                    
                    2.84
                    
                    
                    
                    179,357
                    
                    
                    
                    3.63
                    
                    
                    
                    183,353
                    
                    
                    
                    4.47Total
      interest-bearing deposits
                    
                    
                    326,352
                    
                    
                    
                    1.96
                    
                    
                    
                    294,794
                    
                    
                    
                    2.72
                    
                    
                    
                    300,024
                    
                    
                    
                    3.66Noninterest-bearing
      demand and savings deposits
                    
                    
                    27,235
                    
                    
                    
                    
                    
                    
                    
                    23,329
                    
                    
                    
                    
                    
                    
                    
                    20,729Total
      deposits
                    
                    $
                    353,587
                    
                    
                    
                    
                    
                    
                    $
                    318,123
                    
                    
                    
                    
                    
                    
                    $
                    320,753
 
 The
following table sets forth the aggregate time deposits in the Bank classified by
rates as of the dates indicated.
 
 At December 31,2009
                    
                    
                    2008
                    
                    
                    2007(In thousands)Less
      than 2.00%
                    
                    $
                    76,024
                    
                    
                    $
                    15,071
                    
                    
                    $
                    —2.00%
      - 3.99%
                    
                    
                    94,919
                    
                    
                    
                    136,408
                    
                    
                    
                    46,9774.00%
      - 5.99%
                    
                    
                    11,935
                    
                    
                    
                    40,885
                    
                    
                    
                    127,6286.00%
      - 7.99%
                    
                    
                    15
                    
                    
                    
                    40
                    
                    
                    
                    44$
                    182,893
                    
                    
                    $
                    192,404
                    
                    
                    $
                    174,649
  14
  The
following table sets forth the amount and maturities of the Bank’s time deposits
at December 31, 2009.
  Amount DueLess Than
                    
                    
                    
                    
                    
                    
                    
                    
                    More ThanOne Year
                    
                    
                    1-2 Years
                    
                    
                    2-3 Years
                    
                    
                    3 Years
                    
                    
                    Total(In thousands)Less
      than 2.00%
                    
                    $
                    63,092
                    
                    
                    $
                    12,286
                    
                    
                    $
                    646
                    
                    
                    $
                    —
                    
                    
                    $
                    76,0242.00%
      - 3.99%
                    
                    
                    57,275
                    
                    
                    
                    14,678
                    
                    
                    
                    7,745
                    
                    
                    
                    15,221
                    
                    
                    
                    94,9194.00%
      - 5.99%
                    
                    
                    3,979
                    
                    
                    
                    2,302
                    
                    
                    
                    3,900
                    
                    
                    
                    1,754
                    
                    
                    
                    11,9356.00%
      - 7.99%
                    
                    
                    11
                    
                    
                    
                    4
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    15$
                    124,357
                    
                    
                    $
                    29,270
                    
                    
                    $
                    12,291
                    
                    
                    $
                    16,975
                    
                    
                    $
                    182,893
 
 The
following table indicates the amount of the Bank’s certificates of deposit of
$100,000 or more by time remaining until maturity at December 31,
2009.
  CertificatesMaturity Period
                    
                    of Deposit(In thousands)Three
      months or less
                    
                    $
                    7,574Over
      three through six months
                    
                    
                    13,314Over
      six through twelve months
                    
                    
                    16,819Over
      twelve months
                    
                    
                    14,808Total
                    
                    $
                    52,515
 
 Borrowings.  Deposits
are the primary sources of funds for the Bank’s lending and investment
activities and for its general business purposes.  The Bank also uses
advances from the FHLB to supplement its supply of lendable funds, to meet
deposit withdrawal requirements and to extend the terms of its
liabilities.  FHLB advances are typically secured by the Bank’s FHLB
stock, a portion of first mortgage loans, investment securities and overnight
deposits.  At December 31, 2009, the Bank had $46.4 million of FHLB
advances outstanding.
  The
Federal Home Loan Banks function as central reserve banks providing credit for
member financial institutions.  As a member, the Bank is required to
own capital stock in the FHLB and is authorized to apply for advances on the
security of such stock and certain of its home mortgages and other assets
(principally, securities which are obligations of, or guaranteed by, the United
States) provided certain standards related to creditworthiness have been
met.  Borrowings decreased $33.6 million in 2009, as the Bank relied
more on core deposits to fund portfolio lending, and also due to the
restructuring strategy implemented in the second half of the year that resulted
in a reduction in the size of the Bank’s balance sheet.
  On March
8, 2006, the Company formed Ameriana Capital Trust I (“Trust I”), a wholly owned
statutory business trust.  The Company purchased 100% of the common
stock of Trust I for $310,000.  Trust I issued $10.0 million in trust
preferred securities and those proceeds combined with the $310,000 in proceeds
of the common stock were used to purchase $10.3 million in subordinated
debentures issued by the Company.  The subordinated debentures are
unconditionally guaranteed by the Company and are the sole asset of Trust
I.  The subordinated debentures bear a rate equal to the average of
6.71% and the three-month London Interbank Offered Rate (“LIBOR”) plus 150 basis
points for the first five years following the offering.  After the
first five years, the subordinated debentures will bear a rate equal to 150
basis points over the three-month LIBOR rate.  At December 31, 2009,
the debentures had an interest rate of 4.23%.
  15
 
 The
following table sets forth certain information regarding borrowings at the dates
and for the periods indicated.
  At
      or for the YearYear
      Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007(Dollars
      in thousands)Amounts
      outstanding at end of period:FHLB
      advances
                  
                  $
                  46,375
                  
                  
                  $
                  79,925
                  
                  
                  $
                  58,203Subordinated
      debentures
                  
                  
                  10,310
                  
                  
                  
                  10,310
                  
                  
                  
                  10,310Repurchase
      agreement
                  
                  
                  7,500
                  
                  
                  
                  7,500
                  
                  
                  
                  —Weighted
      average rate paid on:FHLB
      advances at end of period
                  
                  
                  3.84
                  %
                  
                  
                  4.05
                  %
                  
                  
                  4.29
                  %Subordinated
      debentures
                  
                  
                  4.23
                  
                  
                  
                  5.10
                  
                  
                  
                  6.46Repurchase
      agreement
                  
                  
                  4.42
                  
                  
                  
                  4.42
                  
                  
                  
                  —Maximum
      amount of borrowings outstanding at anymonth
      end:FHLB
      advances
                  
                  $
                  79,925
                  
                  
                  $
                  89,925
                  
                  
                  $
                  66,324Subordinated
      debentures
                  
                  
                  10,310
                  
                  
                  
                  10,310
                  
                  
                  
                  10,310Repurchase
      agreement
                  
                  
                  7,500
                  
                  
                  
                  7,500
                  
                  
                  
                  —Approximate
      average amounts outstanding during period:FHLB
      advances
                  
                  $
                  61,244
                  
                  
                  $
                  76,901
                  
                  
                  $
                  53,138Subordinated
      debentures
                  
                  
                  10,310
                  
                  
                  
                  10,310
                  
                  
                  
                  10,310Repurchase
      agreement
                  
                  
                  7,500
                  
                  
                  
                  2,062
                  
                  
                  
                  —Approximate
      weighted average rate during the period paid on:FHLB
      advances
                  
                  
                  3.97
                  %
                  
                  
                  3.99
                  %
                  
                  
                  4.50
                  %Subordinated
      debentures
                  
                  
                  4.64
                  
                  
                  
                  5.83
                  
                  
                  
                  6.91Repurchase
      agreement
                  
                  
                  4.42
                  
                  
                  
                  4.42
                  
                  
                  
                  —
  16
  Average
Balance Sheet
  The
following table sets forth certain information relating to the Bank’s average
yield on assets and average cost of liabilities for the periods
indicated.  Such yields and costs are derived by dividing income or
expenses by the average balance of assets or liabilities, respectively, for the
periods presented.  Interest/dividends from tax-exempt municipal loans
and tax-exempt municipal securities have been increased by $256,000, $537,000,
and $666,000 for 2009, 2008, and 2007, respectively, from the amount listed
on the income statement to reflect interest income on a tax-equivalent
basis.  Average balances for 2009, 2008 and 2007 are calculated from
actual daily balances.
  Years Ended December 31,2009
                                          
                                          
                                          2008
                                          
                                          
                                          2007Average
                                            Balance
                                          
                                          
                                          Interest/
                                            Dividends
                                          
                                          
                                          Average
                                            Yield/
                                            Cost
                                          
                                          
                                          Average
                                            Balance
                                          
                                          
                                          Interest
                                            Dividends
                                          
                                          
                                          Average
                                            Yield/
                                            Cost
                                          
                                          
                                          Average
                                            Balance
                                          
                                          
                                          Interest/
                                              Dividends
                                          
                                          
                                          Average
                                            Yield/
                                            Cost(Dollars in thousands)Interest-earning
      assets:Loan
      portfolio (1)
                                          
                                          $
                                          335,522
                                          
                                          
                                          $
                                          19,434
                                          
                                          
                                          
                                          5.79
                                          %
                                          
                                          $
                                          311,260
                                          
                                          
                                          $
                                          19,823
                                          
                                          
                                          
                                          6.37
                                          %
                                          
                                          $
                                          274,287
                                          
                                          
                                          $
                                          19,377
                                          
                                          
                                          
                                          7.06
                                          %Mortgage-backed
      securities
                                          
                                          
                                          48,078
                                          
                                          
                                          
                                          2,258
                                          
                                          
                                          
                                          4.70
                                          
                                          
                                          
                                          44,808
                                          
                                          
                                          
                                          2,260
                                          
                                          
                                          
                                          5.04
                                          
                                          
                                          
                                          34,606
                                          
                                          
                                          
                                          1,662
                                          
                                          
                                          
                                          4.80Other
      securities:Taxable
                                          
                                          
                                          3,208
                                          
                                          
                                          
                                          133
                                          
                                          
                                          
                                          4.15
                                          
                                          
                                          
                                          5,391
                                          
                                          
                                          
                                          292
                                          
                                          
                                          
                                          5.42
                                          
                                          
                                          
                                          29,292
                                          
                                          
                                          
                                          1,080
                                          
                                          
                                          
                                          3.69Tax-exempt
      (2)
                                          
                                          
                                          9,765
                                          
                                          
                                          
                                          575
                                          
                                          
                                          
                                          5.89
                                          
                                          
                                          
                                          22,444
                                          
                                          
                                          
                                          1,270
                                          
                                          
                                          
                                          5.66
                                          
                                          
                                          
                                          33,266
                                          
                                          
                                          
                                          1,867
                                          
                                          
                                          
                                          5.61Short-term
      investments and other interest-earning assets (3)
                                          
                                          
                                          23,622
                                          
                                          
                                          
                                          197
                                          
                                          
                                          
                                          0.83
                                          
                                          
                                          
                                          16,206
                                          
                                          
                                          
                                          473
                                          
                                          
                                          
                                          2.92
                                          
                                          
                                          
                                          12,231
                                          
                                          
                                          
                                          580
                                          
                                          
                                          
                                          4.74Total
      interest-earning assets
                                          
                                          
                                          420,195
                                          
                                          
                                          
                                          22,597
                                          
                                          
                                          
                                          5.38
                                          
                                          
                                          
                                          400,109
                                          
                                          
                                          
                                          24,118
                                          
                                          
                                          
                                          6.03
                                          
                                          
                                          
                                          383,682
                                          
                                          
                                          
                                          24,566
                                          
                                          
                                          
                                          6.40Noninterest-earning
      assets
                                          
                                          
                                          54,627
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          49,521
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          41,563Total
      assets
                                          
                                          $
                                          474,822
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          449,630
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          425,245Interest-bearing
      liabilities:Demand
      deposits and savings
                                          
                                          $
                                          132,306
                                          
                                          
                                          
                                          894
                                          
                                          
                                          
                                          0.68
                                          
                                          
                                          $
                                          115,437
                                          
                                          
                                          
                                          1,512
                                          
                                          
                                          
                                          1.31
                                          
                                          
                                          $
                                          116,671
                                          
                                          
                                          
                                          2,768
                                          
                                          
                                          
                                          2.37Certificate
      of deposits
                                          
                                          
                                          194,046
                                          
                                          
                                          
                                          5,512
                                          
                                          
                                          
                                          2.84
                                          
                                          
                                          
                                          179,357
                                          
                                          
                                          
                                          6,517
                                          
                                          
                                          
                                          3.63
                                          
                                          
                                          
                                          183,353
                                          
                                          
                                          
                                          8,205
                                          
                                          
                                          
                                          4.48Total
      interest-bearing deposits
                                          
                                          
                                          326,352
                                          
                                          
                                          
                                          6,406
                                          
                                          
                                          
                                          1.96
                                          
                                          
                                          
                                          294,794
                                          
                                          
                                          
                                          8,029
                                          
                                          
                                          
                                          2.72
                                          
                                          
                                          
                                          300,024
                                          
                                          
                                          
                                          10,973
                                          
                                          
                                          
                                          3.66Borrowings
                                          
                                          
                                          79,054
                                          
                                          
                                          
                                          3,246
                                          
                                          
                                          
                                          4.11
                                          
                                          
                                          
                                          89,273
                                          
                                          
                                          
                                          3,759
                                          
                                          
                                          
                                          4.21
                                          
                                          
                                          
                                          63,448
                                          
                                          
                                          
                                          3,105
                                          
                                          
                                          
                                          4.89Total
      interest-bearing liabilities
                                          
                                          
                                          405,406
                                          
                                          
                                          
                                          9,652
                                          
                                          
                                          
                                          2.38
                                          
                                          
                                          
                                          384,067
                                          
                                          
                                          
                                          11,788
                                          
                                          
                                          
                                          3.07
                                          
                                          
                                          
                                          363,472
                                          
                                          
                                          
                                          14,078
                                          
                                          
                                          
                                          3.87Noninterest-bearing
      liabilities
                                          
                                          
                                          35,946
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          32,304
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          29,139Total
      liabilities
                                          
                                          
                                          441,352
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          416,371
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          392,611Stockholders’
      equity
                                          
                                          
                                          33,470
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          33,259
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          32,634Total
      liabilities and stockholders’ Equity
                                          
                                          $
                                          474,822
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          449,630
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          425,245Net
      interest income
                                          
                                          
                                          
                                          
                                          
                                          $
                                          12,945
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          12,330
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          10,488Interest
      rate spread
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3.00
                                          %
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2.96
                                          %
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2.53
                                          %Net
      tax equivalent yield (4)
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3.08
                                          %
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3.08
                                          %
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          2.73
                                          %Ratio
      of average interest-earning assets to to average interest-bearing
      liabilities
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          103.65
                                          %
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          104.18
                                          %
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          105.48
                                          %
 (1)
              Interest
      and average yield presented on a tax-equivalent basis using a
      tax-effective tax rate of 32% for municipal bank qualified tax-exempt
      loans subject to the Tax Equity and FiscalResponsibility
      Act of 1982 penalty.  Nonaccrual loans are included in average
      loans outstanding
 (2)
              Interest
      and average yield presented on a tax-equivalent basis using a tax rate of
      34%.
 (3)
              Includes interest-bearing
      deposits in other financial institutions, mutual funds, trust preferred
      securities, and FHLB stock.
 (4)
              Net  interest income is
      presented on a tax-equivalent basis as a percentage of average
      interest-earning assets.
  17
  Subsidiary
Activities
  The
Company maintains two wholly owned subsidiaries, the Bank and Ameriana Capital
Trust I.  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 has two wholly owned
subsidiaries: AIA sells insurance products and AFS operates a brokerage
facility.  At December 31, 2009, the Bank’s investments in its
subsidiaries were approximately $1.3 million, consisting of direct equity
investments.
  Indiana
commercial banks may acquire or establish subsidiaries that engage in activities
permitted to be performed by the commercial bank itself, or permitted to
operating subsidiaries of national banks.  Under FDIC regulations, a
subsidiary of a state bank may not engage as principal in any activity that is
not of a type permissible for a subsidiary of a national bank unless the FDIC
determines that the activity does not impose a significant risk to the affected
insurance fund.
  REGULATION
AND SUPERVISION
  The
Company expects competition to increase in the future as a result of
legislative, regulatory and technological changes and the continuing trend of
consolidation in the financial services industry.  Technological
advances, for example, have lowered barriers to entry, allowed banks to expand
their geographic reach by providing services over the Internet and made it
possible for non-depository institutions to offer products and services that
traditionally have been provided by banks.  Changes in federal law
permit affiliation among banks, securities firms and insurance companies, which
promotes a competitive environment in the financial services
industry.  Competition for deposits and the origination of loans could
limit the Company’s growth in the future.
  Regulation
and Supervision of the Company
  General.The
Company is a public company registered with the Securities and Exchange
Commission (the “SEC”), whose common stock trades on The NASDAQ Stock Market LLC
and is a bank holding company subject to regulation by the Federal Reserve Board
under the Bank Holding Company Act, as amended (“BHCA”).  As a result,
the activities of the Company are subject to certain requirements and
limitations, which are described below.  As a public reporting
company, the Company is required to file annual, quarterly and current reports
with the SEC.  As a bank holding company, the Company is required to
file annual and quarterly reports with the Federal Reserve Board and to furnish
such additional information as the Federal Reserve Board may require pursuant to
the BHCA.  The Company is also subject to regular examination by the
Federal Reserve Board.
  Dividends.The
Federal Reserve Board has the power to prohibit dividends by bank holding
companies if their actions constitute unsafe or unsound
practices.  The Federal Reserve Board has issued a policy statement on
the payment of cash dividends by bank holding companies, which expresses the
Federal Reserve Board’s view that a bank holding company should pay cash
dividends only to the extent that the company’s net income for the past year is
sufficient to cover both the cash dividends and a rate of earnings retention
that is consistent with the company’s capital needs, asset quality and overall
financial condition.  The Federal Reserve Board also indicated that it
would be inappropriate for a bank holding company experiencing serious financial
problems to borrow funds to pay dividends.  Under the prompt
corrective action regulations adopted by the Federal Reserve Board, the Federal
Reserve Board may prohibit a bank holding company from paying any dividends if
the holding company’s bank subsidiary is classified as
“undercapitalized.”  See “Regulation and Supervision of the
Bank – Prompt Corrective Regulatory Action.”
  Stock Repurchases.As a
bank holding company, the Company is required to give the Federal Reserve Board
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of the Company’s
consolidated net worth.  The Federal Reserve Board may disapprove such
a purchase or redemption if it determines that the proposal would violate any
law, regulation, Federal Reserve Board order, directive, or any condition
imposed by, or written agreement with, the Federal Reserve
Board.  This requirement does not apply to bank holding companies that
are “well-capitalized,” “well-managed” and are not the subject of any unresolved
supervisory issues.
  18
  Acquisitions.  The
Company is required to obtain the prior approval of the Federal Reserve Board to
acquire all, or substantially all, of the assets of any bank or bank holding
company or merge with another bank holding company.  Prior Federal
Reserve Board approval will also be required for the Company to acquire direct
or indirect ownership or control of any voting securities of any bank or bank
holding company if, after giving effect to such acquisition, the Company would,
directly or indirectly, own or control more than 5% of any class of voting
shares of such bank or bank holding company.  In evaluating such
transactions, the Federal Reserve Board considers such matters as the financial
and managerial resources of and future prospects of the companies involved,
competitive factors and the convenience and needs of the communities to be
served.  Bank holding companies may acquire additional banks in any
state, subject to certain restrictions such as deposit concentration
limits.  With certain exceptions, the BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of a company that is not a bank or a bank holding company,
or from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries.  The principal exceptions to these prohibitions involve
certain non-bank activities, which, by statute or by Federal Reserve Board
regulation or order, have been identified as activities closely related to the
business of banking.  The activities of the Company are subject to
these legal and regulatory limitations under the BHCA and the related Federal
Reserve Board regulations.  The Gramm-Leach-Bliley Act of 1999
authorized a bank holding company that meets specified conditions, including
being well-capitalized and well managed, to opt to become a “financial holding
company,” and thereby engage in a broader array of financial activities than
previously permitted.  Such activities can include insurance
underwriting and investment banking.  The Company has not, up to this
time, opted to become a financial holding company.  The Federal
Reserve Board has the power to order a holding company or its subsidiaries to
terminate any activity, or to terminate its ownership or control of any
subsidiary, when it has reasonable cause to believe that the continuation of
such activity or such ownership or control constitutes a serious risk to the
financial safety, soundness or stability of any bank subsidiary of that holding
company.
  Under the
Change in Bank Control Act of 1978 (the “CBCA”), a 60-day prior written notice
must be submitted to the Federal Reserve Board if any person (including a
company), or any group acting in concert, seeks to acquire 10% of any class of
the Company’s outstanding voting securities, unless the Federal Reserve Board
determines that such acquisition will not result in a change of control of the
bank.  Under the CBCA, the Federal Reserve Board has 60 days within
which to act on such notice taking into consideration certain factors, including
the financial and managerial resources of the proposed acquiror, the convenience
and needs of the community served by the bank and the antitrust effects of an
acquisition.
  Under the
BHCA, any company would be required to obtain prior approval from the Federal
Reserve Board before it may obtain “control” of the Company within the meaning
of the BHCA.  Control for BHCA purposes generally is defined to mean
the ownership or power to vote 25% or more of any class of the Company’s voting
securities or the ability to control in any manner the election of a majority of
the Company’s directors.  An existing bank holding company would be
required to obtain the Federal Reserve Board’s prior approval under the BHCA
before acquiring more than 5% of the Company’s voting stock.
  Under
Indiana banking law, prior approval of the Indiana Department of Financial
Institutions is also required before any person may acquire control of an
Indiana bank or bank holding company.  The Department will issue a
notice approving the transaction if it determines that the persons proposing to
acquire the Indiana bank or bank holding company are qualified in character,
experience and financial responsibility, and the transaction does not jeopardize
the interests of the public.
  Capital
Requirements.  The Federal Reserve Board has adopted guidelines
regarding the capital adequacy of bank holding companies, which require bank
holding companies to maintain on a consolidated basis, specified minimum ratios
of capital to total assets and capital to risk-weighted assets.  These
requirements, which generally apply to bank holding companies with consolidated
assets of $500 million or more, are substantially similar to those applicable to
the Bank.  See “–
Regulation and Supervision of the Bank – Capital
Requirements.”
  Regulation
and Supervision of the Bank
  General.  The Bank,
as an Indiana chartered commercial bank, is subject to extensive regulation by
the Indiana Department of Financial Institutions and the FDIC.  The
lending activities and other investments of the Bank must comply with various
regulatory requirements.  The Indiana Department of Financial
Institutions and FDIC periodically examine the Bank for compliance with various
regulatory requirements.  The Bank must file reports with the Indiana
Department of Financial Institutions and the FDIC describing its activities and
financial condition.  The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.  This
supervision and regulation is intended primarily for the protection of
depositors.  Certain of these regulatory requirements are referred to
below or appear elsewhere in this Form 10-K.  The regulatory
discussion, however, does not purport to be an exhaustive treatment of
applicable laws and regulations and is qualified in its entirety by reference to
the actual statutes and regulations.  The Bank’s conversion from an
Indiana savings bank to an Indiana commercial bank has not materially changed
the regulatory requirements applicable to the Bank.
  19
  Federal
Banking Law
  Capital
Requirements.  Under FDIC regulations, state chartered banks
that are not members of the Federal Reserve System are required to maintain a
minimum leverage capital requirement consisting of a ratio of Tier 1 capital to
total assets of 3% if the FDIC determines that the institution is not
anticipating or experiencing significant growth and has well-diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings, and in general, a strong banking organization, rated
composite 1 under the Uniform Financial Institutions Rating System (the CAMELS
rating system) established by the Federal Financial Institutions Examination
Council.  For all but the most highly rated institutions meeting the
conditions set forth above, the minimum leverage capital ratio is
4%.  Tier 1 capital is the sum of common stockholders’ equity,
noncumulative perpetual preferred stock (including any related surplus) and
minority interests in consolidated subsidiaries, minus all intangible assets
(other than certain mortgage and certain other servicing assets, purchased
credit card relationships, credit-enhancing interest-only strips and certain
deferred tax assets), identified losses, investments in certain financial
subsidiaries and non-financial equity investments.
  In
addition to the leverage capital ratio (the ratio of Tier I capital to total
assets), state chartered nonmember banks must maintain a minimum ratio of
qualifying total capital to risk-weighted assets of at least 8%, of which at
least half must be Tier 1 capital.  Qualifying total capital consists
of Tier 1 capital plus Tier 2 capital (also referred to as supplementary
capital) items.  Tier 2 capital items include allowances for loan
losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred
stock and preferred stock with a maturity of over 20 years, certain other
capital instruments and up to 45% of pre-tax net unrealized holding gains on
equity securities.  The includable amount of Tier 2 capital cannot
exceed the institution’s Tier 1 capital.  Qualifying total capital is
further reduced by the amount of the bank’s investments in banking and finance
subsidiaries that are not consolidated for regulatory capital purposes,
reciprocal cross-holdings of capital securities issued by other banks, most
intangible assets and certain other deductions.  Under the FDIC
risk-weighted system, all of a bank’s balance sheet assets and the credit
equivalent amounts of certain off-balance sheet items are assigned to one of
four broad risk-weight categories from 0% to 100%, based on the regulators’
perception of the risks inherent in the type of assets or item.  The
aggregate dollar amount of each category is multiplied by the risk weight
assigned to that category.  The sum of these weighted values equals
the bank’s risk-weighted assets.
  At
December 31, 2009, the Bank’s ratio of Tier 1 capital to total assets was 8.27%,
its ratio of Tier 1 capital to risk-weighted assets was 11.25% and its ratio of
total risk-based capital to risk-weighted assets was 12.51%.
  Investment
Activities.  Since the enactment of Federal Deposit Insurance
Corporation Improvement Act, all state-chartered FDIC-insured banks have
generally been limited in their activities as principal and their equity
investments to the type and in the amount authorized for national banks,
notwithstanding state law.  The Federal Deposit Insurance Corporation
Improvement Act and the FDIC regulations permit exceptions to these
limitations.  The FDIC is authorized to permit such institutions to
engage in state authorized activities or investments not permissible for
national banks (other than non-subsidiary equity investments) if they meet all
applicable capital requirements and it is determined that such activities or
investments do not pose a significant risk to the Deposit Insurance
Fund.  The FDIC has adopted regulations governing the procedures for
institutions seeking approval to engage in such activities or
investments.  The Gramm-Leach-Bliley Act of 1999 specifies that a
non-member bank may control a subsidiary that engages in activities as principal
that would only be permitted for a national bank to conduct in a “financial
subsidiary” if a bank meets specified conditions and deducts its investment in
the subsidiary for regulatory capital purposes.
  Interstate Banking and
Branching.  The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 permitted bank holding companies to acquire banks in any
state subject to specified concentration limits and other
conditions.  The Interstate Banking Act also authorizes the interstate
merger of banks.  In addition, among other things, the Interstate
Banking Act permits banks to establish de novo branches on an interstate basis
provided that such action is specifically authorized by the law of the host
state.
  Dividend
Limitations.  The Bank may not pay dividends on its capital
stock if its regulatory capital would thereby be reduced below the amount then
required for the liquidation account established for the benefit of certain
depositors of the Bank at the time of its conversion to stock
form.  In addition, the Bank may not pay dividends that exceed
retained net income for the applicable calendar year to date, plus retained net
income for the preceding two years without prior approval from the Indiana
Department of Financial Institutions.  At December 31, 2009, the
shareholders’ equity of the Bank was $40.4 million.
  20
  Earnings
of the Bank appropriated to bad debt reserves and deducted for federal income
tax purposes are not available for payment of cash dividends or other
distributions to stockholders without payment of taxes at the then current tax
rate by the Bank on the amount of earnings removed from the reserves for such
distributions.  See “Federal and State
Taxation.”
  Under
FDIC regulations, the Bank is prohibited from making any capital distributions
if, after making the distribution, the Bank would fail to meet any applicable
capital requirements.  For additional information about dividend
limitations see Note 11 in the Consolidated Financial Statements.
  Insurance of
Deposit Accounts.  The Bank’s deposits are insured up to
applicable limits by the Deposit Insurance Fund of the FDIC.  The
Deposit Insurance Fund is the successor to the Bank Insurance Fund and the
Savings Association Insurance Fund, which were merged in 2006.
 
 Under the FDIC’s risk-based assessment
system, insured institutions are assigned to one of four risk categories based
on supervisory evaluations, regulatory capital levels and certain other factors,
with less risky institutions paying lower assessments.  An
institution’s assessment rate depends upon the category to which it is
assigned.  For calendar 2008, assessments ranged from five to
forty-three basis points of each institution’s deposit assessment
base.  Due to losses incurred by the Deposit Insurance Fund in 2008
from failed institutions, and anticipated future losses, the FDIC adopted an
across the board seven basis point increase in the assessment range for the
first quarter of 2009.  FDIC made further refinements to its
risk-based assessment that were effective April 1, 2009, and effectively made
the range 7 to 77.5 basis points.  The FDIC may adjust the scale
uniformly from one quarter to the next, except that no adjustment can deviate
more than three basis points from the base scale without notice and comment
rulemaking.  No institution may pay a dividend if in default of the
federal deposit insurance assessment.
 
 The FDIC imposed on all insured
institutions a special emergency assessment of five basis points of total assets
minus Tier 1 capital, as of June 30, 2009 (capped at ten basis points of an
institution’s deposit assessment base on the same date) in order to cover losses
to the Deposit Insurance Fund.  That special assessment was collected
on September 30, 2009.  The FDIC provided for similar special
assessments during the final two quarters of 2009, if deemed
necessary.  However, in lieu of further special assessments, the FDIC
required insured institutions to prepay estimated quarterly risk-based
assessments for the fourth quarter of 2009 through the fourth quarter of
2012.  The estimated assessments, which include an assumed annual
assessment base increase of 5%, was recorded as a prepaid expense asset as of
December 30, 2009.  As of December 31, 2009, and each quarter
thereafter, a charge to earnings will be recorded for each regular assessment
with an offsetting credit to the prepaid asset.
 
 Due to the recent difficult economic
conditions, deposit insurance per account owner has been raised to $250,000 for
all types of accounts until January 1, 2014.  In addition, the FDIC
adopted an optional Temporary Liquidity Guarantee Program by which, for a fee,
noninterest-bearing transaction accounts would receive unlimited insurance
coverage until December 31, 2009, subsequently extended until June 30, 2010, and
certain senior unsecured debt issued by institutions and their holding companies
within a specified time frame would be guaranteed by the FDIC through June 30,
2012, or, in certain cases, December 31, 2012.  The Bank made the
business decision to participatein the unlimited
noninterest-bearing transaction account coverage through December 31,
2009.  The Bank and the Company optedto participate in the
unsecured debt guarantee program.
 
 In addition to the assessment for
deposit insurance, institutions are required to make payments on bonds issued in
the late 1980s by the Financing Corporation to recapitalize a predecessor
deposit insurance fund.  That payment is established quarterly and
during the four quarters ending December 31, 2009 averaged 1.06 basis points of
assessable deposits.
 
 The FDIC has authority to increase
insurance assessments.  A significant increase in insurance premiums
would likely have an adverse effect on the operating expenses and results of
operations of the Bank.  Management cannot predict what insurance
assessment rates will be in the future.
 
 Insurance of deposits may be terminated
by the FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC.  The management of the Bank does not know of any practice,
condition or violation that might lead to termination of deposit
insurance.
  21
  Prompt Corrective Regulatory
Action.The federal banking regulators are required to take
prompt corrective action if an insured depository institution fails to satisfy
certain minimum capital requirements, including a leverage limit, a risk-based
capital requirement and any other measure deemed appropriate by the federal
banking regulators for measuring the capital adequacy of an insured depository
institution.  All institutions, regardless of their capital levels,
are restricted from making any capital distribution or paying any management
fees if the institution would thereafter fail to satisfy the minimum levels for
any of its capital requirements.  An institution that fails to meet
the minimum level for any relevant capital measure (an “undercapitalized
institution”) may be: (i) subject to increased monitoring by the appropriate
federal banking regulator; (ii) required to submit an acceptable capital
restoration plan within 45 days; (iii) subject to asset growth limits; and (iv)
required to obtain prior regulatory approval for acquisitions, branching and new
lines of businesses.  The capital restoration plan must include a
guarantee by the institution’s holding company that the institution will comply
with the plan until it has been adequately capitalized on average for four
consecutive quarters, under which the holding company would be liable up to the
lesser of 5% of the institution’s total assets or the amount necessary to bring
the institution into capital compliance as of the date it failed to comply with
its capital restoration plan.  A “significantly undercapitalized”
institution, as well as any undercapitalized institution that does not submit an
acceptable capital restoration plan, may be subject to regulatory demands for
recapitalization, broader application of restrictions on transactions with
affiliates, limitations on interest rates paid on deposits, asset growth and
other activities, possible replacement of directors and officers, and
restrictions on capital distributions by any bank holding company controlling
the institution.  Any company controlling the institution may also be
required to divest the institution or the institution could be required to
divest subsidiaries.  The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt.  At
their discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
provisions.  If an institution’s ratio of tangible capital to total
assets falls below the “critically undercapitalized level” established by law,
i.e., a ratio of
tangible equity to total assets of 2% or less, the institution will be subject
to conservatorship or receivership within specified time
periods.  Tangible equity is defined as core capital plus cumulative
perpetual preferred stock (and related surplus) less all intangible assets other
than qualifying supervisory goodwill and certain purchased mortgage servicing
rights.
  Under the
implementing regulations, the federal banking regulators generally measure an
institution’s capital adequacy on the basis of its total risk-based capital
ratio (the ratio of its total capital to risk-weighted assets), Tier 1
risk-based capital ratio (the ratio of its core capital to risk-weighted assets)
and leverage ratio (the ratio of its core capital to adjusted total
assets).  The following table shows the capital ratios required for
the various prompt corrective action categories.
  Adequately
                    
                    
                    
                    SignificantlyWell Capitalized
                    
                    Capitalized
                    
                    Undercapitalized
                    
                    UndercapitalizedTotal
      risk-based capital ratio
                    
                    10.0%
      or more
                    
                    8.0%
      or more
                    
                    Less
      than 8.0%
                    
                    Less
      than 6.0%Tier
      1 risk-based capital ratio
                    
                    6.0%
      or more
                    
                    4.0%
      or more
                    
                    Less
      than 4.0%
                    
                    Less
      than 3.0%Leverage
      ratio
                    
                    5.0%
      or more
                    
                    4.0%
      or more *
                    
                    Less
      than 4.0% *
                    
                    Less
      than 3.0%
 
 *  3.0%
if institution has a composite 1 CAMELS rating.
 
 The FDIC
may reclassify a well-capitalized depository institution as adequately
capitalized and may require an adequately capitalized or undercapitalized
institution to comply with the supervisory actions applicable to institutions in
the next lower capital category (but may not reclassify a significantly
undercapitalized institution as critically undercapitalized) if the FDIC
determines, after notice and an opportunity for a hearing, that the savings
institution is in an unsafe or unsound condition or that the institution has
received and not corrected a less-than-satisfactory rating for any CAMELS rating
category.
  Safety and Soundness
Guidelines.  Each federal banking agency was required to
establish safety and soundness standards for the depository institutions under
its authority.  The interagency guidelines require depository
institutions to maintain internal controls and information systems and internal
audit systems that are appropriate for the size, nature and scope of the
institution’s business.  The guidelines also establish certain basic
standards for loan documentation, credit underwriting, interest rate risk
exposure and asset growth.  The guidelines further provide that
depository institutions should maintain safeguards to prevent the payment of
compensation, fees and benefits that are excessive or that could lead to
material financial loss, and should take into account factors such as
compensation practices at comparable institutions.  If the appropriate
federal banking agency determines that a depository institution is not in
compliance with the safety and soundness guidelines, it may require the
institution to submit an acceptable plan to achieve compliance with the
guidelines.  A depository institution must submit an acceptable
compliance plan to its primary federal regulator within 30 days of receipt of a
request for such a plan.  Failure to submit or implement a compliance
plan may subject the institution to regulatory sanctions.  Management
believes that the Bank meets all the standards adopted in the interagency
guidelines.
  22
  Enforcement.  The
FDIC has extensive enforcement authority over nonmember insured state banks,
including the Bank.  This enforcement authority includes, among other
things, the ability to assess civil money penalties, issue cease and desist
orders and remove directors and officers.  In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices.  The FDIC has authority
under federal law to appoint a conservator or receiver for an insured bank under
limited circumstances.  The FDIC is required, with certain exceptions,
to appoint a receiver or conservator for an insured state non-member bank if
that banks was “critically undercapitalized” on average during the calendar
quarter beginning 270 days after the date on which the institution became
“critically undercapitalized.”  The FDIC may also appoint itself as
conservator or receiver for an insured state non-member institution under
specific circumstances on the basis of the institution’s financial condition or
upon the occurrence of other events, including (1) insolvency; (2) substantial
dissipation of assets or earnings through violations of law or unsafe or unsound
practices; (3) existence of an unsafe or unsound condition to transact business;
and (4) insufficient capital, or the incurring of losses that will deplete
substantially all of the institution’s capital with no reasonable prospect of
replenishment without federal assistance.
  Reserve
Requirements.  Under Federal Reserve Board regulations, the
Bank currently must maintain average daily reserves equal to 3% on aggregate
transaction accounts up to and including $55.2 million, plus 10% on the
remainder.  The first $10.7 million of transaction accounts are
exempt.  This percentage is subject to adjustment by the Federal
Reserve Board.  Because required reserves must be maintained in the
form of vault cash or in a noninterest-bearing account at a Federal Reserve
Bank, the effect of the reserve requirement is to reduce the amount of the
institution’s interest-earning assets.  At December 31, 2009, the
Bank met applicable Federal Reserve Board reserve requirements.
  Federal Home Loan Bank
System.The Bank is a member of the Federal Home Loan Bank
System, which consists of 12 regional Federal Home Loan Banks governed and
regulated by the Federal Housing Finance Board (“FHFB”).  As a member,
the Bank is required to purchase and hold stock in the FHLB of
Indianapolis.  As of December 31, 2009, the Bank held stock in the
FHLB of Indianapolis in the amount of $5.6 million and was in compliance with
the above requirement.
  The FHLB
of Indianapolis serves as a reserve or central bank for the member institutions
within its assigned region.  It is funded primarily from proceeds
derived from the sale of consolidated obligations of FHLB System.  It
makes loans (i.e.,
advances) to members in accordance with policies and procedures established by
the FHLB System and the Board of Directors of the FHLB of
Indianapolis.
  Loans to Executive Officers,
Directors and Principal Stockholders.Loans to directors,
executive officers and principal stockholders of a state nonmember bank like the
Bank must be made on substantially the same terms as those prevailing for
comparable transactions with persons who are not executive officers, directors,
principal stockholders or employees of the Bank unless the loan is made pursuant
to a compensation or benefit plan that is widely available to employees and does
not favor insiders.  Loans to any executive officer, director and
principal stockholder together with all other outstanding loans to such person
and affiliated interests generally may not exceed 15% of the Bank’s unimpaired
capital and surplus and all loans to such persons may not exceed the
institution’s unimpaired capital and unimpaired surplus.  Loans to
directors, executive officers and principal stockholders, and their respective
affiliates, in excess of the greater of $25,000 or 5% of capital and surplus (on
any loans where the total outstanding amounts to $500,000 or more) must be
approved in advance by a majority of the Board of Directors of the Bank with any
“interested” director not participating in the voting.  State
nonmember banks are prohibited from paying the overdrafts of any of their
executive officers or directors unless payment is made pursuant to a written,
pre-authorized interest-bearing extension of credit plan that specifies a method
of repayment or transfer of funds from another account at the
bank.  Loans to executive officers may not be made on terms more
favorable than those afforded other borrowers and are restricted as to type,
amount and terms of credit.  In addition, Section 106 of the BHCA
prohibits extensions of credit to executive officers, directors, and greater
than 10% stockholders of a depository institution by any other institution which
has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable
features.
  23
  Transactions with
Affiliates.  A state nonmember bank or its subsidiaries may not
engage in “covered transactions” with any one affiliate in an amount greater
than 10% of such bank’s capital stock and surplus, and for all such transactions
with all affiliates, a state non-member bank is limited to an amount equal to
20% of capital stock and surplus.  All such transactions must also be
on terms substantially the same, or at least as favorable, to the bank or
subsidiary as those provided to a nonaffiliate.  Certain covered
transactions must meet prescribed collateralization requirements.  The
term “covered transaction” includes the making of loans, purchase of assets,
issuance of a guarantee and similar other types of transactions.  An
affiliate of a state non-member bank is any company or entity which controls or
is under common control with the state non-member bank and, for purposes of the
aggregate limit on transactions with affiliates, any subsidiary that would be
deemed a financial subsidiary of a national bank.  In a holding
company context, the parent holding company of a state non-member bank (such as
the Company) and any companies which are controlled by such parent holding
company are affiliates of the state non-member bank.  The BHCA further
prohibits a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain limited
exceptions.
  Indiana
Banking Law
  Branching.  An
Indiana bank is entitled to establish one or more branches de novo or by acquisition in
any location or locations in Indiana and in other states (subject to the
requirements of federal law for interstate banking).  The bank is
required to file an application with the Department of Financial
Institutions.  Approval of the application is contingent upon the
Department’s determination that after the establishment of the branch, the bank
will have adequate capital, sound management and adequate future
earnings.  An application to branch must also be approved by the
FDIC.
  Lending
Limits.  Indiana banks are not subject to percentage of asset
or capital limits on their commercial, consumer and non-residential mortgage
lending, and accordingly, have more flexibility in structuring their portfolios
than federally chartered savings banks.  Indiana law provides that a
bank may not make a loan or extend credit to a borrower or group of borrowers in
excess of 15% of its unimpaired capital and surplus.  An additional
10% of capital and surplus may be lent if secured by specified readily
marketable collateral.
  Enforcement.  The
Department has authority to take enforcement action against an Indiana bank in
appropriate cases, including the issuance of cease and desist orders, removal of
directors or officers, issuance of civil money penalties and appointment of a
conservator or receiver.
  Other
Activities.  The Bank is authorized to engage in a variety of
agency and fiduciary activities including acting as executors of an estate,
transfer agent and in other fiduciary capacities.  On approval from
the Department of Financial Institutions, the Bank would be permitted to
exercise any right granted to national banks.
  Regulatory Restructuring
Legislation.  The Obama Administration has proposed, and the
House of Representatives and Senate are currently considering, legislation that
would restructure the regulation of depository
institutions.  Proposals range from the merger of the Office of Thrift
Supervision, which regulates federal thrifts, with the Office of the Comptroller
of the Currency, which regulated national banks, to the creation of an
independent federal agency that would assume the regulatory responsibilities of
the Office of Thrift Supervision, FDIC, Office of the Comptroller of the
Currency and Federal Reserve Board.  Also, proposed is the creation of
a new federal agency to administer and enforce consumer and fair lending laws, a
function that is now performed by the depository institution
regulators.
  Enactment
of such legislation could revise the regulatory structure imposed on the Bank,
which could result in more stringent regulation.  At this time,
management has no way of predicting the contents of any final legislation, or
whether any legislation will be enacted at all.
  Federal
Taxation.  The Company and its subsidiaries file a consolidated
federal income tax return on a calendar year end.  Saving banks are
subject to the provisions of the Internal Revenue Code of 1986 (the “Code”) in
the same general manner as other corporations.  However, institutions,
such as the Bank, which met certain definitional tests and other conditions
prescribed by the Code benefited from certain favorable provisions regarding
their deductions from taxable income for annual additions to their bad debt
reserve.
  The
Company’s federal income tax returns have not been audited in the past five
years.
  State Taxation.  The
State of Indiana imposes a franchise tax which is assessed on qualifying
financial institutions, such as the Bank.  The tax is based upon
federal taxable income before net operating loss carryforward deductions
(adjusted for certain Indiana modifications) and is levied at a rate of 8.5% of
apportioned adjusted taxable income.
  24
  The
Company’s state income tax returns for the years ended December 31, 2003, 2004
and 2005 were audited in 2007 and no additional taxes were assessed as a result
of the audit.
  EXECUTIVE
OFFICERS OF THE REGISTRANT
  Age atName
                
                December 31, 2009
                
                Principal PositionJerome
      J. Gassen
                
                59
                
                President
      and Chief Executive Officer of the Bank and the CompanyTimothy
      G. Clark
                
                59
                
                Executive
      Vice President and Chief Operating Officer of the Bank and the
      CompanyJohn
      J. Letter
                
                64
                
                Senior
      Vice President, Treasurer and Chief Financial Officer of the Bank and the
      CompanyJames
      A. Freeman
                
                60
                
                Senior
      Vice President and Chief Commercial Lending Officer of the
      BankMichael  L.
      Wenstrup
                
                52
                
                Senior
      Vice President and Chief Credit Officer of the
  Bank
 
 Unless
otherwise noted, all officers have held the position described below for at
least the past five years.
  Jerome J. Gassenwas appointed
President and Chief Executive Officer and director of the Company and the Bank
on June 1, 2005.  Before joining the Company, Mr. Gassen served as
Executive Vice President of Banking of Old National Bank, Evansville, Indiana
from August 2003 until January 2005.  Before serving as Executive Vice
President, Mr. Gassen was the Northern Region President of Old National Bank
from January 2000 to August 2003.  Mr. Gassen also served on Old
National Bank’s Board of Directors from January 2000 until January
2005.  Mr. Gassen served as President and Chief Operating Officer of
American National Bank and Trust Company, Muncie, Indiana from 1997 until
January 2000, when American National was acquired by Old National
Bank.
  Timothy G. Clark joined the
Bank as Executive Vice President and Chief Operating Officer on
September 2, 1997.  He was appointed Executive Vice President and
Chief Operating Officer of the Company on October 23, 2000.  He
previously held the position of Regional Executive and Area President at
National City Bank of Indiana in Seymour, Indiana for five years and before that
held senior management positions with Central National Bank in Greencastle,
Indiana for five years and Hancock Bank & Trust in Greenfield, Indiana for
13 years.
  John J. Letter was appointed
Senior Vice President, Treasurer and Chief Financial Officer of the Company and
the Bank on January 22, 2007.  Before joining the Company, Mr. Letter
served as Regional President with Old National Bank in Muncie, Indiana from
September 2004 to April 2005.  Before being named Regional President,
Mr. Letter also served as District President with Old National Bank from
November 2003 to September 2004 and Regional Chief Financial Officer – Old
National Bank from August 2000 to November 2003.  Mr. Letter was also
Chief Financial Officer and Controller with American National Bank in Muncie
from March 1997 to August 2000.
  James A. Freeman was named
Senior Vice President and Chief Commercial Lending Officer of the Bank in
September 2005.  Before joining Ameriana, Mr. Freeman was Regional
Senior Credit Officer (Small Business Division) for National City Bank from
September 2002 to September 2005, where he managed the credit underwriting
process for a four state region.  Mr. Freeman also served as Credit
Department Manager/Vice President for Fifth Third Bank, Indiana from January
2000 to August 2002.
  Michael L. Wenstrupwas named
Senior Vice President and Chief Credit Officer of the Bank effective March 1,
2010.  Before joining Ameriana, Mr. Wenstrup was Executive Vice President –
Chief Credit Officer and Director of Parkway Bank Arizona, Phoenix, Arizona from
November 2005 to December 2008.  Mr. Wenstrup was Executive Vice President
of Parkway Bank and Trust, Harwood Heights, Illinois from June 1999 to November
2005 and served as Vice President – Portfolio Manager, Commercial Real Estate
with LaSalle National Bank, Chicago, Illinois from January 1994 to June
1999.
  25
 
 Item 1A.  Risk
Factors
 
 An
investment in shares of our common stock involves various
risks.  Before deciding to invest in our common stock, you should
carefully consider the risks described below in conjunction with the other
information in this Form 10-K, including the items included as
exhibits.  Our business, financial condition and results of operations
could be harmed by any of the following risks or by other risks that have not
been identified or that we may believe are immaterial or
unlikely.  The value or market price of our common stock could decline
due to any of these risks.  The risks discussed below also include
forward-looking statements, and our actual results may differ substantially from
those discussed in these forward-looking statements.
  Our increased emphasis on commercial
and construction lending may expose us to increased lending
risk.At December 31, 2009, our loan portfolio consisted of
$104.2 million, or 31.9%, of commercial real estate loans, $30.9 million, or
9.5%, of construction loans, and $23.6 million, or 7.2%, of commercial and
industrial loans and leases.  We intend to continue to increase our
emphasis on the origination of commercial and construction
lending.  However, these types of loans generally expose a lender to
greater risk of non-payment and loss than one- to four-family residential
mortgage loans because repayment of the loans often depends on the successful
operation of the property, the income stream of the borrowers and, for
construction loans, the accuracy of the estimate of the property’s value at
completion of construction and the estimated cost of
construction.  Such loans typically involve larger loan balances to
single borrowers or groups of related borrowers compared to one- to four-family
residential mortgage loans.  Commercial and industrial loans expose us
to additional risks since they typically are made on the basis of the borrower’s
ability to make repayments from the cash flow of the borrower’s business and are
secured by non-real estate collateral that may depreciate over
time.  In addition, since such loans generally entail greater risk
than one to four-family residential mortgage loans, we may need to increase our
allowance for loan losses in the future to account for the likely increase in
probable incurred credit losses associated with the growth of such
loans.  Also, many of our commercial and construction borrowers have
more than one loan outstanding with us.  Consequently, an adverse
development with respect to one loan or one credit relationship can expose us to
a significantly greater risk of loss compared to an adverse development with
respect to a one- to four-family residential mortgage loan.
  Our provision for loan losses
increased substantially during the past fiscal year and we may be required to
make further increases in our provision for loan losses and to charge-off
additional loans in the future, each of which could adversely affect our results
of operations.  Further, our allowance for loan losses may prove to be
insufficient to absorb losses in our loan portfolio.  For 2009,
we recorded a provision for loan losses of $2.2 million.  We also
recorded net loan charge-offs of $1.2 million.  We are experiencing
increasing loan delinquencies and credit losses.  The deterioration in
the general economy and our market area has become a significant contributing
factor to the increased levels of loan delinquencies and nonperforming assets as
of December 31, 2009.  Our nonperforming loans totaled $9.1 million,
representing 2.78% of total loans.  In addition, loans that we have
classified as substandard totaled $6.7 million, representing 2.1% of total
loans.  If these loans do not perform according to their terms and the
collateral is insufficient to pay any remaining loan balance, we may experience
loan losses, which could have a material effect on our operating
results.  Like all financial institutions, we maintain an allowance
for loan losses to provide for loans in our portfolio that may not be repaid in
their entirety.  We believe that our allowance for loan losses is
maintained at a level adequate to absorb probable losses inherent in our loan
portfolio as of the corresponding balance sheet date.  However, our
allowance for loan losses may not be sufficient to cover actual loan losses, and
future provisions for loan losses could materially adversely affect our
operating results.
  In
evaluating the adequacy of our allowance for loan losses, we consider numerous
quantitative factors, including our historical charge-off experience, growth of
our loan portfolio, changes in the composition of our loan portfolio and the
volume of delinquent and classified loans.  In addition, we use
information about specific borrower situations, including their financial
position and estimated collateral values, to estimate the risk and amount of
loss for those borrowers.  Finally, we also consider many qualitative
factors, including general and economic business conditions, current general
market collateral valuations, trends apparent in any of the factors we take into
account and other matters, which are by nature more subjective and
fluid.  Our estimates of the risk of loss and amount of loss on any
loan are complicated by the significant uncertainties surrounding our borrowers’
abilities to successfully execute their business models through changing
economic environments, competitive challenges and other
factors.  Because of the degree of uncertainty and susceptibility of
these factors to change, our actual losses may vary from our current
estimates.
  At
December 31, 2009, our allowance for loan losses as a percentage of total loans
was 1.23%.  Our regulators, as an integral part of their examination
process, periodically review our allowance for loan losses and may require us to
increase our allowance for loan losses by recognizing additional provisions for
loan losses charged to expense, or to decrease our allowance for loan losses by
recognizing loan charge-offs, net of recoveries.  Any such additional
provisions for loan losses or charge-offs, as required by these regulatory
agencies, could have a material adverse effect on our financial condition and
results of operations.
  26
  Our cost of operations is high
relative to our assets.  Our failure to maintain or reduce our
operating expenses costs could hurt our profits.Our operating
expenses, which consist primarily of salaries and employee benefits, occupancy,
furniture and equipment expense, professional fees, data processing expense,
FDIC insurance premiums and assessments, and marketing, totaled $17.1 million
for the year ended December 31, 2009 compared to $14.4 million for the year
ended December 31, 2008.  We continued our concerted effort to
effectively manage our expenses, but experienced the increase in 2009 due
primarily to higher FDIC insurance premiums and assessments, and costs
associated with the new banking centers that are part of our Indianapolis
metropolitan market retail expansion strategy.  Although we generated
an increase in both net interest income on a tax equivalent basis and
noninterest income, we experienced an increase in our efficiency ratio as a
result of the higher operating expenses.  Our efficiency ratio totaled
92.6% for the year ended December 31, 2009 compared to 89.2% for the year ended
December 31, 2008. Failure to control our expenses could hurt future
profits.
  Changes in interest rates could
reduce our net interest income and earnings.Our net interest
income is the interest we earn on loans and investment less the interest we pay
on our deposits and borrowings.  Our net interest margin is the
difference between the yield we earn on our assets and the interest rate we pay
for deposits and our other sources of funding.  Changes in interest
rates—up or down—could adversely affect our net interest margin and, as a
result, our net interest income.  Although the yield we earn on our
assets and our funding costs tend to move in the same direction in response to
changes in interest rates, one can rise or fall faster than the other, causing
our net interest margin to expand or contract.  Our liabilities tend
to be shorter in duration than our assets, so they may adjust faster in response
to changes in interest rates.  As a result, when interest rates rise,
our funding costs may rise faster than the yield we earn on our assets, causing
our net interest margin to contract until the yield catches
up.  Changes in the slope of the “yield curve”—or the spread between
short-term and long-term interest rates—could also reduce our net interest
margin.  Normally, the yield curve is upward sloping, meaning
short-term rates are lower than long-term rates.  Because our
liabilities tend to be shorter in duration than our assets, when the yield curve
flattens or even inverts, we could experience pressure on our net interest
margin as our cost of funds increases relative to the yield we can earn on our
assets.
  The
building of market share through our branching strategy could cause our expenses
to increase faster than revenues.We opened a full-service
banking center in Fishers in October 2008,  a second banking center in
Carmel in December 2008 and a third in Westfield in May 2009.  We also
have purchased property in Plainfield with the expectation to begin construction
on a new full-service banking center in 2011.  There are considerable
costs involved in opening branches and new branches generally require a period
of time to generate sufficient revenues to offset their costs, especially in
areas in which we do not have an established presence.  Accordingly,
any new branch can be expected to negatively impact our earnings for some period
of time until the branch reaches certain economies of scale.
 
 Increased and/or special FDIC
assessments will hurt our earnings.  Beginning in late 2008,
the economic environment caused higher levels of bank failures, which
dramatically increased FDIC resolution costs and led to a significant reduction
in the Deposit Insurance Fund. As a result, the FDIC has significantly increased
the initial base assessment rates paid by financial institutions for deposit
insurance.  These increases in the base assessment rate have increased
our deposit insurance costs and negatively impacted our earnings.  In
addition, in May 2009, the FDIC imposed a special assessment on all insured
institutions due to recent bank and savings association failures.  Our
special assessment, which was reflected in earnings for the quarter ended June
30, 2009, was $225,000.
 
 In lieu
of imposing an additional special assessment, the FDIC has adopted a rule
requiring that all institutions prepay their assessments for the fourth quarter
of 2009 and all of 2010, 2011 and 2012.  Under the rule, the
assessment rate for the fourth quarter of 2009 and for 2010 is based on each
institution’s total base assessment rate for the third quarter of 2009, modified
to assume that the assessment rate in effect on September 30, 2009 had been in
effect for the entire third quarter, and the assessment rate for 2011 and 2012
will be equal to the modified third quarter assessment rate plus an additional 3
basis points.  In addition, each institution’s base assessment rate
for each period will be calculated using its third quarter assessment base,
adjusted quarterly for an estimated 5% annual growth rate in the assessment base
through the end of 2012.  Under this rule, we made a payment of $2.9
million to the FDIC on December 30, 2009.  We recorded the fourth
quarter assessment of $193,000 as a charge to earnings, and recorded $2.7
million as a prepaid expense that will be amortized over the three-year
assessment period.
  27
  If the value of real estate in
central Indiana were to decline materially, a significant portion of our loan
portfolio could become under-collateralized, which could have a material adverse
effect on us.Central Indiana has experienced declines in home
prices over the past two years.  A further decline in local economic
conditions could adversely affect the value of the real estate collateral
securing our loans.  A continued decline in property values would
diminish our ability to recover on defaulted loans by selling the real estate
collateral, making it more likely that we would suffer losses on defaulted
loans.  Additionally, a decrease in asset quality could require
additions to our allowance for loan losses through increased provisions for loan
losses, which would hurt our profits.  Also, a decline in local
economic conditions may have a greater effect on our earnings and capital than
on the earnings and capital of larger financial institutions whose real estate
loan portfolios are more geographically diverse.  Real estate values
are affected by various factors in addition to local economic conditions,
including, among other things, changes in general or regional economic
conditions, governmental rules or policies and natural disasters.
  Our business is subject to the
success of the local economy in which we operate.Since the
latter half of 2007, depressed economic conditions have existed throughout the
United States, including our market area.  Our market area has
experienced home price declines, increased foreclosures and increased
unemployment rates.  Continued deterioration of economic conditions in
our market area could reduce our growth rate, affect the ability of our
customers to repay their loans and generally affect our financial condition and
results of operations.  Conditions such as inflation, recession,
unemployment, high interest rates, short money supply, scarce natural resources,
international disorders, terrorism and other factors beyond our control may
adversely affect our profitability.  We are less able than a larger
institution to spread the risks of unfavorable local economic conditions across
a large number of diversified economies.  Any sustained period of
increased payment delinquencies, foreclosures or losses caused by adverse market
or economic conditions in Indiana could adversely affect the value of our
assets, revenues, results of operations and financial
condition.  Moreover, we cannot give any assurance we will benefit
from any market growth or favorable economic conditions in our primary market
areas if they do occur.
  Recent negative developments in the
financial industry and the domestic and international credit markets may
adversely affect our operations and our stock price.  As a
result of the general economic downturn and uncertainty in the financial
markets, commercial as well as consumer loan portfolio performances have
deteriorated at many institutions and the competition for deposits and quality
loans has increased significantly.  In addition, the values of real
estate collateral supporting many commercial loans and home mortgages have
declined and may continue to decline.  Bank and bank holding company
stock prices have been negatively affected, as has the ability of banks and bank
holding companies to raise capital or borrow in the debt markets compared to
recent years.  As a result, there is a potential for new federal or
state laws and regulations regarding lending and funding practices and liquidity
standards, and bank regulatory agencies are expected to be very aggressive in
responding to concerns and trends identified in examinations, including the
expected issuance of many formal enforcement orders.  Negative
developments in the financial industry and the domestic and international credit
markets, and the impact of new legislation in response to those developments,
may negatively impact our operations by restricting our business operations,
including our ability to originate or sell loans, and adversely impact our
financial performance or our stock price.
  Strong competition within our market
area could hurt our profits and slow growth.We face intense
competition both in making loans and attracting deposits.  This
competition has made it more difficult for us to make new loans and has
occasionally forced us to offer higher deposit rates.  Price
competition for loans and deposits might result in us earning less on our loans
and paying more on our deposits, which reduces net interest
income.  According to the FDIC, as of June 30, 2009, we held 33.9% of
the deposits in Henry County, Indiana, which was the largest market share of
deposits out of the six financial institutions that held deposits in this
county.  We also held 10.8% of the deposits in Hancock County,
Indiana, which was the fourth largest market share of deposits out of the 10
financial institutions that held deposits in this county.  Some of the
institutions with which we compete have substantially greater resources and
lending limits than we have and may offer services that we do not
provide.  We expect competition to increase in the future as a result
of legislative, regulatory and technological changes and the continuing trend of
consolidation in the financial services industry.  Our profitability
depends upon our continued ability to compete successfully in our market
area.
  We operate in a highly regulated
environment and we may be adversely affected by changes in laws and
regulations.The Bank is subject to extensive regulation,
supervision and examination by the Indiana Department of Financial Institutions,
its chartering authority, and by the FDIC, as insurer of its
deposits.  The Company is subject to regulation and supervision by the
Federal Reserve Board.  Such regulation and supervision govern the
activities in which an institution and its holding company may engage, and are
intended primarily for the protection of the insurance fund and for the
depositors and borrowers of the Bank.  The regulation and supervision
by the Indiana Department of Financial Institutions and the FDIC are not
intended to protect the interests of investors in the Company’s common
stock.  Regulatory authorities have extensive discretion in their
supervisory and enforcement activities, including the imposition of restrictions
on our operations, the classification of our assets and determination of the
level of our allowance for loan losses.  Any change in such regulation
and oversight, whether in the form of regulatory policy, regulations,
legislation or supervisory action, may have a material impact on our
operations.
  28
  The trading history of our common
stock is characterized by low trading volume.  Our common stock may be
subject to sudden decreases.Although our common stock trades
on the NASDAQ Global Market, it has not been regularly traded.  We
cannot predict whether a more active trading market in our common stock will
occur or how liquid that market might become.  A public trading market
having the desired characteristics of depth, liquidity and orderliness depends
upon the presence in the marketplace of willing buyers and sellers of our common
stock at any given time, which presence is dependent upon the individual
decisions of investors, over which we have no control.
  The
market price of our common stock may be highly volatile and subject to wide
fluctuations in response to numerous factors, including, but not limited to, the
factors discussed in other risk factors and the following:
  ·
              actual
      or anticipated fluctuations in our operating
  results;
  ·
              changes in interest
      rates;
  ·
              changes in the legal or
      regulatory environment in which we
  operate;
  ·
              press releases, announcements or
      publicity relating to us or our competitors or relating to trends in our
      industry;
  ·
              changes in expectations as to our
      future financial performance, including financial estimates or
      recommendations by securities analysts and
    investors;
  ·
              future sales of our common
      stock;
  ·
              changes in economic conditions in
      our marketplace, general conditions in the U.S. economy, financial markets
      or the banking industry; and
  ·
              other
      developments affecting our competitors or
us.
  These
factors may adversely affect the trading price of our common stock, regardless
of our actual operating performance, and could prevent you from selling your
common stock at or above the price you desire.  In addition, the stock
markets, from time to time, experience extreme price and volume fluctuations
that may be unrelated or disproportionate to the operating performance of
companies.  These broad fluctuations may adversely affect the market
price of our common stock, regardless of our trading performance.
  Failure to comply with the
restrictions and conditions in the resolutions adopted by our board at the
request of our regulators could result in additional enforcement action against
us.On September 28, 2009, the Board of Directors of the
Bank, adopted a resolution agreeing to higher capital requirements, requirements
to reduce the level of our classified and criticized assets and restrictions on
dividend payments.  These restrictions may impede our ability to
operate our business.  Additionally, on December 17, 2009, the Board
of Directors of the Company, at the request of the Federal Reserve Bank of
Chicago, adopted a resolution requiring the Board to obtain the approval of the
Federal Reserve Bank at least thirty days before taking any of the following
actions:
  ·
              The
      payment of corporate dividends;
  ·
              The
      payment of interest on trust preferred
  securities;
  ·
              Any
      increase in debt or issuance of trust preferred obligations (the request
      for approval should include a written debt service plan indicating how
      payments will be made without causing further strain on Ameriana Bank’s
      capital position); and
  ·
              The
      redemption of Ameriana Bancorp
stock.
  The resolution will remain in effect
until the Federal Reserve Bank authorizes the Board to rescind the
resolution.  If we fail to comply with the terms and conditions of the
board resolutions, our regulators could take enforcement action against us,
including the imposition of further operating restrictions.  These
enforcement actions could take the form of a memorandum of understanding or a
cease and desist order.  Any informal or formal enforcement action
could harm our reputation and our ability to retain or attract customers or
employees and impact the trading price of our common stock.
  29
  We may require additional capital in
the future, but that capital may not be available when it is
needed.We anticipate that we have adequate capital for the
foreseeable future.  However, we may at some point need to raise
additional capital to support our continued growth or if we incur significant
loan or securities impairment.  Our ability to raise additional
capital, if needed, will depend on conditions in the capital markets at that
time, which are outside our control, and on our financial
performance.  Accordingly, we cannot assure you of our ability to
raise additional capital, if needed, on terms acceptable to us.  If we
cannot raise additional capital when needed, our ability to further expand our
operations through internal growth could be materially impaired.
  Provisions of our articles of
incorporation, bylaws and Indiana law, as well as state and federal banking
regulations, could delay or prevent a takeover of us by a third
party.Provisions in our articles of incorporation and bylaws
and the corporate law of the State of Indiana could delay, defer or prevent a
third party from acquiring us, despite the possible benefit to our shareholders,
or otherwise adversely affect the price of our common stock.  These
provisions include: supermajority voting requirements for certain business
combinations; the election of directors to staggered terms of three years; and
advance notice requirements for nominations for election to our board of
directors and for proposing matters that shareholders may act on at shareholder
meetings.  In addition, we are subject to Indiana laws, including one
that prohibits us from engaging in a business combination with any interested
shareholder for a period of five years from the date the person became an
interested shareholder unless certain conditions are met.  These
provisions may discourage potential takeover attempts, discourage bids for our
common stock at a premium over market price or adversely affect the market price
of, and the voting and other rights of the holders of, our common
stock.  These provisions could also discourage proxy contests and make
it more difficult for you and other shareholders to elect directors other than
the candidates nominated by our Board of Directors.
  Item 1B. Unresolved Staff
Comments
 
 None.
  30
  Item
2.Properties
 
 The
following table sets forth the location of the Company’s office facilities at
December 31, 2009 and certain other information relating to these properties at
that date.
  
 Year
                                                    
                                                    
                                                    Total
                                                    
                                                    
                                                    Net
                                                    
                                                    Owned/
                                                    SquareAcquired
                                                    
                                                    
                                                    Investment
                                                    
                                                    
                                                    Book Value
                                                    
                                                    Leased
                                                    Feet(Dollars in thousands)Main
      Office:2118
      Bundy Avenue
                                                      New
      Castle, Indiana
                                                    
                                                    1958
                                                    
                                                    
                                                    $
                                                    1,741
                                                    
                                                    
                                                    $
                                                    307
                                                    
                                                    Owned
                                                    
                                                    
                                                    20,500Branch
      Offices:1311
      Broad Street
                                                      New
      Castle, Indiana
                                                    
                                                    1890
                                                    
                                                    
                                                    
                                                    1,136
                                                    
                                                    
                                                    
                                                    178
                                                    
                                                    Owned
                                                    
                                                    
                                                    18,000956
      North Beechwood Street
                                                      Middletown,
      Indiana
                                                    
                                                    1971
                                                    
                                                    
                                                    
                                                    334
                                                    
                                                    
                                                    
                                                    20
                                                    
                                                    Owned
                                                    
                                                    
                                                    5,50022
      North Jefferson Street
                                                      Knightstown,
      Indiana
                                                    
                                                    1979
                                                    
                                                    
                                                    
                                                    401
                                                    
                                                    
                                                    
                                                    124
                                                    
                                                    Owned
                                                    
                                                    
                                                    3,4001810
      North State Street
                                                      Greenfield,
      Indiana
                                                    
                                                    1995
                                                    
                                                    
                                                    
                                                    2,589
                                                    
                                                    
                                                    
                                                    2,163
                                                    
                                                    Owned
                                                    
                                                    
                                                    7,60099
      South Dan Jones Road
                                                      Avon,
      Indiana
                                                    
                                                    1995
                                                    
                                                    
                                                    
                                                    1,564
                                                    
                                                    
                                                    
                                                    1,112
                                                    
                                                    Owned
                                                    
                                                    
                                                    12,6001724
      East 53rd
      Street
                                                      Anderson,
      Indiana
                                                    
                                                    1993
                                                    
                                                    
                                                    
                                                    734
                                                    
                                                    
                                                    
                                                    558
                                                    
                                                    Owned
                                                    
                                                    
                                                    3,000488
      West Main Street
                                                      Morristown,
      Indiana
                                                    
                                                    1998
                                                    
                                                    
                                                    
                                                    363
                                                    
                                                    
                                                    
                                                    262
                                                    
                                                    Owned
                                                    
                                                    
                                                    2,6007435
      West U.S. 52
                                                      New
      Palestine, Indiana
                                                    
                                                    1999
                                                    
                                                    
                                                    
                                                    944
                                                    
                                                    
                                                    
                                                    681
                                                    
                                                    Owned
                                                    
                                                    
                                                    3,3006653
      West Broadway
                                                      McCordsville,
      Indiana
                                                    
                                                    2004
                                                    
                                                    
                                                    
                                                    1,140
                                                    
                                                    
                                                    
                                                    1,028
                                                    
                                                    Owned
                                                    
                                                    
                                                    3,40011521
      Olio Road
                                                      Fishers,
      Indiana
                                                    
                                                    2008
                                                    
                                                    
                                                    
                                                    2,148
                                                    
                                                    
                                                    
                                                    2,094
                                                    
                                                    Owned
                                                    
                                                    
                                                    2,5003975
      West 106th
      Street
                                                      Carmel,
      Indiana
                                                    
                                                    2008
                                                    
                                                    
                                                    
                                                    2,097
                                                    
                                                    
                                                    
                                                    2,051
                                                    
                                                    Owned
                                                    
                                                    
                                                    3,5003333
      East State Road 32Westfield,
      Indiana
                                                    
                                                    2008
                                                    
                                                    
                                                    
                                                    619
                                                    
                                                    
                                                    
                                                    613
                                                    
                                                    Leased (1)
                                                    
                                                    
                                                    5,000Land
      Acquired for Future Branch Office:2437
      East Main Street
                                                      Plainfield,
      Indiana
                                                    
                                                    2008
                                                    
                                                    
                                                    
                                                    1,327
                                                    
                                                    
                                                    
                                                    1,327
                                                    
                                                    Owned
                                                    
                                                    
                                                    —Loan
      Production Office:11711
      N. Pennsylvania, Suite 100
                                                      Carmel,
      Indiana
                                                    
                                                    2007
                                                    
                                                    
                                                    
                                                    34
                                                    
                                                    
                                                    
                                                    25
                                                    
                                                    Leased (2)
                                                    
                                                    
                                                    2,100Ameriana
      Insurance Agency, Inc.:1908
      Bundy Avenue
                                                      New
      Castle, Indiana
                                                    
                                                    1999
                                                    
                                                    
                                                    
                                                    386
                                                    
                                                    
                                                    
                                                    302
                                                    
                                                    Owned
                                                    
                                                    
                                                    5,000Total
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    $
                                                    17,557
                                                    
                                                    
                                                    $
                                                    12,845
 
 (1)
              The
      initial lease expires on May 31, 2029, and the Bank has options for four
      additional terms of five years
each.
 (2)
              The
      initial lease expires on June 30, 2012, and the Bank has options for two
      additional terms of three years
each.
  31
  The total
net book value of $12.8 million shown above for the Company’s office facilities
is $2.7 million less than the total of $15.5 million shown for premises and
equipment on the consolidated balance sheet.  This difference
represents the net book value as of December 31, 2009 for furniture, equipment,
and automobiles.
  Item 3.  Legal
Proceedings
  The
Abstract & Title Guaranty Company, Inc. (“AGT”) sued the Bank in 2003 to
recover for checks issued by AGT and delivered to one of its title insurance
customers for delivery to various payees. Generally, the checks were issued in
conjunction with real estate transactions and were issued to pay mortgage liens
in full. Forty-one such checks were forged and deposited into an account at the
Bank. The litigation was initiated in Hendricks County Superior Court in May of
2003 and the plaintiff is seeking damages of $740,000 plus interest and attorney
fees.  The Bank believes it has adequate insurance to protect it from
any judgment rendered based upon the complaint. However, the insurance does not
provide indemnification for the costs of defending the
litigation.  Discovery is now being conducted by both
parties.   The parties anticipate that the matter will go to
trial in mid to late 2010.
  Except as
indicated above, neither the Company nor the Bank is involved in any pending
legal proceedings other than those occurring in the ordinary course of
business.  Such routine legal proceedings, in the aggregate, are
believed by management to be immaterial to the financial condition and results
of operation of the Company.
  Item
4.  [Reserved]
  32
  PART
II
  Item 5.
                Market
      for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchasersof Equity
      Securities
  Market
for Common Equity and Related Stockholder Matters
  The
Company’s common stock, par value $1.00 per share, is traded on the NASDAQ
Global Marketunder
the symbol “ASBI.”  On March 25, 2010, there were 428 holders of
record of the Company’s common stock.  The Company’s ability to pay
dividends depends on a number of factors including our capital requirements, our
financial condition and results of operations, tax considerations, statutory and
regulatory limitations and general economic conditions.  No assurance
can be given that we will continue to pay dividends or that they will not be
reduced in the future.  See Note 11 to the “Consolidated Financial
Statements” included under Item 8 of this Form 10-K for a discussion of the
restrictions on the payment of cash dividends by the Company.
 
 The
following table sets forth the high and low sales prices for the common stock as
reported on the NASDAQ Global Market and the cash dividends declared on the
common stock for each full quarterly period during the last two fiscal
years.
 
 2009
                    
                    
                    2008Dividends
                    
                    
                    
                    
                    
                    
                    
                    
                    DividendsQuarter Ended:
                    
                    High
                    
                    
                    Low
                    
                    
                    Declared
                    
                    
                    High
                    
                    
                    Low
                    
                    
                    DeclaredMarch
      31
                    
                    $
                    5.99
                    
                    
                    $
                    2.19
                    
                    
                    $
                    0.04
                    
                    
                    $
                    10.00
                    
                    
                    $
                    7.50
                    
                    
                    $
                    0.04June
      30
                    
                    
                    4.42
                    
                    
                    
                    2.50
                    
                    
                    
                    0.04
                    
                    
                    
                    9.50
                    
                    
                    
                    8.51
                    
                    
                    
                    0.04September
      30
                    
                    
                    4.32
                    
                    
                    
                    3.10
                    
                    
                    
                    0.01
                    
                    
                    
                    10.00
                    
                    
                    
                    6.84
                    
                    
                    
                    0.04December
      31
                    
                    
                    3.61
                    
                    
                    
                    2.39
                    
                    
                    
                    0.01
                    
                    
                    
                    8.00
                    
                    
                    
                    4.05
                    
                    
                    
                    0.04
 
 Purchases
of Equity Securities
  We did
not repurchase any of our common stock during the quarter ended December 31,
2009 and at December 31, 2009 we had no publicly announced repurchase plans or
programs.
  33


Item 6.  Selected
Financial Data
  (Dollars in thousands, except per share data)At December 31,Summary of Financial Condition
                      
                      2009
                      
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006
                      
                      
                      2005Cash
                      
                      $
                      6,283
                      
                      
                      $
                      3,810
                      
                      
                      $
                      4,445
                      
                      
                      $
                      7,986
                      
                      
                      $
                      8,318Investment
      securities
                      
                      
                      35,841
                      
                      
                      
                      75,371
                      
                      
                      
                      66,692
                      
                      
                      
                      129,776
                      
                      
                      
                      168,686Loans,
      net of allowances for loan losses
                      
                      
                      321,544
                      
                      
                      
                      322,535
                      
                      
                      
                      294,273
                      
                      
                      
                      249,272
                      
                      
                      
                      218,291Interest-bearing
      deposits and stock inFederal
      Home Loan Bank
                      
                      
                      18,934
                      
                      
                      
                      10,268
                      
                      
                      
                      18,357
                      
                      
                      
                      9,730
                      
                      
                      
                      13,401Other
      assets
                      
                      
                      58,961
                      
                      
                      
                      51,518
                      
                      
                      
                      43,024
                      
                      
                      
                      40,482
                      
                      
                      
                      40,673Total
      assets
                      
                      $
                      441,563
                      
                      
                      
                      463,502
                      
                      
                      
                      426,791
                      
                      
                      
                      437,246
                      
                      
                      
                      449,369Deposits
      noninterest-bearing
                      
                      $
                      29,531
                      
                      
                      $
                      22,070
                      
                      
                      $
                      20,429
                      
                      
                      $
                      19,905
                      
                      
                      $
                      18,788Deposits
      interest-bearing
                      
                      
                      308,850
                      
                      
                      
                      302,336
                      
                      
                      
                      294,317
                      
                      
                      
                      302,529
                      
                      
                      
                      320,563Borrowings
                      
                      
                      64,185
                      
                      
                      
                      97,735
                      
                      
                      
                      68,513
                      
                      
                      
                      74,683
                      
                      
                      
                      66,889Other
      liabilities
                      
                      
                      6,422
                      
                      
                      
                      7,585
                      
                      
                      
                      9,886
                      
                      
                      
                      7,005
                      
                      
                      
                      7,472Total
      liabilities
                      
                      
                      408,988
                      
                      
                      
                      429,726
                      
                      
                      
                      393,145
                      
                      
                      
                      404,122
                      
                      
                      
                      413,712Stockholders’
      equity
                      
                      
                      32,575
                      
                      
                      
                      33,776
                      
                      
                      
                      33,646
                      
                      
                      
                      33,124
                      
                      
                      
                      35,657Total
      liabilities and stockholders’ equity
                      
                      $
                      441,563
                      
                      
                      
                      463,502
                      
                      
                      
                      426,791
                      
                      
                      
                      437,246
                      
                      
                      
                      449,369
 
 Year Ended December 31,Summary of Earnings
                                  
                                  2009
                                  
                                  
                                  2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006
                                  
                                  
                                  2005Interest
      income
                                  
                                  $
                                  22,341
                                  
                                  
                                  $
                                  23,581
                                  
                                  
                                  $
                                  23,900
                                  
                                  
                                  $
                                  22,604
                                  
                                  
                                  $
                                  19,782Interest
      expense
                                  
                                  
                                  9,652
                                  
                                  
                                  
                                  11,788
                                  
                                  
                                  
                                  14,078
                                  
                                  
                                  
                                  13,803
                                  
                                  
                                  
                                  9,995Net
      interest income
                                  
                                  
                                  12,689
                                  
                                  
                                  
                                  11,793
                                  
                                  
                                  
                                  9,822
                                  
                                  
                                  
                                  8,801
                                  
                                  
                                  
                                  9,787Provision
      (credit) for loan losses
                                  
                                  
                                  2,180
                                  
                                  
                                  
                                  1,250
                                  
                                  
                                  
                                  (1,627
                                  )
                                  
                                  
                                  300
                                  
                                  
                                  
                                  (2,852
                                  )Other
      income
                                  
                                  
                                  5,536
                                  
                                  
                                  
                                  3,801
                                  
                                  
                                  
                                  3,494
                                  
                                  
                                  
                                  2,271
                                  
                                  
                                  
                                  4,115Other
      expense
                                  
                                  
                                  17,119
                                  
                                  
                                  
                                  14,384
                                  
                                  
                                  
                                  13,978
                                  
                                  
                                  
                                  13,175
                                  
                                  
                                  
                                  14,513(Loss)
      income before taxes
                                  
                                  
                                  (1,074
                                  )
                                  
                                  
                                  (40
                                  )
                                  
                                  
                                  965
                                  
                                  
                                  
                                  (2,403
                                  )
                                  
                                  
                                  2,241Income
      (tax benefit) taxes
                                  
                                  
                                  (810
                                  )
                                  
                                  
                                  (781
                                  )
                                  
                                  
                                  (219
                                  )
                                  
                                  
                                  (1,433
                                  )
                                  
                                  
                                  183Net
      (loss) income
                                  
                                  $
                                  (264
                                  )
                                  
                                  $
                                  741
                                  
                                  
                                  $
                                  1,184
                                  
                                  
                                  $
                                  (970
                                  )
                                  
                                  $
                                  2,058Basic
      (loss) earnings per share
                                  
                                  $
                                  (0.09
                                  )
                                  
                                  $
                                  0.25
                                  
                                  
                                  $
                                  0.39
                                  
                                  
                                  $
                                  (0.31
                                  )
                                  
                                  $
                                  0.65Diluted
      (loss)earnings per share
                                  
                                  $
                                  (0.09
                                  )
                                  
                                  $
                                  0.25
                                  
                                  
                                  $
                                  0.39
                                  
                                  
                                  $
                                  (0.31
                                  )
                                  
                                  $
                                  0.65Dividends
      declared per share
                                  
                                  $
                                  0.10
                                  
                                  
                                  $
                                  0.16
                                  
                                  
                                  $
                                  0.16
                                  
                                  
                                  $
                                  0.52
                                  
                                  
                                  $
                                  0.64Book
      value per share
                                  
                                  $
                                  10.90
                                  
                                  
                                  $
                                  11.30
                                  
                                  
                                  $
                                  11.26
                                  
                                  
                                  $
                                  10.85
                                  
                                  
                                  $
                                  11.23
  Year Ended December 31,Other Selected Data
                      
                      2009
                      
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006
                      
                      
                      2005Return
      on average assets
                      
                      
                      (0.06
                      )%
                      
                      
                      0.16
                      %
                      
                      
                      0.28
                      %
                      
                      
                      (0.22
                      )%
                      
                      
                      0.47
                      %Return
      on average equity
                      
                      
                      (0.79
                      )%
                      
                      
                      2.23
                      
                      
                      
                      3.63
                      
                      
                      
                      (2.85
                      )
                      
                      
                      5.40Ratio
      of average equity to average assets
                      
                      
                      7.05
                      
                      
                      
                      7.40
                      
                      
                      
                      7.67
                      
                      
                      
                      7.65
                      
                      
                      
                      8.77Dividend
      payout ratio (1)
                      
                      NM
                      
                      
                      
                      64.56
                      
                      
                      
                      41.03
                      
                      
                      NM
                      
                      
                      
                      98.46Number
      of full-service bank offices
                      
                      
                      13
                      
                      
                      
                      12
                      
                      
                      
                      10
                      
                      
                      
                      10
                      
                      
                      
                      10
 
 (1)
              Dividends
      per share declared divided by net income per
  share.
 NM = not
meaningful.
  34
  Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  Who We
Are
  Ameriana
Bancorp (the “Company”) is an Indiana chartered bank holding company organized
in 1987 by Ameriana Bank (the “Bank”).  The Company is subject to
regulation and supervision by the Federal Reserve Bank.  The Bank
began banking operations in 1890.  In June 2002, the Bank converted to
an Indiana savings bank and adopted the name, Ameriana Bank and Trust,
SB.  In July 2006, the Bank closed its Trust Department and adopted
the name “Americana Bank, SB.”  On June 1, 2009, the Bank converted to
an Indiana commercial bank and adopted its present name, “Americana
Bank.”  The charter conversion did not involve any significant
financial or regulatory changes and will not affect the Bank’s current
activities.  The Bank is subject to regulation and supervision by the
Federal Deposit Insurance Corporation (the “FDIC”), and the Indiana Department
of Financial Institutions (the “DFI”).  Our deposits are insured to
applicable limits by the Deposit Insurance Fund administered by the FDIC.
References in this Form 10-K to “we,” “us,” and “our” refer to Ameriana Bancorp
and/or the Bank, as appropriate.
  We are
headquartered in New Castle, Indiana.  We conduct business through our
main office at 2118 Bundy Avenue, New Castle, Indiana, through 12 branch offices
located in New Castle, Middletown, Knightstown, Morristown, Greenfield,
Anderson, Avon, McCordsville, Fishers, Carmel, Westfield and New Palestine,
Indiana, and through our loan production office in Carmel, 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.  On
July 1, 2009, AIA  purchased the book of business of Chapin-Hayworth
Insurance Agency Inc. located in New Castle, Indiana.  AFS had offered
insurance products through its ownership of an interest in Family Financial Life
Insurance Company (“Family Financial”), New Orleans, Louisiana, which offers a
full line of credit-related insurance products.  On May 22, 2009, the
Company announced that AFS had liquidated its 16.67% interest in Family
Financial, and recorded a pre-tax gain of $192,000 from the
transaction.  AFS also operates a brokerage facility in conjunction
with LPL Financial that provides non-bank investment product alternatives to its
customers and the general public.  A third Bank subsidiary, Ameriana
Investment Management, Inc. (“AIMI”), had managed part of the Company’s
investment portfolio.  Following a cost/benefit analysis, AIMI was
liquidated effective December 31, 2009, and the portfolio under management was
transferred to the Bank.  The Company holds a minority interest in a
limited partnership, House Investments, organized to acquire and manage real
estate investments, which qualify for federal tax credits.
  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 primarily in mortgage loans on single-family residences, multi-family,
construction loans, commercial real estate loans, and, to a lesser extent,
commercial and industrial loans, small business lending, home improvement, and
consumer loans.  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 from three months to seven years, interest-bearing
and non interest-bearing checking accounts, savings accounts and money market
accounts.  Our primary source of borrowings is FHLB
advances.  Through our subsidiaries, we engage in insurance and
investment and brokerage activities.
  Our
primary source of income is net interest income, which is the difference between
the interest income earned on our loan and investment portfolios and the
interest expense incurred on our deposits and borrowing
portfolios.  Our loan portfolio typically earns more interest than the
investment portfolio, and our deposits typically have a lower average rate than
FHLB advances.  Several factors affect our net interest
income.  These factors include the loan, investment, deposit, and
borrowing portfolio balances, their composition, the length of their maturity,
re-pricing characteristics, liquidity, credit, and interest rate risk, as well
as market and competitive conditions.
  35
  Financial Challenges,
Strategies and Results in Recent Years
  In 2007,
the Company produced net income of $1.2 million, which represented a $2.2
million improvement over the $1.0 million loss recorded in 2006.  Net
income in 2007 benefited from a $2.8 million settlement related to our
litigation against RLI Insurance Co. (“RLI”) over surety guarantees for certain
lease pools in which Ameriana Bank had previously invested.  The
positive impact from the RLI settlement in 2007 was offset in part by $1.1
million in charge-offs, most of which occurred later in the year when the
economic climate worsened.
  During
2007, the Bank continued its balance sheet restructuring strategy that was
initiated in late 2006 and involved principally the redeployment of funds from
lower-yielding investment securities into higher-yielding loans, and it was the
primary reason that net interest margin on a fully-taxable equivalent basis
improved 44 basis points from 2.29% for 2006 to 2.73% for 2007.  As a
result of this improvement in net interest margin, we were able to grow net
interest income on a fully-taxable equivalent basis by $1.2 million without the
benefit of balance sheet growth, as total assets actually were reduced by $10.5
million, or 2.4%.
  As part
of the Bank’s efforts to expand its commercial lending capabilities, we opened a
commercial lending center in the fast growing suburban area of Carmel, Indiana.
This office and the Bank’s continued emphasis on commercial lending contributed
to the loan growth realized during the year.  Also in 2007, our
re-branding of the Company included the roll-out of a new logo and image
campaign.  These new initiatives continue to provide significant value
to the Company moving forward.
  In 2008,
the Company recorded net income of $741,000, or $443,000 less than 2007 net
income that benefitted from the RLI litigation settlement.  Earnings
in 2008 were negatively impacted by an increase in credit issues related
primarily to worsening economic conditions.
  The
Company was successful in the continuation of its balance sheet growth strategy,
with total assets increasing by $36.7 million, or 8.6% to $463.5
million.  Coupled with this growth was a 35 basis point improvement in
the Company’s net interest margin on a fully-taxable equivalent basis to 3.08%
for 2008 from 2.73% a year earlier, which was accomplished primarily through a
significant reduction in the Bank’s funding costs.
  Loan
portfolio growth of $28.6 million, or 9.6% in 2008 followed the portfolio growth
of $45.1 million in 2007, and in both years was achieved primarily through our
greater commercial lending presence in the Indianapolis market.
  The
Bank’s Indianapolis metropolitan market retail expansion strategy was advanced
with the opening of banking centers in Fishers and West Carmel in the last
quarter of 2008, and in Westfield in May 2009.
  The
economic climate became progressively difficult through most of  2008,
as the world-wide financial crisis reached a peak in the second half of the
year.  The severity of this environment and its consequences to the
industry created many new formidable challenges for bankers.
  Executive Overview
of  2009
  The
Company recorded a net loss of $264,000, or $(0.09) per share for 2009, which
followed net income of $741,000, or $0.25 per share for 2008.  The
results for 2009 compared to 2008 were negatively impacted by higher credit
costs, higher FDIC premiums and a special assessment, and higher operating
expenses resulting primarily from the Bank’s retail expansion
strategy.  Following is additional summary information for the
year:
  ·
              The
      Company reduced its dividend from $0.04 per share to $0.01 per share in
      the third quarter.  Quarterly dividends totaled $0.10 per share
      for 2009.
 
 ·
              The
      Company’s tangible common equity ratio at December 31, 2009 was
      7.11%.
 
 ·
              At
      December 31, 2009, the Bank’s tier 1 leverage ratio was 8.27%, the tier 1
      risk-based capital ratio was 11.25%, and the total risk-based capital
      ratio was 12.51%.  All three ratios were considerably above the
      levels required under regulatory guidelines to be considered “well
      capitalized.”
 
 ·
              A
      5.0% improvement for 2009 in net interest income an a fully tax-equivalent
      basis resulted from higher average earnings assets, as the net interest
      margin of 3.08% was unchanged from
2008.
  36
 
 ·
              Through
      balance sheet restructuring and pricing strategies, the Company improved
      its interest rate spread on a fully tax-equivalent basis by 55 basis
      points from 3.05% at December 31, 2008 to 3.60% at December 31,
      2009.
 
 ·
              A
      $930,000 year-over-year increase in the provision for loan losses for 2009
      to $2.2 million resulted from the Bank’s efforts to strengthen the
      allowance for loan losses due to an increase in non-performing loans and
      charge-offs that related primarily to the continuing weak economic
      environment.
 
 ·
              Total
      nonperforming loans of $9.0 million, or 2.78% of total loans at December
      31, 2009, represented a $2.8 million increase from $6.2 million, or 1.91%
      of total loans at December 31,
2008.
 
 ·
              The
      allowance for loan losses of $4.0 million, or 1.23% of total loans at
      December 31, 2009, represented a $1.0 million increase over $3.0 million,
      or 0.92% of loans at December 31,
2008.
 
 ·
              Other
      real estate owned (“OREO”) at December 31, 2009 of $5.5 million was $1.6
      million higher than the total for the prior year end.  The total
      write-downs during 2009 of OREO still on the books at year end was
      $806,000.
 
 ·
              Other
      income of $5.5 million for 2009 was $1.7 million, or 45.6%, greater than
      the total of $3.8 million for 2008, and resulted primarily from $1.7
      million in gains from sales of investment securities, compared to $103,000
      during 2008.  Increases generated in various other categories of
      other income were offset by higher credit costs in
  2009.
 
 ·
              Other
      expense of $17.1 million for 2009 was $2.7 million, or 19.0%, higher than
      the total of $14.4 million for 2008, and was due primarily to the Bank’s
      Indianapolis retail expansion strategy, and a $797,000 increase in FDIC
      insurance expense due mostly to a higher industry-wide premium rate
      coupled with the one-time credit being exhausted earlier in the year, and
      the industry-wide second quarter special
  assessment.
 
 ·
              The
      income tax benefit of $810,000 with a pre-tax loss of $1.1 million for
      2009 was related primarily to a significant amount of tax-exempt income
      from bank-owned life insurance and tax-exempt interest from municipal
      securities and loans.
 
 Balance
sheet restructuring strategies implemented during the second half of 2009
resulted in a $21.9 million, or 4.7%, decrease in the Company’s total assets
from $463.5 million at December 31, 2008 to $441.6 million at December 31,
2009:
  ·
              Net
      loans receivable were $321.5 million at December 31, 2009, down slightly
      from $322.5 million at the end of 2008,as
      commercial loan demand remained weak and the Bank maintained the strategic
      change adopted earlier in the year of selling fixed-rate residential
      products in the secondary market.
 
 ·
              Although
      the 5.79% yield on the loan portfolio for 2009 was 58 basis points lower
      than 2008, the 5.87% weighted average interest rate for the loan portfolio
      at December 31, 2009 represented a decline of only 7 basis points during a
      low interest rate environment in 2009, compared to a 101 basis point
      reduction experienced in 2008.
 
 ·
              During
      2009, the Bank realized a $14.0 million, or 4.1%, growth in total deposits
      to $338.4 million, with a $23.5 million increase in non-maturity deposits
      partially offset by a $9.5 million decrease in certificate
      accounts.  The decrease in certificate balances was related
      primarily to the balance sheet restructuring initiative and included a
      Bank-planned reduction of $15.0 million from public funds
      accounts.  No brokered certificates of deposit were held at
      December 31, 2009.
 
 ·
              The
      Bank achieved a 74 basis point reduction in the weighted average cost of
      deposits to 1.50% at December 31, 2009 from 2.24% at the end of
      2008.
 
 ·
              A
      $39.5 million, or 52.4%, decrease in the investment portfolio during 2009
      to $35.8 million resulted primarily from the Bank’s balance sheet
      restructuring and $16.1 million of principal payments
      on mortgage-backed securities.  The Bank continues to sell
      municipal securities as part of its overall income tax strategy. As of
      December 31, 2009, the Company did not own Fannie Mae or Freddie Mac
      preferred stock, and did not own private-label mortgage-backed
      securities.
  37
 
 ·
              As
      a matter of policy, the Company has not originated or purchased sub-prime
      loans.
 
 ·
              Using
      funds from the 2009 growth in deposits and reduction in the size of the
      investment portfolio, the Bank was able to reduce borrowings from the
      Federal Home Loan Bank of Indianapolis by $33.6 million, and increase
      short-term investments in interest-bearing deposits by $8.7 million from
      the totals at the end of the prior
year.
  Regulatory
Action
 
 On September 28, 2009, following a
joint examination by and discussions with the FDIC and the Indiana Department of
Financial Institutions, the Board of Directors of the Bank adopted a resolution
agreeing to, among other things:
 
 ·
              Adopt
      a capital plan to increase its Tier 1 Leverage Ratio to 7.75% by December
      31, 2009 and to 8.00% at March 31, 2010 and to increase its Total
      Risk-Based Capital Ratio to 12.00% by December 31,
  2009;
 ·
              Adopt
      a written plan to less classified
assets;
 ·
              Formulate
      and implement a written profit
plan;
 ·
              Receive
      prior written consent from the FDIC and the Indiana Department of
      Financial Institutions before declaring or paying any
      dividends;
 ·
              Strive
      to reduce total holdings of bank-owned life insurance;
  and
 ·
              Furnish
      quarterly progress reports regarding the Bank’s compliance with all
      provisions of the resolution.
 
 Strategic
Summary
  The
current economic downturn has created a challenging operating environment for
all businesses, and, in particular, the financial services industry. Management
continues its focus on maintaining and improving overall credit quality,
liquidity and capital. Earnings pressure is expected to continue as the
deterioration in credit quality resulting from the weak economy is likely to
continue.  Competition for deposits continues to be intense resulting
in higher deposit rates while yields on interest earning assets continue to
experience downward pressure. Management is also focused on reducing
non-interest expense through aggressive cost control measures including freezing
hiring, job restructuring and eliminating certain discretionary
expenditures.
  Achievement
of the Company’s financial objectives will require obtaining new loans and
deposits in our traditional markets, generating significant loan and deposit
growth from our new offices in Hamilton County and continuing the expansion of
our commercial lending strategy in the greater Indianapolis metropolitan
area.
  We
believe the long-term success of the Company is dependent on its ability to
provide its customers with financial advice and solutions that assist them in
achieving their goals.  We will accomplish this 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 advice.  We believe these qualities will
differentiate us from our competitors and increase profitability and shareholder
value.
  To meet
our goals, we have undertaken the following strategies:
  Build Relationships with Our
Customers.Banking is essentially a transaction
business.  Nevertheless, numerous industry studies have shown that
customers want a relationship with their bank and banker based on trust and
sound advice.  Based on this information, we are focusing our efforts
on building relationships and improving our products per
household.
  38
  Achieve Superior Customer
Service.We continually measure customer satisfaction through
post-transaction surveys.  Our evaluations include telephone and
in-person customer surveys, as well as other in-store performance metrics.We have enhanced our
efforts to improve our service by establishing a training department and
formalizing our service standards.
  Develop and Deliver Fully Integrated
Financial Advice and Comprehensive Solutions to Meet Customer Life
Events.We are re-packaging our products around customer “life
events” such as planning for retirement, buying a home and saving for college
education rather than traditional transaction accounts, savings and consumer
loan products.
  Establish Strong Brand
Awareness.We believe it is important to create a value
proposition that is relevant, understood and valued by our
customers.  Accordingly, we are continuing our efforts through our
marketing, customer communications, training, and design of our Banking Centers
to position Ameriana Bank as a premier service brand.
  Use Technology to Expand Our
Customer Base.We continue to enhance our electronic delivery
of products and services to our customers.  Our technology-based
services include business sweep products and cash management services, business
remote item capture and on-line consumer loan and account
opening.  These services will allow us to reach more customers
effectively and conveniently.
  Develop an Innovative Delivery
System.We believe our banking centers must evolve into
“Financial Stores” that showcase our financial products and offer our customers
an environment that is conducive to interacting with knowledgeable Ameriana Bank
associates and with our technology-based products.
  Increase Market Share in Existing
Markets and Expand into New Markets.  We
believe there is significant opportunity to increase our products per household
with existing customers and attract new customers in our existing and new
markets.  Further, we believe there are opportunities to gain market
share in new markets and have developed an expansion strategy to accomplish
this.  As part of our expansion strategy, the Company opened three new
full-service banking centers in Hamilton County, which lies just north of Marion
County and Indianapolis. The new offices in Fishers, Carmel, and Westfield
opened in October 2008, December 2008, and May 2009, respectively.  In
addition, the Company has purchased a site in Plainfield, which will enhance our
presence on the west side of Indianapolis and our existing office in Avon. We
plan to begin construction of the Plainfield office in 2011.  Until
economic conditions improve, the Bank will not acquire additional locations for
development of full-service banking centers.
  Critical Accounting
Policies
  The
accounting and reporting policies of the Company are maintained in accordance
with accounting principles generally accepted in the United States and conform
to general practices within the banking industry. The Company’s significant
accounting policies are described in detail in the Notes to the Company’s
Consolidated Financial Statements. The preparation of financial statements in
conformity with generally accepted accounting principles (“GAAP”) requires
management to make estimates and assumptions. The financial position and results
of operations 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.
  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 credit losses each month 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, regulatory guidance and economic
factors.  This evaluation is inherently subjective, as it requires the
use of significant management estimates.  Many factors can affect
management’s estimates of specific and expected losses, including volatility of
default probabilities, rating migrations, loss severity and economic and
political conditions.  The allowance is increased through provisions
charged to operating earnings and reduced by net charge-offs.
  The
Company determines the amount of the allowance based on relative risk
characteristics of the loan portfolio.  The allowance recorded for
commercial loans is based on reviews of individual credit relationships and an
analysis of the migration of commercial loans and actual loss
experience.  The allowance recorded for non-commercial 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.
  39
  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 and lease 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 judgmental nature of individual loan evaluations, collateral assessments and
the interpretation of economic trends.  Volatility of economic or
customer-specific conditions affecting the identification and estimation of
losses for larger, non-homogeneous credits and the sensitivity of assumptions
utilized to establish allowances for homogenous groups of loans are among other
factors.  The Company estimates a range of inherent losses related to
the existence of these exposures.  The estimates are based upon the
Company’s evaluation of risk associated with the commercial and consumer
allowance levels and the estimated impact of the current economic
environment.
  Mortgage Servicing
Rights.  Mortgage servicing rights (“MSRs”) associated with
loans originated and sold, where servicing is retained, are capitalized and
included in other intangible 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
in SFAS No. 157 “Fair Value Measurement” (“SFAS No. 157”), 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 intangibles
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 assets 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, available tax strategies, 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 December 31, 2009 and
December 31, 2008, 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.
  40
 
 We
believe our tax policies and practices are critical accounting policies because
the determination of our tax provision and current and deferred tax assets and
liabilities have a material impact our net income and the carrying value of our
assets.  We believe our tax liabilities and assets are adequate and
are properly recorded in the consolidated financial statements at December 31,
2009.
  FINANCIAL
CONDITION
  Total
assets decreased $21.9 million, or 4.7%, to $441.6 million at December 31, 2009
from $463.5 million at December 31, 2008 primarily due to balance sheet
restructuring strategies that were implemented during the second half of
2009.
  Cash and Cash
Equivalents
  Total
cash and cash equivalents increased $11.2 million to $19.6 million at December
31, 2009 from $8.4 million at December 31, 2008.  Cash on hand and in
other institutions increased $2.5 million, or 64.9%, to $6.3 million at December
31, 2009.  This change was primarily due to a $1.9 million increase in
our book balance for the noninterest-earning piece of our Federal Reserve Bank
account, which represents electronic deposits not yet
credited.  Interest-bearing deposits increased $8.7 million, or
186.8%, to $13.3 million at December 31, 2009, as the Bank deposited some of the
cash proceeds from the December sales of investment securities into its
overnight investment account at the Federal Reserve Bank.
  Securities
  Investment
securities available for sale decreased 52.4% to $35.8 million at December 31,
2009 from $75.3 million at December 31, 2008.  This $39.5 million
decrease was due primarily to sales of municipal securities, and sales and
principal repayments on mortgage-backed securities that exceeded new
purchases.  Municipal securities decreased to $3.4 million through
total sales of $15.2 million that were designed primarily to support the Bank’s
income tax strategies.  Principal repayments and sales, offset by
$25.6 million of purchases, reduced the total fair value of Ginnie Mae and GSE
mortgage-backed pass-through securities by $30.3 million to $25.0 million at
December 31, 2009.  The 2009 sales related mostly to the balance sheet
restructuring strategies.
 
 All
mortgage-backed securities at December 31, 2009 are insured by either Ginnie
Mae, Fannie Mae or Freddie Mac.  At December 31, 2009, all investments
remained classified as available for sale.  All of our investments are
evaluated for other-than-temporary impairment, and such impairment, if any, is
recognized as a charge to earnings.  There were no other than
temporarily impaired investment securities as of December 31, 2009.
  The
following table identifies changes in the investment securities carrying
values:
  (Dollars
in thousands)
 2009
                            
                            
                            2008
                            
                            
                            $ Change
                            
                            
                            % ChangeDecember
      31:Ginnie
      Mae and GSE mortgage-backed pass-through securities
                            
                            $
                            24,992
                            
                            
                            $
                            55,289
                            
                            
                            $
                            (30,297
                            )
                            
                            
                            (54.80
                            )%Ginnie
      Mae collateralized mortgage obligations
                            
                            
                            5,820
                            
                            
                            
                            —
                            
                            
                            
                            5,820
                            
                            
                            
                            —Municipal
      securities
                            
                            
                            3,431
                            
                            
                            
                            18,557
                            
                            
                            
                            (15,126
                            )
                            
                            
                            (81.51
                            )%Mutual
      funds
                            
                            
                            1,598
                            
                            
                            
                            1,525
                            
                            
                            
                            73
                            
                            
                            
                            4.79
                            %Totals
                            
                            $
                            35,841
                            
                            
                            $
                            75,371
                            
                            
                            $
                            (39,530
                            )
                            
                            
                            (52.45
                            )%
  41
  
 The
following table identifies the percentage composition of the investment
securities:
 
 2009
                        
                        
                        2008
                        
                        
                        2007December
      31:Ginnie
      Mae and GSE mortgage-backed pass-through securities
                        
                        
                        69.7
                        %
                        
                        
                        73.4
                        %
                        
                        
                        47.2
                        %Ginnie
      Mae collateralized mortgage obligations
                        
                        
                        16.2
                        
                        
                        
                        —
                        
                        
                        
                        —Federal
      agencies
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        9.0Municipal
      securities
                        
                        
                        9.6
                        
                        
                        
                        24.6
                        
                        
                        
                        41.5Mutual
      funds
                        
                        
                        4.5
                        
                        
                        
                        2.0
                        
                        
                        
                        2.3Totals
                        
                        
                        100.0
                        %
                        
                        
                        100.0
                        %
                        
                        
                        100.0
                        %
 
 See Note
3 to the “Consolidated Financial Statements” for more information on investment
securities.
  Loans
  Net loans
receivable totaled $321.5 million at December 31, 2009, a decrease of $1.0
million, or 0.3%, from $322.5 million at December 31, 2008.  The lack
of portfolio growth was due primarily to the impact of the weak economy on
commercial loan demand, coupled with management’s decision to sell a significant
portion of  new single-family mortgage loans in the secondary
market.
  Residential
real estate loans increased $482,000 to $161.0 million at December 31, 2009,
from $160.6 million at December 31, 2008.  New production
involved  a mix of owner-occupied single-family and investment
property loans, as well as a blend of products that included both fixed-rate and
variable-rate pricing.  During 2009, the Bank originated $56.8 million
in residential real estate loans, including home equity loans, and sold $19.2
million into the secondary market.  Additionally, the Bank acquired
$9.5 million of in-market loans through a broker.
  Commercial
real estate loans increased $6.0 million to $104.2 million at December 31, 2009,
from $98.2 million at December 31, 2008.  Commercial loans and leases
increased $2.4 million to $23.6 million at December 31, 2009 from $21.2 million
at December 31, 2008.  The overall growth in these two categories of
commercial loans for 2009 was due to increased penetration by our lenders in the
local market areas, particularly the Indianapolis market.  Commercial
real estate and other commercial loans added in 2009 totaled $33.9 million, with
$29.3 million in originations and $4.8 million in purchases.
  The
Bank’s construction loans, which consist primarily of commercial properties,
decreased $8.3 million to $30.9 million during 2009 due primarily to the weaker
economy.  Construction loans added in 2009 totaled $13.9
million.
  On
December 31, 2009, the Bank had $2.8 million in loans to local municipalities,
compared to $2.2 million at December 31, 2008.  Municipal loans are
added through a competitive bid process.  New loans totaled $2.1
million in 2009, with $1.3 million repaid before the end of the
year.
  Consumer
loans declined $421,000 to $4.0 million at December 31, 2009 from $4.4 million
at December 31, 2008.  The decrease was primarily due to a net paydown
of $401,000 in automobile loan balances that was due to decreased demand
resulting primarily from poor economic conditions.  The Bank
originated $2.2 million of consumer loans in 2009.
  New loan
volume in 2009 totaled $118.4 million, compared to $113.3 million in
2008.  New residential loans, including $3.9 million of construction
loans, increased to $70.2 million in 2009 from $47.6 million in
2008.  Commercial loan, commercial real estate, commercial
construction, and municipal loan additions in 2009 totaled $46.0 million
compared to $63.3 million in 2008.  New consumer loans totaled $2.2
million in 2009 compared to $2.4 million in 2008.
  We
generally retain loan servicing on loans sold.  Loans we serviced for
investors, primarily Freddie Mac, Fannie Mae and the Federal Home Loan Bank of
Indianapolis, totaled approximately $115.5 million at December 31, 2009 compared
to $124.9 million at December 31, 2008.  The decrease resulted from a
continued weak residential mortgage market during 2009 with pay downs and
payoffs on existing serviced loans exceeding the dollar amount of new serviced
loans.  Loans sold that we subsequently service generate a steady
source of fee income, with servicing fees ranging from 0.25% to 0.375% per annum
of the loan principal amount.
  42
  Credit
Quality
  Nonperforming
loans increased $2.8 million to $9.1 million at December 31, 2009 from $6.2
million at December 31, 2008.  The increase was due primarily to the
classifications of a retail center loan in Fishers, Indiana, and a
warehouse/office building and adjoining land loan in Indianapolis totaling $3.5
million, and an increase on our single-family residential nonperforming
loans.
  We
recorded net charge-offs of $1.2 million in 2009, compared to net charge-offs of
$936,000 in 2008.  Total charge-offs were $1.2 million and $1.1
million in 2009 and 2008, respectively.  Total recoveries in 2009 were
$64,000 while total recoveries were $115,000 in 2008.
  The
allowance for loan losses as a percent of loans was 1.23% at December 31, 2009
and 0.92% at December 31, 2008.  Although there was a significant
increase in nonperforming loans in the Bank’s loan portfolio during 2009 due
primarily to the continuing weak economy, as a result of our review of
collateral positions and historic loss ratios, management believes that the
allowance for loan losses is adequate to cover all incurred and probable losses
inherent in the portfolio at December 31, 2009.
  Goodwill
  The
$85,000 increase in goodwill from $564,000 at December 31, 2008 to $649,000 at
December 31, 2009 resulted from the June 30, 2009 purchase of an insurance
agency book of business.  $457,000 of the goodwill reported for both
dates relates to deposits associated with a banking center acquired on February
27, 1998.  The results of the Bank’s impairment tests have reflected a
fair value for the deposits at this banking center that exceeds the goodwill,
and a fair value of the two  insurance agency books of business
purchased that exceeds the associated goodwill.
  Cash Value of Life
Insurance
  We have
investments in life insurance on employees and directors, with a balance or cash
surrender value of $24.5 million and $23.7 million, respectively, at December
31, 2009 and 2008.  The majority of these policies were purchased in
1999.  Some policies with lower returns were exchanged in 2007 as part
of a restructuring of the program.  The nontaxable increase in cash
surrender value of life insurance was $869,000 in 2009, compared to $892,000 in
2008.
  Deposits
  The
following table shows deposit changes by category:
  (Dollars
in thousands)
 2009
                              
                              
                              2008
                              
                              
                              $ Change
                              
                              
                              % ChangeDecember
      31,Noninterest-bearing
      deposits
                              
                              $
                              29,531
                              
                              
                              $
                              22,071
                              
                              
                              $
                              7,460
                              
                              
                              
                              33.8
                              %Savings
      deposits
                              
                              
                              24,522
                              
                              
                              
                              21,884
                              
                              
                              
                              2,638
                              
                              
                              
                              12.1NOW
      deposits
                              
                              
                              74,851
                              
                              
                              
                              62,402
                              
                              
                              
                              12,449
                              
                              
                              
                              20.0Money
      market deposits
                              
                              
                              26,584
                              
                              
                              
                              25,645
                              
                              
                              
                              939
                              
                              
                              
                              3.7Certificates
      $100,000 and more
                              
                              
                              52,515
                              
                              
                              
                              64,492
                              
                              
                              
                              (11,977
                              )
                              
                              
                              (18.6
                              )Other
      certificates
                              
                              
                              130,378
                              
                              
                              
                              127,912
                              
                              
                              
                              2,466
                              
                              
                              
                              1.9Totals
                              
                              $
                              338,331
                              
                              
                              $
                              324,406
                              
                              
                              $
                              13,975
                              
                              
                              
                              4.3
                              %
 
 Non-maturity
deposits increased $23.5 million, or 17.8%, to $155.5 million at December 31,
2009 from $132.0 million at December 31, 2008.  $19.9 million of the
2009 increase related to checking accounts, noninterest-bearing and
interest-bearing, with $8.0 million representing growth in public funds checking
balances.  The growth in non-maturity deposits resulted primarily from
the Bank’s increased focus on sales activities coupled with its banking center
expansion strategy, and the reaction of individuals to safer investments due to
market conditions related to the depressed economic
environment.
  43
  Certificates
of deposit decreased $9.5 million primarily as a result of our decision not to
renew three State of Indiana public funds investments totaling $15.0 million, as
part the Bank’s balance sheet restructuring strategy implemented during the
second half of 2009.
  Borrowings
  Borrowings
decreased $33.6 million to $64.2 million at December 31, 2009 from $97.7 million
at December 31, 2008 as the Bank relied more on core deposits to fund portfolio
lending, and also due to the restructuring strategy implemented in the second
half of the year that resulted in a reduction in the size of the Bank’s balance
sheet.  At December 31, 2009, our borrowings consisted of FHLB
advances totaling $46.4 million, one $7.5 million repurchase agreement, and
subordinated debentures in the amount of $10.3 million.  The
subordinated debentures were issued on March 7, 2006, and mature on March 7,
2036.
  Yields Earned and Rates
Paid
  The
following tables set forth the weighted average yields earned on
interest-earning assets and the weighted average interest rates paid on the
interest-bearing liabilities, together with the net yield on interest-earning
assets.  Yields are calculated on a tax-equivalent
basis.  The tax-equivalent adjustment was $256,000, $537,000 and
$666,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
  Year Ended December 31,Weighted
      Average Yield:
                                        
                                        2009
                                        
                                        
                                        2008
                                        
                                        
                                        2007Loans
                                        
                                        
                                        5.79
                                        %
                                        
                                        
                                        6.37
                                        %
                                        
                                        
                                        7.06
                                        %Mortgage-backed
      pass through and collateralized mortgage obligations
                                        
                                        
                                        4.70
                                        
                                        
                                        
                                        5.04
                                        
                                        
                                        
                                        4.80Securities
      – taxable
                                        
                                        
                                        4.15
                                        
                                        
                                        
                                        5.42
                                        
                                        
                                        
                                        3.69Securities
      – tax-exempt
                                        
                                        
                                        5.89
                                        
                                        
                                        
                                        5.66
                                        
                                        
                                        
                                        5.61Other
      interest-earning assets
                                        
                                        
                                        0.83
                                        
                                        
                                        
                                        2.92
                                        
                                        
                                        
                                        4.74All
      interest-earning assets
                                        
                                        
                                        5.38
                                        
                                        
                                        
                                        6.03
                                        
                                        
                                        
                                        6.40Weighted
      Average Cost:Demand
      deposits, money market deposit accounts, and savings
                                        
                                        
                                        0.68
                                        
                                        
                                        
                                        1.31
                                        
                                        
                                        
                                        2.37Certificates
      of deposit
                                        
                                        
                                        2.84
                                        
                                        
                                        
                                        3.63
                                        
                                        
                                        
                                        4.48Federal
      Home Loan Bank advances, repurchase agreement and note
    payable
                                        
                                        
                                        4.11
                                        
                                        
                                        
                                        4.21
                                        
                                        
                                        
                                        4.89All
      interest-bearing liabilities
                                        
                                        
                                        2.38
                                        
                                        
                                        
                                        3.07
                                        
                                        
                                        
                                        3.87Interest
      rate spread (spread between weighted average yield on
      all Interest-earning assets and all interest-bearing
      liabilities)
                                        
                                        
                                        3.00
                                        
                                        
                                        
                                        2.96
                                        
                                        
                                        
                                        2.53Net
      Tax Equivalent Yield (net interest income as a percentage of average
      interest-earning assets)
                                        
                                        
                                        3.08
                                        
                                        
                                        
                                        3.08
                                        
                                        
                                        
                                        2.73
 
 At December 31,Weighted Average Interest Rates:
                      
                      2009
                      
                      
                      2008
                      
                      
                      2007Loans
                      
                      
                      5.87
                      %
                      
                      
                      5.94
                      %
                      
                      
                      6.95
                      %Mortgage-backed
      pass through and collateralized mortgage obligations
                      
                      
                      4.35
                      
                      
                      
                      5.10
                      
                      
                      
                      4.89Securities
      – taxable
                      
                      
                      3.61
                      
                      
                      
                      4.10
                      
                      
                      
                      5.05Securities
      – tax-exempt
                      
                      
                      6.00
                      
                      
                      
                      5.72
                      
                      
                      
                      5.56Other
      earning assets
                      
                      
                      0.77
                      
                      
                      
                      2.29
                      
                      
                      
                      4.49Total
      interest-earning assets
                      
                      
                      5.49
                      
                      
                      
                      5.72
                      
                      
                      
                      6.52Demand
      deposits, money market deposit accounts, and savings
                      
                      
                      0.36
                      
                      
                      
                      0.66
                      
                      
                      
                      2.30Certificates
      of deposit
                      
                      
                      2.46
                      
                      
                      
                      3.28
                      
                      
                      
                      4.31Federal
      Home Loan Bank advances, repurchase agreement, andsubordinated
      debentures
                      
                      
                      3.97
                      
                      
                      
                      4.19
                      
                      
                      
                      4.61Total
      interest-bearing liabilities
                      
                      
                      1.89
                      
                      
                      
                      2.67
                      
                      
                      
                      3.70Interest
      rate spread
                      
                      
                      3.60
                      
                      
                      
                      3.05
                      
                      
                      
                      2.82
  44
  Rate/Volume
Analysis
 
 The
following table sets forth certain information regarding changes in interest
income, interest expense and net interest income for the periods
indicated.  For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to: (1) changes in volume (changes in volume multiplied by old rate) and (2)
changes in rate (changes in rate multiplied by old volume).  For
purposes of this table, changes attributable to changes in both rate and volume
that cannot be segregated have been allocated proportionally based on the
changes due to the rate and the changes due to volume.  No material
amounts of loan fees or out-of-period interest are included in the
table.  Non-accrual loans were not excluded in the
calculations.  The information shown below was adjusted for the
tax-equivalent benefit of bank qualified non-taxable municipal securities and
municipal loans.  The tax equivalent adjustment was $256,000, $537,000
and $666,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
  Year Ended December 31,2009 vs. 2008
                                      
                                      
                                      2008 vs. 2007Increase (Decrease)
                                        Due to Changes in
                                      
                                      
                                      
                                      
                                      
                                      Increase (Decrease)
                                        Due to Changes inVolume
                                      
                                      
                                      Rate
                                      
                                      
                                      Net
                                        Change
                                      
                                      
                                      Volume
                                      
                                      
                                      Rate
                                      
                                      
                                      Net
                                        Change(In thousands)Interest
      income:Loans
                                      
                                      $
                                      1,550
                                      
                                      
                                      $
                                      (1,939
                                      )
                                      
                                      $
                                      (389
                                      )
                                      
                                      $
                                      2,612
                                      
                                      
                                      $
                                      (2,166
                                      )
                                      
                                      $
                                      446Mortgage-backed
      securities
                                      
                                      
                                      163
                                      
                                      
                                      
                                      (165
                                      )
                                      
                                      
                                      (2
                                      )
                                      
                                      
                                      490
                                      
                                      
                                      
                                      108
                                      
                                      
                                      
                                      598Securities
      – taxable
                                      
                                      
                                      (118
                                      )
                                      
                                      
                                      (41
                                      )
                                      
                                      
                                      (159
                                      )
                                      
                                      
                                      (881
                                      )
                                      
                                      
                                      93
                                      
                                      
                                      
                                      (788
                                      )Securities
      – tax-exempt
                                      
                                      
                                      (718
                                      )
                                      
                                      
                                      23
                                      
                                      
                                      
                                      (695
                                      )
                                      
                                      
                                      (608
                                      )
                                      
                                      
                                      11
                                      
                                      
                                      
                                      (597
                                      )Other
      interest-earning assets
                                      
                                      
                                      217
                                      
                                      
                                      
                                      (493
                                      )
                                      
                                      
                                      (276
                                      )
                                      
                                      
                                      188
                                      
                                      
                                      
                                      (295
                                      )
                                      
                                      
                                      (107
                                      )Total
      interest-earning assets
                                      
                                      
                                      1,094
                                      
                                      
                                      
                                      (2,615
                                      )
                                      
                                      
                                      (1,521
                                      )
                                      
                                      
                                      1,801
                                      
                                      
                                      
                                      (2,249
                                      )
                                      
                                      
                                      (448
                                      )Interest
      expense:Demand
      deposits and savings
                                      
                                      
                                      220
                                      
                                      
                                      
                                      (838
                                      )
                                      
                                      
                                      (618
                                      )
                                      
                                      
                                      (29
                                      )
                                      
                                      
                                      (1,227
                                      )
                                      
                                      
                                      (1,256
                                      )Certificates
      of deposits
                                      
                                      
                                      532
                                      
                                      
                                      
                                      (1,537
                                      )
                                      
                                      
                                      (1,005
                                      )
                                      
                                      
                                      (179
                                      )
                                      
                                      
                                      (1,509
                                      )
                                      
                                      
                                      (1,688
                                      )FHLB
      advances, repurchase agreement, note payable, and subordinated
      debentures
                                      
                                      
                                      (433
                                      )
                                      
                                      
                                      (80
                                      )
                                      
                                      
                                      (513
                                      )
                                      
                                      
                                      1,264
                                      
                                      
                                      
                                      (610
                                      )
                                      
                                      
                                      654Total
      interest-bearing liabilities
                                      
                                      
                                      319
                                      
                                      
                                      
                                      (2,455
                                      )
                                      
                                      
                                      (2,136
                                      )
                                      
                                      
                                      1,056
                                      
                                      
                                      
                                      (3,346
                                      )
                                      
                                      
                                      (2,290
                                      )Change
      in net interest income
                                      
                                      $
                                      775
                                      
                                      
                                      $
                                      (160
                                      )
                                      
                                      $
                                      615
                                      
                                      
                                      $
                                      745
                                      
                                      
                                      $
                                      1,097
                                      
                                      
                                      $
                                      1,842
 
 Shareholders’
Equity
 
 Total
shareholders’ equity of $32.6 million at December 31, 2009 was $1.2 million
lower than at December 31, 2008.  This decrease included a $639,000
change in the accumulated other comprehensive income (loss) component of equity
that was due primarily to the Bank’s 2009 investment portfolio strategies that
resulted in realizing $1.7 million in net gains from the sales of
securities.  Total shareholders’ equity was also reduced in 2009 by a
$264,000 net loss and the payment of $299,000 in dividends.
  45
 
 RESULTS OF
OPERATIONS
 
 2009 Compared to
2008
  Net
Income
  The
Company recorded a net loss of $264,000for 2009, or $(0.09) per
diluted share, compared to net income of $741,000, or $0.25 per diluted share,
for 2008.  This decrease of $1.0 million was due primarily to higher
credit costs resulting from continuing weak economic conditions, higher FDIC
insurance premiums and assessments, and higher operating expenses resulting from
adding de novo banking centers.  The following is a summary of changes
in the components of net income for 2009 compared to 2008:
  ·
              The
      Company produced a $896,000, or 7.6%, increase in net interest income that
      resulted from a 5.0% growth in average earning assets.  The
      increase in net interest income was 5.0% on a tax equivalent basis, as the
      net interest margin was unchanged at
3.08%.
  ·
              A
      provision for loan losses of $2.2 million was recorded during 2009,
      compared to $1.3 million for the same period of 2008, with
      an  increase of $930,000.
  ·
              Other
      income for 2009 was $5.5 million, a $1.7 million, or 45.6% improvement
      over the $3.8 million recorded for 2008, and was due primarily to gains on
      sales of investment securities.
  ·
              $17.2
      million in other expense for 2009 was $2.7 million, or 19.0%, higher than
      the total for 2008.
  ·
              The
      income tax benefit of $810,000 for 2009 resulted from the pre-tax loss of
      $1.1 million coupled with the significant amount of tax-exempt income from
      BOLI, municipal securities and municipal loans.  The income tax
      benefit of $781,000 for 2008 included $150,000 related to a favorable tax
      court ruling, and was also positively impacted by a significant amount of
      tax-exempt municipal securities and BOLI
income.
  For a
quarterly breakdown of earnings, see Note 18 to the “Consolidated Financial
Statements.”
  Net Interest
Income
  We derive
the majority of our income from net interest income.  The following
table shows a breakdown of net interest income on a tax equivalent basis for
2009 compared to 2008.  The tax equivalent adjustment was $256,000 and
$537,000 for the years ended December 31, 2009 and 2008, respectively, based on
a tax rate of 34%.
  (Dollars in
      thousands)Years ended December 31,
                              
                              2009
                              
                              
                              2008Interest
                              
                              
                              Yield/Rate
                              
                              
                              Interest
                              
                              
                              Yield/Rate
                              
                              
                              ChangeInterest
      and fees on loans
                              
                              $
                              19,434
                              
                              
                              
                              5.79
                              %
                              
                              $
                              19,823
                              
                              
                              
                              6.37
                              %
                              
                              $
                              (450
                              )Other
      interest income
                              
                              
                              3,163
                              
                              
                              
                              3.74
                              
                              
                              
                              4,295
                              
                              
                              
                              4.83
                              
                              
                              
                              (1,071
                              )Total
      interest income
                              
                              
                              22,597
                              
                              
                              
                              5.38
                              
                              
                              
                              24,118
                              
                              
                              
                              6.03
                              
                              
                              
                              (1,521
                              )Interest
      on deposits
                              
                              
                              6,406
                              
                              
                              
                              1.96
                              
                              
                              
                              8,029
                              
                              
                              
                              2.72
                              
                              
                              
                              (1,623
                              )Interest
      on borrowings
                              
                              
                              3,246
                              
                              
                              
                              4.11
                              
                              
                              
                              3,759
                              
                              
                              
                              4.21
                              
                              
                              
                              (513
                              )Total
      interest expense
                              
                              
                              9,652
                              
                              
                              
                              2.38
                              
                              
                              
                              11,788
                              
                              
                              
                              3.07
                              
                              
                              
                              (2,136
                              )Net interest income
                              
                              
                              12,945
                              
                              
                              
                              —
                              
                              
                              
                              12,330
                              
                              
                              
                              —
                              
                              
                              $
                              615Net
      interest spread
                              
                              
                              
                              
                              
                              
                              3.00
                              %
                              
                              
                              —
                              
                              
                              
                              2.96
                              %Net interest margin
                              
                              
                              
                              
                              
                              
                              3.08
                              %
                              
                              
                              —
                              
                              
                              
                              3.08
                              %
 
 The
growth in net interest income, as shown in the table above, benefited from
certain market conditions in 2009 that allowed the Bank to produce a higher
average balance of earning assets and decrease its cost of funds, primarily
through the repricing of deposit accounts in a relatively stable low interest
rate environment.  Our interest-bearing liabilities have shorter
overall maturities and reprice more frequently to market conditions than our
interest-earning assets.  For a discussion on interest rate risk see
“Interest Rate
Risk.”
  46
  Tax-exempt
interest for 2009 was $514,000 compared to $1.1 million for
2008.  Tax-exempt interest is primarily from bank-qualified municipal
securities and municipal loans.  Total interest income on a
tax-equivalent basis of $22.6 million for 2009 represented a decrease of$1.5 compared to $24.1
million for 2008.  This reduction resulted primarily from the low
interest rate environment in 2009 that led to a reduced average return on
earning assets, which was accompanied by an even greater reduction in the
average cost of interest-bearing liabilities.  Total interest expense
for 2009 decreased $2.1 million compared to 2008, as the Bank took advantage of
market opportunities to reprice and sharply reduce its cost of interest-bearing
deposits, and reduced total borrowings as part of its balance sheet
restructuring strategy.  For further information see “– Financial Condition – Rate/Volume
Analysis.”
  Provision for Loan
Losses
  The
provision for loan losses represents the current period credit or cost
associated with maintaining an appropriate allowance for loan
losses.  Periodic fluctuations in the provision for loan losses result
from management’s assessment of the adequacy of the allowance for loan
losses.  The allowance for loan losses is dependent upon many factors,
including loan growth, net charge-offs, changes in the composition of the loan
portfolio, delinquencies, assessment by management, third parties and banking
regulators of the quality of the loan portfolio, the value of the underlying
collateral on problem loans and the general economic conditions in our market
area.  We believe the allowance for loan losses is adequate to cover
losses inherent in the loan portfolio as calculated in accordance with generally
accepted accounting principles.
  We had a
provision for loan losses of $2.2 million for 2009 compared to a provision of
$1.3 million for 2008.  The provisions for both 2009 and 2008
reflected the increase in nonperforming loans and charge-offs, and the
increasing pressure of current economic conditions on credit
quality.   The allowance to total loans ratio was 1.23% at
December 31, 2009, compared to 0.92% at December 31, 2008.
  Other
Income
  The $1.7
million increase in total other income in 2009 as compared to 2008 resulted
primarily from the following items:
  ·
              A
      $133,000, or 11.8%, increase in brokerage and insurance commissions that
      resulted mostly from the mid-year acquisition of the book of business of a
      local insurance agency;
  ·
              A
      net gain of $1.7 million from $58.6 million in sales of available-for-sale
      investment securities in 2009, compared to a net gain of $103,000 in 2008
      from $9.3 million in sales.  The 2009 sales related mostly to
      the balance sheet restructuring strategies implemented in the second half
      of the year;
 
 ·
              $408,000
      in gains from $19.4 million in sales of loans and the imputed value of the
      associated servicing rights realized in 2009, compared to $51,000 in gains
      from $1.8 million in sales in 2008.  The relatively stable low
      interest rate environment in 2009 contributed to a higher volume of
      refinancing activity for single-family residential mortgage loans than in
      2008;
 
 ·
              $273,000
      in OREO income from the operation of an apartment complex compared to none
      for 2008.  In 2009, the Bank began upgrading some of the units
      and using other marketing efforts to increase the occupancy rate to make
      the apartment complex more attractive to potential
  buyers;
 
 ·
              A
      $192,000 gain from the liquidation of a minority interest in Family
      Financial;
 
 ·
              A
      $178,000 increase in other income that was due primarily to a $261,000
      reduction in losses from unconsolidated subsidiaries to $67,000 in 2009
      from $328,000 in 2008.  $227,000 of the 2008 loss resulted from
      the sale of the title insurance company that the Bank had jointly owned
      with two other financial institutions.  The benefit from the
      reduction in losses from unconsolidated subsidiaries was partially offset
      by a $67,000 increase in the amortization of originated mortgage loan
      servicing rights due mostly to the higher volume of refinancing
      activity.
 
 The
change in total other income in 2009 compared to 2008 was negatively impacted by
$1.1 million in net losses on other real estate owned and other repossessed
assets for 2009, compared to $67,000 in 2008.
  47
 
 Other
Expense
  The $2.7
million, or 19.0%, increase in total other expense for 2009 compared to 2008,
resulted primarily from the acceleration of the Bank’s Indianapolis retail
expansion strategy, a higher required pension plan contribution, higher FDIC
insurance premiums, and OREO expense:
 
 ·
              The
      $9.3 million total cost for salaries and employees benefits for 2009 was
      $857,000 higher than 2008, due mostly to compensation costs related to the
      three new banking centers, a $237,000 increase in employee health
      insurance costs, and a $149,000 increase in funding costs for the frozen
      multi-employer defined benefit retirement plan.  The increase in
      salaries would have been materially greater without the benefit from the
      elimination of other positions primarily through
  attrition.
 
 ·
              The
      $450,000 increase in office occupancy expense and $147,000 increase in
      furniture and equipment expense  were also due mostly to costs
      associated with the two new banking centers that opened during the fourth
      quarter of 2008, the new banking center that opened in May of 2009, and
      the major banking center remodel that was completed in September of
      2008.
 
 ·
              A
      $58,000 increase in legal and professional fees to $623,000 that resulted
      primarily from higher legal fees, mostly related to the Abstract &
      Title Guaranty Company, Inc.
litigation;
 
 ·
              A
      $797,000 increase in FDIC insurance premiums and assessments that was
      related primarily to higher net premiums due to industry-wide increases
      and the exhaustion of the one-time credit, coupled with the industry-wide
      special assessment that resulted in a $225,000 second quarter expense for
      the Bank;
 
 ·
              A
      $91,000 increase in data processing expense to $747,000 that resulted
      primarily from a greater use of the existing electronic services, as well
      as new electronic services provided by the
Bank;
 
 ·
              A
      $255,000 increase in other real estate owned expense related primarily to
      real estate taxes and to operating expenses for the OREO apartment complex
      that provided $273,000 of rental income during 2009;
  and
  ·
              A
      $70,000 increase in other expense from $1.6 million for 2008 to $1.7
      million for 2009 was due primarily
to:
 
 
 (1)
              a
      $45,000 penalty resulting from the prepayment of a Federal Home Loan Bank
      borrowing that was part of the Bank’s balance sheet restructuring
      strategy;
 
 (2)
              a
      $24,000 increase in directors’ fees resulting from special meetings and
      the addition of a new director;
 
 (3)
              a
      $16,000 increase in loan expense that resulted mostly from economic
      conditions, and a $21,000 increase in expenses associated with repossessed
      non-real estate property;
 (4)
              $23,000
      in amortization expense recorded in 2009 related to the fair value of the
      intangible assets associated with the purchased insurance agency book of
      business;  reduced
by
  
 (5)
              a
      $51,000 decrease in educational expense, that resulted primarily from the
      shift in 2009 of sales training expense to the  marketing
      budget.  This change also contributed to the $50,000 increase in
      marketing expense for 2009 compared to
  2008.
  Income Tax
Expense
  We
recorded an income tax benefit of $810,000 on a $1.1 million pre-tax loss for
2009, compared to an income tax benefit of $781,000 on a $40,000 pre-tax loss
for 2008.  Both years had a significant amount of tax-exempt BOLI
income, and tax-exempt income from municipal loans and municipal
securities.  The income tax benefit for 2008 also included a $150,000
reversal of an income tax liability recorded in prior years that resulted from a
favorable tax court ruling regarding the application of the Tax Equity and
Fiscal Responsibility Act penalty to investment subsidiaries of commercial
banks.
   48
  ·
              We
      have a deferred state tax asset of $1.5 million that is primarily the
      result of operating losses sustained since 2003 for state tax
      purposes.  We started recording a valuation allowance against
      our current period state income tax benefit in 2005 due to our concern
      that we may not be able to use more than the tax asset already recorded on
      the books without modifying the use of AIMI, our investment subsidiary,
      which was liquidated effective December 31, 2009.  Operating
      income from AIMI was not subject to state income taxes under state law,
      and is the primary reason for the tax asset.  The valuation
      allowance was $836,000 at December 31,
2009.
 
 ·
              The
      Company had a deferred federal tax asset of $4.0 million at December 31,
      2009, that was composed of $1.9 million of tax benefit from a net
      operating loss carryforward of $5.5 million, $1.1 million related to
      temporary differences between book and tax income, and $1.0 million in tax
      credits.  The federal loss carryforward expires in 2026, and the
      tax credits begin to expire in 2023.  Included in the $1.0
      million of tax credits available to offset future federal income tax are
      approximately $303,000 of alternative minimum tax credits which have no
      expiration date.  Management believes that the Company will be
      able to utilize the benefits recorded for loss carryforwards and credits
      within the allotted time periods.
 
 ·
              The
      Bank has initiated several strategies designed to expedite the use of both
      the deferred state tax asset and the deferred federal tax asset,
      in addition to the liquidation of AIMI, our investment subsidiary, as
      stated above.  Through a series of sales of tax-exempt
      municipal securities, that segment of the investment  portfolio
      has already been reduced by $31.1 million, or 90.1%, from $34.5 million at
      December 31, 2006 to $3.4 million at December 31, 2009.  The
      proceeds from these sales have been reinvested in taxable financial
      instruments.  The Bank is considering a sale/leaseback
      transaction that could result in a significant taxable gain on its office
      properties, and also allow the Bank to convert nonearning assets to
      earnings 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.
 
 ·
              The
      effective tax rate was 75.4% in 2009, which resulted from a $1.1 million
      loss before income taxes coupled with an $810,000 income tax benefit,
      compared to an effective tax rate of 1,959.5% for 2008 that resulted from
      a $40,000 loss before income taxes and a $781,000 income tax
      benefit.  The primary difference in the effective tax rate and
      the statutory tax rates in both 2009 and 2008 relates to cash value of
      life insurance and municipal securities
income.
  See Note
9 to the “Consolidated Financial Statements” for more information relating to
income taxes.
  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 new 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 service fees and
dividends.  Payment of such dividends to the Company by the Bank is
limited under Indiana law.  Additionally, as part of a resolution
adopted by the Board of Directors of the Bank on September 28, 2009, the Bank
cannot declare or pay any dividends without the prior written consent of the
FDIC and the Indiana Department of Financial Institutions.  See
“Regulatory Action.”  The Company believes that such restriction will
not have an impact on the Company’s ability to meet its ongoing cash
obligations.
  49
  At
December 31, 2009, we had $6.1 million in loan commitments outstanding and $35.8
million of additional commitments for line of credit
receivables.  Certificates of deposit due within one year of December
31, 2009 totaled $124.4 million, or 36.8% 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 December 31, 2010.  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 either December 31, 2009 or December 31, 2008.
  Our
primary investing activities are the origination of loans and purchase of
securities.  In 2009, our loan originations totaled $104.3 million,
and we also purchased $9.5 million of loans from a broker and purchased three
loans totaling $4.6 million from other financial institutions.
  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.  Deposit account balances increased by $14.0 million in
2009.  We had FHLB advances of $46.4 million and $79.9 million at
December 31, 2009 and 2008, 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 Bank.  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.  At December 31,
2009, both the Company and the Bank exceeded all of regulatory capital
requirements and are considered “well capitalized” under regulatory
guidelines.
  Off-Balance-Sheet
Arrangements
  In the
normal course of operations, we engage in a variety of financial transactions
that, in accordance with generally accepted accounting principles, are not
recorded on 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.  See Note 4 of the Notes to Consolidated Financial
Statements.
  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.
  Impact of Inflation and
Changing Prices
  The
consolidated financial statements and related data presented in this report have
been prepared in accordance with generally accepted accounting
principles.  This requires the measurement of financial position and
operating results in terms of historical dollars without consideration of
changes in the relative purchasing power of money over time due to
inflation.
  Virtually
all of the assets and liabilities of a financial institution are monetary in
nature.  As a result, interest rates have a more significant impact on
a financial institution’s performance than the effects of general levels of
inflation.  Interest rates do not necessarily move in the same
direction or at the same rate as changes in the prices of goods and services,
which are directly affected by inflation, although interest rates may fluctuate
in response to perceived changes in the rate of inflation.
  Current Accounting
Issues
  On
July 1, 2009, the Accounting Standards Codification became FASB’s
officially recognized source of authoritative U.S. generally accepted accounting
principles applicable to all public and non-public non-governmental entities,
superseding existing FASB, AICPA, EITF and related literature. Rules and
interpretive releases of the SEC under the authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants. All other accounting
literature is considered non-authoritative. The switch to the ASC affects the
way companies refer to U.S. GAAP in financial statements and accounting
policies. Citing particular content in the ASC involves specifying the unique
numeric path to the content through the Topic, Subtopic, Section and Paragraph
structure.
  50
 
 FASB ASC Topic
260, “Determining
Whether Instruments Granted in Shared-Based Payment Transaction are
Participating Securities.”In June 2008,
the FASB issued the FSP which clarifies that unvested share-based payment awards
with a right to receive nonforfeitable dividends are participating
securities.  The FSP also provides guidance on how to allocate
earnings to participating securities and compute EPS using the two-class
method.  The FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
years.  The provisions of the FSP did not have a material impact on
our EPS calculation.  The provisions of this ASC did not have a
material impact on our financial statements.
 
 FASB ASC Topic
320, “Investments—Debt and Equity Securities.”  New
authoritative accounting guidance under ASC Topic 320, “Investments—Debt
and Equity Securities,” (i) changes existing guidance for determining
whether an impairment is other-than-temporary to debt securities and
(ii) replaces the existing requirement that the entity’s management assert
it has both the intent and ability to hold an impaired security until recovery
with a requirement that management assert: (a) it does not have the intent
to sell the security; and (b) it is more likely than not it will not have
to sell the security before recovery of its cost basis. Under ASC
Topic 320, declines in the fair value of held-to-maturity and
available-for-sale securities below their cost that are deemed to be
other-than-temporary are reflected in earnings as realized losses to the extent
the impairment is related to credit losses. The amount of the impairment related
to other factors is recognized in other comprehensive income. The Company
adopted the provisions of the new authoritative accounting guidance under ASC
Topic 320 during the first quarter of 2009. Adoption of the new guidance
did not significantly impact the Company’s financial statements.
  FASB ASC Topic
715, “Compensation—Retirement Benefits.”  New authoritative
accounting guidance under ASC Topic 715, “Compensation—Retirement
Benefits,” provides guidance related to an employer’s disclosures about plan
assets of defined benefit pension or other post-retirement benefit plans. Under
ASC Topic 715, disclosures should provide users of financial statements
with an understanding of how investment allocation decisions are made, the
factors that are pertinent to an understanding of investment policies and
strategies, the major categories of plan assets, the inputs and valuation
techniques used to measure the fair value of plan assets, the effect of fair
value measurements using significant unobservable inputs on changes in plan
assets for the period and significant concentrations of risk within plan assets.
The new authoritative accounting guidance under ASC Topic 715 became
effective for the Company’s financial statements for the year-ended
December 31, 2009 and the required disclosures are reported in
Note 10 – Employee Benefits.
  Additional
new authoritative accounting guidance under ASC Topic 715,
“Compensation—Retirement Benefits,” requires the recognition of a liability and
related compensation expense for endorsement split-dollar life insurance
policies that provide a benefit to an employee that extends to post-retirement
periods. Under ASC Topic 715, life insurance policies purchased for the
purpose of providing such benefits do not effectively settle an entity’s
obligation to the employee. Accordingly, the entity must recognize a liability
and related compensation expense during the employee’s active service period
based on the future cost of insurance to be incurred during the employee’s
retirement. Adoption of the new guidance did not significantly impact the
Company’s financial statements.
  FASB ASC Topic
805, “Business Combinations.”On January 1, 2009,
new authoritative accounting guidance under ASC Topic 805, “Business
Combinations,” became applicable to the Company’s accounting for business
combinations closing on or after January 1, 2009. ASC Topic 805
applies to all transactions and other events in which one entity obtains control
over one or more other businesses. ASC Topic 805 requires an acquirer, upon
initially obtaining control of another entity, to recognize the assets,
liabilities and any non-controlling interest in the acquiree at fair value as of
the acquisition date. Contingent consideration is required to be recognized and
measured at fair value on the date of acquisition rather than at a later date
when the amount of that consideration may be determinable beyond a reasonable
doubt. This fair value approach replaces the cost-allocation process required
under previous accounting guidance whereby the cost of an acquisition was
allocated to the individual assets acquired and liabilities assumed based on
their estimated fair value. ASC Topic 805 requires acquirers to expense
acquisition-related costs as incurred rather than allocating such costs to the
assets acquired and liabilities assumed, as was previously the case under prior
accounting guidance. Assets acquired and liabilities assumed in a business
combination that arise from contingencies are to be recognized at fair value if
fair value can be reasonably estimated. If fair value of such an asset or
liability cannot be reasonably estimated, the asset or liability would generally
be recognized in accordance with ASC Topic 450, “Contingencies.” Under ASC
Topic 805, the requirements of ASC Topic 420, “Exit or Disposal Cost
Obligations,” would have to be met in order to accrue for a restructuring plan
in purchase accounting. Pre-acquisition contingencies are to be recognized at
fair value, unless it is a non-contractual contingency that is not likely to
materialize, in which case, nothing should be recognized in purchase accounting
and, instead, that contingency would be subject to the probable and estimable
recognition criteria of ASC Topic 450, “Contingencies.”
  51
  FASB ASC
Topic 810, “Consolidation.” New authoritative accounting guidance
under ASC Topic 810, “Consolidation,” amended prior guidance to establish
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. Under ASC
Topic 810, a non-controlling interest in a subsidiary, which is sometimes
referred to as minority interest, is an ownership interest in the consolidated
entity that should be reported as a component of equity in the consolidated
financial statements. Among other requirements, ASC Topic 810 requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest. It also
requires disclosure, on the face of the consolidated income statement, of the
amounts of consolidated net income attributable to the parent and to the
non-controlling interest. The new authoritative accounting guidance under ASC
Topic 810 became effective for the Company on January 1, 2009 and did
not have a significant impact on the Company’s financial
statements.
  Further
new authoritative accounting guidance under ASC Topic 810 amends prior
guidance to change how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a company is
required to consolidate an entity is based on, among other things, an entity’s
purpose and design and a company’s ability to direct the activities of the
entity that most significantly impact the entity’s economic performance. The new
authoritative accounting guidance requires additional disclosures about the
reporting entity’s involvement with variable-interest entities and any
significant changes in risk exposure due to that involvement as well as its
affect on the entity’s financial statements. The new authoritative accounting
guidance under ASC Topic 810 will be effective January 1, 2010 and is
not expected to have a significant impact on the Company’s financial
statements.
  FASB ASC
Topic 815, “Derivatives and Hedging.” New authoritative accounting
guidance under ASC Topic 815, “Derivatives and Hedging,” amends prior
guidance to amend and expand the disclosure requirements for derivatives and
hedging activities to provide greater transparency about (i) how and why an
entity uses derivative instruments, (ii) how derivative instruments and
related hedge items are accounted for under ASC Topic 815, and
(iii) how derivative instruments and related hedged items affect an
entity’s financial position, results of operations and cash flows. To meet those
objectives, the new authoritative accounting guidance requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative
instruments and disclosures about credit-risk-related contingent features in
derivative agreements. The new authoritative accounting guidance under ASC
Topic 815 became effective for the Company on January 1, 2009 and the
required disclosures are reported in Note 8 – Borrowings.
  FASB ASC Topic
820, “Fair Value Measurements and Disclosures.” ASC Topic 820, “Fair
Value Measurements and Disclosures,” defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. The provisions of ASC
Topic 820 became effective for the Company on January 1, 2008 for
financial assets and financial liabilities and on January 1, 2009 for
non-financial assets and non-financial liabilities (see Note 16—Fair Value
of Financial Instruments).
  Additional
new authoritative accounting guidance under ASC Topic 820 affirms that the
objective of fair value when the market for an asset is not active is the price
that would be received to sell the asset in an orderly transaction, and
clarifies and includes additional factors for determining whether there has been
a significant decrease in market activity for an asset when the market for that
asset is not active. ASC Topic 820 requires an entity to base its
conclusion about whether a transaction was not orderly on the weight of the
evidence. The new accounting guidance amended prior guidance to expand certain
disclosure requirements. The Corporation adopted the new authoritative
accounting guidance under ASC Topic 820 during the first quarter of 2009.
Adoption of the new guidance did not significantly impact the Corporation’s
financial statements.
 
 Further
new authoritative accounting guidance (Accounting Standards Update
No. 2009-5) under ASC Topic 820 provides guidance for measuring the
fair value of a liability in circumstances in which a quoted price in an active
market for the identical liability is not available. In such instances, a
reporting entity is required to measure fair value utilizing a valuation
technique that uses (i) the quoted price of the identical liability when
traded as an asset, (ii) quoted prices for similar liabilities or similar
liabilities when traded as assets, or (iii) another valuation technique
that is consistent with the existing principles of ASC Topic 820, such as
an income approach or market approach. The new authoritative accounting guidance
also clarifies that when estimating the fair value of a liability, a reporting
entity is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of the
liability. The forgoing new authoritative accounting guidance under ASC
Topic 820 became effective for the Company’s financial statements for
periods ending after October 1, 2009 and did not have a significant impact
on the Company’s financial statements.
  52
  FASB ASC Topic
825 “Financial Instruments.” New authoritative accounting guidance under
ASC Topic 825, “Financial Instruments,” permits entities to choose to
measure eligible financial instruments at fair value at specified election
dates. The fair value measurement option (i) may be applied instrument by
instrument, with certain exceptions, (ii) is generally irrevocable and
(iii) is applied only to entire instruments and not to portions of
instruments. Unrealized gains and losses on items for which the fair value
measurement option has been elected must be reported in earnings at each
subsequent reporting date. The forgoing provisions of ASC Topic 825 became
effective for the Company on January 1, 2008 (see Note 19—Fair Value
of Financial Instruments).
 
 FASB ASC
Topic 855, “Subsequent Events.” New authoritative accounting
guidance under ASC Topic 855, “Subsequent Events,” establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or available to be
issued. ASC Topic 855 defines (i) the period after the balance sheet
date during which a reporting entity’s management should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, (ii) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements, and (iii) the disclosures an entity should make about
events or transactions that occurred after the balance sheet date. The new
authoritative accounting guidance under ASC Topic 855 became effective for
the Company’s financial statements for periods ending after June 15, 2009
and did not have a significant impact on the Company’s financial
statements.
  FASB ASC Topic
860, “Transfers and Servicing.” New authoritative accounting guidance
under ASC Topic 860, “Transfers and Servicing,” amends prior accounting
guidance to enhance reporting about transfers of financial assets, including
securitizations, and where companies have continuing exposure to the risks
related to transferred financial assets. The new authoritative accounting
guidance eliminates the concept of a “qualifying special-purpose entity” and
changes the requirements for derecognizing financial assets. The new
authoritative accounting guidance also requires additional disclosures about all
continuing involvements with transferred financial assets including information
about gains and losses resulting from transfers during the period. The new
authoritative accounting guidance under ASC Topic 860 will be effective
January 1, 2010 and is not expected to have a significant impact on the
Company’s financial statements.
  53
  Split-Dollar Life Insurance
Agreements
  The
Company adopted the accounting guidance for separate agreements which split life
insurance policy benefits between an employer and employee.  This
guidance requires the employer to recognize a liability for future benefits
payable to the employee under these agreements.  The effects of
applying this guidance must be recognized through either a change in accounting
principle through an adjustment to equity or through the retrospective
application to all prior periods.  For calendar year companies, this
guidance was effective beginning January 1, 2008, and upon its
adoption,  the Company recorded a cumulative effect of a change in
accounting principle of $1.1 million.
  Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk
  Not
applicable as issuer is a smaller reporting company.
  54
  Item 8.  Financial
Statements and Supplementary Data
  INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
  PageManagement’s
      Report on Internal Control Over Financial Reporting
                56Report
      of Independent Registered Public Accounting Firm
                57Consolidated
      Balance Sheets at December 31, 2009 and 2008
                58Consolidated
      Statements of Operations for Each of the Two Years in the Period Ended
      December 31, 2009
                59Consolidated
      Statements of Shareholders’ Equity for Each of the Two Years in the Period
      Ended December 31, 2009
                60Consolidated
      Statements of Cash Flows for Each of the Two Years in the Period Ended
      December 31, 2009
                61Notes
      to Consolidated Financial Statements
                63
  55
 
 MANAGEMENT’S
REPORT OF INTERNAL CONTROL OVER FINANCIAL
 PROCEDURES
AND FINANCIAL STATEMENTS
 
 The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting.  The internal control
process has been designed under our supervision to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
Company’s financial statements for external reporting purposes in accordance
with accounting principles generally accepted in the United States of
America.
 
 Management
conducted an assessment of the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2009, utilizing the framework
established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).  Based on
this assessment, management has determined that the Company’s internal control
over financial reporting as of December 31, 2009 is effective.
 
 Our
internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that accurately and fairly reflect, in
reasonable detail, transactions and dispositions of assets; and provide
reasonable assurances that:  (1) transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States; (2) receipts and
expenditures are being made only in accordance with authorizations of management
and the directors of the Company; and (3) unauthorized acquisition, use, or
disposition of the Company’s assets that could have a material effect on the
Company’s financial statements are prevented or timely detected.
 
 All
internal control systems, no matter how well designed, have inherent
limitations.  Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  56
  Report
of Independent Registered Public Accounting Firm
 
 Audit
Committee, Board of Directors and Stockholders
 Ameriana
Bancorp
 New
Castle, Indiana
 
 We have
audited the accompanying consolidated balance sheets of Ameriana Bancorp as of
December 31, 2009 and 2008, and the related consolidated statements of
operations, shareholders’ equity and cash flows for the years then
ended.  The Company's management is responsible for these financial
statements.  Our responsibility is to express an opinion on these
financial statements based on our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audits included
consideration of internal control over financial reporting as a basis for
designing auditing procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting.  Accordingly, we express no
such opinion.  Our audits also included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Ameriana Bancorp as of
December 31, 2009 and 2008, and the results of its operations and its cash flows
for each of the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
  /s/BKD,LLP
 BKD LLP
 Indianapolis,
Indiana
 March 31,
2010
  57
  Ameriana
Bancorp
 Consolidated
Balance Sheets
 (in
thousands, except share data)
 
 December
    312009
                  
                  
                  2008AssetsCash
      on hand and in other institutions
                  
                  $
                  6,283
                  
                  
                  $
                  3,810Interest-bearing
      demand deposits
                  
                  
                  13,305
                  
                  
                  
                  4,639Cash
      and cash equivalents
                  
                  
                  19,588
                  
                  
                  
                  8,449Investment
      securities available for sale
                  
                  
                  35,841
                  
                  
                  
                  75,371Loans
      held for sale
                  
                  
                  537
                  
                  
                  
                  —Loans,
      net of allowance for loan losses of $4,005 and $2,991
                  
                  
                  321,544
                  
                  
                  
                  322,535Premises
      and equipment
                  
                  
                  15,508
                  
                  
                  
                  14,912Stock
      in Federal Home Loan Bank
                  
                  
                  5,629
                  
                  
                  
                  5,629Goodwill
                  
                  
                  649
                  
                  
                  
                  564Cash
      value of life insurance
                  
                  
                  24,538
                  
                  
                  
                  23,669Other
      real estate owned
                  
                  
                  5,517
                  
                  
                  
                  3,881Other
      assets
                  
                  
                  12,212
                  
                  
                  
                  8,492Total
      assets
                  
                  $
                  441,563
                  
                  
                  $
                  463,502Liabilities
      and Shareholders’ EquityLiabilitiesDepositsNoninterest-bearing
                  
                  $
                  29,531
                  
                  
                  $
                  22,070Interest-bearing
                  
                  
                  308,850
                  
                  
                  
                  302,336Total
      deposits
                  
                  
                  338,381
                  
                  
                  
                  324,406Borrowings
                  
                  
                  64,185
                  
                  
                  
                  97,735Drafts
      payable
                  
                  
                  920
                  
                  
                  
                  1,582Other
      liabilities
                  
                  
                  5,502
                  
                  
                  
                  6,003Total
      liabilities
                  
                  
                  408,988
                  
                  
                  
                  429,726Commitments
      and contingenciesShareholders’
      equityPreferred
      stock - 5,000,000 shares authorized and unissued
                  
                  
                  —
                  
                  
                  
                  —Common
      stock, $1.00 par value Authorized 15,000,000 shares Issued – 3,213,952 and
      3,213,952 shares
                  
                  
                  3,214
                  
                  
                  
                  3,214Outstanding
      – 2,988,952 and 2,988,952 sharesAdditional
      paid-in capital
                  
                  
                  1,045
                  
                  
                  
                  1,044Retained
      earnings
                  
                  
                  31,416
                  
                  
                  
                  31,979Accumulated
      other comprehensive (loss) income
                  
                  
                  (102
                  )
                  
                  
                  537Treasury
      stock – 225,000 and 225,000 shares
                  
                  
                  (2,998
                  )
                  
                  
                  (2,998
                  )Total
      shareholders’ equity
                  
                  
                  32,575
                  
                  
                  
                  33,776Total
      liabilities and shareholders’ equity
                  
                  $
                  441,563
                  
                  
                  $
                  463,502
  See
notes to consolidated financial statements
  58
 
 Ameriana
Bancorp
 Consolidated
Statements of Operations
 (in
thousands, except share data)
 
 Year Ended December 312009
                  
                  
                  2008Interest
      IncomeInterest
      and fees on loans
                  
                  $
                  19,373
                  
                  
                  $
                  19,718Interest
      on mortgage-backed securities
                  
                  
                  2,258
                  
                  
                  
                  2,260Interest
      on investment securities
                  
                  
                  513
                  
                  
                  
                  1,130Other
      interest and dividend income
                  
                  
                  197
                  
                  
                  
                  473Total
      interest income
                  
                  
                  22,341
                  
                  
                  
                  23,581Interest
      ExpenseInterest
      on deposits
                  
                  
                  6,406
                  
                  
                  
                  8,029Interest
      on borrowings
                  
                  
                  3,246
                  
                  
                  
                  3,759Total
      interest expense
                  
                  
                  9,652
                  
                  
                  
                  11,788Net
      Interest Income
                  
                  
                  12,689
                  
                  
                  
                  11,793Provision
      for loan losses
                  
                  
                  2,180
                  
                  
                  
                  1,250Net
      Interest Income After Provision for Loan Losses
                  
                  
                  10,509
                  
                  
                  
                  10,543Other
      IncomeOther
      fees and service charges
                  
                  
                  1,860
                  
                  
                  
                  1,794Brokerage
      and insurance commissions
                  
                  
                  1,257
                  
                  
                  
                  1,124Net
      realized and recognized gains on available-for-sale
    securities
                  
                  
                  1,680
                  
                  
                  
                  103Gains
      on sales of loans and servicing rights
                  
                  
                  408
                  
                  
                  
                  51Net
      loss on other real estate owned
                  
                  
                  (928
                  )
                  
                  
                  (67
                  )Loss
      on other repossessed assets
                  
                  
                  (157
                  )
                  
                  
                  —Other
      real estate owned income
                  
                  
                  273
                  
                  
                  
                  —Increase
      in cash value of life insurance
                  
                  
                  869
                  
                  
                  
                  892Gain
      on liquidation of minority interest in unconsolidated
      investment
                  
                  
                  192
                  
                  
                  
                  —Other
                  
                  
                  82
                  
                  
                  
                  (96
                  )Total
      other income
                  
                  
                  5,536
                  
                  
                  
                  3,801Other
      ExpenseSalaries
      and employee benefits
                  
                  
                  9,330
                  
                  
                  
                  8,473Net
      occupancy expense
                  
                  
                  1,580
                  
                  
                  
                  1,130Furniture
      and equipment expense
                  
                  
                  905
                  
                  
                  
                  758Legal
      and professional fees
                  
                  
                  623
                  
                  
                  
                  565FDIC
      insurance premiums and assessments
                  
                  
                  844
                  
                  
                  
                  47Data
      processing expense
                  
                  
                  747
                  
                  
                  
                  656Printing
      and office supplies
                  
                  
                  301
                  
                  
                  
                  341Marketing
      expense
                  
                  
                  553
                  
                  
                  
                  503Other
      real estate owned expense
                  
                  
                  535
                  
                  
                  
                  280Other
                  
                  
                  1,701
                  
                  
                  
                  1,631Total
      other expense
                  
                  
                  17,119
                  
                  
                  
                  14,384Loss
      Before Income Taxes
                  
                  
                  (1,074
                  )
                  
                  
                  (40
                  )Income
      tax benefit
                  
                  
                  (810
                  )
                  
                  
                  (781
                  )Net
      (Loss) Income
                  
                  $
                  (264
                  )
                  
                  $
                  741Basic
      and Diluted (Loss) Earnings Per Share
                  
                  $
                  (0.09
                  )
                  
                  $
                  0.25
  See
notes to consolidated financial statements.
  59
  Ameriana
Bancorp
 Consolidated
Statements of Shareholders’ Equity
 
 AccumulatedCommon
                            Stock
                          
                          
                          Additional
                            Paid-in
                            Capital
                          
                          
                          Retained
                            Earnings
                          
                          
                          Other
                            Comprehensive
                            Income
                            (Loss)
                          
                          
                          Treasury
                            Stock
                          
                          
                          TotalBalance
      at December 31, 2007
                          
                          
                          3,214
                          
                          
                          
                          1,040
                          
                          
                          
                          32,857
                          
                          
                          
                          (467
                          )
                          
                          
                          (2,998
                          )
                          
                          
                          33,646Net
      income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          741
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          741Change
      of $1,113 from unrealized loss to unrealized gain on available-for-sale
      securities, net of income tax of $423
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          690
                          
                          
                          
                          
                          
                          
                          
                          690Change
      in accumulated other comprehensive income related to retirement
      plan
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          314
                          
                          
                          
                          
                          
                          
                          
                          314Comprehensive
      income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,745Cumulative
      effect of a change in accounting principle related to the post-retirement
      cost of split-dollar life insurance
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (1,141
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (1,141
                          )Share-based
      compensation
                          
                          
                          
                          
                          
                          
                          4
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          4Dividends
      declared ($0.16 per share)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (478
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (478
                          )Balance
      at December 31, 2008
                          
                          
                          3,214
                          
                          
                          
                          1,044
                          
                          
                          
                          31,979
                          
                          
                          
                          537
                          
                          
                          
                          (2,998
                          )
                          
                          
                          33,776Net
      loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (264
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (264
                          )Change
      of $1,052 from unrealized gain to unrealized loss on available-for-sale
      securities, net of income tax benefit of $413
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (639
                          )
                          
                          
                          
                          
                          
                          
                          (639
                          )Comprehensive
      loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (903
                          )Share-based
      compensation
                          
                          
                          
                          
                          
                          
                          1
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1Dividends
      declared ($0.10 per share)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (299
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (299
                          )Balance
      at December 31, 2009
                          
                          $
                          3,214
                          
                          
                          $
                          1,045
                          
                          
                          $
                          31,416
                          
                          
                          $
                          (102
                          )
                          
                          $
                          (2,998
                          )
                          
                          $
                          32,575
  See
notes to consolidated financial statements.
  60
 
 Ameriana
Bancorp
 Consolidated
Statements of Cash Flows
 (in
thousands)
 
 Year Ended December
      312009
                  
                  
                  2008Operating
      ActivitiesNet
      (loss) income
                  
                  $
                  (264
                  )
                  
                  $
                  741Items
      not requiring (providing) cashProvision
      for losses on loans
                  
                  
                  2,180
                  
                  
                  
                  1,250Depreciation
      and amortization
                  
                  
                  1,072
                  
                  
                  
                  710Increase
      in cash value of life insurance
                  
                  
                  (869
                  )
                  
                  
                  (892
                  )Gain
      on sale of investments
                  
                  
                  (1,680
                  )
                  
                  
                  (103
                  )Deferred
      taxes
                  
                  
                  (807
                  )
                  
                  
                  (970
                  )Loss
      on sale or write-down of other real estate owned and other repossessed
      assets
                  
                  
                  1,085
                  
                  
                  
                  67Gain
      on liquidation of minority interest in unconsolidated
      investment
                  
                  
                  (192
                  )
                  
                  
                  —Mortgage
      loans originated for sale
                  
                  
                  (19,774
                  )
                  
                  
                  (1,118
                  )Proceeds
      from sale of mortgage loans
                  
                  
                  19,394
                  
                  
                  
                  1,794Gains
      on sale of loans and servicing rights
                  
                  
                  (408
                  )
                  
                  
                  (51
                  )Prepayment
      of FDIC insurance premiums
                  
                  
                  (2,740
                  )
                  
                  
                  —Decrease
      in accrued interest payable
                  
                  
                  (365
                  )
                  
                  
                  (794
                  )Other
      adjustments
                  
                  
                  340
                  
                  
                  
                  1,481Net
      cash (used in) provided by operating activities
                  
                  
                  (3,028
                  )
                  
                  
                  2,115Investing
      ActivitiesPurchase
      of securities
                  
                  
                  (34,657
                  )
                  
                  
                  (30,103
                  )Proceeds/principal
      from sale of securities
                  
                  
                  58,532
                  
                  
                  
                  9,323Proceeds/principal
      from maturity/call of securities
                  
                  
                  —
                  
                  
                  
                  6,000Principal
      collected on mortgage-backed securities
                  
                  
                  16,196
                  
                  
                  
                  7,272Net
      change in loans
                  
                  
                  (5,527
                  )
                  
                  
                  (31,742
                  )Proceeds
      from sales of other real estate owned and other repossessed
      assets
                  
                  
                  1,899
                  
                  
                  
                  472Purchase
      of insurance business
                  
                  
                  (724
                  )
                  
                  
                  —Proceeds
      from liquidation of minority interest in unconsolidated
      investment
                  
                  
                  645
                  
                  
                  
                  —Net
      purchases and construction of premises and equipment
                  
                  
                  (1,580
                  )
                  
                  
                  (7,930
                  )Construction
      costs for other real estate owned
                  
                  
                  —
                  
                  
                  
                  (566
                  )Other
      investing activities
                  
                  
                  62
                  
                  
                  
                  696Net
      cash provided by (used in) provided by investing
activities
                  
                  
                  34,846
                  
                  
                  
                  (46,578
                  )Financing
      ActivitiesNet
      change in demand and savings deposits
                  
                  
                  23,486
                  
                  
                  
                  (8,095
                  )Net
      change in certificates of deposit
                  
                  
                  (9,511
                  )
                  
                  
                  17,755Decrease
      in drafts payable
                  
                  
                  (662
                  )
                  
                  
                  (2,974
                  )Net
      change in short-term borrowings
                  
                  
                  —
                  
                  
                  
                  (3,000
                  )Proceeds
      from long-term borrowings
                  
                  
                  —
                  
                  
                  
                  34,500Repayment
      of long-term borrowings
                  
                  
                  (33,550
                  )
                  
                  
                  (2,278
                  )Net
      change in advances by borrowers for taxes and insurance
                  
                  
                  (143
                  )
                  
                  
                  310Cash
      dividends paid
                  
                  
                  (299
                  )
                  
                  
                  (478
                  )Net
      cash (used in) provided by financing activities
                  
                  
                  (20,679
                  )
                  
                  
                  35,740Change
      in Cash and Cash Equivalents
                  
                  
                  11,139
                  
                  
                  
                  (8,723
                  )
  61
  Ameriana
Bancorp
 Consolidated
Statements of Cash Flows
 (in
thousands)
 
 Year Ended December
      312009
                    
                    
                    2008Cash
      and Cash Equivalents at Beginning of Year
                    
                    
                    8,449
                    
                    
                    
                    17,172Cash
      and Cash Equivalents at End of Year
                    
                    $
                    19,588
                    
                    
                    $
                    8,449Supplemental
      information:Interest
      paid on deposits
                    
                    $
                    6,697
                    
                    
                    $
                    8,869Interest
      paid on borrowings
                    
                    $
                    3,321
                    
                    
                    $
                    3,713Income
      taxes paid net of income taxes refunded
                    
                    
                    —
                    
                    
                    $
                    (165
                    )Non-cash
      supplemental information:Transfer
      from loans to other real estate owned
                    
                    $
                    4,362
                    
                    
                    $
                    1,526Adoption
      of BOLI split-dollar insurance accounting
                    
                    
                    —
                    
                    
                    $
                    1,141
  See
notes to consolidated financial statements.
  62
  Ameriana
Bancorp
 Notes to
Consolidated Financial Statements
 (table
dollar amounts in thousands, except share data)
 
 1.
              Nature
      of Operations and Summary of Significant Accounting
    Policies
 
 Principles of
Consolidation:
The consolidated financial statements include the accounts of Ameriana Bancorp
(the “Company”) and its wholly-owned subsidiary, Ameriana Bank (the “Bank”), and
the Bank’s wholly-owned subsidiaries, Ameriana Investment Management, Inc.
(“AIMI”), Ameriana Financial Services, Inc., and Ameriana Insurance Agency,
Inc.  All significant intercompany accounts and transactions have been
eliminated.  AIMI was liquidated by the Bank effective December 31,
2009, with all of  its assets and liabilities transferred into the
Bank at that time.
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.
 
 The
Company is a bank holding company whose principal activity is the ownership and
management of the Bank and its subsidiaries.  The Bank provides
various banking services and engages in loan servicing activities for investors
and operates in a single significant business segment.  The Bank is
subject to the regulation of the Indiana Department of Financial Institutions
(the “DFI”) and the Federal Deposit Insurance Corporation (the
“FDIC”).  The Company’s gross revenues are substantially earned from
the various banking services provided by the Bank.  The Company also
earns brokerage and insurance commissions from the services provided by the
other subsidiaries.
 
 The Bank
generates loans and receives deposits from customers located primarily in east
central Indiana.  Loans are generally secured by specific items of
collateral including real property, business assets, or consumer
assets.  The Company has sold various loans to investors while
retaining the servicing rights.
 
 Cash
and Cash Equivalents
  The
Company considers all liquid investments with original maturities of three
months or less to be cash equivalents.  At December 31, 2009 and
2008, cash equivalents consisted primarily of interest-bearing deposits with the
Federal Reserve Bank of Chicago and the Federal Home Loan Bank of
Indianapolis.
  One or
more of the financial institutions holding the Company’s cash accounts are
participating in the FDIC’s Transaction Account Guarantee
Program.  Under the program, through June 30, 2010, all
noninterest-bearing transaction accounts at these institutions are fully
guaranteed by the FDIC for the entire amount in the account.
  For
financial institutions opting out of the FDIC’s Transaction Account Guarantee
Program for interest-bearing cash accounts, the FDIC’s insurance limits
increased to $250,000.  The increase in federally insured limits is
currently set to expire December 31, 2013.  At December 31,
2009, the Company’s cash accounts exceeded federally insured limits by
approximately $13.3 million, with $13.3 million held by the Federal Reserve Bank
of Chicago and $23,000 held by the Federal Home Loan Bank of Indianapolis, and
both banks not being insured.
  Investment
Securities
  Debt
securities are classified as held to maturity when the Company has the positive
intent and ability to hold the securities to maturity.  Securities
held to maturity are carried at amortized cost.  Debt securities not
classified as held to maturity are classified as available for
sale.  Securities available for sale are carried at fair value with
unrealized gains and losses reported separately in accumulated comprehensive
income (loss), net of tax.
  Amortization
of premiums and accretion of discounts are recorded using the interest method as
interest income from securities.  Realized gains and losses are
recorded as net security gains (losses).  Gains and losses on sales of
securities are determined on the specific identification
method.
  63
  Ameriana
Bancorp
 Notes to
Consolidated Financial Statements
 (table
dollar amounts in thousands, except share data)
  Effective
April 1, 2009, the Company adopted new accounting guidance related to
recognition and presentation of other-than-temporary impairment
(ASC 320-10).  When the Company does not intend to sell a debt
security, and it is more likely than not that the Company will not have to sell
the security before recovery of its cost basis, it recognizes the credit
component of an other-than-temporary impairment of a debt security in earnings
and the remaining portion in other comprehensive income.  For
held-to-maturity debt securities, the amount of an other-than-temporary
impairment recorded in other comprehensive income for the noncredit portion of a
previous other-than-temporary impairment is amortized prospectively over the
remaining life of the security on the basis of the timing of future estimated
cash flows of the security.
  Prior to
the adoption of the recent accounting guidance on April 1, 2009, management
considered, in determining whether other-than-temporary impairment exists,
(1) the length of time and the extent to which the fair value has been less
than cost, (2) the financial condition and near-term prospects of the
issuer and (3) the intent and ability of the Company to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.
  For
equity securities, when the Company has decided to sell an impaired
available-for-sale security and the entity does not expect the fair value of the
security to fully recover before the expected time of sale, the security is
deemed other-than-temporarily impaired in the period in which the decision to
sell is made.  The Company recognizes an impairment loss when the
impairment is deemed other than temporary even if a decision to sell has not
been made.
  Valuation
Measurements:Valuation
methodologiesoften 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 the lower of cost or
fair value, as defined in ASC 820 “Fair Value Measurements and Disclosures”
(“ASC 820”), 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
intangibles 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 Corporation’s results of
operations.
 
 Stock in Federal
Home Loan Bank is the amount of stock the Company is required to own as
determined by regulation.  This stock is carried at cost and
represents the amount at which it can be sold back to the Federal Home Loan Bank
(FHLB).  The Company reviewed the FHLB stock and based on current
performance of the Federal Home Loan Bank of Indianapolis, the Company
determined there was no impairment of this stock at December 31,
2009.
 
 Loans
Held for
Sale.Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or fair value in the
aggregate.  Net unrealized losses, if any, are recognized through a
valuation allowance by charges to noninterest income.  Gains and
losses on loan sales are recorded in noninterest income, and direct loan
origination costs and fees are deferred at origination of the loan and are
recognized in noninterest income upon sale of the loan.
  Loansare carried at the
principal amount outstanding.  A loan is impaired when, based on
current information or events, it is probable that the Company 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 Company
considers its investment in one-to-four family residential loans and consumer
loans to be homogeneous and, therefore, excluded from separate identification of
evaluation of impairment.  Interest income is accrued on the principal
balances of loans.  The accrual of interest on impaired and nonaccrual
loans is discontinued when, in management’s opinion, the borrower may be unable
to meet payments as they become due.
  64
 
 Ameriana
Bancorp
 Notes to
Consolidated Financial Statements
 (table
dollar amounts in thousands, except share data)
 
 When
interest accrual is discontinued, all unpaid accrued interest is reversed when
considered uncollectible.  Interest income is subsequently recognized
only to the extent cash payments are received.  Certain loan fees and
direct costs are being deferred and amortized as an adjustment of yield on the
loans over the contractual lives of the loans.  When a loan is paid
off or sold, any unamortized loan origination fee balance is credited to
income.
 
 Allowance for
Loan Losses is maintained at a level believed adequate by management to
absorb inherent losses in the loan portfolio.  Management’s
determination of the adequacy of the allowance is based on an evaluation of the
portfolio including consideration of past loan loss experience, current economic
conditions, size, growth and composition of the loan portfolio, the probability
of collecting all amounts due, and other relevant factors.  Impaired
loans are measured by the present value of expected future cash flows, or the
fair value of the collateral of the loan, if collateral
dependent.  The allowance is increased by provisions for loan losses
charged against income.  Loan losses are charged against the allowance
when management believes the uncollectibility of a loan balance is
confirmed.  Subsequent recoveries, if any, are credited to the
allowance.
 
 The
determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions.  Management believes that
as of December 31, 2009, the allowance for loan losses was adequate based
on information then available.  A worsening or protracted economic
decline in the areas within which the Company operates would increase the
likelihood of additional losses due to credit and market risks and could create
the need for additional loss reserves.
 
 Premises and
Equipmentare stated at cost less
accumulated depreciation.  Depreciation is computed principally by the
straight-line method over the estimated useful lives of the related
assets.  Maintenance and repairs are expensed as incurred while major
additions and improvements are capitalized.
 
 Goodwillis tested at least
annually for impairment.  If the implied fair value of goodwill is
lower than its carrying amount, goodwill impairment is indicated and goodwill is
written down to its implied fair value.  Subsequent increases in
goodwill value are not recognized in the financial statements.  There
was no impairment of goodwill recognized in 2009 or 2008.
 
 Other Real Estate
Owned.Assets acquired through, or in lieu of, loan
foreclosure are held for sale and are initially recorded at fair value less cost
to sell at the date of foreclosure, establishing a new cost
basis.  Subsequent to foreclosure, valuations are periodically
performed by management and the assets are carried at the lower of carrying
amount or fair value less cost to sell.  Revenue and expenses from
operations and changes in the valuation allowance are included in net income or
expense from foreclosed assets.
  Earnings per
Share is computed by dividing net income by the weighted-average number
of common and potential common shares outstanding during each year.
 
 Mortgage
Servicing Rightson originated loans are
capitalized by estimating the fair value of the streams of net servicing
revenues that will occur over the estimated life of the servicing
arrangement.  Capitalized servicing rights, which include purchased
servicing rights, are amortized in proportion to and over the period of
estimated servicing revenues.
 
 Stock Options- The Company has stock plans which are described more fully in Note
10.
 
 Income
Taxin the
consolidated Statements of Operations includes deferred income tax provisions or
benefits for all significant temporary differences in recognizing income and
expenses for financial reporting and income tax purposes.  The Company
and its subsidiaries file consolidated tax returns.  The parent
company and subsidiaries are charged or given credit for income taxes as though
separate returns were filed.
  65
 
 Ameriana
Bancorp
 Notes to
Consolidated Financial Statements
 (table
dollar amounts in thousands, except share data)
 
 Reclassificationsof certain amounts in
the 2008 consolidated financial statements have been made to conform to the 2009
presentation.  These reclassifications had no impact on net
income.
 
 2.
              Restriction
      on Cash and Due From Banks
 
 The Bank
is required to maintain reserve funds in cash and/or on deposit with the Federal
Reserve Bank.  The reserve required at December 31, 2009 was
$361,000.
  66
 
 Ameriana
Bancorp
 Notes to
Consolidated Financial Statements
 (table
dollar amounts in thousands, except share data)
 
 3.      Investment
Securities
 
 Amortized
                      Cost
                    
                    
                    Gross
                      Unrealized
                      Gains
                    
                    
                    Gross
                      Unrealized
                      Losses
                    
                    
                    Fair
                      ValueAvailable
      for sale at December 31, 2009Ginnie
      Mae and GSE mortgage-backed pass-through securities
                    
                    $
                    24,953
                    
                    
                    $
                    214
                    
                    
                    $
                    175
                    
                    
                    $
                    24,992Ginnie
      Mae collateralized mortgage obligations
                    
                    
                    6,024
                    
                    
                    
                    —
                    
                    
                    
                    204
                    
                    
                    
                    5,820Municipal
      securities
                    
                    
                    3,461
                    
                    
                    
                    30
                    
                    
                    
                    60
                    
                    
                    
                    3,431Mutual
      funds
                    
                    
                    1,573
                    
                    
                    
                    25
                    
                    
                    
                    —
                    
                    
                    
                    1,598$
                    36,011
                    
                    
                    $
                    269
                    
                    
                    $
                    439
                    
                    
                    $
                    35,841
  Amortized
                    Cost
                  
                  
                  Gross
                    Unrealized
                    Gains
                  
                  
                  Gross
                    Unrealized
                    Losses
                  
                  
                  Fair
                    ValueAvailable
      for sale at December 31, 2008Ginnie
      Mae and GSE mortgage-backed pass-through securities
                  
                  $
                  54,276
                  
                  
                  $
                  1,127
                  
                  
                  $
                  114
                  
                  
                  $
                  55,289Municipal
      securities
                  
                  
                  18,700
                  
                  
                  
                  227
                  
                  
                  
                  370
                  
                  
                  
                  18,557Mutual
      funds
                  
                  
                  1,513
                  
                  
                  
                  12
                  
                  
                  
                  —
                  
                  
                  
                  1,525$
                  74,489
                  
                  
                  $
                  1,366
                  
                  
                  $
                  484
                  
                  
                  $
                  75,371
 
 The
amortized cost and fair value of securities available for sale at
December 31, 2009, by contractual maturity, are shown
below.  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 SaleAmortized
                      Cost
                    
                    
                    Fair
                      ValueOne
      to five years
                    
                    $
                    325
                    
                    
                    $
                    343After
      ten years
                    
                    
                    3,136
                    
                    
                    
                    3,0883,461
                    
                    
                    
                    3,431Ginnie
      Mae and GSE mortgage-backed pass-through securities
                    
                    
                    24,953
                    
                    
                    
                    24,992Ginnie
      Mae collateralized mortgage obligations
                    
                    
                    6,024
                    
                    
                    
                    5,820Mutual
      funds
                    
                    
                    1,573
                    
                    
                    
                    1,598$
                    36,011
                    
                    
                    $
                    35,841
  Certain
investment securities are reported in the financial statements at an amount less
than their historical cost.  Total fair value of these investments at
December 31, 2009 and December 31, 2008 were $18,289,000 and $18,004,000, which
is approximately 51.0% and 23.9% of the Company’s investment
portfolio.
  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.
  67


Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





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 December 31,
2009 and December 31, 2008:


At December 31, 2009
                    
                    Less Than 12 Months
                    
                    
                    12 Months or Longer
                    
                    
                    TotalFair Value
                    
                    
                    Unrealized
                      Losses
                    
                    
                    Fair Value
                    
                    
                    Unrealized
                      Losses
                    
                    
                    Fair Value
                    
                    
                    Unrealized
                      LossesGinnie
      Mae and GSE mortgage-backed pass-through securities
                    
                    $
                    10,394
                    
                    
                    $
                    172
                    
                    
                    $
                    231
                    
                    
                    $
                    3
                    
                    
                    $
                    10,625
                    
                    
                    $
                    175Ginnie
      Mae collateralized mortgage obligations
                    
                    
                    5,820
                    
                    
                    
                    204
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    5,820
                    
                    
                    
                    204Municipal
      securities
                    
                    
                    1,844
                    
                    
                    
                    60
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,844
                    
                    
                    
                    60$
                    18,058
                    
                    
                    $
                    436
                    
                    
                    $
                    231
                    
                    
                    $
                    3
                    
                    
                    $
                    18,289
                    
                    
                    $
                    439
 
 At December 31, 2008
                  
                  Less Than 12 Months
                  
                  
                  12 Months or Longer
                  
                  
                  TotalFair Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrealized
                    LossesGinnie
      Mae and GSE mortgage-backed pass-  through
      securities
                  
                  $
                  6,490
                  
                  
                  $
                  93
                  
                  
                  $
                  1,524
                  
                  
                  $
                  21
                  
                  
                  $
                  8,014
                  
                  
                  $
                  114Municipal
      securities
                  
                  
                  5,865
                  
                  
                  
                  187
                  
                  
                  
                  4,125
                  
                  
                  
                  183
                  
                  
                  
                  9,990
                  
                  
                  
                  370$
                  12,355
                  
                  
                  $
                  280
                  
                  
                  $
                  5,649
                  
                  
                  $
                  204
                  
                  
                  $
                  18,004
                  
                  
                  $
                  484




Mortgage-backed
pass-through securities: The contractual cash flows of those investments
are guaranteed by either Ginnie Mae, a U.S. Government agency, or by U.S.
Government-sponsored entities, Fannie Mae and Freddie Mac, 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 unrealized losses on the Company’s investment
in collateralized mortgage obligations were caused by interest rate
changes.  The contractual cash flows of those 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.  Because the decline in market value was attributable to
changes in interest rates and not credit quality, and because the Company has
the ability and intent to hold those investments until a recovery of fair value,
which may be maturity, the Company does not consider those investments to be
other-than-temporarily impaired at December 31, 2009.





Municipal
securities:  All of the municipal securities in the Company’s
investment portfolio at December 31, 2009 that were rated by Moody’s Investors
Service received an investment grade credit quality rating.  Two
securities were not rated by Moody’s, but received an investment grade rating
from Standard & Poor’s.  One security was not rated by either
Moody’s or Standard & Poor’s.   The contractual terms of
those investments do not permit the issuer to settle the securities at a price
less than the amortized cost of the investment.





Investment
securities with a total market value of $5,820,000 and $32,339,000 were pledged
at December 31, 2009 and December 31, 2008, respectively, to secure FHLB
advances and three letters of credit.





Investment
securities with a total market value of $9,030,000 and $9,512,000 were pledged
at December 31, 2009 and December 31, 2008, respectively, to secure a repurchase
agreement.





A gross
gain of $1,744,000 and a gross loss of $64,000 resulting from sales of available
for sale securities were realized during the year ended December 31, 2009, with
a net tax expense of $571,000.  A gross gain of $111,000 and a gross
loss of $8,000 resulting from sales of available for sale securities were
realized during the year ended December 31, 2008, with a net tax expense of
$35,000.


68





Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





4.
            Loans





December 312009
                
                
                2008Residential
      mortgage loans
                
                $
                161,035
                
                
                $
                160,553Commercial
      mortgage loans
                
                
                104,231
                
                
                
                98,173Construction
      mortgage loans
                
                
                30,943
                
                
                
                39,281Municipal
      loans
                
                
                2,781
                
                
                
                2,218Consumer
      loans
                
                
                4,003
                
                
                
                4,424Commercial
      loans
                
                
                23,580
                
                
                
                21,215326,573
                
                
                
                325,864DeductUndisbursed
      loan proceeds
                
                
                1,005
                
                
                
                386Deferred
      loan fees (expenses), net
                
                
                19
                
                
                
                (48
                )Allowance
      for loan losses
                
                
                4,005
                
                
                
                2,9915,029
                
                
                
                3,329$
                321,544
                
                
                $
                322,535





Loans
being serviced by the Company for investors, primarily Freddie Mac, totaled
approximately $115,509,000 and $124,873,000 as of December 31, 2009 and
2008, respectively.  Such loans are not included in the preceding
table.





The
aggregate fair value of capitalized mortgage servicing rights at
December 31, 2009 and 2008 is based on comparable market values and
expected cash flows, with impairment assessed based on portfolio characteristics
including product type, investor type and interest rates.  At December
31, 2009 and December 31, 2008 the fair value of mortgage servicing rights was
approximately $710,000 and $966,000, respectively.  No valuation
allowance was necessary at December 31, 2009 and 2008.





Year Ended December 312009
                
                
                2008Mortgage
      servicing rightsBalance
      at beginning of year
                
                $
                743
                
                
                $
                865Servicing
      rights capitalized
                
                
                167
                
                
                
                16Amortization
      of servicing rights
                
                
                (203
                )
                
                
                (138
                )Balance
      at end of year
                
                $
                707
                
                
                $
                743




69





Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





At
December 31, 2009 and 2008, the Company had outstanding commitments to originate
loans of approximately $6,056,000 and $3,436,000. The outstanding commitments
for 2009 included $3,028,000 for one-to four family mortgage loans, $2,545,000
for commercial real estate loans and $483,000 for commercial loans, while the
outstanding commitments for 2008 were primarily for one-to-four family mortgage
loans.  In addition, the Company had $35,791,000 and $35,640,000 of
conditional commitments for lines of credit at December 31, 2009 and
2008.  Exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit is
represented by the contractual or notional amount of those
instruments.  The same credit policies are used in making such
commitments as are used for instruments that are included in the consolidated
balance sheets.  Commitments to extend credit are agreements to lend
to a customer as long as there is no violation of any condition established in
the contract.  Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee.  Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements.


Each
customer's credit worthiness is evaluated on a case-by-case
basis.  The amount of collateral obtained, if deemed necessary upon
extension of credit, is based on management's credit
evaluation.  Collateral held varies but may include accounts
receivable, inventory, real estate, equipment, and income-producing commercial
properties.  In addition, the Company had $10,335,000 and $9,599,000
of letters of credit outstanding at December 31, 2009 and
2008.  Letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third
party.  The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to
customers.





Executive
officers and directors of Ameriana Bancorp and significant subsidiaries and
their related interests are loan clients of Ameriana Bancorp’s affiliate bank in
the normal course of business.  An analysis of the 2009 activity of
these loans is as follows:





2009Balance
      at beginning of year
                      
                      $
                      5,830New
      loans
                      
                      
                      8,410Repayments
                      
                      
                      (3,153
                      )Balance at end of year
                      
                      $
                      11,087





At
December 31, 2009, unfunded commitment amounts related to the outstanding loan
balances shown above totaled $548,000.





5.
            Allowance
      for Loan Losses





Year Ended December 312009
                  
                  
                  2008Balance
      at beginning of year
                  
                  $
                  2,991
                  
                  
                  $
                  2,677Provision
      for losses
                  
                  
                  2,180
                  
                  
                  
                  1,250Charge-offs
                  
                  
                  (1,230
                  )
                  
                  
                  (1,051
                  )Recoveries
                  
                  
                  64
                  
                  
                  
                  115Net
      charge-offs
                  
                  
                  (1,166
                  )
                  
                  
                  (936
                  )Balance
      at end of year
                  
                  $
                  4,005
                  
                  
                  $
                  2,991





At
December 31, 2009 and 2008, impaired loans totaled $11,401,000 and $8,151,000
with an allocation of the allowance for loan losses of $1,305,000 and
$1,024,000.





Interest
income of $799,000 and $70,000 was recognized on average impaired loans of
$11,099,000 and $3,802,000 for 2009 and 2008, respectively.





Cash
basis interest on impaired loans included above was $740,000 and $70,000 for
2009 and 2008, respectively.





At
December 31, 2009, there were three loans totaling $171,000 that were accruing
and delinquent 90 days or more, and at December 31, 2008 there was one loan for
$1,000 that was accruing and delinquent more than 90
days.  Non-accruing loans at December 31, 2009 and 2008 were
$8,882,000 and $6,218,000, respectively.


70


Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





6.
            Premises
      and Equipment





December 312009
                
                
                2008Land
                
                $
                4,254
                
                
                $
                4,254Land
      improvements
                
                
                1,220
                
                
                
                579Office
      buildings
                
                
                12,083
                
                
                
                11,981Furniture
      and equipment
                
                
                6,856
                
                
                
                6,129Automobiles
                
                
                145
                
                
                
                12124,558
                
                
                
                23,064Less
      accumulated depreciation
                
                
                9,050
                
                
                
                8,152$
                15,508
                
                
                $
                14,912





7.
            Deposits





December 312009
                
                
                2008Demand
                
                $
                130,966
                
                
                $
                110,118Savings
                
                
                24,522
                
                
                
                21,884Certificates
      of $100,000 or more
                
                
                52,515
                
                
                
                64,492Other
      certificates
                
                
                130,378
                
                
                
                127,912$
                338,381
                
                
                $
                324,406





The
Company held no brokered certificates at December 31, 2009 and
2008.





Certificates
maturing in years ending after December 31, 2009:





2010
                  
                  $
                  124,3572011
                  
                  
                  29,2702012
                  
                  
                  12,2912013
                  
                  
                  2,9032014
                  
                  
                  13,933Thereafter
                  
                  
                  139$
                  182,893




71


Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





8.   Borrowings





Borrowings
at December 31, 2009 and 2008 include Federal Home Loan Bank advances totaling
$46,375,000 and $79,925,000 with a weighted-average rate of 3.84% and
4.05%.  The advances are secured by a combination of first mortgage
loans, investment securities and overnight deposits.  At December 31,
2009, the pledged mortgage loans totaled $135,158,000, and the pledged
investment securities had a carrying and market value of
$5,820,000.





Some
advances are subject to restrictions or penalties in the event of
prepayment.  In addition, $24,000,000 of the advances outstanding at
December 31, 2009 contained options with dates ranging from August 24, 2010 to
March 10, 2014, whereby the interest rate may be adjusted by the Federal Home
Loan Bank, at which time the advances may be repaid at the option of the Company
without penalty.





Borrowings
at December 31, 2009 and 2008 also include subordinated debentures in the amount
of $10,310,000 at a rate equal to the average of 6.71% and the three-month
London Interbank Offered Rate (“LIBOR”) plus 150 basis points for the first five
years following the offering, or March 15, 2011.  After the first five
years, the securities will bear a rate equal to 150 basis points over the
three-month LIBOR.  At December 31, 2009, the interest rate was
4.23%.  These subordinated debentures mature on March 15,
2036.





Borrowings
at December 31, 2009 also include a repurchase agreement with Barclays Capital,
Inc. in the amount of $7,500,000 with a rate of 4.42%.  The repurchase
agreement has embedded interest rate caps with a four-year term ending on
September 22, 2012 that have a total notional value of $15,000,000. The interest
rate caps will provide a reduction of the interest rate during any quarter if
three-month LIBOR exceeds 3.81% on the quarterly determination
date.  These embedded interest rate caps are considered to be clearly
and closely related to the host instrument.  The repurchase agreement
has a seven-year term with a final repurchase date of September 22, 2015, and
provides Barclays Capital, Inc. with an early termination right on the four-year
anniversary date of September 22, 2012.  At December 31, 2009, pledged
investment securities for this repurchase agreement had a market value of
$9,030,000.  In 2008, the Company had one repurchase agreement in the
amount of $7,500,000 in place for part of the year, resulting in an average
balance for 2008 of $2,070,000.





Aggregate
annual maturities of borrowings at December 31, 2009 are:





FHLB
                          Advances
                        
                        
                        Repurchase
                          Agreement
                        
                        
                        Subordinated
                          Debentures
                        
                        
                        TotalMaturities
      in years ending December 312010
                        
                        $
                        15,375
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        $
                        15,3752011
                        
                        
                        6,000
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        6,0002012
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —2013
                        
                        
                        5,000
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        5,0002014
                        
                        
                        15,000
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        15,000Thereafter
                        
                        
                        5,000
                        
                        
                        $
                        7,500
                        
                        
                        $
                        10,310
                        
                        
                        
                        22,810$
                        46,375
                        
                        
                        $
                        7,500
                        
                        
                        $
                        10,310
                        
                        
                        $
                        64,185





72


Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





9.
            Income
      Taxes





The
components of the net deferred tax asset at December 31, 2009 and 2008 are as
follows:





December 312009
                            
                            
                            2008Deferred tax assets:Deferred
      compensation
                            
                            $
                            869
                            
                            
                            $
                            839General
      loan loss reserves
                            
                            
                            1,859
                            
                            
                            
                            1,385Net
      unrealized loss on securities available for sale
                            
                            
                            68
                            
                            
                            
                            —State
      and federal net operating loss carryfoward and tax credits
      carryfoward
                            
                            
                            4,230
                            
                            
                            
                            3,602Other
      real estate owned
                            
                            
                            136
                            
                            
                            
                            376Other
                            
                            
                            95
                            
                            
                            
                            677,257
                            
                            
                            
                            6,269Deferred tax liabilities:FHLB
      stock dividends
                            
                            
                            (312
                            )
                            
                            
                            (313
                            )Deferred
      loan fees
                            
                            
                            (314
                            )
                            
                            
                            (334
                            )Net
      unrealized gain on securities available for sale
                            
                            
                            —
                            
                            
                            
                            (345
                            )Mortgage
      servicing rights
                            
                            
                            (291
                            )
                            
                            
                            (307
                            )Deferred
      state tax
                            
                            
                            (199
                            )
                            
                            
                            (214
                            )Depreciation
                            
                            
                            (219
                            )
                            
                            
                            (215
                            )Prepaid
      expenses
                            
                            
                            (140
                            )
                            
                            
                            (197
                            )Goodwill
                            
                            
                            (131
                            )
                            
                            
                            (112
                            )(1,606
                            )
                            
                            
                            (2,037
                            )Net deferred tax asset before valuation
      allowance
                            
                            
                            5,651
                            
                            
                            
                            4,232Valuation
      allowanceBeginning
      balance
                            
                            
                            (637
                            )
                            
                            
                            (336
                            )Change
      during the period
                            
                            
                            (199
                            )
                            
                            
                            (301
                            )Ending
      balance
                            
                            
                            (836
                            )
                            
                            
                            (637
                            )Net
      deferred tax asset
                            
                            $
                            4,815
                            
                            
                            $
                            3,595





As of
December 31, 2009, the Company had approximately $18,185,000 of state tax loss
carryforward available to offset future franchise tax.  As of December
31, 2009, the Company had approximately $5,536,000 of federal tax loss
carryforward available to offset future federal tax.  Also, at
December 31, 2009, the Company had approximately $1,039,000 of tax credits
available to offset future federal income tax.  The state loss
carryforward begins to expire in 2023.  The federal loss carryforward
expires in 2026.  The tax credits begin to expire in
2023.  Included in the $1,039,000 of tax credits available to offset
future federal income tax are approximately $303,000 of alternative minimum tax
credits which have no expiration date.  Management believes that the
Company will be able to utilize the benefits recorded for both state and federal
loss carryforwards and federal credits within the allotted time
periods.





Retained
earnings at December 31, 2009, includes an allocation of income to bad debt
deductions of approximately $11,883,000 for which no provision for federal
income taxes has been made.  If, in the future, this portion of
retained earnings is used for any purpose other than to absorb bad debt losses,
including redemption of bank stock or excess dividends, or loss of “bank”
status, federal income taxes may be imposed at the then applicable
rates.  The unrecorded deferred income tax liability on the above
amount was approximately $4,000,000.


73





Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





The
effective income tax rate on income from continuing operations is reconciled to
the statutory corporate tax rate as follows:





Year Ended December 312009
                      
                      
                      2008Statutory
      federal tax rate
                      
                      
                      34.0
                      %
                      
                      
                      34.0
                      %Tax
      credits
                      
                      
                      0.1
                      
                      
                      
                      3.7Cash
      value of life insurance
                      
                      
                      26.4
                      
                      
                      
                      797.3Tax
      exempt interest - municipal securities and municipal loans
                      
                      
                      15.9
                      
                      
                      
                      881.3Other
                      
                      
                      (1.0
                      )
                      
                      
                      243.2Effective tax rate
                      
                      
                      75.4
                      %
                      
                      
                      1959.5
                      %





The
credit for income taxes consists of the following:





Year Ended December 312009
                  
                  
                  2008FederalCurrent
                  
                  $
                  (
      3
                  )
                  
                  $
                  189Deferred
                  
                  
                  (807
                  )
                  
                  
                  (970
                  )Tax
      benefit
                  
                  $
                  (810
                  )
                  
                  $
                  (781
                  )





The
Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction and various states and foreign jurisdictions.  With a few
exceptions, the Company is no longer subject to U.S. federal, state and local or
non-U.S. income tax examinations by tax authorities for years before
2006.





10.
Employee Benefits





Multi-Employer
Defined Benefit Pension Plan.The Company is a participating
employer in a multi-employer defined benefit pension plan.  Since the
defined benefit pension plan is a multi-employer plan, no separate actuarial
valuations are made with respect to each participating employer.  The
Company froze the defined benefit pension plan on June 30, 2004 to stop
accruing benefits to plan participants beyond what was already earned to that
date and to prevent new participants from entering the plan.  The
change was made in an effort to control and reduce pension plan expense in the
future.  The Company will continue to make contributions to meet
required funding obligations.





401(k)
Plan.The Company’s self-administered 401(k) plan became
effective April 1, 2008.  Prior to that date, the Company was a
participating employer in a multi-employer 401(k) plan.  The current
plan covers substantially all full-time employees of the Company.  The
Company matches employees’ contributions to the 401(k) plan at the rate of 100%
for the first 4% of base salary contributed by participants.




74




Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





Pension
expense for the plans totaled $453,000 and $295,000 in 2009 and 2008,
respectively.





Split-dollar life
insurance agreements.The Company
adopted the accounting guidance for separate agreements which split dollar life
insurance policy benefits between an employer and employee.  This guidance
requires the employer to recognize a liability for future benefits payable to
the employee under these agreements.  The effects of applying this guidance
must be recognized through either a change in accounting principle through an
adjustment to equity or through the retrospective application to all
periods.  For calendar year companies, this guidance was effective
beginning January 1, 2008, and upon its adoption, the Company recorded a
cumulative effect of a change in accounting principle of$1,141,000.  At
December 31, 2009 and 2008, the Company had a recorded a liability of $1,213,000
and $1,205,000, respectively.  During 2009 and 2008 the Company
recognized net expense totaling $7,000 and $64,000, respectively.





Supplemental
Executive Retirement Plan.Effective January 1, 2008, the
Company terminated the supplemental retirement plan (the “Plan”) that provided
retirement and death benefits to certain officers and directors.  At
that time, the officers and directors covered by that Plan voluntarily elected
to forego their benefits under the Plan.  Instead, the Company entered
into separate agreements with these certain officers and directors that provide
retirement and death benefits.  The Company is recording an expense
equal to the projected present value of the payment due at the full eligibility
date.  The liability for the plan at December 31, 2009 and 2008 was
$1,823,000 and $1,733,00, respectively.  The expense for the plan was
$218,000 and $169,000 for 2009 and 2008, respectively.


75


Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





The
Company has entered into employment or change in control agreements with certain
officers that provide for the continuation of salary and certain benefits for a
specified period of time under certain conditions.  Under the terms of
the agreements, these payments could occur in the event of a change in control
of the Company, as defined, along with other specific conditions.  The
contingent liability under these agreements is generally three times the annual
salary of the officer.





Stock
Options.Under the 1996 Stock Option and Incentive Plan (“1996
Plan”) and the 2006 Long-Term Incentive Plan (“2006 Plan”),  the
Company has granted options to individuals to purchase common stock at a price
equal to the fair market value at the date of grant, subject to the terms and
conditions of the plans.  The 1996 Plan and the 2006 Plan require that
options be granted at the fair market value of the stock on the date of the
grant.  Options vest and are fully exercisable when granted or over an
extended period subject to continuous employment or under other conditions set
forth in the plans.  The period for exercising options shall not
exceed ten years from the date of grant.  The plans also permit grants
of stock appreciation rights.  An amendment of the 1996 Plan extended
the plan’s term by five years and increased the number of shares reserved under
the plan from 176,000 to 352,000 shares.  The 2006 Plan permits the
granting of up to 225,000 shares.  The 1996 Plan and 2006 Plan were
approved by the stockholders of the Company.





The fair
value of each option award is estimated on the date of grant using a
Black-Scholes option pricing model that uses the assumptions noted in the
following table.  Expected volatility is based on historical
volatility of the Company’s stock and other factors.  The expected
term of options granted is derived from the output of the option valuation model
and represents the period of time that options granted are expected to be
outstanding.  The risk-free rate for periods within the contractual
life of the option is based on the U.S. Treasury yield curve in effect at the
time of the grant.





There
were no stock options granted in 2009.  The following summarizes the
assumptions used in the Black-Scholes model:





2009
                    
                    
                    2008Expected
      volatility
                    
                    N/A
                    
                    
                    
                    39.5
                    %Weighted-average
      volatility
                    
                    N/A
                    
                    
                    
                    39.5
                    %Expected
      dividends
                    
                    N/A
                    
                    
                    
                    1.73
                    %Expected
      term (in years)
                    
                    N/A
                    
                    
                    
                    8.0Risk-free
      rate
                    
                    N/A
                    
                    
                    
                    3.15
                    %




76


Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





A summary
of option activity under the Plan as of December 31, 2009, and changes during
the year then ended, is presented below.





Shares
                
                
                Weighted-
                  Average
                  Exercise Price
                
                
                Weighted-
                  Average
                  Remaining
                  Contractual
                  Term
                
                
                Aggregate
                  Intrinsic ValueOutstanding,
      beginning of year
                
                
                184,482
                
                
                $
                14.07Forfeited
                
                
                (11,500
                )
                
                
                14.08Outstanding,
      end of year
                
                
                172,982
                
                
                $
                14.07
                
                
                
                4.91
                
                
                $
                -0-Exercisable,
      end of year
                
                
                171,182
                
                
                $
                14.10
                
                
                
                4.88
                
                
                $
                -0-




The
weighted-average grant-date fair value of options granted during the year 2008
was $3.68.  There were no options granted during the year 2009, and
there were no options exercised during the years ended December 31, 2009 and
2008.





As of
December 31, 2009, there was $7,000 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
Plan.  That cost is expected to be recognized over a weighted-average
period of 0.95 years.





During
2009, the Company recognized $1,000 of share-based compensation
expense.





11.
Dividend and Capital Restrictions





The
payment of dividends by the Company depends substantially upon receipt of
dividends from the Bank, which is subject to various regulatory restrictions on
the payment of dividends.  Under current regulations, the Bank may not
declare or pay a cash dividend or repurchase any of its capital stock if the
effect thereof would cause its net worth to be reduced below regulatory capital
requirements or the amount required for its liquidation accounts.





In
addition, without prior approval, current regulations allow the Bank to pay
dividends to the Company not exceeding retained net income for the applicable
calendar year to date, plus retained net income for the preceding two
years.  Application is required by the Bank to pay dividends in excess
of this restriction.





On
September 28, 2009, following a joint examination by and discussions with the
FDIC and the Indiana Department of Financial Institutions (“DFI”), the Board of
Directors of the Bank adopted a resolution agreeing to, among other things,
receive prior written consent from the FDIC and the DFI before declaring or
paying any dividends.


77


Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





12.
Earnings Per Share





2009
                          
                          
                          2008Net
                            Loss
                          
                          
                          Weighted-
                            Average
                            Shares
                          
                          
                          Per
                            Share
                            Amount
                          
                          
                          Net
                            Income
                          
                          
                          Weighted-
                            Average
                            Shares
                          
                          
                          Per Share
                            AmountBasic
      (Loss) Earnings Per Share(Loss)
      income available to common shareholders
                          
                          $
                          (264
                          )
                          
                          
                          2,988,952
                          
                          
                          $
                          (0.09
                          )
                          
                          $
                          741
                          
                          
                          
                          2,988,952
                          
                          
                          $
                          0.25Effect
      of Dilutive Stock Options
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          —Diluted
      Earnings Per ShareIncome
      available to common shareholders and assumed conversions
                          
                          $
                          (264
                          )
                          
                          
                          2,988,952
                          
                          
                          $
                          (0.09
                          )
                          
                          $
                          741
                          
                          
                          
                          2,988,952
                          
                          
                          $
                          0.25





Options
to purchase 172,982 and 184,482 shares of common stock at exercise prices of
$9.25 to $15.56 per share were outstanding at December 31, 2009 and 2008,
respectively, but were not included in the computation of diluted earnings per
share because the options were anti-dilutive.





13.
Other Comprehensive (Loss) Income





Other
comprehensive (loss) income components and related taxes were as
follows:





2009
                      
                      
                      2008Unrealized
      gain on securities available for sale arising during the
      period
                      
                      $
                      628
                      
                      
                      $
                      1,010Less:  reclassification
      adjustment for gains realized in net income
                      
                      
                      1,680
                      
                      
                      
                      103Net
      unrealized (loss) gain
                      
                      
                      (1,052
                      )
                      
                      
                      1,113Change
      related to retirement plan
                      
                      
                      —
                      
                      
                      
                      467Other
      comprehensive (loss) income, before tax effect
                      
                      
                      (1,052
                      )
                      
                      
                      1,580Tax (benefit) expense
                      
                      
                      (413
                      )
                      
                      
                      576Other comprehensive (loss)
      income
                      
                      $
                      (639
                      )
                      
                      $
                      1,004





14.
Accumulated other comprehensive (loss) income





2009
                  
                  
                  2008Net
      unrealized (loss) gain on available-for-sale securities, net of income tax
      (benefit) expense of $(68) and $345 for 2009 and 2008,
      respectively
                  
                  $
                  (102
                  )
                  
                  $
                  537$
                  (102
                  )
                  
                  $
                  537




78


Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





15.
Regulatory Matters





The Bank
is subject to various regulatory capital requirements administered by the
federal banking agencies and is assigned to a capital category.  The
assigned capital category is largely determined by three ratios that are
calculated according to the regulations.  The ratios are intended to
measure capital relative to assets and credit risk associated with those assets
and off-balance sheet exposures.  The capital category assigned can
also be affected by qualitative judgments made by regulatory agencies about the
risk inherent in the entity’s activities that are not part of the calculated
ratios.





There are
five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized.  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 December 31,
2009 and 2008, the Bank was categorized as well capitalized and met all subject
capital adequacy requirements.  There are no conditions or events
since December 31, 2009, that management believes have changed this
classification.





On
September 28, 2009, following a joint examination by and discussions with the
FDIC and the Indiana Department of Financial Institutions, the Board of
Directors of the Bank adopted a resolution agreeing to, among other things,
adopt a capital plan to increase its Tier 1 leverage ratio to 7.75% by December
31, 2009 and 8.00% at March 31, 2010, and to increase its Total Risk-Based
Capital Ratio to 12.00% by December 31, 2009.





Actual
and required capital amounts and ratios for the Bank are as
follows:





December 31, 2009Required for
                  Well Capitalized
                
                
                Required For
                  Adequate Capital
                
                
                Actual CapitalRatio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                AmountTotal
      risk-based capital (to risk-weighted assets)
                
                
                10.00
                %
                
                $
                32,634
                
                
                
                8.00
                %
                
                $
                26,107
                
                
                
                12.51
                %
                
                $
                40,811Tier
      1 capital (to risk-weighted assets)
                
                
                6.00
                
                
                
                19,580
                
                
                
                4.00
                
                
                
                13,053
                
                
                
                11.25
                
                
                
                36,720Core
      capital (to adjusted total assets)
                
                
                5.00
                
                
                
                22,189
                
                
                
                3.00
                
                
                
                13,314
                
                
                
                8.27
                
                
                
                36,720





December 31, 2008Required for
                  Well Capitalized
                
                
                Required For
                  Adequate Capital
                
                
                Actual CapitalRatio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                AmountTotal
      risk-based capital (to risk-weighted assets)
                
                
                10.00
                %
                
                $
                32,638
                
                
                
                8.00
                %
                
                $
                26,110
                
                
                
                12.78
                %
                
                $
                41,715Tier
      1 capital (to risk-weighted assets)
                
                
                6.00
                
                
                
                19,583
                
                
                
                4.00
                
                
                
                13,055
                
                
                
                11.82
                
                
                
                38,592Core
      capital (to adjusted total assets)
                
                
                5.00
                
                
                
                23,131
                
                
                
                3.00
                
                
                
                13,879
                
                
                
                8.34
                
                
                
                38,592


79





Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





16.
Fair Value of Financial Instruments




DISCLOSURES
ABOUT FAIR VALUE OF ASSETS AND LIABILITIES




Effective
January 1, 2008, the Company adopted new accounting guidance that defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements.  This guidance has been applied
prospectively as of the beginning of the year/period.




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




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




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




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




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




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
securities valued in Level 1 are mutual funds.




Level 2
securities include U.S. agency and U.S. government sponsored enterprise
mortgage-backed securities, municipal securities, and one U.S. Small Business
Administration asset-backed security. Level 2 securities are valued by a third
party pricing service commonly used in the banking industry utilizing observable
inputs. 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.




There
currently are no securities valued in Level 3.


80




Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





The
following table presents the fair value measurements of assets recognized in the
accompanying balance sheet measured at fair value on a recurring basis and the
level within the ASC 820 fair value hierarchy in which the fair value
measurements fall at December 31, 2009 and December 31, 2008:




Fair Value Measurements UsingAvailable-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
      December 31, 2009:Mortgage-backed
      pass-through securities
                    
                    $
                    24,992,000
                    
                    
                    $
                    —
                    
                    
                    $
                    24,992,000
                    
                    
                    $
                    —Collateralized
      mortgage obligations
                    
                    
                    5,820,000
                    
                    
                    
                    —
                    
                    
                    
                    5,820,000
                    
                    
                    
                    —Municipal
      securities
                    
                    
                    3,431,000
                    
                    
                    
                    —
                    
                    
                    
                    3,431,000
                    
                    
                    
                    —Mutual
      funds
                    
                    
                    1,598,000
                    
                    
                    
                    1,598,000
                    
                    
                    
                    —
                    
                    
                    
                    —$
                    35,841,000
                    
                    
                    $
                    1,598,000
                    
                    
                    $
                    34,243,000
                    
                    
                    $
                    —At
      December 31, 2008:Mortgage-backed
      pass-through securities
                    
                    $
                    55,289,000
                    
                    
                    $
                    —
                    
                    
                    $
                    55,289,000
                    
                    
                    $
                    —Municipal
      securities
                    
                    
                    18,557,000
                    
                    
                    
                    —
                    
                    
                    
                    18,557,000
                    
                    
                    
                    —Mutual
      funds
                    
                    
                    1,525,000
                    
                    
                    
                    1,525,000
                    
                    
                    
                    —
                    
                    
                    
                    —$
                    75,371,000
                    
                    
                    $
                    1,525,000
                    
                    
                    $
                    73,846,000
                    
                    
                    $
                    —




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





Impaired
Loans (Collateral Dependent)





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




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




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




Other
Real Estate Owned




The fair value of the Company’s other
real estate owned is determined using Level 3 inputs, which include current and
prior appraisals and estimated costs to sell. The change in fair value of other
real estate owned on December 31, 2009 that was recognized during the year ended
December 31, 2009 was $806,000, which was recorded as a direct charge to current
earnings.




81




Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





The
following table presents the fair value measurements of assets and liabilities
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 December 31, 2009 and December 31,
2008:




Fair Value Measurements UsingFair Value
                    
                    
                    Quoted Prices in
                      Active Markets
                      for Identical
                      Assets
                      (Level 1)
                    
                    
                    Significant Other
                      Observable
                      Inputs
                      (Level 2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level 3)At
      December 31, 2009:Impaired
      loans
                    
                    $
                    11,401,000
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    11,401,000Other
      real estate owned
                    
                    
                    3,286,000
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    3,286,000At
      December  31, 2008:Impaired
      loans
                    
                    $
                    8,151,000
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    8,151,000Other
      real estate owned
                    
                    
                    1,404,000
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,404,000





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.  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:





December 31, 2009
                  
                  
                  December 31, 2008Carrying
                    Value
                  
                  
                  Fair
                    Value
                  
                  
                  Carrying
                    Value
                  
                  
                  Fair
                    ValueAssetsCash
      and cash equivalents
                  
                  $
                  19,588
                  
                  
                  $
                  19,588
                  
                  
                  $
                  8,449
                  
                  
                  $
                  8,449Investment
      securities available for sale
                  
                  
                  35,841
                  
                  
                  
                  35,841
                  
                  
                  
                  75,371
                  
                  
                  
                  75,371Loans
      held for sale
                  
                  
                  537
                  
                  
                  
                  537
                  
                  
                  
                  —
                  
                  
                  
                  —Loans
                  
                  
                  321,544
                  
                  
                  
                  323,890
                  
                  
                  
                  322,535
                  
                  
                  
                  326,393Interest
      and dividends receivable
                  
                  
                  1,419
                  
                  
                  
                  1,419
                  
                  
                  
                  1,749
                  
                  
                  
                  1,749Stock
      in FHLB
                  
                  
                  5,629
                  
                  
                  
                  5,629
                  
                  
                  
                  5,629
                  
                  
                  
                  5,629LiabilitiesDeposits
                  
                  
                  338,381
                  
                  
                  
                  340,940
                  
                  
                  
                  324,406
                  
                  
                  
                  327,928Borrowings
                  
                  
                  64,185
                  
                  
                  
                  60,034
                  
                  
                  
                  97,735
                  
                  
                  
                  95,762Interest
      payable
                  
                  
                  414
                  
                  
                  
                  414
                  
                  
                  
                  780
                  
                  
                  
                  780Drafts
      payable
                  
                  
                  920
                  
                  
                  
                  920
                  
                  
                  
                  1,582
                  
                  
                  
                  1,582




82





Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





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





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





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





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





Deposits: The fair values of
interest-bearing demand and savings 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.


83





Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





17.
Parent Company Financial Information





The
following are condensed financial statements for the parent company, Ameriana
Bancorp, only:





December 31Balance Sheets
                
                2009
                
                
                2008AssetsCash
                
                $
                164
                
                
                $
                276Investment
      in Bank
                
                
                40,403
                
                
                
                41,933Investments
      in affiliates
                
                
                461
                
                
                
                524Other
      assets
                
                
                1,945
                
                
                
                1,561$
                42,973
                
                
                $
                44,294Liabilities
      and shareholders’ equityNotes
      payable, other
                
                $
                10,310
                
                
                $
                10,310Other
      liabilities
                
                
                88
                
                
                
                208Shareholders’
      equity
                
                
                32,575
                
                
                
                33,776$
                42,973
                
                
                $
                44,294




Year Ended December 31Statements of Operations
                  
                  2009
                  
                  
                  2008Dividends
      from Bank
                  
                  $
                  1,380
                  
                  
                  $
                  1,600Interest
      income
                  
                  
                  14
                  
                  
                  
                  181,394
                  
                  
                  
                  1,618Operating expense
                  
                  
                  1,090
                  
                  
                  
                  1,254Income
      (loss) before income tax benefit and equity in undistributed income of
      Bank
                  
                  
                  304
                  
                  
                  
                  364Income
      tax benefit
                  
                  
                  387
                  
                  
                  
                  453691
                  
                  
                  
                  817Equity
      in undistributed income of Bank and affiliates (distributions in excess of
      equity in income)
                  
                  
                  (955
                  )
                  
                  
                  (76
                  )Net
      Income (Loss)
                  
                  $
                  (264
                  )
                  
                  $
                  741




84




Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





Year Ended December 31Statements
      of Cash Flows
                  
                  2009
                  
                  
                  2008Operating
      ActivitiesNet
      (loss) income
                  
                  $
                  (264
                  )
                  
                  $
                  741Items
      not requiring (providing) cashEquity
      in undistributed income of Bank and affiliates (distributions in excess of
      equity in income)
                  
                  
                  955
                  
                  
                  
                  76Other
      adjustments
                  
                  
                  (504
                  )
                  
                  
                  (421
                  )Net
      cash provided by operating activities
                  
                  
                  187
                  
                  
                  
                  396Financing
      ActivitiesCash
      dividends paid
                  
                  
                  (299
                  )
                  
                  
                  (478
                  )Net
      cash used in financing activities
                  
                  
                  (299
                  )
                  
                  
                  (478
                  )Change
      in cash
                  
                  
                  (112
                  )
                  
                  
                  (82
                  )Cash
      at beginning of year
                  
                  
                  276
                  
                  
                  
                  358Cash
      at end of year
                  
                  $
                  164
                  
                  
                  $
                  276




85


Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





18.
Quarterly Data (unaudited)





First
                  Quarter
                
                
                Second
                  Quarter
                
                
                Third
                  Quarter
                
                
                Fourth
                  Quarter2009Total
      interest income
                
                $
                5,823
                
                
                $
                5,580
                
                
                $
                5,655
                
                
                $
                5,283Total
      interest expense
                
                
                2,782
                
                
                
                2,530
                
                
                
                2,345
                
                
                
                1,995Net
      interest income
                
                
                3,041
                
                
                
                3,050
                
                
                
                3,310
                
                
                
                3,288Provision
      for loan losses
                
                
                338
                
                
                
                615
                
                
                
                320
                
                
                
                907Net
      income (loss)
                
                
                (113
                )
                
                
                (466
                )
                
                
                187
                
                
                
                128Securities
      gains (losses) - net
                
                
                107
                
                
                
                (5
                )
                
                
                793
                
                
                
                785Basic
      earnings (loss) per share
                
                
                (0.04
                )
                
                
                (0.15
                )
                
                
                0.06
                
                
                
                0.04Diluted
      earnings (loss) per share
                
                
                (0.04
                )
                
                
                (0.15
                )
                
                
                0.06
                
                
                
                0.04Dividends
      declared per share
                
                
                0.04
                
                
                
                0.04
                
                
                
                0.01
                
                
                
                0.01Stock
      price rangeHigh
                
                
                5.99
                
                
                
                4.42
                
                
                
                4.32
                
                
                
                3.61Low
                
                
                2.19
                
                
                
                2.50
                
                
                
                3.10
                
                
                
                2.392008Total
      interest income
                
                $
                5,935
                
                
                $
                5,859
                
                
                $
                5,848
                
                
                $
                5,939Total
      interest expense
                
                
                3,210
                
                
                
                2,846
                
                
                
                2,841
                
                
                
                2,891Net
      interest income
                
                
                2,725
                
                
                
                3,013
                
                
                
                3,007
                
                
                
                3,048Provision
      for loan losses
                
                
                371
                
                
                
                221
                
                
                
                205
                
                
                
                453Net
      income (loss)
                
                
                383
                
                
                
                383
                
                
                
                393
                
                
                
                (418
                )Securities
      gains (losses)
                
                
                49
                
                
                
                60
                
                
                
                (6
                )
                
                
                —Basic
      earnings (loss) per share
                
                
                0.13
                
                
                
                0.13
                
                
                
                0.13
                
                
                
                (0.14
                )Diluted
      earnings (loss) per share
                
                
                0.13
                
                
                
                0.13
                
                
                
                0.13
                
                
                
                (0.14
                )Dividends
      declared per share
                
                
                0.04
                
                
                
                0.04
                
                
                
                0.04
                
                
                
                0.04Stock
      price rangeHigh
                
                
                10.00
                
                
                
                9.50
                
                
                
                10.00
                
                
                
                8.00Low
                
                
                7.50
                
                
                
                8.51
                
                
                
                6.84
                
                
                
                4.05





Significant
activity in the fourth quarter of 2009





The two
primary factors impacting net income for the quarter were a larger provision for
loan losses related to management’s continuing evaluation regarding the adequacy
of the allowance for loan losses considering the current economic environment,
and $785,000 in gains from sales of available-for-sale investment
securities.


86





Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





19.  Current
and Future Accounting Matters





q
            Financial Accounting Standards
      Board (FASB)




§
            ASU No. 2009-05,Measuring Liabilities at Fair
      Valuecodified in “Fair
      Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at
      Fair Value”




In August
2009, this ASU provides amendments for fair value measurements of
liabilities.  It provides clarification that in circumstances in which
a quoted price in an active market for the identical liability is not available,
a reporting entity is required to measure fair value using one or more
techniques.  ASU 2009-05 also clarifies that when estimating a fair
value of a liability, a reporting entity is not required to include a separate
input or adjustment to other inputs relating to the existence of a restriction
that prevents the transfer of the liability.  ASU 2009-05 is effective
for the first reporting period (including interim periods) beginning after
issuance or fourth quarter 2009.  The provisions of this ASU did not
have a material impact on our financial statements.




§
            ASU 2009-01 (formerly SFAS No.
      168), Topic 105 -
      Generally Accepted Accounting Principles - FASB Accounting Standards
      Codification  and the Hierarchy of Generally Accepted Accounting
      Principles




ASU
2009-01 establishes the FASB Accounting Standards Codification (Codification) as
the single source of authoritative U.S. generally accepted accounting principles
(U.S. GAAP) recognized by the FASB to be applied by nongovernmental
entities.  Rules and interpretive releases of the SEC under authority
of federal securities laws are also sources of authoritative U.S. GAAP for SEC
registrants.  ASU 2009-01 was effective for financial statements
issued for interim and annual periods ending after September 15,
2009.  We have made the appropriate changes to GAAP references in our
financial statements.




§
            ASC 810 (Formerly SFAS No. 167,Amendments to
      FASB Interpretation No.
46(R))




In June
2009, the FASB issued consolidation guidance applicable to variable interest
entities.  The amendments to the consolidation guidance affect all
entities currently within the scope of the previous standard, as well as
qualifying special-purpose entities (QSPEs) that are currently excluded from the
scope of the previous standard.  This standard is effective as of the
beginning of the first annual reporting period that begins after November 15,
2009.  We are currently assessing the impact of this standard on our
financial condition, results of operations, and disclosures.




§
            ASC 860 (Formerly SFAS No. 166,Accounting for
      Transfers of Financial Assets Accounting for Transfers of Financial
      Assets, an amendment of FASB Statement No.
  140)




This
standard amends the derecognition accounting and disclosure guidance relating to
transfers of financial assets.  This standard eliminates the exemption
from consolidation for QSPEs, and also requires a transferor to evaluate all
existing QSPEs to determine whether it must be consolidated.  ASC 860
is effective as of the beginning of the first annual reporting period that
begins after November 15, 2009.  We are currently assessing the impact
of this standard on our financial condition, results of operations, and
disclosures.


87


Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





§
            ASC 855 (formerly SFAS No.
      165,Subsequent
      Events)




In May
2009, the FASB issued ASC 855 which establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or available to be issued.  SFAS 165
was effective for interim or annual periods ending after June 15,
2009.  We have adopted the provisions of SFAS 165.




§
            ASC 825 (formerly FASB Staff
      Position (FSP) 107-1 and APB 28-1,Interim Disclosures about Fair
      Value of Financial
Instruments)




§
            In
      April 2009, the FASB issued the FSP which requires a public entity to
      provide disclosures about fair value of financial instruments in interim
      financial information.  The FSP is effective for interim and
      annual financial periods ending after June 15, 2009.  We adopted
      the provisions of the FSP on April 1, 2009 and the impact on our
      disclosures is more fully discussed in Note
G.




§
            ASC 320 (formerly FSP FAS
      115-2, FAS124-2 and EITF 99-20-2,Recognition and Presentation
      of
Other-Than-Temporary-Impairment)




In April
2009, the FASB issued the FSP which (i) changes existing guidance for
determining whether an impairment is other than temporary to debt securities and
(ii) replaces the existing requirement that the entity’s management assert it
has both the intent and ability to hold an impaired security until recovery with
a requirement that management assert: (a) it does not have the intent to sell
the security; and (b) it is more likely than not it will not have to sell the
security before recovery of its cost basis.  Under the FSP, declines
in the fair value of held-to-maturity and available-for-sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses to the extent the impairment is related to credit
losses.  The amount of impairment related to other factors is
recognized in other comprehensive income.  The FSP is effective for
interim and annual periods ending after June 15, 2009.  We adopted the
provisions of  the FSPon April 1, 2009.  The provisions of
this ASC did not have a material impact on our financial
statements.




§
            ASC 820 (formerly FSP FAS
      157-4,Determining Fair Value When
      the Volume and Level of Activity for the Asset or Liability Have
      Significantly Decreased and Identifying Transactions That Are Not
      Orderly)




In April
2009, the FASB issued the FSP which affirms the objective of fair value when a
market is not active, clarifies and includes additional factors for determining
whether there has been a significant decrease in market activity, eliminates the
presumption that all transactions are distressed unless proven otherwise, and
requires an entity to disclose a change in valuation technique.  The
FSP is effective for interim and annual periods ending after June 15,
2009.  We adopted the provisions of the FSP on April 1,
2009.  We adopted the provisions of the FSP on April 1,
2009.  The provisions of this ASC did not have a material impact on
our financial statements.




§
            ASC 260 (formerly FSP EITF
      03-6-1,Determining Whether
      Instruments Granted in Shared-Based Payment Transaction are Participating
      Securities)




In June
2008, the FASB issued the FSP which clarifies that unvested share-based payment
awards with a right to receive nonforfeitable dividends are participating
securities.  The FSP also provides guidance on how to allocate
earnings to participating securities and compute EPS using the two-class
method.  The FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
years.  The provisions of the FSP did not have a material impact on
our EPS calculation.  The provisions of this ASC did not have a
material impact on our financial statements.


88







Ameriana
Bancorp


Notes to
Consolidated Financial Statements


(table
dollar amounts in thousands, except share data)





20.  Significant
Estimates, Concentrations and Contingencies





Accounting
principles generally accepted in the United States of America require disclosure
of certain significant estimates and current vulnerabilities due to certain
concentrations.  Estimates related to the allowance for loan losses
are reflected in the footnote regarding loans.  Current
vulnerabilities due to certain concentrations of credit risk are discussed in
the footnote on commitments and credit risk.




Litigation


The
Company is currently involved in a legal matter where the plaintiff has asserted
that the Company wrongfully deposited checks over forged
endorsements.  The plaintiff is seeking damages of
$740,000.  The Company is vigorously defending against this claim and
does not expect the resolution of this matter to have a material adverse effect
on the consolidated financial position, results of operations and cash flows of
the Company.  As such, the Company has not established any accrual
related to this matter.


Bank-Owned
Life Insurance


Approximately
47% of the Company’s investment in bank-owned life insurance was held by two
carriers at December 31, 2009 and 2008, respectively.





21.  Current
Economic Conditions




The
current protracted economic decline continues to present financial institutions
with circumstances and challenges, which in some cases have resulted in large
and unanticipated declines in the fair values of investments and other assets,
constraints on liquidity and capital and significant credit quality problems,
including severe volatility in the valuation of real estate and other collateral
supporting loans.




At
December 31, 2009, the Company held $104,231,000 in commercial real estate loans
and $23,004,000 in loans collateralized by commercial and development real
estate.  Due to national, state and local economic conditions, values
for commercial and development real estate have declined significantly, and the
market for these properties is depressed.




The
accompanying financial statements have been prepared using values and
information currently available to the Company.




Given the volatility of current
economic conditions, the values of assets and liabilities recorded in the
financial statements could change rapidly, resulting in material future
adjustments in asset values, the allowance for loan losses and capital that
could negatively impact the Company’s ability to meet regulatory capital
requirements and maintain sufficient liquidity.





22.  Risks
and Uncertainties





The
Company’s allowancefor loan losses contains certain
assumptions on the value of collateral dependent loans as well as certain
economic and industry conditions which may be subject to change within the next
year.  These changes could have an adverse impact on the allowance for
loan loss in the near term.


89





Item 9.  Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure




Not
applicable.




Item
9A(T).  Controls and Procedures




(a)
            Disclosure
      Controls and Procedures





The
Company’s management, including the Company’s principal executive officer and
principal financial officer, have evaluated the effectiveness of the Company’s
“disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”).  Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company’s disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the “SEC”) (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 the Company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required
disclosure.




(b)
            Internal
      Controls Over Financial Reporting





Management’s
annual report on internal control over financial reporting is incorporated
herein by reference to the Company’s audited Consolidated Financial Statements
in this Annual Report on Form 10-K.




This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.




(c)
            Changes
      to Internal Control Over Financial
Reporting





Except as
indicated herein, there were no changes in the Company’s internal control over
financial reporting during the three months ended December 31, 2009 that have
materially affected, or are reasonable likely to materially affect, the
Company’s internal control over financial reporting.




Item 9B.  Other
Information




Not
applicable.


90


PART
III




Item
10.  Directors, Executive Officers and Corporate
Governance




Information
concerning the directors of the Company is incorporated herein by reference to
the section captioned “Items
to be Voted on by Shareholders – Item 1 – Election of Directors” in the
Proxy Statement for the 2010 Annual Meeting of Shareholders (the “Proxy
Statement”).




Information
concerning the executive officers of the Company is incorporated herein by
reference to “Item
1.  Business – Executive Officers” in Part I of this Annual
Report on Form 10-K.




Information
concerning compliance with Section 16(a) of the Exchange Act required by this
item is incorporated herein by reference to the cover page of this Form 10-K and
the section titled “Other
Information Relating to Directors and Executive Officers — Section 16(a)
Beneficial Ownership Reporting Compliance” in the Proxy
Statement.




The
Company has adopted a Code of Ethics that applies to the Company’s principal
executive officer, principal accounting and financial officer and senior
executive officers.  For information concerning the Code of Ethics,
see the section titled “Corporate Governance and Board
Matters – Code of Ethics” in the Proxy Statement.  The Code of
Ethics is posted on the Company’s Internet Web site at www.ameriana.com.  The
Company intends to satisfy the disclosure requirement under Item 5.05 of Form
8-K regarding an amendment to or waiver from a provision of the Company’s Code
of Ethics by posting such information on its Internet site at www.ameriana.com.




Information
concerning the Audit Committee and its composition and the audit committee
financial expert and other corporate governance matters is incorporated by
reference to the section titled “Corporate Governance and Board
Matters” in the Proxy Statement.




Item
11.  Executive Compensation




The
information required by this item is incorporated herein by reference to the
sections captioned “Corporate
Governance and Board Matters—Director Compensation” and “Executive Compensation” in
the Proxy Statement.




Item 12.  Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters




Information
required by this item is incorporated herein by reference to the section
captioned “Stock
Ownership” in the Proxy Statement.




(a)           Security
Ownership of Certain Beneficial Owners





Information
required by this item is incorporated herein by reference to the section
captioned “Stock
Ownership” in the Proxy Statement.




(b)           Security
Ownership of Management





Information
required by this item is incorporated herein by reference to the section
captioned “Stock
Ownership” in the Proxy Statement.




(c)           Changes
in Control





Management
of Ameriana Bancorp knows of no arrangements, including any pledge by any person
or securities of Ameriana Bancorp, the operation of which may at a subsequent
date result in a change in control of the registrant.


91





(d)          Equity
Compensation Plan Information





The
following table sets forth information about Company common stock that may be
issued under the Company’s equity compensation plans as of December 31,
2009.  The Company does not maintain any equity compensation plans
that have not been approved by shareholders.




Plan Category
              
              Number of securities
                to be issued upon
                the exercise of
                outstanding options,
                warrants and rights
              
              
              Weighted-average
                exercise price of
                outstanding options,
                warrants and rights
              
              
              Number of securities
                remaining available
                for future issuance
                under equity
                compensation plans
                (excluding securities
                reflected in the first
                column)Equity
      compensation plansapproved
      by security holders
              
              
              172,982
              
              
              $
              14.07
              
              
              
              221,000Equity
      compensation plansnot
      approved by security holders
              
              
              n/a
              
              
              
              n/a
              
              
              
              n/aTotal
              
              
              172,982
              
              
              $
              14.07
              
              
              
              221,000





Item
13.Certain
Relationships and Related Transactions, and Director
Independence





The
information concerning certain relationships and related transactions is
incorporated herein by reference to the section captioned “Other Information Relating to
Directors and Executive Officers—Transactions with Related Persons” in
the Proxy Statement.





Information
concerning director independence is incorporated by reference to the section
titled “Items to be Voted on
by Shareholders – Item 1 – Election of Directors” in the Proxy
Statement.





Item
14.  Principal Accountant Fees and Services





The
information required by this item is incorporated herein by reference to the
section captioned “Items to be
Voted on by Shareholders – Item 2 – Ratification of the Independent Registered
Public Accounting Firm” in the Proxy Statement.


92





PART
IV





Item
15.Exhibits
and Financial Statement Schedules





List of Documents Filed as
Part of This Report





(1)           Financial
Statements.  The following
consolidated financial statements are filed under Item 8 hereof:




Report
      of Independent Registered Public Accounting FirmConsolidated
      Balance Sheets at December 31, 2009 and 2008Consolidated
      Statements of Operations for Each of the Two Years in the Period Ended
      December 31, 2009Consolidated
      Statements of Stockholders’ Equity for Each of the TwoYears in the
      Period EndedDecember
      31, 2009Consolidated
      Statements of Cash Flows for Each of the Two Years in the Period Ended
      December 31, 2009Notes
      to Consolidated Financial
Statements





(2)           Financial
Statement Schedules.All schedules for which
provision is made in the applicable accounting regulations are either not
required under the related instructions or are inapplicable, and therefore have
been omitted.




(3)           Exhibits.  The
following is a list of exhibits as part of this Annual Report on Form 10-K and
is also the Exhibit Index.




No.
                  
                  Description3.1
                  
                  Ameriana
      Bancorp Amended and Restated Articles of Incorporation (incorporated
      herein by reference to the Company’s Registration Statement on Form S-4
      filed with the SEC on September 18, 1989)3.2
                  
                  Amended
      and Restated Bylaws (incorporated herein by reference to the Company’s
      Current Report on Form 8-K filed with the SEC on October 2,
      2007)4.1
                  
                  No
      long-term debt instrument issued by the Registrant exceeds 10% of
      consolidated assets or is registered.  In accordance with
      paragraph 4 (iii) of Item 601 (b) of Regulation S-K, the Registrant will
      furnish the SEC copies of long-term debt instruments and related
      agreements upon request.10.1*
                  
                  Employment
      Agreement, dated January 1, 2008, between Ameriana Bank and Jerome J.
      Gassen (incorporated herein by reference to the Company’s Quarterly Report
      on Form 10-Q for the quarter ended March 31, 2008 filed with the SEC on
      May 15, 2008)10.2*
                  
                  Employment
      Agreement, dated January 1, 2008, between Ameriana Bank and Timothy G.
      Clark (incorporated herein by reference to the Company’s Annual Report on
      Form 10-Q for the quarter ended March 31, 2008 filed with the SEC on May
      15, 2008)10.3*
                  
                  Ameriana
      Bancorp Amended and Restated 1996 Stock Option and Incentive Plan
      (incorporated herein by reference to the Company’s Registration Statement
      on Form S-8 filed with the SEC on May 9, 2003)10.4*
                  
                  Change
      in Control Severance Agreement, dated September 20, 2005, by and between
      Ameriana Bank and James A. Freeman (incorporated herein by reference to
      the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2005 filed with the SEC on November 14,
  2005)


93




10.5*
                
                Life
      Insurance Endorsement Method Split Dollar Plan Agreement, dated May 6,
      1999, as amended, between Ameriana Bank and Timothy G. Clark (incorporated
      herein by reference to the Company’s Annual Report on Form 10-K for the
      year ended December 31, 2008,  filed with the SEC on March 30,
      2009)10.6*
                
                Employment
      Agreement, effective January 1, 2008, between Ameriana Bank and John J.
      Letter (incorporated herein by reference to the Company’s Quarterly Report
      on Form 10-Q for the quarter ended March 31, 2008 filed with the SEC on
      May 15, 2008)10.7*
                
                Supplemental
      Life Insurance Agreement, effective December 20, 2007, by and between
      Ameriana Bank and Jerome J. Gassen (incorporated herein by reference to
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2007, filed with the SEC on March 31, 2008)10.8*
                
                Supplemental
      Life Insurance Agreement, effective December 20, 2007, by and between
      Ameriana Bank and Richard E. Hennessey (incorporated herein by reference
      to the Company’s Annual Report on Form 10-K for the year ended December
      31, 2007, filed with the SEC on March 31, 2008)10.9*
                
                Ameriana
      Bank Salary Continuation Agreement dated December 15, 2008 between
      Ameriana Bank and Jerome J. Gassen (incorporated herein by reference to
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2008, filed with the SEC on March 30, 2009)10.10*
                
                Ameriana
      Bank Salary Continuation Agreement dated December 18, 2008 between
      Ameriana Bank and Timothy G. Clark (incorporated herein by reference to
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2008, filed with the SEC on March 30, 2009)10.11*
                
                Ameriana
      Bank Supplemental Retirement Plan, dated December 10, 2008 between
      Ameriana Bank and Michael E. Kent (incorporated herein by reference to the
      Company’s Annual Report on Form 10-K for the year ended December 31, 2008,
      filed with the SEC on March 30, 2009)10.12*
                
                Mr.
      Drackett’s Supplemental Retirement Plan is the same as the Supplemental
      Retirement Plan in Exhibit 10.11, which is incorporated herein by
      reference except as to: (i) the name of the Executive, which is Charles M.
      Drackett, Jr.; (ii) the date of execution, which is December 30, 2008; and
      (iii) the annual benefit amount in Section 2.1.1, which is
      $21,000.10.13*
                
                Mr.
      Danielson’s Supplemental Retirement Plan is the same as  the
      Supplemental Retirement Plan in Exhibit 10.11, which is incorporated
      herein by reference except as to: (i) the name of the Executive, which is
      Donald C. Danielson; (ii) the date of execution, which is November 17,
      2008; (iii) the normal retirement age under Section 1.10, which is age 87;
      and (iv) the annual benefit amount in Section 2.1.1, which is
      $20,000.10.14*
                
                Ameriana
      Bank Supplemental Retirement Plan dated November 15, 2008 between Ameriana
      Bank and Ronald R. Pritzke (incorporated herein by reference to the
      Company’s Annual Report on Form 10-K for the year ended December 31, 2008,
      filed with the SEC on March 30, 2009)10.15*
                
                Mr.
      Hayes’s Supplemental Retirement Plan is the same as the Supplemental
      Retirement Plan in Exhibit 10.11, which is incorporated herein by
      reference except as to: (i) the name of the Executive, which is R. Scott
      Hayes.; (ii) the date of execution, which is November 16, 2008; and (iii)
      the annual benefit amount in Section 2.1.1, which is
    $15,000.


94




10.16*
              
              Ameriana
      Bank Supplemental Retirement Plan dated December 30, 2008 between Ameriana
      Bank and Richard Hennessey (incorporated herein by reference to the
      Company’s Annual Report on Form 10-K for the year ended December 31, 2008,
      filed with the SEC on March 30,
2009)




21
            Subsidiaries




23
            Consent
      of BKD, LLP




31.1
            Rule 13(a)-14(a)
      Certification of Chief Executive
Officer




31.2
            Rule 13(a)-14(a)
      Certification of Chief Financial
Officer




32
            Certifications
      Pursuant to 18 U.S.C.
Section 1350







*  Management
contract or compensation plan or arrangement.


95


SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) 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
      BANCORPDate:
      March 31, 2010
                  By:
                  /s/
      Jerome
      J. GassenJerome
      J. GassenPresident
      and Chief Executive Officer(Duly
      Authorized
Representative)





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant in the capacities
and on the dates indicated.




By:
                                  /s/
      Jerome
      J. Gassen
                                  
                                  March 31, 2010Jerome
      J. GassenPresident,
      Chief Executive Officerand
      Director(Principal
      Executive Officer)By:
                                  /s/
      John
      J. Letter
                                  
                                  March 31, 2010John
      J. LetterSenior Vice President, Treasurer and Chief Financial Officer(Principal
      Financial and Accounting Officer)By:
                                  /s/
      Michael
      E. Bosway
                                  
                                  March 31, 2010Michael
      E. BoswayDirectorBy:
                                  /s/
      Donald
      C. Danielson
                                  
                                  March 31, 2010Donald
      C. DanielsonDirectorBy:
                                  /s/
      Charles
      M. Drackett, Jr.
                                  
                                  March 31, 2010Charles
      M. Drackett, Jr.DirectorBy:
                                  /s/
      R.
      Scott Hayes
                                  
                                  March 31, 2010R.
      Scott HayesDirectorBy:
                                  /s/
      Richard
      E. Hennessey
                                  
                                  March 31, 2010Richard
      E. HennesseyDirectorBy:
                                  /s/ Michael
      E. Kent
                                  
                                  March 31, 2010Michael
      E. KentDirectorBy:
                                  /s/
      Ronald
      R. Pritzke
                                  
                                  March 31, 2010Ronald
      R. PritzkeDirector


96