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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-K



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(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, 2005

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



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AMERIANA
BANCORP

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Indiana                                                        |  | 35-1782688                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|2118 Bundy Avenue, New Castle, Indiana                         |  | 47362-1048                          
|(Address of principal executive offices)                       |  | (Zip Code)                          

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



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Securities registered pursuant
to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $1.00 per share



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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 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 , or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ̈Accelerated Filer ̈Non-accelerated Filer  x

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

The market value of the registrants common stock held by nonaffiliates of the registrant at June 30, 2005 was
approximately $40.1 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 27, 2006, the registrant had 3,212,452 shares of its common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Proxy Statement for the 2006 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K



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##### Table of Contents

INDEX



|         |  |                                                                                                              |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                                              |  | Page
|Part I   |  |                                                                                                             
|Item 1.  |  | Business                                                                                                     |  | 1   
|Item 1A. |  | Risk Factors                                                                                                 |  | 29  
|Item 1B. |  | Unresolved Staff Comments                                                                                    |  | 32  
|Item 2.  |  | Properties                                                                                                   |  | 33  
|Item 3.  |  | Legal Proceedings                                                                                            |  | 34  
|Item 4.  |  | Submission of Matters to a Vote of Securities Holders                                                        |  | 34  
|         | 
|Part II  |  |                                                                                                             
|         |  |                                                                                                             
|Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 35  
|Item 6.  |  | Selected Financial Data                                                                                      |  | 36  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operation                         |  | 37  
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 55  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 56  
|Item 9.  |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                         |  | 84  
|Item 9A. |  | Controls and Procedures                                                                                      |  | 84  
|Item 9B. |  | Other Information                                                                                            |  | 84  
|         | 
|Part III |  |                                                                                                             
|         |  |                                                                                                             
|Item 10. |  | Directors and Executive Officers of the Registrant                                                           |  | 84  
|Item 11. |  | Executive Compensation                                                                                       |  | 84  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 84  
|Item 13. |  | Certain Relationships and Related Transactions                                                               |  | 85  
|Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 85  
|         | 
|Part IV  |  |                                                                                                             
|         |  |                                                                                                             
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  | 85  



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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 wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the
date made. The Company wishes to advise 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 (BHCA). The Company became the holding company for Ameriana Bank and Trust, SB, an Indiana chartered
savings bank headquartered in New Castle, Indiana (the Bank), in 1990. The Company also holds a minority interest in a limited partnership organized to acquire and manage real estate investments, which qualify for federal tax credits.

The Bank. The Bank began operations in 1890. Since 1935, the Bank has been a member of the Federal Home Loan Bank
(FHLB) System. Its deposits are insured to applicable limits by the Savings Association Insurance Fund (SAIF), administered by the Federal Deposit Insurance Corporation (FDIC). On June 29, 2002, the Bank
converted to an Indiana savings bank and adopted its present name. As a result of the conversion, the Bank became 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 nine other branch offices located in New Castle, Middletown, Knightstown, Morristown, Greenfield, Anderson, Avon, McCordsville and New Palestine, Indiana. The
business of the Bank consists primarily of attracting deposits from the general public and originating mortgage loans on single-family residences, multi-family and commercial real estate and construction loans. To a lesser extent, the Bank also
makes home improvement loans and consumer loans and, through its subsidiaries, engages in insurance and brokerage activities.

The Bank has
three wholly-owned subsidiaries, Ameriana Insurance Agency (AIA), Ameriana Financial Services, Inc. (AFS) and Ameriana Investment Management, Inc. (AIMI). AIA provides insurance sales from offices in New Castle,
Greenfield and Avon, Indiana. AFS offers insurance products through its ownership of an interest in Family Financial Life Insurance Company, New Orleans, Louisiana, which offers a full line of credit-related insurance products. In 2002, AFS acquired
a 20.9% ownership interest in Indiana Title Insurance Company, LLC through which it offers title insurance. AFS also operates a brokerage facility in conjunction with Linsco/Private Ledger. AIMI manages the Companys investment portfolio.

The Bank currently operates a Trust Department, which provides trust, investment and estate planning services. However, the Board of
Directors has elected to close the Trust Department, effective August 1, 2006. See Recent Developments below for more information.



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The principal sources of funds for the Banks lending activities include deposits received from the
general public, funds borrowed from the FHLB, 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 equity
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. See Recent Developments below for more information.

Recent Developments.In connection with its review of current operations, the Banks Board of Directors determined that the continued
maintenance of its Trust Department does not fit within the Banks long-term strategic plans. Accordingly, on March 3, 2006, the Banks Board resolved to close the Trust Department, effective August 1, 2006. Each of the Trust
Departments clients will receive materials in the upcoming months notifying them of the elimination of the Trust Department and coordinating with them on the delivery of any trust property currently under management.

On March 8, 2006, the Company announced the completion of its offering of $10.0 million of trust preferred securities. The Company intends to use
the proceeds from the issuance of the trust preferred securities for general corporate purposes and to increase the Banks regulatory capital.

On March 27, 2006, Paul W. Prior, the Companys Chairman of the Board, informed the Company that he intends to retire from the Boards of Directors of the Company and the Bank, effective at the 2006 annual meeting of shareholders.
At its meeting on March 27, 2006, the Board of Directors determined that upon Mr. Priors retirement: (1) Mr. Prior will become a director emeritus; (2) Michael E. Kent will become Chairman of the Board; and
(3) Ronald R. Pritzke will become Vice Chairman of the Board.

Regulatory Actions. During the second quarter of 2002, the Bank
entered into a memorandum of understanding (MOU) with the FDIC and the DFI. Among other things, the MOU required the Bank to adopt written action plans with respect to certain classified assets, revise its lending policies, require
greater financial information from borrowers, establish a loan review program and certain other internal controls. The FDIC and the DFI released the Bank from the MOU in the third quarter of 2005. The release of the MOU was contingent on the
Banks adoption of a resolution that required the Bank to continue reducing the level of assets classified as substandard, formulate and implement a written Profit Plan, abstain from purchasing additional Bank Owned Life Insurance policies,
formalize policies for leveraging strategies and maintain Tier 1 capital at or above 7% of assets. The Bank adopted the resolution on June 27, 2005.

Competition.The Bank experiences substantial competition both in attracting and retaining savings deposits and in the making of mortgage and other loans. Direct competition for savings deposits comes from
other savings institutions, commercial banks, insurance companies, and credit unions located in the Banks market area. Additional significant competition for savings deposits comes from money market mutual funds and corporate and government
debt securities.

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 real estate loans normally comes from other thrift institutions, commercial banks, mortgage bankers, mortgage brokers and insurance companies. The Bank has been able to compete
effectively in its market area.

The Bank has branch offices in Henry, Hancock, Hendricks, Shelby and Madison Counties in Indiana. In
addition to savings banks with offices in these counties, the Bank competes with several commercial banks and savings institutions in surrounding counties, many of which have 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.



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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, and equity lines of credit 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, Hendricks, Madison, Shelby, Delaware and Marion counties in the State of Indiana.



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The following table sets forth information concerning the Banks loans by type of loan at the dates
indicated.



|                           |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|-------------------------- |  | ---------------------- | ------- | - | ------ | - | ------ | ---- | ------- |  | ------ | ------ |  | ---- | ------- |  | ------ | - | - | - | ------- | ------ | ------ | - |  | - | ------- |  | ------ | -
|                           |  | At December 31,        |        
|                           |  | 2005                   |         |   | 2004   |   |        | 2003 |         |  | 2002   |        |  | 2001 |        
|                           |  | Amount                 |         | % |        |   | Amount |      | %       |  |        | Amount |  | %    |         |  | Amount |   | % |   |         | Amount |        | % | 
|                           |  | (Dollars in thousands) |        
|Real estate loans:         |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Commercial                 |  | $                      | 68,484  |   | 30.58  | % |        | $    | 76,222  |  | 37.76  | %      |  | $    | 76,033  |  | 36.12  | % |   | $ | 84,974  |        | 26.72  | % |  | $ | 61,678  |  | 16.91  | %
|Residential loans          |  |                        | 98,495  |   | 43.99  |   |        |      | 93,544  |  | 46.35  |        |  |      | 100,865 |  | 47.92  |   |   |   | 157,622 |        | 49.57  |   |  |   | 211,601 |  | 58.00  |  
|Construction loans         |  |                        | 44,803  |   | 20.01  |   |        |      | 13,339  |  | 6.61   |        |  |      | 18,035  |  | 8.57   |   |   |   | 42,714  |        | 13.43  |   |  |   | 42,045  |  | 11.52  |  
|Commercial loans           |  |                        | 7,962   |   | 3.56   |   |        |      | 14,334  |  | 7.10   |        |  |      | 7,672   |  | 3.64   |   |   |   | 19,192  |        | 6.03   |   |  |   | 18,536  |  | 5.08   |  
|Consumer loans:            |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Mobile home and auto loans |  |                        | 3,098   |   | 1.38   |   |        |      | 3,656   |  | 1.81   |        |  |      | 5,191   |  | 2.47   |   |   |   | 10,092  |        | 3.17   |   |  |   | 15,941  |  | 4.37   |  
|Loans secured by deposits  |  |                        | 582     |   | 0.26   |   |        |      | 506     |  | 0.25   |        |  |      | 811     |  | 0.39   |   |   |   | 1,130   |        | 0.36   |   |  |   | 1,348   |  | 0.37   |  
|Home improvement loans     |  |                        | 218     |   | 0.10   |   |        |      | 113     |  | 0.06   |        |  |      | 206     |  | 0.10   |   |   |   | 248     |        | 0.08   |   |  |   | 403     |  | 0.11   |  
|Other                      |  |                        | 276     |   | 0.12   |   |        |      | 129     |  | 0.06   |        |  |      | 1,661   |  | 0.79   |   |   |   | 2,043   |        | 0.64   |   |  |   | 13,294  |  | 3.64   |  
|                           |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Total                      |  |                        | 223,918 |   | 100.00 | % |        |      | 201,843 |  | 100.00 | %      |  |      | 210,474 |  | 100.00 | % |   |   | 318,015 |        | 100.00 | % |  |   | 364,846 |  | 100.00 | %
|                           |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Less:                      |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Loans in process           |  |                        | 2,485   |   |        |   |        |      | 1,966   |  |        |        |  |      | 2,271   |  |        |   |   |   | 4,401   |        |        |   |  |   | 12,725  |  |        |  
|Deferred loan fees         |  |                        | 307     |   |        |   |        |      | 405     |  |        |        |  |      | 318     |  |        |   |   |   | 362     |        |        |   |  |   | 8       |  |        |  
|Loan loss reserve          |  |                        | 2,835   |   |        |   |        |      | 3,128   |  |        |        |  |      | 3,744   |  |        |   |   |   | 8,666   |        |        |   |  |   | 1,730   |  |        |  
|                           |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Subtotal                   |  |                        | 5,627   |   |        |   |        |      | 5,499   |  |        |        |  |      | 6,333   |  |        |   |   |   | 13,429  |        |        |   |  |   | 14,463  |  |        |  
|                           |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  
|Total                      |  | $                      | 218,291 |   |        |   |        | $    | 196,344 |  |        |        |  | $    | 204,141 |  |        |   |   | $ | 304,586 |        |        |   |  | $ | 350,383 |  |        |  
|                           |  |                        |         |   |        |   |        |      |         |  |        |        |  |      |         |  |        |   |   |   |         |        |        |   |  |   |         |  |        |  



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The following table shows, at December 31, 2005, 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 in
|                                                |  | 2006                             |        | 2007 - 2010 |   | 2011 andThereafter |  | Total
|                                                |  | (In thousands)                  
|Type of Loan:                                   |  |                                  |        |             |   |                    |  |       |         |  |   |        
|Residential and commercial real estate mortgage |  | $                                | 4,616  |             | $ | 8,935              |  | $     | 153,428 |  | $ | 166,979
|Real estate construction                        |  |                                  | 28,291 |             |   | 11,312             |  |       | 5,200   |  |   | 44,803 
|Other                                           |  |                                  | 5,261  |             |   | 6,177              |  |       | 698     |  |   | 12,136 
|                                                |  |                                  |        |             |   |                    |  |       |         |  |   |        
|Total                                           |  | $                                | 38,168 |             | $ | 26,424             |  | $     | 159,326 |  | $ | 223,918
|                                                |  |                                  |        |             |   |                    |  |       |         |  |   |        

The following table sets forth the dollar amount of the Companys aggregate loans due after
one year from December 31, 2005, 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 |  | $              | 41,064 |                 | $ | 121,299 |  | $ | 162,363
|Real estate construction                        |  |                | 13,840 |                 |   | 2,672   |  |   | 16,512 
|Other loans                                     |  |                | 6,792  |                 |   | 83      |  |   | 6,875  
|                                                |  |                |        |                 |   |         |  |   |        
|Total                                           |  | $              | 61,696 |                 | $ | 124,054 |  | $ | 185,750
|                                                |  |                |        |                 |   |         |  |   |        

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 substantially shorter period. The Bank generally sells fixed-rate mortgage loans in the secondary market and retains adjustable-rate loans in its portfolio. Some fixed-rate mortgage loans, primarily those with contractual
maturities of fifteen years or less, may be retained by the Bank 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. Most of
the residential mortgage loans originated and retained by the Bank in 2005 were hybrid loans with a fixed-rate for five and seven years and adjusts 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 $5.3 million or 11.7% of the construction loan portfolio at December 31, 2005 compared to $2.3 million or 17.7% at December 31, 2004.

In 2005, the Bank originated $19.5 million in adjustable-rate residential mortgage loans, including hybrids, and $18.0 million in fixed-rate mortgage
loans. In 2004, the Bank originated $13.2 million in adjustable-rate residential mortgage loans, and $20.9 million in fixed-rate mortgage loans. Sales of fixed-rate residential mortgage loans into the secondary market in 2005 and 2004 were $8.8
million and $21.2 million, respectively. Gains on residential loan sales in 2005 were $176,000, compared with $309,000 in 2004.



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Commercial Real Estate and Commercial Real Estate Construction Lending. The Bank originates loans
secured by both owner-occupied and non-owner-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. The Banks commercial real estate loans range from $100,000 to $5.0 million. The commercial real estate loans generated 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 $39.5 million or 88.3% of the construction loan portfolio at December 31, 2005 compared to $11.0 million or 82.3% at December 31, 2004. The increase was
mainly due to a commercial lender hired in late 2004 who specialized in commercial real estate construction loans. As these loans mature they will either pay-off or roll to a permanent commercial real estate loan.

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, most of the Banks construction loans are made on homes that are pre-sold, for which permanent financing is already arranged.

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.

Consumer Lending. The
consumer lending portfolio includes automobile loans, home equity lines, 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.

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.



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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. These 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

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, depositors and walk-in customers, and commissioned loan agents. The Bank also obtains consumer and commercial loans from paid brokers. The Bank obtained $12.2 million of loans from brokers and other financial institutions
through loan participations in 2005. 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 to other financial
institutions and institutional investors. 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, 2005, the Bank was servicing $161.5 million of loans for others. The aggregate book value of capitalized servicing rights at December 31, 2005 was $1.1 million.

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. 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.

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 vice president of mortgage banking or the Banks loan committee will analyze the loan application and the property to be used as collateral and subsequently approve or deny the loan request. The
Loan Committee, consisting of members of the Board or management appointed by the Board of Directors, must approve loans between $1,000,000 and $4,500,000. The Board of Directors approves all loans in excess of $4,500,000. If an expedient approval
is necessary for requests over $1,000,000 but less than $4,500,000, approval may be obtained by two of the following individuals: Chief Executive Officer, Chief Operating Officer, and Chief Credit Officer. In connection with the origination of
single-family, residential adjustable-rate loans, borrowers are qualified at a rate of interest equal to the second year rate, 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.



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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, and changes of property ownership and for 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 from none to 1.00 point (one point being equivalent to 1% of the principal amount of the
loan). In accordance with Statement of Financial Accounting Standard No. 91, 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 4 to the Consolidated Financial Statements included under
Item 8 of this Form 10-K.

Delinquencies. When a borrower defaults upon 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 Banks loan committee reviews delinquency reports weekly and monthly.

The Bank follows the collection processes required by Freddie Mac and Fannie Mae 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.



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##### Table of Contents

Non-Performing Assets and Asset Classification. Loans are reviewed on a regular basis and are
placed on non-accrual status when, in the opinion of management, the collection of additional interest is doubtful. Residential mortgage loans are placed on non-accrual status when either principal or interest is 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 becomes over 120 days delinquent. Commercial business and real estate loans are placed on
non-accrual status when the loan is 90 days or more past due. Interest accrued and unpaid at the time a loan is placed on non-accrual 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 the lower of the unpaid principal balance of the related loan or 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 non-performing assets at the
dates indicated.



|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |        |   |  |   |       |  
|------------------------------------------------------ |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ------ | - |  | - | ----- | -
|                                                       |  | At December 31,        |      
|                                                       |  | 2005                   |       |   | 2004 |   |       | 2003 |  |   | 2002  |   |  | 2001 |       
|                                                       |  | (Dollars in thousands) |      
|Loans accounted for on a non-accrual basis:            |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |        |   |  |   |       |  
|Real Estate:                                           |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |        |   |  |   |       |  
|Residential                                            |  | $                      | 494   |   |      | $ | 1,083 |      |  | $ | 1,691 |   |  | $    | 3,281  |   |  | $ | 818   |  
|Commercial                                             |  |                        |      |   |      |   | 3,032 |      |  |   | 3,390 |   |  |      | 2,269  |   |  |   | 1,348 |  
|Construction                                           |  |                        | 1,960 |   |      |   | 1,604 |      |  |   | 3,217 |   |  |      |       |   |  |   |      |  
|Commercial                                             |  |                        | 14    |   |      |   | 10    |      |  |   | 85    |   |  |      | 12,500 |   |  |   |      |  
|Consumer                                               |  |                        |      |   |      |   | 7     |      |  |   |      |   |  |      | 257    |   |  |   | 12    |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |        |   |  |   |       |  
|Total                                                  |  |                        | 2,468 |   |      |   | 5,736 |      |  |   | 8,383 |   |  |      | 18,307 |   |  |   | 2,178 |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |        |   |  |   |       |  
|Accruing loans contractually past due 90 days or more: |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |        |   |  |   |       |  
|Real Estate:                                           |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |        |   |  |   |       |  
|Residential                                            |  |                        | 90    |   |      |   | 143   |      |  |   | 74    |   |  |      | 103    |   |  |   | 268   |  
|Commercial                                             |  |                        |      |   |      |   |      |      |  |   |      |   |  |      | 28     |   |  |   |      |  
|Consumer                                               |  |                        |      |   |      |   | 1     |      |  |   |      |   |  |      | 4      |   |  |   | 127   |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |        |   |  |   |       |  
|Total                                                  |  |                        | 90    |   |      |   | 144   |      |  |   | 74    |   |  |      | 135    |   |  |   | 395   |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |        |   |  |   |       |  
|Total of non-accrual and 90 days past due loans (1)    |  | $                      | 2,558 |   |      | $ | 5,880 |      |  | $ | 8,457 |   |  | $    | 18,442 |   |  | $ | 2,573 |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |        |   |  |   |       |  
|Percentage of total loans                              |  |                        | 1.16  | % |      |   | 2.95  | %    |  |   | 4.07  | % |  |      | 5.89   | % |  |   | 0.74  | %
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |        |   |  |   |       |  
|Other non-performing assets (1)                        |  | $                      | 1,413 |   |      | $ | 572   |      |  | $ | 623   |   |  | $    | 525    |   |  | $ | 606   |  
|                                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |        |   |  |   |       |  

---

|(1) | The Company had no troubled debt restructurings at the dates indicated.
|--- | -----------------------------------------------------------------------

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

The Companys non-performing loans decreased $3.3 million for the year ended December 31,
2005. The decrease was primarily related to two real estate development loans. The first was for a commercial real estate loan for a condominium project in Lafayette, Indiana, with a principal balance of $2.5 million that was classified as
non-accrual in December of 2004. This loan was partially charged-off by $750,000 in 2005 with the remaining $1.8 million included in the construction loan non-accrual balance at December 31, 2005 in the above table. The second was from the
workout of loans to a builder/developer group included in the 2004 and 2003 non-accrual construction loan totals. The properties securing this loan were foreclosed in August 2005 and transferred to real estate owned. The balance of these properties
included in real estate owned was $1.1 million at December 31, 2005.

During 2005, the Bank would have recorded gross interest income
of $207,000 on the loans set forth above as accounted for on a non-accrual basis, if such loans had been current in accordance with their terms. Instead, the Bank recorded interest income of $7,000 on those loans for the year.

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.



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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 losses on loans. The Banks management establishes general loan loss reserves based on, among other things, estimates of the 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 losses on delinquent loans when it determines that losses are anticipated to be incurred on the underlying properties. At December 31, 2005, the Banks allowance for loan losses amounted to $2.8
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.



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##### Table of Contents

The following table sets forth an analysis of the Banks aggregate allowance for loan losses for the
periods indicated.



|                                                                                     |  |                         |        |    |      |   |        |      |  |   |         |   |  |      |       |   |  |   |       |  
|------------------------------------------------------------------------------------ |  | ----------------------- | ------ | -- | ---- | - | ------ | ---- |  | - | ------- | - |  | ---- | ----- | - |  | - | ----- | -
|                                                                                     |  | Year Ended December 31, |       
|                                                                                     |  | 2005                    |        |    | 2004 |   |        | 2003 |  |   | 2002    |   |  | 2001 |      
|                                                                                     |  | (Dollars in thousands)  |       
|Balance at Beginning of Period                                                       |  | $                       | 3,128  |    |      | $ | 3,744  |      |  | $ | 8,666   |   |  | $    | 1,730 |   |  | $ | 1,489 |  
|                                                                                     |  |                         |        |    |      |   |        |      |  |   |         |   |  |      |       |   |  |   |       |  
|Charge-Offs:                                                                         |  |                         |        |    |      |   |        |      |  |   |         |   |  |      |       |   |  |   |       |  
|Real estate loans:                                                                   |  |                         |        |    |      |   |        |      |  |   |         |   |  |      |       |   |  |   |       |  
|Commercial                                                                           |  |                         | 34     |    |      |   | 674    |      |  |   | 68      |   |  |      |      |   |  |   |      |  
|Residential                                                                          |  |                         | 237    |    |      |   | 208    |      |  |   | 182     |   |  |      | 202   |   |  |   | 29    |  
|Construction                                                                         |  |                         | 1,165  |    |      |   | 20     |      |  |   |        |   |  |      | 24    |   |  |   |      |  
|Commercial loans                                                                     |  |                         | 31     |    |      |   | 16     |      |  |   | 10,902  |   |  |      |      |   |  |   |      |  
|Consumer loans                                                                       |  |                         | 65     |    |      |   | 216    |      |  |   | 242     |   |  |      | 162   |   |  |   | 117   |  
|                                                                                     |  |                         |        |    |      |   |        |      |  |   |         |   |  |      |       |   |  |   |       |  
|                                                                                     |  |                         | 1,532  |    |      |   | 1,134  |      |  |   | 11,394  |   |  |      | 388   |   |  |   | 146   |  
|                                                                                     |  |                         |        |    |      |   |        |      |  |   |         |   |  |      |       |   |  |   |       |  
|Recoveries:                                                                          |  |                         |        |    |      |   |        |      |  |   |         |   |  |      |       |   |  |   |       |  
|Real estate loans:                                                                   |  |                         |        |    |      |   |        |      |  |   |         |   |  |      |       |   |  |   |       |  
|Construction                                                                         |  |                         |       |    |      |   |       |      |  |   |        |   |  |      |      |   |  |   |      |  
|Residential                                                                          |  |                         | 97     |    |      |   |       |      |  |   | 1       |   |  |      |      |   |  |   | 12    |  
|Commercial                                                                           |  |                         | 552    |    |      |   |       |      |  |   |        |   |  |      |      |   |  |   |      |  
|Construction                                                                         |  |                         |       |    |      |   |       |      |  |   |        |   |  |      |      |   |  |   |      |  
|Commercial loans                                                                     |  |                         | 3,515  |    |      |   |       |      |  |   |        |   |  |      |      |   |  |   |      |  
|Consumer loans                                                                       |  |                         | 43     |    |      |   | 126    |      |  |   | 31      |   |  |      | 24    |   |  |   | 15    |  
|                                                                                     |  |                         |        |    |      |   |        |      |  |   |         |   |  |      |       |   |  |   |       |  
|                                                                                     |  |                         | 4,207  |    |      |   | 126    |      |  |   | 32      |   |  |      | 24    |   |  |   | 27    |  
|                                                                                     |  |                         |        |    |      |   |        |      |  |   |         |   |  |      |       |   |  |   |       |  
|Net recoveries (charge-offs)                                                         |  |                         | 2,675  |    |      |   | (1,008 | )    |  |   | (11,362 | ) |  |      | (364  | ) |  |   | (119  | )
|                                                                                     |  |                         |        |    |     
|Transfer to allowance for unfunded commitments                                       |  |                         | (116   | )  |      |   |       |      |  |   |        |   |  |      |      |   |  |   |      |  
|                                                                                     |  |                         |        |    |     
|Provision (adjustment) for loan losses                                               |  |                         | (2,852 | )  |      |   | 392    |      |  |   | 6,440   |   |  |      | 7,300 |   |  |   | 360   |  
|                                                                                     |  |                         |        |    |      |   |        |      |  |   |         |   |  |      |       |   |  |   |       |  
|Balance at end of period                                                             |  | $                       | 2,835  |    |      | $ | 3,128  |      |  | $ | 3,744   |   |  | $    | 8,666 |   |  | $ | 1,730 |  
|                                                                                     |  |                         |        |    |      |   |        |      |  |   |         |   |  |      |       |   |  |   |       |  
|Ratio of net charge-offs (recoveries) to average loans outstanding during the period |  |                         | (1.30  | )% |      |   | 0.52   | %    |  |   | 4.25    | % |  |      | 0.11  | % |  |   | 0.03  | %
|                                                                                     |  |                         |        |    |      |   |        |      |  |   |         |   |  |      |       |   |  |   |       |  
|Allowance for loan losses to loans                                                   |  |                         | 1.28   | %  |      |   | 1.57   | %    |  |   | 1.80    | % |  |      | 2.77  | % |  |   | 0.49  | %
|                                                                                     |  |                         |        |    |      |   |        |      |  |   |         |   |  |      |       |   |  |   |       |  

The Company had a provision adjustment of $2.9 million for 2005 compared to a provision expense of
$392,000 in 2004. The 2005 provision adjustment reflected net recoveries of $2.7 million. The 2005 recoveries of $4.2 million included settlements related to the CMC lease pools and full recovery of a $509,000 commercial real estate loan that was
fully charged off in 2004.

The provision for loan losses in 2004 decreased to $392,000 from $6.4 million from 2003. The provision expense
for both 2003 and 2002 was significantly higher than other periods primarily due to the increase in non-accrual loans in 2003 and 2002 and increased charge-offs in 2003. The two lease pools purchased from CMC totaling $10.9 million had 50% reserves
at year-end 2002 due to an expected lengthy litigation process, and the remaining 50% was charged off in 2003 due to continuing uncertainty surrounding the prospects for eventual recovery from the sureties (see Item 3  Legal
Proceedings for more information on the CMC leases). The loans to the builder/developer group discussed under Non-Performing Assets and Asset Classification above and its related parties had reserves of $30,000, $261,000,
$831,000, and $895,000 at December 31, 2005, 2004, 2003 and 2002, respectively. Property securing one of the loans to the builder/developer was foreclosed in 2005, charged-down to fair value less selling costs, and transferred to real estate
owned. The charge-down on this property is included in construction loan charge-offs. The remaining reserves were necessary to reflect managements view on



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##### Table of Contents

the risk in the loan portfolio due to the change in the portfolio mix and other problem loans. See also Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations  Loans  Credit Quality.

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,        |      
|                                |  | 2005                   |       |                                                  | 2004   |   |        | 2003 |                                                 
|                                |  | Amount                 |       | 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                      |  | $                      | 1,545 |                                                  | 30.58  | % |        | $    | 2,013                                            |  | 37.76  | %      |  | $                                                | 1,686 |  | 36.12  | %
|Residential                     |  |                        | 502   |                                                  | 43.99  |   |        |      | 462                                              |  | 46.35  |        |  |                                                  | 620   |  | 47.92  |  
|Construction                    |  |                        | 697   |                                                  | 20.01  |   |        |      | 247                                              |  | 6.61   |        |  |                                                  | 1,095 |  | 8.57   |  
|Commercial loans                |  |                        | 27    |                                                  | 3.56   |   |        |      | 319                                              |  | 7.10   |        |  |                                                  | 192   |  | 3.64   |  
|Consumer loans                  |  |                        | 64    |                                                  | 1.86   |   |        |      | 87                                               |  | 2.18   |        |  |                                                  | 151   |  | 3.75   |  
|                                |  |                        |       |                                                  |        |   |        |      |                                                  |  |        |        |  |                                                  |       |  |        |  
|Total allowance for loan losses |  | $                      | 2,835 |                                                  | 100.00 | % |        | $    | 3,128                                            |  | 100.00 | %      |  | $                                                | 3,744 |  | 100.00 | %
|                                |  |                        |       |                                                  |        |   |        |      |                                                  |  |        |        |  |                                                  |       |  |        |  



|                                |  |                        |       |                                                  |        |   |        |   |                                                  |  |        |  
|------------------------------- |  | ---------------------- | ----- | ------------------------------------------------ | ------ | - | ------ | - | ------------------------------------------------ |  | ------ | -
|                                |  | At December 31,        |      
|                                |  | 2002                   |       |                                                  | 2001   |  
|                                |  | 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                      |  | $                      | 1,414 |                                                  | 26.72  | % |        | $ | 617                                              |  | 16.91  | %
|Residential                     |  |                        | 772   |                                                  | 49.57  |   |        |   | 417                                              |  | 58.00  |  
|Construction                    |  |                        | 539   |                                                  | 13.43  |   |        |   | 90                                               |  | 11.52  |  
|Commercial loans                |  |                        | 5,618 |                                                  | 6.03   |   |        |   | 185                                              |  | 5.08   |  
|Consumer loans                  |  |                        | 323   |                                                  | 4.25   |   |        |   | 421                                              |  | 8.49   |  
|                                |  |                        |       |                                                  |        |   |        |   |                                                  |  |        |  
|Total allowance for loan losses |  | $                      | 8,666 |                                                  | 100.00 | % |        | $ | 1,730                                            |  | 100.00 | %
|                                |  |                        |       |                                                  |        |   |        |   |                                                  |  |        |  



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Investment Activities

Interest and dividends on investment securities, mortgage-backed securities, collateralized mortgage obligations, FHLB stock and other investments provide the second largest source of income for the Bank (after
interest on loans), constituting 32.3% of the Banks total interest income (and dividends) for fiscal 2005. The Bank maintains its liquid assets at levels believed adequate to meet requirements of normal banking activities and potential savings
outflows.

As an Indiana savings 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 savings banks may also invest in collateralized mortgage obligations to the same extent as national banks. An Indiana savings 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 savings bank may not invest more than 10% of its equity capital in the investment securities of any one issuer. An
Indiana savings 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
savings bank may purchase an unrated security if it obtains financial information adequate to document the investment quality of the security.

The Banks investment portfolio consists primarily of obligations issued by federal agencies such as Fannie Mae, the FHLB and the FFCB System, mortgage-backed securities issued by Ginnie Mae and Freddie Mac. The Bank has also invested
in trust-preferred securities, municipal securities and mutual funds and maintains interest-bearing deposits in other financial institutions (primarily the FHLBs). As a member of the FHLB System, the Bank is also required to hold stock in the FHLBs
of Indianapolis and Cincinnati. At December 31, 2005, the Bank owned mutual funds issued by Shay Financial Services, Inc. with a book value of $12.8 million and a market value of $12.3 million. The Bank did not own any other security of a
single issuer that had an aggregate book value in excess of 10% of its equity at December 31, 2005.

The following table sets forth
the carrying value of the Banks investments in federal agency obligations and mortgage-backed securities, collaterized mortgage obligations and other investments at the dates indicated.



|                                                               |  |                  |   |                    |   |         |  |      |         |  |   |       
|-------------------------------------------------------------- |  | ---------------- | - | ------------------ | - | ------- |  | ---- | ------- |  | - | ------
|                                                               |  | At December 31, 
|                                                               |  | Held to Maturity |   | Available For Sale
|                                                               |  | 2005             |   | 2004               |   | 2005    |  | 2004
|                                                               |  | (In thousands)  
|Federal agencies                                               |  |                  |  |                    | $ | 92,255  |  | $    | 89,412  |  |   |      
|Mortgage-backed securities and collateral mortgage obligations |  |                  |  |                    |   | 44,065  |  |      | 45,715  |  |   |      
|Equity securities                                              |  |                  |  |                    |   |        |  |      | 12,290  |  | $ | 12,032
|Municipal securities                                           |  |                  |  |                    |   | 20,362  |  |      | 19,769  |  |   |      
|Other investment securities                                    |  |                  |  |                    |   | 1,640   |  |      | 1,500   |  |   |      
|                                                               |  |                  |   |                    |   |         |  |      |         |  |   |       
|Total investments                                              |  | $                |  |                    | $ | 158,322 |  | $    | 168,686 |  | $ | 12,032
|                                                               |  |                  |   |                    |   |         |  |      |         |  |   |       



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##### Table of Contents

The following table sets forth information regarding maturity distribution and average yields for the
Banks investment securities portfolio at December 31, 2005. The Banks federal agencies investment portfolio consists of obligations issued by Freddie Mac, FHLB, Fannie Mae, and the FFCB System.



|                           |  |                        |        |       |           |   |        |            |        |  |               |        |  |       |        |  |        |   |       |   |       |        |      |       |  |   |        |  |      |  
|-------------------------- |  | ---------------------- | ------ | ----- | --------- | - | ------ | ---------- | ------ |  | ------------- | ------ |  | ----- | ------ |  | ------ | - | ----- | - | ----- | ------ | ---- | ----- |  | - | ------ |  | ---- | -
|                           |  | Within 1 Year          |        |       | 1-5 Years |   |        | 5-10 Years |        |  | Over 10 Years |        |  | Total |       
|                           |  | Amount                 |        | Yield |           |   | Amount |            | Yield  |  |               | Amount |  | Yield |        |  | Amount |   | Yield |   |       | Amount |      | Yield | 
|                           |  | (Dollars in thousands) |       
|Federal agencies           |  | $                      | 24,753 |       | 2.06      | % |        | $          | 64,659 |  | 3.02          | %      |  |       |       |  |       |   |       |   |      |        |     |       |  | $ | 89,412 |  | 2.76 | %
|Municipal securities (1)   |  |                        |       |       |          |   |        |            |       |  |              |        |  | $     | 19,769 |  | 5.37   | % |       |   |      |        |     |       |  |   | 19,769 |  | 5.40 |  
|Mutual funds               |  |                        | 12,290 |       | 4.07      |   |        |            |       |  |              |        |  |       |       |  |       |   |       |   |      |        |     |       |  |   | 12,290 |  | 4.03 |  
|Trust preferred securities |  |                        |       |       |          |   |        |            |       |  |              |        |  |       |       |  |       |   |       | $ | 1,500 |        | 8.86 | %     |  |   | 1,500  |  | 8.86 |  

---

|(1) | Presented on a tax equivalent basis using a tax rate of 34%
|--- | -----------------------------------------------------------

The Banks mortgage-backed securities include both fixed and adjustable-rate securities. At December 31, 2005, the Banks mortgage-backed securities consisted of the following:



|                                |  |                        |        |              |      |  
|------------------------------- |  | ---------------------- | ------ | ------------ | ---- | -
|                                |  | Carrying Amount        |        | Average Rate |     
|                                |  | (Dollars in thousands) |       
|Variable-rate:                  |  |                        |        |              |      |  
|Repricing in one year or less   |  | $                      | 1,469  |              | 5.82 | %
|Repricing in one to five years  |  |                        | 17,879 |              | 4.28 |  
|Repricing in five to ten years  |  |                        |       |              |     |  
|Fixed-rate:                     |  |                        |        |              |      |  
|Maturing in five years or less  |  |                        | 11,910 |              | 3.11 |  
|Maturing in five to ten years   |  |                        | 9,682  |              | 4.47 |  
|Maturing in more than ten years |  |                        | 4,775  |              | 6.14 |  
|                                |  |                        |        |              |      |  
|Total                           |  | $                      | 45,715 |              | 4.09 |  
|                                |  |                        |        |              |      |  

Sources of Funds

General. Savings accounts 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 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.

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,
NOW 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, 2005, approximately 44.8%, or $147.5 million, of the Banks aggregate
retail 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 passbook and 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 deposits from the brokered market. The Bank held a brokered certificate for
$10.0 million at 4.80% at December 31, 2005. The Bank had no brokered certificates at December 31, 2004.



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##### Table of Contents

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.



|                                  |  |                              |         |  |                                     |   |  |                              |         |   |                                     |   |         |                              |        |   |  |   |         |   |  |   |         |  |        |  
|--------------------------------- |  | ---------------------------- | ------- |  | ----------------------------------- | - |  | ---------------------------- | ------- | - | ----------------------------------- | - | ------- | ---------------------------- | ------ | - |  | - | ------- | - |  | - | ------- |  | ------ | -
|                                  |  | Balance at December 31, 2005 |         |  | Increase (Decrease) from Prior Year |   |  | Balance at December 31, 2004 |         |   | Increase (Decrease) From Prior Year |   |         | Balance at December 31, 2003 |       
|                                  |  | (Dollars in thousands)       |        
|Savings deposits                  |  | $                            | 25,034  |  | 7.38                                | % |  | $                            | (2,462  | ) |                                     | $ | 27,496  |                              | 7.99   | % |  | $ | (3,062  | ) |  | $ | 30,558  |  | 8.48   | %
|NOW accounts                      |  |                              | 51,933  |  | 15.30                               |   |  |                              | (2,190  | ) |                                     |   | 54,123  |                              | 15.73  |   |  |   | 10,961  |   |  |   | 43,162  |  | 12.48  |  
|Super NOW accounts                |  |                              | 48,538  |  | 14.30                               |   |  |                              | (10,952 | ) |                                     |   | 59,490  |                              | 17.29  |   |  |   | 22,945  |   |  |   | 36,545  |  | 10.57  |  
|Money market deposit accounts     |  |                              | 22,010  |  | 6.48                                |   |  |                              | (8,833  | ) |                                     |   | 30,843  |                              | 8.96   |   |  |   | (17,395 | ) |  |   | 48,238  |  | 13.95  |  
|Certificate accounts:             |  |                              |         |  |                                     |   |  |                              |         |   |                                     |   |         |                              |        |   |  |   |         |   |  |   |         |  |        |  
|Certificates of $100,000 and more |  |                              | 46,988  |  | 13.85                               |   |  |                              | 19,445  |   |                                     |   | 27,543  |                              | 8.01   |   |  |   | 331     |   |  |   | 27,212  |  | 7.87   |  
|Fixed-rate certificates:          |  |                              |         |  |                                     |   |  |                              |         |   |                                     |   |         |                              |        |   |  |   |         |   |  |   |         |  |        |  
|12 months or less                 |  |                              | 91,729  |  | 27.03                               |   |  |                              | 9,936   |   |                                     |   | 81,793  |                              | 23.77  |   |  |   | 31,956  |   |  |   | 49,837  |  | 14.42  |  
|13-24 months                      |  |                              | 27,612  |  | 8.14                                |   |  |                              | 893     |   |                                     |   | 26,719  |                              | 7.77   |   |  |   | (15,986 | ) |  |   | 42,705  |  | 12.35  |  
|25-36 months                      |  |                              | 9,917   |  | 2.92                                |   |  |                              | (5,345  | ) |                                     |   | 15,262  |                              | 4.44   |   |  |   | 1,034   |   |  |   | 14,228  |  | 4.12   |  
|37 months or greater              |  |                              | 14,411  |  | 4.25                                |   |  |                              | (4,881  | ) |                                     |   | 19,292  |                              | 5.61   |   |  |   | (31,848 | ) |  |   | 51,140  |  | 14.79  |  
|Variable-rate certificates:       |  |                              |         |  |                                     |   |  |                              |         |   |                                     |   |         |                              |        |   |  |   |         |   |  |   |         |  |        |  
|18 months                         |  |                              | 1,179   |  | 0.35                                |   |  |                              | (307    | ) |                                     |   | 1,486   |                              | 0.43   |   |  |   | (633    | ) |  |   | 2,119   |  | 0.61   |  
|                                  |  |                              |         |  |                                     |   |  |                              |         |   |                                     |   |         |                              |        |   |  |   |         |   |  |   |         |  |        |  
|Total                             |  | $                            | 339,351 |  | 100.00                              | % |  | $                            | (4,696  | ) |                                     | $ | 344,047 |                              | 100.00 | % |  | $ | (1,697  | ) |  | $ | 345,744 |  | 100.00 | %
|                                  |  |                              |         |  |                                     |   |  |                              |         |   |                                     |   |         |                              |        |   |  |   |         |   |  |   |         |  |        |  



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##### Table of Contents

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 much more 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, interest-bearing Super NOW accounts,
savings accounts, money market deposit accounts (MMDA) and certificates of deposit ranging in terms from three months to seven years. The Banks Super NOW account, which was introduced in 2003 and pays tiered premium money market
rates with unlimited check writing privileges, had a portfolio balance of $48.5 million at December 31, 2005.

The following table
sets forth the Banks average aggregate balances and interest rates. Average balances in 2005, 2004 and 2003 are calculated from actual daily balances.



|                                                 |  |                                 |         |                   |      |   |                 |      |                   |  |      |                 |  |                   |         |  |      |  
|------------------------------------------------ |  | ------------------------------- | ------- | ----------------- | ---- | - | --------------- | ---- | ----------------- |  | ---- | --------------- |  | ----------------- | ------- |  | ---- | -
|                                                 |  | For the Year Ended December 31, |        
|                                                 |  | 2005                            |         |                   | 2004 |   |                 | 2003 |                  
|                                                 |  | Average Balance                 |         | Average Rate Paid |      |   | Average Balance |      | Average Rate Paid |  |      | Average Balance |  | Average Rate Paid |        
|                                                 |  | (Dollars in thousands)          |        
|Interest-bearing demand deposits                 |  | $                               | 93,066  |                   | 2.29 | % |                 | $    | 76,804            |  | 1.66 | %               |  | $                 | 49,346  |  | 1.64 | %
|Money market deposit accounts                    |  |                                 | 27,140  |                   | 1.33 |   |                 |      | 39,703            |  | 0.95 |                 |  |                   | 53,833  |  | 1.31 |  
|Savings deposits and MMDA                        |  |                                 | 26,657  |                   | 0.45 |   |                 |      | 29,796            |  | 0.27 |                 |  |                   | 33,951  |  | 0.69 |  
|Time deposits                                    |  |                                 | 176,173 |                   | 3.11 |   |                 |      | 179,053           |  | 2.55 |                 |  |                   | 236,887 |  | 3.34 |  
|                                                 |  |                                 |         |                   |      |   |                 |      |                   |  |      |                 |  |                   |         |  |      |  
|Total interest bearing deposits                  |  |                                 | 323,036 |                   | 2.50 |   |                 |      | 325,356           |  | 1.94 |                 |  |                   | 374,017 |  | 2.58 |  
|Non-interest-bearing demand and savings deposits |  |                                 | 18,226  |                   |      |   |                 |      | 21,704            |  |      |                 |  |                   | 22,439  |  |      |  
|                                                 |  |                                 |         |                   |      |   |                 |      |                   |  |      |                 |  |                   |         |  |      |  
|Total deposits                                   |  | $                               | 341,262 |                   |      |   |                 | $    | 347,060           |  |      |                 |  | $                 | 396,456 |  |      |  
|                                                 |  |                                 |         |                   |      |   |                 |      |                   |  |      |                 |  |                   |         |  |      |  

The following table sets forth the aggregate time deposits in the Bank classified by rates as of
the dates indicated.



|                |  |                 |         |      |   |         |  |   |        
|--------------- |  | --------------- | ------- | ---- | - | ------- |  | - | -------
|                |  | At December 31,
|                |  | 2005            |         | 2004 |   | 2003   
|                |  | (In thousands) 
|Less than 2.00% |  | $               | 2,774   |      | $ | 60,372  |  | $ | 77,121 
|2.00% - 3.99%   |  |                 | 113,290 |      |   | 79,172  |  |   | 75,293 
|4.00% - 5.99%   |  |                 | 75,678  |      |   | 31,696  |  |   | 33,448 
|6.00% - 7.99%   |  |                 | 94      |      |   | 855     |  |   | 1,379  
|                |  |                 |         |      |   |         |  |   |        
|                |  | $               | 191,836 |      | $ | 172,095 |  | $ | 187,241
|                |  |                 |         |      |   |         |  |   |        

The following table sets forth the amount and maturities of the Banks time deposits at
December 31, 2005.



|                |  |                    |         |           |   |           |  |                   |        |       |   |        |  |   |        
|--------------- |  | ------------------ | ------- | --------- | - | --------- |  | ----------------- | ------ | ----- | - | ------ |  | - | -------
|                |  | Amount Due        
|Rate            |  | Less Than One Year |         | 1-2 Years |   | 2-3 Years |  | More Than 3 Years |        | Total
|                |  | (In thousands)    
|Less than 2.00% |  | $                  | 2,645   |           | $ | 129       |  |                   |       |       |   |       |  | $ | 2,774  
|2.00% - 3.99%   |  |                    | 83,592  |           |   | 14,362    |  | $                 | 11,617 |       | $ | 3,719  |  |   | 113,290
|4.00% - 5.99%   |  |                    | 42,384  |           |   | 19,369    |  |                   | 51     |       |   | 13,874 |  |   | 75,678 
|6.00% - 7.99%   |  |                    | 50      |           |   |          |  |                   | 4      |       |   | 40     |  |   | 94     
|                |  |                    |         |           |   |           |  |                   |        |       |   |        |  |   |        
|                |  | $                  | 128,671 |           | $ | 33,860    |  | $                 | 11,672 |       | $ | 17,633 |  | $ | 191,836
|                |  |                    |         |           |   |           |  |                   |        |       |   |        |  |   |        



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##### Table of Contents

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, 2005.



|                               |  |                         |       
|------------------------------ |  | ----------------------- | ------
|Maturity Period                |  | Certificates of Deposit
|                               |  | (In thousands)         
|Three months or less           |  | $                       | 8,789 
|Over three through six months  |  |                         | 8,951 
|Over six through twelve months |  |                         | 18,268
|Over twelve months             |  |                         | 10,980
|                               |  |                         |       
|Total                          |  | $                       | 46,988
|                               |  |                         |       

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, 2005, the Bank had $66.6 million of FHLB advances outstanding.

The Federal Home Loan Banks function as central reserve banks providing credit for savings institutions and certain other member financial institutions.
As a member, the Bank is required to own capital stock in its 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.

The Company had a note payable to
a third party financial institution, which had a balance of $300,000 and an interest rate of 5.75% at December 31, 2005. The proceeds of such note were used to finance stock repurchases during 1999.

The following table sets forth certain information regarding borrowings from the FHLBs at the dates and for the periods indicated.



|                                                           |  |                                            |        |   |      |   |        |      |  |   |       |  
|---------------------------------------------------------- |  | ------------------------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                                           |  | At or for the Year Year Ended December 31, |       
|                                                           |  | 2005                                       |        |   | 2004 |   |        | 2003 | 
|                                                           |  | (Dollars in thousands)                     |       
|Amounts outstanding at end of period:                      |  |                                            |        |   |      |   |        |      |  |   |       |  
|FHLB advances                                              |  | $                                          | 66,589 |   |      | $ | 40,040 |      |  | $ | 9,630 |  
|                                                           |  |                                            |       
|Weighted average rate paid on                              |  |                                            |        |   |      |   |        |      |  |   |       |  
|FHLB advances at end of period                             |  |                                            | 3.93   | % |      |   | 3.70   | %    |  |   | 5.38  | %
|                                                           |  |                                            |       
|Maximum amount of borrowings outstanding at any month end: |  |                                            |        |   |      |   |        |      |  |   |       |  
|FHLB advances                                              |  | $                                          | 73,729 |   |      | $ | 50,769 |      |  | $ | 9,698 |  
|                                                           |  |                                            |       
|Approximate average amounts outstanding:                   |  |                                            |        |   |      |   |        |      |  |   |       |  
|FHLB advances                                              |  | $                                          | 49,045 |   |      | $ | 32,672 |      |  | $ | 5,829 |  
|                                                           |  |                                            |       
|Approximate weighted average rate paid on                  |  |                                            |        |   |      |   |        |      |  |   |       |  
|FHLB advances during the period                            |  |                                            | 3.86   | % |      |   | 3.81   | %    |  |   | 6.57  | %



(17)



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##### Table of Contents

Average Balance Sheet

The following table sets forth certain information relating to the Company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 short-term investments and other interest-earning assets have been increased by $367,000, $344,000, and $17,000 for 2005,
2004, and 2003, respectively, from the amount listed on the income statement to reflect interest income on a tax-equivalent basis. Average balances for 2005, 2004 and 2003 are calculated from actual daily balances.



|                                                                                 |  |                                 |         |                     |      |                     |  |        |                 |  |                     |         |                     |   |        |                 |        |                     |  |                     |         |  |   |        |  |        |  
|-------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ------------------- | ---- | ------------------- |  | ------ | --------------- |  | ------------------- | ------- | ------------------- | - | ------ | --------------- | ------ | ------------------- |  | ------------------- | ------- |  | - | ------ |  | ------ | -
|                                                                                 |  | For the Year Ended December 31, |        
|                                                                                 |  | 2005                            |         |                     | 2004 |                     |  | 2003   |                
|                                                                                 |  | Average 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                                                                   |  | $                               | 205,231 |                     | $    | 13,395              |  | 6.53   | %               |  | $                   | 194,826 |                     | $ | 12,760 |                 | 6.55   | %                   |  | $                   | 267,119 |  | $ | 19,241 |  | 7.20   | %
|Mortgage-backed securities                                                       |  |                                 | 49,505  |                     |      | 2,004               |  | 4.05   |                 |  |                     | 39,583  |                     |   | 1,471  |                 | 3.72   |                     |  |                     | 34,187  |  |   | 1,109  |  | 3.24   |  
|Securities                                                                       |  |                                 |         |                     |      |                     |  |        |                 |  |                     |         |                     |   |        |                 |        |                     |  |                     |         |  |   |        |  |        |  
|Taxable                                                                          |  |                                 | 91,773  |                     |      | 2,529               |  | 2.76   |                 |  |                     | 87,941  |                     |   | 2,478  |                 | 2.82   |                     |  |                     | 52,414  |  |   | 1,675  |  | 3.20   |  
|Tax-exempt                                                                       |  |                                 | 19,966  |                     |      | 1,079               |  | 5.40   |                 |  |                     | 20,231  |                     |   | 1,011  |                 | 5.00   |                     |  |                     | 905     |  |   | 50     |  | 5.52   |  
|Short-term investments and other interest-earning assets (1)                     |  |                                 | 28,317  |                     |      | 1,142               |  | 4.03   |                 |  |                     | 33,849  |                     |   | 955    |                 | 2.82   |                     |  |                     | 48,622  |  |   | 1,038  |  | 2.13   |  
|                                                                                 |  |                                 |         |                     |      |                     |  |        |                 |  |                     |         |                     |   |        |                 |        |                     |  |                     |         |  |   |        |  |        |  
|Total interest-earning assets                                                    |  |                                 | 394,792 |                     |      | 20,149              |  | 5.10   |                 |  |                     | 376,430 |                     |   | 18,675 |                 | 4.96   |                     |  |                     | 403,247 |  |   | 23,113 |  | 5.73   |  
|Noninterest-earning assets                                                       |  |                                 | 39,918  |                     |      |                     |  |        |                 |  |                     | 47,988  |                     |   |        |                 |        |                     |  |                     | 49,247  |  |   |        |  |        |  
|                                                                                 |  |                                 |         |                     |      |                     |  |        |                 |  |                     |         |                     |   |        |                 |        |                     |  |                     |         |  |   |        |  |        |  
|Total assets                                                                     |  | $                               | 434,710 |                     |      |                     |  |        |                 |  | $                   | 424,418 |                     |   |        |                 |        |                     |  | $                   | 452,494 |  |   |        |  |        |  
|                                                                                 |  |                                 |         |                     |      |                     |  |        |                 |  |                     |         |                     |   |        |                 |        |                     |  |                     |         |  |   |        |  |        |  
|Interest-bearing liabilities:                                                    |  |                                 |         |                     |      |                     |  |        |                 |  |                     |         |                     |   |        |                 |        |                     |  |                     |         |  |   |        |  |        |  
|Demand deposits and savings                                                      |  | $                               | 146,863 |                     |      | 2,616               |  | 1.78   |                 |  | $                   | 146,303 |                     |   | 1,733  |                 | 1.18   |                     |  | $                   | 137,130 |  | $ | 1,746  |  | 1.27   |  
|Certificates of deposits                                                         |  |                                 | 176,173 |                     |      | 5,472               |  | 3.11   |                 |  |                     | 179,053 |                     |   | 4,572  |                 | 2.55   |                     |  |                     | 236,887 |  |   | 7,910  |  | 3.34   |  
|                                                                                 |  |                                 |         |                     |      |                     |  |        |                 |  |                     |         |                     |   |        |                 |        |                     |  |                     |         |  |   |        |  |        |  
|Total interest-bearing deposits                                                  |  |                                 | 323,036 |                     |      | 8,088               |  | 2.50   |                 |  |                     | 325,356 |                     |   | 6,305  |                 | 1.94   |                     |  |                     | 374,017 |  |   | 9,656  |  | 2.58   |  
|Borrowings                                                                       |  |                                 | 49,276  |                     |      | 1,907               |  | 3.87   |                 |  |                     | 33,031  |                     |   | 1,261  |                 | 3.82   |                     |  |                     | 6,512   |  |   | 410    |  | 6.30   |  
|                                                                                 |  |                                 |         |                     |      |                     |  |        |                 |  |                     |         |                     |   |        |                 |        |                     |  |                     |         |  |   |        |  |        |  
|Total interest-bearing liabilities                                               |  |                                 | 372,312 |                     |      | 9,995               |  | 2.68   |                 |  |                     | 358,387 |                     |   | 7,566  |                 | 2.11   |                     |  |                     | 380,529 |  |   | 10,066 |  | 2.65   |  
|                                                                                 |  |                                 |         |                     |      |                     |  |        |                 |  |                     |         |                     |   |        |                 |        |                     |  |                     |         |  |   |        |  |        |  
|Noninterest-bearing liabilities                                                  |  |                                 | 24,279  |                     |      |                     |  |        |                 |  |                     | 27,370  |                     |   |        |                 |        |                     |  |                     | 32,967  |  |   |        |  |        |  
|                                                                                 |  |                                 |         |                     |      |                     |  |        |                 |  |                     |         |                     |   |        |                 |        |                     |  |                     |         |  |   |        |  |        |  
|Total liabilities                                                                |  |                                 | 396,591 |                     |      |                     |  |        |                 |  |                     | 385,757 |                     |   |        |                 |        |                     |  |                     | 413,496 |  |   |        |  |        |  
|Shareholders equity                                                             |  |                                 | 38,119  |                     |      |                     |  |        |                 |  |                     | 38,661  |                     |   |        |                 |        |                     |  |                     | 38,998  |  |   |        |  |        |  
|                                                                                 |  |                                 |         |                     |      |                     |  |        |                 |  |                     |         |                     |   |        |                 |        |                     |  |                     |         |  |   |        |  |        |  
|Total liabilities and shareholders equity                                       |  | $                               | 434,710 |                     |      |                     |  |        |                 |  | $                   | 424,418 |                     |   |        |                 |        |                     |  | $                   | 452,494 |  |   |        |  |        |  
|                                                                                 |  |                                 |         |                     |      |                     |  |        |                 |  |                     |         |                     |   |        |                 |        |                     |  |                     |         |  |   |        |  |        |  
|Net interest income                                                              |  |                                 |         |                     | $    | 10,154              |  |        |                 |  |                     |         |                     | $ | 11,109 |                 |        |                     |  |                     |         |  | $ | 13,047 |  |        |  
|                                                                                 |  |                                 |         |                     |      |                     |  |        |                 |  |                     |         |                     |   |        |                 |        |                     |  |                     |         |  |   |        |  |        |  
|Interest rate spread                                                             |  |                                 |         |                     |      |                     |  | 2.42   | %               |  |                     |         |                     |   |        |                 | 2.85   | %                   |  |                     |         |  |   |        |  | 3.08   | %
|Net tax equivalent yield on interest-earning assets                              |  |                                 |         |                     |      |                     |  | 2.57   | %               |  |                     |         |                     |   |        |                 | 2.95   | %                   |  |                     |         |  |   |        |  | 3.24   | %
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                                 |         |                     |      |                     |  | 106.04 | %               |  |                     |         |                     |   |        |                 | 105.03 | %                   |  |                     |         |  |   |        |  | 105.97 | %

---

|(1) | Includes interest-bearing deposits in other financial institutions, mutual funds, trust preferred securities, and FHLB stock. Presented on a tax equivalent basis using a tax rate of
34%.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Trust Activities

During 1999, the Bank began offering trust, investment and estate planning services through its Ameriana Trust and Investment Management Services Division. Trust services consist of personal trusts, testamentary
trusts, investment agency accounts (discretionary and directed), guardianships, rollover IRAs (discretionary and directed) and estates (personal representative). These accounts are offered to customers within the Banks service areas in
Indiana. Trust account balances of $75,000 and more can profitably be managed by the Bank. At December 31, 2005, the Bank had $13.7 million in trust assets under management. On March 3, 2006, the Banks Board of Directors resolved to
close the Trust Department, effective August 1, 2006.

Subsidiary Activities

The Companys only wholly-owned subsidiary is the Bank. 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 three wholly-owned subsidiaries: AFS, AIS and AIMI. At December 31, 2005, the Banks investments in its subsidiaries were approximately $127.3 million,
consisting of direct equity investments.

Indiana savings banks may acquire or establish subsidiaries that engage in activities permitted
to be performed by the savings 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, Inc. (Nasdaq) and is a bank holding company
subject to regulation by the Federal Reserve Board under the 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.



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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.

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 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 percent 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 stock savings bank, bank or bank holding company. The Department will issue a notice approving the transaction if it determines that
the persons proposing to acquire the savings bank, 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 specified minimum ratios of capital to total assets and capital to risk-weighted assets. These requirements are substantially similar to those applicable to the Bank. See  Regulation and Supervision of
the Bank  Capital Requirements.



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Regulation and Supervision of the Bank

General. The 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 be reference to the actual statutes and regulations.

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 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 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, 2005, the Banks ratio of Tier 1 capital to total assets was 7.95%, its ratio of Tier 1
capital to risk-weighted assets was 12.85% and its ratio of total risk-based capital to risk-weighted assets was 13.94%.

During the second
quarter of 2002, the Bank entered into a memorandum of understanding (MOU) with the FDIC and the DFI. Among other things, the MOU required the Bank to adopt written action plans with respect to certain classified assets, revise its
lending policies, require greater financial information from borrowers, establish a loan review program and certain other internal controls. The FDIC and the DFI released the Bank from the MOU during the third quarter of 2005. The release of the MOU
was contingent on the Banks adoption of a resolution that required the Bank to continue reducing the level of assets as substandard, formulate and implement a written Profit Plan, abstain from purchasing additional Bank Owned Life Insurance
policies, formalize policies for leveraging strategies and maintain Tier 1 capital at or above 7% of assets. The Bank adopted the resolution on June 27, 2005.



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Investment Activities. Since the enactment of Federal Deposit Insurance Corporation Improvement
Act, all state-chartered FDIC-insured banks, including savings banks, have generally been limited in their investment activities to principal and equity investments of 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 Bank 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.

Investment Banking and Branching. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, permits adequately capitalized 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 new 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. The Companys Board of Directors have also resolved not to cause the Bank to pay dividends if its Tier 1 capital would be less than 7% thereafter. At December 31, 2005, the
shareholders equity of the Bank was $35.7 million.

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 have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%. For additional information
about dividend limitations see Note 15 in the Consolidated Financial Statements.

Deposit Insurance.The Bank is required to
pay assessments to the FDIC for insurance of its deposits by the SAIF based on a percentage of the Banks insured deposits. The FDIC is required to set semi-annual assessments for SAIF-insured institutions at a rate determined by the FDIC to be
necessary to maintain the designated reserve ratio of the SAIF at 1.25% of estimated insured deposits or at a higher percentage of insured deposits that the FDIC determines to be justified for that year by circumstances raising a significant risk of
substantial future losses to the SAIF. In the event that the SAIF should fail to meet its statutory reserve ratio, the FDIC would be required to set semi-annual assessment rates for SAIF members that are sufficient to increase the reserve ratio to
1.25% within one year or in accordance with such other schedule that the FDIC adopts by regulation to restore the reserve ratio within 15 years.

The assessment rate for an insured depository institution is determined by the assessment risk classification assigned to the institution by the FDIC based on the institutions capital level and supervisory evaluations. Based on the
data reported to regulators for date closest to the last day of the fourth month preceding the semi-annual assessment period, institutions are assigned to one of three capital groups  well capitalized, adequately capitalized or
undercapitalized  using the same percentage criteria as in the prompt corrective action regulations. See  Prompt Corrective Regulatory Action below. Within each capital group, institutions are assigned to one of three
subgroups on the basis of supervisory evaluations by the institutions primary supervisory authority and such other information as the FDIC determines to be relevant to the institutions financial condition and the risk posed to the
deposit insurance fund.



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The FDIC has adopted an assessment schedule for SAIF deposit insurance pursuant to which the assessment
rate for well-capitalized institutions with the highest supervisory ratings is zero and institutions in the worst risk assessment classification are assessed at the rate of 0.27% of insured deposits. At December 31, 2005, the Bank is considered
well-capitalized. In addition, FDIC-insured institutions are required to pay assessments to the FDIC to help fund interest payments on certain bonds issued by the Financing Corporation, an agency of the federal government established to finance
takeovers of insolvent thrifts.

Federal Deposit Insurance Reform Act of 2005.The Federal Deposit Insurance Reform Act of 2005 (the
Act), signed by the President on February 8, 2006, revised the laws governing the federal deposit insurance system. The Act provides for the consolidation of the SAIF and the Bank Insurance Fund into a combined Deposit
Insurance Fund. Under the Act, insurance premiums are to be determined by the Federal Deposit Insurance Corporation (FDIC) based on a number of factors, primarily the risk of loss that insured institutions pose to the Deposit
Insurance Fund. The legislation eliminates the current minimum 1.25% reserve ratio for the insurance funds, the mandatory assessments when the ratio fall below 1.25% and the prohibition on assessing the highest quality banks when the ratio is above
1.25%. The Act provides the FDIC with flexibility to adjust the new insurance funds reserve ratio between 1.15% and 1.5%, depending on projected losses, economic changes and assessment rates at the end of a calendar year.

The Act increased deposit insurance coverage limits from $100,000 to $250,000 for certain types of Individual Retirement Accounts, 401(k) plans and other
retirement savings accounts. While it preserved the $100,000 coverage limit for individual accounts and municipal deposits, the FDIC was furnished with the discretion to adjust all coverage levels to keep pace with inflation beginning in 2010. Also,
institutions that become undercapitalized will be prohibited from accepting certain employee benefit plan deposits.

The consolidation of
the SAIF and Bank Insurance Fund must occur no later than the first day of the calendar quarter that begins 90-days after the date of the Acts enactment, i.e., July 1, 2006. The Act also states that the FDIC must promulgate
final regulations implementing the remainder of its provisions not later than 270 days after its enactment.

At this time, management
cannot predict the effect, if any, that the Act will have on insurance premiums paid by the Bank.

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.



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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.



|                                |  |                  |  |                        |  |                  |  |                              
|------------------------------- |  | ---------------- |  | ---------------------- |  | ---------------- |  | -----------------------------
|                                |  | Well Capitalized |  | Adequately Capitalized |  | Undercapitalized |  | SignificantlyUndercapitalized
|Total 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.

Enforcement. The FDIC has extensive enforcement authority over insured state savings 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% of net transaction accounts over $7.8 million up to $48.3 million, plus 10% on the remainder. 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, 2005, the Bank met applicable Federal Reserve Board reserve requirements.



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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, 2005,
the Bank held stock in the FHLB of Indianapolis in the amount $6.4 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.

The Bank is also a member of the FHLB of Cincinnati due to remaining borrowings after the merger of Ameriana-Ohio and the Bank. As of December 31, 2005, the Bank held stock in the FHLB of Cincinnati in the amount
of $1.1 million and was in compliance with requirements of membership.

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 (up to $500,000) 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.

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.

Patriot Act. The Patriot Act is intended to strengthen U.S. law enforcements and the intelligence communities abilities to work
cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency
laws and imposes various regulations including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may
be involved in terrorism or money laundering.



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Indiana Banking Law

Branching. An Indiana savings bank is entitled to establish one or more branches de novo or by acquisition in any location or locations in Indiana. The savings 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 savings 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 savings 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
savings 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 savings 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.

Federal and State Taxation

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.

The Companys state income tax returns
have not been audited in the past five years.



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EXECUTIVE OFFICERS OF THE REGISTRANT



|                    |  |                          |  |                                                                                                 
|------------------- |  | ------------------------ |  | ------------------------------------------------------------------------------------------------
|Name                |  | Age at December 31, 2005 |  | Principal Position                                                                              
|Jerome J. Gassen    |  | 55                       |  | President and Chief Executive Officer of the Bank and the Company                               
|                    |  |                         
|Timothy G. Clark    |  | 55                       |  | Executive Vice President and Chief Operating Officer of the Bank and the Company                
|                    |  |                         
|Bradley L. Smith    |  | 45                       |  | Senior Vice President - Treasurer and Chief Financial Officer of the Bank and the Company       
|                    |  |                         
|Nancy A. Rogers     |  | 63                       |  | Senior Vice President - Marketing Services of the Bank and Secretary of the Bank and the Company
|                    |  |                         
|Grover F. Archer    |  | 65                       |  | Senior Vice President - Retail Banking of the Bank                                              
|                    |  |                         
|Deborah A. Bell     |  | 53                       |  | Senior Vice President - Information Technology of the Bank                                      
|                    |  |                         
|Ronald M. Holloway  |  | 56                       |  | Senior Vice President - Lending Services of the Bank                                            
|                    |  |                         
|Jan F. Wright       |  | 62                       |  | Senior Vice President - Business Services of the Bank                                           
|                    |  |                         
|James A. Freeman    |  | 56                       |  | Senior Vice President  Commercial Lending and Credit Administration                            
|                    |  |                         
|Matthew Branstetter |  | 38                       |  | Senior Vice President - Chief Credit Officer                                                    

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. Prior to 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 elected 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 5 years and prior to that held senior management positions with Central National Bank in
Greencastle, Indiana for 5 years and Hancock Bank & Trust in Greenfield, Indiana for 13 years.

Bradley L. Smith joined the
Bank as Senior Vice President-Treasurer and Chief Financial Officer of the Bank and Company on April 10, 2002. He is a graduate of the University of Kentucky and is a Certified Public Accountant. Mr. Smith is a member of the American
Institute of Certified Public Accountants and the Indiana CPA Society. Prior to joining the Bank, he was the Executive Vice President of Finance Center Federal Credit Union in Indianapolis, where he had been employed since 1992.

Nancy A. Rogers was appointed as Senior Vice President - Marketing Services in March 1995 and was also appointed Secretary of the Company and the
Bank in 1998. She has been employed at the Bank since 1964 and most recently served as Vice President and Director of Advertising and Public Relations.



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Grover F. Archer joined the Bank as Senior Vice President  Retail Banking in January 1999.
Prior to joining the Bank, he held the position of Area President for one year, as Regional Administrative Manager for six years and Senior Vice President and Director of Retail Banking for six years at National City Bank of Indiana and its
predecessor in Anderson, Indiana. Prior to that time Mr. Archer was in senior management positions with Indiana Lawrence Bank in North Manchester, Indiana for 16 years.

Deborah A. Bell was appointed as Senior Vice President-Information Technology in May 1998. She has been employed at the Bank since 1976 and most
recently served as Vice President and Director of Data Processing since 1991, after serving in that department since July 1985.

Ronald
M. Holloway has been employed by the Bank since 1973 and was elected Senior Vice President and Chief Lending Officer in December 1995. Mr. Holloway previously was responsible for the Banks loan servicing department.

Jan F. Wright was elected as Senior Vice President-Business Services at the Bank in January 1998 and prior to that served as Senior Vice President
- Branch Operations since March 1995. He previously held the position of Vice President and Director of Loan Origination and Processing and has been employed by the Bank since 1972.

James A. Freeman was named Senior Vice President  Commercial Lending and Credit Administration in September 2005. Prior to 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.

Matthew Branstetterwas
appointed as Senior Vice President  Chief Credit Officer in March 2006. Prior to joining Ameriana, Mr. Branstetter was Senior Vice President, Credit Administrator for Old National Bank in Indianapolis from 2000 to 2006, where he managed
the credit underwriting process for a four-state region. During his banking career, Mr. Branstetter also served as Vice President-Comptroller and Corporate Treasurer for FCN Bank in Brookville, Indiana from 1989 to 2000.



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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.

A significant percentage of our assets are invested in lower yielding investments, which has contributed to our low profitability.Our results of
operations are substantially dependant on our net interest income, which is the difference between the interest income earned on our interest-earning assets and the interest expense paid on our interest-bearing liabilities. The low interest-rate
environment that existed in 2001 through mid-2004 led to the refinancing of a substantial portion of our one- to four-family loans. These loans were subsequently sold to minimize the potential interest rate risk associated with maintaining such
long-term low-interest loans in portfolio. The proceeds from such loans sales were invested in government agency securities. Additionally, during such period, our residential loan production decreased due to reduced demand in our market area.
Accordingly, at December 31, 2005, 37.5% of our assets were invested in investment and mortgage-backed securities. These investments yield substantially less than the loans we hold in our portfolio. To counteract this, in 2004, we devoted more
resources towards loan production, specifically residential and commercial real estate lending, with the goal of investing a greater proportion of our assets in loans. We have also made efforts to reduce our cost of funds, through more disciplined
and effective pricing strategies, and to reduce our operating expenses, by reducing staffing levels and freezing our pension plan in June 2004. Together, these efforts are designed to increase our net interest income. There can be no assurance,
however, that we will be able to increase the origination of loans, successfully reduce our cost of funds or operating expenses or that we will be able to successfully implement this strategy.

Certain interest rate movements may hurt our earnings.Interest rates have recently been at historically low levels. However, since June 30,
2004, the U.S. Federal Reserve has increased its target for the federal funds rate fifteen times, from 1.00% to 4.75%. While these short-term market interest rates (which we use as a guide to price our deposits) have increased, longer-term market
interest rates (which we use as a guide to price our longer-term loans) have not. This flattening of the market yield curve has resulted in our interest rate spread declining from 3.08% at December 31, 2003 to 2.42% at
December 31, 2005 and net interest margin declining from 3.24% for the year ended December 31, 2003 to 2.57% for the year ended December 31, 2005. If short-term interest rates continue to rise, and if rates on our deposits and
borrowings continue to reprice upwards faster than the rates on our long-term loans and investments, we would experience further compression of our interest rate spread and net interest margin, which would have a negative effect on our
profitability.

Our increased emphasis on commercial and construction lending may expose us to increased lending risks.At
December 31, 2005, our loan portfolio consisted of $68.5 million, or 31.0% of commercial real estate loans, $44.8 million, or 20.3% of construction loans and $8.0 million, or 3.6% of commercial business loans. 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 business 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.



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Our relatively high level of non-performing loans and classified assets expose us to increased lending
risks. Further, our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.At December 31, 2005, our non-performing loans totaled $2.6 million, representing 1.16% of total loans. In addition, loans
that we have classified as either substandard, doubtful or loss totaled $15.8 million, representing 7.2% 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, 2005, our allowance for loan losses as a percentage of total loans was 1.28%. 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.

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 and data processing expense, totaled $14.5 million for the year ended December 31, 2005 compared to
$13.4 million for the year ended December 31, 2004. Our efficiency ratio totaled 104.40% for the year ended December 31, 2005 compared to 90.87% for the year ended December 31, 2004. We have made a concerted effort to control our
expenses and operate more efficiently, through such actions as reducing personnel and freezing of our pension plan. However, the failure to reduce our expenses could hurt our profits.

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 Federal Deposit Insurance Corporation, as of June 30, 2005, we held 35.0% of the deposits in Henry County, Indiana, which was the largest market share of deposits out of the four
financial institutions that held deposits in this county. We also held 11.9% of the deposits in Hancock County, Indiana, which was the 4thlargest market share of deposits out of the ten 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.



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If we do not achieve profitability on our new branch, it may negatively impact our earnings.We
opened our McCordsville branch office in February 2004. Numerous factors contribute to the performance of a new branch, such as a suitable location, qualified personnel and an effective marketing strategy. Additionally, it takes time for a new
branch to generate significant deposits and make sufficient loans to produce enough income to offset expenses, some of which, like salaries and occupancy expense, are relatively fixed costs. We expect that it may take a period of time before the new
branch office can become profitable. During this period, operating this new branch office may negatively impact our net income.

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.With most of our loans
concentrated in central Indiana, a decline in local economic conditions could adversely affect the value of the real estate collateral securing our loans. A 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.Because the majority of our borrowers
and depositors are individuals and businesses located and doing business in central Indiana our success significantly depends to a significant extent upon economic conditions in central Indiana. Adverse 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.

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 Nasdaq National 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;
| | - |  | ---------------------------------



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| |  |  | 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.

We operate in a highly regulated environment and we may be adversely affected by changes in laws and
regulations.Ameriana Bank and Trust, SB is subject to extensive regulation, supervision and examination by the Indiana Department of Financial Institutions, its chartering authority, and by the Federal Deposit Insurance Corporation, as insurer
of its deposits. Ameriana Bancorp 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 Ameriana Bank and Trust, SB. The regulation and supervision by the Indiana Department of Financial Institutions and the Federal Deposit Insurance Corporation are not
intended to protect the interests of investors in Ameriana Bancorp 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.

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.

Item 1B. Unresolved Staff Comments

Not applicable.



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##### Table of Contents

Item 2. Properties

The following table sets forth the location of the Companys office
facilities at December 31, 2005, and certain other information relating to these properties at that date.



|                                                                 |  |               |  |                               |       |                |   |               |  |             |  |       
|---------------------------------------------------------------- |  | ------------- |  | ----------------------------- | ----- | -------------- | - | ------------- |  | ----------- |  | ------
|                                                                 |  | Year Acquired |  | Total Investment              |       | Net Book Value |   | Owned/ Leased |  | Square Feet
|                                                                 |  |               |  | (Dollar amounts in thousands) |       |                |   |              
|Main Office:                                                     |  |               |  |                               |       |                |   |               |  |             |  |       
|2118 Bundy Avenue                                                |  |               |  |                               |       |                |   |               |  |             |  |       
|New Castle, Indiana                                              |  | 1958          |  | $                             | 1,658 |                | $ | 364           |  | Owned       |  | 20,500
|                                                                 |  |               |  |                               |      
|Branch Offices:                                                  |  |               |  |                               |       |                |   |               |  |             |  |       
|1311 Broad Street                                                |  |               |  |                               |       |                |   |               |  |             |  |       
|New Castle, Indiana                                              |  | 1890          |  |                               | 1,137 |                |   | 278           |  | Owned       |  | 18,000
|                                                                 |  |               |  |                               |      
|956 North Beechwood Street                                       |  |               |  |                               |       |                |   |               |  |             |  |       
|Middletown, Indiana                                              |  | 1971          |  |                               | 326   |                |   | 50            |  | Owned       |  | 5,500 
|                                                                 |  |               |  |                               |      
|22 North Jefferson Street                                        |  |               |  |                               |       |                |   |               |  |             |  |       
|Knightstown, Indiana                                             |  | 1979          |  |                               | 400   |                |   | 152           |  | Owned       |  | 3,400 
|                                                                 |  |               |  |                               |      
|1810 North State Street                                          |  |               |  |                               |       |                |   |               |  |             |  |       
|Greenfield, Indiana                                              |  | 1995          |  |                               | 1,161 |                |   | 890           |  | Owned       |  | 5,800 
|                                                                 |  |               |  |                               |      
|99 Dan Jones Road                                                |  |               |  |                               |       |                |   |               |  |             |  |       
|Avon, Indiana                                                    |  | 1995          |  |                               | 1,560 |                |   | 1,249         |  | Owned       |  | 12,600
|                                                                 |  |               |  |                               |      
|1724 East 53rd Street                                            |  |               |  |                               |       |                |   |               |  |             |  |       
|Anderson, Indiana                                                |  | 1993          |  |                               | 734   |                |   | 622           |  | Owned       |  | 4,900 
|                                                                 |  |               |  |                               |      
|488 West Main Street                                             |  |               |  |                               |       |                |   |               |  |             |  |       
|Morristown, Indiana                                              |  | 1998          |  |                               | 353   |                |   | 288           |  | Owned       |  | 2,600 
|                                                                 |  |               |  |                               |      
|7435 West U.S. 52                                                |  |               |  |                               |       |                |   |               |  |             |  |       
|New Palestine, Indiana                                           |  | 1999          |  |                               | 944   |                |   | 781           |  | Owned       |  | 3,300 
|                                                                 |  |               |  |                               |      
|6653 West Broadway                                               |  |               |  |                               |       |                |   |               |  |             |  |       
|McCordsville, Indiana                                            |  | 2004          |  |                               | 1,136 |                |   | 1,109         |  | Owned       |  | 3,400 
|                                                                 |  |               |  |                               |      
|Ameriana Insurance Agency, Inc. and Trust Department of the Bank |  |               |  |                               |       |                |   |               |  |             |  |       
|1908 Bundy Avenue                                                |  |               |  |                               |       |                |   |               |  |             |  |       
|New Castle, Indiana                                              |  | 1999          |  |                               | 384   |                |   | 333           |  | Owned       |  | 5,000 
|                                                                 |  |               |  |                               |       |                |   |               |  |             |  |       
|Total                                                            |  |               |  | $                             | 9,793 |                | $ | 6,116         |  |             |  |       
|                                                                 |  |               |  |                               |       |                |   |               |  |             |  |       

The Bank purchased land in 2003 for future bank use. The total investment for the land was
$236,000. The value of the land is not included in the table above.



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##### Table of Contents

Item 3.Legal Proceedings

As previously reported, the Bank has been involved in
litigation relating to its interests in the two pools of equipment leases originated by Commercial Money Center, Inc. (CMC), a California-based equipment leasing company that is now in bankruptcy.

In June and September 2001, the Bank purchased the income streams from two separate pools of commercial leases totaling $12,003,000. Each lease within
each pool was supported by a surety bond issued by one of two insurance companies rated at least A by Moodys. The bonds guaranteed payment of all amounts due under the leases in the event of default by the lessee. Each pool was
sold by the terms of a Sales and Servicing Agreement, which provided that the insurers will service the leases. In each case the insurers assigned their servicing rights and responsibilities to Commercial Servicing Corporation (CSC), a
Company which has now filed for bankruptcy.

When the lease pools went into default, notice was given to each insurer. One of them made
payments for a few months under a reservation of rights; the other paid nothing. Both insurers claim they were defrauded by CMC, the Company that sold the lease pools. Both were now denying responsibility for payment. CMC also filed for bankruptcy
protection. The Bank believes the surety bonds are enforceable against the insurers. The unpaid balance for the pools was $10,900,000, of which approximately 50% was guaranteed by American Motorists Insurance Company (AMICO), and
approximately 50% was guaranteed by RLI Insurance Company (RLI).

All of the Banks claims against AMICO have been settled
for $2.3 million plus the retention of all payments made by AMICO prior to the settlement. RLI issued surety bonds on 53 leases. RLI has paid nothing toward settlement of the claims being made by the Bank. The litigation continues to pend in the
Northern District of Ohio (Cleveland). The Court has ordered the parties to participate in mediation. The Bank participated in mediation with RLI on January 9, 2006. No settlement was reached. There are approximately 17 banks with claims
against 5 insurance companies. Until the mediation process has been completed by all of the banks and insurance companies, all proceedings have been stayed by the Court. It is anticipated that the Court will issue a new Case Management Plan during
March or April, 2006.

During 2005, the Bank collected $1.1 million from the Trustee in the CMC/CSC bankruptcies. The funds were applied
against the balance owed in the RLI pool. The lessees in that pool continue to pay and the Bank is receiving approximately $7-8,000 each month from the lessees. Those payments will cease in June or July, 2006. It is the Banks intent to
continue to aggressively pursue its claims against RLI for the principal and interest owed plus attorney fees, litigation expenses, interest, damages, and other costs. The principal amount owed by RLI has not been reduced since our last report.
Attorney fees, litigation expenses, damages, interest, and other costs continue to grow. It is unlikely that the RLI litigation will be resolved in 2006.

Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of
security holders during the fourth quarter of the fiscal year covered by this Report.



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##### Table of Contents

PART II

Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchasers of Equity Securities

The Companys common stock, par value $1.00 per share, is traded on the Nasdaq National Market under the symbol ASBI. On March 27, 2006, there were 548 holders of record of the Companys
common stock. The Company began paying quarterly dividends during the fourth quarter of fiscal year 1987. The Companys ability to pay dividends is dependent on dividends received from the Bank. See Note 12 to the Consolidated Financial
Statements included under Item 8 of this Annual Report 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 National Market and the cash dividends declared on the common stock for each full quarterly period during the
last two fiscal years.



|               |  |      |       |      |   |                    |  |      |      |     |   |                    |  |   |       |  |   |     
|-------------- |  | ---- | ----- | ---- | - | ------------------ |  | ---- | ---- | --- | - | ------------------ |  | - | ----- |  | - | ----
|               |  | 2005 |       | 2004
|Quarter Ended: |  | High |       | Low  |   | Dividends Declared |  | High |      | Low |   | Dividends Declared
|March 31       |  | $    | 16.04 |      | $ | 13.30              |  | $    | 0.16 |     | $ | 17.00              |  | $ | 14.50 |  | $ | 0.16
|June 30        |  |      | 15.35 |      |   | 12.90              |  |      | 0.16 |     |   | 17.28              |  |   | 14.56 |  |   | 0.16
|September 30   |  |      | 14.64 |      |   | 12.75              |  |      | 0.16 |     |   | 17.15              |  |   | 14.30 |  |   | 0.16
|December 31    |  |      | 14.00 |      |   | 11.93              |  |      | 0.16 |     |   | 16.50              |  |   | 14.50 |  |   | 0.16

The Company did not repurchase any shares of its common stock during the quarter ended
December 31, 2005.



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##### Table of Contents

Item 6.Selected Financial Data



|                                                              |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |     |  |   |         |  
|------------------------------------------------------------- |  | --------------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | --- |  | - | ------- | -
|                                                              |  | (Dollars in thousands, except per share data) |        
|                                                              |  | At December 31,                               |        
|Summary of Financial Condition                                |  | 2005                                          |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|Cash                                                          |  | $                                             | 8,318   |   |      | $ | 8,645   |      |  | $ | 9,275   |   |  | $    | 7,481   |     |  | $ | 7,518   |  
|Investment securities                                         |  |                                               | 168,686 |   |      |   | 170,354 |      |  |   | 137,788 |   |  |      | 58,155  |     |  |   | 140,629 |  
|Loans net of allowances for loan losses                       |  |                                               | 218,291 |   |      |   | 196,344 |      |  |   | 204,141 |   |  |      | 304,586 |     |  |   | 350,383 |  
|Interest-bearing deposits and stock in Federal Home Loan Bank |  |                                               | 13,401  |   |      |   | 15,673  |      |  |   | 12,222  |   |  |      | 44,974  |     |  |   | 11,648  |  
|Other assets                                                  |  |                                               | 40,673  |   |      |   | 37,537  |      |  |   | 39,027  |   |  |      | 41,611  |     |  |   | 41,896  |  
|                                                              |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |     |  |   |         |  
|Total assets                                                  |  | $                                             | 449,369 |   |      | $ | 428,553 |      |  | $ | 402,453 |   |  | $    | 456,807 |     |  | $ | 552,074 |  
|                                                              |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |     |  |   |         |  
|Deposits noninterest-bearing                                  |  | $                                             | 18,788  |   |      | $ | 19,649  |      |  | $ | 19,039  |   |  | $    | 19,124  |     |  | $ | 24,257  |  
|Deposits interest-bearing                                     |  |                                               | 320,563 |   |      |   | 324,398 |      |  |   | 326,705 |   |  |      | 383,063 |     |  |   | 388,156 |  
|Borrowings                                                    |  |                                               | 66,889  |   |      |   | 40,390  |      |  |   | 10,230  |   |  |      | 6,432   |     |  |   | 88,583  |  
|Other liabilities                                             |  |                                               | 7,472   |   |      |   | 5,473   |      |  |   | 7,605   |   |  |      | 9,148   |     |  |   | 8,183   |  
|                                                              |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |     |  |   |         |  
|Total liabilities                                             |  |                                               | 413,712 |   |      |   | 389,910 |      |  |   | 363,579 |   |  |      | 417,767 |     |  |   | 509,179 |  
|Shareholders equity                                          |  |                                               | 35,657  |   |      |   | 38,643  |      |  |   | 38,874  |   |  |      | 39,040  |     |  |   | 42,895  |  
|                                                              |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |     |  |   |         |  
|Total liabilities and shareholders equity                    |  | $                                             | 449,369 |   |      | $ | 428,553 |      |  | $ | 402,453 |   |  | $    | 456,807 |     |  | $ | 552,074 |  
|                                                              |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |     |  |   |         |  
|                                                              | 
|                                                              |  | Year Ended December 31,                       |        
|Summary of Earnings                                           |  | 2005                                          |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|Interest income                                               |  | $                                             | 19,782  |   |      | $ | 18,331  |      |  | $ | 23,096  |   |  | $    | 29,973  |     |  | $ | 37,170  |  
|Interest expense                                              |  |                                               | 9,995   |   |      |   | 7,566   |      |  |   | 10,066  |   |  |      | 17,541  |     |  |   | 24,243  |  
|Net interest income                                           |  |                                               | 9,787   |   |      |   | 10,765  |      |  |   | 13,030  |   |  |      | 12,432  |     |  |   | 12,927  |  
|Provision (adjustment) for loan losses                        |  |                                               | (2,852  | ) |      |   | 392     |      |  |   | 6,440   |   |  |      | 7,300   |     |  |   | 360     |  
|Other income                                                  |  |                                               | 4,115   |   |      |   | 3,961   |      |  |   | 10,540  |   |  |      | 2,949   |     |  |   | 4,046   |  
|Other expense                                                 |  |                                               | 14,513  |   |      |   | 13,381  |      |  |   | 13,602  |   |  |      | 13,675  |     |  |   | 11,348  |  
|                                                              |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |     |  |   |         |  
|Income (loss) before taxes                                    |  |                                               | 2,241   |   |      |   | 953     |      |  |   | 3,528   |   |  |      | (5,594  | )   |  |   | 5,265   |  
|Income taxes                                                  |  |                                               | 183     |   |      |   | (473    | )    |  |   | 1,110   |   |  |      | (2,519  | )   |  |   | 1,465   |  
|                                                              |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |     |  |   |         |  
|Net income (loss)                                             |  | $                                             | 2,058   |   |      | $ | 1,426   |      |  | $ | 2,418   |   |  | $    | (3,075  | )   |  | $ | 3,800   |  
|                                                              |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |     |  |   |         |  
|Basic earnings (loss) per share                               |  | $                                             | 0.65    |   |      | $ | 0.45    |      |  | $ | 0.77    |   |  | $    | (0.98   | )   |  | $ | 1.21    |  
|Diluted earnings (loss) per share                             |  | $                                             | 0.65    |   |      | $ | 0.45    |      |  | $ | 0.77    |   |  | $    | (0.98   | )   |  | $ | 1.21    |  
|                                                              |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |     |  |   |         |  
|Dividends declared per share                                  |  | $                                             | 0.64    |   |      | $ | 0.64    |      |  | $ | 0.64    |   |  | $    | 0.64    |     |  | $ | 0.61    |  
|                                                              |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |     |  |   |         |  
|Book value per share                                          |  | $                                             | 11.23   |   |      | $ | 12.26   |      |  | $ | 12.35   |   |  | $    | 12.40   |     |  | $ | 13.63   |  
|                                                              |  |                                               |         |   |      |   |         |      |  |   |         |   |  |      |         |     |  |   |         |  
|                                                              | 
|                                                              |  | Year Ended December 31,                       |        
|Other Selected Data                                           |  | 2005                                          |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|Return on average assets                                      |  |                                               | 0.47    | % |      |   | 0.34    | %    |  |   | 0.53    | % |  |      | (0.60   | )%  |  |   | 0.72    | %
|Return on average equity                                      |  |                                               | 5.40    |   |      |   | 3.69    |      |  |   | 6.20    |   |  |      | (7.32   | )   |  |   | 8.92    |  
|Ratio of average equity to average assets                     |  |                                               | 8.77    |   |      |   | 9.11    |      |  |   | 8.62    |   |  |      | 8.18    |     |  |   | 8.12    |  
|Dividend payout ratio (1)                                     |  |                                               | 98.46   |   |      |   | 142.22  |      |  |   | 83.12   |   |  |      | NM      | (2) |  |   | 50.41   |  
|Number of full-service bank offices                           |  |                                               | 10      |   |      |   | 10      |      |  |   | 9       |   |  |      | 11      |     |  |   | 11      |  

---

|(1) | Based on total dividends per share declared and net income per share for the year.
|--- | ----------------------------------------------------------------------------------

|(2) | NM - Not meaningful.
|--- | --------------------



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##### Table of Contents

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 Savings
Bank, FSB (the Bank). The Company is subject to regulation and supervision by the Federal Reserve Bank. The Bank began banking operations in 1890. On June 29, 2002, the Bank converted to an Indiana savings bank and adopted its
present name, Ameriana Bank and Trust, SB. 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 Savings Association Insurance Fund administered by the FDIC. References in this Form 10-K to we, us, and our refer to Ameriana Bancorp and/or Ameriana Bank and
Trust, as appropriate.

We are headquartered in New Castle, Indiana. We conduct business through our main office at 2118 Bundy Avenue, New
Castle, Indiana and through nine branch offices located in New Castle, Middletown, Knightstown, Morristown, Greenfield, Anderson, Avon, McCordsville and New Palestine, Indiana.

The Bank has three wholly owned subsidiaries, Ameriana Insurance Agency (AIA), Ameriana Financial Services, Inc. (AFS) and
Ameriana Investment Management, Inc. (AIMI). AIA provides insurance sales from offices in New Castle, Greenfield and Avon, Indiana. AFS offers debt protection products through its ownership of an interest in Family Financial Holdings,
Incorporated, Columbus, Indiana. In 2002, AFS acquired a 20.9% ownership interest in Indiana Title Insurance Company, LLC (ITIC) through which it offers title insurance. AFS also operates a brokerage facility in conjunction with
Linsco/Private Ledger. AIMI manages the Banks investment portfolio. 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 Federal Home Loan Bank (FHLB) advances. Through our
subsidiaries, we engage in insurance and brokerage activities. We also operate a Trust Department, which provides trust, investment and estate planning services. The Company has decided to close the Trust Department in 2006. For more information on
the closure of the Trust Department, see Note 20 to the Consolidated Financial Statements included under Item 8 of this Form 10-K.

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.

Financial Challenges in Recent Years

Since
2001, when we posted net income of $3.8 million, our Company has faced several significant financial challenges.

In 2002, we posted a net
loss of $3.1 million. This loss was due primarily to security losses and large loan provision expenses. We disposed of $137 million in securities for a pre-tax loss of $3.2 million. The securities were sold to address a considerable increase in the
Banks interest rate risk primarily due to volatile collateralized mortgage obligations. We also experienced a decline in credit quality of our loan portfolio which resulted in provision for loan loss of $7.3 million. Non-performing loans grew
substantially in 2002 to $18.4 million at December 31, 2002 compared to $2.6 million at December 31, 2001. The main cause for the increase was related to the two lease pools originated by Commercial Money Center (CMC), a now
bankrupt company, totaling $10.9 million, which both went into default. The Bank became involved in a variety of litigation related to these lease pools. Each lease within each pool is supported by a surety bond issued by one of two insurance
companies. Both insurance companies denied responsibility for payment. In addition to the leases, non-performing assets included loans to a builder/development group and its related parties totaling $3.6 million.



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##### Table of Contents

In 2003, we posted net income of $2.4 million. Net income during this period included charges totaling
$5.9 million, taken primarily to write off the remainder of the troubled lease portfolio. These charges were offset to some extent by a gain of $5.5 million from the sale of two branches in Ohio. Unfavorable market conditions since 2000 reduced
earnings in the employee pension fund and accordingly caused a significant increase in the contribution required by the Company. Nonperforming loans were $8.5 million at December 31, 2003 and consisted primarily of commercial real estate.

In 2004, we posted net income of $1.4 million. A decline in net interest income and gains on sale of loans were major factors in the
results. Heavy mortgage loan refinancing from 2001 to 2003 shifted a major portion of our earning assets from loans to lower earning investments. Short-term interest rates grew rapidly in the last six months of the year leading to a flattening of
the yield curve. The combination of these two events squeezed our net interest margin. The slowdown in mortgage loan refinancing resulted in the decline in gains on sale of loans. We froze the defined-benefit pension plan on June 30, 2004 to
discontinue accruing benefits to plan participants beyond what was already earned to 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.
Nonperforming loans were $5.9 million at December 31, 2004 and consisted primarily of commercial real estate.

Overview of 2005



| |  |  | Net income for 2005 was $2.1 million, an increase of 44.3% over 2004.
| | - |  | ---------------------------------------------------------------------



| |  |  | We recovered $4.2 million from loans previously charged-off.
| | - |  | ------------------------------------------------------------



| |  |  | We made a voluntary payment of $1.1 million to fund a portion of our pension liability.
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | A flattening yield curve further squeezed our net interest margin.
| | - |  | ------------------------------------------------------------------



| |  |  | We achieved 11% loan growth, primarily in commercial construction real estate loans.
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Non-performing loans declined over 50%.
| | - |  | ---------------------------------------



| |  |  | Harry J. Bailey retired as President and CEO. He was replaced by Jerome J. Gassen.
| | - |  | ----------------------------------------------------------------------------------

Our net income was $2.1 million in 2005, which included significant recoveries from leases charged off in prior periods, offset by a one-time large payment towards our pension liability. We had significant recoveries
in 2005, primarily from the two equipment lease pools originated by CMC, a now bankrupt company, that were charged off for $10.9 million during 2002 and 2003. The lease recoveries included a $2.3 million settlement against one of the two sureties
for the lease pools and a payment of $1.1 million received in settlement of the CMC bankruptcy. The litigation against RLI Insurance Company (RLI), the other surety for the lease pools, continues. We also made a $1.1 million voluntary
payment to fund a portion of our pension liability in 2005. Short-term interest rates continued to rise in 2005 which led to a flattening yield curve. As a result, our net interest margin declined to 2.57% in 2005 from 2.95% in 2004.

We experienced solid loan growth in 2005, with net loans increasing 11% for the year. Credit quality improved in 2005 with a decline in non-performing
loans of over 50%.

Our President and CEO for more than twenty years, Mr. Harry J. Bailey, retired on June 1, 2005.
Mr. Jerome J. Gassen, our current President and CEO, started with the Company on June 1, 2005.

Strategic Summary

We have concentrated on improving the soundness of our organization as evidenced by the significant recoveries of past loan and lease losses and
dramatic improvement in asset quality. These efforts had a positive impact on earnings in 2005 and should lead to increased profitability in the future. We have also made a concerted effort to reduce our expenses and operate more efficiently.

We project our net interest margin, which was 2.57% in 2005, may decline 20  30 basis points in the first half of 2006 before it
starts to improve in the latter half of the year. The Federal Reserve increased short-term interest rates 25 basis points in January 2006, which led to an inverted yield curve in the first quarter. We project the Federal Reserve will increase
short-term interest rates another 25 to 50 basis points before midyear and leave rates unchanged for the remainder of the year. We further project that short-term rates will begin to decline in early 2007. Our interest-bearing liabilities re-price
to current market conditions faster than our interest-earning assets. Most of the variable rate mortgage loans in our portfolio lag the market 45 days when they are scheduled to re-price. A stabilized short-term interest rate environment in the
second half of 2006 would provide interest-earning assets an opportunity to catch-up, leading to an expected improvement in the net interest margin. We also expect an improvement in the mix of interest-earning assets in 2006 that may further improve
the net interest margin.

About 39% of our investment securities portfolio at December 31, 2005, consisting primarily of government
agency securities, earns an average yield of 2.44%, 53 basis points below our cost of funds. We will receive steady cash flows from these securities as they mature over a twenty-month period starting in the second quarter of 2006. The cash flows
from these securities will be used to pay down short-term borrowings and fund new loan volume. The steady redeployment of cash flows from the investment portfolio into higher-yielding assets should improve the net interest margin.



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As part of the 2006 corporate plan, the Company has adopted a number of short and long-term action plans
including:



| |  |  | Recruiting seasoned commercial lenders, credit analysts and key risk managers.
| | - |  | ------------------------------------------------------------------------------



| |  |  | Diversifying the loan portfolio by reducing the concentration in commercial real estate and expanding commercial, residential real estate and consumer lending.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Focusing on retail banking activities including emphasizing transactional deposit growth, expanding customer relationships as measured by products per household and acquisition of
new customer relationships.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reducing the operating expenses of the Company.
| | - |  | -----------------------------------------------



| |  |  | Reducing the size of the investment portfolio as a percent of total assets.
| | - |  | ---------------------------------------------------------------------------

We believe the continued 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 associates to provide exceptional service and sound advice. We believe these qualities will differentiate us from our competitors and increase profitability
and shareholder value.

In order 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.

Achieve Superior Customer Service.We continually measure customer satisfaction through post-transaction surveys. Our evaluations include
in-person customer surveys, mystery shoppers and other in-store performance metrics.

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 loan products.

Establish Strong Brand Awareness.We believe it is important to create
a value proposition that is understood and appreciated by our customers. Accordingly, we are undertaking an effort through our marketing, customer communications and design of our Banking Centers to create the Ameriana Bank 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 will include business interest banking and cash management services, business remote item capture and on-line loan and account opening. These services will allow us to reach more customers effectively and
conveniently.

Develop an Innovative Delivery System.We believe our bank branches must evolve into Financial Stores
that showcase our financial products and offer our customers an environment that is conducive to interacting with knowledgeable Ameriana 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 markets. Longer term, we would like to fill-in our existing franchise in East Central Indiana as our profitability improves.



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Critical Accounting Policies

The accounting and reporting policies of the Company are maintained in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The
Companys significant accounting policies are described in detail in the Notes to the Companys Consolidated Financial Statements. 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 quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry
or customer-specific concentrations), trends in loan performance, 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.

Regardless of the extent of the Companys analysis of customer performance, portfolio trends or risk management processes, certain inherent but
undetected losses are probable within the loan portfolio. This is due to several factors, including inherent delays in obtaining information regarding a customers financial condition or changes in their unique business conditions, the
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 imprecision 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.



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FINANCIAL CONDITION

Total assets increased $20.8 million or 4.9% to $449.4 million at December 31, 2005 from $428.6 million at December 31, 2004. The increase was primarily due to an increase in the loan portfolio that was
funded by short-term FHLB advances.

Cash and Cash Equivalents

Total cash and cash equivalents decreased $2.8 million to $14.3 million at December 31, 2005 from $17.1 million at December 31, 2004. Cash on hand and in other institutions decreased $327,000 or 3.8% to $8.3
million at December 31, 2005. Interest-bearing deposits decreased $2.5 million or 29.2% to $6.0 million at December 31, 2005. The decrease was primarily due to the re-investment of the proceeds from an investment security for $2.0 million
that matured on December 31, 2004 and was included in interest-bearing deposits at that date.

Securities

Investments held to maturity were all reclassified as available for sale in the third quarter of 2005 which resulted in a $158.3 million reduction of
investments held to maturity (HTM) and a $156.6 million increase in investments available for sale (AFS) at December 31, 2005. This reclassification provides us with more flexibility to address changes in interest rate
risk or capitalize on opportunities to generate higher interest earnings. The change had no effect on our earnings but did reduce shareholders equity due to the recording of unrealized net losses in other comprehensive income. All of our investments
are evaluated for other-than-temporary impairment, and such impairment, if any, is recognized as a charge to earnings.

Overall, investment
securities available for sale and held to maturity decreased $1.7 million to $168.7 million at December 31, 2005, from $170.4 million at December 31, 2004, as funds from maturing securities were invested in loans.

The following table identifies changes in the investment securities carrying values:



|                                                        |  |                        |         |      |   |          |  |   |          |   |  |       |   
|------------------------------------------------------- |  | ---------------------- | ------- | ---- | - | -------- |  | - | -------- | - |  | ----- | --
|                                                        |  | (Dollars in thousands) |         |      |   |         
|                                                        |  | 2005                   |         | 2004 |   | $ Change |  |   | % Change |  
|December 31:                                            |  |                        |         |      |   |          |  |   |          |   |  |       |   
|Mortgage-backed and collateralized mortgage obligations |  | $                      | 45,715  |      | $ | 44,065   |  | $ | 1,650    |   |  | 3.74  | % 
|Federal agencies                                        |  |                        | 89,412  |      |   | 92,255   |  |   | (2,843   | ) |  | (3.08 | ) 
|Municipal securities                                    |  |                        | 19,769  |      |   | 20,362   |  |   | (593     | ) |  | (2.91 | ) 
|Mutual funds                                            |  |                        | 12,290  |      |   | 12,032   |  |   | 258      |   |  | 2.14  |   
|Trust preferred                                         |  |                        | 1,500   |      |   | 1,640    |  |   | (140     | ) |  | (8.54 | ) 
|                                                        |  |                        |         |      |   |          |  |   |          |   |  |       |   
|Totals                                                  |  | $                      | 168,686 |      | $ | 170,354  |  | $ | (1,668   | ) |  | (0.98 | )%
|                                                        |  |                        |         |      |   |          |  |   |          |   |  |       |   

The following table identifies the percentage composition of the investment securities:



|                                                        |  |       |   |  |       |  
|------------------------------------------------------- |  | ----- | - |  | ----- | -
|                                                        |  | 2005  |   |  | 2004  |  
|December 31:                                            |  |       |   |  |       |  
|Mortgage-backed and collateralized mortgage obligations |  | 27.1  | % |  | 25.9  | %
|Federal agencies                                        |  | 53.0  |   |  | 54.1  |  
|Municipal securities                                    |  | 11.7  |   |  | 12.0  |  
|Mutual funds                                            |  | 7.3   |   |  | 7.0   |  
|Trust preferred                                         |  | 0.9   |   |  | 1.0   |  
|                                                        |  |       |   |  |       |  
|Totals                                                  |  | 100.0 | % |  | 100.0 | %
|                                                        |  |       |   |  |       |  

See Note 3 to the Consolidated Financial Statements for more
information on investment securities.



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Loans

Net loans receivable totaled $218.3 million at December 31, 2005, an increase of $22.0 million or 11.2% from $196.3 million at December 31, 2004. Construction loans are primarily responsible for the increase.

Residential loans increased $5.0 million to $98.5 million at December 31, 2005 from $93.5 million at December 31, 2004. In recent years,
fixed-rate residential mortgage loans made up most of the new loan volume and were sold to minimize our exposure to interest rate risk. In 2005, as the interest rate for fixed-rate financing began to increase, the demand for fixed-rate financing
declined while the demand for variable rate financing grew. We retained new variable rate residential mortgage loans in our loan portfolio which resulted in residential loan portfolio growth. We generally retain loan servicing on loans sold. Loans
we serviced for investors, primarily Freddie Mac, Fannie Mae and the FHLB, totaled approximately $161.5 million at December 31 2005 compared to $179.6 million at December 31, 2004. Loans sold and that we subsequently service generate a
steady source of fee income, with servicing fees ranging from 0.25% to 0.375%. Construction loans increased $31.5 million to $44.8 million at December 31, 2005 from $13.3 million at December 31, 2004. The increase was primarily due to
commercial real estate development loans which resulted from the addition of new commercial lenders.

Commercial loans declined $6.3
million to $8.0 million at December 31, 2005 from $14.3 million at December 31, 2004. The decrease was primarily due to principal pay-downs on lease loans purchased from an Indiana-based financial institution. Consumer loans declined
$230,000 to $4.2 million at December 31, 2005 from $4.4 million at December 31, 2004. We placed less emphasis on consumer lending in recent years. In 2001, we discontinued our indirect lending program where we acquired loans through
automobile dealers in the Companys lending areas. The highly competitive consumer lending environment made it difficult for us to book consumer loans at profitable spreads. Management intends to increase our emphasis on consumer lending in
2006.

New loan production was $121.0 million in 2005 compared to $107.1 million in 2004. Loan production improved in all areas.
Residential loan production increased to $37.5 million in 2005 from 34.2 million in 2004. Commercial real estate and construction loan production increased to $65.5 million in 2004 from $60.2 million in 2004.

Credit Quality

Non-performing assets declined
$3.3 million to $2.6 million at December 31, 2005 from $5.9 million at December 31, 2004. The decrease was primarily related to three real estate development loans. The first is a commercial real estate loan for a condominium project in
Lafayette, Indiana, with a principal balance of $2.5 million that was classified as non-accrual in December of 2004. This loan was partially charged-down by $750,000 in 2005. The second was for a real estate development/lot loan for a builder
developer. The properties securing this loan for $1.6 million were foreclosed in August 2005. The loan was partially charged-off and transferred to real estate owned for $1.1 million. A third commercial real estate loan for $1.8 million was
reclassified from non-accrual to performing at September 30, 2005.

We recorded net recoveries of $2.7 million in 2005 and net
charge-offs of $1.0 million in 2004. Loan charge-offs were $1.5 million and $1.1 million in 2005 and 2004, while recoveries were $4.2 million and $126,000 in the same periods. In addition to the lease recoveries, we recovered $509,000 in 2005 on a
commercial real estate loan that was charged-off in 2004.

The allowance for loan losses as a percent of loans was 1.28% at
December 31, 2005 and 1.57% at December 31, 2004. The decline reflects the improvement in asset quality.



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Cash Value of Life Insurance

We have investments in life insurance on employees and directors, with a balance or cash surrender value of $21.1 million and $20.5 million, respectively, at December 31, 2005 and 2004. The majority of these
policies were purchased in 1999. The nontaxable increase in cash surrender value of life insurance was $708,000 in 2005 compared to $767,000 in 2004.

Deposits

The following table shows deposit changes by category:



|                               |  |                        |         |      |   |          |  |   |          |   |  |       |   
|------------------------------ |  | ---------------------- | ------- | ---- | - | -------- |  | - | -------- | - |  | ----- | --
|                               |  | (Dollars in thousands) |         |      |   |         
|                               |  | 2005                   |         | 2004 |   | $ Change |  |   | % Change |  
|December 31,                   |  |                        |         |      |   |          |  |   |          |   |  |       |   
|Noninterest-bearing accounts   |  | $                      | 18,788  |      | $ | 19,649   |  | $ | (861     | ) |  | (4.4  | )%
|Savings deposits               |  |                        | 25,003  |      |   | 27,470   |  |   | (2,467   | ) |  | (9.0  | ) 
|NOW and Super NOW accounts     |  |                        | 81,714  |      |   | 93,990   |  |   | (12,276  | ) |  | (13.1 | ) 
|Money market accounts          |  |                        | 22,010  |      |   | 30,843   |  |   | (8,833   | ) |  | (28.6 | ) 
|Certificates $100,000 and more |  |                        | 46,988  |      |   | 27,543   |  |   | 19,445   |   |  | 70.6  |   
|Other certificates             |  |                        | 144,848 |      |   | 144,552  |  |   | 296      |   |  | 0.2   |   
|                               |  |                        |         |      |   |          |  |   |          |   |  |       |   
|Totals                         |  | $                      | 339,351 |      | $ | 344,047  |  | $ | (4,696   | ) |  | (1.4  | )%
|                               |  |                        |         |      |   |          |  |   |          |   |  |       |   

Non-maturity deposits decreased $24.5 million, or 14.2%, to $147.5 million at December 31,
2005 from $172.0 million at December 31, 2004. Approximately $9.7 million of this decline were from funds that transferred to certificate of deposits. The remaining $14.7 million of the decline was primarily from funds that left the Bank due to
a highly competitive market for short-term deposits.

Certificate of deposits increased due to a $10.0 million brokered certificate issued
by the Bank in 2005. The remaining $9.8 million increase was primarily from funds transferred from non-maturity deposits.

Borrowings

Borrowings increased $26.5 million to $66.9 million at December 31, 2005 from $40.4 million at December 31, 2004. Our
borrowings consist of FHLB advances totaling $66.6 million and a note payable of $300,000. The increase in borrowings was necessary to fund loan growth.

Note payable declined $50,000 to $300,000 at December 31, 2005 from $350,000 at December 31, 2004. Note payable is to a third-party financial institution bearing interest at 5.75% and 3.75% at
December 31, 2005 and 2004, respectively, the proceeds of which were used to finance stock repurchases during 1999.

Interest Rate Risk

Interest Rate Risk (IRR) is the risk to earnings and capital arising from movements in interest rates. IRR can result
from:



| |  |  | timing differences in the maturity/repricing of an institutions assets, liabilities, and off balance sheet contracts;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | the effect of embedded options, such as call or convertible options, loan prepayments, interest rate caps, and deposit withdrawals;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | unexpected shifts of the yield curve that affect both the slope and shape of the yield curve and;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | differences in the behavior of lending and funding rates, sometimes referred to as basis risk. An example would occur if floating rate assets and liabilities, with otherwise
identical repricing characteristics, were based on market indexes that were imperfectly correlated.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The Asset-Liability Committee and the Board of Directors review our exposure to interest rate changes and
market risk quarterly. This review is accomplished by the use of a cash flow simulation model using detailed securities, loan, deposit, borrowings and market information to estimate fair values of assets and liabilities using discounted cash flows.
We monitor IRR from two perspectives:



| |  |  | Economic value at risk  long term exposure
| | - |  | -------------------------------------------

The
difference between the Banks estimated fair value of assets and the estimated fair value of liabilities is the fair value of equity, also referred to as net present value of equity (NPV). The change in the NPV is calculated at
different interest rate intervals. This measures our IRR exposure from movements in interest rates and the resulting change in the NPV.



| |  |  | Earnings at risk  near term exposure
| | - |  | -------------------------------------

The model also
tests the impact various interest rate scenarios have on net interest income over a stated period of time (one year, for example).

We
recognize that effective management of IRR includes an understanding of when potential adverse changes in interest rates will flow through the profit and loss statement. Accordingly, we will manage our position so that exposure to net interest
income is monitored over both a one year planning horizon (accounting perspective) and a longer term strategic horizon (economic perspective).

Our objective is to manage our exposure to interest rate risk, bearing in mind that we will always be in the business of taking on rate risk and that rate risk immunization is not possible. Also, it is recognized that as exposure to
interest rate risk is reduced, so too may the net interest margin be reduced.

Change in IRR Calculation

We changed our emphasis on what we monitor for IRR in 2005. The NPV method was our primary IRR measurement in the past. The NPV method uses a liquidation
model by simulating a mark-to-market of the entire balance sheet. The liquidation model identifies mismatched risk both for the near-term and long-term. Our primary concern going forward is our IRR exposure in the near term by focusing on earnings
at risk.

We also changed to a different modeling program which uses similar methodologies and assumptions as the previous model. The IRR
calculation results are similar as illustrated in the following table:

Effect of change in net interest income from December 31,
2005 for Year 1 and Year 2

(Dollars in thousands)



|          |  |                               |        |                           |   |           |  |             |        |           |       |  |      
|--------- |  | ----------------------------- | ------ | ------------------------- | - | --------- |  | ----------- | ------ | --------- | ----- |  | -----
|          |  | Projected Net Interest Income |        | % Change From Year 1 Base
|          |  | Down 200 bp                   |        | Base                      |   | Up 200 bp |  | Down 200 bp |        | Up 200 bp
|Year 1:   |  |                               |        |                           |   |           |  |             |        |           |       |  |      
|Old Model |  | $                             | 9,658  |                           | $ | 9,740     |  | $           | 9,369  |           | -0.85 |  | -3.81
|New Model |  |                               | 9,776  |                           |   | 9,821     |  |             | 9,606  |           | -0.46 |  | -2.19
|          |  |                               |        |                           |  
|Year 2    |  |                               |        |                           |   |           |  |             |        |           |       |  |      
|Old Model |  | $                             | 10,412 |                           | $ | 10,747    |  | $           | 11,079 |           | 6.90  |  | 13.75
|New Model |  |                               | 10,383 |                           |   | 11,207    |  |             | 11,103 |           | 5.72  |  | 13.05

The primary difference between the two models is the reinvestment of cash flows. The old model
assumed cash flows were reinvested in the same type of financial instrument where the new model directs cash flows to specific loan types, primarily hybrid adjustable-rate mortgages.

Current Position Assessment as of December 31, 2005

Led by loan growth, total assets
increased to $449.4 million at December 31, 2005. Loan demand centered on commercial construction, hybrid residential adjustable-rate mortgages, and home equity lines of credit draws. While Federal Reserve rate increases and redeployment of
lower yielding investment cash flow into loans have helped push average yields up 14 basis points (bp), our average cost of funds escalated 57 bp due to higher short-term borrowing costs and a migration of money market deposit accounts (MMDA) and
checking account balances to higher coupon certificate of deposits. The resulting tightening of balance sheet spread offset the positive effect of balance sheet growth.



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##### Table of Contents

The balance sheet appears positioned to produce wider margins over the next two to three years,
regardless of the direction of interest rate movements, as lower yielding bullet agency investments mature and are replaced at significantly higher yields. A falling rate environment appears to be the least beneficial for earnings, reducing the net
reinvestment benefit realized as the agency ladder matures and is reinvested. Earnings at risk to rate changes over the next twelve months fall well within policy guidelines of 10%.

Interest Rate Scenarios

Base Case Projected net interest income in first
year assuming current rates remain unchanged.

Net interest income, based on the size and mix of the current balance sheet and rate
environment, is expected to improve over the coming months as asset yield improvements outpace cost of funds increases. This assessment does not take into account continued pricing adjustments to deposit rates (should market rate movements cease) or
additional migration of lower yielding MMDA/checking balances to certificates of deposits.

Falling Rates -200 BP Projected net interest income declines 0.46% in first year and increases 5.72% in second year when compared to base case scenario.

While deposit rate reductions help stabilize margins in the early stages of the scenario, asset yields unwind more rapidly over the second year of the simulation due to the reinvestment risk of the agency ladder (as outlined above). This
stalls earnings momentum realized in the base case scenario and leads to a sustained downward trend in earnings.

Rising Rates +200
BP- Projected net interest income declines 2.19% in first year and increases 13.05% in second year when compared to base case scenario.

Deposit rate increases and escalating cost on short-term borrowings place an initial drag on earnings if market rates rise. Our earnings trends improve as deposit costs stabilize in the second year of the simulation and larger blocks of
asset cash flow cycles through and are replaced in the higher rate environment.



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##### Table of Contents

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.



|                                                                                                                                 |  |                         |   |  |      |   |  |      |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                                                                                                                                 |  | Year Ended December 31, |  
|                                                                                                                                 |  | 2005                    |   |  | 2004 |   |  | 2003 |  
|Weighted Average Yield:                                                                                                          |  |                         |   |  |      |   |  |      |  
|Loans                                                                                                                            |  | 6.53                    | % |  | 6.55 | % |  | 7.20 | %
|Mortgage-backed and collateralized mortgage obligations                                                                          |  | 4.05                    |   |  | 3.72 |   |  | 3.24 |  
|Securities - taxable                                                                                                             |  | 2.76                    |   |  | 2.82 |   |  | 3.20 |  
|Securities - tax-exempt                                                                                                          |  | 5.40                    |   |  | 5.00 |   |  | 5.52 |  
|Other interest-earning assets                                                                                                    |  | 4.03                    |   |  | 2.82 |   |  | 2.13 |  
|All interest-earning assets                                                                                                      |  | 5.10                    |   |  | 4.96 |   |  | 5.73 |  
|                                                                                                                                 |  |                         |  
|Weighted Average Cost:                                                                                                           |  |                         |   |  |      |   |  |      |  
|Demand deposits, money market deposit accounts, and savings                                                                      |  | 1.78                    |   |  | 1.18 |   |  | 1.27 |  
|Certificates of deposit                                                                                                          |  | 3.11                    |   |  | 2.55 |   |  | 3.34 |  
|Federal Home Loan Bank advances and note payable                                                                                 |  | 3.87                    |   |  | 3.82 |   |  | 6.30 |  
|All interest-bearing liabilities                                                                                                 |  | 2.68                    |   |  | 2.11 |   |  | 2.65 |  
|                                                                                                                                 |  |                         |   |  |      |   |  |      |  
|Interest Rate Spread (spread between weighted average yield on all interest-earning assets and all interest-bearing
liabilities) |  | 2.42                    |   |  | 2.85 |   |  | 3.08 |  
|                                                                                                                                 |  |                         |   |  |      |   |  |      |  
|Net Tax Equivalent Yield (net interest income as a percentage of average interest-earning assets)                                |  | 2.57                    |   |  | 2.95 |   |  | 3.24 |  
|                                                                                                                                 | 
|                                                                                                                                 |  | At December 31,         |  
|                                                                                                                                 |  | 2005                    |   |  | 2004 |   |  | 2003 |  
|Weighted Average Interest Rates:                                                                                                 |  |                         |   |  |      |   |  |      |  
|Loans                                                                                                                            |  | 6.65                    | % |  | 6.10 | % |  | 6.82 | %
|Mortgage-backed and collateralized mortgage obligations                                                                          |  | 4.09                    |   |  | 3.56 |   |  | 4.79 |  
|Securities - taxable                                                                                                             |  | 2.76                    |   |  | 2.76 |   |  | 3.03 |  
|Securities - tax-exempt                                                                                                          |  | 5.32                    |   |  | 5.32 |   |  | 5.32 |  
|Other earning assets                                                                                                             |  | 4.54                    |   |  | 3.61 |   |  | 3.06 |  
|Total interest-earning assets                                                                                                    |  | 5.28                    |   |  | 4.77 |   |  | 5.46 |  
|Demand deposits, money market deposit accounts, and savings                                                                      |  | 1.96                    |   |  | 1.58 |   |  | 1.03 |  
|Certificates of deposit                                                                                                          |  | 3.57                    |   |  | 2.65 |   |  | 2.59 |  
|Federal Home Loan Bank advances and note payable                                                                                 |  | 3.93                    |   |  | 3.70 |   |  | 5.38 |  
|Total interest-bearing liabilities                                                                                               |  | 3.10                    |   |  | 2.32 |   |  | 2.03 |  
|Interest rate spread                                                                                                             |  | 2.18                    |   |  | 2.45 |   |  | 3.43 |  



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##### Table of Contents

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. The tax equivalent adjustment
was $367,000, $344,000, and $17,000 for the years ended December 31, 2005, 2004, and 2003 respectively.



|                                   |  |                                       |      |   |                                       |   |        |           |  |   |        |   |  |      |        |   |           |   |        |   |  |   |        |  
|---------------------------------- |  | ------------------------------------- | ---- | - | ------------------------------------- | - | ------ | --------- |  | - | ------ | - |  | ---- | ------ | - | --------- | - | ------ | - |  | - | ------ | -
|                                   |  | Year Ended December 31,               |     
|                                   |  | 2005                                  |      |   | vs.                                   |   |        | 2004      |  |   | 2004   |   |  | vs.  |        |   | 2003      |  
|                                   |  | Increase (Decrease) Due to Changes in |      |   | Increase (Decrease) Due to Changes in |  
|                                   |  | Volume                                |      |   | Rate                                  |   |        | NetChange |  |   | Volume |   |  | Rate |        |   | NetChange |  
|                                   |  | (In thousands)                        |     
|Interest income:                   |  |                                       |      |   |                                       |   |        |           |  |   |        |   |  |      |        |   |           |   |        |   |  |   |        |  
|Loans                              |  | $                                     | 679  |   |                                       | $ | (44    | )         |  | $ | 635    |   |  | $    | (4,853 | ) |           | $ | (1,628 | ) |  | $ | (6,481 | )
|Mortgage-backed securities         |  |                                       | 393  |   |                                       |   | 140    |           |  |   | 533    |   |  |      | 188    |   |           |   | 174    |   |  |   | 362    |  
|Securities - taxable               |  |                                       | 106  |   |                                       |   | (55    | )         |  |   | 51     |   |  |      | 973    |   |           |   | (170   | ) |  |   | 803    |  
|Securities - tax-exempt            |  |                                       | (13  | ) |                                       |   | 81     |           |  |   | 68     |   |  |      | 965    |   |           |   | (4     | ) |  |   | 961    |  
|Other interest-earning assets      |  |                                       | (175 | ) |                                       |   | 362    |           |  |   | 187    |   |  |      | 1,421  |   |           |   | (1,504 | ) |  |   | (83    | )
|                                   |  |                                       |      |   |                                       |   |        |           |  |   |        |   |  |      |        |   |           |   |        |   |  |   |        |  
|Total interest-earning assets      |  |                                       | 990  |   |                                       |   | 484    |           |  |   | 1,474  |   |  |      | (1,306 | ) |           |   | (3,132 | ) |  |   | (4,438 | )
|                                   |  |                                       |      |   |                                       |   |        |           |  |   |        |   |  |      |        |   |           |   |        |   |  |   |        |  
|Interest Expense:                  |  |                                       |      |   |                                       |   |        |           |  |   |        |   |  |      |        |   |           |   |        |   |  |   |        |  
|Demand deposits and savings        |  |                                       | 7    |   |                                       |   | 876    |           |  |   | 883    |   |  |      | 312    |   |           |   | (325   | ) |  |   | (13    | )
|Certificates of deposits           |  |                                       | (75  | ) |                                       |   | 975    |           |  |   | 900    |   |  |      | (1,700 | ) |           |   | (1,638 | ) |  |   | (3,338 | )
|FHLB advances and note payable     |  |                                       | 628  |   |                                       |   | 18     |           |  |   | 646    |   |  |      | 942    |   |           |   | (91    | ) |  |   | 851    |  
|                                   |  |                                       |      |   |                                       |   |        |           |  |   |        |   |  |      |        |   |           |   |        |   |  |   |        |  
|Total interest-bearing liabilities |  |                                       | 560  |   |                                       |   | 1,869  |           |  |   | 2,429  |   |  |      | (446   | ) |           |   | (2,054 | ) |  |   | (2,500 | )
|                                   |  |                                       |      |   |                                       |   |        |           |  |   |        |   |  |      |        |   |           |   |        |   |  |   |        |  
|Change in net interest income      |  | $                                     | 430  |   |                                       | $ | (1,385 | )         |  | $ | (955   | ) |  | $    | (860   | ) |           | $ | (1,078 | ) |  | $ | (1,938 | )
|                                   |  |                                       |      |   |                                       |   |        |           |  |   |        |   |  |      |        |   |           |   |        |   |  |   |        |  



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##### Table of Contents

RESULTS OF OPERATIONS

2005 Compared to 2004

Net Income

Net income for 2005 increased 44.3% to $2.1 million, or $0.65 per diluted share, compared to net income of $1.4 million, or $0.45 per diluted share, for 2004. The $632,000 increase in net income and the $0.20 increase
in diluted earnings per share for the year ended December 31, 2005, compared to the same period a year ago, was the result of the following factors:



| |  |  | A $978,000 decrease in net interest income, reflecting the cost of interest-bearing liabilities which increased higher than earnings on interest-earning assets;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A credit to the allowance for loan losses of $2.9 million in 2005 compared to a provision of $392,000 in 2004;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | A $154,000 increase in other income primarily due to increases of $236,000 in other fees and service charges, and $197,000 in other income. These increases were partially offset by
decreases of $133,000 in gain on sale of loans and servicing rights, $87,000 in brokerage and insurance commissions and $59,000 in increase on cash surrender value of life insurance;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A $1.1 million increase in other expense. The major components of this increase were increases of $694,000 in salaries and employee benefits primarily due to additional pension
expense less a decline in salary expense from reduced staffing levels, $41,000 in occupancy and equipment expense, $275,000 in legal and professional fees, $46,000 in advertising and marketing expense and $156,000 in other expenses. These increases
were partially offset by decreases of $43,000 in printing and office supplies and $37,000 in data processing expense; and,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A $656,000 increase in income taxes.
| | - |  | ------------------------------------

See Net
Interest Income, Provision for Loan Losses, Other Income, Other Expenses , and Income Taxes, for more information regarding the changes in net income for 2005 compared to 2004. For a quarterly
breakdown of earnings, see Note 19 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
2005 compared to 2004. The tax equivalent adjustment was $367,000 and $344,000 for the years ended December 31, 2005 and 2004, respectively.

(Dollars in thousands)



|                           |  |          |        |            |      |   |          |   |            |  |      |        |  |   |       |  
|-------------------------- |  | -------- | ------ | ---------- | ---- | - | -------- | - | ---------- |  | ---- | ------ |  | - | ----- | -
|                           |  | 2005     |        |            | 2004 |   |          |   |           
|Years ended December 31,   |  | Interest |        | Yield/Rate |      |   | Interest |   | Yield/Rate |  |      | Change | 
|Interest and fees on loans |  | $        | 13,395 |            | 6.53 | % |          | $ | 12,760     |  | 6.55 | %      |  | $ | 635   |  
|Other interest income      |  |          | 6,754  |            | 3.56 |   |          |   | 5,915      |  | 3.26 |        |  |   | 839   |  
|                           |  |          |        |            |      |   |          |   |            |  |      |        |  |   |       |  
|Total interest income      |  |          | 20,149 |            | 5.10 |   |          |   | 18,675     |  | 4.96 |        |  |   | 1,474 |  
|                           |  |          |        |            |      |   |          |   |            |  |      |        |  |   |       |  
|Interest on deposits       |  |          | 8,088  |            | 2.50 |   |          |   | 6,305      |  | 1.94 |        |  |   | 1,783 |  
|Interest on borrowings     |  |          | 1,907  |            | 3.87 |   |          |   | 1,261      |  | 3.82 |        |  |   | 646   |  
|                           |  |          |        |            |      |   |          |   |            |  |      |        |  |   |       |  
|Total interest expense     |  |          | 9,995  |            | 2.68 |   |          |   | 7,566      |  | 2.11 |        |  |   | 2,429 |  
|                           |  |          |        |            |      |   |          |   |            |  |      |        |  |   |       |  
|Net interest income        |  | $        | 10,154 |            |     |   |          | $ | 11,109     |  |     |        |  | $ | (955  | )
|                           |  |          |        |            |      |   |          |   |            |  |      |        |  |   |       |  
|Net interest spread        |  |          |       |            | 2.42 | % |          |   |           |  | 2.85 | %      |  |   |      |  
|Net interest margin        |  |          |       |            | 2.57 |   |          |   |           |  | 2.95 |        |  |   |      |  
|                           |  |          |        |            |      |   |          |   |            |  |      |        |  |   |       |  



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##### Table of Contents

The decline in net interest income, as shown in the table above, was primarily due to the flattening
yield curve, which resulted in short-term interest rates rising faster than longer-term interest rates. Our interest-bearing liabilities have shorter overall maturities and reprice more frequently to market conditions than our interest-earning
assets and, thus, our cost of funds rose quicker than our yield on assets. For a discussion on interest rate risk see Item 3  Quantitative and Qualitative Disclosure About Market Risk.

Tax-exempt interest for 2005 was $712,000 compared to $667,000 for 2004. Tax-exempt interest is from bank-qualified municipal securities. Total interest
income on a tax equivalent basis for 2005 increased $1.5 million compared to the same period of the prior year. This increase was the result of an increase in yield on interest-earning assets of 14 basis points due to higher market interest rates
and an $18.4 million increase in average interest-earning assets. Total interest expense for the 2005 increased $2.4 million compared to the same period of the prior year. This increase was the result of an increase in cost of interest-bearing
liabilities of 57 basis points and a $13.6 million increase in average interest-bearing liabilities. For a further discussion 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 areas. 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 adjustment of $2.9 million
for 2005 compared to a provision of $392,000 in 2004. The 2005 provision adjustment reflected total recoveries of $4.2 million primarily due to recoveries on the leases. We recorded net recoveries of $2.7 million in 2005 and net charge-offs of $1.0
million in 2004.

Other Income

The increase in other income in 2005 as compared to 2004 resulted primarily from increases in other fees and service charges, and other income, which was partially offset by decreases in gain on sale of loans and servicing rights, brokerage
and insurance commissions, and increase on cash surrender value of life insurance.



| |  |  | The increase in other fees and service charges was primarily due to an increase in deposit service charge fees mainly from the Overdraft Honors program, which began in late 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in other income was mainly from a $177,000 gain on sale of land we owned which was adjacent to our branch lot in Greenfield, Indiana and which was not needed for
expansion purposes.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in gain on sale of loans and servicing rights was due to a decline in mortgage loans sold during the period. Loans originated for sale were $8.8 million in 2005
compared to $21.2 million in 2004. Although residential mortgage loan production was comparable in 2005 and 2004, we retained a greater portion of our loans in 2005 because we originated more adjustable-rate loans. We sold most of our fixed-rate
mortgage loan production in 2004. However, in 2005, we retained most of the fifteen-year fixed-rate mortgage loans we produced. Fifteen year fixed-rate mortgage loans generally pose lower interest rate risk than thirty-year fixed-rate mortgage loans
because of their shorter average life.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in brokerage and insurance commissions was mainly due to a decline in sales because of an extended medical leave by one of our two brokers in 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decline in increase on cash surrender value of life insurance was due to lower investment rates.
| | - |  | ----------------------------------------------------------------------------------------------------



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##### Table of Contents

Other Expense

The increase in other expense in 2005 as compared to 2004 resulted primarily from increases in salaries and employee benefits, occupancy and equipment expense, legal and professional fees, advertising and marketing,
and other expenses, which was partially offset by decreases in printing and office supplies and data processing expense.



| |  |  | The increase in salaries and employee benefits was primarily due to an increase in pension expense offset by a reduction in salary expense. In addition to the increase in pension
expense, we also incurred an additional $93,000 in health insurance premiums to reimburse our health insurance provider for claims in past plan years that were in excess of the annual cap. The decline in salary expense was due to reduced staffing
levels as a result of improved efficiencies.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in occupancy and equipment expense was primarily due to increased depreciation expense related to our McCordsville branch that opened in 2004. Other occupancy expense
categories that contributed to the increase included utilities and repairs and maintenance.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in legal and professional fees was due to consulting fees paid to Profit Resources for a consulting engagement to improve operational efficiencies and recruiting fees
for the Chief Executive Officer, Chief Lending Officer and a commercial loan officer.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in advertising and marketing expense was due to an increase in loan promotions which led to higher advertising and direct mail costs.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in other expenses was in part due to a large donation of $70,000 to the city of Anderson, Indiana for its downtown revitalization project. The donation was part of an
agreement between the city and a group of banks, including us, where the city paid off loans secured by commercial buildings in downtown Anderson.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in printing and office supplies and data processing expenses were due to general expense reductions mainly due to improved operating efficiencies.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

Income Tax Expense

The increase in income taxes in 2005 as compared to 2004 resulted primarily from higher net operating earnings and a valuation allowance against our current period state income taxes. We recorded an income tax expense of $183,000 in 2005,
compared to an income tax benefit of $473,000 in 2004.



| |  |  | We have a deferred state tax asset 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. Operating income from AIMI is
not subject to state income taxes under current state law, and is the primary reason for the tax asset. The valuation allowance was $284,000 at December 31, 2005.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The effective tax rate was 8.2% in 2005 and (49.6)% in 2004. The primary difference between the effective tax rates and the statutory tax rates in 2005 relates to tax credits, cash
value of life insurance and municipal securities income. The primary difference in the effective tax rate and the statutory tax rates in 2004 relates to tax credits, cash value of life insurance, municipal security income, and state income tax
credits.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See Note 10 to the Consolidated Financial Statements for more information.



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##### Table of Contents

2004 Compared to 2003

Net Income

Net income for 2004 decreased 41.0%
to $1.4 million, or $0.45 per diluted share compared to net income of $2.4 million, or $0.77 per diluted share, for 2003. The $1.0 million decrease in net income and the $0.32 decrease in diluted earnings per share for the year ended
December 31, 2004, compared to the same period a year ago, was to the result of the following factors:



| |  |  | A $2.3 million decrease in net interest income, reflected the decline in the average loan balances and yield on interest-earning assets partially offset by a decline in the average
balance and cost of interest-bearing liabilities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A $6.0 million decrease in the provision for loan losses;
| | - |  | ---------------------------------------------------------



| |  |  | A $6.6 million decrease in other income primarily due to decreases of $5.5 million in net gain on sale of branches and $1.6 million in gain on sale of loans and servicing rights.
These decreases were partially offset by increases of $107,000 in other fees and service charges, $126,000 in brokerage and insurance commissions and $315,000 in other income;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A $221,000 decrease in other expense. The major components of this decrease were decreases of $46,000 in legal and professional fees, $107,000 in advertising and marketing expense
and $164,000 in other expenses. These decreases were partially offset by an increase of $52,000 in furniture and equipment expense, and;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A $1.6 million decrease in income taxes.
| | - |  | ----------------------------------------

See Net
Interest Income, Provision for Loan Losses, Other Income, Other Expenses and Income Taxes, for more information regarding the changes in net income for the period 2004 compared to 2003. For a
quarterly breakdown of earnings, see Note 19 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 2004 compared to
2003. The tax equivalent adjustment was $344,000 and $17,000 for the years ended December 31, 2004 and 2003, respectively.

(Dollars
in thousands)



|                           |  |          |        |            |      |   |          |   |            |  |      |        |  |   |        |  
|-------------------------- |  | -------- | ------ | ---------- | ---- | - | -------- | - | ---------- |  | ---- | ------ |  | - | ------ | -
|                           |  | 2004     |        |            | 2003 |   |          |   |           
|Years ended December 31,   |  | Interest |        | Yield/Rate |      |   | Interest |   | Yield/Rate |  |      | Change | 
|Interest and fees on loans |  | $        | 12,760 |            | 6.55 | % |          | $ | 19,241     |  | 7.20 | %      |  | $ | (6,481 | )
|Other interest income      |  |          | 5,915  |            | 3.26 |   |          |   | 3,872      |  | 2.84 |        |  |   | 2,043  |  
|                           |  |          |        |            |      |   |          |   |            |  |      |        |  |   |        |  
|Total interest income      |  |          | 18,675 |            | 4.96 |   |          |   | 23,113     |  | 5.73 |        |  |   | (4,438 | )
|                           |  |          |        |            |      |   |          |   |            |  |      |        |  |   |        |  
|Interest on deposits       |  |          | 6,305  |            | 1.94 |   |          |   | 9,656      |  | 2.58 |        |  |   | (3,351 | )
|Interest on borrowings     |  |          | 1,261  |            | 3.82 |   |          |   | 410        |  | 6.30 |        |  |   | 851    |  
|                           |  |          |        |            |      |   |          |   |            |  |      |        |  |   |        |  
|Total interest expense     |  |          | 7,566  |            | 2.11 |   |          |   | 10,066     |  | 2.65 |        |  |   | (2,500 | )
|                           |  |          |        |            |      |   |          |   |            |  |      |        |  |   |        |  
|Net interest income        |  | $        | 11,109 |            |     |   |          | $ | 13,047     |  |     |        |  | $ | (1,938 | )
|                           |  |          |        |            |      |   |          |   |            |  |      |        |  |   |        |  
|Net interest spread        |  |          |       |            | 2.85 | % |          |   |           |  | 3.08 | %      |  |   |       |  
|Net interest margin        |  |          |       |            | 2.95 |   |          |   |           |  | 3.24 |        |  |   |       |  
|                           |  |          |        |            |      |   |          |   |            |  |      |        |  |   |        |  

The main cause for the decline in net interest income, as shown in the table above, was primarily
due to a shift from higher-earning loans to lower-earning investments. For a discussion on interest rate risk see Item 3  Quantitative and Qualitative Disclosure About Market Risk.



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##### Table of Contents

Tax-exempt interest for 2004 was $667,000 compared to $33,000 for 2003. Tax-exempt interest for 2004 and
2003 was from bank-qualified municipal securities. Total interest income on a tax equivalent basis for 2004 decreased $4.4 million compared to the same period of the prior year. This decrease was the result of a decline in yield on interest-earning
assets of 77 basis points and a $26.8 million decrease in average interest-earning assets. Total interest expense for the 2004 decreased $2.5 million compared to the same period of the prior year. This decrease was the result of a decline in cost of
interest-bearing liabilities of 54 basis points and a $22.1 million decrease in average interest-bearing liabilities. For a further discussion see Financial Condition  Rate/Volume Analysis.

Provision for Loan Losses

Provision for loan
losses was $392,000 for 2004, compared to $6.4 million in 2003. The provision expense for 2003 included specific reserves for the troubled lease pools.

Net loan charge-offs were $1.0 million and $11.4 million for the years 2004 and 2003, respectively. The largest charge-off in 2004 was from a commercial real estate loan for $509,000. The largest charge-offs in 2003
were from the troubled lease pools for $10.9 million.

We wrote-off the remaining balances of these lease pools in 2003 and recorded an
after-tax loss of $3.5 million. Due to continued uncertainty surrounding the prospects for eventual recovery from the sureties, the fact that one of the insurance companies had its credit rating down-graded to D by A.M. Best and that the
litigation with respect to the enforcement of the surety bonds was proving more protracted and challenging than originally anticipated, we determined to charge off the remaining balances of the lease pools. We recovered some of the lease losses in
2005. For more information see Item 3  Legal Proceedings.

Other Income

The decrease in other income in 2004 as compared to 2003 resulted primarily from the decline in the net gain on the sale of branches, and net gain on sale
of loans and servicing rights. These decreases were partially offset by increases in other fees and service charges, brokerage and insurance commissions, and other income.



| |  |  | The decline in net gain on the sale of branches was due to the sale of our two Ohio branches in 2003 for a net gain of $5.5 million. On September 30, 2003, we sold two
Cincinnati-area branches to Peoples Community Bancorp, Inc. The transaction included real property related to the Deer Park branch and its leasehold on the premises for the Landen branch. Additionally, we conveyed most consumer and commercial loans
at those branches as part of the transaction, as well as the branches savings deposits, but retained and will continue to service certain single-family residential mortgages originated in those locations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decline in net gain on sale of loans and servicing rights was due to a drop in the volume of mortgage loan refinancing which resulted in less loans sold. The low interest rate
environment in 2003 and 2002 kept the demand for mortgage loan refinancing at a high level. Due to the significant decrease in volume of loans refinanced 2004, mortgage loans we originated declined $129.1 million to $21.2 million in 2004 from $150.3
million in 2003.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in other fees and service charges was due to an increase in deposit service charge fees and to the Overdraft Honors program which began in late 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in brokerage and insurance commissions was mainly the result of higher brokerage commissions due to increased sales and bonus insurance commissions.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in other income was due to net loan servicing fees which increased due to a decline in mortgage loan refinancing in 2004 compared to 2003, which resulted in less
write-offs of mortgage loan servicing rights remaining on our loans that were refinanced. Mortgage loan servicing rights are assets that are created when mortgage loans are sold and we retain the servicing rights. The servicing rights are recognized
as income at the time the loan is sold and the servicing asset is also recorded. The asset is then amortized as an expense to mortgage servicing income over the life of the loan.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Other Expense

The decrease in other expense in 2004 as compared to 2003 resulted primarily from decreases in legal and professional fees, advertising and marketing expenses, and other expenses, which was partially offset by an
increase in furniture and equipment expense.



| |  |  | The decrease in legal and professional fees was due to a decline in legal costs primarily due to less time devoted on the CMC lease litigation in 2004 compared to 2003.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decline in advertising and marketing expenses was due to expenditures by the Ohio branches in the prior period which were sold in September of 2003.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decline in other expenses was due to decreases in loan processing, federal deposit insurance, and Ohio franchise tax expenses. Loan processing expense was $60,000 less due to a
lower volume of loans originated and sold in 2004 compared to 2003. Federal deposit insurance was $34,000 lower due to a decline in average deposit balances resulting from the sale of the Ohio branches in 2003. The Ohio franchise tax expense was
$68,000 for 2003. There was no Ohio franchise tax expense in 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in furniture and equipment expense was due to increased depreciation expense from equipment purchases and higher personal property tax expense.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

Income Tax Expense

The decrease in income taxes in 2004 as compared to 2003 resulted primarily from a decline in pretax income. We recorded an income tax benefit of $473,000 in 2004, compared to an income tax expense of $1.1 million in 2003.



| |  |  | The effective tax rate was (49.6)% in 2004 and 31.5% in 2003. The primary difference in the effective tax rate and the statutory tax rates in 2004 relates to tax credits, cash value
of life insurance, municipal security income, and state income tax credits. The primary difference between the effective tax rates and the statutory tax rates in 2003 relates to tax credits, cash value of life insurance and the disposition of
goodwill resulting from the sale of the Ohio branches.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See Note 10 to the Consolidated Financial Statements for
more information.



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##### Table of Contents

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.

At December 31, 2005, we had $9.5 million in loan commitments outstanding and $33.1 million of additional
commitments for line of credit receivables. Retail certificates of deposit (excluding brokered CDs) due within one year of December 31, 2005 totaled $118.7 million, or 35.0% of total deposits. If these maturing certificates of deposit do not
remain with us, other sources of funds must be used, including other certificates of deposit, brokered CDs, and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than currently
paid on the certificates of deposit due on or before December 31, 2006. 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 a brokered CD for $10.0 million at December 31, 2005. There were no brokered CDs at December 31, 2004.

Our primary investing activities are the origination of loans and purchase of securities. In 2005, we originated $121.0 million of loans and purchased $14.9 million of securities. In 2004, we originated $107.1 million
of loans and purchased $75.9 million of securities.

Financing activities consist primarily of activity in retail deposit accounts,
brokered certificates, 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. Retail deposits decreased $14.7 million in 2005. We
had FHLB advances of $66.6 million and $40.0 million at December 31, 2005 and 2004, 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, 2005, 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 to the 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.

Contractual Obligations

Either the Company or the Bank has the following known contractual obligations as of December 31, 2005:



|                                |       |                        |                  |  |           |        |           |   |                   |  |   |       |  |   |       
|------------------------------- | ----- | ---------------------- | ---------------- |  | --------- | ------ | --------- | - | ----------------- |  | - | ----- |  | - | ------
|Contractual Obligations         |       | Payment due by period 
|                                | Total |                        | Less than 1 year |  | 1-3 years |        | 3-5 years |   | More than 5 years
|                                |       | (Dollars in thousands)
|Long-Term Debt Obligations (1)  |       | $                      | 66,589           |  | $         | 38,216 |           | $ | 5,448             |  | $ | 2,925 |  | $ | 20,000
|Operating Lease Obligations (2) |       |                        | 148              |  |           | 71     |           |   | 72                |  |   | 5     |  |   |      
|Purchase Obligations (3)        |       |                        | 598              |  |           | 145    |           |   | 235               |  |   | 153   |  |   | 65    
|                                |       |                        |                  |  |           |        |           |   |                   |  |   |       |  |   |       
|Total                           |       | $                      | 67,635           |  | $         | 38,732 |           | $ | 5,755             |  | $ | 3,083 |  | $ | 20,065
|                                |       |                        |                  |  |           |        |           |   |                   |  |   |       |  |   |       

---

|(1) | FHLB advances
|--- | -------------

|(2) | Auto lease
|--- | ----------

|(3) | Data processing, maintenance, and telephone agreements
|--- | ------------------------------------------------------



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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

Share-Based Compensation

In December 2004, FASB issued an amendment to SFAS 123 (SFAS 123R), which eliminates the ability to account for share-based compensation transactions
using Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires that such transactions be accounted for using a fair value-based method. On April 14, 2005, the SEC amended the compliance
date for SFAS 123R from the beginning of the first interim or annual period that begins after June 15, 2005 to the next fiscal year beginning after June 15, 2005. The Company adopted SFAS 123R as of January 1, 2006. The effect on the
Companys results of operations depends on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided and possible performance condition
requirements, and so cannot currently be predicted for future awards.

SFAS 123R applies to all awards granted after the effective date and
to awards modified, repurchased, or cancelled after that date. The statement establishes standards for accounting for share-based payment transactions. Share-based payment transactions are those in which an entity exchanges its equity instruments
for goods or services or in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of these equity instruments. SFAS 123R
covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights and employee stock purchase plans.

As of January 1, 2006, the Company applied SFAS 123R using the modified prospective method. This method requires that compensation expense be
recorded for all unvested stock options and restricted stock awards over the requisite service period (generally the vesting schedule). For liability-classified awards, the Company measures the cost of employee services received in exchange for an
award based on its current fair value. The fair value is re-measured subsequently at each reporting date through the settlement date, and changes in fair value are recognized as compensation cost. For equity-classified awards, the grant date fair
value is recognized in earnings over the requisite service period.

Earnings Per Share

The FASB has issued a proposed amendment to SFAS No. 128, Earnings Per Share, to clarify guidance for mandatorily convertible instruments, the
treasury stock method, contingently issuable shares, and contracts that may be settled in cash or share. The primary impact on the Company of the proposed Statement is the change to the treasury stock method for year-to-date diluted earnings per
share.

Currently, SFAS No. 128 requires that the number of incremental shares included in the denominator be determined by computing
a year-to-date weighted average of the number of incremental shares included in each quarterly diluted EPS computation. Under this proposed Statement, the number of incremental shares included in year-to-date diluted earnings per share would be
computed using the average market price of common shares for the year-to-date period, independent of the quarterly computations. This computational change is not expected to have a significant impact on the Companys diluted earnings per share.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information required by
this item is incorporated herein by reference to the section captioned Interest Rate Risk in Item 7 of this annual report on Form 10-K.



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Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                  |  |     
|----------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                  |  | Page
|Report of Independent Registered Public Accounting Firm                                                           |  | 57  
|                                                                                                                  | 
|Consolidated Balance Sheets at December 31, 2005 and 2004                                                         |  | 58  
|                                                                                                                  | 
|Consolidated Statements of Income for Each of the Three Years in the Period Ended December 31, 2005               |  | 59  
|                                                                                                                  | 
|Consolidated Statements of Shareholders Equity for Each of the Three Years in the Period Ended December 31, 2005 |  | 60  
|                                                                                                                  | 
|Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 2005           |  | 61  
|                                                                                                                  | 
|Notes to Consolidated Financial Statements                                                                        |  | 62  



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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, 2005 and 2004, and the related consolidated statements of income, shareholders equity and cash flows for each of the three years in the period ended
December 31, 2005. These financial statements are the responsibility of the Companys management. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as 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, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United
States of America.

LOGO

Indianapolis, Indiana

February 3, 2006, except for Note 20 as to which the date is March 8, 2006



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##### Table of Contents

Ameriana Bancorp

Consolidated Balance Sheets

(in thousands, except share data)



|                                                                                                                   |  |             |         |   |      |   |        
|------------------------------------------------------------------------------------------------------------------ |  | ----------- | ------- | - | ---- | - | -------
|                                                                                                                   |  | December 31
|                                                                                                                   |  | 2005        |         |   | 2004
|Assets                                                                                                             |  |             |         |   |      |   |        
|Cash on hand and in other institutions                                                                             |  | $           | 8,318   |   |      | $ | 8,645  
|Interest-bearing demand deposits                                                                                   |  |             | 5,952   |   |      |   | 8,408  
|                                                                                                                   |  |             |         |   |      |   |        
|Cash and cash equivalents                                                                                          |  |             | 14,270  |   |      |   | 17,053 
|Investment securities held to maturity (fair value of $156,294)                                                    |  |             |        |   |      |   | 158,322
|Investment securities available for sale                                                                           |  |             | 168,686 |   |      |   | 12,032 
|Loans, net of allowance for loan losses of $2,835 and $3,128                                                       |  |             | 218,291 |   |      |   | 196,344
|Premises and equipment                                                                                             |  |             | 7,676   |   |      |   | 7,966  
|Stock in Federal Home Loan Bank                                                                                    |  |             | 7,449   |   |      |   | 7,265  
|Goodwill                                                                                                           |  |             | 564     |   |      |   | 564    
|Cash value of life insurance                                                                                       |  |             | 21,180  |   |      |   | 20,472 
|Other assets                                                                                                       |  |             | 11,253  |   |      |   | 8,535  
|                                                                                                                   |  |             |         |   |      |   |        
|Total assets                                                                                                       |  | $           | 449,369 |   |      | $ | 428,553
|                                                                                                                   |  |             |         |   |      |   |        
|Liabilities and Shareholders Equity                                                                               |  |             |         |   |      |   |        
|Liabilities                                                                                                        |  |             |         |   |      |   |        
|Deposits                                                                                                           |  |             |         |   |      |   |        
|Noninterest-bearing                                                                                                |  | $           | 18,788  |   |      | $ | 19,649 
|Interest-bearing                                                                                                   |  |             | 320,563 |   |      |   | 324,398
|                                                                                                                   |  |             |         |   |      |   |        
|Total deposits                                                                                                     |  |             | 339,351 |   |      |   | 344,047
|Borrowings                                                                                                         |  |             | 66,889  |   |      |   | 40,390 
|Drafts payable                                                                                                     |  |             | 2,763   |   |      |   | 2,327  
|Other liabilities                                                                                                  |  |             | 4,709   |   |      |   | 3,146  
|                                                                                                                   |  |             |         |   |      |   |        
|Total liabilities                                                                                                  |  |             | 413,712 |   |      |   | 389,910
|                                                                                                                   |  |             |         |   |      |   |        
|Commitments and contingencies                                                                                      |  |             |         |   |      |   |        
|Shareholders equity                                                                                               |  |             |         |   |      |   |        
|Preferred stock - 5,000,000 shares authorized and unissued                                                         |  |             |        |   |      |   |       
|Common stock, $1.00 par value Authorized 15,000,000 shares Issued and outstanding - 3,174,397 and 3,150,988 shares |  |             | 3,174   |   |      |   | 3,151  
|Additional paid-in capital                                                                                         |  |             | 708     |   |      |   | 537    
|Retained earnings                                                                                                  |  |             | 34,731  |   |      |   | 34,670 
|Accumulated other comprehensive income (loss)                                                                      |  |             | (2,956  | ) |      |   | 285    
|                                                                                                                   |  |             |         |   |      |   |        
|Total shareholders equity                                                                                         |  |             | 35,657  |   |      |   | 38,643 
|                                                                                                                   |  |             |         |   |      |   |        
|Total liabilities and shareholders equity                                                                         |  | $           | 449,369 |   |      | $ | 428,553
|                                                                                                                   |  |             |         |   |      |   |        

See notes to consolidated financial statements.



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Ameriana Bancorp

Consolidated Statements of Income

(in thousands, except share data)



|                                                             |  |                        |        |   |      |   |        |      |  |   |       
|------------------------------------------------------------ |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------
|                                                             |  | Year Ended December 31
|                                                             |  | 2005                   |        |   | 2004 |   |        | 2003
|Interest Income                                              |  |                        |        |   |      |   |        |      |  |   |       
|Interest and fees on loans                                   |  | $                      | 13,395 |   |      | $ | 12,760 |      |  | $ | 19,241
|Interest on mortgage-backed securities                       |  |                        | 2,004  |   |      |   | 1,471  |      |  |   | 1,109 
|Interest on investment securities                            |  |                        | 3,718  |   |      |   | 3,518  |      |  |   | 1,983 
|Other interest and dividend income                           |  |                        | 665    |   |      |   | 582    |      |  |   | 763   
|                                                             |  |                        |        |   |      |   |        |      |  |   |       
|Total interest income                                        |  |                        | 19,782 |   |      |   | 18,331 |      |  |   | 23,096
|                                                             |  |                        |        |   |      |   |        |      |  |   |       
|Interest Expense                                             |  |                        |        |   |      |   |        |      |  |   |       
|Interest on deposits                                         |  |                        | 8,088  |   |      |   | 6,305  |      |  |   | 9,656 
|Interest on borrowings                                       |  |                        | 1,907  |   |      |   | 1,261  |      |  |   | 410   
|                                                             |  |                        |        |   |      |   |        |      |  |   |       
|Total interest expense                                       |  |                        | 9,995  |   |      |   | 7,566  |      |  |   | 10,066
|                                                             |  |                        |        |   |      |   |        |      |  |   |       
|Net Interest Income                                          |  |                        | 9,787  |   |      |   | 10,765 |      |  |   | 13,030
|Provision (adjustment) for loan losses                       |  |                        | (2,852 | ) |      |   | 392    |      |  |   | 6,440 
|                                                             |  |                        |        |   |      |   |        |      |  |   |       
|Net Interest Income After Provision for Loan Losses          |  |                        | 12,639 |   |      |   | 10,373 |      |  |   | 6,590 
|                                                             |  |                        |        |   |      |   |        |      |  |   |       
|Other Income                                                 |  |                        |        |   |      |   |        |      |  |   |       
|Other fees and service charges                               |  |                        | 1,708  |   |      |   | 1,472  |      |  |   | 1,365 
|Brokerage and insurance commissions                          |  |                        | 999    |   |      |   | 1,086  |      |  |   | 960   
|Net realized gains on sales of available-for-sale securities |  |                        |       |   |      |   |       |      |  |   | 41    
|Gains on sales of loans and servicing rights                 |  |                        | 176    |   |      |   | 309    |      |  |   | 1,878 
|Net gain on sale of branches                                 |  |                        |       |   |      |   |       |      |  |   | 5,511 
|Increase in cash value of life insurance                     |  |                        | 708    |   |      |   | 767    |      |  |   | 773   
|Other                                                        |  |                        | 524    |   |      |   | 327    |      |  |   | 12    
|                                                             |  |                        |        |   |      |   |        |      |  |   |       
|Total other income                                           |  |                        | 4,115  |   |      |   | 3,961  |      |  |   | 10,540
|                                                             |  |                        |        |   |      |   |        |      |  |   |       
|Other Expense                                                |  |                        |        |   |      |   |        |      |  |   |       
|Salaries and employee benefits                               |  |                        | 8,787  |   |      |   | 8,093  |      |  |   | 8,082 
|Net occupancy expense                                        |  |                        | 846    |   |      |   | 796    |      |  |   | 783   
|Furniture and equipment expense                              |  |                        | 808    |   |      |   | 817    |      |  |   | 765   
|Legal and professional fees                                  |  |                        | 1,042  |   |      |   | 767    |      |  |   | 813   
|Data processing expense                                      |  |                        | 542    |   |      |   | 579    |      |  |   | 554   
|Printing and office supplies                                 |  |                        | 231    |   |      |   | 274    |      |  |   | 279   
|Advertising and marketing expense                            |  |                        | 253    |   |      |   | 207    |      |  |   | 314   
|Other                                                        |  |                        | 2,004  |   |      |   | 1,848  |      |  |   | 2,012 
|                                                             |  |                        |        |   |      |   |        |      |  |   |       
|Total other expense                                          |  |                        | 14,513 |   |      |   | 13,381 |      |  |   | 13,602
|                                                             |  |                        |        |   |      |   |        |      |  |   |       
|Income Before Income Taxes                                   |  |                        | 2,241  |   |      |   | 953    |      |  |   | 3,528 
|Income taxes                                                 |  |                        | 183    |   |      |   | (473   | )    |  |   | 1,110 
|                                                             |  |                        |        |   |      |   |        |      |  |   |       
|Net Income                                                   |  | $                      | 2,058  |   |      | $ | 1,426  |      |  | $ | 2,418 
|                                                             |  |                        |        |   |      |   |        |      |  |   |       
|Basic and Diluted Earnings Per Share                         |  | $                      | 0.65   |   |      | $ | 0.45   |      |  | $ | 0.77  
|                                                             |  |                        |        |   |      |   |        |      |  |   |       

See notes to consolidated financial statements.



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Ameriana Bancorp

Consolidated Statements of Shareholders Equity

(in thousands, except per share data)



|                                                                                                                             |  |              |       |                            |   |                   |  |   |                                              |   |  |       |        |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----- | -------------------------- | - | ----------------- |  | - | -------------------------------------------- | - |  | ----- | ------ | - |  | - | ------ | -
|                                                                                                                             |  | Common Stock |       | Additional Paid-in Capital |   | Retained Earnings |  |   | AccumulatedOther Comprehensive Income
(Loss) |   |  | Total |       
|Balance at January 1, 2003                                                                                                   |  | $            | 3,147 |                            | $ | 499               |  | $ | 34,856                                       |   |  | $     | 538    |   |  | $ | 39,040 |  
|Net income                                                                                                                   |  |              |      |                            |   |                  |  |   | 2,418                                        |   |  |       |       |   |  |   | 2,418  |  
|Change in unrealized loss on available-for-sale securities, net of income tax benefit of $359                                |  |              |      |                            |   |                  |  |   |                                             |   |  |       | (577   | ) |  |   | (577   | )
|                                                                                                                             |  |              |       |                            |   |                   |  |   |                                              |   |  |       |        |   |  |   |        |  
|Comprehensive income                                                                                                         |  |              |       |                            |   |                   |  |   |                                              |   |  |       |        |   |  |   | 1,841  |  
|Exercise of stock options                                                                                                    |  |              | 1     |                            |   | 7                 |  |   |                                             |   |  |       |       |   |  |   | 8      |  
|Dividends declared ($0.64 per share)                                                                                         |  |              |      |                            |   |                  |  |   | (2,015                                       | ) |  |       |       |   |  |   | (2,015 | )
|                                                                                                                             |  |              |       |                            |   |                   |  |   |                                              |   |  |       |        |   |  |   |        |  
|Balance at December 31, 2003                                                                                                 |  |              | 3,148 |                            |   | 506               |  |   | 35,259                                       |   |  |       | (39    | ) |  |   | 38,874 |  
|Net income                                                                                                                   |  |              |      |                            |   |                  |  |   | 1,426                                        |   |  |       |       |   |  |   | 1,426  |  
|Change in unrealized gain on available-for-sale securities, net of income tax expense of $173                                |  |              |      |                            |   |                  |  |   |                                             |   |  |       | 324    |   |  |   | 324    |  
|                                                                                                                             |  |              |       |                            |   |                   |  |   |                                              |   |  |       |        |   |  |   |        |  
|Comprehensive income                                                                                                         |  |              |       |                            |   |                   |  |   |                                              |   |  |       |        |   |  |   | 1,750  |  
|Exercise of stock options                                                                                                    |  |              | 3     |                            |   | 31                |  |   |                                             |   |  |       |       |   |  |   | 34     |  
|Tax benefit related to exercise of non-qualified stock options                                                               |  |              |      |                            |   |                  |  |   | 1                                            |   |  |       |       |   |  |   | 1      |  
|Dividends declared ($0.64 per share)                                                                                         |  |              |      |                            |   |                  |  |   | (2,016                                       | ) |  |       |       |   |  |   | (2,016 | )
|                                                                                                                             |  |              |       |                            |   |                   |  |   |                                              |   |  |       |        |   |  |   |        |  
|Balance at December 31, 2004                                                                                                 |  |              | 3,151 |                            |   | 537               |  |   | 34,670                                       |   |  |       | 285    |   |  |   | 38,643 |  
|Net income                                                                                                                   |  |              |      |                            |   |                  |  |   | 2,058                                        |   |  |       |       |   |  |   | 2,058  |  
|Change in the excess of additional pension liability over unrecognized prior service cost, net of income tax benefit of
$178 |  |              |       |                            |   |                   |  |   |                                              |   |  |       | (346   | ) |  |   | (346   | )
|Change in unrealized gain on available-for-sale securities, net of income tax benefit of $1,579                              |  |              |       |                            |   |                   |  |   |                                              |   |  |       | (2,895 | ) |  |   | (2,895 | )
|                                                                                                                             |  |              |       |                            |   |                   |  |   |                                              |   |  |       |        |   |  |   |        |  
|Comprehensive loss                                                                                                           |  |              |       |                            |   |                   |  |   |                                              |   |  |       |        |   |  |   | (1,183 | )
|Exercise of stock options                                                                                                    |  |              | 23    |                            |   | 171               |  |   |                                              |   |  |       |        |   |  |   | 194    |  
|Tax benefit related to exercise of non-qualified stock options                                                               |  |              |       |                            |   |                   |  |   | 27                                           |   |  |       |        |   |  |   | 27     |  
|Dividends declared ($0.64 per share)                                                                                         |  |              |       |                            |   |                   |  |   | (2,024                                       | ) |  |       |        |   |  |   | (2,024 | )
|                                                                                                                             |  |              |       |                            |   |                   |  |   |                                              |   |  |       |        |   |  |   |        |  
|Balance at December 31, 2005                                                                                                 |  | $            | 3,174 |                            | $ | 708               |  | $ | 34,731                                       |   |  | $     | (2,956 | ) |  | $ | 35,657 |  
|                                                                                                                             |  |              |       |                            |   |                   |  |   |                                              |   |  |       |        |   |  |   |        |  

See notes to consolidated financial statements.



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Ameriana Bancorp

Consolidated Statements of Cash Flows

(in thousands)



|                                                                     |  |                        |         |   |      |   |         |      |  |   |          |  
|-------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                     |  | Year Ended December 31 |        
|                                                                     |  | 2005                   |         |   | 2004 |   |         | 2003 | 
|Operating Activities                                                 |  |                        |         |   |      |   |         |      |  |   |          |  
|Net income                                                           |  | $                      | 2,058   |   |      | $ | 1,426   |      |  | $ | 2,418    |  
|Items not requiring (providing) cash                                 |  |                        |         |   |      |   |         |      |  |   |          |  
|Provision (adjustment) for losses on loans                           |  |                        | (2,852  | ) |      |   | 392     |      |  |   | 6,440    |  
|Depreciation and amortization                                        |  |                        | 1,435   |   |      |   | 1,441   |      |  |   | 1,503    |  
|Increase in cash value of life insurance                             |  |                        | (708    | ) |      |   | (767    | )    |  |   | (773     | )
|Mortgage loans originated for sale                                   |  |                        | (8,830  | ) |      |   | (21,165 | )    |  |   | (150,283 | )
|Proceeds from sale of mortgage loans                                 |  |                        | 9,259   |   |      |   | 21,708  |      |  |   | 154,529  |  
|Gains on sale of loans and servicing rights                          |  |                        | (176    | ) |      |   | (309    | )    |  |   | (1,878   | )
|Gain on sale of investments                                          |  |                        |        |   |      |   |        |      |  |   | (41      | )
|Gain on sale of branches                                             |  |                        |        |   |      |   |        |      |  |   | (5,511   | )
|Increase (decrease) in drafts payable                                |  |                        | 436     |   |      |   | (1,150  | )    |  |   | (1,622   | )
|Other adjustments                                                    |  |                        | 284     |   |      |   | 2,471   |      |  |   | (783     | )
|                                                                     |  |                        |         |   |      |   |         |      |  |   |          |  
|Net cash provided by operating activities                            |  |                        | 906     |   |      |   | 4,047   |      |  |   | 3,999    |  
|                                                                     |  |                        |         |   |      |   |         |      |  |   |          |  
|Investing Activities                                                 |  |                        |         |   |      |   |         |      |  |   |          |  
|Purchase of investment securities held to maturity                   |  |                        | (14,913 | ) |      |   | (69,183 | )    |  |   |         |  
|Proceeds from maturities/calls of securities held to maturity        |  |                        |        |   |      |   | 14,846  |      |  |   |         |  
|Principal collected on mortgage-backed securities held to maturity   |  |                        | 9,089   |   |      |   | 8,302   |      |  |   |         |  
|Purchase of investment securities available for sale                 |  |                        | (476    | ) |      |   | (6,730  | )    |  |   | (139,037 | )
|Proceeds from sale of investment securities available for sale       |  |                        |        |   |      |   |        |      |  |   | 20,705   |  
|Proceeds from maturities/calls of securities available for sale      |  |                        |        |   |      |   | 16,154  |      |  |   | 18,764   |  
|Principal collected on mortgage-backed securities available for sale |  |                        | 2,807   |   |      |   | 2,345   |      |  |   | 19,696   |  
|Net change in loans                                                  |  |                        | (20,580 | ) |      |   | 6,189   |      |  |   | 64,512   |  
|Net purchases of premises and equipment                              |  |                        | (661    | ) |      |   | (802    | )    |  |   | (1,233   | )
|Purchase of Federal Home Loan Bank stock                             |  |                        | (184    | ) |      |   | (317    | )    |  |   |         |  
|Net cash paid on sale of branches                                    |  |                        |        |   |      |   |        |      |  |   | (19,751  | )
|Other investing activities                                           |  |                        | 1,053   |   |      |   | 1,215   |      |  |   | 488      |  
|                                                                     |  |                        |         |   |      |   |         |      |  |   |          |  
|Net cash used in investing activities                                |  |                        | (23,865 | ) |      |   | (27,981 | )    |  |   | (35,856  | )
|                                                                     |  |                        |         |   |      |   |         |      |  |   |          |  
|Financing Activities                                                 |  |                        |         |   |      |   |         |      |  |   |          |  
|Net change in demand and savings deposits                            |  |                        | (24,439 | ) |      |   | 13,464  |      |  |   | 41,347   |  
|Net change in certificates of deposit                                |  |                        | 19,742  |   |      |   | (15,161 | )    |  |   | (42,179  | )
|Net change in short-term borrowings                                  |  |                        | 27,000  |   |      |   | 5,000   |      |  |   |         |  
|Proceeds from borrowings                                             |  |                        | 6,750   |   |      |   | 26,325  |      |  |   | 5,000    |  
|Repayment of borrowings                                              |  |                        | (7,251  | ) |      |   | (1,165  | )    |  |   | (1,202   | )
|Exercise of stock options                                            |  |                        | 194     |   |      |   | 34      |      |  |   | 8        |  
|Net change in advances by borrowers for taxes and insurance          |  |                        | 204     |   |      |   | (43     | )    |  |   | (249     | )
|Cash dividends paid                                                  |  |                        | (2,024  | ) |      |   | (2,016  | )    |  |   | (2,015   | )
|                                                                     |  |                        |         |   |      |   |         |      |  |   |          |  
|Net cash provided by financing activities                            |  |                        | 20,176  |   |      |   | 26,438  |      |  |   | 710      |  
|                                                                     |  |                        |         |   |      |   |         |      |  |   |          |  
|Change in Cash and Cash Equivalents                                  |  |                        | (2,783  | ) |      |   | 2,504   |      |  |   | (31,147  | )
|Cash and Cash Equivalents at Beginning of Year                       |  |                        | 17,053  |   |      |   | 14,549  |      |  |   | 45,696   |  
|                                                                     |  |                        |         |   |      |   |         |      |  |   |          |  
|Cash and Cash Equivalents at End of Year                             |  | $                      | 14,270  |   |      | $ | 17,053  |      |  | $ | 14,549   |  
|                                                                     |  |                        |         |   |      |   |         |      |  |   |          |  

See notes to consolidated financial statements.



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##### Table of Contents

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 and Trust, SB (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.

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. AIMI manages the Companys investment portfolio.

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 and consumer assets. The Company has sold various loans to investors while retaining the servicing rights.

Cash and Cash Equivalents consist of cash on hand and in other institutions and interest-bearing demand deposits.

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 other 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.

Stock in Federal Home Loan Bank is stated at cost and the amount of stock the Company is required to own is determined by regulation.

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 nonaccrual and
substantially delinquent loans may be considered to be impaired. Generally, loans are placed on non-accrual status at 90 days past due and interest is considered a loss, 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. 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.



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Ameriana Bancorp

Notes to
Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

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, 2005, 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 annually tested 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.

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 a stock-based employee compensation plan, which is described more fully in Note 11. The Company accounts for this plan
under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is
reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if the
Company had applied the fair value provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.



|                                                                                                                     |  |      |       |      |   |       |  |   |      
|-------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                                                                                                     |  | 2005 |       | 2004 |   | 2003 
|Net income, as reported                                                                                              |  | $    | 2,058 |      | $ | 1,426 |  | $ | 2,418
|                                                                                                                     |  |      |      
|Less: Total stock-based employee compensation cost determined under the fair value based method, net of income taxes |  |      | 371   |      |   | 380   |  |   | 7    
|                                                                                                                     |  |      |       |      |   |       |  |   |      
|Pro forma net income                                                                                                 |  | $    | 1,687 |      | $ | 1,046 |  | $ | 2,411
|                                                                                                                     |  |      |       |      |   |       |  |   |      
|Basic and diluted earnings per share, as reported                                                                    |  | $    | 0.65  |      | $ | 0.45  |  | $ | 0.77 
|                                                                                                                     |  |      |      
|Basic and diluted earnings per share, pro forma                                                                      |  |      | 0.53  |      |   | 0.33  |  |   | 0.77 



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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

On December 29, 2005, the Company accelerated the vesting of all 50,000
outstanding stock options granted under the 1996 Stock Option and Incentive Plan. These stock options, which otherwise would have vested from time to time through August 2009, became exercisable immediately. The acceleration affected options held by
employees of the Company and the Bank, including 28,500 options held by executive officers.

Income Taxin the consolidated statements of
income 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.

Reclassificationsof
certain amounts in the 2004 and 2003 consolidated financial statements have been made to conform to the 2005 presentation.

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, 2005 was $300,000.

3. Investment Securities



|                                        |  |                |         |                        |   |                         |  |            |       |  |   |        
|--------------------------------------- |  | -------------- | ------- | ---------------------- | - | ----------------------- |  | ---------- | ----- |  | - | -------
|                                        |  | Amortized Cost |         | Gross Unrealized Gains |   | Gross Unrealized Losses |  | Fair Value
|Available for sale at December 31, 2005 |  |                |         |                        |   |                         |  |            |       |  |   |        
|Mortgage-backed securities              |  | $              | 46,580  |                        | $ | 45                      |  | $          | 910   |  | $ | 45,715 
|Federal agencies                        |  |                | 91,567  |                        |   |                        |  |            | 2,155 |  |   | 89,412 
|Municipal securities                    |  |                | 20,288  |                        |   | 1                       |  |            | 520   |  |   | 19,769 
|Other investment securities             |  |                | 1,500   |                        |   |                        |  |            |      |  |   | 1,500  
|Equity securities                       |  |                | 12,789  |                        |   |                        |  |            | 499   |  |   | 12,290 
|                                        |  |                |         |                        |   |                         |  |            |       |  |   |        
|                                        |  | $              | 172,724 |                        | $ | 46                      |  | $          | 4,084 |  | $ | 168,686
|                                        |  |                |         |                        |   |                         |  |            |       |  |   |        
|                                        |  |                |         |                       
|                                        |  | Amortized Cost |         | Gross Unrealized Gains |   | Gross Unrealized Losses |  | Fair Value
|Available for sale at December 31, 2004 |  |                |         |                        |   |                         |  |            |       |  |   |        
|Equity securities                       |  | $              | 12,312  |                        | $ |                        |  | $          | 280   |  | $ | 12,032 
|Held to maturity at December 31, 2004   |  |                |         |                        |   |                         |  |            |       |  |   |        
|Mortgage-backed securities              |  |                | 44,065  |                        |   | 48                      |  |            | 408   |  |   | 43,705 
|Federal agencies                        |  |                | 92,255  |                        |   | 52                      |  |            | 1,486 |  |   | 90,821 
|Municipal securities                    |  |                | 20,362  |                        |   | 6                       |  |            | 244   |  |   | 20,124 
|Other investment securities             |  |                | 1,640   |                        |   | 4                       |  |            |      |  |   | 1,644  
|                                        |  |                |         |                        |   |                         |  |            |       |  |   |        
|                                        |  |                | 158,322 |                        |   | 110                     |  |            | 2,138 |  |   | 156,294
|                                        |  |                |         |                        |   |                         |  |            |       |  |   |        
|                                        |  | $              | 170,634 |                        | $ | 110                     |  | $          | 2,418 |  | $ | 168,326
|                                        |  |                |         |                        |   |                         |  |            |       |  |   |        



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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

The amortized cost and fair value of securities available for sale at
December 31, 2005, 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 Sale
|                           |  | Amortized Cost     |         | Fair Value
|Within one year            |  | $                  | 25,102  |            | $ | 24,753 
|One to five years          |  |                    | 66,465  |            |   | 64,659 
|Five to ten years          |  |                    | 20,288  |            |   | 19,769 
|After ten years            |  |                    | 1,500   |            |   | 1,500  
|                           |  |                    |         |            |   |        
|                           |  |                    | 113,355 |            |   | 110,681
|Mortgage-backed securities |  |                    | 46,580  |            |   | 45,715 
|Equity securities          |  |                    | 12,789  |            |   | 12,290 
|                           |  |                    |         |            |   |        
|                           |  | $                  | 172,724 |            | $ | 168,686
|                           |  |                    |         |            |   |        

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, 2005 and 2004 were $161,079,000 and $148,326,000, which is approximately 95.5% and 88.1% of the Companys investment portfolio.

Mortgage-backed securities: The unrealized losses on the Companys investment in mortgage-backed securities were caused by interest rate increases.
The contractual cash flows of those investments are guaranteed by agencies of the U. S. Government. 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, 2005.

Federal agencies: The unrealized losses
on the Companys investment in federal agencies were caused by interest rate increases. 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.
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, 2005.

Municipal securities: The unrealized losses on the Companys investment in municipal securities were caused by interest rate increases.
All municipal securities in the Companys investment portfolio at December 31, 2005 have a credit rating of Aaa by Moodys Investors Service. 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. 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, 2005.

Equity securities: The unrealized losses on the Companys investment in
equity securities were caused by interest rate increases. Those equity securities consist of mutual funds whose portfolio compositions are primarily investments in debt securities with an average credit quality rating of AAA by Standard and
Poors. 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 these investments until a projected recovery of fair value, the Company
does not consider those investments to be other-than-temporarily impaired at December 31, 2005.



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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

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

The following table shows the Companys investments gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at
December 31, 2005 and 2004:



|                           |  |                     |         |                     |   |            |  |                   |         |            |   |                   |  |   |         |  |   |      
|-------------------------- |  | ------------------- | ------- | ------------------- | - | ---------- |  | ----------------- | ------- | ---------- | - | ----------------- |  | - | ------- |  | - | -----
|                           |  | Less Than 12 Months |         | 12 Months or Longer |   | Total     
|                           |  | Fair Value          |         | Unrealized Losses   |   | Fair Value |  | Unrealized Losses |         | Fair Value |   | Unrealized Losses
|At December 31, 2005       |  |                     |         |                     |   |            |  |                   |         |            |   |                   |  |   |         |  |   |      
|Mortgage-backed securities |  | $                   | 20,493  |                     | $ | 295        |  | $                 | 19,767  |            | $ | 615               |  | $ | 40,260  |  | $ | 910  
|Federal agencies           |  |                     | 5,777   |                     |   | 96         |  |                   | 83,635  |            |   | 2,059             |  |   | 89,412  |  |   | 2,155
|Municipal securities       |  |                     | 10,431  |                     |   | 174        |  |                   | 8,686   |            |   | 346               |  |   | 19,117  |  |   | 520  
|Equity securities          |  |                     |        |                     |   |           |  |                   | 12,290  |            |   | 499               |  |   | 12,290  |  |   | 499  
|                           |  |                     |         |                     |   |            |  |                   |         |            |   |                   |  |   |         |  |   |      
|                           |  | $                   | 36,701  |                     | $ | 565        |  | $                 | 124,378 |            | $ | 3,519             |  | $ | 161,079 |  | $ | 4,084
|                           |  |                     |         |                     |   |            |  |                   |         |            |   |                   |  |   |         |  |   |      
|                           |  |                     |        
|                           |  | Less Than 12 Months |         | 12 Months or Longer |   | Total     
|                           |  | Fair Value          |         | Unrealized Losses   |   | Fair Value |  | Unrealized Losses |         | Fair Value |   | Unrealized Losses
|At December 31, 2004       |  |                     |         |                     |   |            |  |                   |         |            |   |                   |  |   |         |  |   |      
|Mortgage-backed securities |  | $                   | 30,229  |                     | $ | 343        |  | $                 | 3,139   |            | $ | 65                |  | $ | 33,368  |  | $ | 408  
|Federal agencies           |  |                     | 72,758  |                     |   | 1,280      |  |                   | 12,190  |            |   | 206               |  |   | 84,948  |  |   | 1,486
|Municipal securities       |  |                     | 17,662  |                     |   | 237        |  |                   | 316     |            |   | 7                 |  |   | 17,978  |  |   | 244  
|Equity securities          |  |                     |        |                     |   |           |  |                   | 12,032  |            |   | 280               |  |   | 12,032  |  |   | 280  
|                           |  |                     |         |                     |   |            |  |                   |         |            |   |                   |  |   |         |  |   |      
|                           |  | $                   | 120,649 |                     | $ | 1,860      |  | $                 | 27,677  |            | $ | 558               |  | $ | 148,326 |  | $ | 2,418
|                           |  |                     |         |                     |   |            |  |                   |         |            |   |                   |  |   |         |  |   |      

Investment securities with a total carrying value of $53,933,000 and $16,435,000 were pledged at December 31,
2005 and 2004 to secure FHLB advances and a letter of credit.

No investment securities were sold during 2005 and 2004. A gross gain of $41,000 resulting
from sales of available-for-sale securities was realized for 2003.

All held-to-maturity debt securities were transferred to available-for-sale during
2005. On the date of transfer, these investments had a book value of $163.3 million, a market value of $160.2 million, and an unrealized net loss of $3.2 million on that date. This reclassification provides the Company with more flexibility to
address changes in interest rate risk. The change had no effect on earnings but did reduce shareholders equity due the recording of unrealized net losses in other comprehensive income.

All available-for-sale debt securities were transferred to held-to-maturity during 2004. The transfer was made to reflect managements intent at that time. The net
unrealized gains on the securities at the date of transfer to the held-to-maturity classification will be amortized over the remaining terms of the securities. The unamortized portion of these net unrealized gains totaled $716,000 at
December 31, 2004 and is included in accumulated comprehensive income.



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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

4. Loans



|                            |  |             |         |      |   |        
|--------------------------- |  | ----------- | ------- | ---- | - | -------
|                            |  | December 31
|                            |  | 2005        |         | 2004
|Residential mortgage loans  |  | $           | 98,495  |      | $ | 93,544 
|Commercial mortgage loans   |  |             | 68,484  |      |   | 76,222 
|Construction mortgage loans |  |             | 44,803  |      |   | 13,339 
|Consumer loans              |  |             | 3,592   |      |   | 3,898  
|Commercial loans            |  |             | 7,962   |      |   | 14,334 
|Loans secured by deposits   |  |             | 582     |      |   | 506    
|                            |  |             |         |      |   |        
|                            |  |             | 223,918 |      |   | 201,843
|                            |  |             |         |      |   |        
|Deduct                      |  |             |         |      |   |        
|Undisbursed loan proceeds   |  |             | 2,485   |      |   | 1,966  
|Deferred loan costs, net    |  |             | 307     |      |   | 405    
|Allowance for loan losses   |  |             | 2,835   |      |   | 3,128  
|                            |  |             |         |      |   |        
|                            |  |             | 5,627   |      |   | 5,499  
|                            |  |             |         |      |   |        
|                            |  | $           | 218,291 |      | $ | 196,344
|                            |  |             |         |      |   |        

Loans being serviced by the Company for investors, primarily the Federal Home Loan Mortgage Corporation and
Federal National Mortgage Association, totaled approximately $161,463,000, $179,596,000 and $193,016,000 as of December 31, 2005, 2004 and 2003. Such loans are not included in the preceding table.

The aggregate fair value of capitalized mortgage servicing rights at December 31, 2005 and 2004 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. No valuation allowance was necessary at December 31, 2005 and 2004.



|                                 |  |                        |       |   |      |   |       |      |  |   |       |  
|-------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                 |  | Year Ended December 31 |      
|                                 |  | 2005                   |       |   | 2004 |   |       | 2003 | 
|Mortgage servicing rights        |  |                        |       |   |      |   |       |      |  |   |       |  
|Balance at beginning of year     |  | $                      | 1,219 |   |      | $ | 1,313 |      |  | $ | 1,197 |  
|Servicing rights capitalized     |  |                        | 86    |   |      |   | 157   |      |  |   | 727   |  
|Amortization of servicing rights |  |                        | (214  | ) |      |   | (251  | )    |  |   | (611  | )
|                                 |  |                        |       |   |      |   |       |      |  |   |       |  
|Balance at end of year           |  | $                      | 1,091 |   |      | $ | 1,219 |      |  | $ | 1,313 |  
|                                 |  |                        |       |   |      |   |       |      |  |   |       |  



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##### Table of Contents

Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

At December 31, 2005 and 2004, the Company had outstanding commitments to
originate loans of approximately $9,459,000 and $18,512,000. The outstanding commitments for 2005 were primarily for adjustable-rate mortgages with rates that are determined just prior to closing or fixed-rate mortgage loans with rates locked in at
the time of loan commitment and the outstanding commitments for 2004 were primarily for commercial real estate loans. In addition, the Company had $33,089,000 and $23,268,000 of conditional commitments for lines of credit receivables at
December 31, 2005 and 2004. 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 $4,842,000 and $4,412,000 of letters of
credit outstanding at December 31, 2005 and 2004. 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.

5. Allowance for Loan Losses



|                                               |  |                        |        |   |      |   |        |      |  |   |         |  
|---------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                               |  | Year Ended December 31 |       
|                                               |  | 2005                   |        |   | 2004 |   |        | 2003 | 
|Balance at beginning of year                   |  | $                      | 3,128  |   |      | $ | 3,744  |      |  | $ | 8,666   |  
|Transfer to allowance for unfunded commitments |  |                        | (116   | ) |      |   |       |      |  |   |        |  
|Provision (adjustment) for losses              |  |                        | (2,852 | ) |      |   | 392    |      |  |   | 6,440   |  
|Charge-offs                                    |  |                        | (1,532 | ) |      |   | (1,134 | )    |  |   | (11,394 | )
|Recoveries                                     |  |                        | 4,207  |   |      |   | 126    |      |  |   | 32      |  
|                                               |  |                        |        |   |      |   |        |      |  |   |         |  
|Net recoveries (charge-offs)                   |  |                        | 2,675  |   |      |   | (1,008 | )    |  |   | (11,362 | )
|                                               |  |                        |        |   |      |   |        |      |  |   |         |  
|Balance at end of year                         |  | $                      | 2,835  |   |      | $ | 3,128  |      |  | $ | 3,744   |  
|                                               |  |                        |        |   |      |   |        |      |  |   |         |  

At December 31, 2005 and 2004, impaired loans totaled $3,922,000 and $5,994,000 with an allocation of the
allowance for loan losses of $724,000 and $1,014,000.

Interest income of $128,000, $77,000, and $154,000 was recognized on average impaired loans of
$5,305,000, $5,437,000, and $14,471,000 for 2005, 2004, and 2003.

Cash basis interest on impaired loans included above was $123,000, $77,000 and $154,000
for 2005, 2004, and 2003.

At December 31, 2005 and 2004, accruing loans delinquent 90 days or more totaled $90,000 and $144,000. Non-accruing loans
at December 31, 2005 and 2004 were $2,468,000 and $5,736,000.



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##### Table of Contents

Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

6. Premises and Equipment



|                              |  |             |        |      |   |       
|----------------------------- |  | ----------- | ------ | ---- | - | ------
|                              |  | December 31
|                              |  | 2005        |        | 2004
|Land                          |  | $           | 1,714  |      | $ | 1,810 
|Land improvements             |  |             | 497    |      |   | 497   
|Office buildings              |  |             | 7,818  |      |   | 7,754 
|Furniture and equipment       |  |             | 4,658  |      |   | 4,472 
|Automobiles                   |  |             | 148    |      |   | 98    
|                              |  |             |        |      |   |       
|                              |  |             | 14,835 |      |   | 14,631
|Less accumulated depreciation |  |             | 7,159  |      |   | 6,665 
|                              |  |             |        |      |   |       
|                              |  | $           | 7,676  |      | $ | 7,966 
|                              |  |             |        |      |   |       

7. Goodwill

During 2003, $727,000 of goodwill was eliminated in connection with the sale of two Ohio branches. On September 29, 2003, the branches located in Deer Park and Landen, Ohio were sold to Peoples Community Bancorp, Inc. of West Chester,
Ohio. The transaction included the Companys real property related to the Deer Park branch and its leasehold on the premises for the Landen branch. Additionally, the Company conveyed most consumer and commercial loans at those branches as part
of the transaction, as well as the branches savings deposits. The Company retained and will continue to service certain single family residential mortgages originated in those locations.

8. Deposits



|                                 |  |             |         |      |   |        
|-------------------------------- |  | ----------- | ------- | ---- | - | -------
|                                 |  | December 31
|                                 |  | 2005        |         | 2004
|Demand                           |  | $           | 122,481 |      | $ | 144,456
|Savings                          |  |             | 25,034  |      |   | 27,496 
|Certificates of $100,000 or more |  |             | 46,988  |      |   | 27,543 
|Other certificates               |  |             | 144,848 |      |   | 144,552
|                                 |  |             |         |      |   |        
|                                 |  | $           | 339,351 |      | $ | 344,047
|                                 |  |             |         |      |   |        

At December 31, 2005, the Company held a brokered certificate for $9,977,000. The Company held no brokered
certificates at December 31, 2004.



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##### Table of Contents

Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

Certificates maturing in years ending after
December 31, 2005:



|           |  |   |        
|---------- |  | - | -------
|2006       |  | $ | 128,671
|2007       |  |   | 33,860 
|2008       |  |   | 11,672 
|2009       |  |   | 6,800  
|2010       |  |   | 2,891  
|Thereafter |  |   | 7,942  
|           |  |   |        
|           |  | $ | 191,836
|           |  |   |        

Interest paid on deposits approximated deposit interest expense in 2005, 2004 and 2003.

9. Borrowings

Borrowings at December 31, 2005 and 2004
include Federal Home Loan Bank advances totaling $66,589,000 and $40,040,000 with a weighted-average rate of 3.93% and 3.70%. The advances are secured by a combination of first-mortgage loans, investment securities and overnight deposits. Some
advances are subject to restrictions or penalties in the event of prepayment.

Borrowings at December 31, 2005 and 2004 also include a note payable
for $300,000 and $350,000 to another financial institution with a rate of 5.75% and 3.75%. The note is secured by the outstanding common stock of the Bank. The note outstanding at December 31, 2005 was due at January 24, 2006 and was
renewed at that date to July 24, 2006.

Interest paid on borrowings was $1,908,000, $1,221,000 and $414,000 for 2005, 2004 and 2003.



|                                       |  |   |       
|-------------------------------------- |  | - | ------
|Maturities in years ending December 31 |  |   |       
|2006                                   |  | $ | 38,338
|2007                                   |  |   | 3,000 
|2008                                   |  |   | 2,626 
|2009                                   |  |   | 2,550 
|2010                                   |  |   | 375   
|Thereafter                             |  |   | 20,000
|                                       |  |   |       
|                                       |  | $ | 66,889
|                                       |  |   |       



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##### Table of Contents

Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

10. Income Taxes



|                                                                             |  |             |        |   |      |   |        |  
|---------------------------------------------------------------------------- |  | ----------- | ------ | - | ---- | - | ------ | -
|                                                                             |  | December 31 |       
|                                                                             |  | 2005        |        |   | 2004 |  
|Deferred tax assets                                                          |  |             |        |   |      |   |        |  
|Deferred compensation                                                        |  | $           | 599    |   |      | $ | 514    |  
|General loan loss reserves                                                   |  |             | 1,149  |   |      |   | 1,283  |  
|Net unrealized loss on securities available for sale                         |  |             | 1,428  |   |      |   |       |  
|Reserve for uncollected interest                                             |  |             | 204    |   |      |   | 274    |  
|State and federal net operating loss carryfoward and tax credits carryfoward |  |             | 2,171  |   |      |   | 1,442  |  
|Benefit plans                                                                |  |             | 300    |   |      |   | 117    |  
|                                                                             |  |             |        |   |      |   |        |  
|                                                                             |  |             | 5,851  |   |      |   | 3,630  |  
|                                                                             |  |             |        |   |      |   |        |  
|Deferred tax liabilities                                                     |  |             |        |   |      |   |        |  
|FHLB stock dividends                                                         |  |             | (828   | ) |      |   | (760   | )
|Tax bad debt reserves                                                        |  |             | (23    | ) |      |   | (23    | )
|Deferred loan fees                                                           |  |             | (140   | ) |      |   | (42    | )
|Mortgage servicing rights                                                    |  |             | (450   | ) |      |   | (506   | )
|Net unrealized gains on securities available for sale                        |  |             |       |   |      |   | (151   | )
|Deferred state tax                                                           |  |             | (234   | ) |      |   | (295   | )
|Depreciation                                                                 |  |             | (214   | ) |      |   | (210   | )
|Prepaid expenses                                                             |  |             | (140   | ) |      |   | (66    | )
|Other                                                                        |  |             | (2     | ) |      |   | (21    | )
|                                                                             |  |             |        |   |      |   |        |  
|                                                                             |  |             | (2,031 | ) |      |   | (2,074 | )
|                                                                             |  |             |        |   |      |   |        |  
|Net deferred tax asset before valuation allowance                            |  |             | 3,820  |   |      |   | 1,556  |  
|                                                                             |  |             |        |   |      |   |        |  
|Valuation allowance                                                          |  |             |        |   |      |   |        |  
|Beginning balance                                                            |  |             |       |   |      |   |       |  
|Increase during the period                                                   |  |             | (284   | ) |      |   |       |  
|                                                                             |  |             |        |   |      |   |        |  
|Ending balance                                                               |  |             | (284   | ) |      |   |       |  
|                                                                             |  |             |        |   |      |   |        |  
|Net deferred tax asset                                                       |  | $           | 3,536  |   |      | $ | 1,556  |  
|                                                                             |  |             |        |   |      |   |        |  

As of December 31, 2005, the Company had approximately $11,406,000 of state tax loss carryforward available
to offset future franchise tax. As of December 31, 2005, the Company had approximately $651,000 of federal tax loss carryforward available to offset future federal tax. Also, at December 31, 2005, the Company had approximately $1,086,000
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 2024. The tax credits begin to expire in 2023. Included in the $1,086,000 of tax credits
available to offset future federal income tax are approximately $467,000 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.

Retained earnings at December 31, 2005, 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.



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##### Table of Contents

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 31 |  
|                                               |  | 2005                   |   |  | 2004  |    |  | 2003 |  
|Statutory federal tax rate                     |  | 34.0                   | % |  | 34.0  | %  |  | 34.0 | %
|State income taxes, net of federal tax benefit |  | 0.6                    |   |  | (18.4 | )  |  | 0.9  |  
|Tax credits                                    |  | (5.8                   | ) |  | (17.2 | )  |  | (4.9 | )
|Cash value of life insurance                   |  | (10.7                  | ) |  | (27.3 | )  |  | (7.5 | )
|Municipal securities                           |  | (10.9                  | ) |  | (23.7 | )  |  | (.9  | )
|Disposition/amortization of goodwill           |  |                       |   |  |      |    |  | 8.8  |  
|Other                                          |  | 1.0                    |   |  | 3.0   |    |  | 1.1  |  
|                                               |  |                        |   |  |       |    |  |      |  
|Effective tax rate                             |  | 8.2                    | % |  | (49.6 | )% |  | 31.5 | %
|                                               |  |                        |   |  |       |    |  |      |  

The provision (credit) for income taxes consists of the following:



|         |  |                        |      |   |      |   |      |      |  |   |       |  
|-------- |  | ---------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ----- | -
|         |  | Year Ended December 31 |     
|         |  | 2005                   |      |   | 2004 |   |      | 2003 | 
|Federal  |  |                        |      |   |      |   |      |      |  |   |       |  
|Current  |  | $                      | 634  |   |      | $ | 235  |      |  | $ | (903  | )
|Deferred |  |                        | (473 | ) |      |   | (443 | )    |  |   | 1,963 |  
|         |  |                        |      |   |      |   |      |      |  |   |       |  
|         |  |                        | 161  |   |      |   | (208 | )    |  |   | 1,060 |  
|         |  |                        |      |   |      |   |      |      |  |   |       |  
|State    |  |                        |      |   |      |   |      |      |  |   |       |  
|Current  |  |                        | 56   |   |      |   |     |      |  |   | 56    |  
|Deferred |  |                        | (34  | ) |      |   | (265 | )    |  |   | (6    | )
|         |  |                        |      |   |      |   |      |      |  |   |       |  
|         |  |                        | 22   |   |      |   | (265 | )    |  |   | 50    |  
|         |  |                        |      |   |      |   |      |      |  |   |       |  
|         |  | $                      | 183  |   |      | $ | (473 | )    |  | $ | 1,110 |  
|         |  |                        |      |   |      |   |      |      |  |   |       |  

The Company paid $550,000 and $1,503,000 of state and federal income taxes in 2005 and 2003. The Company paid no
state and federal taxes in 2004.

11. Employee Benefits

The Company is a participating employer in a multi-employer defined-benefit pension plan and a 401(k) plan. The plans cover substantially all full-time employees of the Company. The Company matches employees contributions to the 401k
plan at the rate of 100% for the first 4% of base salary contributed by participants. 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 made a voluntary payment of $1.1 million to the defined-benefit pension plan in 2005 to fund a portion of the liability. The payment was made to improve our funded status, which is
expected to reduce the overall normal cost under the plan and provide greater flexibility in meeting minimum funding requirements in future periods. The Company will continue to make contributions to meet required funding obligations. Pension
expense for the plans totaled $1,504,000, $932,000 and $768,000 in 2005, 2004 and 2003.



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##### Table of Contents

Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

The Company has arrangements that provide
retirement and death benefits to certain officers and directors.

The Company uses a December 31 measurement date for the plan. Information about the
plans funded status and pension cost follows:



|                                                                   |  |             |        |   |      |   |        |   |  | 
|------------------------------------------------------------------ |  | ----------- | ------ | - | ---- | - | ------ | - |  | 
|                                                                   |  | December 31 |       
|                                                                   |  | 2005        |        |   | 2004 |  
|Change in benefit obligation                                       |  |             |        |   |      |   |        |   |  | 
|Beginning of year                                                  |  | $           | 1,582  |   |      | $ | 1,415  |  
|Service cost                                                       |  |             | 82     |   |      |   | 82     |  
|Interest cost                                                      |  |             | 94     |   |      |   | 85     |  
|Actuarial gain                                                     |  |             | 507    |   |      |   | 1      |  
|Benefits paid                                                      |  |             | (74    | ) |      |   |        |  
|                                                                   |  |             |        |   |      |   |        |   |  | 
|End of year                                                        |  |             | 2,191  |   |      |   | 1,582  |  
|                                                                   |  |             |        |   |      |   |        |   |  | 
|Change in fair value of plan assets                                |  |             |        |   |      |   |        |   |  | 
|End of year                                                        |  |             |       |   |      |   |       |  
|                                                                   |  |             |        |   |      |   |        |   |  | 
|Funded status                                                      |  |             | (2,191 | ) |      |   | (1,582 | )
|Unrecognized net actuarial loss                                    |  |             | 524    |   |      |   |       |  
|Unrecognized prior service cost                                    |  |             | 279    |   |      |   | 360    |  
|                                                                   |  |             |        |   |      |   |        |   |  | 
|Prepaid (accrued) benefit cost                                     |  | $           | (1,388 | ) |      | $ | (1,222 | )
|                                                                   |  |             |        |   |      |   |        |   |  | 
|Accumulated benefit obligation                                     |  | $           | (2,191 | ) |      | $ | (1,222 | )
|                                                                   |  |             |        |   |      |   |        |   |  | 
|Other amounts recognized in the balance sheets:                    |  |             |        |   |      |   |        |   |  | 
|Intangible asset                                                   |  | $           | 279    |   |      | $ | 360    |  
|                                                                   |  |             |        |   |      |   |        |   |  | 
|Accumulated other comprehensive income                             |  | $           | 346    |   |      | $ |       |  
|                                                                   |  |             |        |   |      |   |        |   |  | 
|Deferred tax                                                       |  | $           | 178    |   |      | $ |       |  
|                                                                   |  |             |        |   |      |   |        |   |  | 
|Weighted-average assumptions used to determine benefit obligation: |  |             |        |   |      |   |        |   |  | 
|Discount rate                                                      |  |             | 6.0    | % |      |   | 6.0    | %
|Rate of compensation increase                                      |  |             | N/A    |   |      |   | N/A    |  
|Weighted-average assumptions used to determine benefit cost:       |  |             |        |   |      |   |        |   |  | 
|Discount rate                                                      |  |             | 6.0    | % |      |   | 6.0    | %
|Expected return on plan assets                                     |  |             | N/A    |   |      |   | N/A    |  
|Rate of compensation increase                                      |  |             | N/A    |   |      |   | N/A    |  
|Components of net periodic benefit cost                            |  |             |        |   |      |   |        |   |  | 
|Service cost                                                       |  | $           | 82     |   |      | $ | 82     |  
|Interest cost                                                      |  |             | 94     |   |      |   | 85     |  
|Amortization of prior service cost                                 |  |             | 65     |   |      |   | 64     |  
|                                                                   |  |             |        |   |      |   |        |   |  | 
|Net periodic benefit cost                                          |  | $           | 241    |   |      | $ | 231    |  
|                                                                   |  |             |        |   |      |   |        |   |  | 

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.



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##### Table of Contents

Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

Under the 1987 Stock Option Plan and the 1996 Stock Option and Incentive Plan
(1996 Plan), which are accounted for under the recognition and measurement principles of APB No. 25, Accounting for Stock Issued to Employees, and related interpretations, 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. Plan terms permit certain nonincentive stock options to be granted at less than market value at plan committee
discretion. 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. During 2004, an
adjustment was made to the number of options outstanding due to a previous stock split not reflected in certain awards.

The following is a summary of the
status of the Companys stock option plans and changes in those plans as of and for the years ended December 31, 2005, 2004 and 2003.



|                                                               |  |                        |   |      |                                  |       |        |         |   |                                  |   |        |  |         |                                 |  |   |      
|-------------------------------------------------------------- |  | ---------------------- | - | ---- | -------------------------------- | ----- | ------ | ------- | - | -------------------------------- | - | ------ |  | ------- | ------------------------------- |  | - | -----
|                                                               |  | Year Ended December 31
|                                                               |  | 2005                   |   | 2004 |                                  | 2003 
|Options                                                        |  | Shares                 |   |      | Weighted- Average Exercise Price |       | Shares |         |   | Weighted- Average Exercise Price |   | Shares |  |         | Weighted-Average Exercise Price
|Outstanding at beginning of year                               |  | 362,110                |   |      | $                                | 13.98 |        | 195,052 |   |                                  | $ | 14.29  |  | 199,022 |                                 |  | $ | 14.27
|Granted                                                        |  | 74,750                 |   |      |                                  | 12.66 |        | 161,232 |   |                                  |   | 14.87  |  |        |                                 |  |   |     
|Exercised                                                      |  | (29,120                | ) |      |                                  | 10.43 |        | (2,700  | ) |                                  |   | 12.66  |  | (825    | )                               |  |   | 9.43 
|Forfeited/expired                                              |  | (24,578                | ) |      |                                  | 13.97 |        | (6,134  | ) |                                  |   | 14.14  |  | (3,145  | )                               |  |   | 14.30
|Other adjustments                                              |  |                       |   |      |                                  |      |        | 14,660  |   |                                  |   |       |  |        |                                 |  |   |     
|                                                               |  |                        |   |      |                                  |       |        |         |   |                                  |   |        |  |         |                                 |  |   |      
|Outstanding at end of year                                     |  | 383,162                |   |      |                                  | 14.00 |        | 362,110 |   |                                  |   | 13.98  |  | 195,052 |                                 |  |   | 14.29
|                                                               |  |                        |   |      |                                  |       |        |         |   |                                  |   |        |  |         |                                 |  |   |      
|Options exercisable at year end                                |  | 383,162                |   |      |                                  | 14.00 |        | 292,610 |   |                                  |   | 13.79  |  | 187,052 |                                 |  |   | 14.29
|Weighted-average fair value of options granted during the year |  |                        |   |      |                                  | 3.47  |        |         |   |                                  |   | 3.92   |  |         |                                 |  |   |     

As of December 31, 2005, selected other information in exercise price ranges for options outstanding and
exercisable is as follows:



|                     |  |                  |  |                                  |       |                                             |           |                  |         |                                  |   |      
|-------------------- |  | ---------------- |  | -------------------------------- | ----- | ------------------------------------------- | --------- | ---------------- | ------- | -------------------------------- | - | -----
|Outstanding          |  | Exercisable     
|Exercise Price Range |  | Number of Shares |  | Weighted- Average Exercise Price |       | Weighted-Average Remaining Contractual Life |           | Number of Shares |         | Weighted- Average Exercise Price
|$9.10 -12.53         |  | 106,305          |  | $                                | 11.29 |                                             | 6.4 years |                  | 106,305 |                                  | $ | 11.29
|13.05 -18.30         |  | 276,857          |  |                                  | 15.03 |                                             | 5.7 years |                  | 276,857 |                                  |   | 15.03

There were 8,612 shares under the 1996 Plan available for grant at
December 31, 2005.



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##### Table of Contents

Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

Although the Company has elected to follow APB No. 25, SFAS No. 123R
requires pro forma disclosures of net income and earnings per share as if the Company had accounted for its employee stock options under that Statement. The fair value of each option grant was estimated on the grant date using an option-pricing
model with the following assumptions:



|                                                            |  |               |  |              
|----------------------------------------------------------- |  | ------------- |  | -------------
|                                                            |  | 2005          |  | 2004         
|Risk-free interest rates                                    |  | 4.1% - 4.4%   |  | 3.4% - 4.1%  
|Dividend yields                                             |  | 4.3%          |  | 4.1% - 4.2%  
|Expected volatility factors of market price of common stock |  | 34.9% - 35.6% |  | 34.5% - 35.6%
|Weighted-average expected life of the options               |  | 8.5 years     |  | 8 years      

The proforma effect on net income is disclosed in Note 1.

12. 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 and the Companys Board of Directors have resolved not to cause the Bank to pay dividends if
its Tier 1 capital would be less than 7% thereafter. At December 31, 2005, the shareholders equity of the Bank was $35,657,000.

13.
Earnings Per Share



|                                                                |  |                        |       |                         |           |                  |   |        |  |                          |       |                  |           |        |   |                          |  |                 |       |  |           |  |   |     
|--------------------------------------------------------------- |  | ---------------------- | ----- | ----------------------- | --------- | ---------------- | - | ------ |  | ------------------------ | ----- | ---------------- | --------- | ------ | - | ------------------------ |  | --------------- | ----- |  | --------- |  | - | ----
|                                                                |  | Year Ended December 31
|                                                                |  | 2005                   |       | 2004                    |           | 2003            
|                                                                |  | Income                 |       | Weighted-Average Shares |           | Per Share Amount |   | Income |  | Weighted- Average Shares |       | Per Share Amount |           | Income |   | Weighted- Average Shares |  | Per ShareAmount
|Basic Earnings Per Share                                        |  |                        |       |                         |           |                  |   |        |  |                          |       |                  |           |        |   |                          |  |                 |       |  |           |  |   |     
|Income available to common shareholders                         |  | $                      | 2,058 |                         | 3,160,392 |                  | $ | 0.65   |  | $                        | 1,426 |                  | 3,149,384 |        | $ | 0.45                     |  | $               | 2,418 |  | 3,148,164 |  | $ | 0.77
|                                                                |  |                        |       |                         |           |                  |   |        |  |                          |       |                  |           |        |   |                          |  |                 |       |  |           |  |   |     
|Effect Of Dilutive Stock Options                                |  |                        |      |                         | 12,911    |                  |   |        |  |                          |      |                  | 31,766    |        |   |                          |  |                 |      |  | 3,412     |  |   |     
|                                                                |  |                        |       |                         |           |                  |   |        |  |                          |       |                  |           |        |   |                          |  |                 |       |  |           |  |   |     
|Diluted Earnings Per Share                                      |  |                        |       |                         |           |                  |   |        |  |                          |       |                  |           |        |   |                          |  |                 |       |  |           |  |   |     
|Income available to common shareholders and assumed conversions |  | $                      | 2,058 |                         | 3,173,303 |                  | $ | 0.65   |  | $                        | 1,426 |                  | 3,181,150 |        | $ | 0.45                     |  | $               | 2,418 |  | 3,151,576 |  | $ | 0.77
|                                                                |  |                        |       |                         |           |                  |   |        |  |                          |       |                  |           |        |   |                          |  |                 |       |  |           |  |   |     

Options to purchase 276,857, 34,100 and 131,700 shares of common stock at exercise prices of $14.25 to $18.30,
$16.75 to $18.30 and $14.25 to $18.30 per share were outstanding at December 31, 2005, 2004 and 2003, but were not included in the computation of diluted earnings per share because the options were anti-dilutive.



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##### Table of Contents

Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

14. Other Comprehensive Income (Loss)

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



|                                                                                                       |  |      |        |   |      |   |      |      |  |   |      |  
|------------------------------------------------------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                                                                       |  | 2005 |        |   | 2004 |   |      | 2003 | 
|Unrealized losses on securities available for sale                                                     |  | $    | (4,474 | ) |      | $ | (219 | )    |  | $ | (895 | )
|Unrealized gains on securities transferred from available for sale to held to maturity                 |  |      |       |   |      |   | 896  |      |  |   |     |  
|Amortization of unrealized gains on securities transferred from available for sale to held to maturity |  |      |       |   |      |   | (180 | )    |  |   |     |  
|Excess of additional pension liability over unrecognized prior service cost                            |  |      | (524   | ) |      |   |     |      |  |   |     |  
|Reclassification for realized amount included in income                                                |  |      |       |   |      |   |     |      |  |   | 41   |  
|                                                                                                       |  |      |        |   |      |   |      |      |  |   |      |  
|Other comprehensive income (loss), before tax effect                                                   |  |      | (4,998 | ) |      |   | 497  |      |  |   | (936 | )
|Tax expense (benefit)                                                                                  |  |      | (1,757 | ) |      |   | 173  |      |  |   | (359 | )
|                                                                                                       |  |      |        |   |      |   |      |      |  |   |      |  
|Other comprehensive income (loss)                                                                      |  | $    | (3,241 | ) |      | $ | 324  |      |  | $ | (577 | )
|                                                                                                       |  |      |        |   |      |   |      |      |  |   |      |  

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, 2005 and 2004, the Bank is categorized as well capitalized and met all subject capital adequacy requirements. There are no conditions or events since December 31, 2005, that
management believes have changed this classification.

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



|                                                   |  |                               |   |                |        |        |       |       |   |        |   |       
|-------------------------------------------------- |  | ----------------------------- | - | -------------- | ------ | ------ | ----- | ----- | - | ------ | - | ------
|                                                   |  | December 31, 2005            
|                                                   |  | Required For Adequate Capital |   | Actual Capital
|                                                   |  | Ratio                         |   |                | Amount |        | Ratio |       |   | Amount
|Total risk-based capital (to risk-weighted assets) |  | 8.0                           | % |                | $      | 21,781 |       | 13.94 | % |        | $ | 37,925
|Tier 1 capital (to risk-weighted assets)           |  | 4.0                           |   |                |        | 10,890 |       | 12.85 |   |        |   | 34,958
|Core capital (to adjusted total assets)            |  | 3.0                           |   |                |        | 13,187 |       | 7.95  |   |        |   | 34,958
|Core capital (to adjusted tangible assets)         |  | 2.0                           |   |                |        | 8,791  |       | 7.95  |   |        |   | 34,958
|Tangible capital (to adjusted total assets)        |  | 1.5                           |   |                |        | 6,593  |       | 7.95  |   |        |   | 34,958



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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)



|                                                   |  |                               |   |                |        |        |       |       |   |        |   |       
|-------------------------------------------------- |  | ----------------------------- | - | -------------- | ------ | ------ | ----- | ----- | - | ------ | - | ------
|                                                   |  | December 31, 2004            
|                                                   |  | Required For Adequate Capital |   | Actual Capital
|                                                   |  | Ratio                         |   |                | Amount |        | Ratio |       |   | Amount
|Total risk-based capital (to risk-weighted assets) |  | 8.0                           | % |                | $      | 20,901 |       | 15.37 | % |        | $ | 40,161
|Tier 1 capital (to risk-weighted assets)           |  | 4.0                           |   |                |        | 10,451 |       | 14.17 |   |        |   | 37,033
|Core capital (to adjusted total assets)            |  | 3.0                           |   |                |        | 13,029 |       | 8.53  |   |        |   | 37,033
|Core capital (to adjusted tangible assets)         |  | 2.0                           |   |                |        | 8,686  |       | 8.53  |   |        |   | 37,033
|Tangible capital (to adjusted total assets)        |  | 1.5                           |   |                |        | 6,514  |       | 8.53  |   |        |   | 37,033

During the third quarter of 2005, the Indiana Department of Financial Institutions (DFI) and the
Federal Deposit Insurance Corporation (FDIC) released the Bank from a memorandum of understanding (MOU) dated May 23, 2002. The MOU required the Bank to adopt written action plans with respect to certain classified
assets, revise its lending policies in accordance with examiner recommendations, required greater financial information from borrowers, establish a loan review program, document Board review of the adequacy of loan losses, formulate a plan for
improving the Banks profitability, review staffing needs with particular emphasis on loan administration, strengthen certain internal controls and audit coverage and address other regulatory compliance issues raised in an examination report by
the FDIC and DFI. The release of the MOU was contingent on the Banks adoption of a resolution that required the Bank to continue reducing the level of assets classified as substandard, formulate and implement a written Profit Plan, abstain
from purchasing additional Bank Owned Life Insurance policies, formalize policies for leveraging strategies, and maintain Tier 1 capital at or above 7% of assets. The Bank adopted the resolution on June 27, 2005.

16. Fair Value of Financial Instruments

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



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##### Table of Contents

Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

The following table presents the estimates of fair
value of financial instruments:



|                                         |  |                |         |            |   |                |  |            |         |  |   |        
|---------------------------------------- |  | -------------- | ------- | ---------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                                         |  | December 31   
|                                         |  | 2005           |         | 2004      
|                                         |  | Carrying Value |         | Fair Value |   | Carrying Value |  | Fair Value
|Assets                                   |  |                |         |            |   |                |  |            |         |  |   |        
|Cash and cash equivalents                |  | $              | 14,270  |            | $ | 14,270         |  | $          | 17,053  |  | $ | 17,053 
|Investment securities held to maturity   |  |                |        |            |   |               |  |            | 158,322 |  |   | 156,294
|Investment securities available for sale |  |                | 168,686 |            |   | 168,686        |  |            | 12,032  |  |   | 12,032 
|Loans                                    |  |                | 218,291 |            |   | 219,627        |  |            | 196,344 |  |   | 198,438
|Interest receivable                      |  |                | 2,321   |            |   | 2,321          |  |            | 2,110   |  |   | 2,110  
|Stock in FHLB                            |  |                | 7,449   |            |   | 7,449          |  |            | 7,265   |  |   | 7,265  
|                                         |  |                |         |           
|Liabilities                              |  |                |         |            |   |                |  |            |         |  |   |        
|Deposits                                 |  |                | 339,351 |            |   | 337,651        |  |            | 344,047 |  |   | 343,273
|Borrowings                               |  |                | 66,889  |            |   | 65,529         |  |            | 40,390  |  |   | 39,927 
|Interest payable                         |  |                | 589     |            |   | 589            |  |            | 351     |  |   | 351    
|Drafts payable                           |  |                | 2,763   |            |   | 2,763          |  |            | 2,327   |  |   | 2,327  

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.

Investment Securities:Fair values are
based on quoted market prices.

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.



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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 31
|Balance Sheets                       |  | 2005        |        | 2004
|Assets                               |  |             |        |      |   |       
|Cash                                 |  | $           | 765    |      | $ | 562   
|Investment in Bank                   |  |             | 35,238 |      |   | 38,830
|Investments in affiliates            |  |             | 349    |      |   | 361   
|Other assets                         |  |             | 165    |      |   | 152   
|                                     |  |             |        |      |   |       
|                                     |  | $           | 36,517 |      | $ | 39,905
|                                     |  |             |        |      |   |       
|Liabilities and shareholders equity |  |             |        |      |   |       
|Notes payable, other                 |  | $           | 300    |      | $ | 350   
|Other liabilities                    |  |             | 560    |      |   | 912   
|Shareholders equity                 |  |             | 35,657 |      |   | 38,643
|                                     |  |             |        |      |   |       
|                                     |  | $           | 36,517 |      | $ | 39,905
|                                     |  |             |        |      |   |       



|                                                                                                    |  |                        |       |   |      |   |       |  |   |       |  
|--------------------------------------------------------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- |  | - | ----- | -
|                                                                                                    |  | Year Ended December 31 |      
|Statements of Operations                                                                            |  | 2005                   |       |   | 2004 |   | 2003  | 
|Dividends from Bank                                                                                 |  | $                      | 2,675 |   |      | $ | 1,400 |  | $ | 3,300 |  
|Interest income                                                                                     |  |                        |      |   |      |   | 3     |  |   | 8     |  
|                                                                                                    |  |                        |       |   |      |   |       |  |   |       |  
|                                                                                                    |  |                        | 2,675 |   |      |   | 1,403 |  |   | 3,308 |  
|Operating expense                                                                                   |  |                        | 589   |   |      |   | 500   |  |   | 525   |  
|                                                                                                    |  |                        |       |   |      |   |       |  |   |       |  
|Income before income tax benefit and equity in undistributed income of Bank                         |  |                        | 2,086 |   |      |   | 903   |  |   | 2,783 |  
|Income tax benefit                                                                                  |  |                        | 335   |   |      |   | 363   |  |   | 404   |  
|                                                                                                    |  |                        |       |   |      |   |       |  |   |       |  
|                                                                                                    |  |                        | 2,421 |   |      |   | 1,266 |  |   | 3,187 |  
|Equity in undistributed income of Bank and affiliates (distributions in excess of equity in income) |  |                        | (363  | ) |      |   | 160   |  |   | (769  | )
|                                                                                                    |  |                        |       |   |      |   |       |  |   |       |  
|Net Income                                                                                          |  | $                      | 2,058 |   |      | $ | 1,426 |  | $ | 2,418 |  
|                                                                                                    |  |                        |       |   |      |   |       |  |   |       |  



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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)



|                                                              |  |                        |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                              |  | Year Ended December 31 |       
|Statements of Cash Flows                                      |  | 2005                   |        |   | 2004 |   |        | 2003 | 
|Operating Activities                                          |  |                        |        |   |      |   |        |      |  |   |        |  
|Net income                                                    |  | $                      | 2,058  |   |      | $ | 1,426  |      |  | $ | 2,418  |  
|Items not requiring (providing) cash                          |  |                        |        |   |      |   |        |      |  |   |        |  
|Equity in undistributed income of subsidiaries and affiliates |  |                        | 363    |   |      |   | (160   | )    |  |   | 769    |  
|Other adjustments                                             |  |                        | (338   | ) |      |   | (240   | )    |  |   | 828    |  
|                                                              |  |                        |        |   |      |   |        |      |  |   |        |  
|Net cash provided by operating activities                     |  |                        | 2,083  |   |      |   | 1,026  |      |  |   | 4,015  |  
|                                                              |  |                        |        |   |      |   |        |      |  |   |        |  
|Investing Activity - changes in advances to subsidiaries      |  |                        |       |   |      |   | 1,746  |      |  |   | (1,746 | )
|                                                              |  |                        |        |   |      |   |        |      |  |   |        |  
|Financing Activities                                          |  |                        |        |   |      |   |        |      |  |   |        |  
|Repayment of other borrowings                                 |  |                        | (50    | ) |      |   | (250   | )    |  |   | (240   | )
|Cash dividends paid                                           |  |                        | (2,024 | ) |      |   | (2,016 | )    |  |   | (2,015 | )
|Proceeds from exercise of stock options                       |  |                        | 194    |   |      |   | 34     |      |  |   | 8      |  
|                                                              |  |                        |        |   |      |   |        |      |  |   |        |  
|Net cash used in financing activities                         |  |                        | (1,880 | ) |      |   | (2,232 | )    |  |   | (2,247 | )
|                                                              |  |                        |        |   |      |   |        |      |  |   |        |  
|Change in cash                                                |  |                        | 203    |   |      |   | 540    |      |  |   | 22     |  
|Cash at beginning of year                                     |  |                        | 562    |   |      |   | 22     |      |  |   |       |  
|                                                              |  |                        |        |   |      |   |        |      |  |   |        |  
|Cash at end of year                                           |  | $                      | 765    |   |      | $ | 562    |      |  | $ | 22     |  
|                                                              |  |                        |        |   |      |   |        |      |  |   |        |  



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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 Quarter
|2005                                   |  |               |        |   |                |   |       |               |  |                |       |  |   |      
|Total interest income                  |  | $             | 4,657  |   |                | $ | 4,837 |               |  | $              | 5,056 |  | $ | 5,232
|Total interest expense                 |  |               | 2,231  |   |                |   | 2,360 |               |  |                | 2,530 |  |   | 2,874
|Net interest income                    |  |               | 2,426  |   |                |   | 2,477 |               |  |                | 2,526 |  |   | 2,358
|Provision (adjustment) for loan losses |  |               | (2,050 | ) |                |   | (982  | )             |  |                | 35    |  |   | 145  
|Net income                             |  |               | 760    |   |                |   | 730   |               |  |                | 396   |  |   | 172  
|                                       |  |               |        |   |                |   |       |               |  |                |       |  |   |      
|Basic earnings per share               |  |               | 0.24   |   |                |   | 0.23  |               |  |                | 0.13  |  |   | 0.05 
|                                       |  |               |        |   |                |   |       |               |  |                |       |  |   |      
|Diluted earnings per share             |  |               | 0.24   |   |                |   | 0.23  |               |  |                | 0.12  |  |   | 0.05 
|                                       |  |               |        |   |                |   |       |               |  |                |       |  |   |      
|Dividends declared per share           |  |               | 0.16   |   |                |   | 0.16  |               |  |                | 0.16  |  |   | 0.16 
|                                       |  |               |        |   |                |   |       |               |  |                |       |  |   |      
|Stock price range                      |  |               |        |   |                |   |       |               |  |                |       |  |   |      
|High                                   |  |               | 16.04  |   |                |   | 15.35 |               |  |                | 14.64 |  |   | 14.00
|Low                                    |  |               | 13.30  |   |                |   | 12.90 |               |  |                | 12.75 |  |   | 11.93
|                                       |  |               |        |   |                |   |       |               |  |                |       |  |   |      
|2004                                   |  |               |        |   |                |   |       |               |  |                |       |  |   |      
|Total interest income                  |  | $             | 4,705  |   |                | $ | 4,369 |               |  | $              | 4,566 |  | $ | 4,691
|Total interest expense                 |  |               | 1,744  |   |                |   | 1,802 |               |  |                | 1,897 |  |   | 2,123
|Net interest income                    |  |               | 2,961  |   |                |   | 2,567 |               |  |                | 2,669 |  |   | 2,568
|Provision for loan losses              |  |               | 150    |   |                |   | 50    |               |  |                | 75    |  |   | 117  
|Net income                             |  |               | 471    |   |                |   | 435   |               |  |                | 412   |  |   | 108  
|                                       |  |               |        |   |                |   |       |               |  |                |       |  |   |      
|Basic earnings per share               |  |               | 0.15   |   |                |   | 0.14  |               |  |                | 0.13  |  |   | 0.03 
|                                       |  |               |        |   |                |   |       |               |  |                |       |  |   |      
|Diluted earnings per share             |  |               | 0.15   |   |                |   | 0.14  |               |  |                | 0.13  |  |   | 0.03 
|                                       |  |               |        |   |                |   |       |               |  |                |       |  |   |      
|Dividends declared per share           |  |               | 0.16   |   |                |   | 0.16  |               |  |                | 0.16  |  |   | 0.16 
|                                       |  |               |        |   |                |   |       |               |  |                |       |  |   |      
|Stock price range                      |  |               |        |   |                |   |       |               |  |                |       |  |   |      
|High                                   |  |               | 17.00  |   |                |   | 17.28 |               |  |                | 17.15 |  |   | 16.50
|Low                                    |  |               | 14.50  |   |                |   | 14.56 |               |  |                | 14.30 |  |   | 14.50
|                                       |  |               |        |   |                |   |       |               |  |                |       |  |   |      

19. Future Accounting Matters

Share-Based Compensation

In December 2004, FASB issued an amendment to SFAS 123 (SFAS 123R), which eliminates the
ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires that such transactions be accounted for using a fair
value-based method. On April 14, 2005, the SEC amended the compliance date for SFAS 123R from the beginning of the first interim or annual period that begins after June 15, 2005 to the next fiscal year beginning after June 15, 2005.
The Company adopted SFAS 123R as of January 1, 2006. The effect on the Companys results of operations depends on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well
as the vesting periods provided and possible performance condition requirements, and so cannot currently be predicted for future awards.



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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

SFAS 123R applies to all awards granted after the effective date and to awards
modified, repurchased, or cancelled after that date. The statement establishes standards for accounting for share-based payment transactions. Share-based payment transactions are those in which an entity exchanges its equity instruments for goods or
services or in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of these equity instruments. SFAS 123R covers a wide
range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights and employee stock purchase plans.

As of January 1, 2006, the Company applied SFAS 123R using the modified prospective method. This method requires that compensation expense be recorded for all unvested stock options and restricted stock awards
over the requisite service period (generally the vesting schedule). For liability-classified awards, the Company measures the cost of employee services received in exchange for an award based on its current fair value. The fair value is re-measured
subsequently at each reporting date through the settlement date, and changes in fair value are recognized as compensation cost. For equity-classified awards, the grant date fair value is recognized in earnings over the requisite service period.

Earnings Per Share

The FASB has issued a proposed
amendment to SFAS No. 128, Earnings Per Share, to clarify guidance for mandatorily convertible instruments, the treasury stock method, contingently issuable shares, and contracts that may be settled in cash or share. The primary impact
on the Company of the proposed Statement is the change to the treasury stock method for year-to-date diluted earnings per share.

Currently, SFAS
No. 128 requires that the number of incremental shares included in the denominator be determined by computing a year-to-date weighted average of the number of incremental shares included in each quarterly diluted EPS computation. Under this
proposed Statement, the number of incremental shares included in year-to-date diluted earnings per share would be computed using the average market price of common shares for the year-to-date period, independent of the quarterly computations. This
computational change is not expected to have a significant impact on the Companys diluted earnings per share.

20. Recent Developments

Trust Preferred Securities Issued in 2006

On
March 8, 2006, the Company completed a private placement of $10,000,000 in trust preferred securities. The Company intends to use the proceeds from the issuance of the trust preferred securities for general corporate purposes and to increase
the regulatory capital of the Bank. The trust preferred securities will 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 securities will bear a rate equal to 150 basis points over the three-month LIBOR.

The securities were issued by
a statutory business trust formed by Ameriana Bancorp and were sold in a private placement pursuant to an applicable exemption from registration under the Securities Act of 1933, as amended.



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Ameriana Bancorp

Notes to Consolidated Financial Statements

(table dollar amounts in thousands, except share data)

Trust Department of Bank to Close in 2006

In connection with its goal of maximizing profitability, the Company determined that the continued maintenance of Ameriana Trust and Investment Management, the trust
department of the Bank, does not fit within the Companys long-term strategic plans. Accordingly, on March 3, 2006, the Board of Directors of the Company resolved to close Ameriana Trust and Investment Management, effective August 1,
2006. Each of the trust departments clients will receive materials in the upcoming months notifying them of the elimination of the trust department and coordinating with them on the delivery of any trust property currently under management.



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

Not applicable.

Item 9A. Controls and Procedures

As of the end of the period covered by this report, management of
the Company carried out an evaluation, under the supervision and with the participation of the Companys principal executive officer and principal financial officer, of the effectiveness of the Companys disclosure controls and procedures.
Based on this evaluation, the Companys principal executive officer and principal financial officer concluded that the Companys disclosure controls and procedures are effective in ensuring that information required to be disclosed by the
Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, (1) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission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. It should be noted
that the design of the Companys disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no reasonable assurance that any design of disclosure controls and
procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, but the Companys principal executive and financial officers have concluded that the Companys disclosure controls and
procedures are, in fact, effective at a reasonable assurance level.

Item 9B. Other Information

Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant

Information concerning the
directors of the Company, the Audit Committee and the audit committee financial expert is incorporated herein by reference to the sections captioned Corporate Governance and Proposal 1  Election of Directors in the
Proxy Statement for the 2006 Annual Meeting of Shareholders (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 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. 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 5.5 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 Web site at www.ameriana.com.

Item 11. Executive Compensation

The information required by this item is incorporated herein by
reference to the sections captioned 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 sections captioned Security Ownership and Proposal 2  Approval of the Ameriana Bancorp 2006 Long-Term Incentive Plan in the Proxy
Statement.



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##### Table of Contents

Item 13. Certain Relationships and Related Transactions

The information required by this item
is incorporated herein by reference to the section captioned Transactions with Management 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 Proposal 3  Ratification of Appointment of Auditors in the Proxy Statement.

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 Firm

Consolidated Balance Sheets at December 31, 2005 and 2004

Consolidated Statements of Income for Each of the Three Years in the Period Ended December 31, 2005

Consolidated Statements of Shareholders Equity for Each of the Three Years in the Period Ended December 31, 2005

Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 2005

Notes 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.   |  | Description                                                                                                                                                                                                                                                                                     
|3.1   |  | 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 Annual Report on Form 10-K filed with the SEC on March 29, 2004)                                                                                                                                                 
|      | 
|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* |  | Ameriana Bancorp 1987 Stock Option Plan (incorporated herein by reference to the Companys Registration Statement on Form S-8 filed with the SEC on March 30, 1990 and May 17,
1996)                                                                                                            
|      | 
|10.2* |  | Employment Agreement, dated June 1, 2005, between Ameriana Bank and Trust and Jerome J. Gassen (incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2005 filed with the SEC on August 11, 2005)                                      
|      | 
|10.3* |  | Employment Agreement, dated February 26, 2001, between Ameriana Bank and Trust and Timothy G. Clark (incorporated herein by reference to the Companys Annual Report on Form 10-K filed
with the SEC on March 29, 2001)                                                                         
|      | 
|10.4* |  | Employment Agreement, dated January 1, 2004, between Ameriana Bank and Trust and Bradley L. Smith (incorporated herein by reference to the Companys Annual Report on Form 10-K filed with
the SEC on March 29, 2004)                                                                           



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|       |  |                                                                                                                                                                                                                                                                                                    
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.5*  |  | Ameriana Bank of Indiana, F.S.B. Director Supplemental Retirement Program Director Agreement (incorporated herein by reference to the Companys Annual Report on Form 10-K filed with the
SEC on March 30, 2000)                                                                                   
|       | 
|10.6*  |  | Ameriana Bank of Indiana, F.S.B. Director Supplemental Retirement Program Director Agreement, dated June 4, 1999, between Ameriana Bank of Indiana, F.S.B. and Paul W. Prior (incorporated
herein by reference to the Companys Annual Report on Form 10-K filed with the SEC on March 30, 2000)   
|       | 
|10.7*  |  | Executive Supplemental Retirement Plan Agreement, dated May 6, 1999, between Ameriana Bank of Indiana, F.S.B. and Timothy G. Clark (incorporated herein by reference to the Companys
Annual Report on Form 10-K filed with the SEC on March 29, 2001)                                             
|       | 
|10.8*  |  | Executive Supplemental Retirement Plan Agreement Amendment, dated December 5, 2003, between Ameriana Bank of Indiana, F.S.B. and Timothy G. Clark (incorporated herein by reference to the
Companys Annual Report on Form 10-K filed with the SEC on March 29, 2004)                              
|       | 
|10.9*  |  | 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)                                                                                                
|       | 
|10.10* |  | Change in Control Severance Agreement, dated September 20, 2005, by and between Ameriana Bank and Trust, SB 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)
|       | 
|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     |  | Certification Pursuant to 18 U.S.C. Section 1350                                                                                                                                                                                                                                                   

---

|* | Management contract or compensation plan or arrangement.
|- | --------------------------------------------------------



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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 BANCORP
|                     |  |                 
|Date: March 27, 2006 |  | By:              |  | /s/ Jerome J. Gassen                 
|                     |  |                  |  | Jerome J. Gassen                     
|                     |  |                  |  | President 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 27, 2006
|    |  | Jerome J. Gassen                                |  |               
|    |  | President, Chief Executive Officer and Director |  |               
|    |  | (Principal Executive Officer)                   |  |               
|    |  |                                                
|By: |  | /s/ Bradley L. Smith                            |  | March 27, 2006
|    |  | Bradley L. Smith                                |  |               
|    |  | Senior Vice President - Treasurer               |  |               
|    |  | (Principal Financial and Accounting Officer)    |  |               
|    |  |                                                
|By: |  | /s/ Paul W. Prior                               |  | March 27, 2006
|    |  | Paul W. Prior                                   |  |               
|    |  | Chairman of the Board and Director              |  |               
|    |  |                                                
|By: |  | /s/ Donald C. Danielson                         |  | March 27, 2006
|    |  | Donald C. Danielson                             |  |               
|    |  | Director                                        |  |               
|    |  |                                                
|By: |  | /s/ Charles M. Drackett, Jr.                    |  | March 27, 2006
|    |  | Charles M. Drackett, Jr.                        |  |               
|    |  | Director                                        |  |               
|    |  |                                                
|By: |  | /s/ R. Scott Hayes                              |  | March 27, 2006
|    |  | R. Scott Hayes                                  |  |               
|    |  | Director                                        |  |               
|    |  |                                                
|By: |  | /s/ Richard E. Hennessey                        |  | March 27, 2006
|    |  | Richard E. Hennessey                            |  |               
|    |  | Director                                        |  |               
|    |  |                                                
|By: |  | /s/ Michael E. Kent                             |  | March 27, 2006
|    |  | Michael E. Kent                                 |  |               
|    |  | Director                                        |  |               
|    |  |                                                
|By: |  | /s/ Ronald R. Pritzke                           |  | March 27, 2006
|    |  | Ronald R. Pritzke                               |  |               
|    |  | Director                                        |  |