UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549





FORM
10-Q






(Mark
One)


x           QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For the
quarterly period ended June 30, 2009


OR




 ̈           TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT




For the
transition period from 
to




Commission
File Number: 0-18392




AMERIANA
BANCORP





(Exact
name of registrant as specified in its charter)




Indiana
              
              35-1782688(State
      or Other Jurisdiction of
              
              (I.R.S.
      EmployerIncorporation
      or Organization)
              
              Identification
      No.)





2118 Bundy Avenue, New Castle,
      Indiana
              
              47362-1048(Address of Principal Executive Offices)
              
              (Zip
      Code)




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




Not Applicable


(Former
name, former address and former fiscal year, if changed since last
report)




Indicate
by check mark whether the registrant (l) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes x No
 ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes  ̈ No
 ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer,” “ accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.




Large accelerated filer ̈
            
            Accelerated
      filer ̈Non-accelerated
      filer ̈
            
            Smaller reporting companyx(Do
      not check if a smaller reporting company)




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




At August
14, 2009,
the registrant had 2,988,952 shares of its common stock
outstanding.







AMERIANA
BANCORP




Table
of Contents





Page
      No.Part
      I.  Financial InformationItem
      1.
                Financial
      Statements (Unaudited)Consolidated
      Condensed Balance Sheets at June 30, 2009 and December 31,
      2008
                3Consolidated
      Condensed Statements of Operations for the Three and Six Months Ended June
      30, 2009 and 2008
                4Consolidated
      Condensed Statements of Shareholders’ Equity for the   Six
      Months Ended June 30, 2009
                5Consolidated
      Condensed Statements of Cash Flows for the Six Months Ended June 30, 2009
      and 2008
                6Notes
      to Consolidated Condensed Financial Statements
                8Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition  and Results of
      Operations
                17Item
      3.
                Quantitative
      and Qualitative Disclosure about Market Risk
                28Item
      4.
                Controls
      and Procedures
                28Part
      II.  Other InformationItem
      1.
                Legal
      Proceedings
                28Item
      1A.
                Risk
      Factors
                28Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                29Item
      3.
                Defaults
      upon Senior Securities
                29Item
      4T.
                Submission
      of Matters to a Vote of Security Holders
                29Item
      5.
                Other
      Information
                29Item
      6.
                Exhibits
                29Signatures





(2)




PART
I - FINANCIAL INFORMATION




ITEM
I - FINANCIAL STATEMENTS





Ameriana
Bancorp


Consolidated
Condensed Balance Sheets


(In
thousands, except share data)





June 30,
                  
                  
                  December 31,2009
                  
                  
                  2008(Unaudited)AssetsCash
      on hand and in other institutions
                  
                  $
                  8,697
                  
                  
                  $
                  3,810Interest-bearing
      demand deposits
                  
                  
                  18,459
                  
                  
                  
                  4,639Cash
      and cash equivalents
                  
                  
                  27,156
                  
                  
                  
                  8,449Investment
      securities available for sale
                  
                  
                  64,852
                  
                  
                  
                  75,371Loans
      held for sale
                  
                  
                  308
                  
                  
                  
                  —Loans,
      net of allowance for loan losses of $3,643 and $2,991
                  
                  
                  335,823
                  
                  
                  
                  322,535Premises
      and equipment
                  
                  
                  15,569
                  
                  
                  
                  14,912Stock
      in Federal Home Loan Bank
                  
                  
                  5,629
                  
                  
                  
                  5,629Goodwill
                  
                  
                  649
                  
                  
                  
                  564Cash
      value of life insurance
                  
                  
                  24,095
                  
                  
                  
                  23,669Other
      real estate owned
                  
                  
                  5,658
                  
                  
                  
                  3,881Other
      assets
                  
                  
                  9,697
                  
                  
                  
                  8,492Total
      assets
                  
                  $
                  489,436
                  
                  
                  $
                  463,502Liabilities
      and Shareholders’ EquityLiabilitiesDepositsNoninterest-bearing
                  
                  $
                  28,325
                  
                  
                  $
                  22,070Interest-bearing
                  
                  
                  345,454
                  
                  
                  
                  302,336Total
      deposits
                  
                  
                  373,779
                  
                  
                  
                  324,406Borrowings
                  
                  
                  74,235
                  
                  
                  
                  97,735Drafts
      payable
                  
                  
                  2,040
                  
                  
                  
                  1,582Other
      liabilities
                  
                  
                  6,292
                  
                  
                  
                  6,003Total
      liabilities
                  
                  
                  456,346
                  
                  
                  
                  429,726Commitments
      and contingenciesShareholders’
      equityPreferred
      stock - 5,000,000 shares authorized and unissued
                  
                  
                  —
                  
                  
                  
                  —Common
      stock, $1.00 par valueAuthorized
      15,000,000 sharesIssued  –  3,213,952
      shares and 3,213,952 shares
                  
                  
                  3,214
                  
                  
                  
                  3,214Outstanding
      – 2,988,952 shares and 2,988,952 sharesAdditional
      paid-in capital
                  
                  
                  1,047
                  
                  
                  
                  1,044Retained
      earnings
                  
                  
                  31,161
                  
                  
                  
                  31,979Accumulated
      other comprehensive income
                  
                  
                  666
                  
                  
                  
                  537Treasury
      stock at cost – 225,000 shares and 225,000 shares
                  
                  
                  (2,998
                  )
                  
                  
                  (2,998
                  )Total
      shareholders’ equity
                  
                  
                  33,090
                  
                  
                  
                  33,776Total
      liabilities and shareholders’ equity
                  
                  $
                  489,436
                  
                  
                  $
                  463,502





See
notes to consolidated condensed financial statements.


(3)





Ameriana
Bancorp


Consolidated
Condensed Statements of Operations


(In
thousands, except per share data)


(Unaudited)





Three Months Ended
                
                
                Six Months EndedJune 30,
                
                
                June 302009
                
                
                2008
                
                
                2009
                
                
                2008Interest
      IncomeInterest
      and fees on loans
                
                $
                4,823
                
                
                $
                4,854
                
                
                $
                9,707
                
                
                $
                9,815Interest
      on mortgage-backed securities
                
                
                603
                
                
                
                553
                
                
                
                1,274
                
                
                
                1,011Interest
      on investment securities
                
                
                130
                
                
                
                314
                
                
                
                313
                
                
                
                668Other
      interest and dividend income
                
                
                24
                
                
                
                138
                
                
                
                109
                
                
                
                300Total
      interest income
                
                
                5,580
                
                
                
                5,859
                
                
                
                11,403
                
                
                
                11,794Interest
      ExpenseInterest
      on deposits
                
                
                1,710
                
                
                
                1,964
                
                
                
                3,483
                
                
                
                4,324Interest
      on borrowings
                
                
                820
                
                
                
                882
                
                
                
                1,829
                
                
                
                1,732Total
      interest expense
                
                
                2,530
                
                
                
                2,846
                
                
                
                5,312
                
                
                
                6,056Net
      Interest Income
                
                
                3,050
                
                
                
                3,013
                
                
                
                6,091
                
                
                
                5,738Provision
      for loan losses
                
                
                615
                
                
                
                221
                
                
                
                953
                
                
                
                592Net
      Interest Income After Provision for Loan Losses
                
                
                2,435
                
                
                
                2,792
                
                
                
                5,138
                
                
                
                5,146Other
      IncomeOther
      fees and service charges
                
                
                461
                
                
                
                454
                
                
                
                878
                
                
                
                864Brokerage
      and insurance commissions
                
                
                246
                
                
                
                282
                
                
                
                583
                
                
                
                685Net
      realized and recognized gains (losses) on available-for-sale investment
      securities
                
                
                (5
                )
                
                
                60
                
                
                
                102
                
                
                
                109Gains
      on sales of loans and servicing rights
                
                
                173
                
                
                
                14
                
                
                
                187
                
                
                
                41Net
      losses on other real estate owned
                
                
                (379
                )
                
                
                (20
                )
                
                
                (700
                )
                
                
                (18
                )Other
      real estate owned income
                
                
                105
                
                
                
                —
                
                
                
                105
                
                
                
                —Increase
      in cash value of life insurance
                
                
                213
                
                
                
                225
                
                
                
                426
                
                
                
                435Gain
      on liquidation of minority interest in unconsolidated
      investment
                
                
                192
                
                
                
                —
                
                
                
                192
                
                
                
                —Other
                
                
                14
                
                
                
                5
                
                
                
                25
                
                
                
                45Total
      other income
                
                
                1,020
                
                
                
                1,020
                
                
                
                1,798
                
                
                
                2,161Other
      ExpenseSalaries
      and employee benefits
                
                
                2,218
                
                
                
                2,108
                
                
                
                4,366
                
                
                
                4,242Net
      occupancy expense
                
                
                364
                
                
                
                266
                
                
                
                738
                
                
                
                526Furniture
      and equipment expense
                
                
                224
                
                
                
                183
                
                
                
                441
                
                
                
                366Legal
      and professional fees
                
                
                235
                
                
                
                173
                
                
                
                415
                
                
                
                302FDIC
      insurance premiums and assessments
                
                
                239
                
                
                
                9
                
                
                
                254
                
                
                
                18Data
      processing expense
                
                
                205
                
                
                
                176
                
                
                
                382
                
                
                
                307Printing
      and office supplies
                
                
                59
                
                
                
                66
                
                
                
                148
                
                
                
                123Marketing
      expense
                
                
                157
                
                
                
                52
                
                
                
                328
                
                
                
                144Other
      real estate owned expense
                
                
                241
                
                
                
                29
                
                
                
                304
                
                
                
                56Other
                
                
                401
                
                
                
                409
                
                
                
                822
                
                
                
                779Total
      other expense
                
                
                4,343
                
                
                
                3,471
                
                
                
                8,198
                
                
                
                6,863(Loss)
      Income Before Income Taxes
                
                
                (888
                )
                
                
                341
                
                
                
                (1,262
                )
                
                
                444Income
      tax benefit
                
                
                422
                
                
                
                42
                
                
                
                683
                
                
                
                322Net
      (Loss) Income
                
                $
                (466
                )
                
                $
                383
                
                
                $
                (579
                )
                
                $
                766Basic
      (Loss) Earnings Per Share
                
                $
                (0.16
                )
                
                $
                0.13
                
                
                $
                (0.19
                )
                
                $
                0.26Diluted
      (Loss) Earnings Per Share
                
                $
                (0.16
                )
                
                $
                0.13
                
                
                $
                (0.19
                )
                
                $
                0.26Dividends
      Declared Per Share
                
                $
                0.04
                
                
                $
                0.04
                
                
                $
                0.08
                
                
                $
                0.08


See
notes to consolidated condensed financial statements


(4)


Ameriana
Bancorp


Consolidated
Condensed Statements of Shareholders’ Equity


(In
thousands, except per share data)


(Unaudited)





Common
                Stock
              
              
              Additional
                Paid-in
                Capital
              
              
              Retained
                Earnings
              
              
              Accumulated
                Other
                Comprehensive
                Income
              
              
              Treasury
                Stock
              
              
              TotalBalance
      at December 31, 2008
              
              $
              3,214
              
              
              $
              1,044
              
              
              $
              31,979
              
              
              $
              537
              
              
              $
              (2,998
              )
              
              $
              33,776Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              (579
              )
              
              
              —
              
              
              
              —
              
              
              
              (579
              )Increase
      of $206 in unrealized gain on available-for-sale securities, net of income
      tax
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              129
              
              
              
              —
              
              
              
              129Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (450
              )Share-based
      compensation
              
              
              —
              
              
              
              3
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              3Dividends declared ($0.08 per
      share)
              
              
              —
              
              
              
              —
              
              
              
              (239
              )
              
              
              —
              
              
              
              —
              
              
              
              (239
              )Balance at June 30, 2009
              
              $
              3,214
              
              
              $
              1,047
              
              
              $
              31,161
              
              
              $
              666
              
              
              $
              (2,998
              )
              
              $
              33,090




See
notes to consolidated condensed financial statements.


(5)


Ameriana
Bancorp


Consolidated
Condensed Statements of Cash Flows


(In
thousands)


(Unaudited)





Six Months Ended June 30,2009
                
                
                2008Operating ActivitiesNet
      (loss) income
                
                $
                (579
                )
                
                $
                766Items
      not requiring (providing) cashProvision
      for losses on loans
                
                
                953
                
                
                
                592Depreciation
      and amortization
                
                
                507
                
                
                
                332Increase
      in cash value of life insurance
                
                
                (426
                )
                
                
                (435
                )Gain
      from sale of available-for-sale securities
                
                
                (102
                )
                
                
                (109
                )Mortgage
      loans originated for sale
                
                
                (9,803
                )
                
                
                (655
                )Proceeds
      from sale of mortgage loans
                
                
                9,572
                
                
                
                912Gains
      on sale of loans and servicing rights
                
                
                (187
                )
                
                
                (41
                )Loss
      on sale or write-down of other real estate owned
                
                
                700
                
                
                
                18Gain
      on liquidation of minority interest in unconsolidated
      investment
                
                
                (192
                )
                
                
                —Increase
      in accrued interest payable
                
                
                (131
                )
                
                
                (356
                )Other
      adjustments
                
                
                (838
                )
                
                
                (312
                )Net
      cash (used in) provided by operating activities
                
                
                (526
                )
                
                
                712Investing
      ActivitiesPurchase
      of securities
                
                
                (5,380
                )
                
                
                (14,986
                )Proceeds/principal
      from the sale of securities
                
                
                7,916
                
                
                
                9,272Proceeds/principal
      from maturities/calls of securities
                
                
                —
                
                
                
                1,000Principal
      collected on mortgage-backed securities
                
                
                8,263
                
                
                
                3,935Net
      change in loans
                
                
                (17,278
                )
                
                
                (15,640
                )Proceeds
      from sales of other real estate owned
                
                
                554
                
                
                
                106Purchase
      of insurance book of business
                
                
                (724
                )
                
                
                —Proceeds
      from liquidation of minority interest in unconsolidated
      investment
                
                
                645
                
                
                
                —Net
      purchases and construction of premises and equipment
                
                
                (1,136
                )
                
                
                (5,622
                )Construction
      cost for other real estate owned
                
                
                —
                
                
                
                (496
                )Other
      investing activities
                
                
                22
                
                
                
                70Net
      cash used in investing activities
                
                
                (7,118
                )
                
                
                (22,361
                )Financing
      ActivitiesNet
      change in demand and savings deposits
                
                
                40,318
                
                
                
                2,292Net
      change in certificates of deposit
                
                
                9,055
                
                
                
                (2,494
                )Increase
      (decrease) in drafts payable
                
                
                458
                
                
                
                (3,047
                )Net
      change in short-term borrowings
                
                
                —
                
                
                
                4,500Proceeds
      from long-term borrowings
                
                
                —
                
                
                
                27,000Repayment
      of long-term borrowings
                
                
                (23,500
                )
                
                
                (1,278
                )Net
      change in advances by borrowers for taxes and insurance
                
                
                259
                
                
                
                427Cash
      dividends paid
                
                
                (239
                )
                
                
                (239
                )Net
      cash provided by financing activities
                
                
                26,351
                
                
                
                27,161Change
      in Cash and Cash Equivalents
                
                
                18,707
                
                
                
                5,512Cash
      and Cash Equivalents at Beginning of Year
                
                
                8,449
                
                
                
                17,172Cash
      and Cash Equivalents at End of Quarter
                
                $
                27,156
                
                
                $
                22,684


(6)


Ameriana
Bancorp
 Consolidated
Condensed Statements of Cash Flows
 (In
thousands)
 (Unaudited)


Six Months Ended June 30,2009
                  
                  
                  2008Supplemental
      information:Interest
      paid on deposits
                  
                  $
                  3,554
                  
                  
                  $
                  4,706Interest
      paid on borrowings
                  
                  $
                  1,895
                  
                  
                  $
                  1,706Income
      taxes paid net of income taxes refunded
                  
                  $
                  —
                  
                  
                  $
                  100Non-cash
      supplemental information:Transfers
      from loans to other real estate owned
                  
                  $
                  3,037
                  
                  
                  $
                  1,231





See
notes to consolidated condensed financial statements.


(7)


AMERIANA
BANCORP AND SUBSIDIARIES





NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS





NOTE
A - - BASIS OF PRESENTATION





The
consolidated condensed financial statements include the accounts of Ameriana
Bancorp (the “Company”) and its wholly-owned subsidiary, Ameriana Bank (the
“Bank”).  The Bank has three direct wholly-owned subsidiaries,
Ameriana Insurance Agency, Ameriana Financial Services, Inc., and Ameriana
Investment Management, Inc.





The
unaudited interim consolidated condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and, therefore, do not include
all information and disclosures required by generally accepted accounting
principles (“GAAP”) for complete financial statements.  In the opinion
of management, the financial statements reflect all adjustments (comprised only
of normal recurring adjustments and accruals) necessary to present fairly the
Company’s financial position and results of operations and cash
flows.  The consolidated condensed balance sheet of the Company as of
December 31, 2008, has been derived from the audited consolidated balance sheet
of the Company as of that date.  The results of operations for the
period are not necessarily indicative of the results to be expected in the full
year.  These statements should be read in conjunction with the
consolidated financial statements and related notes which are included in the
Company's Annual Report on Form 10-K for the year ended December 31,
2008.





NOTE
B - - SHAREHOLDERS’ EQUITY





On May
21, 2009, the Board of Directors declared a quarterly cash dividend of $0.04 per
share.  This dividend, totaling approximately $120,000, was accrued
for payment to shareholders of record on June 12, 2009, and was paid on July 6,
2009.





No
stock options were exercised during the second quarter of 2009.





NOTE
C - - EARNINGS (LOSS) PER SHARE





Earnings
(loss) per share were computed as follows:


(In thousands, except share data)Three Months Ended June 30,2009
                      
                      
                      2008Loss
                      
                      
                      Weighted
                        Average
                        Shares
                      
                      
                      PerShare
                        Amount
                      
                      
                      Income
                      
                      
                      Weighted
                        Average
                        Shares
                      
                      
                      PerShare
                        AmountBasic
      (Loss) Earnings Per Share: (Loss) incomeavailable
      tocommon  shareholders
                      
                      $
                      (466
                      )
                      
                      
                      2,988,952
                      
                      
                      $
                      (0.16
                      )
                      
                      $
                      383
                      
                      
                      
                      2,988,952
                      
                      
                      $
                      0.13Effect
      of dilutive stock options
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      
                      
                      
                      
                      –
                      
                      
                      
                      –Diluted
      (Loss) Earnings Per Share: (Loss) income available to common shareholders
      and assumed conversions
                      
                      $
                      (466
                      )
                      
                      
                      2,988,952
                      
                      
                      $
                      (0.16
                      )
                      
                      $
                      383
                      
                      
                      
                      2,988,952
                      
                      
                      $
                      0.13





(In thousands, except share data)Six Months Ended June 30,2009
                
                
                2008Loss
                
                
                Weighted
                  Average
                  Shares
                
                
                Per Share
                  Amount
                
                
                Income
                
                
                Weighted
                  Average
                  Shares
                
                
                Per Share
                  AmountBasic
      (Loss) Earnings Per Share: (Loss) incomeavailable
      to common  shareholders
                
                $
                (579
                )
                
                
                2,988,952
                
                
                $
                (0.19
                )
                
                $
                766
                
                
                
                2,988,952
                
                
                $
                0.26Effect
      of dilutive stock options
                
                
                –
                
                
                
                –
                
                
                
                
                
                
                
                –
                
                
                
                –Diluted
      (Loss) Earnings Per Share: (Loss) income available to common shareholders
      and assumed conversions
                
                $
                (579
                )
                
                
                2,988,952
                
                
                $
                (0.19
                )
                
                $
                766
                
                
                
                2,988,952
                
                
                $
                0.26





Options
to purchase 199,482 and 208,282 shares of common stock at exercise prices of
$9.25 to $15.56 and $9.25 to $17.05 per share were outstanding at June 30, 2009
and 2008, respectively, but were not included in the computation of diluted
earnings per share because the options were anti-dilutive.


(8)





NOTE
D - - INVESTMENT SECURITIES





The
following tables provide the composition of investment securities at June 30,
2009, and December 31, 2008:




Amortized
                  Cost
                
                
                Gross
                  Unrealized
                  Gains
                
                
                Gross
                  Unrealized
                  Losses
                
                
                Fair
                  ValueAvailable
      for sale at June 30, 2009Mortgage-backed
      securities
                
                $
                48,463
                
                
                $
                1,344
                
                
                $
                6
                
                
                $
                49,801Municipal
      securities
                
                
                10,881
                
                
                
                59
                
                
                
                291
                
                
                
                10,649SBA
      asset-backed securities
                
                
                2,877
                
                
                
                —
                
                
                
                43
                
                
                
                2,834Mutual
      funds
                
                
                1,544
                
                
                
                24
                
                
                
                —
                
                
                
                1,568$
                63,765
                
                
                $
                1,427
                
                
                $
                340
                
                
                $
                64,852





Amortized
                  Cost
                
                
                Gross
                  Unrealized
                  Gains
                
                
                Gross
                  Unrealized
                  Losses
                
                
                Fair
                  ValueAvailable
      for sale at December 31, 2008Mortgage-backed
      securities
                
                $
                54,276
                
                
                $
                1,127
                
                
                $
                114
                
                
                $
                55,289Municipal
      securities
                
                
                18,700
                
                
                
                227
                
                
                
                370
                
                
                
                18,557Mutual
      funds
                
                
                1,513
                
                
                
                12
                
                
                
                —
                
                
                
                1,525$
                74,489
                
                
                $
                1,366
                
                
                $
                484
                
                
                $
                75,371





The
amortized cost and fair value of securities available for sale at June 30, 2009,
by contractual maturity, are shown below.  Expected maturities will
differ from contractual maturities because issuers may have the right to
call


or prepay
obligations with or without call or prepayment penalties.





Available for SaleAmortized
                    Cost
                  
                  
                  Fair
                    ValueWithin
      one year
                  
                  $
                  —
                  
                  
                  $
                  —One
      to five years
                  
                  
                  2,997
                  
                  
                  
                  3,027Five
      to ten years
                  
                  
                  1,537
                  
                  
                  
                  1,546After
      ten years
                  
                  
                  6,347
                  
                  
                  
                  6,07610,881
                  
                  
                  
                  10,649Mortgage-backed
      securities
                  
                  
                  48,463
                  
                  
                  
                  49,801SBA
      asset-backed securities
                  
                  
                  2,877
                  
                  
                  
                  2,834Equity
      securities
                  
                  
                  1,544
                  
                  
                  
                  1,568$
                  63,765
                  
                  
                  $
                  64,852





Mortgage-backed
securities: The unrealized losses on the Company’s investment in
mortgage-backed securities were caused by interest rate changes.  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 June 30, 2009.


(9)





SBA asset-backed
securities:The unrealized loss on the Company’s investment in
a U.S. Small Business Administration asset-backed security was caused by
interest rate changes.  The contractual cash flows of those
investments are guaranteed by an agency of the U.S.
Government.  Accordingly, it is expected that the security 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 June 30, 2009.





Municipal
securities:  The unrealized losses on the Company’s investment
in municipal securities were caused either by interest rate changes and/or
reduced credit ratings of the insurers of these securities.  All of
the municipal securities in the Company’s investment portfolio at June 30, 2009
that were rated by Moody’s Investors Service received an investment grade credit
quality rating.  Seven securities were not rated by Moody’s, but
received an investment grade rating from Standard & Poor’s.  One
security was not rated by either Moody’s or Standard &
Poor’s.   The contractual terms of those investments do not
permit the issuer to settle the securities at a price less than the amortized
cost of the investment.  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 June 30, 2009.





Equity
securities:The equity securities balance at June 30, 2009
consisted of an investment in the CRA Qualified Investment mutual fund, whose
portfolio composition is primarily in debt securities with an average credit
quality rating of AAA by Standard & Poor’s.





Certain
investment securities are reported in the financial statements at an amount less
than their historical cost.  Total fair value of these investments at
June 30, 2009 and December 31, 2008 were $12,959,000 and $18,004,000, which is
approximately 20.0% and 23.9% of the Company’s investment
portfolio.




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




The
following table shows the Company’s investments’ gross unrealized losses and
fair value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position at June 30, 2009
and December 31, 2008:





At June 30, 2009
                  
                  Less Than 12 Months
                  
                  
                  12 Months or Longer
                  
                  
                  TotalFair Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrealized
                    LossesMortgage-backed
      securities
                  
                  $
                  2,487
                  
                  
                  $
                  2
                  
                  
                  $
                  385
                  
                  
                  $
                  4
                  
                  
                  $
                  2,872
                  
                  
                  $
                  6Municipal
      securities
                  
                  
                  3,703
                  
                  
                  
                  74
                  
                  
                  
                  3,550
                  
                  
                  
                  217
                  
                  
                  
                  7,253
                  
                  
                  
                  291SBA
      asset-backed securities
                  
                  
                  2,834
                  
                  
                  
                  43
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,834
                  
                  
                  
                  43$
                  9,024
                  
                  
                  $
                  119
                  
                  
                  $
                  3,935
                  
                  
                  $
                  221
                  
                  
                  $
                  12,959
                  
                  
                  $
                  340





At December 31, 2008
                  
                  Less Than 12 Months
                  
                  
                  12 Months or Longer
                  
                  
                  TotalFair Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrealized
                    LossesMortgage-backed
      securities
                  
                  $
                  6,490
                  
                  
                  $
                  93
                  
                  
                  $
                  1,524
                  
                  
                  $
                  21
                  
                  
                  $
                  8,014
                  
                  
                  $
                  114Municipal
      securities
                  
                  
                  5,865
                  
                  
                  
                  187
                  
                  
                  
                  4,125
                  
                  
                  
                  183
                  
                  
                  
                  9,990
                  
                  
                  
                  370$
                  12,355
                  
                  
                  $
                  280
                  
                  
                  $
                  5,649
                  
                  
                  $
                  204
                  
                  
                  $
                  18,004
                  
                  
                  $
                  484





Investment
securities with a total market value of $27,472,000 and $32,339,000 were pledged
at June 30, 2009, and December 31, 2008, respectively, to secure FHLB
advances and three letters of credit.





Investment
securities with a total market value of $8,955,000 and $9,512,000 were pledged
at June 30, 2009, and December 31, 2008, respectively, to secure a repurchase
agreement.





A gross
gain of $131,000 and a gross loss of $29,000 resulting from sales of available
for sale securities were realized during the first six months of 2009, with a
net tax expense of $35,000.


(10)


NOTE
E - - CURRENT AND FUTURE ACCOUNTING MATTERS





Business
Combinations





Financial
Accounting Standards Board Statement No. 141 Revised (SFAS 141R), “Business Combinations (Revised
2007),” was issued in December 2007 and replaces SFAS 141 which applies
to all transactions and other events in which one entity obtains control over
one or more other businesses.  SFAS 141R requires an acquirer, upon
initially obtaining control of another entity, to recognize the assets,
liabilities and any non-controlling interest in the acquiree at fair value as of
the acquisition date.  Contingent consideration is required to be
recognized and measured at fair value on the date of acquisition rather than at
a later date when the amount of that consideration may be determinable beyond a
reasonable doubt.  This fair value approach replaces the cost
allocation process required under SFAS 141 whereby the cost of an acquisition
was allocated to the individual asset acquired and liabilities assumed based on
their estimated fair value.  SFAS 141R requires acquirers to expense
acquisition-related costs as incurred rather than allocating such costs to the
assets acquired and liabilities assumed.  Under SFAS 141R, the
requirements of SFAS 146, “Accounting for Costs Associated
with Exit or Disposal Activities,”would have to be met in order to
accrue for a restructuring plan in purchase
accounting.  Pre-acquisition contingencies are to be recognized at
fair value, unless it is a non-contractual contingency that is not likely to
materialize, in which case, nothing should be recognized in purchase
accounting.  Instead, that contingency would be subject to the
probable and estimable recognition criteria under SFAS 5, “Accounting for
Contingencies.” SFAS 141R was effective for the Company on
January 1, 2009 and did not have a significant impact on the Company’s financial
statements.





Noncontrolling
Interest in Consolidated Financial Statements





Financial
Accounting Standards Board Statement No. 160 (SFAS 160), “Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB Statement No. 51,”
was issued in December 2007 and establishes accounting and reporting standards
for the non-controlling interest in a subsidiary and for the deconsolidation of
a subsidiary.  SFAS 160 clarifies that a non-controlling interest in a
subsidiary, which is sometimes referred to as a minority interest, is an
ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements.  Among
other requirements, SFAS 160 requires consolidated net income to be reported at
amounts that are attributable to both the parent and the non-controlling
interest.  It also requires disclosure, on the face of the
consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the non-controlling interest.  SFAS
160 was effective for the Company on January 1, 2009 and did not have a
significant impact on the Company’s financial statements.





Disclosures
About Derivative Instruments and Hedging Activities





Financial
Accounting Standards Board Statement No. 161 (SFAS 161), “Disclosures About Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement No. 133,”was issued in March 2008 and amends and expands the disclosure
requirements of SFAS 133 to provide greater transparency about (i) how and why
an entity uses derivative instruments, (ii) how derivative instruments and
related hedge items are accounted for under SFAS 133 and its related
interpretations, and (iii) how derivative instruments and related hedged items
affect an entity’s financial position, results of operations and cash
flows.  To meet those objectives, SFAS 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative
instruments and disclosures about credit-risk-related contingent features in
derivative agreements.  SFAS 161 was effective for the Company on
January 1, 2009 and did not have a significant impact on the Company’s financial
statements.





SFAS
No. 165, Subsequent Events





The
FASB has issued FASB Statement No. 165, Subsequent Events. Statement
165 establishes general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. Specifically, Statement 165
provides:





·
            The
      period after the balance sheet date during which management of a reporting
      entity should evaluate events or transactions that may occur for potential
      recognition or disclosure in the financial
  statements;


·
            The
      circumstances under which an entity should recognize events or
      transactions occurring after the balance sheet date in its financial
      statements; and


·
            The
      disclosures that an entity should make about events or transactions that
      occurred after the balance sheet
date.





Statement
165 was effective for interim or annual financial periods ending after June 15,
2009, and shall be applied prospectively.


(11)





SFAS
No. 167, Amendments to FASB Interpretation No. 46(R) and SFAS No. 166,
Accounting for Transfers ofFinancial
Assets





The
FASB has issued the following two standards which change the way entities
account for securitizations and special-purpose entities:





·
            FASB
      Statement No. 166, Accounting for Transfers of Financial
      Assets;


·
            FASB
      Statement No. 167, Amendments to FASB Interpretation No.
      46(R).





Statement
166 is a revision to FASB Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, and
will require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. It eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures.





Statement
167 is a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest
Entities, and changes how a reporting entity determines when an entity
that is insufficiently capitalized or is not controlled through voting (or
similar rights) should be consolidated. The determination of whether a reporting
entity is required to consolidate another entity is based on, among other
things, the other entity’s purpose and design and the reporting entity’s ability
to direct the activities of the other entity that most significantly impact the
other entity’s economic performance.





The
new standards will require a number of new disclosures. Statement 167 will
require a reporting entity to provide additional disclosures about its
involvement with variable interest entities and any significant changes in risk
exposure due to that involvement. A reporting entity will be required to
disclose how its involvement with a variable interest entity affects the
reporting entity’s financial statements. Statement 166 enhances information
reported to users of financial statements by providing greater transparency
about transfers of financial assets and an entity’s continuing involvement in
transferred financial assets.





The
Federal Reserve is reviewing regulatory capital requirements associated with the
adoption of the new accounting standards by financial institutions. In
conducting this review, the Federal Reserve is considering a broad range of
factors including the maintenance of prudent capital levels, the record of
recent bank experiences with off-balance sheet vehicles, and the results of the
recent Supervisory Capital Assessment Program (SCAP). As part of the SCAP,
participating banking organizations' capital adequacy was assessed using
assumptions consistent with standards ultimately included in FAS 166 and FAS
167.





Statements
166 and 167 will be effective at the start of a reporting entity’s first fiscal
year beginning after November 15, 2009, or January 1, 2010, for a calendar
year-end entity. Early application is not permitted.  The Company is
currently evaluating the potential impact, if any, of the adoption of these two
statements on the Company.




Accounting
for Assets Acquired and Liabilities Assumed in a Business Combination that Arise
from Contingencies




Financial
Accounting Standards Board Staff Position (FSP) FAS 141 (R)-1, “Accounting for Assets Acquired
and Liabilities Assumed
in a Business Combination That Arise from Contingencies” amends and
clarifies FAS 141(R), Business Combinations, regarding the initial recognition
and measurement, subsequent measurement and accounting and disclosure of assets
and liabilities arising from contingencies in a business combination. This FSP
eliminates the distinction between contractual and noncontractual contingencies
discussed in FAS 141(R), specifies whether contingencies should be measured at
fair value or in accordance with FAS 5, provides application guidance on
subsequent accounting for assets acquired and liabilities assumed in a business
combination that arise from contingencies and establishes new disclosure
requirements.  This FSP is effective for assets or liabilities arising
from contingencies in business combinations for which the acquisition date is on
or after the beginning of the first annual reporting period beginning on or
after December 15, 2008.  The Company is currently evaluating the
potential impact of the FSP on the Company.




(12)




Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly




Financial
Accounting Standards Board Staff Position (FSP) FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for The Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” was issued
on April 9, 2009.  This FSP provides additional guidance for
estimating fair value in accordance with FASB Statement No. 157, Fair Value
Measurements, when the volume and level of activity for the asset or liability
have significantly decreased.  This FSP also includes guidance on
identifying circumstances that indicate a transaction is not
orderly.   Even if there has been a significant decrease in the
volume and level of activity regardless of valuation technique, the objective of
a fair value measurement remains the same.  Fair value is the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction (that is, not a forced liquidation or distressed sale)
between market participants at the measurement date under current market
conditions.  This FSP is effective for interim reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009 only if FSP FAS 115-2 and FAS 124-2 and FSP FAS 107-1 and
APG 28-1 are adopted concurrently.  This FSP does not require
disclosures for earlier periods presented for comparative purposes at initial
adoption.  The Company adopted the FSP effective for the period ending
June 30, 2009, and adoption did not result in a material effect on consolidated
results of operations.




Recognition
and Presentation of Other-Than-Temporary Impairments




Financial
Accounting Standards Board Staff Position (FSP) No. 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments” was issued on April 9, 2009.  This FSP amends the
other-than-temporary guidance in U.S. generally accepted accounting principles
for debt securities to make the guidance more operational and to improve the
presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements.  This FSP does not
amend existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities and does not require
disclosures for earlier periods presented for comparative purposes at initial
adoption.  This FSP is effective for interim reporting periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009 only if FSP FAS 157-4 and FSP FAS 107-1 and APG 28-1 are adopted
concurrently.  This FSP does not require disclosures for earlier
periods presented for comparative purposes at initial adoption.  The
Company adopted the FSP effective for the period ending June 30, 2009, and
adoption did not result in a material effect on consolidated results of
operations.




Interim
Disclosures about Fair Value of Financial Instruments




Financial
Accounting Standards Board Staff Position (FSP) No. 107-1 and APG 28-1, “Interim Disclosures about Fair Value of Financial
Instruments” was issued on April 9, 2009.  This FSP amends FASB
Statement No. 107, Disclosures about Fair Value of Financial Instruments and APB
Opinion No. 28, Interim Financial Reporting, to require disclosures about fair
value of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements.  Effective for
interim reporting periods ending after June 15, 2009, early adoption is
permitted for periods ending after March 15, 2009 only if FSP FAS 157-4 and FSP
FAS 115-2 and FAS 124-2 are adopted concurrently.  The Company adopted
the FSP effective for the period ending June 30, 2009, and adoption did not
result in a material effect on consolidated results of operations. Additional
disclosures required by the adoption of these standards are included
above.




Accounting
for Defensive Intangible Assets




Emerging
Issues Task Force (EITF) No. 08-07, “Accounting for Defensive Intangible
Assets” was issued on September 9, 2008.  Prior to the issuance
of FAS 157, when an entity acquired a business or group of assets, it typically
allocated little or no value to the intangible assets that it did not intend to
actively use.  Defensive assets are those assets not actively used
after being acquired, but contribute to an increase in value of other assets
owned by the acquiring entity.  This document addresses whether an
acquired defensive asset should be accounted for as a separate unit of
accounting or whether the value should be added as a component of an existing
intangible asset.  Additionally, determination of a useful life for a
defensive asset is addressed.  The Company has complied with this EITF
and its adoption did not result in a material affect on the consolidated results
of operations.




Equity
Method Investment Accounting Considerations




Emerging
Issues Task Force (EITF) No. 08-06, “Equity Method Investment Accounting
Considerations” was issued on September 2, 2008.  This issue
addresses several questions related to equity method investments
including:  (1) how the initial carrying value of an equity method
investment should be determined; (2) how the difference between the investor’s
carrying value, as determined in Issue 1, and the underlying equity of the
investee should be allocated to the underlying assets and liabilities of the
investee; (3) how an impairment assessment of an underlying indefinite-lived
intangible asset of an equity method investment should be performed; (4) how an
equity method investee’s issuance of shares should be accounted for; and (5) how
to account for a change in an investment from the equity method to the cost
method.  The Company has complied with this EITF and its adoption did
not result in a material affect on the consolidated results of
operations.




Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own
Stock




Emerging
Issues Task Force (EITF) No. 07-05, “Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock”was issued on
September 9, 2007.  This document addresses the determination of
whether an instrument (or an embedded feature) is indexed to an entity’s own
stock, which is the first part of the scope exception in paragraph 11(a) of FAS
133.  If an instrument (or an embedded feature) that has the
characteristics of a derivative instrument under paragraphs 6–9 of FAS 133 is
indexed to an entity's own stock, it is still necessary to evaluate whether it
is classified in stockholders’ equity (or would be classified in stockholders’
equity if it were a freestanding instrument).  The Company has
complied with this EITF and its adoption did not result in a material affect on
the consolidated results of operations.


(13)





NOTE
F -– RETIREMENT PLAN





Effective
January 1, 2008, the Company terminated the supplemental retirement plan (the
“Plan”) that provided retirement and death benefits to certain officers and
directors.  At that time, the officers and directors covered by that
Plan voluntarily elected to forego their benefits under the
Plan.  Instead, the Company entered into separate agreements with
these certain officers and directors that provide retirement and death
benefits.  The Company is recording an expense equal to the projected
present value of the payments due at the full eligibility date.  The
liability for the agreements was $1.8 million at June 30, 2009, and $1.7 million
at December 31, 2008.  The expense for the Plan was $109,000 for the
six months ended June 30, 2009, and $169,000 for the year ended December 31,
2008.





NOTE
G – DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES




Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
No. 157, Fair Value
Measurements (FAS 157).  FAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements.  FAS 157 has been applied prospectively
as of the beginning of the year/period.




FAS
157 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date.  FAS 157 also establishes a fair
value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair
value.  The standard describes three levels of inputs that may be used
to measure fair value:




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


Level
      2
                Observable
      inputs other than Level 1 prices, such as quoted prices for similar assets
      or liabilities; quoted prices in active markets that are not active; or
      other inputs that are observable or can be corroborated by observable
      market data for substantially the full term of the assets or
      liabilities
 Level
      3
                  Unobservable
      inputs that are supported by little or no market activity and that are
      significant to the fair value of the assets or
  liabilities


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




Available-for-sale
Securities




Where
quoted market prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy.  The
securities valued in Level 1 are mutual funds.




Level 2
securities include U.S. agency and U.S. government sponsored enterprise
mortgage-backed securities,  municipal securities, and one U.S. Small
Business Administration asset-backed security.  Level 2 securities are
valued by a third party pricing service commonly used in the banking industry
utilizing observable inputs.  The pricing provider utilizes evaluated
pricing models that vary based on asset class.  These models
incorporate available market information including quoted prices of securities
with similar characteristics and, because many fixed-income securities do not
trade on a daily basis, apply available information through processes such as
benchmark curves, benchmarking of like securities, sector grouping and matrix
pricing.  In addition, model processes, such as an option adjusted
spread model is used to develop prepayment and interest rate scenarios for
securities with prepayment features.




There
currently are no securities valued in Level 3.




The
following table presents the fair value measurements of assets and liabilities
recognized in the accompanying balance sheet measured at fair value on a
recurring basis and the level within the FAS 157 fair value hierarchy in which
the fair value measurements fall at June 30, 2009 and December 31,
2008:


(14)




Fair Value Measurements UsingAvailable-for-sale securities:
                  
                  Fair Value
                  
                  
                  Quoted Prices in
                    Active Markets for
                    Identical Assets
                    (Level 1)
                  
                  
                  Significant Other
                    Observable Inputs
                    (Level 2)
                  
                  
                  Significant
                    Unobservable
                    Inputs
                    (Level 3)At
      June 30, 2009:Mortgage-backed
      securities
                  
                  $
                  49,801,000
                  
                  
                  $
                  —
                  
                  
                  $
                  49,801,000
                  
                  
                  $
                  —Municipal
      securities
                  
                  
                  10,649,000
                  
                  
                  
                  —
                  
                  
                  
                  10,649,000
                  
                  
                  
                  —SBA
      asset-backed securities
                  
                  
                  2,834,000
                  
                  
                  
                  —
                  
                  
                  
                  2,834,000
                  
                  
                  
                  —Mutual
      funds
                  
                  
                  1,568,000
                  
                  
                  
                  1,568,000
                  
                  
                  
                  —
                  
                  
                  
                  —$
                  64,852,000
                  
                  
                  $
                  1,568,000
                  
                  
                  $
                  63,284,000
                  
                  
                  $
                  —At
      December 31, 2008Mortgage-backed
      securities
                  
                  $
                  55,289,000
                  
                  
                  $
                  —
                  
                  
                  $
                  55,289,000
                  
                  
                  $
                  —Municipal
      securities
                  
                  
                  18,557,000
                  
                  
                  
                  —
                  
                  
                  
                  18,557,000
                  
                  
                  
                  —Mutual
      funds
                  
                  
                  1,525,000
                  
                  
                  
                  1,525,000
                  
                  
                  
                  —
                  
                  
                  
                  —$
                  75,371,000
                  
                  
                  $
                  1,525,000
                  
                  
                  $
                  73,846,000




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





Impaired
      Loans and Other Real Estate Owned





Loan impairment is reported when
scheduled payments under contractual terms are deemed
uncollectible.  Impaired loans are carried at the fair value of
collateral if the loan is collateral dependent.  A portion of the
allowance for loan losses is allocated to impaired loans if the value of such
loans is deemed to be less than the unpaid balance.  If these
allocations cause the allowance for loan losses to increase, such increase is
reported as a component of the provision for loan losses.  Loan losses
are charged against the allowance when management believes the uncollectability
of the loan is confirmed.  During the first six months of 2009,
twenty-six impaired loans were partially charged-off or re-evaluated,
resulting in a remaining balance for these loans, net of specific reserve,of $14.2
million as of June 30, 2009.  This valuation would be
considered Level 3, consisting of appraisals of underlying collateral and
discounted cash flow analysis.




The fair value of the Company’s other
real estate owned is determined using Level 3 inputs, which include current and
prior appraisals and estimated costs to sell. The change in fair value of other
real estate owned on June 30, 2009 that was recognized during the six months
ended June 30, 2009 was $634,000, which was recorded as a direct charge to
current earnings.




The following table presents the fair
value measurements of assets and liabilities recognized in the accompanying
balance sheet measured at fair value on a nonrecurring basis and the level
within the FAS 157 fair value hierarchy in which the fair value measurements
fall at June 30, 2009 and December 31, 2008:




Fair Value Measurements UsingFair Value
                  
                  
                  Quoted
                    Prices
                    inActive
                    Markets forIdentical
                    Assets
                    (Level 1)
                  
                  
                  Significant
                    Other
                    Observable
                    Inputs
                    (Level 2)
                  
                  
                  Significant
                    Unobservable
                    Inputs
                    (Level 3)At
      June 30, 2009:Impaired
      loans
                  
                  $
                  14,226,000
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  14,226,000Other
      real estate owned
                  
                  
                  5,658,000
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  5,658,000At
      December  31, 2008:Impaired
      loans
                  
                  $
                  8,151,000
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  8,151,000Other
      real estate owned
                  
                  
                  3,881,000
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3,881,000





(15)




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 realized upon an immediate settlement of the
instruments.  Accordingly, the aggregate fair value amounts presented
do not represent, and should not be construed to represent, the underlying value
of the Company.





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





June 30, 2009
                      
                      
                      December 31, 2008Carrying
                        Value
                      
                      
                      Fair
                        Value
                      
                      
                      Carrying
                        Value
                      
                      
                      Fair
                        ValueAssetsCash
      and cash equivalents
                      
                      $
                      27,156
                      
                      
                      $
                      27,156
                      
                      
                      $
                      8,449
                      
                      
                      $
                      8,449Investment
      securities available for sale
                      
                      
                      64,852
                      
                      
                      
                      64,852
                      
                      
                      
                      75,371
                      
                      
                      
                      75,371Loans
      held for sale
                      
                      
                      308
                      
                      
                      
                      308
                      
                      
                      
                      —
                      
                      
                      
                      —Loans
                      
                      
                      335,823
                      
                      
                      
                      337,293
                      
                      
                      
                      322,535
                      
                      
                      
                      326,393Interest
      receivable
                      
                      
                      1,548
                      
                      
                      
                      1,548
                      
                      
                      
                      1,717
                      
                      
                      
                      1,717Stock
      in FHLB
                      
                      
                      5,629
                      
                      
                      
                      5,629
                      
                      
                      
                      5,629
                      
                      
                      
                      5,629LiabilitiesDeposits
                      
                      
                      373,779
                      
                      
                      
                      365,252
                      
                      
                      
                      324,406
                      
                      
                      
                      327,978Borrowings
                      
                      
                      74,235
                      
                      
                      
                      70,742
                      
                      
                      
                      97,735
                      
                      
                      
                      95,762Interest
      payable
                      
                      
                      644
                      
                      
                      
                      644
                      
                      
                      
                      780
                      
                      
                      
                      780Drafts
      payable
                      
                      
                      2,040
                      
                      
                      
                      2,040
                      
                      
                      
                      1,582
                      
                      
                      
                      1,582





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.





NOTE
H – SUBSEQUENT EVENT





Subsequent
events have been evaluated through August 13, 2009, which is the date the
financial statements were available to be issued.


(16)


ITEM
2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





Management’s Discussion and Analysis of
Financial Condition and Results of Operations (the “MD&A”) is designed to
provide a reader of our financial statements with a narrative on our financial
condition, results of operations, liquidity, critical accounting policies,
off-balance sheet arrangements and the future impact of accounting
standards.  We believe it is useful to read our MD&A in
conjunction with the consolidated financial statements contained in Part I in
this Quarterly Report on Form 10-Q (this "Form 10-Q"), our Annual Report on Form
10-K for the fiscal year ended December 31, 2008, and our other reports on Forms
10-Q and 8-K and other publicly available information.





FORWARD-LOOKING
STATEMENTS





This Form 10-Q may contain certain
“forward-looking statements” within the meaning of the federal securities laws.
These statements are not historical facts, rather statements based on Ameriana
Bancorp’s current expectations regarding its business strategies, intended
results and future performance.  Forward-looking statements are
generally preceded by terms such as “expects,” “believes,” “anticipates,”
“intends” and similar expressions.  Such statements are subject to
certain risks and uncertainties including changes in economic conditions in the
Company’s market area, changes in policies by regulatory agencies, the outcome
of litigation, fluctuations in interest rates, demand for loans and deposits in
the Company’s market area, changes in the quality or composition of our loan
portfolio, changes in accounting principles, laws and regulations, and
competition that could cause actual results to differ materially from historical
earnings and those presently anticipated or projected.  Additional
factors that may affect our results are discussed in the Form 10-K under Part I,
Item 1A- “Risk Factors,” in this Form 10-Q under Part II, Item 1A -“Risk
Factors,” and in other reports filed with the Securities and Exchange
Commission.  The Company cautions readers not to place undue reliance
on any such forward-looking statements, which speak only as of the date
made.  The Company advises readers that the factors listed above could
affect the Company’s financial performance and could cause the Company’s actual
results for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements.





The
Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions that may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.





Who We
Are





Ameriana Bancorp (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, as amended.  The
Company became the holding company for Ameriana Bank, an Indiana chartered
commercial bank headquartered in New Castle, Indiana (the “Bank”) in
1990.  The Company also holds a minority interest in a limited
partnership organized to acquire and manage real estate investments, which
qualify for federal tax credits.





The
Bank began operations in 1890.  Since 1935, the Bank has been a member
of the Federal Home Loan Bank (the “FHLB”) System.  Its deposits are
insured to applicable limits by the Deposit Insurance Fund, administered by the
Federal Deposit Insurance Corporation (the “FDIC”).  On June 29, 2002,
the Bank converted to an Indiana savings bank and adopted the name “Ameriana
Bank and Trust, SB.”  As a result of the conversion in 2002, the Bank
became subject to regulation by the Indiana Department of Financial Institutions
and the FDIC.  On July 31, 2006, the Bank closed its Trust Department
and adopted the name Ameriana Bank, SB, on September 12, 2006.  On
June 10, 2009, the Bank converted to an Indiana chartered commercial bank and
adopted the name Ameriana Bank.  The Bank conducts business through
its main office at 2118 Bundy Avenue, New Castle, Indiana and through twelve
branch offices located in New Castle, Middletown, Knightstown, Morristown,
Greenfield, Anderson, Avon, McCordsville, Carmel, Fishers, Westfield and New
Palestine, Indiana and a loan production office in Carmel,
Indiana.  The Bank offers a wide range of retail and commercial
banking services, including:  (i) accepting deposits; (ii) originating
commercial, mortgage, consumer and construction loans; and (iii) through its
subsidiaries, providing investment and brokerage services and insurance
services.


(17)


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.  On June 30, 2009, AIA completed
the purchase of the book of business of Chapin-Hayworth Insurance Agency Inc.
located in New Castle.  AFS has offered insurance products through its
ownership of an interest in Family Financial Life Insurance Company (“Family
Financial”), New Orleans, Louisiana, which offers a full line of credit-related
insurance products.  On May 22, 2009, the Company announced that AFS
had liquidated its 16.67% interest in Family Financial, and recorded a pre-tax
gain of $192,000 from the transaction.  In 2002, AFS acquired a 20.9%
ownership interest in Indiana Title Insurance Company, LLC (“ITIC”) through
which it offered title insurance.  On December 31, 2008, the Company
along with joint-venture partners First Merchants Corporation and Mutual First
Financial, sold the assets of ITIC to IN Title Company, a newly formed company
by current ITIC executives.  AFS also operates a brokerage facility in
conjunction with LPL Financial that provides non-bank investment product
alternatives to its customers and the general public.  AIMI manages
the Company’s investment portfolio.





What We
Do





The
Bank is a community-oriented financial institution.  Our principal
business consists of attracting deposits from the general public and investing
those funds along with borrowed funds primarily in mortgage loans on
single-family residences, multi-family loans, construction loans, commercial
real estate loans, and, to a lesser extent, commercial and industrial loans,
small business lending, home improvement loans, 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 ranging from three months to seven years,
interest-bearing and noninterest-bearing checking accounts, savings accounts and
money market accounts.  Our primary source of borrowings is FHLB
advances.  Through our subsidiaries, we engage in insurance and
brokerage activities.




Our
primary source of income is net interest income, which is the difference between
the interest income earned on our loan and investment portfolios and the
interest expense incurred on our deposits and borrowing
portfolios.  Our loan portfolio typically earns more interest than the
investment portfolio, and our deposits typically have a lower average rate than
FHLB advances.  Several factors affect our net interest
income.  These factors include 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.





Executive Overview of the
Second Quarter of 2009





The
Company recorded a net loss of $466,000, or $(0.16) per share, for the second
quarter of 2009, which resulted primarily from higher credit costs due to the
current economic environment, as reflected in the loan loss provision of
$615,000, net losses of $379,000 from sales and write-downs of other real estate
owned (“OREO”), $136,000 in net expenses associated with OREO, and an increase
of $230,000 in FDIC insurance premiums and assessments.  Following is
additional summary information for the quarter:





·
            The
      Company maintained its quarterly dividend of $0.04 per
    share.





·
            The
      Company’s tangible common equity ratio at June 30, 2009, was
      6.64%.





·
            All
      three of the Bank’s capital ratios at June 30, 2009 were considerably
      above the levels required under regulatory guidelines to be considered
      “well capitalized.”





·
            Net
      interest income for the second quarter of 2009 was $37,000, or 1.2% higher
      than the same quarter in 2008, primarily from the growth of the Bank’s
      loan portfolio.





·
            Net
      interest margin of 2.86%, on a fully tax-equivalent basis for the second
      quarter of 2009, declined 33 basis points from 3.19% for the second
      quarter of 2008, due largely to strategies designed to strengthen the
      Bank’s balance sheet liquidity
position.





·
            An
      increase in the provision for loan losses, compared to the same period of
      2008, to $615,000 resulted from the Bank’s efforts to strengthen the
      allowance for loan losses due to an increase in non-performing
      loans.





·
            Other
      income of $1.0 million for the second quarter of 2009 was unchanged from
      the total for the same quarter of 2008, but several components had major
      differences.  The 2009 quarter was impacted by a $359,000
      increase in net losses and write-downs of OREO, but benefited from a
      $159,000 improvement in gains from sales of loans and servicing rights,
      and a $192,000 gain from the liquidation of an investment in an
      unconsolidated subsidiary.


(18)




·
            Other
      expense for the second quarter of 2009 was $872,000, or 25.1%, higher than
      the same quarter in 2008, due primarily to the acceleration of the Bank’s
      Indianapolis retail expansion strategy, $225,000 in expense recorded as a
      result of the industry-wide FDIC special assessment, and a significant
      increase in OREO expense.





·
            The
      income tax benefit of $422,000 for the second quarter of 2009 was related
      primarily to the credit costs and a significant amount of tax-exempt
      income from municipal securities and bank-owned life
      insurance.





For the
second quarter of 2009, total assets decreased by $6.8 million, or 1.4%, to
$489.4 million.  Significant factors relating to balance sheet items
include:





·
            A
      $1.0 million reduction in the investment portfolio during the quarter
      resulted primarily from principal payments on mortgage-backed securities
      and $691,000 in sales of municipal securities exceeding the $5.4 million
      of securities purchases.  The Bank continues to sell municipal
      securities as part of its overall income tax and liquidity
      strategies.





·
            Net
      loans receivable of $335.8 million at June 30, 2009 represented a minimal
      increase of $48,000 for the quarter, but there was a material change in
      the mix of the portfolio as the Bank experienced growth in commercial
      loans, while the size of the residential mortgage portfolio declined, as
      most new originations during the second quarter were sold into the
      secondary market.





·
            Reflective
      of the continuing weak economy, total non-performing loans of $4.4
      million, or 1.31% of total net loans at June 30, 2009, represented a $1.1
      million increase from March 31,
2009.





·
            The
      allowance for loan losses of $3.6 million at June 30, 2009, was equal to
      1.07% of total loans and 82.7% of non-performing loans, compared to ratios
      of 0.95% and 98.0%, respectively, at March 31,
  2009.





·
            As
      of June 30, 2009, the Company did not own Fannie Mae or Freddie Mac
      preferred stock or private-label mortgage-backed
      securities.  The Company has no direct exposure to sub-prime
      loans in its loan portfolio.





·
            During
      the second quarter of 2009, total deposits increased by $15.2 million, or
      4.2%, to $373.8 million.  The total for retail and business
      accounts increased by $15.7 million, while deposit balances representing
      public funds decreased by $467,000.
      No brokered certificates of deposit were held at June 30,
      2009.





·
            The
      Bank repaid two borrowings from the Federal Home Loan Bank totaling $20
      million during the second quarter using funds accumulated from total
      deposit growth since the beginning of the
year.





Strategic
Issues





As part of the Bank’s efforts to expand
its commercial lending capabilities, in the second quarter of 2007, the Bank
opened a commercial lending center in the fast growing suburban area of Carmel,
Indiana. This office and the Bank’s current emphasis on commercial lending have
contributed to our continued loan growth, which coupled with our strong focus on
retail banking activities, is expected to allow us to produce earnings growth
for the Company.





A major remodeling of our Greenfield
Banking Center, our second largest office, was completed in the third quarter of
2008. The renovations will provide our customers the opportunity to interact
with our banking associates in a new and dynamic environment that will include
interactive terminals, an internet café, and multi-media in-store
marketing.





In
early 2008, the Company announced plans to open three new full-service banking
centers in Hamilton County, which lies just north of Marion County and
Indianapolis.  The new offices in Fishers and Carmel opened in
November 2008 and December 2008, respectively, and the Westfield office opened
in late May of 2009.  These new banking centers enhance Ameriana’s
presence in one of the fastest growing areas of Indiana, considerably increase
the footprint in the Indianapolis area, and boost the Company’s overall
visibility in this market.





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 customers’ first choice for financial advice and
      solutions;




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




(19)




·
            understanding
      and meeting customers’ 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.





CRITICAL
ACCOUNTING POLICIES





The
accounting and reporting policies of the Company are maintained in accordance
with accounting principles generally accepted in the United States and conform
to general practices within the banking industry. The Company’s significant
accounting policies are described in detail in the Notes to the Company’s
Consolidated Financial Statements. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions. The financial position and results of operations
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.  The following are the Company’s critical accounting
policies:





Allowance for Loan
Losses.The
allowance for loan losses provides coverage for probable losses in the Company’s
loan portfolio. Management evaluates the adequacy of the allowance for 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 and lease portfolio. This is due to several factors,
including inherent delays in obtaining information regarding a customer’s
financial condition or changes in their unique business conditions, the
judgmental nature of individual loan evaluations, collateral assessments and the
interpretation of economic trends. Volatility of economic or customer-specific
conditions affecting the identification and estimation of losses for larger,
non-homogeneous credits and the sensitivity of assumptions utilized to establish
allowances for homogenous groups of loans are among other factors. The Company
estimates a range of inherent losses related to the existence of these
exposures. The estimates are based upon the Company’s evaluation of risk
associated with the commercial and consumer allowance levels and the estimated
impact of the current economic environment.





Mortgage
Servicing Rights.  Mortgage servicing rights (“MSRs”)
associated with loans originated and sold, where servicing is retained, are
capitalized and included in other assets in the consolidated balance sheet. The
value of the capitalized servicing rights represents the present value of the
future servicing fees arising from the right to service loans in the portfolio.
Critical accounting policies for MSRs relate to the initial valuation and
subsequent impairment tests. The methodology used to determine the valuation of
MSRs requires the development and use of a number of estimates, including
anticipated principal amortization and prepayments of that principal balance.
Events that may significantly affect the estimates used are changes in interest
rates, mortgage loan prepayment speeds and the payment performance of the
underlying loans. The carrying value of the MSRs is periodically reviewed for
impairment based on a determination of fair value. Impairment, if any, is
recognized through a valuation allowance and is recorded as amortization of
intangible assets.





Valuation
Measurements.Valuation methodologies often involve a
significant degree of judgment, particularly when there are no observable active
markets for the items being valued.  Investment securities and
residential mortgage loans held for sale are carried at fair value, as defined
in SFAS No. 157 “Fair Value Measurement” (“SFAS No. 157”), which requires key
judgments affecting how fair value for such assets and liabilities is
determined.  In addition, the outcomes of valuations have a direct
bearing on the carrying amounts for goodwill and intangible
assets.  To determine the values of these assets and liabilities, as
well as the extent to which related assets may be impaired, management makes
assumptions and estimates related to discount rates, asset returns, prepayment
rates and other factors.  The use of different discount rates or other
valuation assumptions could produce significantly different results, which could
affect the Corporation’s results of operations.




(20)




FINANCIAL
CONDITION





Total
assets of $489.4 million at June 30, 2009, represented growth of$25.9
million, or 5.6%, from the December 31, 2008 total of $463.5
million.  This increase for the first six months of 2009 was driven
primarily by significant deposit growth, which provided the Bank with the
ability to fund its loan portfolio growth, improve its balance sheet liquidity
position, and also reduce outstanding borrowings.





Cash
and cash equivalents of $27.1 million at June 30, 2009, were $18.7 million
higher than the December 31, 2008 total of $8.4 million.  This
increase for the six month period was related to the Bank’s deposit growth, as
well as $7.9 million in sales of municipal securities.  Cash and cash
equivalents represent an immediate source of liquidity to fund loans or meet
deposit outflows.





Investment
securities available for sale decreased 14.0% to $64.9 million at June 30, 2009
from $75.4 million at December 31, 2008.  This $10.5 million decrease
was due primarily to sales of municipal securities and principal repayments on
mortgage-backed securities.  Municipal securities decreased to $10.9
million through total sales of $7.9 million designed to support the Bank’s
income tax and liquidity strategies.  Principal repayments of $8.3
million, net of one $2.5 million Ginnie Mae purchase, reduced the total book
value for mortgage-backed securities to $48.5 million.  All
mortgage-backed securities in the portfolio at June 30, 2009, are insured by
either Ginnie Mae, Fannie Mae or Freddie Mac.  The only other purchase
during the six month period was a $2.9 million U.S. Small Business
Administration security that carries the full faith and credit guarantee of the
U.S. Government.





We
realized a $13.3 million, or 4.1%, increase in net loans receivable to $335.8
million from $322.5 million at December 31, 2008.  Our commercial loan
growth objective of 6.7% for the six months of 2009 was negatively impacted by
the effect of the economic recession on the business community, while
residential mortgage loan volume exceeded projections, due primarily to the
success of the Federal Reserve’s actions to reduce mortgage loan interest
rates.  For the six month period ended June 30, 2009, the Bank’s
commercial and investment residential real estate, and commercial business loans
increased $6.2 million, or 3.5%, to $183.2 million.  The
owner-occupied residential real estate first mortgage loan portfolio grew $9.7
million, or 7.9%, during the six month period to $131.5 million at June 30,
2009, however this represents a decrease of $5.2 million from the total of
$136.7 million at March 31, 2009.  The Bank has elected to add most
new originations of this product to its portfolio during the first quarter, as
spreads to funding costs continued to remain wide.  As a result of
balance sheet management considerations, later in the first quarter, the Bank
modified its mortgage banking strategy selling most of the new residential real
estate production into the secondary market.  $9.8 million of new
originations during the six months of 2009 were classified as for
sale.  The residential mortgage loan strategy is reviewed regularly to
ensure that it remains consistent with the Bank’s overall balance sheet
management objectives.





Premises
and equipment of $15.6 million at June 30, 2009, represented a $657,000 increase
over the total of $14.9 million at December 31, 2008.  The net
increase was a result of payments for additions totaling $1.1 million, related
primarily to the Indianapolis market expansion strategy, exceeding $479,000 of
depreciation for the six month period.





The
total for other assets was $9.7 million at June 30, 2009, compared to $8.5
million at December 31, 2008.  This increase of $1.2 million was
primarily the net of the $640,000 portion of AIA’s purchase price for an
insurance book of business not allocated to goodwill, a $606,000 increase in
deferred tax assets, and a $359,000 increase in due from securities dealers,
reduced by the $453,000 December 31, 2008 book value of the investment in Family
Financial that was liquidated in 2009.





Total
deposits of $373.8 million at June 30, 2009, represented an increase of $49.4
million, or 15.2%, from the total of $324.4 million at December 31,
2008.  $21.6 million of this growth was realized with the Bank’s
public funds checking product, and it is expected that some of these funds will
be lost when higher yield investment opportunities are available to the
municipalities.  Total public funds certificates of deposits declined
$5.0 million to $16.1 million, with $15.0 million representing State of Indiana
investments.  $18.3 million of the $32.8 million growth in retail and
business deposits during the six  months of 2009  was
attributed to the three new Indianapolis metropolitan area banking centers
located in Fishers, Carmel and Westfield.  The Bank has maintained its
focus on strategies designed to grow total balances in multi-product deposit
relationships.  Our markets remain very competitive for deposit
products and the Bank continues to utilize pricing strategies designed to
produce growth with an acceptable marginal cost for both existing and new
deposits.




(21)




Borrowings
declined by $23.5 million during the first six months of 2009 to $74.2 million,
as the Bank used available cash to repay four borrowings from the Federal Home
Loan Bank that had reached maturity.  Wholesale funding options and
strategies are continuously being analyzed to ensure that we retain sufficient
sources of credit to fund all of the Company’s needs, and to control funding
costs by using this alternative to organic deposit account funding when
appropriate.





Drafts
payable of $2.0 million at June 30, 2009, reflected a $458,000 increase from
$1.6 million at December 31, 2008.  This difference will vary and is a
function of the dollar amount of checks issued near period end and the time
required for those checks to clear.





Total
shareholders’ equity of $33.1 million at June 30, 2009, was $686,000 lower than
the total at December 31, 2008, with the reduction resulting from the $579,000
net loss and $239,000 in dividends paid during the six month period, partially
offset by an unrealized gain net of income taxes of $129,000 from the Bank’s
available for sale investments securities portfolio. The Company declined to
participate in the United States Treasury Department’s Troubled Asset Relief
Program, even though the Treasury approved the purchase of up to $9.8 million of
the Company’s senior preferred stock.  The Company ended the first six
months of 2009 with a tangible common equity to total tangible assets ratio of
6.64%, while the Bank’s three regulatory capital ratios were all considerably
above the levels required under regulatory guidelines to be considered “well
capitalized.”





RESULTS
OF OPERATIONS





Second Quarter of 2009
compared to the Second Quarter of 2008





The
Company recorded a net loss of $466,000, or $(0.16) per diluted share, for the
second quarter of 2009, compared to net income of $383,000, or $0.13 per diluted
share, for the second quarter of 2008.





The
net loss for the second quarter of 2009 resulted primarily from higher credit
costs due to the current economic environment, as reflected in the loan loss
provision of $615,000, coupled with net losses from sales and write-downs of
OREO totaling $379,000.  Compared to the same period in 2008, other
expense for the second quarter of 2009 increased by $872,000, primarily due to
costs associated with the three new Indianapolis metropolitan area banking
centers, OREO expense, and the expense recorded related to the industry-wide
special assessment to replenish the FDIC insurance fund.





Net Interest
Income





Net
interest income on a fully tax-equivalent basis decreased $30,000, or 1.0%, to
$3.12 million for the second quarter of 2009 compared to $3.15 million for the
same period of 2008.  The decrease resulted primarily from strategies
designed to enhance the Bank’s balance sheet liquidity in the face of
challenging economic conditions by maintaining higher levels of cash and cash
equivalents, which provide a lower yield.  Due primarily to these
liquidity strategies, the Company’s net interest margin on a fully
tax-equivalent basis declined to 2.86% for the second quarter of 2009 from 3.19%
for the second quarter of 2008.  The impact to net interest income
from the decline in the net interest margin was largely mitigated by growth in
average earning assets for the second quarter of 2009 compared to the same
period of 2008 of $39.8 million.





Tax-exempt
interest was $141,000 for the second quarter of 2009 compared to $270,000 for
the same period of 2008. Our tax-exempt interest was from bank-qualified
municipal securities and municipal loans.  The tax-equivalent
adjustments were $71,000 and $137,000 for the second quarter of 2009 and 2008,
respectively.





(22)





Provision for Loan
Losses





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





(Dollars in thousands)Three Months Ended June 30,2009
                                  
                                  
                                  2008Balance
      at beginning of quarter
                                  
                                  $
                                  3,225
                                  
                                  
                                  $
                                  2,909Provision
      for loan losses
                                  
                                  
                                  615
                                  
                                  
                                  
                                  221Charge-offs
                                  
                                  
                                  (201
                                  )
                                  
                                  
                                  (276
                                  )Recoveries
                                  
                                  
                                  4
                                  
                                  
                                  
                                  55Net
      charge-offs
                                  
                                  
                                  (197
                                  )
                                  
                                  
                                  (221
                                  )Balance
      at end of period
                                  
                                  $
                                  3,643
                                  
                                  
                                  $
                                  2,909Allowance
      to total loans
                                  
                                  
                                  1.07
                                  %
                                  
                                  
                                  0.94
                                  %Allowance
      to non-performing loans
                                  
                                  
                                  82.66
                                  %
                                  
                                  
                                  83.30
                                  %





We recorded a provision for loan losses
of $615,000 in the second quarter of 2009, compared to $221,000 for the same
period in 2008.  The provision for loan losses for the second quarter
of 2009 reflected the continuing pressure of current economic conditions on
credit quality.  Based on the results of the Company’s continuing
review process, it is management’s opinion that the allowance for loan losses is
adequate as of June 30, 2009.





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





(Dollars in thousands)June 30,2009
                                  
                                  
                                  2008Loans
      accounted for on a non-accrual basis
                                  
                                  $
                                  4,344
                                  
                                  
                                  $
                                  2,543Accruing
      loans contractually past due 90 days or more
                                  
                                  
                                  63
                                  
                                  
                                  
                                  949Total
      of non-accrual and 90 days past due loans
                                  
                                  $
                                  4,407
                                  
                                  
                                  $
                                  3,492Percentage
      of total net loans
                                  
                                  
                                  1.31
                                  %
                                  
                                  
                                  1.13
                                  %Other
      non-performing assets (1)
                                  
                                  $
                                  5,946
                                  
                                  
                                  $
                                  4,026





(1)   Other
non-performing assets represent property acquired through foreclosure or
repossession.  This property is carried at the lower of its fair
market value or carrying value.





The
allowance for loan losses to non-performing loans ratio of 82.66% at June 30,
2009 was similar to the ratio of 83.30% at June 30,
2008.  Non-performing loans of $4.4 million at June 30, 2009
represented a 26.2% increase over the total of $3.5 million at June 30, 2008,
but there was a similar 25.2% increase in the allowance for loan losses to $3.6
million from $2.9 million a year earlier.





Other
real estate owned of $5.7 million at June 30, 2009, represented a decrease of
$694,000 from March 31, 2009, with one new property and five sales, and three
major write downs at the end of the quarter that totaled $386,000.





The
total of $288,000 for repossessed assets at June 30, 2009, was unchanged from
March 31, 2009.





Other
Income





The
Company recorded other income of $1.02 million for the second quarter of 2009,
which was the same as the total of $1.02 million for the same period a year
earlier, although there were several substantial differences in the components
of the two totals:





·
            Due
      primarily to significant residential mortgage loan refinancing activity in
      2009, gains on sales of loans and servicing rights of $173,000 for the
      second quarter were $159,000 greater than the same quarter of
      2008.




(23)




·
            Due
      mostly to the $386,000 in write downs at quarter end, $379,000 in net
      losses on OREO for the second quarter was $359,000 higher than the total
      of $20,000 for the year earlier
quarter.





·
            The
      Bank earned $105,000 in rental income from an OREO apartment complex for
      the second quarter of 2009, and recorded no OREO rental income for the
      same period in 2008.





·
            Other
      income for the second quarter of 2009 included the $192,000 gain from the
      liquidation of a minority interest in Family Financial, an unconsolidated
      investment that focused on credit-related insurance
    products.





Other
Expense





The
$872,000, or 25.1% increase in total other expense in the second quarter of
2009, compared to the second quarter of 2008, resulted primarily from the
acceleration of the Bank’s Indianapolis retail expansion strategy, the
industry-wide FDIC special assessment, and OREO expense:





·
            The
      $2.2 million total cost for salaries and employees benefits for the second
      quarter of 2009 was $110,000 higher than the year earlier quarter, due
      mostly to compensation costs related to the three new banking
      centers.  The increase would have been materially greater
      without the benefit from the elimination of other positions through
      attrition.





·
            A
      $98,000 increase in office occupancy expense, and a $41,000 increase in
      furniture and equipment expense, were due mostly to costs associated with
      the two new banking centers that opened during the fourth quarter of 2008,
      the new banking center that opened in May of 2009, and the major banking
      center remodel that was completed in September
  2008.





·
            A
      $62,000 increase in legal and other professional fees was due primarily to
      legal fees related to the Abstract & Title Guaranty Company, Inc.
      litigation that were incurred in the second quarter of 2009, while the
      second quarter of 2008 benefited from a $20,000 recovery of legal fees
      paid in a prior year.





·
            The
      $230,000 increase in FDIC insurance premiums and assessments was related
      primarily to the industry-wide special assessment that resulted in a
      $225,000 second quarter expense for the
Bank.





·
            A
      $105,000 increase in marketing expense resulted primarily from promotional
      activities related to the opening of the new banking
    centers.





·
            The
      $241,000 of other real estate owned expense exceeded the total for the
      same quarter a year earlier by $212,000, and related primarily to real
      estate taxes and to operating expenses for the OREO apartment complex that
      provided $105,000 of rental income during the
  quarter.





Income Tax
Expense





The
income tax benefit of $422,000 for the second quarter of 2009 was due to both
the loss before income taxes of $888,000 and a significant amount of tax-exempt
income from municipal securities and BOLI.  For the same quarter of
2008, the Company had income before taxes of $341,000 and recorded a tax benefit
of $42,000 that was due to a similar amount of BOLI income coupled with the
interest from a larger average investment in municipal
securities.  The municipal securities portfolio had been reduced from
an average balance of $24.3 million for the second quarter of 2008 to an average
balance of $11.3 million for the second quarter of 2009.





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 deferred 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
deferred tax asset.





The
Company also has a deferred federal tax asset that is composed of tax benefit
from a net operating loss carryforward and purchased tax credits.  The
federal loss carryforward expires in 2026, and the tax credits begin to expire
in 2023.  Management believes that the Company will be able to utilize
the benefits recorded for loss carryforwards and credits within the allotted
time periods.




(24)





Six Months Ended June 30,
2009 compared to the Six Months Ended June 30, 2008





The
Company recorded a net loss of $579,000, or $(0.19) per diluted share, for the
six months of 2009, compared to net income of $766,000, or $0.26 per diluted
share, for the first six months of 2008.





Net
income in the year-earlier period benefited from a favorable federal income tax
ruling that resulted in an additional $150,000 of income tax benefit for the six
month period.  The net loss for the six months of 2009 resulted
primarily from a substantial loan loss provision of $953,000, and net losses
from OREO sales and write-downs that totaled $700,000.  The Company
achieved net interest income growth of $353,000, or 6.2%, compared to the first
six months of 2008 that resulted primarily from the Bank’s success with
continuing efforts related to loan portfolio growth.  The significant
increase in other expense for the six months of 2009 compared to the same period
in 2008 was due primarily to costs associated with new banking centers, the FDIC
special assessment, and higher OREO expense.





Net Interest
Income





Net
interest income on a fully tax-equivalent basis increased $230,000, or 3.8%, to
$6.3 million for the six months of 2009 compared to $2.0 million for the same
period of 2008, and resulted primarily from growth of 9.1% in the Bank’s loan
portfolio.  The Company’s net interest margin on a fully
tax-equivalent basis declined to 2.92% for the six months of 2009 from 3.08% for
the first six months of 2008.  The decrease in the net interest margin
was due largely to on balance sheet liquidity strategies designed to grow cash
and cash equivalents to address risks associated with difficult economic
conditions, as well as the recent significant increase in non-maturity
deposits.





Tax-exempt
interest was $331,000 for the six months of 2009 compared to $568,000 for the
same period of 2008. Our tax-exempt interest results from holdings of
bank-qualified municipal securities and municipal loans.  The
tax-equivalent adjustments were $167,000 and $289,000 for the six months of 2009
and 2008, respectively.





Provision for Loan
Losses





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





(Dollars in thousands)Six Months Ended June 30,2009
                          
                          
                          2008Balance
      at beginning of year
                          
                          $
                          2,991
                          
                          
                          $
                          2,677Provision
      for loan losses
                          
                          
                          953
                          
                          
                          
                          592Charge-offs
                          
                          
                          (319
                          )
                          
                          
                          (441
                          )Recoveries
                          
                          
                          18
                          
                          
                          
                          81Net
      charge-offs
                          
                          
                          (301
                          )
                          
                          
                          (360
                          )Balance
      at end of period
                          
                          $
                          3,643
                          
                          
                          $
                          2,909





We had a provision for loan losses of
$953,000 for the six months of 2009, compared to $592,000 for the same period in
2008.  The increase in the provision reflected the additional loan
portfolio growth and the continuing pressure of current economic conditions on
credit quality, which resulted in the allowance to total loans ratio increasing
to 1.07% at June 30, 2009 from 0.92% at December 31, 2008.





Other
Income





The
$363,000 decrease in other income to $1.8 million for the six months of 2009,
compared to $2.2 million for the same period of 2008, resulted primarily from a
$682,000 increase in net losses on OREO from $18,000 to
$700,000.  Major positive differences included an increase of $146,000
in gains on sales of loans and servicing rights from significant refinance
activity due to lower mortgage loan interest rates, and the $192,000 gain from
the liquidation of a minority interest in Family Financial.





Other
Expense





The
Company recorded a $1.3 million growth in total other expense for the six months
of 2009, compared to the first six months of 2008, with the following major
increases:




(25)




·
            An
      increase of $595,000 in the total of salaries and employee benefits,
      office occupancy expense, furniture and equipment expense, and marketing
      expense that was due mostly to costs associated with the two new banking
      centers that opened during the fourth quarter of 2008, the new banking
      center that opened in May of 2009, and the major banking center remodel
      that was completed in September
2008;





·
            A
      $236,000 increase in FDIC insurance premiums and assessments that was
      related primarily to the industry-wide special assessment that resulted in
      a $225,000 second quarter expense for the Bank;
  and





·
            The
      $304,000 of other real estate owned expense that exceeded the total for
      the same period a year earlier by $248,000, and related primarily to real
      estate taxes and to operating expenses for an apartment
      complex.





Income Tax
Expense





Although
the Company had a loss before income taxes of $1.3 million for the six months of
2009, compared to income before income taxes of $444,000 for the same period of
2008, the 2008 income tax benefit was not correspondingly lower for the
following two reasons.  In the first six months of 2008, the Bank had
a larger portfolio of tax-exempt municipal securities and also benefited from a
$150,000 reversal of an income tax liability recorded in prior years that
resulted from a favorable tax court ruling regarding the application of the Tax
Equity and Fiscal Responsibility Act penalty to investment subsidiaries of
commercial banks.  The first six months of both of 2009 and 2008
benefited from significant amounts of tax-exempt income from municipal
securities and BOLI.





OFF-BALANCE
SHEET ARRANGEMENTS





In
the normal course of operations, we engage in a variety of financial
transactions that, in accordance with GAAP, are not recorded in our financial
statements.  These transactions involve, to varying degrees, elements
of credit, interest rate and liquidity risk.  Such transactions are
used primarily to manage customers’ requests for funding and take the form of
loan commitments and lines of credit.





For
the six months ended June 30, 2009, we did not engage in any off-balance sheet
transactions reasonably likely to have a material effect on our financial
condition, results of operations or cash flows.





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 mortgage loans and
investment securities, through borrowings from the FHLB system and the Federal
Reserve Bank Discount Window programs, through the brokered certificates market,
and securities sold under agreements to repurchase. We regularly adjust the
investments in liquid assets based upon our assessment of (1) expected loan
demand, (2) expected deposit flows, (3) yields available on interest-earning
deposits and securities and (4) the objectives of our asset/liability
program.





The
Company is a separate entity and apart from the Bank and must provide for its
own liquidity. In addition to its operating expenses, the Company is responsible
for the payment of dividends declared for its shareholders, and interest and
principal on outstanding debt. At times, the Company has redeemed its stock.
Substantially all of the Company’s revenues are obtained from subsidiary service
fees and dividends. Payment of such dividends to the Company by the Bank is
limited under Indiana law. The Bank must obtain the approval from the state
regulatory agency for the payment of a dividend if the total of all dividends
declared by the Bank during the calendar year, including the proposed dividend,
would exceed the sum of the net income for the year to date combined with its
retained net income (as defined) for the previous two years. The Company
believes that such restriction will not have an impact on the Company’s ability
to meet its ongoing cash obligations.





At
June 30, 2009, we had $5.0 million in loan commitments outstanding and $36.7
million of available commercial and consumer lines of credit. Certificates of
deposit due within one year of June 30, 2009, totaled $142.7 million, or 38.2%
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 certificates of deposit, securities sold under agreements to
repurchase, and other borrowings.  Depending on market conditions, we
may be required to pay higher rates on such deposits or other borrowings than
the rates that we are now paying on those certificates of deposit that are due
within one year of June 30, 2009. However, based on past experiences we believe
that a significant portion of the certificates of deposit will remain with us.
We also have the ability to attract and retain deposits by adjusting the
interest rates offered.




(26)




Our
primary investing activity, the origination and purchase of loans, produced
growth of $13.3 million in net loans receivable for the six months of
2009.  In the first six months of 2008, we experienced an increase of
$13.9 million in net loans receivable.





Financing
activities consist primarily of activity in retail deposit accounts and FHLB
advances. Deposit flows are affected by the overall level of interest rates, the
interest rates and products we offer, and our local competitors and other
factors.  Total deposits increased by $49.4 million and total FHLB
advances were reduced by $23.5 million during the six months of 2009. There were
no brokered certificates at either June 30, 2009 or December 31,
2008.





In
March 2006, the Company completed a private placement of $10.0 million in trust
preferred securities. The proceeds from the private placement are included in
Borrowings on the Consolidated Condensed Balance Sheets.  The proceeds
were used initially for paying down short-term borrowings and were also used to
fund a stock repurchase program.  We paid $239,000 in cash dividends
to our shareholders for both the six-month periods ended June 30, 2009 and
2008.  The dividend rates were $0.08 per share for the first six
months of 2009 and 2008.





The
Bank is subject to various regulatory capital requirements set by the FDIC
including a risk-based capital measure. The Company is also subject to similar
capital requirements set by the Federal Reserve Board.  The risk-based
capital guidelines include both a definition of capital and a framework for
calculating risk-weighted assets by assigning balance sheet assets and
off-balance sheet items to broad risk categories. At June 30, 2009, both the
Company and the Bank exceeded all of their regulatory capital requirements and
were considered “well capitalized” under regulatory guidelines.





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 June 30, 2009 and
December 31, 2008, the Bank was categorized as well capitalized and met all
subject capital adequacy requirements.  There are no conditions or
events since June 30, 2009, that management believes have changed this
classification.





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





June
      30, 2009





Actual Capital
                      
                      
                      Required For
                        Adequate Capital
                      
                      
                      To Be
                        Well CapitalizedAmount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      RatioTotal
      risk-based capital ratio
                        (risk
      based capital to risk-weighted assets)
                      
                      $
                      41,289
                      
                      
                      
                      12.07
                      %
                      
                      $
                      27,375
                      
                      
                      
                      8.00
                      %
                      
                      $
                      34,219
                      
                      
                      
                      10.00
                      %Tier
      1 risk-based capital ratio
                        (tier
      1 capital to risk-weighted assets)
                      
                      $
                      37,507
                      
                      
                      
                      10.96
                      %
                      
                      $
                      13,688
                      
                      
                      
                      4.00
                      %
                      
                      $
                      20,532
                      
                      
                      
                      6.00
                      %Tier
      1 leverage ratio
                        (tier
      1 capital  to adjusted average total assets)
                      
                      $
                      37,507
                      
                      
                      
                      7.76
                      %
                      
                      $
                      14,500
                      
                      
                      
                      3.00
                      %
                      
                      $
                      24,167
                      
                      
                      
                      5.00
                      %





December
      31, 2008





Actual Capital
                      
                      
                      Required For
                        Adequate Capital
                      
                      
                      To Be
                        Well CapitalizedAmount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      RatioTotal
      risk-based capital ratio
                        (risk
      based capital to risk-weighted assets)
                      
                      $
                      41,715
                      
                      
                      
                      12.78
                      %
                      
                      $
                      26,110
                      
                      
                      
                      8.00
                      %
                      
                      $
                      32,638
                      
                      
                      
                      10.00
                      %Tier
      1 risk-based capital ratio
                        (tier
      1 capital to risk-weighted assets)
                      
                      $
                      38,592
                      
                      
                      
                      11.82
                      %
                      
                      $
                      13,055
                      
                      
                      
                      4.00
                      %
                      
                      $
                      19,583
                      
                      
                      
                      6.00
                      %Tier
      1 leverage ratio
                        (tier
      1 capital  to adjusted average total assets)
                      
                      $
                      38,592
                      
                      
                      
                      8.34
                      %
                      
                      $
                      13,879
                      
                      
                      
                      3.00
                      %
                      
                      $
                      23,131
                      
                      
                      
                      5.00
                      %




(27)





AVAILABLE
INFORMATION





Our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and any amendments to such reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are
made available free of charge on our website, www.ameriana.com, as
soon as reasonably practicable after such reports are electronically filed with,
or furnished to, the Securities and Exchange Commission.  Information
on our website should not be considered a part of this Form 10-Q.





ITEM
3 – QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK





Not
applicable as issuer is a smaller reporting company.





ITEM
4T. – CONTROLS AND PROCEDURES





As
of the end of the period covered by this report, we carried out an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of the effectiveness of our disclosure
controls and procedures. Based on this evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures are effective in ensuring that information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
Act of 1934, as amended, (1) is recorded, processed, summarized and reported,
within the time periods specified in the SEC’s rules and forms and (2) is
accumulated and communicated to our management, including our principal
executive and principal financial officers as appropriate to allow timely
discussions regarding required disclosures.  It should be noted that
the design of our disclosure controls and procedures is based in part upon
certain reasonable assumptions about the likelihood of future events, and there
can be no 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 our principal executive and financial
officers have concluded that our disclosure controls and procedures are, in
fact, effective at a reasonable assurance level.





There
were no changes in the Company’s internal control over financial reporting
during the three months ended June 30, 2009 that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.





PART
II - OTHER INFORMATION





ITEM 1 – LEGAL PROCEEDINGS




The Abstract & Title Guaranty
Company, Inc. (“AGT”) sued the Bank in 2003 to recover for checks issued by AGT
and delivered to one of its title insurance customers for delivery to various
payees. Generally, the checks were issued in conjunction with real estate
transactions and were issued to pay mortgage liens in full. Forty-one such
checks were forged and deposited into an account at the Bank. The
litigation was initiated in Hendricks County Superior Court in May of 2003 and
the plaintiff is seeking damages of approximately $740,000 plus interest and
attorney fees.  The Bank has adequate insurance to protect it from any
judgment rendered based upon the complaint. However, the insurance does not
provide indemnification for the costs of defending the litigation. 
Discovery is now being conducted by both parties.    The parties
anticipate that the matter will go to trial in early to mid-2010.




Except
as indicated above, neither the Company nor the Bank is involved in any pending
legal proceedings other than routine legal proceedings occurring in the ordinary
course of business. Such routine legal proceedings, in the aggregate, are
believed by management to be immaterial to the financial condition and results
of operations of the company.





ITEM
1A – RISK FACTORS





In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2008 which could materially
affect our business, financial condition or future results. The risks described
in our Annual Report on Form 10-K are not the only risks that we face.
Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.




(28)





ITEM
2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





The
Company did not repurchase any of its common stock during the quarter ended June
30, 2009.





ITEM 3 – DEFAULTS UPON SENIOR
SECURITIES





Not Applicable





ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS





The
Annual Meeting of the Stockholders of the Company was held on May 21,
2009.  The results of the vote were as follows:





1.
            The
      following individuals were elected as
directors:





Term
                          
                          Votes For
                          
                          
                          Votes WithheldR.
      Scott Hayes
                          
                          Three
      Year
                          
                          
                          2,003,274
                          
                          
                          
                          476,450Michael
      E. Kent
                          
                          Three
      Year
                          
                          
                          2,068,586
                          
                          
                          
                          411,138





2.           The
appointment of BKD, LLP as independent auditors of Ameriana Bancorp for the year
ended December 31, 2009 was ratified by the stockholders as
follows:





For
                    
                    Against
                    
                    
                    Abstain2,459,251
                    
                    
                    15,631
                    
                    
                    
                    4,842





ITEM 5 – OTHER
INFORMATION





Not Applicable





ITEM 6  - EXHIBITS





No.
              
              Description31
              
              Rule
      13a-14(a)/15d-14(a) Certifications32
              
              Section
      1350 Certifications




(29)





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.








AMERIANA
      BANCORPDATE:
                            August
      14, 2009
                            
                            /s/
      Jerome J. GassenJerome
      J. GassenPresident
      and Chief Executive Officer(Duly
      Authorized Representative)DATE:
                            August
      14, 2009
                            
                            /s/
      John J. LetterJohn
      J. LetterSenior
      Vice President-Treasurer andChief
      Financial Officer(Principal
      Financial Officerand
      Accounting
Officer)