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SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q QUARTERLY REPORT Pursuant to Section 13 or 15 (d) of
The Securities Exchange Act of 1934 For the Quarterly Period Ended: September 30, 2004 Commission File Number: 0-18392 Ameriana Bancorp 
  Indiana
    
    35-1782688(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. employer
identification number)
 2118 Bundy Avenue, New Castle, Indiana
    
    47362-1048(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, include area code (765) 529-2230 Indicate by check mark whether the Registrant (1) 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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X] As of October 30, 2004, there were issued and outstanding 3,149,988 shares of
the registrants common stock.




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AMERIANA BANCORP AND SUBSIDIARIES CONTENTS Page
No.PART I FINANCIAL INFORMATIONITEM 1
    
    Financial StatementsConsolidated Condensed Balance Sheets as of September 30, 2004 and December 31, 2003
    
    
    3Consolidated Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2004 and 2003
    
    
    4Consolidated Condensed Statement of Shareholders Equity for the Nine Months Ended September 30, 2004
    
    
    5Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003
    
    
    6Notes to Consolidated Condensed Financial Statements
    
    
    7ITEM 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9ITEM 3
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    16ITEM 4
    
    Controls and Procedures
    
    
    17PART II OTHER INFORMATION
    
    
    20ITEM 1
    
    Legal ProceedingsITEM 2
    
    Unregistered Sales of Equity Securities and Use of ProceedsITEM 3
    
    Defaults upon Senior SecuritiesITEM 4
    
    Submission of Matters to a Vote of Security HoldersITEM 5
    
    Other InformationITEM 6
    
    ExhibitsSIGNATURES
    
    
    21EX-31 SECTION 302 CERTIFICATIONS OF THE CEO & CFOEX-32 SECTION 906 CERTIFICATIONS OF THE CEO & CFO
  2




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PART I    FINANCIAL INFORMATION AMERIANA BANCORP AND SUBSIDIARY 
   September 30
    
    December 31,2004
    
    2003(Unaudited)AssetsCash on hand and in other institutions
    
    $
    11,255
    
    
    $
    9,505Interest-bearing demand deposits
    
    
    7,769
    
    
    
    5,044Cash and cash equivalents
    
    
    19,024
    
    
    
    14,549Investment securities held to maturity (fair value
of $158,970)
    
    
    160,103
    
    
    
    Investment securities available for sale
    
    
    11,975
    
    
    
    137,788Mortgage loans available for sale
    
    
    243
    
    
    
    730Loans receivable
    
    
    201,251
    
    
    
    207,885Allowance for loan losses
    
    
    (3,079
    )
    
    
    (3,744
    )Net loans receivable
    
    
    198,172
    
    
    
    204,141Real estate owned
    
    
    494
    
    
    
    602Premises and equipment
    
    
    8,049
    
    
    
    7,887Stock in Federal Home Loan Bank
    
    
    7,189
    
    
    
    6,948Mortgage servicing rights
    
    
    1,239
    
    
    
    1,313Investments in unconsolidated affiliates
    
    
    1,588
    
    
    
    1,592Goodwill
    
    
    564
    
    
    
    564Cash surrender value of life insurance
    
    
    20,300
    
    
    
    19,706Other assets
    
    
    5,106
    
    
    
    6,633Total assets
    
    $
    434,046
    
    
    $
    402,453Liabilities and Shareholders EquityLiabilities:Deposits:Noninterest-bearing
    
    $
    16,650
    
    
    $
    19,039Interest-bearing
    
    
    319,170
    
    
    
    326,705Total deposits
    
    
    335,820
    
    
    
    345,744Advances from Federal Home Loan Bank
    
    
    50,769
    
    
    
    9,630Notes payable
    
    
    350
    
    
    
    600Drafts payable
    
    
    4,483
    
    
    
    3,477Advances by borrowers for taxes and insurance
    
    
    243
    
    
    
    89Other liabilities
    
    
    3,250
    
    
    
    4,039Total liabilities
    
    
    394,915
    
    
    
    363,579Shareholders equity:Preferred stock (5,000,000 shares authorized;
none issued)
    
    
    
    
    
    
    Common stock
($1.00 par value; authorized
15,000,000 shares; issued shares: 3,149,888 and 3,148,288, respectively)
    
    
    3,150
    
    
    
    3,148Additional paid-in capital
    
    
    524
    
    
    
    506Retained earnings
    
    
    35,065
    
    
    
    35,259Accumulated other comprehensive income (loss)
    
    
    392
    
    
    
    (39
    )Total shareholders equity
    
    
    39,131
    
    
    
    38,874Total liabilities and shareholders equity
    
    $
    434,046
    
    
    $
    402,453
 See accompanying notes to consolidated condensed financial statements. 3




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AMERIANA BANCORP AND SUBSIDIARY 
    Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Interest Income:Interest and fees on loans
    
    $
    3,123
    
    
    $
    4,664
    
    
    $
    9,595
    
    
    $
    15,482Interest on investment securities
    
    
    1,305
    
    
    
    793
    
    
    
    3,621
    
    
    
    2,150Other interest and dividend income
    
    
    138
    
    
    
    179
    
    
    
    424
    
    
    
    604Total interest income
    
    
    4,566
    
    
    
    5,636
    
    
    
    13,640
    
    
    
    18,236Interest Expense:Interest on deposits
    
    
    1,551
    
    
    
    2,300
    
    
    
    4,573
    
    
    
    7,980Interest on FHLB advances and other borrowings
    
    
    346
    
    
    
    92
    
    
    
    870
    
    
    
    290Total interest expense
    
    
    1,897
    
    
    
    2,392
    
    
    
    5,443
    
    
    
    8,270Net interest income
    
    
    2,669
    
    
    
    3,244
    
    
    
    8,197
    
    
    
    9,966Provision for Loan Losses
    
    
    75
    
    
    
    4,790
    
    
    
    275
    
    
    
    6,340Net interest income after provision for loan losses
    
    
    2,594
    
    
    
    (1,546
    )
    
    
    7,922
    
    
    
    3,626Other Income:Net loan servicing fees
    
    
    50
    
    
    
    (101
    )
    
    
    155
    
    
    
    (193
    )Other fees and service charges
    
    
    395
    
    
    
    361
    
    
    
    1,058
    
    
    
    1,040Brokerage and insurance commissions
    
    
    254
    
    
    
    241
    
    
    
    846
    
    
    
    723Net gain (loss) on investments in unconsolidated
affiliates
    
    
    (14
    )
    
    
    3
    
    
    
    16
    
    
    
    2Net gain on sale of branches
    
    
    
    
    
    
    5,511
    
    
    
    
    
    
    
    5,511Gains on sales of loans and servicing rights
    
    
    72
    
    
    
    818
    
    
    
    245
    
    
    
    1,771Gain on sale of investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41Increase in cash surrender value of life insurance
    
    
    191
    
    
    
    173
    
    
    
    595
    
    
    
    592Other
    
    
    30
    
    
    
    25
    
    
    
    85
    
    
    
    47Total other income
    
    
    978
    
    
    
    7,031
    
    
    
    3,000
    
    
    
    9,534Other Expense:Salaries and employee benefits
    
    
    1,947
    
    
    
    2,174
    
    
    
    5,960
    
    
    
    6,142Net occupancy and equipment expense
    
    
    395
    
    
    
    424
    
    
    
    1,175
    
    
    
    1,240Federal insurance premium
    
    
    39
    
    
    
    48
    
    
    
    117
    
    
    
    143Data processing expense
    
    
    156
    
    
    
    153
    
    
    
    418
    
    
    
    396Printing and office supplies
    
    
    57
    
    
    
    74
    
    
    
    175
    
    
    
    188Amortization of intangible assets
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    25Other
    
    
    647
    
    
    
    716
    
    
    
    1,964
    
    
    
    2,226Total other expense
    
    
    3,241
    
    
    
    3,596
    
    
    
    9,809
    
    
    
    10,360Income before income taxes
    
    
    331
    
    
    
    1,889
    
    
    
    1,113
    
    
    
    2,800Income taxes
    
    
    (81
    )
    
    
    937
    
    
    
    (205
    )
    
    
    997Net Income
    
    $
    412
    
    
    $
    952
    
    
    $
    1,318
    
    
    $
    1,803Basic Earnings Per Share
    
    $
    0.13
    
    
    $
    0.30
    
    
    $
    0.42
    
    
    $
    0.57Diluted Earnings Per Share
    
    $
    0.13
    
    
    $
    0.30
    
    
    $
    0.42
    
    
    $
    0.57Dividends Declared Per Share
    
    $
    0.16
    
    
    $
    0.16
    
    
    $
    0.48
    
    
    $
    0.48
 See accompanying notes to consolidated condensed financial statements. 4




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AMERIANA BANCORP AND SUBSIDIARY 
    2004Balances, January 1
    
    $
    38,874Net income
    
    
    1,318Other comprehensive income
    
    
    431Comprehensive income
    
    
    1,749Exercise of stock options
    
    
    20Dividends declared
    
    
    (1,512
    )Balances, September 30
    
    $
    39,131
 See accompanying notes to consolidated condensed financial statements. 5




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AMERIANA BANCORP AND SUBSIDIARY 
    Nine Months EndedSeptember 30,2004
    
    2003Operating ActivitiesNet income
    
    $
    1,318
    
    
    $
    1,803Items not requiring (providing) cashProvision for losses on loans
    
    
    275
    
    
    
    6,340Depreciation and amortization
    
    
    1,067
    
    
    
    1,154Increase in cash surrender value
    
    
    (594
    )
    
    
    (592
    )Mortgage loans originated for sale
    
    
    (17,123
    )
    
    
    (190,692
    )Proceeds from sale of mortgage loans
    
    
    17,727
    
    
    
    193,650Gains on sale of loans and servicing rights
    
    
    (245
    )
    
    
    (1,771
    )Gain on sale of investments
    
    
    
    
    
    
    (41
    )Net gain on sale of branches
    
    
    
    
    
    
    (5,511
    )Increase (decrease) in drafts payable
    
    
    1,006
    
    
    
    (1,233
    )Other adjustments
    
    
    2,299
    
    
    
    1,824Net cash provided by operating activities
    
    
    5,730
    
    
    
    4,931Investing ActivitiesPurchase of investment securities held to maturity
    
    
    (64,132
    )
    
    
    Purchase of investment securities available for sale
    
    
    (6,625
    )
    
    
    (104,103
    )Proceeds from sale of investment securities available for sale
    
    
    
    
    
    
    20,705Proceeds from maturities/calls of securities held to maturity
    
    
    16,617
    
    
    
    Proceeds from maturities/calls of securities available for sale
    
    
    18,499
    
    
    
    33,577Net change in loans
    
    
    4,734
    
    
    
    53,927Net purchases of premises and equipment
    
    
    (697
    )
    
    
    (591
    )Net cash paid on sale of branches
    
    
    
    
    
    
    (19,751
    )Purchase of Federal Home Loan Bank Stock
    
    
    (241
    )
    
    
    (105
    )Other investing activities
    
    
    963
    
    
    
    301Net cash used in investing activities
    
    
    (30,882
    )
    
    
    (16,040
    )Financing ActivitiesNet change in demand and passbook deposits
    
    
    503
    
    
    
    35,778Net change in certificates of deposit
    
    
    (10,427
    )
    
    
    (33,862
    )Net change in short-term borrowings
    
    
    20,000
    
    
    
    Proceeds from borrowings
    
    
    21,825
    
    
    
    Net change in advances by borrowers for taxes and insurance
    
    
    154
    
    
    
    68Repayment of borrowings
    
    
    (936
    )
    
    
    (952
    )Exercise of stock options
    
    
    20
    
    
    
    8Cash dividends paid
    
    
    (1,512
    )
    
    
    (1,511
    )Net cash provided by (used in) financing activities
    
    
    29,627
    
    
    
    (471
    )Change in Cash and Cash Equivalents
    
    
    4,475
    
    
    
    (11,580
    )Cash and Cash Equivalents at Beginning of Year
    
    
    14,549
    
    
    
    45,696Cash and Cash Equivalents at End of Year
    
    $
    19,024
    
    
    $
    34,116Supplemental information:Interest paid
    
    $
    4,662
    
    
    $
    7,523Income taxes paid
    
    
    
    
    
    
    1,503
 See accompanying notes to consolidated condensed financial statements. 6




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AMERIANA BANCORP AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands, except share data) NOTE A  BASIS OF PRESENTATION Ameriana Bancorp (the Company) is a bank holding company. Through its
wholly owned subsidiary, Ameriana Bank and Trust (the Bank), the Company
offers an extensive line of banking services and provides a range of
investments and securities products through branches in the central Indiana
area. Ameriana Bank and Trust also offers trust and investment management
services. The Bank has three direct wholly owned subsidiaries, Ameriana
Insurance Agency (AIA), Ameriana Financial Services, Inc. (AFS) and
Ameriana Investment Management, Inc. (AIMI). AIA provides insurance sales
from offices in New Castle, Greenfield and Avon, Indiana. AFS offers insurance
products through its ownership of an interest in Family Financial Holdings,
Incorporated, Columbus, Indiana, which offers a full line of credit, related
insurance products. AFS also operates a brokerage facility in conjunction with
Linsco/Private Ledger. AFS has a 20.9% ownership interest in Indiana Title
Insurance Company, LLC through which it offers title insurance. AIMI manages
the Banks investment portfolio. The Company maintains a website at
www.ameriana.com. 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 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
results of operations for the period are not necessarily indicative of the
results to be expected in the full year. A summary of the Companys
significant accounting policies is set forth in Note 1 of Notes to Consolidated
Financial Statements in the Companys annual report on Form 10-K for the year
ended December 31, 2003. The consolidated condensed balance sheet of the Company as of December 31,
2003 has been derived from the audited consolidated balance sheet of the
Company as of that date. NOTE B  SHAREHOLDERS EQUITY On August 30, 2004, the Board of Directors declared a quarterly cash
dividend of $.16 per share. This dividend, totaling $504,000, was accrued for
payment to shareholders of record on September 17, 2004, and was paid on
October 1, 2004. Payment was made for 3,149,888 shares, compared to 3,148,988
the previous quarter. Stock options totaling 900 shares were exercised during
the third quarter of 2004. 7




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NOTE C  EARNINGS PER SHARE Earnings per share were computed as follows: (In thousands, except share data)Three Months Ended September 30,2004
    
    2003Weighted
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    Per Share
    
    
    
    
    
    Average
    
    Per ShareIncome
    
    Shares
    
    Amount
    
    Income
    
    Shares
    
    AmountBasic
Earnings per Share: Income available to Common
shareholders
    
    $
    412
    
    
    
    3,149,427
    
    
    $
    0.13
    
    
    $
    952
    
    
    
    3,148,288
    
    
    $
    0.30Effect of
dilutive stock options
    
    
    
    
    
    
    24,374
    
    
    
    
    
    
    
    
    
    
    
    5,355Diluted
Earnings Per Share: Income available to common
shareholders and assumed
conversions
    
    $
    412
    
    
    
    3,173,801
    
    
    $
    0.13
    
    
    $
    952
    
    
    
    3,153,643
    
    
    $
    0.30
 (In thousands, except share data)Nine Months Ended September 30,2004
    
    2003Weighted
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    Per Share
    
    
    
    
    
    Average
    
    Per ShareIncome
    
    Shares
    
    Amount
    
    Income
    
    Shares
    
    AmountBasic
Earnings per Share: Income available to Common
shareholders
    
    $
    1,318
    
    
    
    3,148,969
    
    
    $
    0.42
    
    
    $
    1,803
    
    
    
    3,148,122
    
    
    $
    0.57Effect of dilutive stock options
    
    
    
    
    
    
    23,136
    
    
    
    
    
    
    
    
    
    
    
    2,028Diluted
Earnings Per Share: Income available to common
shareholders and assumed
conversions
    
    $
    1,318
    
    
    
    3,172,105
    
    
    $
    0.42
    
    
    $
    1,803
    
    
    
    3,150,150
    
    
    $
    0.57
 At September 30, 2004, options to purchase 34,100 shares were excluded from the
computation of diluted earnings per share because the options exercise price
was greater than or equal to the average market price of common shares. NOTE D  STOCK BASED COMPENSATION The Company has stock-based employee compensation plans, which are accounted
for under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation. (In thousands, except share data)Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    412
    
    
    $
    952
    
    
    $
    1,318
    
    
    $
    1,803Less: Total
stock-based employee
compensation cost
determined under the
fair value based
method, net of income
taxes
    
    
    (9
    )
    
    
    
    
    
    
    (87
    )
    
    
    (7
    )Pro forma net income
    
    $
    403
    
    
    $
    952
    
    
    $
    1,231
    
    
    $
    1,796Earnings per share:Basic  as reported
    
    $
    0.13
    
    
    $
    0.30
    
    
    $
    0.42
    
    
    $
    0.57Basic  pro forma
    
    
    0.13
    
    
    
    0.30
    
    
    
    0.39
    
    
    
    0.57Diluted  as reported
    
    
    0.13
    
    
    
    0.30
    
    
    
    0.42
    
    
    
    0.57Diluted  pro forma
    
    
    0.13
    
    
    
    0.30
    
    
    
    0.39
    
    
    
    0.57
 8




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AMERIANA BANCORP AND SUBSIDIARIES 
 ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS General This Quarterly Report on Form 10-Q (Form 10-Q) may contain statements,
which constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number
of places in this Form 10-Q and include statements regarding the intent,
belief, outlook, estimate or expectations of the Company primarily with respect
to future events and future financial performance. Readers of this Form 10-Q
are cautioned that any such forward looking statements are not guarantees of
future events or performance and involve risks and uncertainties, and that
actual results may differ materially from those in the forward looking
statements as a result of various factors. The accompanying information
contained in this Form 10-Q identifies important factors that could cause such
differences. These factors include changes in interest rates; loss of deposits
and loan demand to other financial institutions; substantial changes in
financial markets; changes in real estate values and the real estate market or
regulatory changes. As with most bank holding companies, the Companys largest source of
revenue has historically been net interest income, which is determined by (i)
the difference between rates of interest earned on interest-earning assets and
rates paid on interest-bearing liabilities (interest rate spread), and (ii)
the relative amounts of interestearning assets and interest-bearing
liabilities. Levels of other income and operating expenses also significantly
affect net income. Significant Events in 2003 Sale of Cincinnati Branches:On April 7, 2003, the Company announced that
it had agreed to sell its two Cincinnati-area branches to Peoples Community
Bancorp, Inc. (NASDAQ/NM: PCBI)(PCBI) of West Chester, Ohio. The two
branches are located in Deer Park and Landen, Ohio. On September 30, 2003, the
Company announced the completion of the sale of the two branches to PCBI. In
connection with the sale, the Company recorded an after-tax gain of
approximately $2,930,000 or $0.93 per diluted share in the third quarter 2003.
The transaction included the Companys real property related to the Deer Park
branch and its leasehold on the premises for the Landen branch. Additionally,
the Company conveyed $28,847,000 in loans, which consisted of most of the
consumer and commercial loans at those branches as part of the transaction, as
well as the branches savings deposits, but retained and will continue to
service certain single family residential mortgages originated in those
locations. Company Writes Off Troubled Lease Portfolio in 2003:On September 30, 2003
the Company charged-off the two troubled equipment leases (lease pools)
originated by Commercial Money Center (CMC), a now bankrupt company. The
Company recorded an after-tax loss of approximately $2,784,000 or $0.88 per
diluted share. Prior to September 30, 2003, the Company had established
reserves against these lease pools equal to approximately 58% of the
$10,900,000 that remained outstanding. See Recent Developments. Recent Developments Ameriana announced on November 12, 2004, that it has reached a tentative
settlement in its litigation against the American Motorist Insurance Company
(AMICO). That litigation pertains to the stream of lease payments Ameriana
purchased from the now-bankrupt Commercial Money Center and the surety bonds
issued by AMICO and RLI Insurance Co. to guarantee the income stream of those
leases. Under the terms of the agreement, AMICO will pay $2.3 million into an
escrow account in full settlement of the case. These funds will be held in
escrow for a period of 90 days. If AMICO remains financially viable, the
escrowed funds will be released to Ameriana at the end of that 90-day period
and Ameriana will dismiss its case against AMICO. As previously reported, during 2001 Ameriana purchased two pools of
equipment lease payment streams originated by Commercial Money Center (CMC)
for approximately $12 million. Each lease in the pools was backed by a surety
bond issued by either AMICO or RLI, guaranteeing payment of all amounts due
under the leases in the event of default by the lessee. CMC subsequently
declared bankruptcy, leaving an unpaid balance on the lease pools totaling
$10.9 million, approximately 50% of which was guaranteed by AMICO. Both
insurers later claimed they were defrauded by CMC and denied responsibility for
the unpaid balance. Ameriana and other financial institutions participating in
the lease pools thereupon initiated litigation against the sureties, and
between December 31, 2002, and September 30, 2003, Ameriana first reserved and
then wrote-off the entire unpaid balance. The Companys
litigation against the other surety bond issuer, RLI, continues. It is
unlikely that the litigation will be resolved in 2004. 9




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Critical Accounting Policies The accounting and reporting policies of the Company are 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 for the year ended December 31, 2003. 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 are integral to the understanding of reported
results. Critical accounting policies are those policies that management
believes are the most important to the portrayal of the Companys financial
condition and results, and they require management to make estimates that are
difficult, subjective or complex. Allowance for Loan Losses:The allowance for loan losses provides
coverage for probable losses in the Companys loan portfolio. Management
evaluates the adequacy of the allowance for loan losses each quarter based on
changes, if any, in underwriting activities, the loan portfolio composition
(including product mix and geographic, industry or customer-specific
concentrations), trends in loan performance, 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 homogeneous 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 homogeneous category
or group of loans. The allowance for loan losses relating to impaired loans is
based on the loans observable market price, the collateral for certain
collateral-dependent loans, or the discounted cash flows using the loans
effective interest rate. Regardless of the extent of the Companys analysis of customer
performance, portfolio trends or risk management processes, certain inherent
but undetected losses are probable within the loan portfolio. This is due to
several factors, including inherent delays in obtaining information regarding a
customers financial condition or changes in their unique business conditions,
the judgmental nature of individual loan evaluations, collateral assessments
and the interpretation of economic trends. Volatility of economic or
customer-specific conditions affecting the identification and estimation of
losses for larger, non-homogeneous credits and the sensitivity of assumptions
utilized to establish allowances for homogenous groups of loans are among other
factors. The Company estimates a range of inherent losses related to the
existence of these exposures. The estimates are based upon the Companys
evaluation of imprecision risk associated with the commercial and consumer
allowance levels and the estimated impact of the current economic environment. Mortgage Servicing Rights:Mortgage servicing rights (MSRs) associated
with loans originated and sold, where servicing is retained, are capitalized
and included in other intangible assets in the consolidated balance sheet. The
value of the capitalized servicing rights represents the present value of the
future servicing fees arising from the right to service loans in the portfolio.
Critical accounting policies for MSRs relate to the initial valuation and
subsequent impairment tests. The methodology used to determine the valuation of
MSRs requires the development and use of a number of estimates, including
anticipated principal amortization and prepayments of that principal balance.
Events that may significantly affect the estimates used are changes in interest
rates, mortgage loan prepayment speeds and the payment performance of the
underlying loans. The carrying value of the MSRs is periodically reviewed for
impairment based on a determination of fair value. Impairment, if any, is
recognized through a valuation allowance and is recorded as amortization of
intangible assets. 10




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##### Table of Contents



Goodwill and Other Intangibles:The Company records all assets and
liabilities acquired in purchase acquisitions, including goodwill and other
intangibles, at fair value as required by Statement of Financial Accounting
Standards (SFAS) No. 141. Goodwill is subject, at a minimum, to annual tests
for impairment. Other intangible assets are amortized over their estimated
useful lives using straight-line and accelerated methods, and are subject to
impairment if events or circumstances indicate a possible inability to realize
the carrying amount. The initial goodwill and other intangibles recorded, and
subsequent impairment analysis, requires management to make subjective
judgments concerning estimates of how the acquired asset will perform in the
future. Events and factors that may significantly affect the estimates include,
among others, customer attrition, changes in revenue growth trends, specific
industry conditions and changes in competition. The Cincinnati branches sold had approximately $890,000 recorded as
goodwill and core deposit intangibles. The $890,000 was written-off and netted
against the gain on the sale of the branches in the third quarter of 2003. FINANCIAL CONDITION Assets totaled $434,046,000 at September 30, 2004, an increase of
$31,593,000, or 7.9% from $402,453,000 at December 31, 2003. The increase was
primarily due to a planned strategy to leverage the institutions assets to
improve earnings and return on equity. This was accomplished primarily through
new Federal Home Loan Bank advances of $30.0 million in the first nine months
of 2004. Cash and cash equivalents totaled $19,024,000 at September 30, 2004, an
increase of $4,475,000 from $14,549,000 at December 31, 2003. Investment securities totaled $172,078,000 at September 30, 2004, an
increase of $34,290,000 or 24.9% from $137,788,000 at December 31, 2003. The
increase was funded with additional Federal Home Loan Bank advances and excess
funds from a decline in the loan portfolio. The Company transferred the
majority of its investment securities from available for sale to held to
maturity in the first six months of 2004. The securities were transferred at
fair value at the date of the transfer. The unrealized holding gain or loss at
the date of the transfer will continue to be reported in accumulated other
comprehensive income (loss), a separate component of shareholders equity, but
will be amortized over the remaining life of the security. Investments
classified as available for sale are adjusted to fair value each month-end with
the resulting after-tax unrealized gains or loss included in accumulated other
comprehensive income (loss) included in equity. Investments classified as
held to maturity are not adjusted to fair value each month. Loans receivable totaled $201,251,000 at September 30, 2004, a decline of
$6,634,000 or 3.2% from $207,885,000 at December 31, 2003. Most of the decline
was in residential mortgage loans. The Company continued to sell new fixed
rate mortgages to minimize potential long-term interest rate risk associated
with such long-term, low-interest loans. The deposit portfolio totaled $335,820,000 at September 30, 2004, a
decrease of $9,924,000 or 2.9% from $345,744,000 at December 31, 2003. Non
interest-bearing deposits decreased $2,389,000 while interest-bearing deposits
declined $7,535,000. Advances from Federal Home Loan Bank totaled $50,769,000 at September 30,
2004, an increase of $41,4139,000 or 427.2% from $9,630,000 at December 31,
2003. The Company borrowed $20,000,000 in ten year putable FHLB advances for
an average cost of 3.67% during the fourth quarter of 2003 and the first
quarter of 2004. These advances may re-price to the three-month Libor rate
should that index reach 8.00% during any quarterly period after two-years after
the date the funds were borrowed. The three-month Libor was 2.01% at September
30, 2004. The remaining advances were for fixed-and variable-rate advances to
fund security purchases and general liquidity needs. Equity totaled $39,131,000 at September 30, 2004, an increase of $257,000
or 0.7% from $38,874,000 at December 31, 2003. The increase was due to net
income of $1,318,000, other comprehensive income of $431,000, and exercised
stock options of $20,000, offset by cash dividends of $1,512,000. The Banks capital ratios are well in excess of minimum regulatory
requirements. At September 30, 2004, the Bank had a tier 1 capital ratio of
8.97%, a tier 1 risk-based capital ratio of 14.83%, and a risk-based capital
ratio of 16.02%. 11




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##### Table of Contents



Historically, funds provided by operations, loan principal repayments and
new deposits have been the Companys principal sources of liquid funds. In
addition, the Company has the ability to obtain funds through the sale of new
mortgage loans and through borrowings from the FHLB system. The Company had
outstanding commitments to originate loans of approximately $16,226,000 and
$2,845,000 at September 30, 2004 and December 31, 2003. The commitments
outstanding at September 30, 2004 were primarily for commercial real estate
loans. In addition, the Company had $23,278,000 and $21,409,000 of conditional
commitments for lines of credit receivables at September 30, 2004 and December
31, 2003. The Company also had $4,427,000 and $3,604,000 of letters of credit
outstanding as of September 30, 2004 and December 31, 2003. Management believes
that the Companys liquidity and other sources of funds will be sufficient to
fund all outstanding commitments and other cash needs. A portion of these
commitments is for fixed-rate mortgage loans, which will be sold immediately
into the secondary market. RESULTS OF OPERATIONS Net income for the quarter ended September 30, 2004 totaled $412,000 or
$0.13 per diluted share compared to net income of $952,000, or $0.30 per
diluted share for the quarter ended September 30, 2003. Net interest income
and gains on sale of loans and servicing rights were higher in the third
quarter of 2003 compared to the third quarter of 2004. The third quarter of
2003 included a gain on the sale of Ohio branches and higher provision for loan
loss expense resulting from the write off of two troubled lease pools. Net income for the nine months ended September 30, 2004 totaled $1,318,000
or $0.42 per diluted share compared to net income of $1,803,000, or $0.57 per
diluted share for the nine months ended September 30, 2003. Net interest income
and gains on sale of loans and servicing rights were higher for the nine months
ended September 30, 2003 compared to the nine months ended September 30, 2004.
The first nine months of 2003 included a gain on the sale of Ohio branches and
higher provision for loan loss expense resulting from the write off of two
troubled lease pools. The following table summarizes the Companys average net interest-earning
assets (which include non-accrual loans) and average interest-bearing
liabilities with the accompanying average rates for the three and nine months
ended September 30, 2004 and 2003. The yields/cost shown below were adjusted
for the tax-equivalent benefit of non-taxable municipal securities: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Dollars in Thousands)Average interest-earning assets
    
    $
    380,447
    
    
    $
    424,948
    
    
    $
    376,186
    
    
    $
    429,475Average interest-bearing liabilities
    
    $
    361,685
    
    
    $
    395,797
    
    
    $
    354,831
    
    
    $
    396,598Net interest-earning assets
    
    $
    18,762
    
    
    $
    29,151
    
    
    $
    21,355
    
    
    $
    32,877Average yield on/cost of:Interest-earning assets
    
    
    4.86
    %
    
    
    5.26
    %
    
    
    4.92
    %
    
    
    5.68
    %Interest-bearing liabilities
    
    
    2.08
    %
    
    
    2.40
    %
    
    
    2.04
    %
    
    
    2.79
    %Net interest spread
    
    
    2.78
    %
    
    
    2.86
    %
    
    
    2.88
    %
    
    
    2.89
    %
 12




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##### Table of Contents



The following table sets forth the impact of rate and volume changes on
net interest income for the three and nine months ended September 30, 2004
compared to the same periods in 2003. The yields shown below were adjusted for
the tax-equivalent benefit of non-taxable municipal securities: (Dollars in Thousands)Three Months Ended September 30,
    
    Nine Months Ended September 30,2004 vs 2003
    
    2004 vs 2003Increase (Decrease)
    
    Increase (Decrease)Due to Change in
    
    Due to Change inVolume
    
    Rate
    
    Net Change
    
    Volume
    
    Rate
    
    Net ChangeInterest-earning assets
    
    $
    (590
    )
    
    $
    (383
    )
    
    $
    (973
    )
    
    $
    (2,263
    )
    
    $
    (2,085
    )
    
    $
    (4,348
    )Interest-bearing liabilities
    
    
    (206
    )
    
    
    (289
    )
    
    
    (495
    )
    
    
    (871
    )
    
    
    (1,956
    )
    
    
    (2,827
    )Change in net interest income
    
    $
    (384
    )
    
    $
    (94
    )
    
    $
    (478
    )
    
    $
    (1,392
    )
    
    $
    (129
    )
    
    $
    (1,521
    )
 Net interest income for the quarter ended September 30, 2004 totaled
$2,669,000, a decrease of $575,000, or 17.7% from $3,244,000 for the quarter
ended September 30, 2003. Part of the decrease in net interest income was due
to the increase in non-taxable interest income from the purchase of municipal
securities. The tax equivalent adjustment reflected in the table above
approximates $97,000 using a federal income tax rate of 34%. Average earning
assets declined $44,501,000 to $380,447,000 in the third quarter of 2004
compared to $424,948,000 in the third quarter of 2003. The decline was due to
the write-off of troubled leases and the sale of the Ohio branches, both of
which took place in the third quarter of 2003. In addition, the mix of assets
changed as earning asset balances shifted from higher yielding loans to
lower-yielding investments. Average loan balances decreased by $81.7 million or
29.5% to $195.6 million. Lower yielding securities and short-term investment
average balances increased by $37.2 million or 25.2% to $184.8 million. The
net interest spread, which is the difference between the yield on average
interest-earning assets and cost of interest-bearing liabilities, decreased 8
basis points to 2.78% for the third quarter of 2004 compared to 2.86% in the
third quarter of 2003. The change in the net interest spread was due to a
decrease in yield of 40 basis points on average interest-earning assets offset
by a 32 basis point reduction in the cost of average interest-bearing
liabilities. The decreased yield and cost of funds resulted in a decrease of
interest income offset by lower interest expense. The $973,000 decrease in
tax-equivalent interest income on average interest-earning assets in the third
quarter of 2004 was a combination of a decrease of $590,000 because of lower
average balances and an decrease of $383,000 due to higher average rates. The
decrease of $495,000 in cost of interest-bearing liabilities in the third
quarter of 2004 was a combination of a decrease of $206,000 from lower average
balances and a decrease of $289,000 from lower average rates. The lower
average rates were the result of high cost certificates that repriced at
maturity to a lower rate, and an overall shift from certificates to short-term
money market accounts, Super Now accounts, and lower borrowing cost. The net
interest margin on interest-earning assets, which is net interest income as a
percentage of average earning assets, decreased 15 basis points to 2.88% in the
third quarter of 2004 from 3.03% in the third quarter of 2003. Net interest income decreased 17.8% or $1,769,000 in the nine months ended
September 30, 2004 compared to the same period in 2003. Part of the decrease
in net interest income was due to the increase in non-taxable interest income
from the purchase of municipal securities. The tax equivalent adjustment
reflected in the table above approximates $248,000 using a federal income tax
rate of 34%. Average earning assets declined $53,289,000 to $376,186,000 in the
nine months ended September 30, 2004 compared to $429,475,000 in the same
period in 2003. The decline was due to the write-off of troubled leases and
the sale of the Ohio branches, both of which took place in the third quarter of
2003. In addition, the mix of assets changed as earning asset balances shifted
from higher yielding loans to lower-yielding investments. Average loan balances
decreased by $117.8 million or 39.9% to $177.8 million. Lower yielding
securities and short-term investment average balances increased by $64.5
million or 48.2% to $198.4 million. The net interest spread decreased 1 basis
point to 2.88% for the nine months ended September 30, 2004 compared to 2.89%
for the same period in 2003. The change in the net interest spread was due to
a decrease in yield of 76 basis points on average interest-earning 13




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##### Table of Contents



assets offset by a 75 basis point reduction in the cost of average
interest-bearing liabilities. The decreased yield and cost of funds resulted
in a decrease of interest income offset by lower interest expense. The
$4,348,000 decrease in tax-equivalent interest income on average
interest-earning assets in the nine months ended September 30, 2004 was a
combination of a decrease of $2,263,000 because of lower average balances and
an decrease of $2,085,000 due to lower average rates. The $2,085,000 decline
because of lower average rates included a $220,000 correction for interest owed
to FHLMC for loans sold from June 2002 to June 2004. The decrease of
$2,827,000 in cost of interest-bearing liabilities in the first nine months of
2004 was a combination of a decrease of $871,000 from lower average balances
and a decrease of $1,956,000 from lower average rates. The lower average rates
were the result of high cost certificates that repriced at maturity to a lower
rate, and an overall shift from certificates to short-term money market
account, Super Now accounts, and lower borrowing cost. The net interest margin
on interest-earning assets decreased 11 basis points to 2.99% for the nine
months ended September 30, 2004 from 3.10% for the same period in 2003. The following table summarizes the Companys non-performing assets at September
30, 2004 and December 31, 2003: Dollars in ThousandsSeptember 30,
    
    December 31,2004
    
    2003Loans:Non-accrual
    
    $
    4,876
    
    
    $
    8,383Restructured Loans
    
    
    354
    
    
    
    473Over 90 days delinquent and still accruing
    
    
    594
    
    
    
    74Real estate owned
    
    
    494
    
    
    
    602Total
    
    $
    6,318
    
    
    $
    9,532
 The Companys non-performing assets decreased $3,214,000 in the nine
months ended September 30, 2004. The decline was mainly in non-accrual loans.
The non-accrual loans are mostly made up of commercial and commercial
real-estate loans. The Bank has a number of real estate development/lot loans and single
family residential loans on existing properties with a builder/developer group,
and its related parties, that are currently in default and bankruptcy. The
Bank is working closely with the workout specialist hired by the bankruptcy
trustee on liquidation of the properties involved in the bankruptcy and is
negotiating with the borrower and its counsel for resolution of the remaining
properties. The total outstanding balance of these loans totaled $2.1 million
and $3.5 million as of September 30, 2004 and December 31, 2003. Net charge-offs (charge-offs less recoveries) were $178,000 and
$10,945,000 for the third quarter of 2004 and 2003 respectively. Net
charge-offs were $940,000 and $11,304,000 for the first nine months of 2004 and
2003 respectively. A charge-off in the first quarter of 2004 of a commercial
real-estate loan for $509,000 made up most of the net charge-offs for the first
nine months of 2004. The main reason for the large charge-offs for the third
quarter of 2003 and the first nine months of 2003 was the $10,900,000
charge-off of the lease pools. Management believes the allowance for loan losses is adequate to absorb
losses inherent in the portfolio based on information at September 30, 2004.
The allowance for loan losses as a percentage of loans was 1.53% and 1.80% at
September 30, 2004 and December 31, 2003, respectively. Provision expense was
$75,000 and $4,790,000 for third quarter of 2004 and 2003 respectively.
Provision expense was $275,000 and $6,340,000 for first nine months of 2004 and
2003 respectively. The provision in the current-year was lower than planned
levels due to recoveries of earlier losses, a decline in the loan portfolio
balance, and a decrease in non-performing assets. The Company set aside
additional specific reserves in the second and third quarter of 2003 totaling
$5,890,000 on two pools of commercial leases that were written off completely
in the third quarter of 2003. The Companys non-interest income was $978,000 and $7,031,000 in the third
quarter of 2004 and 2003 respectively, for a decrease of $6,053,000 or 86.1%.
The main causes of the decrease was due to the net gain on the sale of Ohio
branches in 2003 and by lower gain on sale of loans and servicing rights in
2004. Net gain on sale of branches was $5,511,000 in the third quarter of
2003. Net loan servicing fees improved $151,000 to $50,000 in the third
quarter of 2004 from a net expense of $101,000 in the same period in 2003. The
improvement was due to a decline in mortgage loan refinancing in the third
quarter of 2004 compared to the same period in 2003, which resulted in less
write-offs of 14




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##### Table of Contents



mortgage loan servicing rights remaining on the Companys loans that were
refinanced. Mortgage loan servicing rights is an asset that is created when
mortgage loans are sold and the Company retains the servicing rights. The
servicing rights are recognized as income at the time the loan is sold and the
servicing asset is also recorded. The asset is then amortized as an expense to
mortgage servicing income over the life of the loan. Other fees and service
charges improved $34,000 for the third quarter of 2004 compared to the third
quarter of 2003. Brokerage and insurance commissions increased $13,000 or 5.4%
to $254,000 in the third quarter of 2004 from $241,000 in the same period in
2003. Gain on sale of loans and servicing rights declined $746,000 to $72,000
in the third quarter of 2004 from $818,000 in the same period in 2003. The
decline was due to a drop in the volume of mortgage loan refinancing which
resulted in less loans sold. The low interest rate environment in 2003 and
2002 kept the demand for mortgage loan refinancing at a high level. Due to the
rate structure in early 2004 and the large volume of loans refinanced during
2003 and 2002, mortgage loans originated by the Company declined $45.6 million
to $5.3 million from $50.9 million in the third quarter of 2004 and 2003,
respectively. The Companys non-interest income was $3,000,000 and $9,534,000 in the
first nine months of 2004 and 2003 respectively, for a decrease of $6,534,000
or 68.5%. The main causes of the decrease was due to the net gain on the sale
of Ohio branches in 2003 and by lower gain on sale of loans and servicing
rights in 2004. Net loan servicing fees improved $348,000 to $155,000 for the
first nine months of 2004 from a net expense of $193,000 in the same period in
2003. The improvement was due to a decline in mortgage loan refinancing in the
first nine months of 2004 compared to the same period in 2003, which resulted
in less write-offs of mortgage loan servicing rights remaining on the Companys
loans that were refinanced. Brokerage and insurance commissions increased
$123,000 or 17.01% to $846,000 in the first nine months of 2004 from $723,000
in the same period in 2003. Gain on sale of loans and servicing rights declined
$1,526,000 to $245,000 in the first nine months of 2004 from $1,771,000 in the
same period in 2003. The decline was due to a drop in the volume of mortgage
loan refinancing which resulted in less loans sold. Mortgage loans originated
by the Company declined $121.5 million to $29.4 million from $150.9 million in
the first nine months of 2004 and 2003, respectively. Loss on sale of
investments was zero in the first nine months of 2004 compared to $41,000 in
the same period in 2003. Non-interest expense was $3,241,000 in the third quarter of 2004 and
$3,596,000 in the third quarter of 2003, for a decrease of $355,000 or 9.9%.
The largest component of the decline was attributable to salary and benefits
expense, which made-up 60.1% of total non-interest expenses in the third
quarter of 2004, compared to 60.5% in the third quarter of 2003. Salaries and
employee benefits decreased $227,000 or 10.4% to $1,947,000 in the third
quarter of 2004, compared to $2,174,000 in the third quarter of 2003. The
decline was attributable to the closure of the Ohio branches offset by lower
deferred loan expenses due to a decline in mortgage loan originations. Net
occupancy and equipment expense decreased $29,000 or 6.8% to $395,000 in the
third quarter of 2004, compared to $424,000 in the third quarter of 2003
primarily due to the closure of the Ohio branches. Federal insurance premium
expense decreased $9,000 or 18.8% to $39,000 in the third quarter of 2004,
compared to $48,000 in the third quarter of 2003. Federal insurance premiums
are assessed on the Companys deposit portfolio balance with the insurance rate
based on the Federal Deposit Insurance Corporations risk classification of the
Company. The Federal insurance premiums decreased due to the decline in the
deposit portfolio. Printing and office supplies decreased $17,000 or 23.0% to
$57,000 in the third quarter of 2004, compared to $74,000 in the third quarter
of 2003. Non-interest expense was $9,809,000 and $10,360,000 in the first nine
months of 2004 and 2003 respectively, for a decrease of $551,000 or 5.3%.
Salaries and employee benefits made-up 60.8% of total non-interest expenses in
the first nine months of 2004 compared to 59.3% for the first nine months of
2003. Salaries and employee benefits decreased $182,000 or 3.0% to $5,960,000
in the first nine months of 2004, compared to $6,142,000 for the same period in
2003. The decline was attributable to the closure of the Ohio branches offset
by lower deferred loan expenses due to a decline in mortgage loan originations.
Net occupancy and equipment expense decreased $65,000 or 5.2% to $1,175,000 in
the first nine months of 2004, compared to $1,240,000 in the same period for
2003 primarily due to the closure of the Ohio branches. Federal insurance
premium expense decreased $26,000 or 18.2% to $117,000 in the first nine months
of 2004, compared to $143,000 for the same period in 2003. The Federal
insurance premiums decreased due to the decline in the deposit portfolio. Data
processing expense increased $22,000 or 5.6% to $418,000 in the first nine
months of 2004, compared to $396,000 for the same period in 15




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##### Table of Contents



2003. Printing and office supplies decreased $13,000 or 6.9% to $175,000
in the first nine months of 2004, compared to $188,000 for the same period in
2003. Income taxes were a benefit of $81,000 in the third quarter of 2004
compared to an expense of $937,000 in the third quarter of 2003 for an overall
reduction of $1,018,000. The reduction in taxes was due to a reduction in
pretax income, higher nontaxable interest income from municipal securities and
higher investment income from AIMI in 2004, which is exempt from state income
tax. Income taxes were a benefit of $205,000 in the first nine months of 2004
compared to an expense of $997,000 in the same period in 2003 for an overall
tax expense decrease of $1,202,000. The factors that affected this change are
similar to the aforementioned factors for the quarter. The effective tax rates and the statutory tax rates differ primarily to
tax credits, cash value of life insurance, nontaxable interest income, and a
reduction in state tax expense. Off-Balance Sheet Arrangements In the normal course of operations, the Company engages in a variety of
financial transactions that, in accordance with generally accepted accounting
principles, are not recorded in the Companys financial instruments. 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 nine months ended September 30, 2004, the Company did not engage
in any off-balance sheet transactions reasonably likely to have a material
effect on the Companys financial condition, results of operations or cash
flows. OTHER The Securities and Exchange Commission (SEC) maintains reports, proxy
information, statements and other information regarding registrants that file
electronically with the SEC, including the Company. The address is
(http://www.sec.gov). 16




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##### Table of Contents



ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Asset/Liability Committee and the Board of Directors review the Companys
exposure to interest rate changes and market risk on a quarterly basis. This
review is accomplished by the use of a cash flow simulation model using
detailed securities, loan and deposit, and market information to estimate the
potential impact of interest rate increases and decreases on the earning assets
and liabilities. The model tests the impact on net interest income under
various interest rate scenarios by estimating the interest rate sensitivity
position at each interest rate interval. The change in the net portfolio value
(NPV) is also calculated at each interest rate interval. This tests the
interest rate risk exposure from movements in interest rates by using interest
sensitivity analysis to determine the change in the NPV of discounted cash
flows from assets and liabilities. NPV represents the market value of portfolio equity and is equal to the
estimated market value of assets minus the estimated market value of
liabilities. The model uses a number of assumptions, including the relative
levels of market interest rates and prepayments in mortgage loans and certain
types of callable investments. These computations do not contemplate any
actions management may undertake to reposition the assets and liabilities in
response to changes in the interest rate, and should not be relied upon as
indicative of actual results. In addition, certain shortcomings are inherent
in the model of computing NPV. Should interest rates remain or decrease below
present levels, the portion of adjustable rate loans could decrease in future
periods due to loan refinancing or payoff activity. In the event of an
interest rate change, pre-payment levels would likely be different from those
assumed in the model and the ability of borrowers to repay their adjustable
rate loans may decrease during rising interest rate environments. Presented below is the assessment of the risk of NPV in the event of sudden and
sustained 200 and 100 basis point increases and decreases respectively, in
prevailing interest rates as of September 30, 2004. NPV as Percent ofNet Portfolio Value
    
    Present Value of AssetsChange in Rates
    
    Dollar Amount
    
    Dollar Change
    
    Percent Change
    
    NPV Ratio
    
    Change(Dollars in thousands)+200 bp*
    
    $
    42,275
    
    
    $
    (5,464
    )
    
    
    (11.45
    )%
    
    
    9.93
    %
    
    
    (90) bp
    *Base or 0%
    
    
    47,739
    
    
    
    
    
    
    
    
    
    
    
    10.83-100 bp*
    
    
    49,144
    
    
    
    1,405
    
    
    
    2.94
    
    
    
    10.99
    
    
    
    16  bp
    *
 * basis points Presented below is the assessment of the risk of NPV in the event of sudden and
sustained 200 and 100 basis point increases and decreases respectively in
prevailing interest rates as of December 31, 2003. NPV as Percent ofNet Portfolio Value
    
    Present Value of AssetsChange in Rates
    
    Dollar Amount
    
    Dollar Change
    
    Percent Change
    
    NPV Ratio
    
    Change(Dollars in thousands)+200 bp*
    
    $
    41,094
    
    
    $
    (2,751
    )
    
    
    (6.27
    )
    
    
    10.37
    %
    
    
    (38) bp
    *Base or 0%
    
    
    43,845
    
    
    
    
    
    
    
    
    
    
    
    10.75
    
    
    
    -100 bp*
    
    
    44,538
    
    
    
    693
    
    
    
    1.58
    
    
    
    10.77
    
    
    
    3  bp
    *
 * basis points At September 30, 2004, an increase in interest rates of 200 basis points would
have resulted in a decrease of 11.45% in the net portfolio value compared to a
decrease of 6.27% at December 31, 2003. This change was primarily the result
an increase in the duration of investment securities from 2.16 to 3.14 years.
Duration is a measure of price or value sensitivity typically expressed in
years. It is calculated by time-weighting the present value of an instruments
cash flows. 17




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##### Table of Contents



ITEM 4  CONTROLS AND PROCEDURES As of the end of the period covered by this report, management of the Company
carried out an evaluation, under the supervision and with the participation of
the Companys principal executive officer and principal financial officer, of
the effectiveness of the Companys disclosure controls and procedures. Based on
this evaluation, the Companys principal executive officer and principal
financial officer concluded that the Companys disclosure controls and
procedures are effective in ensuring that information required to be disclosed
by the Company in reports that it files or submits under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commissions rules and forms. It should be noted that the design of the
Companys disclosure controls and procedures is based in part upon certain
reasonable assumptions about the likelihood of future events, and there can be
no reasonable assurance that any design of disclosure controls and procedures
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote, but the Companys principal executive and
financial officers have concluded that the Companys disclosure controls and
procedures are, in fact, effective at a reasonable assurance level. In addition, there have been no changes in the Companys internal control over
financial reporting (to the extent that elements of internal control over
financial reporting are subsumed within disclosure controls and procedures)
identified in connection with the evaluation described in the above paragraph
that occurred during the Companys last fiscal quarter, that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting. 18




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##### Table of Contents



PART II  OTHER INFORMATION 
 ITEM 1    Legal Proceedings The Bank is involved in a variety of litigation relating to its interests
in the two pools of equipment leases originated by the Commercial Money Center,
Inc. (CMC), a California based equipment-leasing Company that is now in
bankruptcy. In June and September 2001, the Bank purchased the income streams from two
separate pools of commercial leases totaling $12,003,000. Each lease within
each pool was supported by a surety bond issued by one of two insurance
companies rated at least A by Moodys. The bonds guarantee payment of all
amounts due under the leases in the event of default by the lessee. Each pool
was sold by the terms of a Sales and Servicing Agreement which provides that
the insurers will service the leases. In each case the insurers have assigned
their servicing rights and responsibilities to Commercial Servicing
Corporation, a Company, which has now filed bankruptcy. When the lease pools went into default, notice was given to each insurer.
One of them made payments for a few months under a reservation of rights; the
other paid nothing. Both insurers claim they were defrauded by Commercial Money
Center (CMC), the Company which sold the lease pools. Both are now denying
responsibility for payment. CMC has also filed for bankruptcy protection. The
Bank believes the surety bonds are enforceable against the insurers. The current unpaid balance for the pools
is $10,900,000. Many other financial institutions have purchased lease pools from CMC. All
of the lease pools are in default and in litigation. The Panel on Multidistrict
Litigation has taken control of the many actions and assigned them to the U.S.
District Court for the Northern District of Ohio, Eastern Division. The
actions have been consolidated for the purpose of discovery and other pretrial
proceedings. The Bank has reached a tentative settlement of its claim against American
Motorists Insurance Company (AMICO)(one of the issuers of surety bonds). Under
the terms of the agreement, AMICO will pay $2.3 million into an escrow account
in full settlement of the case. These funds will be held in escrow for a
period of 90 days. If AMICO remains financially viable, the escrowed funds
will be released to Ameriana at the end of that 90-day period and Ameriana will
dismiss its case against AMICO. The Companys litigation against the other issuer, RLI, continues. It is
unlikely that the litigation will be resolved in 2004. 
 ITEM 2   Unregistered Sales of Equity Securities and Use of Proceeds The Company did not repurchase any of its common stock during the three
months ended September 30,2004. 
 ITEM 3    Defaults in Senior Securities Not Applicable 
 ITEM 4    Submission of Matters to a Vote of Security Holders Not Applicable 
 ITEM 5    Other Information Not Applicable 
 ITEM 6    Exhibits No. Description Exhibit 31, Rule 13a-14(a)/15d-14(a) Certifications Exhibit 32, Section 1350 Certifications 19




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##### Table of Contents



SIGNATURES AMERIANA BANCORP AND SUBSIDIARIES 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: November 15, 2004
    
    /s/ Harry J. BaileyHarry J. BaileyPresident andChief Executive Officer(Duly Authorized Representative)DATE: November 15, 2004
    
    /s/ Bradley L. SmithBradley L. SmithSenior Vice President-Treasurer(Principal Financial Officerand Accounting Officer)
 20