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

Edgar Online, Inc.

 Management's Discussion and Analysis of Financial Condition and Results of Operations (the "MD&A") is designed to provide a narrative on our financial condition, results of operations, liquidity, critical accounting policies, off-balance sheet arrangements and the future impact of accounting standards. It is useful to read our MD&A in conjunction with the consolidated financial statements contained in Part I in this Quarterly Report on Form 10-Q (this "Form 10-Q"), our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (the "Form 10-K"), and our other reports on Forms 10-Q and current reports on Forms 8-K and other publicly available information.  

FORWARD-LOOKING STATEMENTS

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

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, commercial and industrial loans and leases, and, to a lesser extent, consumer loans and loans to municipalities. We have from time to time purchased loans and loan participations in the secondary market. We also invest in various federal and government agency                                          (31)

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  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 investment and brokerage activities.  Our primary source of income is net interest income, which is the difference between the interest income earned on our loan and investment portfolios and the interest expense incurred on our deposits and borrowings. Our loan portfolio typically earns more interest than the investment portfolio, and our deposits typically have a lower average rate than FHLB advances and other borrowings. Several factors affect our net interest income. These factors include loan, investment, deposit, and borrowing portfolio balances, their composition, the length of their maturity, re-pricing characteristics, liquidity, credit, and interest rate risk, as well as market and competitive conditions and the current interest rate environment.  

Executive Overview of the First Quarter of 2013

The Company recorded net income of $614,000, or $0.21 per share, for the three-month period ended March 31, 2013, which represented a $269,000, or 78.0%, improvement over the first quarter of 2012.

• Consistent with its capital contingency plan, the Company paid a de

             minimis quarterly dividend of $0.01 per share.    

• At March 31, 2013 the Bank's tier 1 leverage ratio was 9.31%, the tier

             1 risk-based capital ratio was 13.04%, and the total risk-based              capital ratio was 14.30%. All three ratios were considerably above the              levels required under regulatory guidelines to be considered "well              capitalized," and exceeded the higher standards as established in the              Board resolution addressed below.            •     Net interest income on a fully tax-equivalent basis for the first              quarter of 2013 represented an increase of $28,000, or 0.8%, over the              same quarter of 2012, that resulted from a $8.1 million, or 2.1%,              growth in average interest-earning assets over the same period a year              earlier.            •     Net interest margin of 3.73% on a fully tax-equivalent basis for the              first quarter of 2013 was 3 basis points lower than the same period in              2012. The decrease was due primarily to market conditions that              continue to put pressure on the average yield from interest-earning              assets.            •     The Bank recorded a $255,000 provision for loan losses in the first              quarter of 2013, which was equal to both the provision for the prior              quarter and the provision for the first quarter of 2012.            •     Other income of $1.5 million for the first quarter of 2013 represented              a $232,000 increase from the same quarter of 2012.                    •   Net losses on other real estate owned in the first quarter of                    2013 totaled $1,000, compared with $156,000 in the same quarter                    a year earlier that included a $130,000 write-down of an                    uncompleted apartment project.                    •   A $37,000 increase in brokerage and insurance commissions                    related primarily to a $42,000 increase over the same quarter a                    year earlier in the contingency bonus received by the Bank's                    insurance subsidiary that resulted from better claims loss                    experience on insured properties.                    •   A $25,000 increase in gains on sales of loans and servicing                    rights resulted from better pricing received,

notwithstanding a

                   lower dollar amount of total sales than the year earlier                    quarter.            •     Other expense for the first quarter of 2013 of $4.0 million was              $159,000, or 3.9%, lower than the same quarter in 2012,

primarily as a

             result of a $90,000 decrease in salaries and employee benefits that              included a $74,000 reduction in the cost of the frozen defined benefit              pension plan, and a $65,000 reduction in other real estate owned              expense.    

• The Company had income before income taxes of $826,000 for the first

              quarter of 2013, but recorded income tax expense of $212,000, 

an

              effective rate of only 25.7% that was due primarily to a 

significant

             amount of tax-exempt income from bank-owned life insurance.                                           (32) 

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For the first quarter of 2013, total assets increased by $3.2 million, or 0.7%, to $449.0 million from $445.8 million at December 31, 2012:

• Investments in interest-bearing demand deposits increased $3.6 million

              from $14.3 million at December 31, 2012 to $17.9 million at 

March 31,

              2013, of which $17.7 million was invested at the Federal 

Reserve Bank

              of Chicago and $151,000 at the Federal Home Loan Bank of Indianapolis.            •     At March 31, 2013, the Bank held $4.5 million in FDIC insured bank

             certificates of deposit, all of which were added during the third              quarter of 2012, which had a weighted-average rate of 0.86% and a              weighted-average remaining life of about 1.5 years.            •     There was essentially no change in the $2.3 million investment              securities held to maturity portfolio, which consists of local              municipal securities, with only amortization of $1,000 during the              quarter.            •     A $4.0 million decrease in the investment securities              available-for-sale portfolio during the first quarter of 2013 to $35.3              million, which consisted almost totally of mortgage-backed securities              insured by either Ginnie Mae, FNMA or FHLMC, resulted

primarily from

             sales of $3.7 million, $2.4 million of principal repayments, and a              $316,000 decrease in unrealized gains, partly offset by one $2.4              million purchase.            •     Net loans receivable of $319.5 million at March 31, 2013 represented              an increase of $6.3 million, or 2.0%, for the first quarter of 2013,              which resulted primarily from $6.9 million growth in

commercial real

             estate loans and a $973,000 increase in other commercial loans,              partially offset by a $1.4 million decline in residential real estate              loans related primarily to the Bank's mortgage banking strategy for              the quarter.            •     Total non-performing loans of $7.1 million, or 2.2% of total net loans

             at March 31, 2013, represented a decrease of $471,000 from              December 31, 2012.    

• The allowance for loan losses of $3.9 million at March 31, 2013 was

              1.21% of total loans and 55.04% of non-performing loans, 

compared to

              1.33% and 55.75%, respectively, at December 31, 2012.            •     The recorded value of Bank owned life insurance was $27.2 million at              March 31, 2013, with the  change for the quarter 

representing

             the increase in cash surrender value.    

• Other real estate owned of $6.1 million at March 31, 2013 represented

              a $206,000 decrease from December 31, 2012 that was primarily 

the net

             result of three sales and one addition of single-family

properties.            •     During the first quarter of 2013, total deposits increased by $2.0              million, or 0.6%, to $358.7 million, as the Bank maintained 

its strong

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

to run

              off. This strategy, coupled with customers continuing to 

migrate to

             more liquid deposit products due primarily to the low interest rate              environment, resulted in an $8.2 million increase in checking, money              market and savings balances, and a $6.2 million decrease in              certificates of deposit.    

• There was no change in the total amount or weighted average cost of

             borrowed money at March 31, 2013 from December 31, 2012.            •     Total shareholders' equity of $36.9 million at March 31, 2013              represented an increase of $375,000 over the total for

December 31,              2012.                                           (33) 

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Regulatory Action

  On July 26, 2010, following a joint examination by and discussions with the FDIC and the Indiana Department of Financial Institutions, the Board of Directors of the Bank adopted a resolution agreeing to, among other things:    

• Adopt a capital plan to increase its Tier 1 Leverage Ratio to 8.50% by

June 30, 2010 and to maintain a Total Risk-Based Capital Ratio of 12.00%;

      •   Adopt a written plan to lower classified assets;       •   Formulate and implement a written profit plan;    

• Receive prior written consent from the FDIC and the Indiana Department of

         Financial Institutions before declaring or paying any dividends;       •   Strive to reduce total holdings of bank-owned life insurance; and    

• Furnish quarterly progress reports regarding the Bank's compliance with

all provisions of the resolution.

The Bank is currently in compliance with the provisions of the resolution.

Strategic Issues

  To diversify the balance sheet and provide new avenues for loan and deposit growth, the Bank further expanded into Indianapolis, adding three full-service offices in 2008 and 2009 in the suburban markets of Carmel, Fishers and Westfield. As a result, half of our banking centers are located in the Indianapolis metropolitan area. These banking centers are focused on generating new deposits and lending relationships, where significant opportunities exist to win market share from smaller institutions lacking the depth of financial products and services, and large institutions that have concentrated on large business customers.  Although the expansion strategy initially negatively affected earnings, the Bank's expansion into new markets is critical for its long-term sustainable growth. Additional expansion in the Indianapolis metropolitan area, including construction of a new full-service banking center in Plainfield on property purchased by the Bank in early 2008, was put on hold primarily due to the economic environment. On October 13, 2012, the Bank closed the McCordsville Banking Center. The opening of the Fishers Banking Center in 2008, which is in close proximity to the McCordsville and Geist communities, allowed Ameriana to serve the financial needs of its McCordsville customers from a new convenient location. Ameriana is committed to developing a branch network that meets the changing needs of customers while maximizing profitability for its shareholders.  The economic climate became progressively difficult through most of 2008, as the world-wide financial crisis reached a peak in the second half of the year, and the subsequent economic recovery continued to move slowly through the first quarter of 2013. The severity of this environment and its consequences to the industry created many new formidable challenges for bankers.  Earnings pressure is expected to continue as the uncertain economy maintains stress on credit quality and new loan rates. Deposit acquisition remains competitive; however, the Bank's disciplined pricing has resulted in further reduction of its cost of deposits. The Bank's pricing strategies, combined with the low interest rate environment, has positively impacted net interest income. Reducing noninterest expense has been a priority of the Bank, and management has utilized aggressive cost control measures including freezing hiring, job restructuring and eliminating certain discretionary expenditures.  With the Bank's mantra of "Soundness. Profitability. Growth - in that order, no exceptions," the priorities, culture and risk strategy of the Bank are focused on asset quality and credit risk management. Despite the current economic pressures, as well as the industry's challenges related to compliance and regulatory requirements, tightened credit standards, and capital preservation, management remains cautiously optimistic that business conditions will improve over the longer term and is steadfast in the belief that the Company is well positioned to grow and enhance shareholder value as this recovery occurs.                                          (34)

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  With a community banking history stretching over 120 years, the Bank has built its strong reputation with community outreach programs and being a workplace of choice. By combining its rich tradition with its ability to provide its customers with financial advice and solutions, the Bank will accomplish its mission by:    

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

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

• understanding and meeting customer's financial needs throughout their

              life cycle.   Serving customers requires the commitment of all Ameriana Bank associates to provide exceptional service and sound financial advice. We believe these qualities will differentiate us from our competitors and increase profitability and shareholder value.  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 of the Company can be affected by these estimates and assumptions, and such estimates and assumptions are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company's financial condition and results, and they require management to make estimates that are difficult, subjective or complex, and subject to change if actual circumstances differ from those that were assumed. The following are the Company's critical accounting policies:  Allowance for Loan Losses. The allowance for loan losses provides coverage for probable losses in the Company's loan portfolio. Management evaluates the adequacy of the allowance for loan losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, including the level of non-performing, delinquent and classified loans, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management's estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to 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 noncommercial loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences and historical losses, adjusted for current trends, for each loan category or group of loans. The allowance for loan losses relating to impaired loans is based on the loan's observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan's effective interest rate.  Regardless of the extent of the Company's analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors, including inherent delays in obtaining information regarding a customer's financial condition or changes in their unique business conditions, the subjective nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger, non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company's evaluation of risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment. Future adjustments to the allowance for loan losses may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, various regulatory agencies periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments at the time of their examination.                                          (35)

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  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 by FASB fair value guidance, which requires key judgments affecting how fair value for such assets and liabilities is determined. In addition, the outcomes of valuations have a direct bearing on the carrying amounts for goodwill and intangible assets. To determine the values of these assets and liabilities, as well as the extent to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment rates and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect the Company's results of operations.  Income Tax Accounting. We file a consolidated federal income tax return. The provision for income taxes is based upon income in our consolidated financial statements. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.  Under U.S. GAAP, a valuation allowance is required to be recognized if it is "more likely than not" that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax asset is highly subjective and dependent upon judgment concerning our evaluation of both positive and negative evidence, our forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Positive evidence includes the existence of taxes paid in available carry-back years as well as the probability that taxable income will be generated in future periods, while negative evidence includes any cumulative losses in the current year and prior two years and general business and economic trends. At March 31, 2013 and December 31, 2012, we determined that our existing valuation allowance was adequate, largely based on available tax planning strategies and our projections of future taxable income. Any reduction in estimated future taxable income may require us to increase the valuation allowance against our deferred tax assets. Any required increase to the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.  Positions taken in our tax returns may be subject to challenge by the taxing authorities upon examination. The benefit of an uncertain tax position is initially recognized in the financial statements only when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is more likely than not of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Differences between our position and the position of tax authorities could result in a reduction of a tax benefit or an increase to a tax liability, which could adversely affect our future income tax expense.  We believe our tax policies and practices are critical accounting policies because the determination of our tax provision and current and deferred tax assets and liabilities have a material impact our net income and the carrying value of our assets. We believe our tax liabilities and assets are adequate and are properly recorded in the condensed consolidated financial statements at March 31, 2013.                                          (36) 

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FINANCIAL CONDITION

  Total assets of $449.0 million at March 31, 2013 represented an increase of $3.2 million, or 0.7%, from the December 31, 2012 total of $445.8 million. The increase resulted primarily from growth in loans with additional funds provided through the Bank's growth in deposit accounts.  Cash and cash equivalents increased $2.9 million to $23.8 million at March 31, 2013 from the December 31, 2012 total of $20.9 million. Included in the total at March 31, 2013 was $17.7 million of interest-bearing demand deposits at the Federal Reserve Bank of Chicago. Cash and cash equivalents represent an immediate source of liquidity to fund loans or meet deposit outflows.  At March 31, 2013, the Bank held $4.5 million in FDIC insured bank certificates of deposit which had a weighted-average rate of 0.86% and a weighted-average remaining life of approximately 1.5 years. $5.7 million of certificates of deposit had been added in the third quarter of 2012, with the initial maturities in the first quarter of 2013. The matured certificates of deposit were not replaced due to low reinvestment rates.  Investment securities available-for-sale decreased by $4.0 million to $35.3 million at March 31, 2013 from $39.3 million at December 31, 2012. The decrease resulted primarily from two sales of mortgage-backed securities totaling $3.7 million, $2.4 million of principal repayments on mortgage-backed securities, and a $316,000 decrease in unrealized gains, partly offset by one mortgage-backed securities purchase of $2.4 million. All mortgage-backed securities, which totaled $33.4 million at March 31, 2013, are insured by either Ginnie Mae, a U.S. Government agency, or by Fannie Mae or Freddie Mac, each a U.S. Government sponsored enterprise ("GSE").  There was essentially no change in the $2.3 million investment securities held to maturity portfolio, which consists of local municipal securities, with only amortization of $1,000 during the quarter.  Net loans receivable increased by $6.3 million, or 2.0%, to $319.5 million at March 31, 2013 from $313.2 million at December 31, 2012. This growth was due mostly to a $6.9 million, or 6.8%, increase in commercial real estate loans and a $973,000 increase in other commercial loans, which was partially offset by a $1.4 million decline in residential real estate loans that resulted primarily from sales of new production loans into the secondary market totaling $4.5 million. The Bank's mortgage-banking strategy is reviewed regularly to ensure that it remains consistent with the Bank's overall balance sheet management objectives.  Premises and equipment of $14.4 million at March 31, 2013 represented a $185,000 decrease from $14.5 million at December 31, 2012. The net decrease was a result of $251,000 of depreciation for the three months ended March 31, 2013 exceeding capital expenditures of $66,000 for the period.  

Goodwill was $656,000 at March 31, 2013, unchanged from December 31, 2012. Goodwill of $457,000 relates to deposits associated with a banking center acquired in 1998, and $199,000 is the result of three separate insurance business acquisitions. The Bank's impairment tests reflected no impairment as of March 31, 2013.

  We have investments in life insurance on employees and directors with a balance or cash surrender value of $27.2 million and $27.0 million at March 31, 2013 and December 31, 2012, respectively. The non-taxable increase in cash surrender value of this life insurance was $183,000 for the three months of 2013, compared to $193,000 for the same period a year earlier.  Other real estate owned totaled $6.1 million at March 31, 2013, a $206,000 decrease from $6.3 million at December 31, 2012. Sales of three single-family properties with an aggregate book value of $232,000 and one $69,000 addition of a single-family property occurred during the three-month period ended March 31, 2013. The sales together with a small recovery on a prior year sale resulted in a net loss of $1,000, and there were no write-downs of other real estate owned during the three-month period ended March 31, 2013.  

Other assets of $9.9 million at March 31, 2013 represented a $669,000 reduction from December 31, 2012, that included a $141,000 decrease in prepaid FDIC insurance premiums, and the return of a $128,000 reserve related to the Company's employee health insurance program.

                                      (37)

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  Total deposits of $358.7 million at March 31, 2013 represented an increase of $2.0 million, or 0.6%, from $356.7 million at December 31, 2012, as the Bank maintained its strong focus on nurturing existing and attracting new core deposit relationships. During the first three months of 2013, checking, money market and savings balances increased $8.2 million, while certificate of deposit balances decreased $6.2 million, as customers continued to migrate to more liquid deposit products, due primarily to the ongoing economic uncertainty and related low interest rate environment. The Bank has concentrated on strategies designed to grow total balances in multi-product deposit relationships, and continues to utilize pricing strategies designed to produce growth with an acceptable marginal cost for both existing and new deposits.  Total borrowed money of $45.8 million at March 31, 2013 was unchanged from December 31, 2012. Wholesale funding options and strategies are continuously analyzed to ensure that we retain sufficient sources of credit to fund all of the Bank's needs, and to control funding costs by using this alternative to organic deposit account funding when appropriate.  Drafts payable of $1.3 million at March 31, 2013 increased $76,000 from $1.2 million at December 31, 2012. 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 $36.9 million at March 31, 2013 represented a $375,000 increase over the total of $36.5 million at December 31, 2012. The increase resulted from net income of $614,000 partly offset by a $210,000 decrease in unrealized gains net of income tax related to the Bank's available-for-sale investment securities portfolio, and by $29,000 in dividends declared during the three-month period ended March 31, 2013. The Company and the Bank's regulatory capital ratios were all considerably above the levels required under regulatory guidelines to be considered "well capitalized," and exceeded the higher standards as established in the July 26, 2010 Board resolution.  

RESULTS OF OPERATIONS

First Quarter of 2013 compared to the First Quarter of 2012

  The Company recorded net income of $614,000, or $0.21 per diluted share, for the first quarter of 2013, compared to net income of $345,000, or $0.12 per diluted share, for the first quarter of 2012.  The earnings growth of $269,000, or 78.0%, for the first quarter of 2013 compared to the same quarter a year earlier was related primarily to a $155,000 reduction in the net loss from sales and write-downs of other real estate owned, and a $159,000 decrease in non-interest expense.  

Net Interest Income

  Net interest income on a fully tax-equivalent basis of $3.5 million for the first quarter of 2013 represented an increase of $28,000, or 0.8%, compared to the same period of 2012, that resulted from $8.1 million growth in average interest-earning assets to $385.6 million, a 2.1% increase over the same period of 2011. Net interest margin on a fully tax-equivalent basis for the first quarter of 2013 of 3.73% was 3 basis points lower than the year earlier period. The Bank was able to stabilize net interest income as it benefited from the growth in interest-earning assets, coupled with certain market conditions that allowed it to decrease its cost of funds, primarily through the re-pricing of deposit accounts in a relatively stable low interest rate environment. This was offset by a decrease in the average yield on interest-earning assets due to market conditions.  Tax-exempt interest was $40,000 for the first quarter of 2013 compared to $37,000 for the same period of 2012, and resulted from municipal securities and municipal loans. Tax-equivalent adjustments were $17,000 and $16,000 for the first quarter of 2013 and 2012, respectively.  

"Net interest income on a fully tax-equivalent basis" is calculated by increasing net interest income by an amount that represents the additional taxable interest income that would be needed to produce the same amount of after-tax income as the tax-exempt interest income included in net interest income for the period.

"Net interest margin on fully tax-equivalent basis" is calculated by dividing annualized "net interest income on a fully tax-equivalent basis" by average interest-earning assets for the period.

Our "fully tax-equivalent basis" calculations are based on a federal income tax rate of 34%.

                                          (38)  

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Provision for Loan Losses

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

                                                    (Dollars in thousands)                                               Three Months Ended March 31,                                                  2013                  2012

Balance at beginning of quarter $ 4,239 $ 4,132

        Provision for loan losses                       255              

255         Charge-offs                                    (625 )            (365 )         Recoveries                                       57                10          Net charge-offs                                (568 )            (355 ) 

        Balance at end of period            $         3,926          $ 

4,032

        Allowance to total loans                       1.21 %           

1.28 %

        Allowance to non-performing loans             55.04 %          

46.78 %

    We recorded a provision for loan losses of $255,000 for the first quarter of both 2013 and 2012, which is reflective of the continuing pressure of economic conditions on credit quality, including an elevated amount of non-performing loans. Total charge-offs of $625,000 for the first quarter of 2013 included loans with specific reserves totaling $572,000 at December 31, 2012.  

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

                                                                     (Dollars in thousands)                                                                          March 31,                                                                   2013                2012  Loans accounted for on a non-accrual basis                     $     7,133

$ 8,507

  Accruing loans contractually past due 90 days or more                   -                113   Total of non-accrual and 90 days or more past due loans (1)                                                            $     7,133$  8,620  Percentage of total net loans                                         2.23 %            2.74 %   Other non-performing assets (2)                                $     6,120$  7,545 Total non-performing assets                                    $    13,253$ 16,165  Percentage of total assets                                            2.95 %            3.65 %  

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

$     2,877$  2,322 Total troubled debt restructurings                             $    11,739$  9,325

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

March 31, 2013 included $2.9 million of troubled debt restructurings, which

consisted of a $1.0 million residential construction loan, a loan of $949,000

on developed commercial land, four residential non-construction loans

totaling $556,000, four commercial loans totaling $322,000, and two consumer

loans totaling $3,000.

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

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

value or its carrying value.

   The allowance for loan losses of $3.9 million at March 31, 2013 was $106,000 lower than a year earlier, but the allowance for loan losses to non-performing loans ratio increased from 46.78% at March 31, 2012 to 55.04% at March 31, 2013 due to a lower total of non-performing loans. Non-performing loans of $7.1 million at March 31, 2013 represented a $1.5 million decrease from the total of $8.6 million at March 31, 2012, and a $471,000 decrease from the end of the prior quarter. It is management's opinion that the allowance for loan losses at March 31, 2013 is adequate based on measurements of the credit risk in the entire portfolio as of that date.                                          (39)

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Total charge-offs of $625,000 for the first quarter of 2013 included $479,000, fully reserved at December 31, 2012, related to a hotel in northern Indiana.

  At March 31, 2013, the Bank had $11.7 million in loans categorized as troubled debt restructurings, with twelve loans for $2.9 million also included in the table above in the total for loans accounted for on a non-accrual basis. The total of $11.7 million included $3.9 million related to the hotel in northern Indiana, twenty-three loans on single-family residential properties totaling $4.0 million, two loans totaling $2.4 million for developed commercial land, a $1.0 million construction loan on a residential condominium project, four commercial loans totaling $322,000, a commercial real estate loan for $28,000, and two consumer loans totaling $3,000.  

Other Income

  The Company recorded other income of $1.5 million for the first quarter of 2013, an increase of $232,000, or 18.1%, from the total for the same period a year earlier that resulted primarily from the following changes:    

• A $155,000 reduction in the net loss from sales and write-downs of other

real estate owned to $1,000 for the first quarter of 2013 from a net loss

         of $156,000 for the first quarter of 2012 that included a $130,000          write-down of an uncompleted apartment project;    

• A $37,000 increase in brokerage and insurance commissions to $449,000 for

the first quarter of 2013 from $412,000 for the year earlier quarter, that

was due primarily to a $42,000 increase in the contingency bonus received

by the Bank's insurance subsidiary that resulted from better claims loss

          experience on insured properties; and          •   A $25,000 increase in gains on sales of loans and servicing rights to

$157,000 from $132,000 for the first quarter of 2012 that resulted from          better pricing received, notwithstanding a lower dollar amount of total          sales than the year earlier quarter.  

Other Expense

Total other expense of $4.0 million for the first quarter of 2013 was $159,000, or 3.9%, lower than the first quarter of 2012, with the following major differences:

• A $90,000 decrease in salaries and employee benefits to $2.2 million that

resulted primarily from a $74,000 reduction in the cost of the Company's

          frozen defined benefit pension plan;          •   A $65,000 decrease in other real estate owned expense to $80,000 that

resulted primarily from a lower average dollar amount of foreclosed

properties than the year earlier quarter, and additional costs recorded in

the quarter ended March 31, 2012 related to the sale of a foreclosed golf

course in December of 2011.

Income Tax Expense

  The Company recorded income tax expense of $212,000 on pre-tax income of $826,000 for the three-month period ended March 31, 2013, compared to income tax expense of $78,000 on pre-tax income of $423,000 for the same period a year earlier. Both quarters had a significant amount of tax-exempt income, primarily from bank-owned life insurance.  We have a deferred state tax asset that is primarily the result of operating losses sustained since 2003. We started recording a valuation allowance against our current period state income tax benefit in 2005 due to our concern that we may not be able to use more than the tax asset already recorded on the books without modifying the use of AIMI, our investment subsidiary, which was liquidated effective December 31, 2009. Operating income from AIMI was not subject to state income taxes under state law, and as a result was also a major factor in the growth of the deferred state tax asset.  The Company also has a deferred federal tax asset that is composed of tax benefit from a net operating loss carry-forward and purchased tax credits. The federal loss carry-forward expires in 2026, and the tax credits begin to expire in 2023. The tax credits include alternative minimum tax credits, which have no expiration date. Management believes that the Company will be able to utilize the benefits recorded for loss carry-forwards and credits within the allotted time periods.                                          (40) 

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  In addition to the liquidation of AIMI, the Bank has initiated several strategies designed to expedite the use of both the deferred state tax asset and the deferred federal tax asset. Through sales of $34.5 million of municipal securities and only one purchase since December 31, 2006, that segment of the investment securities portfolio has been reduced to $2.3 million. The proceeds from these sales have been reinvested in taxable financial instruments. The Bank has periodically evaluated a sale/leaseback transaction that could result in a taxable gain on its office properties, and also allow the Bank to convert nonearning assets to assets that will produce taxable income. Additionally, the Bank is exploring options related to reducing its current investment in tax-exempt bank owned life insurance policies that involve the reinvestment of the proceeds in taxable financial instruments with a similar or greater risk-adjusted after-tax yield. Sales of banking centers not important to long-term growth objectives that would result in taxable gains and reduced operating expenses could be considered by the Bank.  

OFF-BALANCE SHEET ARRANGEMENTS

  In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers' requests for funding and take the form of loan commitments and lines of credit.  We do not have any off-balance-sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.  

LIQUIDITY AND CAPITAL RESOURCES

  Liquidity is the ability to meet current and future obligations of a short-term nature. Historically, funds provided by operations, loan repayments and new deposits have been our principal sources of liquid funds. In addition, we have the ability to obtain funds through the sale of investment securities and mortgage loans, through borrowings from the FHLB system, and through the brokered certificates market. We regularly adjust the investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability program.  The Company is a separate entity and apart from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for the payment of dividends declared for its shareholders and the payment of interest on its subordinated debentures. At times, the Company has repurchased its stock. Substantially all of the Company's operating cash is obtained from subsidiary dividends. Payment of such dividends to the Company by the Bank is limited under Indiana law. Additionally, as part of a resolution adopted by the Board of Directors of the Bank on July 26, 2010, the Bank cannot declare or pay any dividends without the prior written consent of the FDIC and the Indiana Department of Financial Institutions. See "Regulatory Action." The Company believes that such restriction will not have an impact on the Company's ability to meet its ongoing cash obligations.  At March 31, 2013, we had $23.6 million in loan commitments outstanding and $50.1 million of additional commitments for line of credit receivables. Certificates of deposit due within one year of March 31, 2013 totaled $68.2 million, or 19.0% of total deposits. If these maturing certificates of deposit do not remain with us, other sources of funds must be used, including other certificates of deposit, brokered CDs, and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than currently paid on the certificates of deposit due on or before March 31, 2014. However, based on past experiences we believe that a significant portion of the certificates of deposit will remain. We have the ability to attract and retain deposits by adjusting the interest rates offered. We held no brokered CDs at March 31, 2013 or at December 31, 2012.  

Our primary investing activity, the origination and purchase of loans, is offset by the sale of loans and principal repayments. In the first three months of 2013, net loans receivable increased by $6.3 million, or 2.0%.

  Financing activities consist primarily of activity in deposit accounts and FHLB advances. Deposit flows are affected by the overall level of interest rates, the interest rates and products we offer, and our local competitors and other factors. Total deposits increased by $2.0 million, or 0.6%, and total FHLB advances were unchanged during the first three months of 2013.                                          (41)

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  The Bank is subject to various regulatory capital requirements set by the FDIC, including a risk-based capital measure. The Company is also subject to similar capital requirements set by the Federal Reserve Board. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. In addition, as part of a resolution adopted by the Board of Directors of the Bank on July 26, 2010, the Bank adopted a capital plan to increase its Tier 1 Leverage Ratio to 8.50% by June 30, 2010 and maintain a Total Risk-Based Capital Ratio of 12.00%, both of which the Bank has accomplished. See "Regulatory Action."  There are five capital categories defined in the regulations, ranging from well capitalized to critically under-capitalized. Classification in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. At March 31, 2013 and December 31, 2012, the Bank was categorized as "well capitalized" and met all subject capital adequacy requirements. There are no conditions or events since March 31, 2013 that management believes have changed this classification.  Actual, required, and well capitalized amounts and ratios for the Bank are as follows:                                                       March 31, 2013                                                                         Required For                   To Be                                              Actual Capital           Adequate Capital           Well Capitalized                                            Amount       Ratio         Amount       Ratio        Amount        Ratio  Total risk-based capital ratio            $ 45,101       14.30 %    $   25,224       8.00 %    $  31,530       10.00 % (risk based capital to risk-weighted assets)  Tier 1 risk-based capital ratio           $ 41,119       13.04 %    $   12,612       4.00 %    $  18,918        6.00 % (tier 1 capital to risk-weighted assets)  Tier 1 leverage ratio                     $ 41,119        9.31 %    $   13,245       3.00 %    $  22,075        5.00 % (tier 1 capital to adjusted average total assets)                                                       December 31, 2012                                                                          Required For                   To Be                                               Actual Capital           Adequate Capital           Well Capitalized                                             Amount       Ratio         Amount       Ratio        Amount        Ratio  Total risk-based capital ratio             $ 44,797       14.45 %    $   24,798       8.00 %    $  30,998       10.00 % (risk based capital to risk-weighted assets)  Tier 1 risk-based capital ratio            $ 40,870       13.18 %    $   12,399       4.00 %    $  18,599        6.00 % (tier 1 capital to risk-weighted assets)  Tier 1 leverage ratio                      $ 40,870        9.31 %    $   13,167       3.00 %    $  21,945        5.00 % (tier 1 capital to adjusted average total assets)   Actual, required, and well capitalized amounts and ratios for the Company are as follows:                                                       March 31, 2013                                                                          Required For                   To Be                                               Actual Capital           Adequate Capital           Well Capitalized                                             Amount       Ratio         Amount       Ratio        Amount        Ratio  Total risk-based capital ratio             $ 45,456       14.27 %    $   25,491       8.00 %    $  31,864       10.00 % (risk based capital to risk-weighted assets)  Tier 1 risk-based capital ratio            $ 41,474       13.02 %    $   12,746       4.00 %    $  19,118        6.00 % (tier 1 capital to risk-weighted assets)  Tier 1 leverage ratio                      $ 41,474        9.39 %    $   13,254       3.00 %    $  22,090        5.00 % (tier 1 capital to adjusted average total assets)                                           (42) 

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  Table of Contents                                                   December 31, 2012                                                                          Required For                   To Be                                               Actual Capital           Adequate Capital           Well Capitalized                                             Amount       Ratio         Amount       Ratio        Amount        Ratio  Total risk-based capital ratio             $ 45,072       14.39 %    $   25,058       8.00 %    $  31,322       10.00 % (risk based capital to risk-weighted assets)  Tier 1 risk-based capital ratio            $ 41,145       13.14 %    $   12,529       4.00 %    $  18,793        6.00 % (tier 1 capital to risk-weighted assets)  Tier 1 leverage ratio                      $ 41,145        9.37 %    $   13,176       3.00 %    $  21,960        5.00 % (tier 1 capital to adjusted average total assets)   AVAILABLE INFORMATION  Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge on our website, www.ameriana.com, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission. Information on our website should not be considered a part of this Form 10-Q. 

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