Summary of AMERIANA BANCORP

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

FORWARD-LOOKING STATEMENTS

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

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

Who We Are

Ameriana Bancorp (the "Company") is an Indiana chartered bank holding company subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act of 1956, as amended. The Company became the holding company for Ameriana Bank, an Indiana chartered commercial bank headquartered in New Castle, Indiana (the "Bank") in 1990. The Company also holds a minority interest in a limited partnership organized to acquire and manage real estate investments, which qualify for federal tax credits.

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

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

What We Do

The Bank is a community-oriented financial institution. Our principal business consists of attracting deposits from the general public and investing those funds along with borrowed funds primarily in mortgage loans on single-family residences, multi-family loans, construction loans, commercial real estate loans, and, to a lesser extent, commercial and industrial loans, small business lending, home improvement loans, and consumer loans. We have from time to time purchased loans and loan participations in the secondary market. We also invest in various federal and government agency obligations and other investment securities permitted by applicable laws and regulations, including mortgage-backed, municipal and equity securities. We offer customers in our market area time deposits with terms ranging from three months to seven years, interest-bearing and noninterest-bearing checking accounts, savings accounts and money market accounts. Our primary source of borrowings is FHLB advances. Through our subsidiaries, we engage in insurance and brokerage activities.

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

Executive Overview of the Second Quarter of 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Strategic Issues

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

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

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

We believe the continued success of the Company is dependent on its ability to provide its customers with financial advice and solutions that assist them in achieving their goals. We will accomplish this mission by:

· being our customers' first choice for financial advice and solutions;

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

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· understanding and meeting customers' financial needs throughout their life cycle.

Serving customers requires the commitment of all Ameriana associates to provide exceptional service and sound advice. We believe these qualities will differentiate us from our competitors and increase profitability and shareholder value.

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company are maintained in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The Company's significant accounting policies are described in detail in the Notes to the Company's Consolidated Financial Statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions, and such estimates and assumptions are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company's financial condition and results, and they require management to make estimates that are difficult, subjective or complex. The following are the Company's critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses provides coverage for probable losses in the Company's loan portfolio. Management evaluates the adequacy of the allowance for credit losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management's estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.

The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for non-commercial loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences and historical losses, adjusted for current trends, for each loan category or group of loans. The allowance for loan losses relating to impaired loans is based on the loan's observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan's effective interest rate.

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

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

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

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FINANCIAL CONDITION

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

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

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

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

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

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

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

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

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

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

RESULTS OF OPERATIONS

Second Quarter of 2009 compared to the Second Quarter of 2008

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

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