SUMMARY
OF SELECTED CONSOLIDATED FINANCIAL DATA


(dollars
in thousands except per share data & offices)








Year
                      Ended
                    
                    
                    Year
                      Ended
                    
                    
                    Year
                      Ended
                    
                    
                    Year
                      Ended
                    
                    
                    Year
                      EndedDec
      2008
                    
                    
                    Dec
      2007
                    
                    
                    Dec
      2006
                    
                    
                    Dec
      2005
                    
                    
                    Dec
      2004Selected
      Balance Sheet Data:Total
      assets
                    
                    $
                    969,373
                    
                    
                    $
                    908,806
                    
                    
                    $
                    904,467
                    
                    
                    $
                    850,786
                    
                    
                    $
                    868,207Cash
      and cash equivalents
                    
                    
                    22,586
                    
                    
                    
                    40,552
                    
                    
                    
                    106,063
                    
                    
                    
                    53,736
                    
                    
                    
                    52,320Loans
      held for sale
                    
                    
                    2,856
                    
                    
                    
                    7,112
                    
                    
                    
                    6,925
                    
                    
                    
                    4,795
                    
                    
                    
                    2,617Securities
      available for sale
                    
                    
                    91,096
                    
                    
                    
                    62,306
                    
                    
                    
                    56,887
                    
                    
                    
                    123,351
                    
                    
                    
                    124,790Securities
      held to maturity
                    
                    
                    4,467
                    
                    
                    
                    1,557
                    
                    
                    
                    1,635
                    
                    
                    
                    1,806
                    
                    
                    
                    1,779Portfolio
      loans, net
                    
                    
                    792,146
                    
                    
                    
                    742,874
                    
                    
                    
                    675,662
                    
                    
                    
                    608,688
                    
                    
                    
                    629,490Deposits
                    
                    
                    710,639
                    
                    
                    
                    707,551
                    
                    
                    
                    727,159
                    
                    
                    
                    655,314
                    
                    
                    
                    640,181Borrowings
                    
                    
                    150,103
                    
                    
                    
                    114,833
                    
                    
                    
                    84,131
                    
                    
                    
                    101,041
                    
                    
                    
                    139,899Shareholders'
      equity
                    
                    
                    92,012
                    
                    
                    
                    67,454
                    
                    
                    
                    71,281
                    
                    
                    
                    73,038
                    
                    
                    
                    77,364Selected
      Operations Data:Total
      interest income
                    
                    $
                    51,338
                    
                    
                    $
                    55,201
                    
                    
                    $
                    50,355
                    
                    
                    $
                    44,976
                    
                    
                    $
                    42,746Total
      interest expense
                    
                    
                    22,549
                    
                    
                    
                    27,661
                    
                    
                    
                    24,644
                    
                    
                    
                    19,817
                    
                    
                    
                    19,159Net
      interest income
                    
                    
                    28,789
                    
                    
                    
                    27,540
                    
                    
                    
                    25,711
                    
                    
                    
                    25,159
                    
                    
                    
                    23,587Provision
      for loan losses
                    
                    
                    4,292
                    
                    
                    
                    1,361
                    
                    
                    
                    850
                    
                    
                    
                    808
                    
                    
                    
                    1,770Net
      interest income after provision for loan losses
                    
                    
                    24,497
                    
                    
                    
                    26,179
                    
                    
                    
                    24,861
                    
                    
                    
                    24,351
                    
                    
                    
                    21,817Gain
      on sale of loans
                    
                    
                    1,446
                    
                    
                    
                    1,497
                    
                    
                    
                    1,430
                    
                    
                    
                    1,539
                    
                    
                    
                    2,651Loss
      on securities
                    
                    
                    (437
                    )
                    
                    
                    -
                    
                    
                    
                    (1,956
                    )
                    
                    
                    -
                    
                    
                    
                    -Gain
      on sale of mortgage servicing
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,957
                    
                    
                    
                    -
                    
                    
                    
                    -Other
      non interest income
                    
                    
                    10,931
                    
                    
                    
                    11,357
                    
                    
                    
                    10,872
                    
                    
                    
                    9,684
                    
                    
                    
                    7,767Non
      interest expenses
                    
                    
                    28,834
                    
                    
                    
                    29,774
                    
                    
                    
                    27,906
                    
                    
                    
                    26,503
                    
                    
                    
                    24,528Income
      before income taxes
                    
                    
                    7,603
                    
                    
                    
                    9,259
                    
                    
                    
                    9,258
                    
                    
                    
                    9,071
                    
                    
                    
                    7,707Income
      tax provision
                    
                    
                    2,600
                    
                    
                    
                    3,136
                    
                    
                    
                    2,817
                    
                    
                    
                    2,969
                    
                    
                    
                    2,544Net
      Income
                    
                    $
                    5,003
                    
                    
                    $
                    6,123
                    
                    
                    $
                    6,441
                    
                    
                    $
                    6,102
                    
                    
                    $
                    5,163Basic
      earnings per common share
                    
                    $
                    1.47
                    
                    
                    $
                    1.75
                    
                    
                    $
                    1.74
                    
                    
                    $
                    1.57
                    
                    
                    $
                    1.25Diluted
      earnings per common share
                    
                    $
                    1.47
                    
                    
                    $
                    1.72
                    
                    
                    $
                    1.70
                    
                    
                    $
                    1.53
                    
                    
                    $
                    1.21Cash
      dividends per common share
                    
                    $
                    0.64
                    
                    
                    $
                    0.80
                    
                    
                    $
                    0.79
                    
                    
                    $
                    0.75
                    
                    
                    $
                    0.75Selected
      Financial and Statistical Data:Return
      on average assets
                    
                    
                    0.54
                    %
                    
                    
                    0.70
                    %
                    
                    
                    0.75
                    %
                    
                    
                    0.71
                    %
                    
                    
                    0.60
                    %Return
      on average shareholders' equity
                    
                    
                    7.11
                    %
                    
                    
                    8.88
                    %
                    
                    
                    9.00
                    %
                    
                    
                    8.19
                    %
                    
                    
                    6.50
                    %Interest
      rate spread during the period
                    
                    
                    3.29
                    %
                    
                    
                    3.38
                    %
                    
                    
                    3.24
                    %
                    
                    
                    3.19
                    %
                    
                    
                    2.97
                    %Net
      interest margin on average earning assets
                    
                    
                    3.35
                    %
                    
                    
                    3.45
                    %
                    
                    
                    3.29
                    %
                    
                    
                    3.22
                    %
                    
                    
                    3.00
                    %Average
      shareholders' equity to average assets
                    
                    
                    7.55
                    %
                    
                    
                    7.89
                    %
                    
                    
                    8.31
                    %
                    
                    
                    8.68
                    %
                    
                    
                    9.17
                    %Efficiency
      ratio
                    
                    
                    70.07
                    %
                    (1)
                    
                    71.26
                    %
                    (2)
                    
                    73.41
                    %
                    
                    
                    72.85
                    %
                    
                    
                    72.13
                    %Nonperforming
      loans to total loans
                    
                    
                    3.03
                    %
                    
                    
                    1.51
                    %
                    
                    
                    0.54
                    %
                    
                    
                    0.70
                    %
                    
                    
                    2.01
                    %Nonperforming
      assets to total assets
                    
                    
                    2.86
                    %
                    
                    
                    1.29
                    %
                    
                    
                    0.46
                    %
                    
                    
                    0.54
                    %
                    
                    
                    1.71
                    %Loss
      allowance to nonperforming loans
                    
                    
                    35.30
                    %
                    
                    
                    60.87
                    %
                    
                    
                    175.90
                    %
                    
                    
                    155.78
                    %
                    
                    
                    61.23
                    %Loss
      allowance to total loans
                    
                    
                    1.07
                    %
                    
                    
                    0.92
                    %
                    
                    
                    0.95
                    %
                    
                    
                    1.09
                    %
                    
                    
                    1.23
                    %Dividend
      payout ratio
                    
                    
                    42.95
                    %
                    
                    
                    45.30
                    %
                    
                    
                    45.23
                    %
                    
                    
                    47.67
                    %
                    
                    
                    59.22
                    %Loan
      servicing portfolio
                    
                    $
                    94,647
                    
                    
                    $
                    54,283
                    
                    
                    $
                    36,977
                    
                    
                    $
                    588,503
                    
                    
                    $
                    605,040Allowance
      for loan losses
                    
                    $
                    8,589
                    
                    
                    $
                    6,972
                    
                    
                    $
                    6,598
                    
                    
                    $
                    6,753
                    
                    
                    $
                    7,864Number
      of full service offices
                    
                    
                    19
                    
                    
                    
                    20
                    
                    
                    
                    19
                    
                    
                    
                    19
                    
                    
                    
                    18





(1)  Non
interest expense as a percentage of the sum of net interest income and non
interest income, excluding one time expense related to a $437,000 impairment
loss on the Shay Ultra Short Mortgage fund.


(2)  Non
interest expense as a percentage of the sum of net interest income and non
interest income, excluding one time expense items of $988,000 pre-tax related to
a separation agreement and the write-down


of the
Company’s former operations building.





- 4
-





MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION


AND
RESULTS OF OPERATIONS





FORWARD
LOOKING STATEMENTS


This
Annual Report contains 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 Annual
Report and include statements regarding the intent, belief, outlook, estimate or
expectations of the Company (as defined below), its directors or its officers
primarily with respect to future events and the future financial performance of
the Company.  Readers of this Annual Report 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
Annual Report 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,
regulatory changes, changes in the financial condition of issuers of the
Company’s investments and borrowers, changes in the economic condition of the
Company’s market area, increases in compensation and employee expenses, or
unanticipated results in pending legal or regulatory proceedings.





The
following financial information presents an analysis of the asset and liability
structure of Indiana Community Bancorp and a discussion of the results of
operations for each of the periods presented in the Annual Report as well as a
discussion of Indiana Community Bancorp’s sources of liquidity and capital
resources.





HOLDING
COMPANY BUSINESS


Indiana
Community Bancorp (the “Company") is organized as a bank holding company
authorized to engage in activities permissible for a financial holding company
and owns all of the outstanding capital stock of Indiana Bank and Trust Company
(the “Bank").  The business of the Bank and therefore, the Company, is
providing consumer and business banking services to certain markets in the
south-central portions of the state of Indiana.  The Bank does
business through 19 full service banking offices.





GENERAL


The
Company's earnings in recent years reflect the fundamental changes that have
occurred in the regulatory, economic and competitive environment in which
commercial banks operate.  The Company's earnings are primarily
dependent upon its net interest income.  Interest income is a function
of the average balances of loans and investments outstanding during a given
period and the average yields earned on such loans and
investments.  Interest expense is a function of the average amount of
deposits and borrowings outstanding during the same period and the average rates
paid on such deposits and borrowings.  Net interest income is the
difference between interest income and interest expense.





The
Company is subject to interest rate risk to the degree that its interest-bearing
liabilities, primarily deposits and borrowings with short- and medium-term
maturities, mature or reprice more rapidly, or on a different basis, than its
interest-earning assets.  While having liabilities that mature or
reprice more frequently on average than assets would typically be beneficial in
times of declining interest rates, in the current low rate environment,
interest-bearing liabilities are near their minimum rate.  In this
environment, declining interest rates could result in compression of the
Company’s margin.  The Company's net income is also affected by such
factors as fee income and gains or losses on sale of loans.





OVERVIEW


In the
challenging economic environment of 2008, the Company focused on credit risk
mitigation and expense reduction.  In addition, the Company maintained
its efforts to restructure the balance sheet and develop deposit fee income
through the offering of new commercial deposit services and new retail deposit
products.  The Company originated higher yielding commercial and
commercial real estate loans while decreasing balances of residential mortgage
loans and indirect auto loans.  As a result, commercial and commercial
real estate loans increased $14.2 million and $65.3 million, respectively, while
residential mortgage loans and consumer loans decreased $22.3 million and $6.8
million, respectively.   Deposit balances were reallocated within
the various deposit products as money market deposit balances declined $29.3
million while certificates of deposits and public fund certificates increased
$13.3 million and $10.2 million, respectively.  The increase in public
fund certificates was related to deposits received from one public fund
entity.  The increase in certificates of deposit reflects customers’
preference for the safety of bank deposits and the guaranteed yield offered in
the declining rate environment experienced in 2008.   The Company
increased its use of FHLB advances by $30.6 million to fund the previously
mentioned loan growth.  In December of 2008 the Company strengthened
its capital position by issuing $21.5 million in preferred stock and warrants to
the United States Treasury Department under the Capital Purchase Program for
healthy banks.  The Company’s net interest income increased $1.2
million due to loan growth, as the net interest margin declined 10 basis points
from 2007 to 3.35%.




In a year
marked by increasing unemployment and economic downturn, the Company experienced
net charge offs of $2.7 million and an increase of $15.9 million in non
performing assets.  The increase in non performing assets was
primarily the result of four commercial loan relationships totaling $13.8
million which were transferred to non-performing status during
2008.  The Company’s provision for loan losses was $4.3 million, an
increase of $2.9 million over the prior year. As the Company’s provision expense
for the year exceeded net charge offs, the allowance for loan losses increased
$1.6 million, resulting in an increase in the ratio of the allowance for loan
losses to total loans to 1.07% up from .92% in 2007.






- 5
-





Non
interest income decreased $914,000 due to a $437,000 loss on securities and a
decrease in of $503,000 in investment advisory services.  The Company
sold its investment advisory services business during the third quarter of
2008.  In the second quarter of 2008, the Company recorded a loss of
$419,000 related to an other than temporary impairment in the value of its $4.3
million investment in the AMF Ultra Short Mortgage Fund.  The growth
in interchange fees and treasury management services led to a $217,000 increase
in deposit fees.





Non
interest expense decreased $940,000 for the year.  Excluding the
impact of the $788,000 one time employee related expense and the $200,000 write
down of the Bank’s former operations building incurred in 2007, expenses would
have increased $48,000 in 2008.  Compensation and employee benefits
expense decreased $718,000, or 17.4%, for the fourth quarter and $583,000, or
3.6%, year-to-date.  Over the past three quarters, the Company has
decreased the expense related to the defined benefit pension plan, reduced the
Company’s overall workforce by approximately 10% and sold the brokerage
business. The Company froze its defined benefit pension plan effective April 1,
2008 which decreased expenses by approximately $700,000
annually.  During the third quarter, the Company announced a workforce
reduction of 26 positions, or approximately 10% of the Company’s
workforce.  Management anticipates a cost savings of approximately
$750,000 annually related to the workforce reduction.  As a result of
the sale of the brokerage business, management estimates a cost savings ofapproximately
$1.1 million annually in commission and salary expense.





Significant
earnings pressures are expected to exist during 2009, as well as challenges to
a) ensure adequate liquidity; b) manage the continuing deterioration in overall
credit quality; and c) improve efficiency and cost management
strategies.  Earnings pressure on the Company’s net interest income is
expected to continue in 2009 as historically low rates continue to drive yields
on interest-earning assets down while competition for deposits limits the
downward trend on interest-bearing liabilities.  The Company plans to
address these challenges through various strategic alternatives including a) the
growth and retention of a stable source of core deposits in the Company’s market
area; b) diversification of risk within the commercial portfolio; and c)
maintaining the advantages achieved in previous cost control measures and
defining new behaviors and expectations to utilize current employees in a more
effective way.





ASSET/LIABILITY
MANAGEMENT


The
Company follows a program designed to decrease its vulnerability to material and
prolonged increases in interest rates.  This strategy includes 1)
selling certain longer term, fixed rate loans from its portfolio; 2) increasing
the origination of adjustable rate loans; 3) improving its interest rate gap by
shortening the maturities of its interest-earning assets and extending the
maturities of its interest-bearing liabilities; and 4) increasing its non
interest income.





A
significant part of the Company's program of asset and liability management has
been the increased emphasis on the origination of adjustable rate and/or
short-term loans, which include adjustable rate residential construction loans,
commercial loans, and consumer-related loans.  The Company continues
to originate fixed rate residential mortgage loans.  However,
management’s strategy is to sell substantially all residential mortgage loans
that the Company originates.  The Company sells the servicing on
mortgage loans sold, thereby increasing non interest income.  The
proceeds of these loan sales are used to reinvest in other interest-earning
assets or to repay wholesale borrowings.





The
Company continues to assess methods to stabilize interest costs and match the
maturities of liabilities to assets.  During 2008, customer preference
for certificates of deposit including those with longer maturities has resulted
in longer maturities for retail deposits.  Retail deposit specials are
competitively priced to attract deposits in the Company’s market
area.  However, when retail deposit funds become unavailable due to
competition, the Company employs FHLB advances to maintain the necessary
liquidity to fund lending operations.





The
Company applies early withdrawal penalties to protect the maturity and cost
structure of its deposits and utilizes longer term, fixed rate borrowings when
the cost and availability permit the proceeds of such borrowings to be invested
profitably.





- 6
-


INTEREST RATE SPREAD


The
following table sets forth information concerning the Company's interest-earning
assets, interest-bearing liabilities, net interest income, interest rate spreads
and net yield on average interest-earning assets during the periods indicated
(including amortization of net deferred fees which are considered adjustments of
yields).  Average balance calculations were based on daily
balances.  (dollars in thousands)





Year
      Ended
                  
                  Year
      Ended
                  
                  Year
      EndedDec
      2008
                  
                  Dec
      2007
                  
                  Dec
      2006Average
                    Balance
                  
                  Interest
                  Average
                    Yield/Rate
                  
                  Average
                    Balance
                  
                  Interest
                  Average
                    Yield/Rate
                  
                  Average
                    Balance
                  
                  Interest
                  Average
                    Yield/RateAssets:Interest-earning
      assets:Residential
      mortgage loans
                  $
                  135,601
                  $
                  8,516
                  6.28%
                  $
                  162,641
                  $
                  10,471
                  6.44%
                  $
                  177,687
                  $
                  10,939
                  6.16%Commercial
      mortgage loans
                  
                  301,543
                  
                  18,736
                  6.21%
                  
                  240,682
                  
                  16,766
                  6.97%
                  
                  215,633
                  
                  14,312
                  6.64%Second
      and home equity loans
                  
                  101,185
                  
                  6,186
                  6.11%
                  
                  101,787
                  
                  7,342
                  7.21%
                  
                  96,104
                  
                  7,021
                  7.31%Commercial
      loans
                  
                  206,922
                  
                  12,670
                  6.12%
                  
                  180,187
                  
                  14,538
                  8.07%
                  
                  126,282
                  
                  10,015
                  7.93%Other
      consumer loans
                  
                  23,892
                  
                  1,890
                  7.91%
                  
                  30,502
                  
                  2,280
                  7.47%
                  
                  36,297
                  
                  2,659
                  7.33%Securities
                  
                  69,030
                  
                  2,878
                  4.17%
                  
                  60,991
                  
                  2,688
                  4.41%
                  
                  105,604
                  
                  4,246
                  4.02%Short-term
      investments
                  
                  21,452
                  
                  462
                  2.15%
                  
                  22,417
                  
                  1,116
                  4.98%
                  
                  23,459
                  
                  1,163
                  4.96%Total
      interest-earning assets (1)
                  
                  859,625
                  $
                  51,338
                  5.97%
                  
                  799,207
                  $
                  55,201
                  6.92%
                  
                  781,066
                  $
                  50,355
                  6.46%Allowance
      for loan losses
                  
                  (7,591
                  )
                  
                  
                  
                  (6,720
                  )
                  
                  
                  
                  (6,696
                  )Cash
      and due from banks
                  
                  13,587
                  
                  
                  
                  
                  19,511
                  
                  
                  
                  
                  22,996Bank
      premises and equipment
                  
                  15,457
                  
                  
                  
                  
                  16,765
                  
                  
                  
                  
                  17,568Other
      assets
                  
                  50,866
                  
                  
                  
                  
                  45,474
                  
                  
                  
                  
                  47,853Total
      assets
                  $
                  931,944
                  
                  
                  
                  $
                  874,237
                  
                  
                  
                  $
                  862,787LiabilitiesInterest-bearing
      liabilities:Deposits:Transaction
      accounts
                  $
                  380,230
                  $
                  3,848
                  1.01%
                  $
                  371,145
                  $
                  7,630
                  2.06%
                  $
                  360,133
                  $
                  6,574
                  1.83%Certificate
      accounts
                  
                  322,275
                  
                  12,876
                  4.00%
                  
                  318,541
                  
                  15,029
                  4.72%
                  
                  307,608
                  
                  12,805
                  4.16%FHLB
      borrowings
                  
                  122,921
                  
                  5,059
                  4.12%
                  
                  77,028
                  
                  3,884
                  5.04%
                  
                  83,157
                  
                  4,284
                  5.15%Other
      borrowings
                  
                  15,464
                  
                  766
                  4.95%
                  
                  15,588
                  
                  1,118
                  7.17%
                  
                  15,100
                  
                  981
                  6.50%Total
      interest-bearing liabilities
                  
                  840,890
                  $
                  22,549
                  2.68%
                  
                  782,302
                  $
                  27,661
                  3.54%
                  
                  765,998
                  $
                  24,644
                  3.22%Other
      liabilities
                  
                  20,695
                  
                  
                  
                  
                  22,976
                  
                  
                  
                  
                  24,101Total
      liabilities
                  
                  861,585
                  
                  
                  
                  
                  805,278
                  
                  
                  
                  
                  790,099Total
      shareholders’ equity
                  
                  70,359
                  
                  
                  
                  
                  68,959
                  
                  
                  
                  
                  72,688Total
      Liabilities and
                    Shareholders’
      Equity
                  $
                  931,944
                  
                  
                  
                  $
                  874,237
                  
                  
                  
                  $
                  862,787Net
      Interest Income
                  
                  
                  $
                  28,789
                  
                  
                  
                  $
                  27,540
                  
                  
                  
                  $
                  25,711Net
      Interest Rate Spread
                  
                  
                  
                  
                  3.29%
                  
                  
                  
                  
                  3.38%
                  
                  
                  
                  
                  3.24%Net
      Earning Assets
                  $
                  18,735
                  
                  
                  
                  $
                  16,905
                  
                  
                  
                  $
                  15,068Net
      Interest Margin (2)
                  
                  
                  
                  
                  3.35%
                  
                  
                  
                  
                  3.45%
                  
                  
                  
                  
                  3.29%Average
      Interest-earningAssets
      to AverageInterest-bearing
      Liabilities
                  
                  102.23%
                  
                  
                  
                  
                  102.16%
                  
                  
                  
                  
                  101.97%





(1)
            Average
      balances are net of non-performing
loans.


(2)
            Net
      interest income divided by the average balance of interest-earning
      assets.


- 7
-





RATE/VOLUME
ANALYSIS


The
following table sets forth the changes in the Company's interest income and
interest expense resulting from changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing
liabilities.  Changes not solely attributable to volume or rate
changes have been allocated in proportion to the changes due to volume or
rate.  (dollars in thousands)








Year
      Ended
                    
                    
                    Year
      EndedDec
      2008 vs. Dec 2007
                    
                    
                    Dec
      2007 vs. Dec 2006Increase/(Decrease)
                    
                    
                    Increase/(Decrease)Due
      to
                      Rate
                    
                    
                    Due
      to
                      Volume
                    
                    
                    Total
                      Change
                    
                    
                    Due
      to
                      Rate
                    
                    
                    Due
      to
                      Volume
                    
                    
                    Total
                      ChangeInterest
      Income on Interest-Earning Assets:Residential
      mortgage loans
                    
                    $
                    (251
                    )
                    
                    $
                    (1,704
                    )
                    
                    $
                    (1,955
                    )
                    
                    $
                    552
                    
                    
                    $
                    (1,020
                    )
                    
                    $
                    (468
                    )Commercial
      mortgage loans
                    
                    
                    (1,470
                    )
                    
                    
                    3,440
                    
                    
                    
                    1,970
                    
                    
                    
                    734
                    
                    
                    
                    1,720
                    
                    
                    
                    2,454Second
      and home equity loans
                    
                    
                    (1,113
                    )
                    
                    
                    (43
                    )
                    
                    
                    (1,156
                    )
                    
                    
                    (88
                    )
                    
                    
                    409
                    
                    
                    
                    321Commercial
      loans
                    
                    
                    (4,857
                    )
                    
                    
                    2,989
                    
                    
                    
                    (1,868
                    )
                    
                    
                    177
                    
                    
                    
                    4,346
                    
                    
                    
                    4,523Other
      consumer loans
                    
                    
                    144
                    
                    
                    
                    (534
                    )
                    
                    
                    (390
                    )
                    
                    
                    55
                    
                    
                    
                    (434
                    )
                    
                    
                    (379
                    )Securities
                    
                    
                    (132
                    )
                    
                    
                    322
                    
                    
                    
                    190
                    
                    
                    
                    459
                    
                    
                    
                    (2,017
                    )
                    
                    
                    (1,558
                    )Short-term
      investments
                    
                    
                    (608
                    )
                    
                    
                    (46
                    )
                    
                    
                    (654
                    )
                    
                    
                    5
                    
                    
                    
                    (52
                    )
                    
                    
                    (47
                    )Total
                    
                    
                    (8,287
                    )
                    
                    
                    4,424
                    
                    
                    
                    (3,863
                    )
                    
                    
                    1,894
                    
                    
                    
                    2,952
                    
                    
                    
                    4,846Interest
      Expense on Interest-Bearing Liabilities:Deposits:Transaction
      accounts
                    
                    
                    (3,974
                    )
                    
                    
                    192
                    
                    
                    
                    (3,782
                    )
                    
                    
                    850
                    
                    
                    
                    206
                    
                    
                    
                    1,056Certificate
      accounts
                    
                    
                    (2,331
                    )
                    
                    
                    178
                    
                    
                    
                    (2,153
                    )
                    
                    
                    1,756
                    
                    
                    
                    468
                    
                    
                    
                    2,224FHLB
      borrowings
                    
                    
                    (524
                    )
                    
                    
                    1,699
                    
                    
                    
                    1,175
                    
                    
                    
                    (89
                    )
                    
                    
                    (311
                    )
                    
                    
                    (400
                    )Other
      borrowings
                    
                    
                    (343
                    )
                    
                    
                    (9
                    )
                    
                    
                    (352
                    )
                    
                    
                    104
                    
                    
                    
                    33
                    
                    
                    
                    137Total
                    
                    
                    (7,172
                    )
                    
                    
                    2,060
                    
                    
                    
                    (5,112
                    )
                    
                    
                    2,621
                    
                    
                    
                    396
                    
                    
                    
                    3,017Net
      Change in Net Interest Income
                    
                    $
                    (1,115
                    )
                    
                    $
                    2,364
                    
                    
                    $
                    1,249
                    
                    
                    $
                    (727
                    )
                    
                    $
                    2,556
                    
                    
                    $
                    1,829






- 8
-





RESULTS
OF OPERATIONS


Comparison
of Year Ended December 31, 2008 and Year Ended December 31, 2007:





General


The
Company reported net income of $5.0 million for the year ended December 31,
2008.  This compared to net income of $6.1 million for the year
ended December 31, 2007, representing a decrease of $1.1 million, or
18.3%.





Net
Interest Income


Net
interest income increased $1.2 million, or 4.5%, for the year ended December 31,
2008, compared to the year ended December 31, 2007.  The increase in
net interest income was primarily the net result of three factors: 1) the
increase in interest-earning assets and interest-bearing liabilities; 2) the
changing mix of the Company’s interest-earning assets and interest-bearing
liabilities and 3) the decreasing rate environment.  Total interest
income for the year ended December 31, 2008, decreased $3.9 million, or 7.0%, as
compared to the year ended December 31, 2007.  The decrease in
interest income was a result of a 95 basis point decrease in the yield earned on
interest-earning assets.  This factor was offset by a $60.4 million
increase in average interest-earning assets for the year ended December 31,
2008, as compared to December 31, 2007.  Total interest expense for
the year ended December 31, 2008 decreased $5.1 million, or 18.5%, as compared
to the year ended December 31, 2007.  This decrease, like the decrease
in interest income, was driven by the declining rate environment evidenced by
the 86 basis point decrease in rates paid on average interest-bearing
liabilities for the two comparative years.  The impact of the rate
decrease on interest expenses was mitigated by the $58.6 million increase in the
average balance of interest-bearing liabilities.  The net result of
the decreasing rate environment and the increase in average balances of
interest-earning assets and interest-bearing liabilities was a 10 basis point
decrease in the net interest margin for the year ended 2008 to 3.35%, as
compared to 3.45% for the year ended 2007.





Provision
for Loan Losses


Provision
for loan losses was $4.3 million for the year ended December 31, 2008 compared
to $1.4 million for the year ended December 31, 2007.  The provision
for loan losses increased $2.9 million during 2008 due primarily to an increase
in the Company’s non performing loans due to deteriorating economic conditions
impacting the Company’s local markets and its
customers.  Non-performing assets to total assets increased to 2.86%
at December 31, 2008 from 1.29% at December 31, 2007, and non-performing loans
to gross loans increased to 3.03% at December 31, 2008 from 1.51% at December
31, 2007.  Non-performing assets totaled $27.7 million at December 31,
2008.  The Company has six commercial relationships within its Indiana
market footprint that comprise $19.5 million or approximately 70% of the total
non-performing assets at December 31, 2008.  Net charge offs for 2008
were $2.7 million compared to $987,000 for 2007.  During 2008, net
charge offs in the Company’s commercial and commercial mortgage portfolio
increased $983,000 compared to the prior year.  The largest charge
offs during 2008 were related to a residential subdivision on the south side of
Indianapolis and a condominium development on the north side of
Indianapolis.  In addition to these residential housing related
losses, the Company experienced increased charge offs in residential mortgage
and consumer loans secured by residential property.  The slowdown in
the housing market during 2008 resulted in lower than anticipated sales volumes
and decreases in property values which contributed to the increased charge
offs.





During
2008, the banking industry experienced increasing trends in problem assets and
increased credit losses which resulted from continued weakness in the national
economy.  The impact of the national economic downturn on the
Company’s Indiana market footprint became more pronounced during the second half
of 2008 with the greatest impacts being evidenced by declining property values
and a significant increase in the state unemployment rate.  The
economic downturn has negatively impacted the Bank’s commercial and retail
customers’ ability to repay their debt.  As a result, management
determined that a significant increase to the provision for loan losses was
necessary, based on negative national and local economic trends, which resulted
in increased levels of non-performing assets and increased charge offs during
2008.





Non
Interest Income


Non
interest income decreased $914,000, or 7.1%, for the year.  The net
decrease in non interest income for 2008 was due primarily to decreases in
investment advisory fees and the loss on securities.  The Company sold
its investment advisory services business during the third quarter of 2008 for
the book value of the goodwill and associated intangible assets related to this
business.  Due to the timing of the sale, the Company had no brokerage
fee income in the fourth quarter which resulted in a decrease in investment
advisory services of $503,000, or 26.8% for the year.  In the second
quarter of 2008 the Company recorded a loss of $419,000 related to an other than
temporary impairment in the value of its $4.3 million investment in the AMF
Ultra Short Mortgage Fund, (Fund).  During the second quarter, the net
asset value of the Fund declined significantly due to liquidity concerns within
the mortgage backed securities market combined with the downgrade of certain
securities in the Fund’s portfolio by various ratings agencies.  The
Company redeemed its shares in the Fund for cash and securities in July 2008
resulting in an additional impairment of $18,000.  Offsetting these
non interest income reductions was a $217,000, or 3.3%, increase in deposit
fees.   Interchange income from deposit activity increased
$151,000, or 13.5%.  In addition, the Company’s focus on treasury
management services for business accounts increased commercial deposit fees
$119,000, or 40.6%.






- 9
-






Non
Interest Expenses


Non
interest expenses totaled $28.8 million for the year ended December 31, 2008, a
decrease of $940,000, or 3.2%, compared to the year ended December 31,
2007.  In 2007, the Company had one time miscellaneous charges of
$988,000 associated with a separation agreement with a former employee and a
write-down of the Company’s former operations building, which was subsequently
donated to a


local non
profit organization.  Excluding these one time charges, the Company’s
non interest expense would have remained relatively stable, increasing
$48,000.  Compensation and employee benefits


decreased $583,000,
or 3.6%, for the year ended 2008 as compared to the year
ended 2007 due primarily to cost control measures the Company initiated in
2008.  These measures include freezing the


Company’s
defined benefit pension plan as of April 1, 2008, and a work force reduction in
the third quarter of 2008 of approximately 10%.  In addition, the 2008
third quarter sale of the brokerage business eliminated salaries and commissions
associated with those services.  Offsetting these reductions was an
increase in the Company’s 401K match, additional credit analysts and internal
audit staff. Service bureau expense increased $280,000, or 17.1%, over the
prior year due to costs associated with expanding treasury management and
internet banking services, as well as a full year of costs associated with
remote deposit capture which was implemented in second half of 2007.
Professional fees decreased $383,000, or 29.4%, over the prior
year.  Various changes within the professional fee category
included


lower
legal, consulting and internal audit fees. In 2008, the Company brought in house
its internal audit function, which had been outsourced in prior
years.  Loan expense increased $331,000 due primarily


to
expenses incurred on distressed loans.  Miscellaneous expenses
decreased $713,000, or 18.2%, for the year ended 2008, as compared to the year
ended 2007.  Exclusive of the one time charges discussed above
miscellaneous expenses would have increased $75,000 or 2.4%.





Income
Taxes


Income
tax expense totaled $2.6 million for the year ended December 31, 2008; a
decrease of $536,000, or 17.1%, compared to the year ended December 31,
2007.  This decrease mirrors the decrease in pre-tax income of $1.7
million or 17.9%.





RESULTS
OF OPERATIONS


Comparison
of Year Ended December 31, 2007 and Year Ended December 31, 2006:





General


The
Company reported net income of $6.1 million for the year ended December 31,
2007.  This compared to net income of $6.4 million for the year
ended December 31, 2006, representing a decrease of $318,000, or
4.9%.





Net
Interest Income


Net
interest income increased $1.8 million, or 7.1%, for the year ended December 31,
2007, compared to the year ended December 31, 2006.  The increase in
net interest income was primarily due to the changing mix of the Company’s
interest-earning assets and interest-bearing liabilities.  Total
interest income for the year ended December 31, 2007, increased $4.8 million, or
9.6%, as compared to the year ended December 31, 2006.  The increase
in interest income was a result of two factors: 1) the $18.2 million increase in
average earning assets for 2007 compared to 2006 and 2) the 46 basis point
increase in yield on interest-earning assets for the same period.  The
yield on interest-earning assets increased during 2007 primarily due to a shift
away from lower yielding residential mortgages into higher yielding commercial
and commercial real estate loans.  Total interest expense for the year
ended December 31, 2007 increased $3.0 million, or 12.2%, as compared to the
year ended December 31, 2006.  The increase was due primarily to the
changing mix of interest-bearing liabilities as certificates of deposit and
money market accounts increased $7.2 million and $20.2 million, respectively,
while lower rate interest bearing checking accounts decreased $25.4 million for
the year.    As a result of the mix shift noted above, the
rate paid on interest-bearing liabilities increased 32 basis
points.  The Company was able to increase its net interest margin 16
basis points to 3.45% for 2007.





Provision
for Loan Losses


Provision
for loan losses was $1.4 million for the year ended December 31, 2007, an
increase of $511,000 from $850,000 in 2006.  The provision for loan
losses increased during 2007 due to increases in the loan portfolio and an
increase in the Company’s non performing assets.  In addition, the
Company considered negative national economic conditions and the impact on the
Company’s local markets and its customers.  Commercial and commercial
real estate growth has occurred primarily in the Indianapolis market over the
past two years.  This in-market commercial loan growth has been
generated by commercial lending officers with significant experience in the
Indianapolis market.  Much of the loan growth has come from customer
relationships that have been maintained by the commercial officers for a number
of years.  Loss trends within the loan portfolio for 2007 were
consistent with historical loss trends.  Net charge offs for 2007 were
$987,000 compared to $1.0 million for 2006.  Non-performing assets to
total assets increased to 1.29% at December 31, 2007 from .46% at December 31,
2006, and non-performing loans to gross loans increased to 1.51% at December 31,
2007 from .54% at December 31, 2006.  The increase in these two ratios
is primarily the result of two commercial relationships totaling $6.1 million
being added to non-performing loans in 2007.  During 2007, assets
classified by management as special mention or substandard that were not
included in non-performing assets decreased $8.3 million.  Therefore,
the shift from internally classified problem assets to non-performing assets
during 2007 did
not result in a significant change in the provision for loan losses as similar
loss allocations were required for non-performing assets as compared to
internally classified problem assets.  During 2007, the banking
industry experienced increasing trends in problem assets and credit losses which
resulted from weakening national economic trends and a decline in housing
values.  As a result, local markets were impacted in varying degrees
by the national trends.  The Company’s local market footprint was
impacted by the slow down in the housing sector and the decline in housing
values.  However, the local markets in the Company’s footprint were
aided by diversified industry as well as the positive impact of new jobs created
from existing employers or new projects.  As a result, management
determined that a slight increase in the provision for loan losses related to
national and local economic factors was appropriate.






- 10
-





Non
Interest Income


Non
interest income increased $551,000, or 4.5%, for the year.  The net
increase in non interest income for 2007 was due primarily to increases in
investment advisory fees and deposit fees partially offset by a decrease in loan
servicing income, net of impairments.  Investment advisory revenue
increased $511,000, or 37.5%, for the year due to increased production in
established markets and the mid year acquisition of a book of business located
on the south side of Indianapolis.  Deposit fees increased $450,000,
or 7.4%, for the year due to the continued growth in fees associated with an
overdraft privilege product and interchange fees related to increased debit card
usage.  The increases listed above were partially offset by a decrease
in loan servicing income, net of impairments.  Loan servicing income,
net of impairments decreased $662,000 for the year due to the sale of the
Company’s mortgage servicing portfolio and the corresponding mortgage servicing
rights in the fourth quarter of 2006.  As a result of the sale of the
mortgage servicing portfolio, the Company had decreases in fee income associated
with the mortgage servicing portfolio including reductions in servicing fees and
complementary fees such as insurance revenue and late charge fee
income.





Non
Interest Expenses


Non interest expenses totaled
$29.8million for the year ended December
31,2007, an increase of $1.9million, or6.7%, compared to the year ended December
31,2006.  The expense increases
wereprimarily related to
increasesinmiscellaneous expenses and compensation
and employee benefits expenses.Miscellaneous expense increased
$1.0million due primarily to a separation
agreement with an employee and awrite-down of the Company’s former operations building, which was subsequently
donated to a local non profit organization.  Professional fees
increases included $99,000 primarily due to additional legal and accounting
expenses incurred to address new proxy disclosure requirements and new
accounting pronouncements.The $146,000 decrease in loan expenses
is related to expenses associated with the sale of mortgage servicing rights
which occurred in 2006.  The $526,000 increase in compensation
and employee benefits was a result of additional salary and incentive
compensation expense for the new commercial lending and commercial credit staff
in Indianapolis, additional commission costs associated with increased
investment advisory service fees and normal annual salary
increases.  Additionally, in 2006,the Company reduced its vacation
accrual $260,000 pursuant to a change in vacation policy.





Income
Taxes


Income
tax expense totaled $3.1 million for the year ended December 31, 2007; an
increase of $319,000, or 11.3%, compared to the year ended December 31,
2006.  During 2006, the Company’s effective tax rate was reduced due
to the sale of available for sale securities which reduced the state
apportionment factor for Indiana during the year.  As a result, the
Company’s effective tax rate increased to 33.9% in 2007 compared to 30.4% in
2006.





FINANCIAL
CONDITION


The
Company's total assets increased $60.6 million to $969.4 million at December 31,
2008, from $908.8 million at December 31, 2007.  Cash and cash
equivalents balances decreased $18.0 million during 2008.  FHLB
advances increased $30.6 million.  The amount of the decrease in cash
and cash equivalents and the funds provided by the FHLB advances were used to
fund loan growth as total loans increased $50.9 million, or 6.8%, for the
year.  Commercial and commercial mortgage loans increased $79.5
million, or 16.7%, for the year.  The growth in commercial and
commercial mortgage loans was driven by growth from the Indianapolis market –
commercial and commercial mortgage loans in Indianapolis increased $80.0 million
during 2008.  Of the
commercial real estate loans, $20.0 million and $19.6 million were
collateralized by multi-family residential property at December 31,2008 and2007, respectively, $82.7million and $75.6million were collateralized by
property under construction at December 31,2008and2007, respectively, and $914,000and$1.3 millionwere collateralized by unimproved land
at December 31,2008and2007,
respectively.  Residential mortgage balances decreased $22.3
million for the year as the Company sells substantially all residential mortgage
originations. The Company's
primary lending area is south-central Indiana.  Virtually all of the
Company's loans originated and purchased are to borrowers located within the
state of Indiana.  Of the residential mortgages, $938,000and $1.0million were collateralized by
unimproved land at December 31,2008and2007, respectively.The
consumer loan balances decreased $6.8 million for the year because the Company
no longer originates indirect auto loans.




Total
retail deposits decreased $3.4 million, or .5%, for the year.  This
decrease is the result of a $29.3 million decrease in money market accounts as
these balances were unusually high at the end of the prior year with a December
31, 2007 balance of $185.8 million compared to average yearly balances of $127.5
million and $125.4 million for 2007 and 2008, respectively.  Other
retail deposit categories showed growth of $25.9 million for the year ended
2008.  This included growth of $13.3 million in certificate of deposit
accounts and $7.3 million in interest checking, respectively. Public funds
certificates increased $10.2 million from deposits obtained from one public fund
entity.  The Company focused its advertising dollars related to
deposits on certificate of deposit accounts with an upgradeable feature and a
new high yield checking account in 2008.  Brokered deposits decreased
$3.8 million for the year due to maturities.





As of
December 31, 2008, shareholders’ equity was $92.0 million, an increase of $24.6
million compared to the prior year.  During 2008, the Company issued
$21.5 million of preferred stock and warrants to the United States Treasury
Department under the Capital Purchase Program.






- 11
-





Fourth
Quarter 2008 Results


The
Company had fourth quarter 2008 earnings of $1.5 million or $0.43 diluted
earnings per common share compared to earnings of $1.6 million or $0.47 diluted
earnings per common share for the fourth


quarter
of 2007.   Net interest income increased $328,000, or 4.7%, to
$7.2 million for the fourth quarter as compared to the fourth quarter of the
prior year.  Net interest margin for the fourth quarter of
2008


was
3.28%, which represented a decrease of 23 basis points compared to the third
quarter of 2008.  Net interest margin for 2008 was 3.35% compared to
3.45% for 2007 - a 10 basis point decrease.  Net


interest
margin has been
fluctuating significantly from quarter to quar ter due
to rapid changes in interest rates.  Non interest income decreased
$693,000 to $2.7 million for the fourth quarter.  The
primary


reason
for the decrease during the fourth quarter related to a reduction in brokerage
fees of $491,000.  During the third quarter, the Company chose to
discontinue offering brokerage services through


Raymond
James and the brokerage business was sold to the brokers who had been serving
these customers.  Non interest expenses decreased $729,000, or 10.0%,
to $6.6 million for the fourth quarter.  Compensation and employee
benefits expense decreased $718,000, or 17.4%, in the fourth quarter of
2008.  Over the past three quarters, the Company has decreased the
expense related to the


defined
benefit pension plan, reduced the Company’s overall workforce by approximately
10% and sold the brokerage business. The Company froze its defined benefit
pension plan effective April 1, 2008 which decreased expense by approximately
$700,000 annually.  During the third quarter, the Company announced a
workforce reduction of 26 positions, or approximately 10% of the Company’s
workforce.  This workforce reduction was completed during the third
quarter.  Severance costs associated with the workforce reduction were
included in expense for the third quarter.  Management


anticipates
a cost savings of approximately $750,000 annually related to the workforce
reduction beginning in the fourth quarter.  As a result of the sale of
the brokerage business, management estimates


a cost
savings of approximately $1.1 million annually in commission and salary
expense.  The efficiency ratio decreased to 66.3% for the fourth
quarter of 2008 compared to 71.0% for the fourth quarter of 2007.





INTEREST
RATE SENSITIVITY


Interest
rate risk is the exposure to adverse changes in net interest income due to
changes in interest rates.  Interest rate sensitivity for the Company
is a result of repricing, option, and basis risks.  Repricing risk
represents timing mismatches in the Company’s ability to alter contractual rates
earned on financial assets or paid on liabilities in response to changes in
market interest rates.  For example, if interest-bearing liabilities
reprice or mature more quickly than interest-earning assets, an increase in
market rates could adversely affect net interest income.  Conversely,
if interest-bearing liabilities reprice or mature more quickly than
interest-earning assets, a decrease in market rates could positively affect net
interest income.  Option risk arises from embedded options present in
many financial instruments such as loan prepayment options and deposit early
withdrawal options.  These provide customers opportunities to take
advantage of directional changes in rates, which could have an adverse impact on
the Company’s net interest income.  Basis risk refers to the potential
for changes in the underlying relationship between market rates or indices,
which subsequently result in a narrowing of the spread earned on a loan or
investment relative to its cost of funds.





Net
interest income represents the Company’s principal component of
income.  Consistency of the Company’s net interest income is largely
dependent upon the effective management of interest rate risk.  The
Company has established risk measures, limits and policy guidelines in its
Interest Rate Risk Management Policy.  The responsibility for
management of interest rate risk resides with the Company’s Asset/Liability
Committee (“ALCO”), with oversight by the Board of Directors.  The
Company uses an earnings simulation analysis that measures the sensitivity of
net interest income to various interest rate movements.  The base-case
scenario is established using current interest rates.  The comparative
scenarios assume an immediate parallel shock in increments of 100 basis point
rate movements.  The interest rate scenarios are used for analytical
purposes and do not necessarily represent management’s view of future market
movements.  Rather, these are intended to provide a measure of the
degree of volatility interest rate movements may introduce into the earnings of
the Company.  Modeling the sensitivity of earnings to interest rate
risk is highly dependent on numerous assumptions embedded in the
model.  These assumptions include, but are not limited to,
management’s best estimates of the effect of changing interest rates on the
prepayment speeds of certain assets and liabilities, projections for activity
levels in each of the product lines offered by the Company and historical
behavior of deposit rates and balances in relation to changes in interest
rates.  These assumptions are inherently uncertain, and as a result,
the model cannot precisely measure net interest income or precisely predict the
impact of fluctuations in interest
rates on net interest income.  Actual results will differ from
simulated results due to timing, magnitude, and frequency of interest rate
changes as well as changes in market conditions. The Company’s 12-month net
interest income sensitivity profile as of fiscal year-end December 31, 2008 and
December 31, 2007 is as follows:





As
      Of
                            Dec
      2008
                            Dec
      2007Changes
      in Rates
                            Net
      Interest
                              Income
      % Change
                            Net
      Interest
                              Income
      % Change
                            Interest
      Rate
                              Risk
      Management
                              Policy
      Guidelines+
      300 basis points
                            3.80
                            (10.84)
                            (20.00)+
      200 basis points
                            2.68
                            (6.91)
                            (15.00)+
      100 basis points
                            1.26
                            (3.58)
                            (7.50)-
      100 basis points
                            0.26
                            3.47
                            (7.50)-
      200 basis points
                            (3.61)
                            4.37
                            (15.00)-
      300 basis points
                            (7.19)
                            2.40
                            (20.00)








- 12
-




ASSET
QUALITY


In
accordance with the Company's classification of assets policy, management
evaluates the loan and investment portfolio each month to identify assets that
may contain probable losses.  In addition, management evaluates the
adequacy of its allowance for loan losses.





SECURITIES


Management
reviews its available for sale and held to maturity securities for other than
temporary impairment on a quarterly basis.  The review includes an
analysis of the facts and circumstances of each individual investment such as
the severity of loss, the length of time the fair value has been below cost, the
expectation for that security’s performance, the creditworthiness of the issuer
and the Company’s intent and ability to hold the security to recovery or
maturity.  The Company uses a third party pricing service to obtain
quotes for the fair value of its securities.  The Company has used
this service since 2002 and has found through subsequent transactions the quotes
received from this service to be reliable and accurate.  In 2008 the
Company recorded a loss of
$437,000 related to an other than temporary impairment in the value of its $4.3
million investment in the AMF Ultra Short Mortgage Fund. During the second
quarter, the net asset value of the Fund declined significantly due to liquidity
concerns within the mortgage backed securities market combined with the
downgrade of certain securities in the Fund’s portfolio by various ratings
agencies.  The Company redeemed its shares in the Fund for cash and
securities in July 2008.  The securities received as a result of the
redemption in kind were recorded at their fair value when received and
classified as held to maturity.  In reviewing these securities at
December 31, 2008, for other than temporary impairment, management considered
the change in market value of the securities in the last half of 2008, the
expectation for the security’s future performance based on the receipt of all
required cash flows, Moody’s ratings where available, and the Company’s intent
and ability to hold the securities to maturity.  Based on this
criteria management determined the value of held to maturity securities
portfolio did not require additional impairment.  In analyzing the
available for sale portfolio, the Company had two securities with a face amount
of $2.0 million and an unrealized loss of $940,000 at the end of
2008.  These two securities are rated Aa3 by Moodys indicating these
securities are considered of high quality and of very low credit
risk.  The issuers of the two securities are two well capitalized
banks.  Management believes that the decline in market value is due
primarily to the interest rate and maturity as these securities carry an
interest rate of LIBOR plus 55 basis points with maturity beyond ten
years.  The Company has the intent and ability to hold these two
securities to recovery, which may be maturity.  Other available for
sale securities in a loss position have been so for less than twelve
months.  Based on this criteria management determined the available
for sale portfolio did not have any other than temporary
impairment.





GOODWILL


At
December 31, 2008 the Company had goodwill of $1.4 million.  Due to
the significant adverse change in the business climate experienced as a result
of the economic recession management tested goodwill for impairment on a
quarterly basis beginning in the second quarter of 2008.  Management’s
test for impairment includes comparing the market price of the Company’s stock
to the carrying value, as well as using the average of each quarters published
multiples for bank mergers and acquisitions.   Based on this
testing the Company’s estimated value exceeded capital by 71%, 33% and 25% in
the second, third and fourth quarters, respectively.  Management
considered the results of this testing, as well as the Company’s positive
earning stream in each quarter and determined that the performance of the level
one test indicated the Company’s goodwill was not impaired as of each quarter
end.  Management intends to test goodwill on a quarterly basis in 2009
due to the declining quarterly trend of estimated value exceeding capital in
2008, as well as the continuing rapidly changing economic
environment.




NON-PERFORMING
ASSETS


The
following table sets forth information concerning non-performing assets of the
Company.  Real estate owned includes property acquired in settlement
of foreclosed loans that is carried at net realizable value.  (dollars
in thousands)





As
      of
                                        
                                        Dec
      2008
                                        
                                        
                                        Dec
      2007
                                        
                                        
                                        Dec
      2006
                                        
                                        
                                        Dec
      2005
                                        
                                        
                                        Dec
      2004Non-accruing
      loans:Residential
      mortgage loans
                                        
                                        $
                                        2,349
                                        
                                        
                                        $
                                        2,284
                                        
                                        
                                        $
                                        1,637
                                        
                                        
                                        $
                                        1,656
                                        
                                        
                                        $
                                        1,249Commercial
      mortgage loans
                                        
                                        
                                        4,971
                                        
                                        
                                        
                                        2,009
                                        
                                        
                                        
                                        413
                                        
                                        
                                        
                                        212
                                        
                                        
                                        
                                        5,633Second
      and home equity loans
                                        
                                        
                                        696
                                        
                                        
                                        
                                        466
                                        
                                        
                                        
                                        200
                                        
                                        
                                        
                                        308
                                        
                                        
                                        
                                        410Commercial
      loans
                                        
                                        
                                        14,381
                                        
                                        
                                        
                                        5,613
                                        
                                        
                                        
                                        490
                                        
                                        
                                        
                                        754
                                        
                                        
                                        
                                        2,094Other
      consumer loans
                                        
                                        
                                        137
                                        
                                        
                                        
                                        144
                                        
                                        
                                        
                                        112
                                        
                                        
                                        
                                        140
                                        
                                        
                                        
                                        149Total
                                        
                                        
                                        22,534
                                        
                                        
                                        
                                        10,516
                                        
                                        
                                        
                                        2,852
                                        
                                        
                                        
                                        3,070
                                        
                                        
                                        
                                        9,53590
      days past due and still accruing loans:Residential
      mortgage loans
                                        
                                        
                                        481
                                        
                                        
                                        
                                        64
                                        
                                        
                                        
                                        459
                                        
                                        
                                        
                                        456
                                        
                                        
                                        
                                        168Commercial
      loans
                                        
                                        
                                        37
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Total
                                        
                                        
                                        518
                                        
                                        
                                        
                                        64
                                        
                                        
                                        
                                        459
                                        
                                        
                                        
                                        456
                                        
                                        
                                        
                                        168Troubled
      debt restructured
                                        
                                        
                                        1,282
                                        
                                        
                                        
                                        874
                                        
                                        
                                        
                                        440
                                        
                                        
                                        
                                        809
                                        
                                        
                                        
                                        3,141Total
      non-performing loans
                                        
                                        
                                        24,334
                                        
                                        
                                        
                                        11,454
                                        
                                        
                                        
                                        3,751
                                        
                                        
                                        
                                        4,335
                                        
                                        
                                        
                                        12,844Real
      estate owned
                                        
                                        
                                        3,379
                                        
                                        
                                        
                                        311
                                        
                                        
                                        
                                        436
                                        
                                        
                                        
                                        271
                                        
                                        
                                        
                                        2,019Total
      Non-Performing Assets
                                        
                                        $
                                        27,713
                                        
                                        
                                        $
                                        11,765
                                        
                                        
                                        $
                                        4,187
                                        
                                        
                                        $
                                        4,606
                                        
                                        
                                        $
                                        14,863Non-performing
      assets to total assets
                                        
                                        
                                        2.86
                                        %
                                        
                                        
                                        1.29
                                        %
                                        
                                        
                                        0.46
                                        %
                                        
                                        
                                        0.54
                                        %
                                        
                                        
                                        1.71
                                        %Non-performing
      loans to total loans
                                        
                                        
                                        3.03
                                        %
                                        
                                        
                                        1.51
                                        %
                                        
                                        
                                        0.54
                                        %
                                        
                                        
                                        0.70
                                        %
                                        
                                        
                                        2.01
                                        %Allowance
      for loan losses to non-performing loans
                                        
                                        
                                        35.30
                                        %
                                        
                                        
                                        60.87
                                        %
                                        
                                        
                                        175.90
                                        %
                                        
                                        
                                        155.78
                                        %
                                        
                                        
                                        61.23
                                        %






- 13
-




Total
non-performing assets increased $15.9 million to $27.7 million at December 31,
2008.  The increase was primarily the result of four commercial loan
relationships totaling $13.8 million which were transferred to non-performing
status during 2008.  Two of these commercial relationships totaling
$6.7 million are residential condominium projects in the Indianapolis
area.  The loans are secured by partially completed condominium
projects which have been negatively impacted by the slowdown in the residential
housing market resulting in decreased unit sales and decreased
prices.  One commercial relationship is an excavating and heavy
equipment leasing company in Indianapolis totaling approximately $5.3 million
which is secured by inventory and equipment.  The fourth commercial
relationship is a commercial land development loan on the south side of
Indianapolis totaling $1.8 million which is secured by undeveloped
land.  In addition, non-performing residential mortgage and second and
home equity loans increased $482,000 and $230,000, respectively.





ALLOWANCE
FOR LOAN LOSSES


The
provision for loan losses was $4.3 million for the year ended December 31, 2008
which resulted in an increase in the balance of the allowance for loan losses to
$8.6 million at December 31, 2008 as compared to $7.0 million at December 31,
2007.  The allowance for loan losses as a percentage of total loans
increased to 1.07% at December 31, 2008 from 0.92% at December 31,
2007.





In
determining the appropriate balance in the allowance for loan losses, management
considered such factors as trends in the loan portfolio, historical loss trends,
levels of non-performing assets and the impact of the local and national
economy.  Commercial and commercial real estate growth totaled $79.5
million during 2008 and occurred primarily in the Indianapolis
market.  Many of the Company’s commercial real estate loans are
related to residential and commercial land development in the Indianapolis
market.  During 2008, the residential land development sector
experienced softening due to the effects of the national economic downturn and
the overall slowdown in the residential housing market.  In
particular, the residential condominium market which had experienced significant
growth in recent years slowed dramatically in 2008.  As the overall
residential housing market slowed in Indianapolis, demand for condominiums
dropped substantially.  Overall, the Company experienced declining
credit quality trends during 2008 which was consistent with the banking industry
as a whole.  The declining credit quality trends were evidenced by
significant increases in non-performing assets during the year and net charge
offs which exceeded the Company’s historical average.  Total
non-performing assets increased $15.9 million to $27.7 million during
2008.  Management allocates a specific portion of the allowance for
loan losses to each significant non-performing loan.  In addition,
Management classifies problem assets and allocates a portion of the allowance
for loan losses prior to loans becoming non-performing assets.  During
2008, assets classified by management as special mention or substandard that
were not
included in non-performing assets increased $13.5 million.  As a
result, during 2008 the Company recorded a provision for loan losses well in
excess of current net charge offs resulting in an increase in the allowance for
loan losses of $1.6 million or 23.1%.  Management determined that a
significant increase in the allowance for loan losses was appropriate in light
of the decline in credit quality resulting from the impacts of the national
economic downturn on the Company’s local market footprint.





The
following table sets forth an analysis of the allowance for loan losses.
(dollars in thousands)





As
      Of
                      
                      Dec
      2008
                      
                      
                      Dec
      2007
                      
                      
                      Dec
      2006
                      
                      
                      Dec
      2005
                      
                      
                      Dec
      2004Balance
      at beginning of period
                      
                      $
                      6,972
                      
                      
                      $
                      6,598
                      
                      
                      $
                      6,753
                      
                      
                      $
                      7,864
                      
                      
                      $
                      7,506Provision
      for loan losses
                      
                      
                      4,292
                      
                      
                      
                      1,361
                      
                      
                      
                      850
                      
                      
                      
                      808
                      
                      
                      
                      1,770Loan
      charge-offs:Residential
      mortgage loans
                      
                      
                      (499
                      )
                      
                      
                      (136
                      )
                      
                      
                      (84
                      )
                      
                      
                      (264
                      )
                      
                      
                      (88
                      )Commercial
      mortgage loans
                      
                      
                      (342
                      )
                      
                      
                      (7
                      )
                      
                      
                      -
                      
                      
                      
                      (893
                      )
                      
                      
                      (28
                      )Second
      and home equity loans
                      
                      
                      (339
                      )
                      
                      
                      (24
                      )
                      
                      
                      (67
                      )
                      
                      
                      (158
                      )
                      
                      
                      (136
                      )Commercial
      loans
                      
                      
                      (1,219
                      )
                      
                      
                      (691
                      )
                      
                      
                      (470
                      )
                      
                      
                      (422
                      )
                      
                      
                      (993
                      )Other
      consumer loans
                      
                      
                      (642
                      )
                      
                      
                      (608
                      )
                      
                      
                      (706
                      )
                      
                      
                      (311
                      )
                      
                      
                      (279
                      )Total
      charge-offs
                      
                      
                      (3,041
                      )
                      
                      
                      (1,466
                      )
                      
                      
                      (1,327
                      )
                      
                      
                      (2,048
                      )
                      
                      
                      (1,524
                      )Recoveries:Residential
      mortgage loans
                      
                      
                      34
                      
                      
                      
                      14
                      
                      
                      
                      14
                      
                      
                      
                      10
                      
                      
                      
                      16Commercial
      mortgage loans
                      
                      
                      1
                      
                      
                      
                      1
                      
                      
                      
                      6
                      
                      
                      
                      42
                      
                      
                      
                      9Second
      and home equity loans
                      
                      
                      45
                      
                      
                      
                      22
                      
                      
                      
                      2
                      
                      
                      
                      1
                      
                      
                      
                      2Commercial
      loans
                      
                      
                      57
                      
                      
                      
                      177
                      
                      
                      
                      109
                      
                      
                      
                      26
                      
                      
                      
                      51Other
      consumer loans
                      
                      
                      229
                      
                      
                      
                      265
                      
                      
                      
                      191
                      
                      
                      
                      50
                      
                      
                      
                      34Total
      recoveries
                      
                      
                      366
                      
                      
                      
                      479
                      
                      
                      
                      322
                      
                      
                      
                      129
                      
                      
                      
                      112Net
      charge-offs
                      
                      
                      (2,675
                      )
                      
                      
                      (987
                      )
                      
                      
                      (1,005
                      )
                      
                      
                      (1,919
                      )
                      
                      
                      (1,412
                      )Balance
      at End of Period
                      
                      $
                      8,589
                      
                      
                      $
                      6,972
                      
                      
                      $
                      6,598
                      
                      
                      $
                      6,753
                      
                      
                      $
                      7,864Net
      charge-offs to average loans
                      
                      
                      0.35
                      %
                      
                      
                      0.14
                      %
                      
                      
                      0.15
                      %
                      
                      
                      0.31
                      %
                      
                      
                      0.22
                      %Allowance
      for loan losses to total loans
                      
                      
                      1.07
                      %
                      
                      
                      0.92
                      %
                      
                      
                      0.95
                      %
                      
                      
                      1.09
                      %
                      
                      
                      1.23
                      %






- 14
-




ALLOCATION
OF THE ALLOWANCE FOR LOAN LOSSES


The
following table indicates the portion of the allowance for loan loss management
has allocated to each loan type:  (dollars in thousands)





As
      Of
                    
                    Dec
      2008
                    
                    
                    Dec
      2007
                    
                    
                    Dec
      2006
                    
                    
                    Dec
      2005
                    
                    
                    Dec
      2004Residential
      mortgage loans
                    
                    $
                    741
                    
                    
                    $
                    1,153
                    
                    
                    $
                    1,355
                    
                    
                    $
                    1,858
                    
                    
                    $
                    1,243Commercial
      mortgage loans
                    
                    
                    2,195
                    
                    
                    
                    1,541
                    
                    
                    
                    1,233
                    
                    
                    
                    1,718
                    
                    
                    
                    2,919Second
      and home equity loans
                    
                    
                    821
                    
                    
                    
                    762
                    
                    
                    
                    640
                    
                    
                    
                    567
                    
                    
                    
                    633Commercial
      loans
                    
                    
                    4,298
                    
                    
                    
                    2,833
                    
                    
                    
                    2,623
                    
                    
                    
                    1,813
                    
                    
                    
                    2,216Other
      consumer loans
                    
                    
                    534
                    
                    
                    
                    683
                    
                    
                    
                    747
                    
                    
                    
                    797
                    
                    
                    
                    853Total
      Allowance for Loan Losses
                    
                    $
                    8,589
                    
                    
                    $
                    6,972
                    
                    
                    $
                    6,598
                    
                    
                    $
                    6,753
                    
                    
                    $
                    7,864





The
unallocated allowance is assigned to the various loan categories as
follows.  First a portion of the unallocated allowance is based on
management’s perception of probable risk in the different loan
categories.  At December 31, 2008, this included $400,000, $200,000
and $900,000 assigned to second mortgages and home equity loans, consumer loans
and commercial loans, respectively.  The $700,000 remainder of the
unallocated allowance is assigned to the various loan categories based on
principal balance of the loan categories.





LIQUIDITY
AND CAPITAL RESOURCES


The
Company maintains its liquid assets at a level believed adequate to meet
requirements of normal daily activities, repayment of maturing debt and
potential deposit outflows.  Cash flow projections are regularly
reviewed and updated to assure that adequate liquidity is
maintained.  Cash for these purposes is generated through the sale or
maturity of securities and loan prepayments and repayments, and may be generated
through increases in deposits or borrowings.  Loan payments are a
relatively stable source of funds, while deposit flows are influenced
significantly by the level of interest rates and general money market
conditions.




Borrowings
may be used to compensate for reductions in other sources of funds such as
deposits.  As a member of the FHLB System, the Company may borrow from
the FHLB of Indianapolis.  At December 31, 2008, the Company had
$129.9 million in advances from the FHLB of Indianapolis.  As of that
date, the Company had commitments of approximately $158.4 million to fund lines
of credit and undisbursed portions of loans in process, loan originations of
approximately $41.9 million, letters of credit of $2.9 million, and
commitments to sell loans of $54.7 million.  In the opinion of
management, the Company has sufficient cash flow and borrowing capacity to meet
current and anticipated funding commitments.





On
December 12, 2008, Indiana Community Bancorp strengthened its capital position
by issuing 21,500 shares of the Company’s Fixed Rate Cumulative Perpetual
Preferred Stock, Series A (the “Series A Preferred Stock”) and a warrant to
purchase 188,707 shares of the Company’s common stock, without par value (the
“Common Stock”), for an aggregate purchase price of $21.5 million in
cash.  The Series A Preferred Stock qualifies as Tier 1 capital and
will pay cumulative dividends at a rate of 5% per annum for the first five
years, and 9% per annum thereafter. The Series A Preferred Stock is non-voting
except with respect to certain matters affecting the rights of the holders
thereof, and may be redeemed by the Company.  The Warrant has a
10-year term and is immediately exercisable upon its issuance, with an exercise
price, subject to anti-dilution adjustments, equal to $17.09 per share of the
Common Stock.  Treasury has agreed not to exercise voting power with
respect to any shares of Common Stock issued upon exercise of the
Warrant.





Upon
issuance of the Series A Preferred Stock on December 12, 2008, the ability of
the Company to declare or pay dividends or distributions on, or purchase, redeem
or otherwise acquire for consideration, shares of its Common Stock will be
subject to restrictions, including a restriction against increasing dividends
from the last quarterly cash dividend per share ($0.12) declared on the Common
Stock prior to October 14, 2008 without the consent of the U.S. Department of
the Treasury. The redemption, purchase or other acquisition of trust preferred
securities of the Company or its affiliates also will be restricted. These
restrictions will terminate on the earlier of (a) the third anniversary of the
date of issuance of the Series A Preferred Stock and (b) the date on which the
Series A Preferred Stock has been redeemed in whole or Treasury has transferred
all of the Series A Preferred Stock to third parties.  In addition,
pursuant to the Certificate of Designations, the ability of the Company to
declare or pay dividends or distributions on, or repurchase, redeem or otherwise
acquire for consideration, shares of its Common Stock will be subject to
restrictions in the event that the Company fails to declare and pay full
dividends (or declare and set aside a sum sufficient for payment thereof) on its
Series A Preferred Stock.






- 15
-




CONTRACTUAL
COMMITMENTS


Financial
Instruments with Off-Balance Sheet Risk


In the
normal course of business, the Company is a party to various activities that
contain credit and market risk that are not reflected in the financial
statements.  Such activities include commitments to extend credit,
selling loans, borrowing funds, and standby letters of
credit.  Commitments to borrow or extend credit, including loan
commitments and standby letters of credit, do not necessarily represent future
cash requirements in that these commitments often expire without being drawn
upon.  Management believes that none of these arrangements exposes the
Company to any greater risk of loss than already reflected on our balance sheet
so accordingly no reserves have been established for these
commitments.  Commitments are summarized as
follows:  (dollars in thousands)





Less Than
                      1
      year
                    
                    
                    1-3
      years
                    
                    
                    4-5
      years
                    
                    
                    Greater Than
                      5
      years
                    
                    
                    TotalContractually
      obligated payments due by period:Certificates
      of deposits
                    
                    $
                    187,450
                    
                    
                    $
                    121,224
                    
                    
                    $
                    20,436
                    
                    
                    $
                    1,497
                    
                    
                    $
                    330,607Long
      term debt
                    
                    
                    19,500
                    
                    
                    
                    23,250
                    
                    
                    
                    85,000
                    
                    
                    
                    17,640
                    
                    
                    
                    145,390Long
      term compensation obligations
                    
                    
                    212
                    
                    
                    
                    520
                    
                    
                    
                    429
                    
                    
                    
                    1,568
                    
                    
                    
                    2,729Commitments
      to extend credit:Commercial
      mortgage and commercial loans (1)
                    
                    
                    107,476
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    107,476Residential
      mortgage loans
                    
                    
                    34,641
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    34,641Revolving
      home equity lines of credit
                    
                    
                    39,633
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    39,633Other
                    
                    
                    18,565
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    18,565Standby
      letters of credit
                    
                    
                    2,922
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,922Commitments
      to sell loans:Residential
      mortgage loans
                    
                    
                    31,990
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    31,990Commercial
      mortgage and commercial loans (2)
                    
                    
                    22,684
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    22,684Total
                    
                    $
                    465,073
                    
                    
                    $
                    144,994
                    
                    
                    $
                    105,865
                    
                    
                    $
                    20,705
                    
                    
                    $
                    736,637





1)
            Commercial
      mortgage and commercial loan commitments to extend credit are presented
      net of the portion of participation interests due to
      investors.


2)
            Commercial
      mortgage and commercial loan commitments to sell loans represent
      participation interests of undisbursed amounts sold to
      investors.




Lease
Obligations


The
Company leases banking facilities and other office space under operating leases
that expire at various dates through 2022 and that contain certain renewal
options.  Rent expense charges to operations were $491,000, $242,000,
and $113,000 for the years ended December 31, 2008, 2007, and 2006,
respectively.  As of December 31, 2008, future minimum annual rental
payments under these leases are as follows: (dollars in thousands)





Year
      Ended December
                  
                  Amount2009
                  
                  $
                  4742010
                  
                  
                  4692011
                  
                  
                  4792012
                  
                  
                  3372013
                  
                  
                  328Thereafter
                  
                  
                  3,129Total
      Minimum Operating Lease Payments
                  
                  $
                  5,216





Change
in Control Agreements


The
Company has entered into change in control agreements with certain executive
officers.  Under certain circumstances provided in the agreements, the
Company may be obligated to pay three times such officers’ base salary and to
continue their health insurance coverage for twelve months.  Such
payments are currently prohibited during the period the Series A Preferred Stock
issued under the Capital Purchase Program is held by the U.S. Department of
Treasury.




- 16
-


OFF-BALANCE
SHEET ARRANGEMENTS


The term
“off-balance sheet arrangement” generally means any transaction, agreement, or
other contractual arrangement to which an entity unconsolidated with the Company
is a party under which the Company has (i) any obligation arising under a
guarantee contract, derivative instrument or variable interest; or (ii) a
retained or contingent interest in assets transferred to such entity or similar
arrangement that serves as credit, liquidity or market risk support for such
assets.  The Company does not have any off-balance sheet arrangements
with unconsolidated entities that have or are reasonably likely to have a
current or future effect on the Company’s financial condition, change in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors, except
as related to the guarantee of Capital Securities issued by the Company’s
unconsolidated Delaware Trust subsidiary, Home Federal Statutory Trust I, as
disclosed in note 9 to the consolidated financial statements.





DERIVATIVE
FINANCIAL INSTRUMENTS


Statement
of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting for
Derivative Instruments and Hedging Activities” as amended, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts requires all derivatives,
whether designated as a hedge, or not, to be recorded on the balance sheet at
fair value.  The Company designates its fixed rate and variable rate
interest rate swaps as fair value and cash flow hedge instruments,
respectively.  If the derivative is designated as a fair value hedge,
the changes in fair value of the derivative are recognized in
earnings.  If the derivative is designated as a cash flow hedge, the
changes in fair value of the derivative are recorded in Accumulated Other
Comprehensive Income (“AOCI”), net of income taxes.  The Company has
only limited involvement with derivative financial instruments and does not use
them for trading purposes.  The Company has interest rate lock
commitments for the origination of loans held for sale which are not material to
the Company’s consolidated financial statements.  See Note 1 for
further discussion of derivative financial instruments.





IMPACT
OF INFLATION


The
consolidated financial statements and related data presented herein have been
prepared in accordance with accounting principles generally accepted in the
United States of America.  These principles require the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.  The primary assets and liabilities of commercial banks
such as the Company are monetary in nature.  As a result, interest
rates have a more significant impact on the Company’s performance than the
effects of general levels of inflation.  Interest rates do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services.  In the current interest rate environment,
liquidity, maturity structure and quality of the Company's assets and
liabilities are critical to the maintenance of acceptable performance
levels.




NEW
ACCOUNTING PRONOUNCEMENTS


In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” which
replaces SFAS No. 141, “Business Combinations.”  This Statement
retains the fundamental requirements in SFAS No. 141 that the acquisition method
of accounting (formerly referred to as purchase method) is used for all business
combinations and that an acquirer is identified for each business
combination.  This Statement defines the acquirer as the entity that
obtains control of one or more businesses in the business combination and
establishes the acquisition date as of the date that the acquirer achieves
control.  This Statement requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values.  This
Statement requires the acquirer to recognize acquisition-related costs and
restructuring costs separately from the business combination as period expenses.
This statement requires that loans acquired in a purchase business combination
be recorded at fair value.  Valuation allowances should reflect only
those losses incurred by the investor after acquisition.   This
Statement is effective for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008.  Management is currently in the process of
determining what effect the provisions of this statement will have on the
Company’s financial position or results of operations.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an Amendment to ARB No. 51.”  This
Statement establishes new accounting and reporting standards that require the
ownership interests in subsidiaries held by parties other than the parent be
clearly identified, labeled, and presented in the consolidated statement of
financial position within equity, but separate from the parent's
equity.  The Statement also requires the amount of consolidated net
income attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of
income.  This Statement is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008.  Management is currently in the process of determining what
effect the provisions of this statement will have on the Company’s financial
position or results of operations.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities - an amendment of FASB Statement No.
133.”  This Statement changes the disclosure requirements for
derivative instruments and hedging activities.  Entities are required
to provide enhanced disclosures about a) how and why an entity uses derivative
instruments, b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows.  This Statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008.  Management is currently in the
process of determining what effect the provisions of this statement will have on
the Company’s financial position or
results of operations.





FASB
staff position FAS 157-3, “Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active,” was posted October 10,
2008.  This FASB Staff Position (FSP) clarifies the application of
FASB Statement No. 157, Fair Value Measurements, in a market that is not active
and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active.  This FSP shall be effective upon issuance, including prior
periods for which financial statements have not been
issued.  Management has determined the adoption of FSP FAS 157-3 did
not have a material effect on the Company’s financial position or results of
operations.






- 17
-





FASB
staff position EITF Issue No. 99-20-1, “Amendments to the Impairment Guidance of
EITF Issue No. 99-20,” was posted December 30, 2008.  This FASB Staff
Position (FSP) amends the impairment guidance in EITF Issue No. 99-20,
“Recognition of Interest Income and Impairment on Purchased Beneficial Interests
and Beneficial Interests that Continue to Be Held by a Transferor in Securitized
Financial Assets,” to achieve more consistent determination of whether an other
than temporary impairment assessment has occurred.  The FSP also
retains and emphasizes the objective of an other than temporary impairment
assessment and the related disclosure requirements in FASB No. 115, “Accounting
for Certain Investments in Debt and Equity Securities,” and other related
guidance.  The FSP is effective for interim and annual reporting
periods ending after December 15, 2008, and shall be applied
prospectively.  Management has determined the adoption of FSP EITF
Issue No. 99-20-1 did not have a material effect on the Company’s financial
position or results of operations.





CRITICAL
ACCOUNTING POLICIES


The notes
to the consolidated financial statements contain a summary of the Company’s
significant accounting policies.  Certain of these policies are
critical to the portrayal of the Company’s financial condition, since they
require management to make difficult, complex or subjective judgments, some of
which may relate to matters that are inherently uncertain.  Management
believes that its critical accounting policies include a determination of the
allowance for loan losses and the valuation of securities.




Allowance
for Loan Losses


A loan is
considered impaired when it is probable the Company will be unable to collect
all contractual principal and interest payments due in accordance with the terms
of the loan agreement. Impaired loans are measured based on the loan’s
discounted cash flow or the estimated fair value of the collateral if the loan
is collateral dependent.  The amount of impairment, if any, and any
subsequent changes are included in the allowance for loan losses.





The
allowance for loan losses is established through a provision for loan losses.
Loan losses are charged against the allowance when management believes the loans
are uncollectible. Subsequent recoveries, if any, are credited to the
allowance.  The allowance for loan losses is maintained at a level
management considers to be adequate to absorb estimated incurred loan losses
inherent in the portfolio, based on evaluations of the collectibility and
historical loss experience of loans.  The allowance is based on
ongoing assessments of the estimated losses inherent in the loan
portfolio.  The Company’s methodology for assessing the appropriate
allowance level consists of several key elements, as described
below.





All
delinquent loans that are 90 days past due are included on the Asset Watch
List.  The Asset Watch List is reviewed quarterly by the Asset Watch
Committee for any classification beyond the regulatory rating based on a loan’s
delinquency.





Commercial
and commercial real estate loans are individually risk rated pursuant to the
loan policy.  Homogeneous loans such as consumer and residential
mortgage loans are not individually risk rated by management.  They
are pooled based on historical portfolio data that management believes will
provide a good basis for the loans' quality.  For all loans not listed
individually on the Asset Watch List, historical loss rates based on the last
two years are the basis for developing expected charge-offs for each pool of
loans.





Historical
loss rates for commercial and consumer loans may be adjusted for significant
factors that, in management’s judgment, reflect the impact of any current
conditions on loss recognition.  Factors which management considers in
the analysis include the effects of the local economy, trends in the nature and
volume of loans (delinquencies, charge-offs, non accrual and problem loans),
changes in the internal lending policies and credit standards, collection
practices, and examination results from bank regulatory agencies and the
Company’s credit review function.





Finally,
a portion of the allowance is maintained to recognize the imprecision in
estimating and measuring loss when evaluating allowances for individual loans or
pools of loans.  This unallocated allowance isbased on factors such as
current economic conditions, trends in the Company’s loan portfolio delinquency,
losses and recoveries, level of under performing and non-performing loans, and
concentrations of loans in any one industry.  The unallocated allowance is assigned
to the various loan categories based on management’s perception of estimated
incurred risk in the different loan categories and the principal balance of the
loan categories.




Valuation
of Securities


Securities
are classified as held-to-maturity or available-for-sale on the date of
purchase. Only those securities classified as held-to-maturity are reported at
amortized cost. Available-for-sale securities are reported at fair value with
unrealized gains and losses included in accumulated other comprehensive income,
net of related deferred income taxes, on the consolidated balance sheets. The
fair value of a security is determined based on quoted market prices. If quoted
market prices are not available, fair value is determined based on quoted prices
of similar instruments. Realized securities gains or losses are reported within
non interest income in the consolidated statements of income. The cost of
securities sold is based on the specific identification method.
Available-for-sale and held-to-maturity securities are reviewed quarterly for
possible other-than-temporary impairment. The review includes an analysis of the
facts and circumstances of each individual investment such as the severity of
loss, the length of time the fair value has been below cost, the expectation for
that security’s performance, the creditworthiness of the issuer and the
Company’s intent and ability to hold the security to recovery, which may be
maturity.  A decline in value that is considered to be
other-than-temporary is recorded as a loss within non interest income in the
consolidated statements of income.  Management believes the price
movements in these securities are dependent upon the movement in market interest
rates and illiquidity related to these assets.  As of December 31,
2008 the unrealized losses in the available for sale securities portfolio
amounted to 1.2% of the fair value of these securities.  Management
also maintains the intent and ability to hold securities in an unrealized loss
position to the earlier of the recovery of losses or maturity.


- 18
-


Management's
Assessment as to the Effectiveness of Internal Control over Financial
Reporting


The
management of Indiana Community Bancorp (the “Company”) is responsible for
establishing and maintaining adequate internal control over financial
reporting.  Internal control over financial reporting is defined in
Rule 13A-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of
1934 as a process designed by, or under the supervision of, a company’s
principal executive and principal financial officers and effected by a company’s
board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America (“Generally
Accepted Accounting Principles”) and includes those policies and procedures
that:





·
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      company;





·
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company
      are being made only in accordance with authorizations of management and
      directors of the company; and





·
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the company’s assets that
      could have a material effect on the financial
  statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008.  In making
this assessment, the Company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.





Based on
our assessment, management believes that, as of December 31, 2008, the Company’s
internal control over financial reporting is effective based on those
criteria.







- 19
-




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM







Audit
Committee, Board of Directors and Shareholders




Indiana
Community Bancorp




Columbus,
Indiana






We have
audited Indiana Community Bancorp's internal control over financial reporting as
of December 31, 2008 based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  The Company's management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
reporting.  Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our
audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects.  Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk.  Our
audit also included performing such other procedures as we considered necessary
in the circumstances.  We believe that our audit provides a reasonable
basis for our opinion.




A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.




In our
opinion, Indiana Community Bancorp maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements of
Indiana Community Bancorp and our report dated March 5, 2009, expressed an
unqualified opinion thereon.













Indianapolis,
Indiana




March 5,
2009









- 20
-





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Audit
Committee, Board of Directors and Shareholders




Indiana
Community Bancorp




Columbus,
Indiana









We have
audited the accompanying consolidated balance sheet of Indiana Community Bancorp
as of December 31, 2008, and the related consolidated statements of income,
shareholders' equity and cash flows for the year ended December 31,
2008.  The Company's management is responsible for these financial
statements.  Our responsibility is to express an opinion on these
financial statements based on our audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  Our audit
included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation.  We believe that our audit provides
a reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Indiana Community Bancorp as
of December 31, 2008, and the results of its operations and its cash flows for
the year ended December 31, 2008, in conformity with accounting principles
generally accepted in the Unites States of America.




As
discussed in Note 15, in 2008, the Company changed its method of accounting for
fair value measurements in accordance with Statement of Financial Accounting
Standards No. 157.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Indiana Community Bancorp's internal control
over financial reporting as of December 31, 2008, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated March
5, 2009, expressed an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.














Indianapolis,
Indiana




March
5, 2009









- 21
-





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of


Indiana
Community Bancorp (formerly Home Federal Bancorp)


Columbus,
Indiana





We have
audited the accompanying consolidated balance sheet of Indiana Community Bancorp
(formerly Home Federal Bancorp) and subsidiaries (the "Company") as of December
31, 2007, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the two years in the period ended December
31, 2007.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on
these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Indiana Community Bancorp and subsidiaries
at December 31, 2007, and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 2007, in conformity
with accounting principles generally accepted in the United States of
America.












/s/
Deloitte & Touche, LLP


Cincinnati,
Ohio


March 14,
2008







- 22
-





CONSOLIDATED
BALANCE SHEETS


(dollars
in thousands except share data)





December
      31, 2008
                        
                        
                        December
      31, 2007Assets:Cash
      and due from banks
                        
                        $
                        22,352
                        
                        
                        $
                        20,082Interest
      bearing demand deposits
                        
                        
                        234
                        
                        
                        
                        20,470Cash
      and cash equivalents
                        
                        
                        22,586
                        
                        
                        
                        40,552Securities
      available for sale at fair value (amortized cost $90,957 and
      $62,551)
                        
                        
                        91,096
                        
                        
                        
                        62,306Securities
      held to maturity at amortized cost (fair value $3,884 and
      $1,558)
                        
                        
                        4,467
                        
                        
                        
                        1,557Loans
      held for sale (fair value $2,907 and $7,250)
                        
                        
                        2,856
                        
                        
                        
                        7,112Portfolio
      loans:Commercial
      loans
                        
                        
                        221,766
                        
                        
                        
                        207,590Commercial
      mortgage loans
                        
                        
                        334,367
                        
                        
                        
                        269,035Residential
      mortgage loans
                        
                        
                        120,227
                        
                        
                        
                        142,481Second
      & home equity loans
                        
                        
                        104,084
                        
                        
                        
                        103,560Other
      consumer loans
                        
                        
                        20,532
                        
                        
                        
                        27,345Unearned
      income
                        
                        
                        (241
                        )
                        
                        
                        (165
                        )Total
      portfolio loans
                        
                        
                        800,735
                        
                        
                        
                        749,846Allowance
      for loan losses
                        
                        
                        (8,589
                        )
                        
                        
                        (6,972
                        )Portfolio
      loans, net
                        
                        
                        792,146
                        
                        
                        
                        742,874Premises
      and equipment
                        
                        
                        15,323
                        
                        
                        
                        15,599Accrued
      interest receivable
                        
                        
                        3,777
                        
                        
                        
                        4,670Goodwill
                        
                        
                        1,394
                        
                        
                        
                        1,875Other
      assets
                        
                        
                        35,728
                        
                        
                        
                        32,261Total
      Assets
                        
                        $
                        969,373
                        
                        
                        $
                        908,806Liabilities
      and Shareholders’ Equity:Liabilities:Deposits:Demand
                        
                        $
                        71,726
                        
                        
                        $
                        69,728Interest
      checking
                        
                        
                        110,944
                        
                        
                        
                        103,624Savings
                        
                        
                        40,862
                        
                        
                        
                        37,513Money
      market
                        
                        
                        156,500
                        
                        
                        
                        185,803Certificates
      of deposit
                        
                        
                        314,425
                        
                        
                        
                        301,146Retail
      deposits
                        
                        
                        694,457
                        
                        
                        
                        697,814Brokered
      deposits
                        
                        
                        5,420
                        
                        
                        
                        9,174Public
      fund certificates
                        
                        
                        10,762
                        
                        
                        
                        563Wholesale
      deposits
                        
                        
                        16,182
                        
                        
                        
                        9,737Total
      deposits
                        
                        
                        710,639
                        
                        
                        
                        707,551FHLB
      advances
                        
                        
                        129,926
                        
                        
                        
                        99,349Short
      term borrowings
                        
                        
                        4,713
                        
                        
                        
                        20Junior
      subordinated debt
                        
                        
                        15,464
                        
                        
                        
                        15,464Other
      liabilities
                        
                        
                        16,619
                        
                        
                        
                        18,968Total
      liabilities
                        
                        
                        877,361
                        
                        
                        
                        841,352Commitments
      and ContingenciesShareholders'
      equity:No
      par preferred stock; Authorized:  2,000,000
    sharesIssued
      and outstanding:  21,500 and 0 shares; Liquidation preference
      $1,000 per share
                        
                        
                        20,962
                        
                        
                        
                        -No
      par common stock; Authorized:  15,000,000 sharesIssued
      and outstanding:  3,358,079 and 3,369,965 shares
                        
                        
                        20,985
                        
                        
                        
                        20,305Retained
      earnings, restricted
                        
                        
                        50,670
                        
                        
                        
                        48,089Accumulated
      other comprehensive loss, net
                        
                        
                        (605
                        )
                        
                        
                        (940
                        )Total
      shareholders' equity
                        
                        
                        92,012
                        
                        
                        
                        67,454Total
      Liabilities and Shareholders' Equity
                        
                        $
                        969,373
                        
                        
                        $
                        908,806





See notes to consolidated financial
statements






- 23
-




CONSOLIDATED
STATEMENTS OF INCOME


(dollars
in thousands except per share data)





Year
      Ended
                  
                  
                  Year
      Ended
                  
                  
                  Year
      EndedDec
      2008
                  
                  
                  Dec
      2007
                  
                  
                  Dec
      2006Interest
      Income:Short
      term investments
                  
                  $
                  462
                  
                  
                  $
                  1,116
                  
                  
                  $
                  1,163Securities
                  
                  
                  2,878
                  
                  
                  
                  2,688
                  
                  
                  
                  4,246Commercial
      loans
                  
                  
                  12,670
                  
                  
                  
                  14,538
                  
                  
                  
                  10,015Commercial
      mortgage loans
                  
                  
                  18,736
                  
                  
                  
                  16,766
                  
                  
                  
                  14,312Residential
      mortgage loans
                  
                  
                  8,516
                  
                  
                  
                  10,471
                  
                  
                  
                  10,939Second
      and home equity loans
                  
                  
                  6,186
                  
                  
                  
                  7,342
                  
                  
                  
                  7,021Other
      consumer loans
                  
                  
                  1,890
                  
                  
                  
                  2,280
                  
                  
                  
                  2,659Total
      interest income
                  
                  
                  51,338
                  
                  
                  
                  55,201
                  
                  
                  
                  50,355Interest
      Expense:Checking
      and savings accounts
                  
                  
                  981
                  
                  
                  
                  1,761
                  
                  
                  
                  1,592Money
      market accounts
                  
                  
                  2,867
                  
                  
                  
                  5,869
                  
                  
                  
                  4,982Certificates
      of deposit
                  
                  
                  12,265
                  
                  
                  
                  14,317
                  
                  
                  
                  11,343Total
      interest on retail deposits
                  
                  
                  16,113
                  
                  
                  
                  21,947
                  
                  
                  
                  17,917Brokered
      deposits
                  
                  
                  426
                  
                  
                  
                  665
                  
                  
                  
                  1,118Public
      funds
                  
                  
                  185
                  
                  
                  
                  47
                  
                  
                  
                  344Total
      interest on wholesale deposits
                  
                  
                  611
                  
                  
                  
                  712
                  
                  
                  
                  1,462Total
      interest on deposits
                  
                  
                  16,724
                  
                  
                  
                  22,659
                  
                  
                  
                  19,379FHLB
      advances
                  
                  
                  5,059
                  
                  
                  
                  3,884
                  
                  
                  
                  4,284Other
      borrowings
                  
                  
                  1
                  
                  
                  
                  8
                  
                  
                  
                  5Long
      term debt
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  650Junior
      subordinated debt
                  
                  
                  765
                  
                  
                  
                  1,110
                  
                  
                  
                  326Total
      interest expense
                  
                  
                  22,549
                  
                  
                  
                  27,661
                  
                  
                  
                  24,644Net
      interest income
                  
                  
                  28,789
                  
                  
                  
                  27,540
                  
                  
                  
                  25,711Provision
      for loan losses
                  
                  
                  4,292
                  
                  
                  
                  1,361
                  
                  
                  
                  850Net
      interest income after provision for loan losses
                  
                  
                  24,497
                  
                  
                  
                  26,179
                  
                  
                  
                  24,861Non
      Interest Income:Gain
      on sale of loans
                  
                  
                  1,446
                  
                  
                  
                  1,497
                  
                  
                  
                  1,430Loss
      on securities
                  
                  
                  (437
                  )
                  
                  
                  -
                  
                  
                  
                  (1,956
                  )Gain
      on sale of mortgage servicing
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,957Investment
      advisory services
                  
                  
                  1,371
                  
                  
                  
                  1,874
                  
                  
                  
                  1,363Service
      fees on deposit accounts
                  
                  
                  6,791
                  
                  
                  
                  6,574
                  
                  
                  
                  6,124Loan
      servicing income, net of impairment
                  
                  
                  551
                  
                  
                  
                  571
                  
                  
                  
                  1,233Miscellaneous
                  
                  
                  2,218
                  
                  
                  
                  2,338
                  
                  
                  
                  2,152Total
      non interest income
                  
                  
                  11,940
                  
                  
                  
                  12,854
                  
                  
                  
                  12,303Non
      Interest Expenses:Compensation
      and employee benefits
                  
                  
                  15,843
                  
                  
                  
                  16,426
                  
                  
                  
                  15,900Occupancy
      and equipment
                  
                  
                  4,159
                  
                  
                  
                  4,086
                  
                  
                  
                  3,908Service
      bureau expense
                  
                  
                  1,917
                  
                  
                  
                  1,637
                  
                  
                  
                  1,506Marketing
                  
                  
                  1,241
                  
                  
                  
                  1,141
                  
                  
                  
                  1,268Professional
      fees
                  
                  
                  919
                  
                  
                  
                  1,302
                  
                  
                  
                  1,203Loan
      expenses
                  
                  
                  696
                  
                  
                  
                  365
                  
                  
                  
                  511Communication
      expense
                  
                  
                  847
                  
                  
                  
                  892
                  
                  
                  
                  710Miscellaneous
                  
                  
                  3,212
                  
                  
                  
                  3,925
                  
                  
                  
                  2,900Total
      non interest expenses
                  
                  
                  28,834
                  
                  
                  
                  29,774
                  
                  
                  
                  27,906Income
      before income taxes
                  
                  
                  7,603
                  
                  
                  
                  9,259
                  
                  
                  
                  9,258Income
      tax provision
                  
                  
                  2,600
                  
                  
                  
                  3,136
                  
                  
                  
                  2,817Net
      Income
                  
                  $
                  5,003
                  
                  
                  $
                  6,123
                  
                  
                  $
                  6,441Basic
      Earnings per Common Share
                  
                  $
                  1.47
                  
                  
                  $
                  1.75
                  
                  
                  $
                  1.74Diluted
      Earnings per Common Share
                  
                  $
                  1.47
                  
                  
                  $
                  1.72
                  
                  
                  $
                  1.70Basic
      weighted average number of shares
                  
                  
                  3,359,666
                  
                  
                  
                  3,492,615
                  
                  
                  
                  3,707,325Dilutive
      weighted average number of shares
                  
                  
                  3,365,131
                  
                  
                  
                  3,560,603
                  
                  
                  
                  3,788,556Dividends
      per share
                  
                  $
                  0.64
                  
                  
                  $
                  0.80
                  
                  
                  $
                  0.79





See notes
to consolidated financial statements


- 24
-





CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY


(dollars
in thousands except share data)





Common
                Shares
                Outstanding
              
              
              Preferred
                Stock
              
              
              Common
                Stock
              
              
              Retained
                Earnings
              
              
              Accumulated
                Other
                Comprehensive
                Income
      (Loss)
              
              
              Total
                Shareholders'
                EquityBalance
      at December 2005
              
              
              3,815,657
              
              
              $
              -
              
              
              $
              15,152
              
              
              $
              59,723
              
              
              $
              (1,837
              )
              
              $
              73,038Comprehensive
      income:Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,441
              
              
              
              
              
              
              
              6,441Change
      in unrealized loss  on securities available for sale, net of
      reclassification adjustment for realized losses of $1,181 and tax effect
      of $781
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,481
              
              
              
              1,481Change
      in fair value of cash flow hedge,  net of tax of
    $7
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              11
              
              
              
              11Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              7,933Cumulative
      effect in change in accounting for SRP obligations,
                net
      of tax of $388
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (592
              )
              
              
              (592
              )Common
      stock options exercised
              
              
              104,724
              
              
              
              
              
              
              
              1,962
              
              
              
              
              
              
              
              
              
              
              
              1,962Common
      stock repurchased
              
              
              (310,163
              )
              
              
              
              
              
              
              (462
              )
              
              
              (8,114
              )
              
              
              
              
              
              
              (8,576
              )Common
      stock compensation expense
              
              
              
              
              
              
              
              
              
              
              296
              
              
              
              
              
              
              
              
              
              
              
              296Tax
      benefit related to exercise of non-qualified common stock
      options
              
              
              
              
              
              
              
              
              
              
              133
              
              
              
              
              
              
              
              
              
              
              
              133Common
      stock cash dividends ($.788 per share)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,913
              )
              
              
              
              
              
              
              (2,913
              )Balance
      at December 2006
              
              
              3,610,218
              
              
              
              -
              
              
              
              17,081
              
              
              
              55,137
              
              
              
              (937
              )
              
              
              71,281Comprehensive
      income:Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,123
              
              
              
              
              
              
              
              6,123Change
      in unrealized loss on securities available for sale, net of tax effect of
      $100
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              189
              
              
              
              189Change
      in supplemental retirement plan obligations,
                net oftax
      of $126
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (192
              )
              
              
              (192
              )Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,120Common
      stock options exercised
              
              
              148,010
              
              
              
              
              
              
              
              3,327
              
              
              
              
              
              
              
              
              
              
              
              3,327Common
      stock repurchased
              
              
              (388,263
              )
              
              
              
              
              
              
              (579
              )
              
              
              (10,397
              )
              
              
              
              
              
              
              (10,976
              )Common
      stock compensation expense
              
              
              
              
              
              
              
              
              
              
              137
              
              
              
              
              
              
              
              
              
              
              
              137Tax
      benefit related to exercise of non-qualified common stock
      options
              
              
              
              
              
              
              
              
              
              
              339
              
              
              
              
              
              
              
              
              
              
              
              339Common
      stock cash dividends ($.800 per share)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,774
              )
              
              
              
              
              
              
              (2,774
              )Balance
      at December 2007
              
              
              3,369,965
              
              
              
              -
              
              
              
              20,305
              
              
              
              48,089
              
              
              
              (940
              )
              
              
              67,454Comprehensive
      income:Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,003
              
              
              
              
              
              
              
              5,003Change
      in unrealized loss  on securities available for sale, net of
      reclassification adjustment for realized losses of $264 and tax effect of
      $138
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              246
              
              
              
              246Change
      in supplemental retirement plan obligations,
                net oftax
      of $58
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              89
              
              
              
              89Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,338Preferred
      stock issued
              
              
              
              
              
              
              21,500
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              21,500Discount
      on preferred stock
              
              
              
              
              
              
              (543
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (543
              )Amortization
      of discount on preferred stock
              
              
              
              
              
              
              5
              
              
              
              
              
              
              
              (5
              )
              
              
              
              
              
              
              -Common
      stock warrants issued
              
              
              
              
              
              
              
              
              
              
              543
              
              
              
              
              
              
              
              
              
              
              
              543Common
      stock repurchased
              
              
              (11,886
              )
              
              
              
              
              
              
              (18
              )
              
              
              (268
              )
              
              
              
              
              
              
              (286
              )Common
      stock compensation expense
              
              
              
              
              
              
              
              
              
              
              155
              
              
              
              
              
              
              
              
              
              
              
              155Common
      stock cash dividends ($.640 per share)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,149
              )
              
              
              
              
              
              
              (2,149
              )Balance
      at December 2008
              
              
              3,358,079
              
              
              $
              20,962
              
              
              $
              20,985
              
              
              $
              50,670
              
              
              $
              (605
              )
              
              $
              92,012





See notes
to consolidated financial statements


- 25
-





CONSOLIDATED
STATEMENTS OF CASH FLOWS


(dollars
in thousands)





Year
      Ended
                  
                  
                  Year
      Ended
                  
                  
                  Year
      EndedDec
      2008
                  
                  
                  Dec
      2007
                  
                  
                  Dec
      2006Cash
      Flows From Operating Activities:Net
      income
                  
                  $
                  5,003
                  
                  
                  $
                  6,123
                  
                  
                  $
                  6,441Adjustments
      to reconcile net income to net cash from operating
    activities:Accretion
      of discounts, amortization and depreciation
                  
                  
                  1,352
                  
                  
                  
                  1,589
                  
                  
                  
                  1,816Provision
      for loan losses
                  
                  
                  4,292
                  
                  
                  
                  1,361
                  
                  
                  
                  850Stock
      based compensation expense
                  
                  
                  155
                  
                  
                  
                  137
                  
                  
                  
                  296Benefit
      for deferred income taxes
                  
                  
                  (834
                  )
                  
                  
                  (196
                  )
                  
                  
                  (2,041
                  )Net
      gain from sale of loans
                  
                  
                  (1,446
                  )
                  
                  
                  (1,497
                  )
                  
                  
                  (1,430
                  )Loss
      from sale of securities
                  
                  
                  437
                  
                  
                  
                  -
                  
                  
                  
                  1,956(Income)/loss
      from joint ventures and net (gain)/loss from real estate
    owned
                  
                  
                  (10
                  )
                  
                  
                  (191
                  )
                  
                  
                  114Loan
      fees deferred/(recognized), net
                  
                  
                  175
                  
                  
                  
                  25
                  
                  
                  
                  (418
                  )Proceeds
      from sale of loans held for sale
                  
                  
                  130,589
                  
                  
                  
                  111,948
                  
                  
                  
                  96,389Origination
      of loans held for sale
                  
                  
                  (124,887
                  )
                  
                  
                  (110,755
                  )
                  
                  
                  (97,089
                  )(Increase)/decrease
      in accrued interest and other assets
                  
                  
                  863
                  
                  
                  
                  960
                  
                  
                  
                  (2,346
                  )Decrease
      in other liabilities
                  
                  
                  (1,381
                  )
                  
                  
                  (3,373
                  )
                  
                  
                  (86
                  )Net
      Cash From Operating Activities
                  
                  
                  14,308
                  
                  
                  
                  6,131
                  
                  
                  
                  4,452Cash
      Flows From / (Used In) Investing Activities:Net
      principal received/(disbursed) on loans
                  
                  
                  (50,799
                  )
                  
                  
                  (50,083
                  )
                  
                  
                  (55,080
                  )Proceeds
      from:Maturities/Repayments
      of:Securities
      held to maturity
                  
                  
                  255
                  
                  
                  
                  176
                  
                  
                  
                  268Securities
      available for sale
                  
                  
                  29,891
                  
                  
                  
                  6,517
                  
                  
                  
                  25,086Sales
      of:Securities
      available for sale
                  
                  
                  8,959
                  
                  
                  
                  4,464
                  
                  
                  
                  105,649Real
      estate owned and other asset sales
                  
                  
                  1,255
                  
                  
                  
                  870
                  
                  
                  
                  778Federal
      Home Loan Bank stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,636Purchases
      of:Loans
                  
                  
                  (7,195
                  )
                  
                  
                  (18,515
                  )
                  
                  
                  (11,268
                  )Securities
      held to maturity
                  
                  
                  (100
                  )
                  
                  
                  (100
                  )
                  
                  
                  (100
                  )Securities
      available for sale
                  
                  
                  (70,744
                  )
                  
                  
                  (16,166
                  )
                  
                  
                  (64,151
                  )Return
      of joint ventures
                  
                  
                  -
                  
                  
                  
                  29
                  
                  
                  
                  586Acquisition
      of/(cash paid for) brokerage business
                  
                  
                  (100
                  )
                  
                  
                  100
                  
                  
                  
                  -Cash
      received from sale of brokerage business
                  
                  
                  650
                  
                  
                  
                  -
                  
                  
                  
                  -(Acquisition)/disposal
      of property and equipment
                  
                  
                  (1,090
                  )
                  
                  
                  102
                  
                  
                  
                  (1,078
                  )Net
      Cash From / (Used In) Investing Activities
                  
                  
                  (89,018
                  )
                  
                  
                  (72,606
                  )
                  
                  
                  2,326Cash
      Flows From / (Used In) Financing Activities:Net
      increase/(decrease) in deposits
                  
                  
                  3,088
                  
                  
                  
                  (19,608
                  )
                  
                  
                  71,845Proceeds
      from advances from FHLB
                  
                  
                  85,000
                  
                  
                  
                  45,000
                  
                  
                  
                  65,000Repayment
      of advances from FHLB
                  
                  
                  (54,423
                  )
                  
                  
                  (14,318
                  )
                  
                  
                  (82,966
                  )Repayment
      of senior debt
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (14,242
                  )Proceeds
      from issuance of junior subordinated debt
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  15,464Net
      proceeds from/(net repayment of) overnight borrowings
                  
                  
                  4,693
                  
                  
                  
                  20
                  
                  
                  
                  (166
                  )Preferred
      stock and warrants issued
                  
                  
                  21,500
                  
                  
                  
                  -
                  
                  
                  
                  -Common
      stock options exercised
                  
                  
                  -
                  
                  
                  
                  3,327
                  
                  
                  
                  1,962Repurchase
      of common stock
                  
                  
                  (286
                  )
                  
                  
                  (10,976
                  )
                  
                  
                  (8,576
                  )Excess
      tax benefit related to stock based compensation
                  
                  
                  -
                  
                  
                  
                  339
                  
                  
                  
                  133Payment
      of dividends on common stock
                  
                  
                  (2,828
                  )
                  
                  
                  (2,820
                  )
                  
                  
                  (2,905
                  )Net
      Cash From Financing Activities
                  
                  
                  56,744
                  
                  
                  
                  964
                  
                  
                  
                  45,549NET
      INCREAS/(DECREASE) IN CASH AND CASH EQUIVALENTS
                  
                  
                  (17,966
                  )
                  
                  
                  (65,511
                  )
                  
                  
                  52,327Cash
      and cash equivalents, beginning of period
                  
                  
                  40,552
                  
                  
                  
                  106,063
                  
                  
                  
                  53,736Cash
      and Cash Equivalents, End of Period
                  
                  $
                  22,586
                  
                  
                  $
                  40,552
                  
                  
                  $
                  106,063Supplemental
      Information:Cash
      paid for interest
                  
                  $
                  22,762
                  
                  
                  $
                  27,835
                  
                  
                  $
                  24,692Cash
      paid for income taxes
                  
                  $
                  3,130
                  
                  
                  $
                  5,280
                  
                  
                  $
                  2,380Non
      Cash Items:Assets
      acquired through foreclosure
                  
                  $
                  4,255
                  
                  
                  $
                  944
                  
                  
                  $
                  1,114Acquisition
      of broker dealer within accounts payable
                  
                  $
                  100
                  
                  
                  $
                  200
                  
                  
                  $
                  -Securities
      received as a redemption in kind
                  
                  $
                  3,027
                  
                  
                  $
                  -
                  
                  
                  $
                  -Sale
      of joint venture, financed by the Company
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,058Dividends
      payable
                  
                  $
                  -
                  
                  
                  $
                  678
                  
                  
                  $
                  725





See notes
to consolidated financial statements


- 26
-


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


For The
Years Ended December 31, 2008, 2007 and 2006





1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES


The
accounting policies of Indiana Community Bancorp and subsidiaries (the
“Company") conform to accounting principles generally accepted in the United
States of America and prevailing practices within the banking
industry.  A summary of the more significant accounting policies
follows:





Basis
of Presentation


The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, HomeFed Financial Corp. and Indiana Bank and Trust
Company (the “Bank") and its wholly-owned subsidiaries.  As of March
1, 2008, the Bank changed its name to Indiana Bank and Trust Company, which has
been reflected throughout this document.  All intercompany balances
and transactions have been eliminated.





Description
of Business


The
Company is a bank holding company.  The Bank provides financial
services to south-central Indiana through its main office in Columbus and 18
other full service banking offices and a commercial loan office in
Indianapolis.  The Company also owns Home Investments, Inc., a Nevada
corporation, that holds, services, manages, and invests a portion of the Bank’s
investment portfolio.





Use
of Estimates


The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes.  Actual results could differ from
those estimates.  Estimates most susceptible to change in the near
term include the allowance for loan losses and the valuation of
securities.





Cash
and Cash Equivalents


All
highly liquid investments with an original maturity of three months or less are
considered to be cash equivalents.  The Bank is required to maintain
reserve funds in cash and/or on deposit with the Federal Reserve
Bank.  The reserve required at December 31, 2008 was $1.0
million.





Securities


Securities
are required to be classified as held to maturity, available for sale or
trading.  Debt securities that the Company has the positive intent and
ability to hold to maturity are classified as held to maturity.  Debt
and equity securities not classified as either held to maturity or trading
securities are classified as available for sale.  Only those
securities classified as held to maturity are reported at amortized cost, with
those available for sale and trading reported at fair value with unrealized
gains and losses included in shareholders' equity, net of tax, or income,
respectively.  Premiums and discounts are amortized over the
contractual lives of the related securities using the effective yield method and
are included in interest income.  Gain or loss on sale of securities
is based on the specific identification method.







Valuation
of Securities


Securities
are classified as held-to-maturity or available-for-sale on the date of
purchase. Only those securities classified as held-to-maturity are reported at
amortized cost. Available-for-sale securities are reported at fair value with
unrealized gains and losses included in accumulated other comprehensive income,
net of related deferred income taxes, on the consolidated balance sheets. The
fair value of a security is determined based on quoted market prices. If quoted
market prices are not available, fair value is determined based on quoted prices
of similar instruments. Realized securities gains or losses are reported within
non interest income in the consolidated statements of income. The cost of
securities sold is based on the specific identification method.
Available-for-sale and held-to-maturity securities are reviewed quarterly for
possible other-than-temporary impairment. The review includes an analysis of the
facts and circumstances of each individual investment such as the severity of
loss, the length of time the fair value has been below cost, the expectation for
that security’s performance, the creditworthiness of the issuer and the
Company’s intent and ability to hold the security to recovery, which may be
maturity.  A decline in value that is considered to be
other-than-temporary is recorded as a loss within non interest income in the
consolidated statements of income.  Management believes the price
movements in these securities are dependent upon the movement in market interest
rates and illiquidity related to these assets. As of December 31, 2008 the
unrealized losses in the available for sale securities portfolio amounted to
1.2% of the fair value of these securities.  Management
also maintains the intent and ability to hold securities in an unrealized loss
position to the earlier of the recovery of losses or maturity.





Loans
Held for Sale


Loans
held for sale consist of mortgage loans conforming to established guidelines and
held for sale to the secondary market.  Mortgage loans held for sale
are carried at the lower of cost or fair value determined on an aggregate
basis.  Gains and losses on the sale of these mortgage loans are
included in non interest income.





Valuation
of Mortgage Servicing Rights


The
Company recognizes the rights to service mortgage loans as separate assets,
which are included in other assets in the consolidated balance
sheet.  The mortgage servicing right (“MSR”) is recorded at fair value
at the time of sale.  MSR’s are evaluated for impairment based on the
fair value of those rights.  The Company uses a present value cash
flow valuation model to establish the fair value of the
MSR’s.  Factors included in the calculation of fair value of the MSR’s
include estimating the present value of future net cash flows, market loan
prepayment speeds for similar loans, discount rates, servicing costs, and other
economic factors.  Servicing rights are amortized over the estimated
period of net servicing revenue.  It is likely that these economic
factors will change over the life of the MSR’s, resulting in different
valuations of the MSR’s.  The differing valuations will affect the
carrying value of the MSR’s on the balance sheet as well as the income recorded
from loan servicing in the consolidated statements of income.  During 2006,
the Company sold its mortgage servicing portfolio and related nonrecourse
mortgage servicing rights for a gain on sale of $2.0 million.





Loans


Loans are
reported at the principal balance outstanding net of deferred loan fees and
direct loan costs.  Interest on real estate, commercial and
installment loans is accrued over the term of the loans on a level yield
basis.  The accrual of interest on impaired loans is discontinued
when, in management’s judgment, the borrower may be unable
to meet payments as they come due.  The recognition of interest income
is discontinued on certain other loans when, in management’s judgment, the
interest will not be collectible in the normal course of business.






- 27
-




Loan
Origination Fees


Nonrefundable
origination fees, net of certain direct origination costs, are deferred and
recognized as a yield adjustment over the contractual life of the underlying
loan.  Any unamortized fees on loans sold are credited to gain on sale
of loans at the time of sale.





Uncollected
Interest


A
reversal of uncollected interest is generally provided on loans which are more
than 90 days past due.  The only loans which are 90 days past due and
are still accruing interest are loans where the Company is guaranteed
reimbursement of interest by either a mortgage insurance contract or by a
government agency.  If neither of these criteria is met, a charge to
interest income equal to all interest previously accrued and unpaid is made, and
income is subsequently recognized only to the extent that cash payments are
received until, in management's judgment, the borrower's ability to make
periodic interest and principal payments returns to normal, in which case the
loan is returned to accrual status.





Allowance
for Loan Losses


A loan is
considered impaired when it is probable the Company will be unable to collect
all contractual principal and interest payments due in accordance with the terms
of the loan agreement.  Impaired loans are measured based on the
loan’s discounted cash flow or the estimated fair value of the collateral if the
loan is collateral dependent.  The amount of impairment, if any, and
any subsequent changes are included in the allowance for loan
losses.





The
allowance for loan losses is established through a provision for loan
losses.  Loan losses are charged against the allowance when management
believes the loans are uncollectible. Subsequent recoveries, if any, are
credited to the allowance.  The allowance for loan losses is
maintained at a level management considers to be adequate to absorb estimated
incurred loan losses inherent in the portfolio, based on evaluations of the
collectibility and historical loss experience of loans.  The allowance
is based on ongoing assessments of the estimated incurred losses inherent in the
loan portfolio.  The Company’s methodology for assessing the
appropriate allowance level consists of several key elements, as described
below.




All
delinquent loans that are 90 days past due are included on the Asset Watch
List.  The Asset Watch List is reviewed quarterly by the Asset Watch
Committee for any classification beyond the regulatory rating based on the
loans' delinquency.





Commercial
and commercial real estate loans are individually risk rated pursuant to the
loan policy.  Homogeneous loans such as consumer and residential
mortgage loans are not individually risk rated by management.  They
are pooled based on historical portfolio data that management believes will
provide a reasonable basis for the loans' quality.  For all loans not
listed individually on the Asset Watch List, historical loss rates based on the
last two years are the basis for developing expected charge-offs for each pool
of loans.





Historical
loss rates for commercial and homogeneous loans may be adjusted for significant
factors that, in management’s judgment, reflect the impact of any current
conditions on loss recognition.  Factors which management considers in
the analysis include the effects of the local economy, trends in the nature and
volume of loans (delinquencies, charge-offs, nonaccrual and problem loans),
changes in the internal lending policies and credit standards, collection
practices, and examination results from bank regulatory agencies and the
Company’s credit review function.





Finally,
a portion of the allowance is maintained to recognize the imprecision in
estimating and measuring loss when evaluating allowances for individual loans or
pools of loans.  This unallocated allowance is based on factors such
as current economic conditions, trends in the Company’s loan portfolio
delinquency, losses and recoveries, level of under performing and non-performing
loans, and concentrations of loans in any one industry.  The
unallocated allowance is assigned to the various loan categories based on
management’s perception of estimated incurred risk in the different loan
categories and the principal balance of the loan categories.





Real
Estate Owned


Real
estate owned represents real estate acquired through foreclosure or deed in lieu
of foreclosure and is recorded at the lower of fair value less cost to sell or
carrying amount.  When property is acquired, it is recorded at net
realizable value at the date of acquisition establishing a new cost basis, with
any resulting write-down charged against the allowance for loan
losses.  Any subsequent deterioration of the property is charged
directly to real estate owned expense, which is included in miscellaneous non
interest expenses on the consolidated statements of income.  Costs
relating to the development and improvement of real estate owned are
capitalized, whereas costs relating to holding and maintaining the properties
are charged to expense.





Premises
and Equipment


Premises
and equipment are carried at cost less accumulated
depreciation.  Depreciation is computed on the straight-line method
over estimated useful lives that range from three to thirty-nine
years.  Leasehold improvements are amortized over the shorter of the
life of the lease or the life of the asset.In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” the Company tests its long-lived assets for impairment
through both a probability-weighted cash flow and primary-asset approach
whenever events or changes in circumstances dictate.  Maintenance,
repairs and minor improvements are charged to non interest expenses as
incurred.





Derivative
Financial Instruments


Statement
of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts.  The Company records all
derivatives, whether designated as a hedge, or not, on the consolidated balance
sheets at fair value.  The Company designates its fixed rate and
variable rate interest rate swaps as fair value and cash flow hedge instruments,
respectively.  If the derivative is designated as a fair value hedge,
the changes in fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings.  If the derivative is
designated as a cash flow hedge, the changes in fair value of the derivative are
recorded in Accumulated Other
Comprehensive Income (“AOCI”), net of income taxes.




- 28
-





The
Company evaluates interest rate lock commitments issued on residential mortgage
loan commitments that will be held for resale as free-standing derivative
instruments.  As of December 31, 2008 the total of these commitments
was immaterial to the financial statements.





The
Company has only limited involvement with derivative financial instruments and
does not use them for trading purposes.  The Company’s two fair value
interest rate swap agreements were retired in


2008 as
discussed in Note 3.  The swaps were entered into as a means of
managing interest rate exposure on certain fixed rate commercial loans and
variable rate debt obligations.  The Company’s cash flow interest rate
swap matured in 2006.





Goodwill
and Other Intangible Assets


In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the
Company annually, as of September 30th,
evaluates goodwill for impairment or on an interim basis if an event occurs or
circumstances change that would more likely than not reduce the fair value of
the Company below its carrying value.  Management determined that
there was no impairment charge resulting from its impairment tests.





In the
fourth quarter of 2005, the Company purchased a retail brokerage business on the
south side of Indianapolis.  This purchase increased goodwill
$300,000.  This purchase also included an intangible asset, customer
list, valued at $200,000 which is being amortized over four years using the
straight line method.  In the second quarter of 2007, the Company
purchased another retail brokerage business on the south side of
Indianapolis.  This purchase increased goodwill
$180,000.  This purchase also included an intangible asset, customer
list, valued at $120,000 which is being amortized over four years using the
straight line method.  The Company’s sold its brokerage business for
its carrying value in the third quarter of 2008 and no longer has any goodwill
associated with these purchases.





Income
Taxes


The
Company and its wholly-owned subsidiaries file consolidated income tax
returns.  Deferred income tax assets and liabilities are determined
using the balance sheet method and are reported in other assets in the
Consolidated Balance Sheets. Under this method, the net deferred tax asset or
liability is based on the tax effects of the differences between the book and
tax basis of assets and liabilities and recognizes enacted changes in tax rates
and laws. Deferred tax assets are recognized to the extent they exist and are
reduced by a valuation allowance based on management’s judgment that their
realization is more-likely-than-not to occur.





Reclassification


Reclassification
of certain amounts in the 2007 and 2006 consolidated financial statements have
been made to conform to the 2008 presentation.


- 29
-


Earnings
per Common Share


Earnings
per share of common stock are based on the weighted average number of basic
shares and dilutive shares outstanding during the year.





The
following is a reconciliation of the weighted average common shares for the
basic and diluted earnings per share computations:





Year
      Ended
                    Dec
      2008
                  
                  
                  Year
      Ended
                    Dec
      2007
                  
                  
                  Year
      Ended
                    Dec
      2006Basic
      Earnings per Common Share:Weighted
      average common shares
                  
                  
                  3,359,666
                  
                  
                  
                  3,492,615
                  
                  
                  
                  3,707,325Diluted
      Earnings per Common Share:Weighted
      average common shares
                  
                  
                  3,359,666
                  
                  
                  
                  3,492,615
                  
                  
                  
                  3,707,325Dilutive
      effect of stock options
                  
                  
                  5,465
                  
                  
                  
                  67,988
                  
                  
                  
                  81,231Weighted
      average common and incremental shares
                  
                  
                  3,365,131
                  
                  
                  
                  3,560,603
                  
                  
                  
                  3,788,556





Anti-dilutive
options are summarized as follows:





As
      Of
                  
                  Dec
      2008
                  
                  
                  Dec
      207
                  
                  
                  Dec
      2006Anti-dilutive
      options
                  
                  
                  294,813
                  
                  
                  
                  123,224
                  
                  
                  
                  10,000








The
following is a computation of earnings per common share. (dollars in thousands,
except per share amounts)


Year
      Ended
                    Dec
      2008
                  
                  
                  Year
      Ended
                    Dec
      2007
                  
                  
                  Year
      Ended
                    Dec
      2006Net
      income
                  
                  $
                  5,003
                  
                  
                  $
                  6,123
                  
                  
                  $
                  6,441Less
      preferred stock dividend
                  
                  
                  59
                  
                  
                  
                  -
                  
                  
                  
                  -Less
      amortization of preferred stock discount
                  
                  
                  5
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      income available to common shareholders
                  
                  $
                  4,939
                  
                  
                  $
                  6,123
                  
                  
                  $
                  6,441Basic
      Earnings per Common Share
                  
                  $
                  1.47
                  
                  
                  $
                  1.75
                  
                  
                  $
                  1.74Diluted
      Earnings per Common Share
                  
                  $
                  1.47
                  
                  
                  $
                  1.72
                  
                  
                  $
                  1.70









Accumulated
Other Comprehensive Income


The
following is a summary of the Company's accumulated other comprehensive
income:  (dollars in thousands)




Accumulated BalanceYear
      Ended
                                Dec
      2008
                              
                              
                              Year
      Ended
                                Dec
      2007
                              
                              
                              Year
      Ended
                                Dec
      2006Unrealized
      holding gains (losses) from securities available for sale
                              
                              $
                              139
                              
                              
                              $
                              (245
                              )
                              
                              $
                              (534
                              )Cumulative
      effect in change in accounting for Supplemental Retirement Plan (SRP)
      obligations
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (980
                              )SRP
      obligation
                              
                              
                              (1,151
                              )
                              
                              
                              (1,298
                              )
                              
                              
                              -Net
      unrealized losses
                              
                              
                              (1,012
                              )
                              
                              
                              (1,543
                              )
                              
                              
                              (1,514
                              )Tax
      effect
                              
                              
                              407
                              
                              
                              
                              603
                              
                              
                              
                              577Accumulated
      Other Comprehensive Loss, Net of Tax
                              
                              $
                              (605
                              )
                              
                              $
                              (940
                              )
                              
                              $
                              (937
                              )





Segments


In
accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information,” management has concluded that the Company is comprised of
a single operating segment, community banking activities, and has disclosed all
required information relating to its one operating
segment.  Management considers parent company activity to represent an
overhead function rather than an operating segment.  The Company
operates in one geographical area and does not have a single external customer
from which it derives 10 percent or more of its revenue.






- 30
-


Stock
Based Compensation


At
December 31, 2008, the Company has a shared based employee compensation plan,
which is described more fully in Note 13.  The Company accounts for
this plan under the recognition and measurements principles of Statement of
Financial Accounting Standards No. 123R, “Share Based Payment.”





Current
Economic Conditions


In the
rapidly changing economic environment the banking industry faces extraordinary
challenges which has occasionally resulted in volatile downward movements in the
fair values of investments and other assets, lack of liquidity and deteriorating
credit quality including severe fluctuations in the value of real estate and
other loan collateral.  The financial statements have been prepared
using values and information currently available to the Company.  In
the current economy, the valuation of assets and liabilities is susceptible to
sudden change, that could result in material future adjustments in the fair
value of assets, the allowance for loan losses, and capital that could be
detrimental to the Company’s ability to maintain a well capitalized status and
adequate liquidity.




New
Accounting Pronouncements


In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” which
replaces SFAS No. 141, “Business Combinations.”  This Statement
retains the fundamental requirements in SFAS No. 141 that the acquisition method
of accounting (formerly referred to as purchase method) is used for all business
combinations and that an acquirer is identified for each business
combination.  This Statement defines the acquirer as the entity that
obtains control of one or more businesses in the business combination and
establishes the acquisition date as of the date that the acquirer achieves
control.  This Statement requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values.  This
Statement requires the acquirer to recognize acquisition-related costs and
restructuring costs separately from the business combination as period
expenses.  This statement requires that loans acquired in a purchase
business combination be recorded at fair value.  Valuation allowances
should reflect only those losses incurred by the investor after
acquisition.  This Statement is effective for business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.  Management
is currently in the process of determining what effect the provisions of this
statement will have on the Company’s financial position or results of
operations.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an Amendment to ARB No. 51.”  This
Statement establishes new accounting and reporting standards that require the
ownership interests in subsidiaries held by parties other than the parent be
clearly identified, labeled, and presented in the consolidated statement of
financial position within equity, but separate from the parent's
equity.  The Statement also requires the amount of consolidated net
income attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of
income.  This Statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008.  Management is currently in the process of determining what
effect the provisions of this statement will have on the Company’s financial
position or results of operations.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities - an amendment of FASB Statement No.
133.”  This Statement changes the disclosure requirements for
derivative instruments and hedging activities.  Entities are required
to provide enhanced disclosures about a) how and why an entity uses derivative
instruments, b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows.  This Statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008.  Management is currently in the
process of determining what effect the provisions of this statement will have on
the Company’s financial position or
results of operations.





FASB
staff position FAS 157-3, “Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active,” was posted October 10,
2008.  This FASB Staff Position (FSP) clarifies the application of
FASB Statement No. 157, Fair Value Measurements, in a market that is not active
and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active.    This FSP shall be effective upon issuance,
including prior periods for which financial statements have not been
issued.  Management has determined the adoption of FSP FAS 157-3 did
not have a material effect on the Company’s financial position or results of
operations.




FASB
staff position EITF Issue No. 99-20-1, “Amendments to the Impairment Guidance of
EITF Issue No. 99-20,” was posted December 30, 2008.  This FASB Staff
Position (FSP) amends the impairment guidance in EITF Issue No. 99-20,
“Recognition of Interest Income and Impairment on Purchased Beneficial Interests
and Beneficial Interests that Continue to Be Held by a Transferor in Securitized
Financial Assets,” to achieve more consistent determination of whether an other
than temporary impairment assessment has occurred.  The FSP also
retains and emphasizes the objective of an other than temporary impairment
assessment and the related disclosure requirements in FASB No. 115, “Accounting
for Certain Investments in Debt and Equity Securities,” and other related
guidance.  The FSP is effective for interim and annual reporting
periods ending after December 15, 2008, and shall be applied
prospectively.  Management has determined the adoption of FSP EITF
Issue No. 99-20-1 did not have a material effect on the Company’s financial
position or results of operations.





- 31
-


2. SECURITIES


Securities
are summarized as follows: (dollars in thousands)





Dec
      2008
                          
                          
                          Dec
      2007Amortized
                          
                          
                          Gross Unrealized
                          
                          
                          Fair
                          
                          
                          Amortized
                          
                          
                          Gross Unrealized
                          
                          
                          FairCost
                          
                          
                          Gains
                          
                          
                          (Losses)
                          
                          
                          Value
                          
                          
                          Cost
                          
                          
                          Gains
                          
                          
                          (Losses)
                          
                          
                          ValueHeld
      to Maturity:Municipal
      bonds
                          
                          $
                          775
                          
                          
                          $
                          1
                          
                          
                          $
                          -
                          
                          
                          $
                          776
                          
                          
                          $
                          775
                          
                          
                          $
                          1
                          
                          
                          $
                          -
                          
                          
                          $
                          776Certificate
      of deposit
                          
                          
                          100
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          100
                          
                          
                          
                          100
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          100Asset
      backed securities
                          
                          
                          235
                          
                          
                          
                          8
                          
                          
                          
                          (16
                          )
                          
                          
                          227
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Collateralized
      mortgage obligations
                          
                          
                          2,368
                          
                          
                          
                          65
                          
                          
                          
                          (653
                          )
                          
                          
                          1,780
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Mortgage
      backed securities
                          
                          
                          989
                          
                          
                          
                          15
                          
                          
                          
                          (3
                          )
                          
                          
                          1,001
                          
                          
                          
                          682
                          
                          
                          
                          9
                          
                          
                          
                          (9
                          )
                          
                          
                          682Total
      Held to Maturity
                          
                          $
                          4,467
                          
                          
                          $
                          89
                          
                          
                          $
                          (672
                          )
                          
                          $
                          3,884
                          
                          
                          $
                          1,557
                          
                          
                          $
                          10
                          
                          
                          $
                          (9
                          )
                          
                          $
                          1,558Available
      for Sale:Agency
      bonds
                          
                          $
                          4,052
                          
                          
                          $
                          90
                          
                          
                          $
                          -
                          
                          
                          $
                          4,142
                          
                          
                          $
                          10,608
                          
                          
                          $
                          71
                          
                          
                          $
                          (1
                          )
                          
                          $
                          10,678Municipal
      bonds
                          
                          
                          23,226
                          
                          
                          
                          462
                          
                          
                          
                          (79
                          )
                          
                          
                          23,609
                          
                          
                          
                          23,571
                          
                          
                          
                          148
                          
                          
                          
                          (16
                          )
                          
                          
                          23,703Collateralized
      mortgage obligations
                          
                          
                          27,858
                          
                          
                          
                          215
                          
                          
                          
                          (94
                          )
                          
                          
                          27,979
                          
                          
                          
                          9,396
                          
                          
                          
                          7
                          
                          
                          
                          (56
                          )
                          
                          
                          9,347Mortgage
      backed securities
                          
                          
                          18,083
                          
                          
                          
                          492
                          
                          
                          
                          (7
                          )
                          
                          
                          18,568
                          
                          
                          
                          11,741
                          
                          
                          
                          72
                          
                          
                          
                          (74
                          )
                          
                          
                          11,739Commercial
      paper
                          
                          
                          14,934
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          14,934
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Corporate
      debt
                          
                          
                          1,963
                          
                          
                          
                          -
                          
                          
                          
                          (940
                          )
                          
                          
                          1,023
                          
                          
                          
                          1,961
                          
                          
                          
                          -
                          
                          
                          
                          (286
                          )
                          
                          
                          1,675Bond
      mutual funds
                          
                          
                          766
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          766
                          
                          
                          
                          5,198
                          
                          
                          
                          -
                          
                          
                          
                          (110
                          )
                          
                          
                          5,088Equity
      securities
                          
                          
                          75
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          75
                          
                          
                          
                          76
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          76Total
      Available for Sale
                          
                          $
                          90,957
                          
                          
                          $
                          1,259
                          
                          
                          $
                          (1,120
                          )
                          
                          $
                          91,096
                          
                          
                          $
                          62,551
                          
                          
                          $
                          298
                          
                          
                          $
                          (543
                          )
                          
                          $
                          62,306





Certain
securities, with amortized cost of $2.1 million and fair value of $2.1 million
at December 31, 2008, and amortized cost of $2.1 million and fair
value of $2.1 million at December 31, 2007 were pledged as collateral for the
Bank's treasury, tax and loan account at the Federal Reserve and for certain
trust, IRA and KEOGH accounts.  In 2008 certain securities, with
amortized cost of $21.1 million and fair value of $21.6 million at December 31,
2008 were pledged as collateral for borrowing purposes at the Federal Home Loan
Bank of Indianapolis.





The
amortized cost and fair value of securities at December 31, 2008 by contractual
maturity are summarized as follows: (dollars in thousands)





Held
      to Maturity
                    
                    
                    Available
      for SaleAmortized
                      Cost
                    
                    
                    Fair
                      Value
                    
                    
                    Yield
                    
                    
                    Amortized
                      Cost
                    
                    
                    Fair
                      Value
                    
                    
                    YieldAgency
      bonds:Due
      in one year or less
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    3.053
                    
                    
                    $
                    3,096
                    
                    
                    
                    4.63
                    %Due
      after 1 year through 5 years
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    999
                    
                    
                    
                    1,046
                    
                    
                    
                    4.89
                    %Municipal
      bonds:Due
      in one year or less
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,344
                    
                    
                    
                    2,360
                    
                    
                    
                    4.43
                    %Due
      after 1 year through 5 years
                    
                    
                    535
                    
                    
                    
                    536
                    
                    
                    
                    7.46
                    %
                    
                    
                    8,332
                    
                    
                    
                    8,494
                    
                    
                    
                    5.08
                    %Due
      after 5 years through 10 years
                    
                    
                    240
                    
                    
                    
                    240
                    
                    
                    
                    7.80
                    %
                    
                    
                    12,550
                    
                    
                    
                    12,755
                    
                    
                    
                    5.55
                    %Certificate
      of deposit:Due
      in one year or less
                    
                    
                    100
                    
                    
                    
                    100
                    
                    
                    
                    1.10
                    %
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Asset
      backed securities
                    
                    
                    235
                    
                    
                    
                    227
                    
                    
                    
                    1.82
                    %
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Collateralized
      mortgage obligations
                    
                    
                    2,368
                    
                    
                    
                    1,780
                    
                    
                    
                    4.40
                    %
                    
                    
                    27,858
                    
                    
                    
                    27,979
                    
                    
                    
                    4.05
                    %Mortgage
      backed securities
                    
                    
                    989
                    
                    
                    
                    1,001
                    
                    
                    
                    5.39
                    %
                    
                    
                    18,083
                    
                    
                    
                    18,568
                    
                    
                    
                    4.93
                    %Commercial
      paper
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    14,934
                    
                    
                    
                    14,934
                    
                    
                    
                    2.72
                    %Corporate
      debt:Due
      after 10 years
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,963
                    
                    
                    
                    1,023
                    
                    
                    
                    4.80
                    %Bond
      mutual funds
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    766
                    
                    
                    
                    766
                    
                    
                    
                    0.94
                    %Equity
      securities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    75
                    
                    
                    
                    75
                    
                    
                    
                    -Total
                    
                    $
                    4,467
                    
                    
                    $
                    3,884
                    
                    
                    
                    4.96
                    %
                    
                    $
                    90,957
                    
                    
                    $
                    91,096
                    
                    
                    
                    4.34
                    %








- 32
-





Activities
related to the sales of securities available for sale and other realized losses
are summarized as follows: (dollars in thousands)





Year
      Ended
                  
                  
                  Year
      Ended
                  
                  
                  Year
      EndedDec
      2008
                  
                  
                  Dec
      2007
                  
                  
                  Dec
      2006Proceeds
      from sales
                  
                  $
                  8,959
                  
                  
                  $
                  4,464
                  
                  
                  $
                  105,649Gross
      losses on sales
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,956Other
      than temporary impairment  losses
                  
                  
                  437
                  
                  
                  
                  -
                  
                  
                  
                  -Tax
      benefit on realized security losses
                  
                  
                  173
                  
                  
                  
                  -
                  
                  
                  
                  775





Taxable
interest income and non-taxable interest income earned on the investment
portfolio is summarized as follows:  (dollars in
thousands)





Year
      Ended
                  
                  
                  Year
      Ended
                  
                  
                  Year
      EndedDec
      2008
                  
                  
                  Dec
      2007
                  
                  
                  Dec
      2006Taxable
      interest income
                  
                  $
                  2,025
                  
                  
                  $
                  1,830
                  
                  
                  $
                  3,389Non-taxable
      interest income
                  
                  
                  853
                  
                  
                  
                  858
                  
                  
                  
                  857Total
      Interest Income
                  
                  $
                  2,878
                  
                  
                  $
                  2,688
                  
                  
                  $
                  4,246








At
December 31, 2008, Management has the intent and ability to hold securities in
an unrealized loss position to recovery, which may be
maturity.  Investments that have been in a continuous unrealized loss
position as of December 31, 2008 and 2007 are summarized as follows: (dollars in
thousands)





As
      of December 31, 2008
                        
                        Less
      than
                          Twelve
      Months
                        
                        
                        Twelve
      Months
                          Or
      Longer
                        
                        
                        TotalDescription
      of Securities
                        
                        Fair
                          Value
                        
                        
                        Unrealized
                          Losses
                        
                        
                        Fair
                          Value
                        
                        
                        Unrealized
                          Losses
                        
                        
                        Fair
                          Value
                        
                        
                        Unrealized
                          LossesAsset
      backed securities
                        
                        $
                        63
                        
                        
                        $
                        (16
                        )
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        63
                        
                        
                        $
                        (16
                        )Collateralized
      mortgage obligations
                        
                        
                        7,081
                        
                        
                        
                        (747
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        7,081
                        
                        
                        
                        (747
                        )Mortgage
      backed securities
                        
                        
                        1,769
                        
                        
                        
                        (10
                        )
                        
                        
                        7
                        
                        
                        
                        -
                        
                        
                        
                        1,776
                        
                        
                        
                        (10
                        )Corporate
      debt
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,023
                        
                        
                        
                        (940
                        )
                        
                        
                        1,023
                        
                        
                        
                        (940
                        )Municipal
      bonds
                        
                        
                        2,780
                        
                        
                        
                        (79
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,780
                        
                        
                        
                        (79
                        )Total
      Temporarily Impaired Securities
                        
                        $
                        11,693
                        
                        
                        $
                        (852
                        )
                        
                        $
                        1,030
                        
                        
                        $
                        (940
                        )
                        
                        $
                        12,723
                        
                        
                        $
                        (1,792
                        )





At
December 31, 2008, the Company had two securities in the available for sale
portfolio with a face amount of $2.0 million and an unrealized loss of
$940,000.  These two securities are rated Aa3 by Moodys indicating
these securities are considered of high quality and of very low credit
risk.  The issuers of the two securities are two well capitalized
banks.  Management believes that the decline in market value is due
primarily to the interest rate and maturity as these securities carry an
interest rate of LIBOR plus 55 basis points with maturities beyond ten
years.





As
      of December 31, 2007
                    
                    Less
      than
                      Twelve
      Months
                    
                    
                    Twelve
      Months
                      Or
      Longer
                    
                    
                    TotalDescription
      of Securities
                    
                    Fair
                      Value
                    
                    
                    Unrealized
                      Losses
                    
                    
                    Fair
                      Value
                    
                    
                    Unrealized
                      Losses
                    
                    
                    Fair
                      Value
                    
                    
                    Unrealized
                      LossesCollateralized
      mortgage obligations
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    4,919
                    
                    
                    $
                    (55
                    )
                    
                    $
                    4,919
                    
                    
                    $
                    (55
                    )Mortgage
      backed securities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,234
                    
                    
                    
                    (83
                    )
                    
                    
                    5,234
                    
                    
                    
                    (83
                    )Corporate
      debt
                    
                    
                    810
                    
                    
                    
                    (151
                    )
                    
                    
                    865
                    
                    
                    
                    (135
                    )
                    
                    
                    1,675
                    
                    
                    
                    (286
                    )Municipal
      bonds
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,920
                    
                    
                    
                    (16
                    )
                    
                    
                    5,920
                    
                    
                    
                    (16
                    )Bond
      mutual funds
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,069
                    
                    
                    
                    (110
                    )
                    
                    
                    4,069
                    
                    
                    
                    (110
                    )Total
      Temporarily Impaired Securities
                    
                    $
                    810
                    
                    
                    $
                    (151
                    )
                    
                    $
                    21,007
                    
                    
                    $
                    (399
                    )
                    
                    $
                    21,817
                    
                    
                    $
                    (550
                    )






3.
            PORTFOLIO
      LOANS


The
Company originates both adjustable and fixed rate loans.  The
adjustable rate loans have interest rate adjustment limitations and are indexed
to various indices.  Adjustable residential mortgages are generally
indexed to the one year Treasury constant maturity rate; adjustable consumer
loans are generally indexed to the prime rate; adjustable commercial loans are
generally indexed to either the prime rate or the one, three or five year
Treasury constant maturity rate.  Future market factors may affect the
correlation of the interest rates the Company pays on the short-term deposits
that have been primarily utilized to fund these loans.





The
principal balance of loans on nonaccrual status totaled approximately $22.5
million at December 31, 2008, $10.5 million at December 31, 2007, and $2.9
million at December 31, 2006.  The Company would have recorded
interest income of $1.3 million, $958,000, and $372,000 for the years ended
December 31, 2008, 2007 and 2006 if loans on non-accrual status had been current
in accordance with their original terms.  Actual interest recognized
was $284,000, $252,000, and $133,000 for the years ended December 31, 2008,
2007, and 2006, respectively.






- 33
-




The
principal balance of loans
90 days past due and still accruing totaled $518,000 and $64,000 at December 31,
2008 and 2007, respectively.  The Bank agreed to modify the terms of
certain loans to customers who were experiencing financial
difficulties.  Modifications included forgiveness of interest, reduced
interest rates and/or extensions of the loan term.  The principal
balance at December 31, 2008, December 31, 2007, and December 31, 2006 on these
restructured loans was $1.3 million, $874,000, and $440,000,
respectively.





The
Company originates and purchases commercial mortgage loans, which totaled $334.4
million and $269.0 million at December 31, 2008 and 2007,
respectively.  These loans are considered by management to be of
somewhat greater risk of collectibility due to the dependency on income
production or future development of the real estate.  The Company also
purchases and originates commercial loans.  Collateral for commercial
loans includes manufacturing equipment, real estate, inventory, accounts
receivable, and securities.  Terms of these loans are normally for up
to ten years and have adjustable rates tied to the reported prime rate and
Treasury indices.  Generally, commercial loans are considered to
involve a higher degree of risk than residential real estate
loans.  However, commercial loans generally carry a higher yield and
are made for a shorter term than real estate loans.





Certain
residential mortgage products have contractual features that may increase credit
exposure to the Company in the event of a decline in housing
prices.  These type of mortgage products offered by the Company
include high loan-to-value (“LTV”) ratios and multiple loans on the same
collateral that when combined result in a high LTV.  Typically a
residential mortgage loan is combined with a home equity loan for a LTV at
origination of over 90% and less than or equal to 100%.  The balance
including unused lines of these loans over 90% LTV at December 31, 2008 was
$13.9 million.





The
Company had entered into two fair value interest rate swap agreements with a
counterparty hedging two fixed rate commercial loans.  In the first
agreement the Company received variable rate payments at the thirty-day London
inter bank offering rate (“LIBOR”) index and made fixed rate payments at
6.28%.  The first swap agreement terminated on July 1,
2008.  In the second agreement the Company received variable rate
payments at thirty day LIBOR and made fixed rate payments at
6.24%.  The final payment was made on December 31, 2008, for the
second swap agreement.  The two interest rate swaps were settled on a
net basis.





Under the
capital standards provisions of FIRREA, the loans-to-one-borrower limitation is
generally 15% of unimpaired capital and surplus, which, for the Bank, was
approximately $16.0 million and $12.9 million at December 31, 2008 and 2007,
respectively.  As of December 31, 2008 and 2007, the Bank was in
compliance with this limitation.





Aggregate
loans to officers and directors included above were $4.2 million and $4.0
million as of December 31, 2008 and 2007, respectively.  Such
loans are made in the ordinary course of business and are made on substantially
the same terms as those prevailing at the time for comparable transactions with
other borrowers.  For the year ended December 31, 2008, loans of $1.7
million were disbursed to officers and directors and repayments of $1.5 million
were received from officers and directors.





At
December 31, 2008 and 2007, deposit overdrafts of $207,000 and $217,000,
respectively, were included in portfolio loans.


An
analysis of the allowance for loan losses is as follows: (dollars in
thousands)





Year
      Ended
                    Dec
      2008
                  
                  
                  Year
      Ended
                    Dec
      2007
                  
                  
                  Year
      Ended
                    Dec
      2006Beginning
      balance
                  
                  $
                  6,972
                  
                  
                  $
                  6,598
                  
                  
                  $
                  6,753Provision
      for loan losses
                  
                  
                  4,292
                  
                  
                  
                  1,361
                  
                  
                  
                  850Charge-offs
                  
                  
                  (3,041
                  )
                  
                  
                  (1,466
                  )
                  
                  
                  (1,327
                  )Recoveries
                  
                  
                  366
                  
                  
                  
                  479
                  
                  
                  
                  322Ending
      Balance
                  
                  $
                  8,589
                  
                  
                  $
                  6,972
                  
                  
                  $
                  6,598








The
following is a summary of information pertaining to impaired
loans:  (dollars in thousands)





As
      Of
                  
                  Dec
      2008
                  
                  
                  Dec
      2007
                  
                  
                  Dec
      2006Impaired
      loans with a valuation reserve
                  
                  $
                  17,170
                  
                  
                  $
                  10,549
                  
                  
                  $
                  3,088Impaired
      loans with no valuation reserve
                  
                  
                  6,646
                  
                  
                  
                  841
                  
                  
                  
                  204Total
      Impaired Loans
                  
                  $
                  23,816
                  
                  
                  $
                  11,390
                  
                  
                  $
                  3,292Valuation
      reserve on impaired loans
                  
                  $
                  2,087
                  
                  
                  $
                  956
                  
                  
                  $
                  381Average
      impaired loans
                  
                  $
                  14,682
                  
                  
                  $
                  7,513
                  
                  
                  $
                  3,508Interest
      income recognized on impaired loans
                  
                  $
                  325
                  
                  
                  $
                  297
                  
                  
                  $
                  188Cash
      basis interest included above
                  
                  $
                  284
                  
                  
                  $
                  252
                  
                  
                  $
                  133





All loans
were analyzed based on collateral analysis.






- 34
-





4.
            LOAN
      SERVICING ACTIVITIES


At
December 31, 2008 and 2007, the Bank was servicing loans for others amounting to
$94.6 million and $54.3 million, respectively consisting of commercial and
commercial real estate participations.  Management believes the
Company receives adequate compensation for the servicing of the participation
loans and therefore no servicing rights are generated by this
activity.  Servicing loans for others generally consists of collecting
payments, maintaining escrow accounts, disbursing payments to investors and
foreclosure processing.  Loan servicing income includes servicing fees
from investors and certain charges collected from borrowers, such as late
payment fees.  During 2006, the Company sold its mortgage servicing
portfolio and related nonrecourse mortgage servicing rights for a gain on sale
of $2.0 million.





Net gain
on sale of loans was $1.4 million, $1.5 million, and $1.4 million for the years
ended December 31, 2008, 2007, and 2006, respectively.  The Bank is
obligated to repurchase certain loans sold to others that become delinquent as
defined by the various agreements.  At December 31, 2008 and 2007,
these obligations were approximately $4.0 million and $7.5 million,
respectively.  Management believes it is remote that, as of December
31, 2008, the Company would have to repurchase these obligations and therefore
no reserve has been established for this purpose.








5.
            ACCRUED
      INTEREST RECEIVABLE


Accrued
interest receivable consists of the following: (dollars in
thousands)





As
      Of
                  
                  Dec
      2008
                  
                  
                  Dec
      2007Loans
                  
                  $
                  3,203
                  
                  
                  $
                  4,060Securities
                  
                  
                  574
                  
                  
                  
                  507Interest-bearing
      deposits
                  
                  
                  -
                  
                  
                  
                  103Total
      Accrued Interest Receivable
                  
                  $
                  3,777
                  
                  
                  $
                  4,670






6.
            PREMISES
      AND EQUIPMENT


Premises
and equipment consists of the following: (dollars in thousands)





As
      Of
                  
                  Dec
      2008
                  
                  
                  Dec
      2007Land
                  
                  $
                  2,521
                  
                  
                  $
                  2,427Buildings
      and improvements
                  
                  
                  15,730
                  
                  
                  
                  15,404Furniture
      and equipment
                  
                  
                  8,831
                  
                  
                  
                  10,261Total
                  
                  
                  27,082
                  
                  
                  
                  28,092Accumulated
      depreciation
                  
                  
                  (11,759
                  )
                  
                  
                  (12,493
                  )Total
      Premises and Equipment
                  
                  $
                  15,323
                  
                  
                  $
                  15,599





Depreciation
expense included in operations for the years ended December 31, 2008, 2007 and
2006 totaled $1.4 million, $1.5 million, and $1.6 million,
respectively.





7.
            DEPOSITS


Deposits
are summarized as follows: (dollars in thousands)





Dec
      2008
                    
                    
                    Dec
      2007Amount
                    
                    
                    Weighted
      Average Rate
                    
                    
                    Amount
                    
                    
                    Weighted
      Average RateNon-interest
      bearing
                    
                    
                    
                    
                    $
                    71,726
                    
                    
                    
                    
                    
                    
                    $
                    69,728Checking
                    
                    
                    
                    
                    
                    
                    110,944
                    
                    
                    
                    1.04
                    %
                    
                    
                    103,624
                    
                    
                    
                    1.98
                    %Savings
                    
                    
                    
                    
                    
                    
                    40,862
                    
                    
                    
                    0.15
                    %
                    
                    
                    37,513
                    
                    
                    
                    0.15
                    %Money
      market
                    
                    
                    
                    
                    
                    
                    156,500
                    
                    
                    
                    0.90
                    %
                    
                    
                    185,803
                    
                    
                    
                    3.38
                    %Total
      transaction accounts
                    
                    
                    
                    
                    
                    
                    380,032
                    
                    
                    
                    0.69
                    %
                    
                    
                    396,668
                    
                    
                    
                    2.11
                    %Certificates
      accounts:Less
      than one year
                    
                    
                    
                    
                    
                    
                    148,093
                    
                    
                    
                    2.95
                    %
                    
                    
                    199,324
                    
                    
                    
                    4.83
                    %12-23
      months
                    
                    
                    
                    
                    
                    
                    24,920
                    
                    
                    
                    3.72
                    %
                    
                    
                    15,016
                    
                    
                    
                    4.27
                    %24-35
      months
                    
                    
                    
                    
                    
                    
                    90,520
                    
                    
                    
                    3.90
                    %
                    
                    
                    46,934
                    
                    
                    
                    4.56
                    %36-59
      months
                    
                    
                    
                    
                    
                    
                    34,772
                    
                    
                    
                    4.29
                    %
                    
                    
                    7,510
                    
                    
                    
                    3.95
                    %60-120
      months
                    
                    
                    
                    
                    
                    
                    32,302
                    
                    
                    
                    4.36
                    %
                    
                    
                    42,099
                    
                    
                    
                    4.44
                    %Total
      certificate accounts
                    
                    
                    
                    
                    
                    
                    330,607
                    
                    
                    
                    3.55
                    %
                    
                    
                    310,883
                    
                    
                    
                    4.69
                    %Total
      Deposits
                    
                    
                    
                    
                    
                    $
                    710,639
                    
                    
                    
                    2.02
                    %
                    
                    $
                    707,551
                    
                    
                    
                    3.25
                    %








Certificate
accounts include certificates of deposit and wholesale deposits.  At
December 31, 2008 and 2007, certificates accounts in amounts of $100,000 or
more totaled $102.2 million and $85.7 million, respectively.








- 35
-




A summary
of certificate accounts by scheduled maturities at December 31, 2008 is as
follows: (dollars in thousands)






2009
              
              2010
              
              2011
              
              2012
              
              2013
              
              Thereafter
              
              Total1.99%
      or less
              $
              42,262
              $
              10
              $
              -
              $
              -
              $
              -
              $
              -
              $
              42,2722.00%
      - 2.99%
              
              26,338
              
              8,222
              
              789
              
              370
              
              305
              
              548
              
              36,5723.00%
      - 3.99%
              
              95,689
              
              28,606
              
              4,682
              
              812
              
              640
              
              391
              
              130,8204.00%
      - 4.99%
              
              19,327
              
              60,285
              
              16,570
              
              17,140
              
              510
              
              558
              
              114,3905.00%
      - 5.99%
              
              3,715
              
              497
              
              1,563
              
              659
              
              -
              
              -
              
              6,434Over
      6.00%
              
              119
              
              -
              
              -
              
              -
              
              -
              
              -
              
              119Total
      Certificate Accounts
              $
              187,450
              $
              97,620
              $
              23,604
              $
              18,981
              $
              1,455
              $
              1,497
              $
              330,607




A summary
of interest expense on deposits is as follows: (dollars in
thousands)




Year
      Ended
                    Dec
      2008
                  
                  
                  Year
      Ended
                    Dec
      2007
                  
                  
                  Year
      Ended
                    Dec
      2006Checking
                  
                  $
                  918
                  
                  
                  $
                  1,698
                  
                  
                  $
                  1,522Savings
                  
                  
                  63
                  
                  
                  
                  63
                  
                  
                  
                  70Money
      market
                  
                  
                  2,867
                  
                  
                  
                  5,869
                  
                  
                  
                  4,982Certificates
      accounts
                  
                  
                  12,876
                  
                  
                  
                  15,029
                  
                  
                  
                  12,805Total
      Interest Expense
                  
                  $
                  16,724
                  
                  
                  $
                  22,659
                  
                  
                  $
                  19,379





8.
            FEDERAL
      HOME LOAN BANK ADVANCES


The
Company was eligible to borrow from the FHLB additional amounts up to
$56.8 million and $28.5 million at December 31, 2008 and 2007,
respectively.  The following FHLB advances were secured by assets
totaling $352.8 million.  The assets include securities and
qualifying loans on residential properties, multifamily properties and
commercial real estate.  (dollars in thousands)





Maturing
      During
                    Year
      Ended
                    December
      31
                  
                  Amount
                  
                  
                  Weighted
                    Average
                    Rate2009
                  
                  $
                  19,500
                  
                  
                  
                  3.22
                  %2010
                  
                  
                  11,250
                  
                  
                  
                  5.08
                  %2011
                  
                  
                  12,000
                  
                  
                  
                  5.10
                  %2012
                  
                  
                  30,000
                  
                  
                  
                  3.95
                  %2013
                  
                  
                  55,000
                  
                  
                  
                  2.99
                  %Thereafter
                  
                  
                  2,176
                  
                  
                  
                  6.52
                  %Total
      FHLB Advances
                  
                  $
                  129,926
                  
                  
                  
                  3.68
                  %





At
December 31, 2008, FHLB advances totaling $97.0 million are subject to various
options by the FHLB to convert the rates.  If the FHLB exercises its
option, the advances will be prepayable at the Company’s option, at par and
without a prepayment penalty.





9.
            OTHER
      BORROWINGS


Junior
Subordinated Debt


On
September 15, 2006, the Company entered into several agreements providing for
the private placement of $15.0 million of Capital Securities due September 15,
2036 (the “Capital Securities”).  The Capital Securities were issued
by the Company’s Delaware trust subsidiary, Home Federal Statutory Trust I (the
“Trust”), to JP Morgan Chase formerly Bear, Stearns & Co., Inc. (the
“Purchaser”).  The Company bought $464,000 in Common Securities (the
“Common Securities”) from the Trust.  The proceeds of the sale of
Capital Securities and Common Securities were used by the Trust to purchase
$15.5 million in principal amount of Junior Subordinated Debt Securities (the
“Debentures”) from the Company pursuant to an Indenture (the “Indenture”)
between the Company and Bank of America National Association, as trustee (the
“Trustee”).





The
Common Securities and Capital Securities will mature in 30 years, will require
quarterly distributions of interest and will bear a floating variable rate equal
to the prevailing three-month LIBOR rate plus 1.65% per annum. Interest on the
Capital Securities and Common Securities is payable quarterly in arrears each
December 15, March 15, June 15 and September 15.  The Company may
redeem the Capital Securities and the Common Securities, in whole or in part,
without penalty, on or after September 15, 2011, or earlier upon the occurrence
of certain events described below with the payment of a premium upon
redemption.






- 36
-




The
Company, as Guarantor, entered into a Guarantee Agreement with Bank of America
National Association, as Guarantee Trustee, for the benefit of the holders of
the Capital Securities. Pursuant
to the Guarantee Agreement, the Company unconditionally agreed to pay to the
holders of the Capital Securities all amounts becoming due and payable with
respect to the Capital Securities, to the extent that the Trust has funds
available for such payment at the time. The Company’s guarantee obligation under
the Guarantee Agreement is a general unsecured obligation of the Company and is
subordinate and junior in right of payment to all of the Company’s long term
debt.




The
Debentures bear interest at the same rate and on the same dates as interest is
payable on the Capital Securities and the Common Securities.  The
Company has the option, as long as it is not in default under the Indenture, at
any time and from time to time, to defer the payment of interest on the
Debentures for up to twenty consecutive quarterly interest payment
periods.  During any such deferral period, or while an event of
default exists under the Indenture, the Company may not declare or pay dividends
or distributions on, redeem, purchase, or make a liquidation payment with
respect to, any of its capital stock, or make payments of principal, interest or
premium on, or repay or repurchase, any other debt securities that rank equal or
junior to the Debentures, subject to certain limited exceptions.





The
Debentures mature 30 years after their date of issuance, and can be redeemed in
whole or in part by the Company, without penalty, at any time after September
15, 2011.  The Company may also redeem the Debentures upon the
occurrence of a “capital treatment event,” an “investment company event” or a
“tax event” as defined in the Indenture, but if such redemption occurs prior to
September 15, 2011, a premium will be payable to Debenture holders upon the
redemption.  The payment of principal and interest on the Debentures
is subordinate and subject to the right of payment of all “Senior Indebtedness”
of the Company as described in the Indenture.





Long
Term Debt


The
Company has a revolving note with Bank of America, N.A with an available balance
of $17.5 million which matures February 15, 2009.  The outstanding
balance was zero at December 31, 2008 and 2007.  The note accrues
interest at a variable rate based on the ninety-day LIBOR index, on the date of
the draw, plus 140 basis points (2.8% on December 31, 2008).  Interest
payments are due ninety days after the date of any principal draws made on the
loan and every ninety days thereafter.  The assets of the Company
collateralized the borrowings under the note.  Under terms of the
agreement, the Company is bound by certain restrictive debt covenants relating
to earnings, net worth and various financial ratios.





Other
Borrowings


The
Company has a $5.0 million overdraft line of credit with the Federal Home Loan
Bank, which had a balance of $4.7 million as of December 31,
2008.  None of the line of credit was used as of December 31,
2007.  The line of credit accrues interest at a variable rate (0.7% on
December 31, 2008).  The Company also has letters of credit for
$289,000 and $1.4 million, as of December 31, 2008 and 2007, respectively, none
of which was used as of either year end.





The
Company had a contract with an official check overnight remittance service that
was terminated in 2008.  The balance with the remittance service was
$20,000 as of December 31, 2007.








10.
            INCOME
      TAXES


An
analysis of the income tax provision is as follows: (dollars in
thousands)





Year
      Ended
                  
                  
                  Year
      Ended
                  
                  
                  Year
      EndedDec
      2008
                  
                  
                  Dec
      2007
                  
                  
                  Dec
      2006Current:Federal
                  
                  $
                  2,666
                  
                  
                  $
                  2,610
                  
                  
                  $
                  4,202State
                  
                  
                  768
                  
                  
                  
                  722
                  
                  
                  
                  656DeferredFederal
                  
                  
                  (646
                  )
                  
                  
                  (164
                  )
                  
                  
                  (1,552
                  )State
                  
                  
                  (188
                  )
                  
                  
                  (32
                  )
                  
                  
                  (489
                  )Income
      Tax Provision
                  
                  $
                  2,600
                  
                  
                  $
                  3,136
                  
                  
                  $
                  2,817




The
difference between the financial statement provision and amounts computed by
using the statutory rate of 34% is reconciled as follows: (dollars in
thousands)





Period
      Ended
                  
                  Dec
      2008
                  
                  
                  Dec
      2007
                  
                  
                  Dec
      2006Income
      tax provision at federal statutory rate
                  
                  $
                  2,584
                  
                  
                  $
                  3,148
                  
                  
                  $
                  3,148State
      tax, net of federal tax benefit
                  
                  
                  383
                  
                  
                  
                  456
                  
                  
                  
                  110Tax
      exempt interest
                  
                  
                  (303
                  )
                  
                  
                  (300
                  )
                  
                  
                  (315
                  )Increase
      in cash surrender value
                    of
      life insurance
                  
                  
                  (175
                  )
                  
                  
                  (171
                  )
                  
                  
                  (157
                  )Other,
      net
                  
                  
                  111
                  
                  
                  
                  3
                  
                  
                  
                  31Income
      Tax Provision
                  
                  $
                  2,600
                  
                  
                  $
                  3,136
                  
                  
                  $
                  2,817






- 37
-





The
Company is allowed to deduct an addition to a reserve for bad debts in
determining taxable income.  This addition differs from the provision
for loan losses for financial reporting purposes.  No deferred taxes
have been provided on the income tax bad debt reserves which total $6.0 million,
for years prior to 1988.  This tax reserve for bad debts is included
in taxable income of later years only if the bad debt reserves are subsequently
used for purposes other than to absorb bad debt losses.  Because the
Company does not intend to use the reserves for purposes other than to absorb
losses, no deferred income taxes were provided at December 31, 2008 and 2007,
respectively.  Pursuant to Statement of Financial Accounting Standards
No. 109 (“SFAS 109”), ”Accounting for Income Taxes,” the Company has recognized
the deferred tax consequences of differences between the financial statement and
income tax treatment of allowances for loan losses arising after June 30,
1987.





The
Company’s deferred income tax assets and liabilities, included in prepaid
expenses and other assets, are as follows: (dollars in thousands)




As
      Of
                    
                    Dec.
      2008
                    
                    
                    Dec.
      2007Deferred
      tax assets:Bad
      debt reserves, net
                    
                    $
                    3,388
                    
                    
                    $
                    2,750Unrealized
      loss on securities available for sale
                    
                    
                    -
                    
                    
                    
                    89Capital
      loss on securities available for sale
                    
                    
                    165
                    
                    
                    
                    -Sale
      leaseback gain
                    
                    
                    700
                    
                    
                    
                    751Other
                    
                    
                    168
                    
                    
                    
                    170Deferred
      compensation
                    
                    
                    2,415
                    
                    
                    
                    2,356Total
      deferred tax assets
                    
                    
                    6,836
                    
                    
                    
                    6,116Deferred
      tax liabilities:Difference
      in basis of fixed assets
                    
                    
                    402
                    
                    
                    
                    304FHLB
      dividend
                    
                    
                    204
                    
                    
                    
                    204Unrealized
      gain on securities available for sale
                    
                    
                    50
                    
                    
                    
                    -Deferred
      fees
                    
                    
                    544
                    
                    
                    
                    610Total
      deferred tax liabilities
                    
                    
                    1,200
                    
                    
                    
                    1,118Net
      Deferred Tax Asset
                    
                    $
                    5,636
                    
                    
                    $
                    4,998




The
Company’s tax years still subject ot examination by taxing authorities are years
subsequent to 2004.





11.
            REGULATORY
      MATTERS


The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies.  Failure to meet minimum
capital requirements can initiate certain mandatory – and possible additional
discretionary – actions by regulators that, if undertaken, could have a direct
material effect on the Company’s and Bank’s financial
statements.  Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank’s assets, liabilities
and certain off-balance sheet items as calculated under regulatory
guidance.  The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.





Quantitative
measures that have been established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table), of


total and Tier
1 capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as defined).  As
of December 31, 2008, the Company and the


Bank met
all capital adequacy requirements to which they were subject.





As of
December 31, 2008, the most recent notifications from the Federal Reserve
categorized the Company and the Bank as “well capitalized” under the regulatory
framework for prompt corrective action.


To be
categorized as “well capitalized” the Company and the Bank must maintain minimum
total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
the table.  There are no conditions or events since that notification
that management believes have changed either entity’s category.






- 38
-





A summary
of capital amounts and ratios as of December 31, 2008 and
2007:


(dollars
in thousands)








Actual
                    
                    
                    For
      Capital
                      Adequacy
      Purposes
                    
                    
                    To
      Be Categorized As
                      “Well
      Capitalized”
                      Under
      Prompt
                      Corrective
      Action
                      ProvisionsAmount
                    
                    
                    Ratio
                    
                    
                    Amount
                    
                    
                    Ratio
                    
                    
                    Amount
                    
                    
                    RatioAs
      of December 31, 2008Total
      risk-based capital(to
      risk-weighted assets)Indiana
      Bank and Trust Company
                    
                    $
                    106,969
                    
                    
                    
                    12.10
                    %
                    
                    $
                    70,716
                    
                    
                    
                    8.0
                    %
                    
                    $
                    88,395
                    
                    
                    
                    10.0
                    %Indiana
      Community Bancorp Consolidated
                    
                    $
                    114,812
                    
                    
                    
                    13.20
                    %
                    
                    $
                    69,604
                    
                    
                    
                    8.0
                    %
                    
                    $
                    87,005
                    
                    
                    
                    10.0
                    %Tier
      1 risk-based capital(to
      risk-weighted assets)Indiana
      Bank and Trust Company
                    
                    $
                    98,380
                    
                    
                    
                    11.13
                    %
                    
                    $
                    35,358
                    
                    
                    
                    4.0
                    %
                    
                    $
                    53,037
                    
                    
                    
                    6.0
                    %Indiana
      Community Bancorp Consolidated
                    
                    $
                    106,223
                    
                    
                    
                    12.21
                    %
                    
                    $
                    34,802
                    
                    
                    
                    4.0
                    %
                    
                    $
                    52,203
                    
                    
                    
                    6.0
                    %Tier
      1 leverage capital(to
      average assets)Indiana
      Bank and Trust Company
                    
                    $
                    98,380
                    
                    
                    
                    10.26
                    %
                    
                    $
                    38,354
                    
                    
                    
                    4.0
                    %
                    
                    $
                    47,942
                    
                    
                    
                    5.0
                    %Indiana
      Community Bancorp Consolidated
                    
                    $
                    106,223
                    
                    
                    
                    11.11
                    %
                    
                    $
                    38,255
                    
                    
                    
                    4.0
                    %
                    
                    $
                    47,819
                    
                    
                    
                    5.0
                    %











Actual
                    
                    
                    For
      Capital
                      Adequacy
      Purposes
                    
                    
                    To
      Be Categorized As
                      “Well
      Capitalized”
                      Under
      Prompt
                      Corrective
      Action
                      ProvisionsAmount
                    
                    
                    Ratio
                    
                    
                    Amount
                    
                    
                    Ratio
                    
                    
                    Amount
                    
                    
                    RatioAs
      of December 31, 2007Total
      risk-based capital(to
      risk-weighted assets)Indiana
      Bank and Trust Company
                    
                    $
                    86,130
                    
                    
                    
                    10.65
                    %
                    
                    $
                    64,673
                    
                    
                    
                    8.0
                    %
                    
                    $
                    80,842
                    
                    
                    
                    10.0
                    %Indiana
      Community Bancorp Consolidated
                    
                    $
                    88,289
                    
                    
                    
                    10.91
                    %
                    
                    $
                    64,759
                    
                    
                    
                    8.0
                    %
                    
                    $
                    80,949
                    
                    
                    
                    10.0
                    %Tier
      1 risk-based capital(to
      risk-weighted assets)Indiana
      Bank and Trust Company
                    
                    $
                    79,158
                    
                    
                    
                    9.79
                    %
                    
                    $
                    32,337
                    
                    
                    
                    4.0
                    %
                    
                    $
                    48,505
                    
                    
                    
                    6.0
                    %Indiana
      Community Bancorp Consolidated
                    
                    $
                    81,317
                    
                    
                    
                    10.05
                    %
                    
                    $
                    32,380
                    
                    
                    
                    4.0
                    %
                    
                    $
                    48,569
                    
                    
                    
                    6.0
                    %Tier
      1 leverage capital(to
      average assets)Indiana
      Bank and Trust Company
                    
                    $
                    79,158
                    
                    
                    
                    8.95
                    %
                    
                    $
                    35,375
                    
                    
                    
                    4.0
                    %
                    
                    $
                    44,219
                    
                    
                    
                    5.0
                    %Indiana
      Community Bancorp Consolidated
                    
                    $
                    81,317
                    
                    
                    
                    9.18
                    %
                    
                    $
                    35,423
                    
                    
                    
                    4.0
                    %
                    
                    $
                    44,279
                    
                    
                    
                    5.0
                    %







Dividend
Restrictions


The
principal source of income and funds for the Company is dividends from the
Bank.  The Bank is subject to certain restrictions on the amount of
dividends that it may declare without prior regulatory approval.  The
Bank requested and received regulatory approval to pay $2.7 million and $11.2
million in dividends to its sole shareholder Indiana Community Bancorp for the
years ended December 2008 and 2007, respectively.  In 2009, the Bank
anticipates requesting regulatory approval to pay dividends to the
Company.





Additionally
eligible deposit account holders at the time of conversion, January 14, 1988,
were granted priority in the event of a future liquidation of the
Bank.  Consequently, a special reserve account was established equal
to the Bank’s $9.4 million equity at December 31, 1986.  No dividends
may be paid to shareholders or outstanding shares repurchased if such payments
reduce the equity of the Bank below the amount required for the liquidation
account.





On
December 12, 2008, Indiana Community Bancorp issued 21,500 shares of the
Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series
A Preferred Stock”) and a warrant to purchase 188,707 shares of the Company’s
common stock, without par value (the “Common Stock”), for an aggregate purchase
price of $21.5 million in cash.  Upon issuance of the Series A
Preferred Stock on December 12, 2008, the ability of the Company to declare or
pay dividends or distributions on, or purchase, redeem or otherwise acquire for
consideration, shares of its Common Stock will be subject to restrictions,
including the Company’s restriction against increasing dividends from the last
quarterly cash dividend per share ($0.12) declared on the Common Stock prior to
October 14, 2008. The redemption, purchase or other acquisition of trust
preferred securities of the Company or its affiliates also will be restricted.
These restrictions will terminate on the earlier of (a) the third anniversary of
the date of issuance of the Series A Preferred Stock and (b) the date on which
the Series A Preferred Stock has been redeemed in whole or Treasury has
transferred all of the Series A Preferred Stock to third
parties. In
addition, pursuant to the Certificate of Designations, the ability
of the Company to declare or pay dividends or distributions on, or repurchase,
redeem or otherwise acquire for consideration, shares of its Common Stock will
be subject to restrictions in the event that the Company fails to declare and
pay full dividends (or declare and set aside a sum sufficient for payment
thereof) on its Series A Preferred Stock.






- 39
-







12.
            EMPLOYEE
      BENEFIT PLANS


Multi-employer
Pension Plan





Prior to
April 1, 2008 the Company participated in a noncontributory multi-employer
pension plan covering all qualified employees.  The trustees of the
Financial Institutions Retirement Fund administer the plan.  There is
no separate valuation of the plan benefits or segregation of plan assets
specifically for the Company, because the plan is a multi-employer plan and
separate actuarial valuations are not made with respect to each
employer.  The Company had expenses of $626,000, $1.2 million and $1.3
million for the years ended December 2008, 2007 and 2006,
respectively.  Cash contributions to the multi-employer pension plan
for these same periods were $208,000, $1.2 million and $1.1 million,
respectively.  The Company choose to freeze its defined benefit
pension plan effective April 1, 2008.





Supplemental
Retirement Plan


The
Company has entered into supplemental retirement agreements for certain officers
(the “Plan”).  These agreements are unfunded. However, the Company has
entered into life insurance contracts to offset the expense of these
agreements.  Benefits under these arrangements are generally paid over
a 15 year period.  The Company uses a December 31 measurement date for
the plan.  The following table sets forth the Plan's funded status at
December 31, 2008 and 2007, and amount recognized in the Company's consolidated
statements of income for the years ended December 31,2008,2007 and 2006, as well as the
projected benefit cost for 2009:  (dollars in thousands)





ProjectedDec
      2009
                  
                  
                  Dec
      2008
                  
                  
                  Dec
      2007
                  
                  
                  Dec
      2006Economic
      assumptions:Discount
      rate
                  
                  
                  
                  
                  
                  5.5
                  %
                  
                  
                  6.0
                  %
                  
                  
                  5.8
                  %Salary
      rate
                  
                  
                  
                  
                  
                  4.0
                  %
                  
                  
                  4.0
                  %
                  
                  
                  4.0
                  %Components
      of net periodic pension expense:Interest
      cost on projected benefit obligation
                  
                  $
                  228
                  
                  
                  $
                  242
                  
                  
                  $
                  222
                  
                  
                  $
                  197Service
      cost
                  
                  
                  104
                  
                  
                  
                  104
                  
                  
                  
                  101
                  
                  
                  
                  100Prior
      service cost
                  
                  
                  89
                  
                  
                  
                  99
                  
                  
                  
                  93
                  
                  
                  
                  61Net
      Periodic Benefit Cost
                  
                  $
                  421
                  
                  
                  $
                  445
                  
                  
                  $
                  416
                  
                  
                  $
                  358




A
reconciliation of the prior and ending balances of the Benefit Obligation for
2008 and 2007 is as follows: (dollars in thousands)





Dec
      2008
                  
                  
                  Dec
      2007Benefit
      obligation at beginning of year
                  
                  $
                  4,162
                  
                  
                  $
                  3,647Interest
      cost
                  
                  
                  242
                  
                  
                  
                  222Service
      cost
                  
                  
                  104
                  
                  
                  
                  101Actuarial
      (gain)/loss
                  
                  
                  (48
                  )
                  
                  
                  411Benefits
      paid during year
                  
                  
                  (203
                  )
                  
                  
                  (219
                  )Benefit
      Obligation at End of Year (unfunded status)
                  
                  $
                  4,257
                  
                  
                  $
                  4,162





The
liability recognized in the balance sheet at December 31, 2008 and 2007 was $4.3
million and $4.2 million, respectively.





Amounts
recognized in accumulated other comprehensive income not yet recognized as a
component of net periodic benefit cost consist of: (dollars in
thousands)





Pension
      benefits
              
              Dec
      2008
              
              
              Dec
      2007Net
      loss, net of tax of ($297) and ($334)
              
              $
              453
              
              
              $
              510Prior
      service cost, net of tax of ($159) and ($180)
              
              
              242
              
              
              
              274Total
              
              $
              695
              
              
              $
              784






- 40
-




Other
changes in plan assets and benefit obligations recognized in other comprehensive
income are as follows for the years ended December 31, 2008 and 2007: (dollars
in thousands)





Dec
      2008
                  
                  
                  Dec
      2007Net
      (gain)/loss, net of tax of $37 and ($147)
                  
                  $
                  (56
                  )
                  
                  $
                  225Amortization
      of prior service cost, net of tax of $21 and $21
                  
                  
                  (33
                  )
                  
                  
                  (33
                  )Total
      recognized in other comprehensive income
                  
                  $
                  (89
                  )
                  
                  $
                  192Total
      recognized in net periodic benefit cost and other comprehensive income,
      net of tax of ($118) and ($291)
                  
                  $
                  180
                  
                  
                  $
                  443





The
estimated net loss and prior service cost for the Plan that will be amortized
from accumulated other comprehensive income into net periodic benefit cost over
the next fiscal year are $35,000 and $54,000, respectively.  As of
December 31, 2008, the projected benefit obligation and the accumulated benefit
obligation were $4.3 million and $3.8 million, respectively. As of December
31, 2007, the projected benefit obligation and the accumulated benefit
obligation were $4.2 million and $4.0 million, respectively.





Prior
service cost is amortized over the estimated remaining employee service lives of
approximately eight years.  The Company expects to make contributions
of $421,000 to the plan in 2009.  The Bank anticipates paying benefits
over the next five years and in the aggregate for the five years thereafter as
follows:  2009 - $212,000, 2010 - $258,000, 2011 - $262,000, 2012 -
$201,000, 2013 - $228,000 and  2014 through 2018 -
$1,568,000.





401(k)
Plan





The
Company has an employee thrift plan established for substantially all full-time
employees.  Effective January 1, 2008, the Company increased the
maximum 401(k) match to 50% of an employee’s


401(k)
contribution, up to a maximum contribution of 3.0% of an individual’s total
eligible salary.  Previously the maximum contribution was of 1.5% of
an individual’s total eligible salary.  The Company


$244,000,
$136,000 and $126,000, during the years ended December 31, 2008, 2007 and
2006, respectively, to this plan.








13.
            STOCK
      OPTIONS


The
Company has stock option plans for the benefit of officers, other key employees
and directors.  As of December 31, 2008, the plans were authorized to
grant additional options to purchase 237,612 shares of the Company's common
stock.  The option price is not to be less than the fair market value
of the common stock on the date the option is granted, and the stock options are
exercisable at any time within the maximum term of 10 years and one day from the
grant date, limited by general vesting terms up to a maximum amount of $100,000
per year on incentive stock options.  The options are nontransferable
and are forfeited upon termination of employment, except in case of retirement,
in which case the options are exercisable for three years after date of
retirement.  The Company issues new common shares to satisfy exercises
of stock options.





The
pre-tax compensation cost charged against income was $155,000, $137,000 and
$296,000 in the income statements for the years ended December 31, 2008, 2007,
and 2006, respectively.  The related income tax benefit recognized in
the same years was $53,000, $46,000, and $89,000 respectively.





The
weighted average grant date fair value of options granted December 31, 2008 and
2006 was $2.48 and $5.58, respectively.  No options were granted
during the year ended December 31, 2007.  The Company estimates the
fair value of each option on the date of grant using the Black Scholes
model.  The Black Scholes model uses the following assumptions: 1.)
expected life in years which is based on historical employee behavior; 2.)
annualized volatility which is based on the price volatility of the Company’s
stock over the expected life of the option; 3.) annual rate of quarterly
dividends based on most recent historical rate; 4.) the discount rate based on
the zero coupon bond with a term equal to the expected life of the option; and
5.) assuming no forfeitures of options.  The fair value of options
granted in 2008 was calculated using the following
assumptions:  dividend yield of 3.72%; risk-free interest rates of
2.81%; expected volatility of 17.15%; and expected life of 6.03
years.  The fair value of options granted in 2006 was calculated using
the following assumptions:  dividend yield of 2.81% to 3.08%;
risk-free interest rates of 4.53% to 4.90%; expected volatility of 18.75% to
21.07%; and expected life of 5.91 to 6.03 years.






- 41
-


The
following is the stock option activity for the years ended December 31, 2008,
2007 and 2006 and the stock options outstanding at the end of the respective
periods:





Options
                                                                                                                              
                                                                                                                              Shares
                                                                                                                              
                                                                                                                              
                                                                                                                              Weighted
                                                                                                                                Average
                                                                                                                                Exercise
                                                                                                                                Price
                                                                                                                              
                                                                                                                              Weighted
                                                                                                                                AverageLife
                                                                                                                                (in years)
                                                                                                                              
                                                                                                                              Aggregate
                                                                                                                                Intrinsic
      ValueOutstanding
      December 31, 2005
                                                                                                                              
                                                                                                                              
                                                                                                                              617,717Granted
                                                                                                                              
                                                                                                                              
                                                                                                                              97,500Forfeited
                                                                                                                              
                                                                                                                              
                                                                                                                              (3,000
                                                                                                                              )Exercised
                                                                                                                              
                                                                                                                              
                                                                                                                              (104,724
                                                                                                                              )Outstanding
      December 31, 2006
                                                                                                                              
                                                                                                                              
                                                                                                                              607,493Forfeited
                                                                                                                              
                                                                                                                              
                                                                                                                              (53,531
                                                                                                                              )Exercised
                                                                                                                              
                                                                                                                              
                                                                                                                              (148,010
                                                                                                                              )Outstanding
      December 31, 2007
                                                                                                                              
                                                                                                                              
                                                                                                                              405.952
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              23.11Granted
                                                                                                                              
                                                                                                                              
                                                                                                                              68,500
                                                                                                                              
                                                                                                                              
                                                                                                                              
                                                                                                                              21.50Forfeited
                                                                                                                              
                                                                                                                              
                                                                                                                              (81,174
                                                                                                                              )
                                                                                                                              
                                                                                                                              
                                                                                                                              23.29Outstanding
      December 31, 2008
                                                                                                                              
                                                                                                                              
                                                                                                                              393,278
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              22.80
                                                                                                                              
                                                                                                                              4.9
                                                                                                                              
                                                                                                                              $
                                                                                                                              -Exercisable
      at December 31, 2008
                                                                                                                              
                                                                                                                              
                                                                                                                              310,812
                                                                                                                              
                                                                                                                              
                                                                                                                              $
                                                                                                                              22.59
                                                                                                                              
                                                                                                                              3.9
                                                                                                                              
                                                                                                                              $
                                                                                                                              -





Options
outstanding at December 31, 2008 include vested options and options expected to
vest.  As of December 31, 2008, 2007, and 2006, there was
approximately $103,000, $89,000 and $300,000 of unrecognized compensation cost
related to the unvested shares, respectively.  The December 31, 2008
cost is expected to be recognized over the remaining vesting period, which
approximates 3 years.  No options were exercised in
2008.  During 2007 and 2006, the Company received $3.3 million and
$2.0 million, respectively, from stock options
exercised.  Additionally, the Company received a tax benefit from
options which had been exercised of $339,000 and $133,000 in 2007 and 2006,
respectively.






14.
            COMMITMENTS


Financial
Instruments with Off-Balance Sheet Risk


In the
normal course of business, the Company makes various commitments to extend
credit that are not reflected in the accompanying consolidated balance
sheets.  Commitments, which are disbursed subject to certain
limitations, extend over various periods of time.  Generally, unused
commitments are cancelled upon expiration of the commitment term as outlined in
each individual contract.  The following table summarizes the
Company’s significant commitments: (dollars in thousands)





Dec 2008
                  
                  
                  Dec
      2007Commitments
      to extend credit:Commercial
      mortgage and commercial loans (1)
                  
                  $
                  107,476
                  
                  
                  $
                  141,490Residential
      mortgage loans
                  
                  
                  34,641
                  
                  
                  
                  18,451Revolving
      home equity lines of credit
                  
                  
                  39,633
                  
                  
                  
                  44,499Other
                  
                  
                  18,565
                  
                  
                  
                  19,806Standby
      letters of credit
                  
                  
                  2,922
                  
                  
                  
                  6,501Commitments
      to sell loans:Residential
      mortgage loans
                  
                  
                  31,990
                  
                  
                  
                  8,572Commercial
      mortgage and commercial loans (2)
                  
                  
                  22,684
                  
                  
                  
                  21,285





1)
            Commercial
      mortgage and commercial loan commitments to extend credit are presented
      net of the portion of participation interests due to
      investors.


2)
            Commercial
      mortgage and commercial loan commitments to sell loans represent
      participation interests of undisbursed amounts sold to
      investors.





Management
believes that none of these arrangements exposes the Company to any greater risk
of loss than already reflected on our balance sheet so accordingly no reserves
have been established for these commitments.





The
Company’s exposure to credit loss in the event of nonperformance by the other
parties to the financial instruments for commitments to extend credit is
represented by the contract amount of those instruments.  The Company
uses the same credit policies and collateral requirements in making commitments
as it does for on-balance sheet instruments.






- 42
-


Lease
Obligations


The
Company leases banking facilities and other office space under operating leases
that expire at various dates through 2022 and that contain certain renewal
options.  Rent expenses charged to operations were $491,000, $242,000,
and $113,000 for the years ended December 31, 2008, 2007, and 2006,
respectively.  As of December 31, 2008, future minimum annual rental
payments under these leases are as follow: (dollars in thousands)





Year
      Ended December
                  
                  Amount2009
                  
                  
                  4742010
                  
                  
                  4692011
                  
                  
                  4792012
                  
                  
                  3372013
                  
                  
                  328Thereafter
                  
                  
                  3,129Total
      Minimum Operating Lease Payments
                  
                  $
                  5,216





Change
in Control Agreements


The
Company has entered into change in control agreements with certain executive
officers.  Under certain circumstances provided in the agreements, the
Company may be obligated to pay three times such officer’s base salary and to
continue their health insurance coverage for twelve months.  Such
payments are currently prohibited during the period the Series A Preferred Stock
issued under the Capital Purchase Program is held by the U.S. Department of the
Treasury.




15.
            FAIR
      VALUE OF FINANCIAL INSTRUMENTS





Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements.”  This statement defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements.  SFAS 157 has been applied
prospectively as of the beginning of the year.





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





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





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





Securities
Available for Sale


When
quoted market prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy.  Securities
purchased in an active market within 30 days of the statement date when a more
recent quoted price has not been obtained are included in Level
1.  Level 2 securities include collateralized mortgage obligations,
mortgage backed securities, corporate debt, agency and municipal bonds, and bond
mutual funds.  Commercial paper with a term of three months or less
have been included in Level 2 since the price can be corroborated by observable
market data for substantially the full term of the investment.  In
certain cases where Level 1 and Level 2 inputs are not available, securities are
classified within Level 3 of the hierarchy and include equity
securities.






- 43
-





The
following table presents the fair value measurements of assets recognized in the
accompanying consolidated balance sheets measured at fair value on a recurring
basis and the level within the SFAS 157 fair value hierarchy in which the fair
value measurements fall at December 31, 2008.  (dollars in
thousands)





December
      31, 2008Fair
      Value Measurements UsingQuoted
      Prices
                        in
      Active
                        Markets
      for
                        Identical
                        Assets
                      
                      
                      Significant
                        Other
                        Observable
                        Inputs
                      
                      Significant
                        Unobservable
                        InputsLevel 1
                      
                      
                      Level 2
                      
                      Level 3
                      
                      
                      Fair ValueSecurities
      available for sale
                      $
                      8,841
                      
                      $
                      82,180
                      $
                      75
                      
                      $
                      91,096






The
following table presents a reconciliation of the beginning and ending balances
of recurring securities available for sale fair value measurements recognized in
the accompanying consolidated balance sheets using significant unobservable
(Level 3) inputs for the year ended December 31, 2008.  (dollars in
thousands)








Total
      Fair Value MeasurementsLevel
      3 Instruments Only
                    
                    Available
      for Sale Debt SecuritiesBalance,
      December 31, 2007
                    
                    $
                    76Total
      gains or losses (realized/unrealized):Included
      in earnings
                    
                    
                    (1
                    )Balance,
      December 31, 2008
                    
                    $
                    75





The
following table presents the fair value measurements of assets recognized in the
accompanying consolidated balance sheets measured at fair value on a non
recurring basis and the level within the SFAS 157 fair value hierarchy in which
the fair value measurements fall at December 31, 2008.  (dollars in
thousands)




December
      31, 2008Fair
      Value Measurements UsingQuoted
      Prices
                      in
      Active
                      Markets
      for
                      Identical
      Assets
                    
                    
                    Significant
                      Other
                      Observable
                      Inputs
                    
                    Significant
                      Unobservable
                      InputsLevel 1
                    
                    
                    Level 2
                    
                    Level 3
                    
                    
                    Fair ValueImpaired
      loans
                    
                    -
                    
                    
                    -
                    
                    15,019
                    
                    
                    15,019





At
December 31, 2008 impaired loans under SFAS No. 114 which had an evaluation
adjustment during 2008 had an aggregate cost of $16.6 million and had been
written down to a fair value of $15.0 million measured using Level 3 inputs
within the fair value hierarchy.  Level 3 inputs for impaired loans
included current and prior appraisals, discounting factors, the borrowers’
financial results or other changes in value.





- 44
-




The
disclosure of the estimated fair value of financial instruments in accordance
with FAS 107 is as follows: (dollars in thousands)





Dec
      2008
                    
                    
                    Dec
      2007Carrying
                      Value
                    
                    
                    Fair
                      Value
                    
                    
                    Carrying
                      Value
                    
                    
                    Fair
                      ValueAssets:Cash
      and cash equivalents
                    
                    $
                    22,586
                    
                    
                    $
                    22,586
                    
                    
                    $
                    40,552
                    
                    
                    $
                    40,552Securities
      available for sale
                    
                    
                    91,096
                    
                    
                    
                    91,096
                    
                    
                    
                    62,306
                    
                    
                    
                    62,306Securities
      held to maturity
                    
                    
                    4,467
                    
                    
                    
                    3,884
                    
                    
                    
                    1,557
                    
                    
                    
                    1,558Loans
      held for sale
                    
                    
                    2,856
                    
                    
                    
                    2,907
                    
                    
                    
                    7,112
                    
                    
                    
                    7,250Loans,
      net
                    
                    
                    792,146
                    
                    
                    
                    795,812
                    
                    
                    
                    742,874
                    
                    
                    
                    748,545Accrued
      interest receivable
                    
                    
                    3,777
                    
                    
                    
                    3,777
                    
                    
                    
                    4,670
                    
                    
                    
                    4,670Federal
      Home Loan Bank stock
                    
                    
                    8,329
                    
                    
                    
                    8,329
                    
                    
                    
                    8,329
                    
                    
                    
                    8,329Liabilities:Deposits
                    
                    
                    710,639
                    
                    
                    
                    719,224
                    
                    
                    
                    707,551
                    
                    
                    
                    711,344FHLB
      advances
                    
                    
                    129,926
                    
                    
                    
                    130,868
                    
                    
                    
                    99,349
                    
                    
                    
                    101,409Junior
      subordinated debt
                    
                    
                    15,464
                    
                    
                    
                    15,481
                    
                    
                    
                    15,464
                    
                    
                    
                    15,520Short-term
      borrowings
                    
                    
                    4,713
                    
                    
                    
                    4,713
                    
                    
                    
                    20
                    
                    
                    
                    20Advance
      payments by borrowers for taxes and insurance
                    
                    
                    369
                    
                    
                    
                    369
                    
                    
                    
                    233
                    
                    
                    
                    233Accrued
      interest payable
                    
                    
                    328
                    
                    
                    
                    328
                    
                    
                    
                    541
                    
                    
                    
                    541Financial
      Instruments:Commitments
      to extend credit
                    
                    
                    135
                    
                    
                    
                    135
                    
                    
                    
                    129
                    
                    
                    
                    129Interest
      rate swaps
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (70
                    )
                    
                    
                    (70
                    )





The
Company, using available market information and appropriate valuation
methodologies, has determined the estimated fair values of all financial
instruments not recognized in the accompanying consolidated balance
sheets.  Considerable judgment is required in interpreting market data
to develop the estimates of fair value.  Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange.  The use of different
market assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.





Cash,
Interest-bearing Deposits, Accrued Interest Receivable, Advance Payments by
Borrowers for Taxes and Insurance, Accrued Interest Payable and Short-term
Borrowings


The
carrying amount as reported in the Consolidated Balance Sheets is a reasonable
estimate of fair value.





Securities
Held to Maturity


Fair
values are based on quoted market prices and dealer quotes.  If quoted
market prices or dealer quotes are not available, fair value is determined based
on quoted prices of similar instruments.





Loans
Held for Sale and Loans, net


The fair
value is estimated by discounting the future cash flows using the current rates
for loans of similar credit risk and maturities.  The estimate of
credit losses is equal to the allowance for loan losses.





Federal
Home Loan Bank Stock


The fair
value is estimated to be the carrying value, which is par.





Deposits


The fair
value of demand deposits, savings accounts and money market deposit accounts is
the amount payable on demand at the reporting date.  The fair value of
fixed-maturity certificates of deposit is estimated, by discounting future cash
flows, using rates currently offered for deposits of similar remaining
maturities.





FHLB
Advances


The fair
value is estimated by discounting future cash flows using rates currently
available to the Company for advances of similar maturities.





Junior
Subordinated Debt and Long Term Debt


Rates
currently available to the Company for debt with similar terms and remaining
maturities are used to estimate fair value of existing debt.






- 45
-





Interest
Rate Swaps


The fair
value is derived from models based upon well-recognized financial principles
which management believes provide a reasonable approximation of the fair value
of the interest rate swap transactions.





Commitments


The
commitments to originate and purchase loans have terms that are consistent with
current market conditions.  The carrying value of the commitments to
extend credit represent the unamortized fee income assessed based on the credit
quality of the borrower.  Since the amount assessed represents the
market rate that would be charged for similar agreements, management believes
that the fair value approximates the carrying value of these
instruments.





The fair
value estimates presented herein are based on information available to
management at December 31, 2008.  Although management is not aware of
any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for purposes of these
financial statements since that date, and, therefore, current estimates of fair
value may differ significantly from the amounts presented herein.







16.
              PARENT
      COMPANY FINANCIAL STATEMENTS


The
      condensed financial statements of Indiana Community Bancorp are as
      follows: (dollarsin
      thousands)





As
      of
                  
                  Dec 2008
                  
                  
                  Dec
      2007Condensed Balance Sheets(Parent Company
      only)Assets:Cash
                  
                  $
                  842
                  
                  
                  $
                  2,203Investment
      in subsidiary
                  
                  
                  99,943
                  
                  
                  
                  81,184Receivable
      from subsidiary
                  
                  
                  21,500
                  
                  
                  
                  -Other
                  
                  
                  712
                  
                  
                  
                  709Total
      Assets
                  
                  $
                  122,997
                  
                  
                  $
                  84,096Liabilities:Junior
      subordinated debt
                  
                  $
                  15,464
                  
                  
                  $
                  15,464Payable
      to subsidiary
                  
                  
                  15,306
                  
                  
                  
                  -Other
                  
                  
                  215
                  
                  
                  
                  1,178Total
      liabilities
                  
                  
                  30,985
                  
                  
                  
                  16,642Shareholders'
      equity
                  
                  
                  92,012
                  
                  
                  
                  67,454Total
      Liabilities and Shareholders' Equity
                  
                  $
                  122,997
                  
                  
                  $
                  84,096





Period
      Ended
                      
                      Dec
      2008
                      
                      
                      Dec
      2007
                      
                      
                      Dec
      2006Condensed Statements of
      Income (Parent
      Company only)Dividends
      from subsidiary
                      
                      $
                      2,732
                      
                      
                      $
                      11,246
                      
                      
                      $
                      7,548Interest
      on securities
                      
                      
                      23
                      
                      
                      
                      33
                      
                      
                      
                      10Other
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      39Total
      income
                      
                      
                      2,755
                      
                      
                      
                      11,279
                      
                      
                      
                      7,597Interest
      on junior subordinated debt
                      
                      
                      765
                      
                      
                      
                      1,110
                      
                      
                      
                      326Interest
      on long term debt
                      
                      
                      -
                      
                      
                      
                      6
                      
                      
                      
                      650Non
      interest expenses
                      
                      
                      801
                      
                      
                      
                      820
                      
                      
                      
                      902Total
      expenses
                      
                      
                      1,566
                      
                      
                      
                      1,936
                      
                      
                      
                      1,878Income
      before taxes and change in undistributed earnings of
      subsidiary
                      
                      
                      1,189
                      
                      
                      
                      9,343
                      
                      
                      
                      5,719Applicable
      income tax benefit
                      
                      
                      (545
                      )
                      
                      
                      (689
                      )
                      
                      
                      (637
                      )Income
      before change in undistributed earnings of subsidiary
                      
                      
                      1,734
                      
                      
                      
                      10,032
                      
                      
                      
                      6,356Increase/(decrease)
      in undistributed earnings of subsidiary
                      
                      
                      3,269
                      
                      
                      
                      (3,909
                      )
                      
                      
                      85Net
      Income
                      
                      $
                      5,003
                      
                      
                      $
                      6,123
                      
                      
                      $
                      6,441






- 46
-






Period
      Ended
                  
                  Dec
      2008
                  
                  
                  Dec
      2007
                  
                  
                  Dec
      2006Condensed Statements of Cash
      Flows (Parent
      Company only)Operating
      Activities:Net
      income
                  
                  $
                  5,003
                  
                  
                  $
                  6,123
                  
                  
                  $
                  6,441Adjustments
      to reconcile net income to net cash provided by operating
      activities:Benefit
      for deferred income taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (7
                  )Decrease
      in other assets
                  
                  
                  (3
                  )
                  
                  
                  (131
                  )
                  
                  
                  (500
                  )Increase
      in other liabilities
                  
                  
                  22
                  
                  
                  
                  1,026
                  
                  
                  
                  585(Increase)/decrease
      in undistributed earnings of subsidiary
                  
                  
                  (3,269
                  )
                  
                  
                  3,909
                  
                  
                  
                  (85
                  )Net
      cash provided by operating activities
                  
                  
                  1,753
                  
                  
                  
                  10,927
                  
                  
                  
                  6,434Financing
      Activities:Payment
      of dividends on common stock
                  
                  
                  (2,828
                  )
                  
                  
                  (2,820
                  )
                  
                  
                  (2,913
                  )Repurchase
      shares of common stock
                  
                  
                  (286
                  )
                  
                  
                  (10,976
                  )
                  
                  
                  (8,576
                  )Excess
      tax benefit related to stock based compensation
                  
                  
                  -
                  
                  
                  
                  339
                  
                  
                  
                  133Exercise
      of stock options
                  
                  
                  -
                  
                  
                  
                  3,327
                  
                  
                  
                  1,962Net
      cash used in financing activities
                  
                  
                  (3,114
                  )
                  
                  
                  (10,130
                  )
                  
                  
                  (9,394
                  )Net
      increase/(decrease) in cash
                  
                  
                  (1,361
                  )
                  
                  
                  797
                  
                  
                  
                  (2,960
                  )Cash
      at beginning of period
                  
                  
                  2,203
                  
                  
                  
                  1,406
                  
                  
                  
                  4,366Cash
      at End of Period
                  
                  $
                  842
                  
                  
                  $
                  2,203
                  
                  
                  $
                  1,406








17.
            CAPITAL
      PURCHASE PROGRAM





On
December 12, 2008, Indiana Community Bancorp entered into a Letter Agreement
(the “Purchase Agreement”) with the United States Department of the Treasury
(“Treasury”), pursuant to which the Company agreed to issue and sell (a) 21,500
shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series
A (the “Series A Preferred Stock”) and (b) a warrant (the “Warrant”) to purchase
188,707 shares of the Company’s common stock, without par value (the “Common
Stock”), for an aggregate purchase price of $21.5 million in cash.





The
Series A Preferred Stock qualifies as Tier 1 capital and will pay cumulative
dividends at a rate of 5% per annum for the first five years, and 9% per annum
thereafter. The Series A Preferred Stock is non-voting except with respect to
certain matters affecting the rights of the holders thereof, and may be redeemed
by the Company.  The Warrant has a 10-year term and is immediately
exercisable upon its issuance, with an exercise price, subject to anti-dilution
adjustments, equal to $17.09 per share of the Common Stock.  Pursuant
to the Purchase Agreement, Treasury has agreed not to exercise voting power with
respect to any shares of Common Stock issued upon exercise of the
Warrant.





In the
Purchase Agreement, the Company agreed that, until such time as Treasury ceases
to own any debt or equity securities of the Company acquired pursuant to the
Purchase Agreement, the Company will take all necessary action to ensure that
its benefit plans with respect to its senior executive officers comply with
Section 111(b) of the Emergency Economic Stabilization Act of 2008 (the “EESA”)
as implemented by any guidance or regulation under the EESA that has been issued
and is in effect as of the date of issuance of the Series A Preferred Stock and
the Warrant, and has agreed to not adopt any benefit plans with respect to, or
which cover, its senior executive officers that do not comply with the EESA, and
the applicable executives have consented to the foregoing.





Upon
issuance of the Series A Preferred Stock on December 12, 2008, the ability of
the Company to declare or pay dividends or distributions on, or purchase, redeem
or otherwise acquire for consideration, shares of its Common Stock will be
subject to restrictions, including a restriction against increasing dividends
from the last quarterly cash dividend per share ($0.12) declared on the Common
Stock prior to October 14, 2008 without the consent of the
Treasury.  The redemption, purchase or other acquisition of trust
preferred securities of the Company or its affiliates also will be restricted.
These restrictions will terminate on the earlier of (a) the third anniversary of
the date of issuance of the Series A Preferred Stock and (b) the date on which
the Series A Preferred Stock has been redeemed in whole or Treasury has
transferred all of the Series A Preferred Stock to third parties.  In
addition, pursuant to the Certificate of Designations, the ability of the
Company to declare or pay dividends or distributions on, or repurchase, redeem
or otherwise acquire for consideration, shares of its Common Stock will be
subject to restrictions in the event that the Company fails to declare and pay
full dividends (or declare and set aside a sum sufficient for payment thereof)
on its Series A Preferred Stock.






- 47
-





18. QUARTERLY RESULTS OF OPERATIONS


(dollars
in thousands except share data)





The
following table presents certain selected unaudited data relating to results of
operations for the three month periods ending on the dates
indicated.





Fiscal
      Year Ended December 31, 2008 (Three months ended)
                  
                  Mar
      31
                    2008
                  
                  
                  Jun
      30
                    2008
                  
                  
                  Sep
      30
                    2008
                  
                  
                  Dec
      31
                    2008Total
      interest income
                  
                  $
                  13,445
                  
                  
                  $
                  12,602
                  
                  
                  $
                  12,793
                  
                  
                  $
                  12,498Total
      interest expense
                  
                  
                  6,555
                  
                  
                  
                  5,442
                  
                  
                  
                  5,301
                  
                  
                  
                  5,251Net
      interest income
                  
                  
                  6,890
                  
                  
                  
                  7,160
                  
                  
                  
                  7,492
                  
                  
                  
                  7,247Provision
      for loan losses
                  
                  
                  360
                  
                  
                  
                  1,924
                  
                  
                  
                  987
                  
                  
                  
                  1,021Net
      interest income after provision for loan losses
                  
                  
                  6,530
                  
                  
                  
                  5,236
                  
                  
                  
                  6,505
                  
                  
                  
                  6,226Loss
      on sale of securities
                  
                  
                  -
                  
                  
                  
                  (419
                  )
                  
                  
                  (18
                  )
                  
                  
                  -Non
      interest income
                  
                  
                  3,084
                  
                  
                  
                  3,196
                  
                  
                  
                  3,403
                  
                  
                  
                  2,694Non
      interest expenses
                  
                  
                  7,415
                  
                  
                  
                  7,754
                  
                  
                  
                  7,078
                  
                  
                  
                  6,587Income
      before income taxes
                  
                  
                  2,199
                  
                  
                  
                  259
                  
                  
                  
                  2,812
                  
                  
                  
                  2,333Income
      tax provision
                  
                  
                  780
                  
                  
                  
                  (14
                  )
                  
                  
                  1,010
                  
                  
                  
                  824Net
      Income
                  
                  $
                  1,419
                  
                  
                  $
                  273
                  
                  
                  $
                  1,802
                  
                  
                  $
                  1,509Basic
      earnings per common share
                  
                  $
                  0.42
                  
                  
                  $
                  0.08
                  
                  
                  $
                  0.54
                  
                  
                  $
                  0.43Diluted
      earnings per common share
                  
                  $
                  0.42
                  
                  
                  $
                  0.08
                  
                  
                  $
                  0.54
                  
                  
                  $
                  0.43Cash
      dividends per share
                  
                  $
                  0.200
                  
                  
                  $
                  0.200
                  
                  
                  $
                  0.120
                  
                  
                  $
                  0.120Stock
      sales price range:  High (1)
                  
                  $
                  24.20
                  
                  
                  $
                  23.19
                  
                  
                  $
                  17.20
                  
                  
                  $
                  19.43Low
                  
                  $
                  18.00
                  
                  
                  $
                  16.54
                  
                  
                  $
                  12.25
                  
                  
                  $
                  11.17











Fiscal
      Year Ended December 31, 2007 (Three months ended)
                  
                  Mar
      31
                    2007
                  
                  
                  Jun
      30
                    2007
                  
                  
                  Sep
      30
                    2007
                  
                  
                  Dec
      31
                    2007Total
      interest income
                  
                  $
                  13,441
                  
                  
                  $
                  13,653
                  
                  
                  $
                  14,063
                  
                  
                  $
                  14,044Total
      interest expense
                  
                  
                  6,638
                  
                  
                  
                  6,797
                  
                  
                  
                  7,101
                  
                  
                  
                  7,125Net
      interest income
                  
                  
                  6,803
                  
                  
                  
                  6,856
                  
                  
                  
                  6,962
                  
                  
                  
                  6,919Provision
      for loan losses
                  
                  
                  280
                  
                  
                  
                  223
                  
                  
                  
                  286
                  
                  
                  
                  572Net
      interest income after provision for loan losses
                  
                  
                  6,523
                  
                  
                  
                  6,633
                  
                  
                  
                  6,676
                  
                  
                  
                  6,347Non
      interest income
                  
                  
                  2,907
                  
                  
                  
                  3,216
                  
                  
                  
                  3,344
                  
                  
                  
                  3,387Non
      interest expenses
                  
                  
                  7,798
                  
                  
                  
                  7,303
                  
                  
                  
                  7,357
                  
                  
                  
                  7,316Income
      before income taxes
                  
                  
                  1,632
                  
                  
                  
                  2,546
                  
                  
                  
                  2,663
                  
                  
                  
                  2,418Income
      tax provision
                  
                  
                  543
                  
                  
                  
                  855
                  
                  
                  
                  962
                  
                  
                  
                  776Net
      Income
                  
                  $
                  1,089
                  
                  
                  $
                  1,691
                  
                  
                  $
                  1,701
                  
                  
                  $
                  1,642Basic
      earnings per common share
                  
                  $
                  0.30
                  
                  
                  $
                  0.48
                  
                  
                  $
                  0.49
                  
                  
                  $
                  0.48Diluted
      earnings per common share
                  
                  $
                  0.30
                  
                  
                  $
                  0.47
                  
                  
                  $
                  0.48
                  
                  
                  $
                  0.47Cash
      dividends per share
                  
                  $
                  0.200
                  
                  
                  $
                  0.200
                  
                  
                  $
                  0.200
                  
                  
                  $
                  0.200Stock
      sales price range:  High (1)
                  
                  $
                  29.50
                  
                  
                  $
                  29.64
                  
                  
                  $
                  29.19
                  
                  
                  $
                  27.00Low
                  
                  $
                  27.61
                  
                  
                  $
                  28.30
                  
                  
                  $
                  26.26
                  
                  
                  $
                  22.57





(1)
            The
      Company's common stock trades on the NASDAQ Global Market under the symbol
      "INCB."


As of
December 31, 2008, the Company had 361 holders of record of its
shares.





19.
Subsequent Event


On
October 7, 2008, the Federal Deposit Insurance Corporation, (“FDIC”) established
a Restoration Plan for the Deposit Insurance Fund, (“DIF”). The Restoration Plan
called for the FDIC to set assessment rates such that the reserve ratio would
return to 1.15 percent within five years.  In February 2009, the FDIC
adopted an interim rule to impose a 20 basis point emergency special assessment
on June 30, 2009, payable on September 30, 2009. Assuming that deposit levels
remain constant, we anticipate that the special assessment for the Bank would
total approximately $1.4 million.  The interim rule also provides
that, after June 30, 2009, the FDIC may impose an emergency special assessment
of up to 10 basis points of an institution’s assessment base whenever, after
June 30, 2009, the reserve ratio of the DIF is deemed
inadequate.  Simultaneously with the adoption of this interim rule,
the FDIC has amended the Restoration Plan and extended the time within which the
reserve ratio must be returned to 1.15 percent to 7 years due to extraordinary
circumstances.  The FDIC currently projects that the combination of
regular quarterly assessments and the 20 basis point special assessment will
prevent the fund reserve ratio from falling to a level that that the Board
believes inadequate.  For this reason, the FDIC does not expect to
impose an additional special assessment of up to 10 basis points.  On
March 5, 2009, FDIC Chairman Sheila Bair announced that if Congress adopts
legislation expanding the FDIC’s line of credit with Treasury from $30 billion
to $100 billion, the FDIC might have the flexibility to reduce the special
emergency assessment, possibly from 20 to 10 basis
points.  Assuming the legislation passes and the FDIC reduces the
special assessment to 10 basis points, we anticipate that the special assessment
for the Bank would total approximately $700,000, based on current deposit
levels.








- 48
-