Table
      of Contents1
              Letter
      to Shareholders4
              Selected Consolidated Financial Data5
              Management’s Discussion & Analysis20
              Management’s
      Assessment as to the Effectivenessof
      Internal Control over Financial Reporting21
              Reports
      of Independent Registered Public Accounting Firms23
              Consolidated
      Balance Sheets24
              Consolidated
      Statements of Operations25
              Consolidated Statements of Shareholders’ Equity26
              Consolidated
      Statements of Cash Flows27
              Notes
      to Consolidated Financial Statements50
              Board
      of Directors and Officers of Indiana Community Bancorpand
      Indiana Bank and Trust Company












LETTER
      TO SHAREHOLDERSIn
      years past, this annual letter was highlighted by
                my
      comments on low inflation, moderate unemploy-
                ment
      and prospects for continuing positive growth throughout our bank’s service
      area. In those letters,
                I
      endeavored to strike a pragmatic tone, balancing a generally positive
      review of economic activity in our region with comments on our bank’s
      investments in technology and fresh approaches to products and services.
      At the same time, I underscored our unwav-
                ering
      commitment to maintaining a strong, conser-
                vative
      approach to managing our business and our customers’ assets.
                
                This
      year, despite the lingering effects of one of
                the
      worst economic downturns any of us has ever
                known,
      there is no reason to depart from such a
                pragmatic
      analysis of our achievements, disappoint-
                ments
      and ongoing opportunities. Although 2009 was
                a
      challenging year for Indiana Bank and Trust and for many of its customers,
      it provided new opportunities
                for
      all of us to balance bad with good, to better mea-
                sure
      our capacity for improvement, and to make nec-
                essary,
      if sometimes painful, adjustments to prepare
                for
      better days ahead. Similarly, this letter provides a chance to reflect on
      the challenges we’ve faced and
                to
      honestly appraise our actions in addressing them
                as
      we look toward a more prosperous future.
                
                For
      many years our state, and our service region in particular, have been
      recognized as relatively strong sectors of the Midwestern
      economy.
              
              While
      the current recession has spared no region,
                its
      negative effects on Indiana have not been as
                severe
      as those suffered by our neighboring states;
                our
      jobless rate, for example, has consistently been
                below
      the national average. Still, twice as many
                Hoosiers
      were looking for work in 2009 than in
                2008,
      and, as in other states, the problems of the
                real
      estate market, the evaporation of liquidity in the
                global
      banking system and a decline in consumer confidence all combined to create
      a wide-ranging economic dilemma that will likely require
      several
                more
      years to fully resolve.
                
                At
      this writing some small but hopeful signs
                of
      recovery again favor our region, beginning with a modest amount of growth
      in Indiana’s economy.
                Last
      year, while national business investment
                fell
      by almost 25 percent, the number of new
                jobs
      committed to Indiana was larger than that
                reported
      in 2008. However, while some sectors
                of
      the economy are seeing positive change, others
                are
      only now encountering severe challenges cre-
                ated
      by the downturn.
                
                Taking
      the long view, it should be observed that
                it
      took an unprecedented combination of events
                to
      create a recession of this magnitude, and it
                will
      take an equally unprecedented combination
                of
      planning, perseverance and common commit-
                ment
      to bring it to a close.








- 1 -







All
      of us at Indiana Bank and Trust appreciate the
                fragile
      nature of the recovery. We have dedicated ourselves to continually
      enhancing our franchise
                as
      the recovery progresses, strengthening our
                core
      business and creating greater value for our shareholders, customers and
      employees as we do.
                
                For
      all of its challenges, 2009 also offered some
                rewards.
      Core retail and commercial deposits
                grew
      by $145 million, a 21 percent increase. As a
                result,
      our loan-to-deposit ratio fell to 89 percent
                at
      the end of 2009 from 114 percent at the end
                of
      2008, a 25 basis point improvement. We were
                also
      successful in reducing operating costs, in
                part
      due to the effects of self-disciplinary spending decisions we made in
      2008.
                
                Like
      many of our customers, we are making some fundamental changes to the
      management of our
                assets
      after a careful analysis of the past year’s
                events.
      In December, for example, we announced
                plans
      to reposition our balance sheet, selling a
                portion
      of our securities portfolio and prepaying
                a
      portion of our Federal Home Loan Bank advances.
                
                Making
      these changes to our balance sheet
                created
      short-term expense but allowed us to
                reduce
      long-term, higher-cost wholesale funding
                by
      $95 million and increase net interest income at
                the
      beginning of 2010. Decisions such as these,
                made
      in a time when there was a noticeable gap
              
              between
      our institution’s earnings and its stock
                price,
      take advantage of the unusual parameters
                of
      the economy as the recovery gradually begins.
                
                These
      actions, which reflect our commitment
                to
      improving our core operating ratios in the current interest rate
      environment, were made possible
                by
      excellent deposit growth – an element of
                the
      “silver lining” which underlies the loss we
                reported
      for 2009.
                
                Loan
      growth was naturally hampered by the
                recession.
      We did not feel it was in the interest
                of
      either our commercial or retail customers for
                them
      to incur additional debt during uncertain
                times;
      instead, we focused our efforts inward to
                create
      stronger business relationships with our existing customer
      base.
                
                Because
      of the extremely negative impacts of the downturn on some of our
      customers, we recorded
                net
      charge-offs totaling $11.7 million. During the
                year,
      we added $4.5 million to the allowance for
                loan
      losses, bringing the total allowance to $13.1
                million,
      or 1.78 percent of total loans, up from $8.6
                million,
      or 1.07 percent of total loans, at the end of
                2008.
      While this contributed to our 2009 fiscal-year
                loss,
      it also builds protection during the uncertain
                early
      days of what we hope is the recovery.






- 2 -








Another
      challenge to our performance in 2009
                came
      through greatly increased costs related to
                standard
      Federal Deposit Insurance Corporation premiums, which rose from $286,000
      in 2008
                to
      $1,785,000. In addition, we were charged a
                special
      assessment of $454,000 last year. At
                the
      beginning of 2010 it remained unclear as to
                whether
      special FDIC assessments would again
                be
      made, but we anticipate that standard premium expenses will remain
      high.
                
                For
      all of these challenges and the impacts they
                have
      had on our operations and profitability, the
                fact
      remains that Indiana Bank and Trust is a
                strong,
      conservatively-managed financial institution. Throughout the past year, we
      have made
                strategic
      decisions, some of them painfulbut
                necessary,
      to continually reevaluate and realign
                our
      operations, products and services in the best
                interests
      of our shareholders, employees and
                customers.
      As a result, we are well positioned to
                build
      on our strengths as economic conditions
                begin
      to improve.
                
                At
      the beginning of 2010, Indiana Community
                Bancorp
      was well-capitalized by any measure. Our
                total
      equity was approximately $85 million. Our past success – and our prospects
      for continued success
                –
      have permitted us to make strategic infrastructure investments to support
      future growth. We
                remain
      committed to building our customer base
              
              and
      to leveraging the momentum we have generated through sensible and
      successful expansion in recent years.
                
                We
      invite you to grow with us as we emerge from
                the
      difficult challenges of the current economic
                downturn
      and work to build a more prosperous
                and
      rewarding future for all Indiana Community
                Bancorp
      stakeholders.
                
                
                
                
                Chairman
      of the Board
                and
      Chief Executive Officer




- 3 -


SUMMARY
OF SELECTED CONSOLIDATED FINANCIAL DATA
 (dollars
in thousands except per share data & offices)
 
 
 Year
                Ended
              
              
              Year
                Ended
              
              
              Year
                Ended
              
              
              Year
                Ended
              
              
              Year
                EndedDec
      2009
              
              
              Dec
      2008
              
              
              Dec
      2007
              
              
              Dec
      2006
              
              
              Dec
      2005Selected
      Balance Sheet Data:Total
      assets
              
              $
              1,010,323
              
              
              $
              969,373
              
              
              $
              908,806
              
              
              $
              904,467
              
              
              $
              850,786Cash
      and cash equivalents
              
              
              52,061
              
              
              
              22,586
              
              
              
              40,552
              
              
              
              106,063
              
              
              
              53,736Loans
      held for sale
              
              
              6,075
              
              
              
              2,856
              
              
              
              7,112
              
              
              
              6,925
              
              
              
              4,795Securities
      available for sale
              
              
              149,633
              
              
              
              91,096
              
              
              
              62,306
              
              
              
              56,887
              
              
              
              123,351Securities
      held to maturity
              
              
              4,084
              
              
              
              4,467
              
              
              
              1,557
              
              
              
              1,635
              
              
              
              1,806Portfolio
      loans, net
              
              
              724,668
              
              
              
              792,146
              
              
              
              742,874
              
              
              
              675,662
              
              
              
              608,688Deposits
              
              
              840,305
              
              
              
              710,639
              
              
              
              707,551
              
              
              
              727,159
              
              
              
              655,314Borrowings
              
              
              70,464
              
              
              
              150,103
              
              
              
              114,833
              
              
              
              84,131
              
              
              
              101,041Shareholders'
      equity
              
              
              84,924
              
              
              
              92,012
              
              
              
              67,454
              
              
              
              71,281
              
              
              
              73,038Selected
      Operations Data:Total
      interest income
              
              $
              47,091
              
              
              $
              51,338
              
              
              $
              55,201
              
              
              $
              50,355
              
              
              $
              44,976Total
      interest expense
              
              
              19,553
              
              
              
              22,549
              
              
              
              27,661
              
              
              
              24,644
              
              
              
              19,817Net
      interest income
              
              
              27,538
              
              
              
              28,789
              
              
              
              27,540
              
              
              
              25,711
              
              
              
              25,159Provision
      for loan losses
              
              
              16,218
              
              
              
              4,292
              
              
              
              1,361
              
              
              
              850
              
              
              
              808Net
      interest income after provision for loan losses
              
              
              11,320
              
              
              
              24,497
              
              
              
              26,179
              
              
              
              24,861
              
              
              
              24,351Gain
      on sale of loans
              
              
              2,630
              
              
              
              1,446
              
              
              
              1,497
              
              
              
              1,430
              
              
              
              1,539Gain/(loss)
      on securities
              
              
              1,825
              
              
              
              (437
              )
              
              
              -
              
              
              
              (1,956
              )
              
              
              -Gain
      on sale of mortgage servicing
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,957
              
              
              
              -Other
      non interest income
              
              
              8,223
              
              
              
              10,931
              
              
              
              11,357
              
              
              
              10,872
              
              
              
              9,684Non
      interest expenses
              
              
              33,403
              
              
              
              28,834
              
              
              
              29,774
              
              
              
              27,906
              
              
              
              26,503Income
      (loss) before income taxes
              
              
              (9,405
              )
              
              
              7,603
              
              
              
              9,259
              
              
              
              9,258
              
              
              
              9,071Income
      tax provision (benefit)
              
              
              (3,556
              )
              
              
              2,600
              
              
              
              3,136
              
              
              
              2,817
              
              
              
              2,969Net
      Income (Loss)
              
              $
              (5,849
              )
              
              $
              5,003
              
              
              $
              6,123
              
              
              $
              6,441
              
              
              $
              6,102Basic
      earnings (loss) per common share
              
              $
              (2.09
              )
              
              $
              1.47
              
              
              $
              1.75
              
              
              $
              1.74
              
              
              $
              1.57Diluted
      earnings (loss) per common share
              
              $
              (2.09
              )
              
              $
              1.47
              
              
              $
              1.72
              
              
              $
              1.70
              
              
              $
              1.53Cash
      dividends per common share
              
              $
              0.26
              
              
              $
              0.64
              
              
              $
              0.80
              
              
              $
              0.79
              
              
              $
              0.75Selected
      Financial and Statistical Data:Return
      on average assets
              
              
              (0.57
              %)
              
              
              0.54
              %
              
              
              0.70
              %
              
              
              0.75
              %
              
              
              0.71
              %Return
      on average shareholders' equity
              
              
              (6.48
              %)
              
              
              7.11
              %
              
              
              8.88
              %
              
              
              9.00
              %
              
              
              8.19
              %Interest
      rate spread during the period
              
              
              2.86
              %
              
              
              3.29
              %
              
              
              3.38
              %
              
              
              3.24
              %
              
              
              3.19
              %Net
      interest margin on average earning assets
              
              
              2.93
              %
              
              
              3.35
              %
              
              
              3.45
              %
              
              
              3.29
              %
              
              
              3.22
              %Average
      shareholders' equity to average assets
              
              
              8.83
              %
              
              
              7.55
              %
              
              
              7.89
              %
              
              
              8.31
              %
              
              
              8.68
              %Efficiency
      ratio
              
              
              71.74
              %
              (1)
              
              70.07
              %
              (2)
              
              71.26
              %
              (3)
              
              73.41
              %
              
              
              72.85
              %Nonperforming
      loans to total loans
              
              
              2.95
              %
              
              
              3.03
              %
              
              
              1.51
              %
              
              
              0.54
              %
              
              
              0.70
              %Nonperforming
      assets to total assets
              
              
              3.41
              %
              
              
              2.86
              %
              
              
              1.29
              %
              
              
              0.46
              %
              
              
              0.54
              %Loss
      allowance to nonperforming loans
              
              
              60.16
              %
              
              
              35.30
              %
              
              
              60.87
              %
              
              
              175.90
              %
              
              
              155.78
              %Loss
      allowance to total loans
              
              
              1.78
              %
              
              
              1.07
              %
              
              
              0.92
              %
              
              
              0.95
              %
              
              
              1.09
              %Common
      stock dividend payout ratio
              
              
              (14.93
              %)
              
              
              42.95
              %
              
              
              45.30
              %
              
              
              45.23
              %
              
              
              47.67
              %Loan
      servicing portfolio
              
              $
              111,634
              
              
              $
              94,647
              
              
              $
              54,283
              
              
              $
              36,977
              
              
              $
              588,503Allowance
      for loan losses
              
              $
              13,113
              
              
              $
              8,589
              
              
              $
              6,972
              
              
              $
              6,598
              
              
              $
              6,753Number
      of full service offices
              
              
              19
              
              
              
              19
              
              
              
              20
              
              
              
              19
              
              
              
              19
 
 (1)  Non
interest expense as a percentage of the sum of net interest income and non
interest income, excluding one time expenses of $5.7 million related to special
FDIC assessment, goodwill impairment and advance prepayment penalty and
excluding one time income items of $2.5 million related to real estate owned
write down and gain on sale of securities from a deleveraging
transaction.
 (2)  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.
 (3)  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 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 2009, the Company focused on credit risk
mitigation and expense reduction.  In addition, the Company maintained
its efforts to grow deposits and develop deposit fee income through the offering
of new commercial deposit services.  Due to the economic challenges
faced by many of the Company’s commercial loan customers, loan balances declined
due to charge offs, workouts and foreclosures.  As a result,
commercial and commercial real estate loans decreased $28.2
million.  Residential lending experienced increased refinancing
activity in the low interest environment of 2009.  The Company sells
almost all residential originations in the secondary market and consumers who
have equity available typically combine second mortgage balances into first
mortgages.  This refinance activity resulted in residential mortgage
loans and second and home equity loans decreasing $22.7 million and $7.0
million, respectively.   Retail deposit balances increased $145.3
million, or 20.9%.  All retail deposit categories increased as
customers chose insured bank deposits which provide safety of principal balance
plus interest. In addition, the Company benefited from significant market
disruption in its headquarter market of Columbus, Indiana.  Demand
deposits, interest checking, money market and certificates of deposit increased
$9.2 million, $59.3 million, $50.6 million and $24.6 million,
respectively.  Wholesale deposits decreased $15.7 million as the
increase in retail deposits provided a source for the repayment of higher
costing wholesale deposits.  In the fourth quarter of 2009, the
Company completed a balance sheet repositioning strategy selling approximately
$100 million of securities and prepaying $55 million of advances.  The
fourth quarter impact of the repositioning transactions resulted in a $2.0
million gain on sale of securities and a $3.8 million prepayment
penalty.  The future impact of these transactions is estimated to
improve net interest income by approximately $2.0 million annually.






- 5 -





In a year
marked by increasing unemployment and economic downturn, the Company experienced
net charge offs of $11.7 million and an increase of $6.7 million in non
performing assets.  The Company’s provision for loan losses was $16.2
million, an increase of $11.9 million over the prior year. As the Company’s
provision expense for the year exceeded net charge offs, the allowance for loan
losses increased $4.5 million, resulting in an increase in the ratio of the
allowance for loan losses to total loans to 1.78% up from 1.07% in
2008.  Non interest income increased $738,000 due to several factors:
a) gain on sale of loans increased $1.2 million due to increased refinance
activity, primarily in the first half of 2009; b) gain on securities, net of
other than temporary impairment, (OTTI), increased $2.3 million primarily due to
the repositioning transactions described above; c) investment advisory services
decreased $1.4 million due to the sale of the Company’s investment advisory
services business during the third quarter of 2008; and d) net loss on real
estate owned increased $548,000 primarily due to the write-down on other real
estate owned of $468,000 related to a former subdivision loan.  Non
interest expense increased $4.6 million for the year.  This increase
included one time expenses of a $3.8 million prepayment fee associated with the
repositioning strategy and a $1.4 million impairment charge off of the Company’s
goodwill.  Other increasing expenses included a) FDIC insurance
expense which increased $1.5 million due partially to a special assessment of
$454,000 and increased assessment rates and b) loan expenses which increased
$863,000 primarily due to workout expenses associated with problem
loans.  The Company experienced a 10.0%, or $1.6 million, decrease in
compensation expense due in part to the sale of the brokerage service business,
a 10% reduction of the Company’s work force in the second quarter of 2008, the
freezing of the Company’s pension plan in April of 2008 and reduced vacation and
bonus expenses.





As the
Company continues to navigate the current economic downturn, 2010’s focus will
include: a) continued mitigation of credit quality issues through
diversification of risk within the commercial portfolio, b) cost control,
primarily through maintaining cost advantages already achieved and pursuing
additional cost reductions where appropriate, and c) deposit growth, building on
the success achieved in 2009.  All of these initiatives will support a
strong capital position as will the recently completed repositioning
transactions which are estimated to add approximately $2.0 million to net
interest income in 2010.  Other challenges facing the Company include
regulatory proposals which will negatively impact overdraft protection income,
additional regulatory loan requirements adding to origination costs, as well as
fraud prevention efforts in the cyber banking arena.  Growth in the
number of deposit accounts would help offset the anticipated reduction of
deposit fees driven by overdraft protection legislation; work flow and
efficiency efforts will assist in reducing loan origination costs, and a
continued focus on security measures will support fraud prevention
efforts.





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 2009, transaction
deposits increased at a greater rate than certificates of deposit resulting in a
shorter duration of repricing for retail deposits.  This shift in
retail deposits resulted from customer preference for more liquid accounts due
to historically low interest rates.  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
      2009
            
            
            Dec
      2008
            
            
            Dec
      2007Average
              Balance
            
            
            Interest
            
            
            Average
              Yield/Rate
            
            
            Average
              Balance
            
            
            Interest
            
            
            Average
              Yield/Rage
            
            
            Average
              Balance
            
            
            Interest
            
            
            Average
              Yield/RageAssets:Interest-earning
      assets:Residential
      mortgage loans
            
            $
            115,140
            
            
            $
            6,192
            
            
            
            5.38
            %
            
            $
            135,601
            
            
            $
            8,516
            
            
            
            6.28
            %
            
            $
            162,641
            
            
            $
            10,471
            
            
            
            6.44
            %Commercial
      & commercial mortgage loans
            
            
            530,359
            
            
            
            30,192
            
            
            
            5.69
            %
            
            
            508,465
            
            
            
            31,406
            
            
            
            6.18
            %
            
            
            420,869
            
            
            
            31,304
            
            
            
            7.44
            %Second
      and home equity loans
            
            
            98,608
            
            
            
            4,992
            
            
            
            5.06
            %
            
            
            101,185
            
            
            
            6,186
            
            
            
            6.11
            %
            
            
            101,787
            
            
            
            7,342
            
            
            
            7.21
            %Other
      consumer loans
            
            
            17,815
            
            
            
            1,452
            
            
            
            8.15
            %
            
            
            23,892
            
            
            
            1,890
            
            
            
            7.91
            %
            
            
            30,502
            
            
            
            2,280
            
            
            
            7.47
            %Securities
            
            
            137,576
            
            
            
            4,164
            
            
            
            3.03
            %
            
            
            69,030
            
            
            
            2,878
            
            
            
            4.17
            %
            
            
            60,991
            
            
            
            2,688
            
            
            
            4.41
            %Short-term
      investments
            
            
            41,971
            
            
            
            99
            
            
            
            0.24
            %
            
            
            21,452
            
            
            
            462
            
            
            
            2.15
            %
            
            
            22,417
            
            
            
            1,116
            
            
            
            4.98
            %Total
      interest-earning assets (1)
            
            
            941,469
            
            
            $
            47,091
            
            
            
            5.00
            %
            
            
            859,625
            
            
            $
            51,338
            
            
            
            5.97
            %
            
            
            799,207
            
            
            $
            55,201
            
            
            
            6.92
            %Allowance
      for loan losses
            
            
            (10,090
            )
            
            
            
            
            
            
            
            
            
            
            (7,591
            )
            
            
            
            
            
            
            
            
            
            
            (6,720
            )Cash
      and due from banks
            
            
            12,913
            
            
            
            
            
            
            
            
            
            
            
            13,587
            
            
            
            
            
            
            
            
            
            
            
            19,511Bank
      premises and equipment
            
            
            15,011
            
            
            
            
            
            
            
            
            
            
            
            15,457
            
            
            
            
            
            
            
            
            
            
            
            16,765Other
      assets
            
            
            62,190
            
            
            
            
            
            
            
            
            
            
            
            50,866
            
            
            
            
            
            
            
            
            
            
            
            45,474Total
      assets
            
            $
            1,021,493
            
            
            
            
            
            
            
            
            
            
            $
            931,944
            
            
            
            
            
            
            
            
            
            
            $
            874,237LiabilitiesInterest-bearing
      liabilities:Deposits:Transaction
      accounts
            
            $
            445,580
            
            
            $
            3,914
            
            
            
            0.88
            %
            
            $
            380,230
            
            
            $
            3,848
            
            
            
            1.01
            %
            
            $
            371,145
            
            
            $
            7,630
            
            
            
            2.06
            %Certificate
      accounts
            
            
            339,152
            
            
            
            10,949
            
            
            
            3.23
            %
            
            
            322,275
            
            
            
            12,876
            
            
            
            4.00
            %
            
            
            318,541
            
            
            
            15,029
            
            
            
            4.72
            %FHLB
      borrowings
            
            
            112,290
            
            
            
            4,278
            
            
            
            3.81
            %
            
            
            122,921
            
            
            
            5,059
            
            
            
            4.12
            %
            
            
            77,028
            
            
            
            3,884
            
            
            
            5.04
            %Other
      borrowings
            
            
            15,464
            
            
            
            412
            
            
            
            2.66
            %
            
            
            15,464
            
            
            
            766
            
            
            
            4.95
            %
            
            
            15,588
            
            
            
            1,118
            
            
            
            7.17
            %Total
      interest-bearing liabilities
            
            
            912,486
            
            
            $
            19,553
            
            
            
            2.14
            %
            
            
            840,890
            
            
            $
            22,549
            
            
            
            2.68
            %
            
            
            782,302
            
            
            $
            27,661
            
            
            
            3.54
            %Other
      liabilities
            
            
            18,799
            
            
            
            
            
            
            
            
            
            
            
            20,695
            
            
            
            
            
            
            
            
            
            
            
            22,976Total
      liabilities
            
            
            931,285
            
            
            
            
            
            
            
            
            
            
            
            861,585
            
            
            
            
            
            
            
            
            
            
            
            805,278Total
      shareholders’ equity
            
            
            90,208
            
            
            
            
            
            
            
            
            
            
            
            70,359
            
            
            
            
            
            
            
            
            
            
            
            68,959Total
      Liabilities and
              Shareholders’
      Equity
            
            $
            1,021,493
            
            
            
            
            
            
            
            
            
            
            $
            931,944
            
            
            
            
            
            
            
            
            
            
            $
            874,237Net
      Interest Income
            
            
            
            
            
            $
            27,538
            
            
            
            
            
            
            
            
            
            
            $
            28,789
            
            
            
            
            
            
            
            
            
            
            $
            27,540Net
      Interest Rate Spread
            
            
            
            
            
            
            
            
            
            
            2.86
            %
            
            
            
            
            
            
            
            
            
            
            3.29
            %
            
            
            
            
            
            
            
            
            
            
            3.38
            %Net
      Earning Assets
            
            $
            28,983
            
            
            
            
            
            
            
            
            
            
            $
            18,735
            
            
            
            
            
            
            
            
            
            
            $
            16,905Net
      Interest Margin (2)
            
            
            
            
            
            
            
            
            
            
            2.93
            %
            
            
            
            
            
            
            
            
            
            
            3.35
            %
            
            
            
            
            
            
            
            
            
            
            3.45
            %Average
      Interest-earningAssets
      to AverageInterest-bearing
      Liabilities
            
            
            103.18
            %
            
            
            
            
            
            
            
            
            
            
            102.23
            %
            
            
            
            
            
            
            
            
            
            
            102.16
            %





(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
      2009 vs. Dec 2008
            
            Dec
      2008 vs. Dec 2007Increase/(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
            
            $
            (1,134
            )
            
            $
            (1,190
            )
            
            $
            (2,324
            )
            
            $
            (251
            )
            
            $
            (1,704
            )
            
            $
            (1,955
            )Commercial
      & commercial mortgage loans
            
            
            (2,695
            )
            
            
            1,481
            
            
            
            (1,214
            )
            
            
            (6,327
            )
            
            
            6,429
            
            
            
            102Second
      and home equity loans
            
            
            (1,040
            )
            
            
            (154
            )
            
            
            (1,194
            )
            
            
            (1,113
            )
            
            
            (43
            )
            
            
            (1,156
            )Other
      consumer loans
            
            
            59
            
            
            
            (497
            )
            
            
            (438
            )
            
            
            144
            
            
            
            (534
            )
            
            
            (390
            )Securities
            
            
            (490
            )
            
            
            1,776
            
            
            
            1,286
            
            
            
            (132
            )
            
            
            322
            
            
            
            190Short-term
      investments
            
            
            4,813
            
            
            
            (5,176
            )
            
            
            (363
            )
            
            
            (608
            )
            
            
            (46
            )
            
            
            (654
            )Total
            
            
            (487
            )
            
            
            (3,760
            )
            
            
            (4,247
            )
            
            
            (8,287
            )
            
            
            4,424
            
            
            
            (3,863
            )Interest
      Expense on Interest-Bearing Liabilities:Deposits:Transaction
      accounts
            
            
            (219
            )
            
            
            285
            
            
            
            66
            
            
            
            (3,974
            )
            
            
            192
            
            
            
            (3,782
            )Certificate
      accounts
            
            
            (2,649
            )
            
            
            722
            
            
            
            (1,927
            )
            
            
            (2,331
            )
            
            
            178
            
            
            
            (2,153
            )FHLB
      borrowings
            
            
            (361
            )
            
            
            (420
            )
            
            
            (781
            )
            
            
            (524
            )
            
            
            1,699
            
            
            
            1,175Other
      borrowings
            
            
            (354
            )
            
            
            -
            
            
            
            (354
            )
            
            
            (343
            )
            
            
            (9
            )
            
            
            (352
            )Total
            
            
            (3,583
            )
            
            
            587
            
            
            
            (2,996
            )
            
            
            (7,172
            )
            
            
            2,060
            
            
            
            (5,112
            )Net
      Change in Net Interest Income
            
            $
            3,096
            
            
            $
            (4,347
            )
            
            $
            (1,251
            )
            
            $
            (1,115
            )
            
            $
            2,364
            
            
            $
            1,249







RESULTS
OF OPERATIONS


Comparison
of Year Ended December 31, 2009 and Year Ended December 31, 2008:





General


The
Company reported a net loss of $5.8 million for the year ended December 31,
2009.  This compared to net income of $5.0 million for the year ended
December 31, 2008, representing a decrease of $10.9 million.





Net
Interest Income


Net
interest income decreased $1.3 million, or 4.4%, for the year ended December 31,
2009, compared to the year ended December 31, 2008.  The decrease in
net interest income was primarily the net result of three factors: 1) the impact
of non accrual loans; 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,
2009, decreased $4.2 million, or 8.3%, as compared to the year ended December
31, 2008.  The Company would have recorded an additional $2.0 million
in interest income in 2009 and $1.3 million in 2008 if loans on non accrual
status had been current in accordance with their original
terms.  Additionally, the changing mix of interest earning assets and
the lower rate environment resulted in a 97 basis point decrease in the
yield.  Average balances of interest earning demand deposits and
securities increased $20.5 million and $68.5 million, respectively, in 2009 as
compared to the prior year.  This excess liquidity was the result of
an $88.8 million increase in average retail deposit balances in 2009 compared to
average retail deposit balances in 2008.  Total interest expense for
the year ended December 31, 2009 decreased $3.0 million, or 13.3%, as compared
to the year ended December 31, 2008.  This decrease, like the decrease
in interest income, was driven by the changing mix of interest bearing
liabilities and the declining rate environment, as evidenced by the 54 basis
point decrease in rates paid for the two comparative years.  As
mentioned earlier the average balances of retail deposits increased $88.8
million in 2009.  Additionally, average balances of higher costing
wholesale deposits and FHLB advances decreased $7.6 million and $10.6 million,
respectively.  The net result of the decreasing rate environment, the
increase in average balances, as well as the changing mix of interest-earning
assets and interest-bearing liabilities was a 42 basis point decrease in the net
interest margin from 3.35% for the year ended 2008 to 2.93% for the year ended
2009.  In December of 2009, the Company implemented a balance sheet
repositioning strategy designed to improve net interest income in
2010.  The Company sold approximately $100 million of securities with
a weighted average yield of 2.2% and prepaid approximately $55.3 million of FHLB
advances with a weighted average rate of 4.5%.  The excess liquidity
from this transaction will be invested in securities with longer maturities,
improving the yield on the securities.  Management estimates that as a
result of the repositioning transactions, the Company’s net interest income will
improve by approximately $2.0 million annually.






- 8 -








Provision
for Loan Losses


Provision
for loan losses was $16.2 million for the year ended December 31, 2009 compared
to $4.3 million for the year ended December 31, 2008.  Net charges
offs totaled $11.7 million for 2009 compared to $2.7 million for
2008.  Six commercial relationships accounted for $9.0 million of the
net charge offs in 2009.  Of these six relationships, $3.8 million in
net charge offs related to three loans that were current as of December 31,
2008.  The remaining three loans were evaluated as of December 31,
2008, based on recent appraisals of the associated collateral, probable
liquidation value and the possibility of cash flow from ongoing business
contracts.   The Company continued to evaluate the business and
collateral values, which sustained significant deterioration throughout
2009.  The charge offs recorded in 2009 were the result of auction
values obtained during the year for the associated collateral.  Total
non performing loans decreased $2.5 million from $24.3 million at the end of
2008 to $21.8 million at the end of 2009.  However, this decrease in
nonperforming loans occurred during the fourth quarter when three large
commercial loans totaling $9.6 million were transferred to other real estate
owned.  Non-performing assets to total assets increased to 3.41% at
December 31, 2009 from 2.86% at December 31, 2008, reflecting the deteriorating
asset quality during 2009.  Non-performing assets totaled $34.4
million at December 31, 2009, a $6.7 million increase compared to December 31,
2008.  The provision for loan losses increased during 2009 due
primarily to an increase in net charge offs and declining asset quality metrics
for the year. During 2009, the banking industry continued to experience
increasing trends in problem assets and 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 was evident
throughout the year 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, the provision for loan losses increased substantially to cover elevated
levels of net charge offs for the year as well as to increase the allowance for
loan losses to cover the increased risk of loss within the Company’s loan
portfolio.  Due to the severity of the economic issues along with the
dramatic drop in collateral values, management determined that the historical
practice of utilizing 5 years of charge off history to determine the required
allowance for loan losses was not adequately representing the current
risks.  Therefore, management changed the methodology during 2009 by
shortening the timeframe of the charge off history from a rolling 5 years to a
rolling 2 years.  As of December 31, 2009 the time frame used to
determine charge off percentages was January 1, 2008 through December 31,
2009.  The elevated charge off levels in the previous 2 years along
with the increase in internally classified problem loans contributed to the
increase in the provision for loan losses.  Based on the revised
methodology and the deterioration of the loan portfolio and collateral values,
the provision for loan losses was increased to fund a $4.5 million increase in
the allowance for loan losses.  See the section captioned “Allowance
for Loan Losses” elsewhere in this discussion for further analysis of the
provision for possible loan losses.




Non
Interest Income


Non
interest income increased $738,000, or 6.2%, for the year.  The
increase in non interest income for 2009 was the net result of several
factors.  Due to the low rate environment in 2009, the Company
experienced increased refinancing activity in residential mortgage
lending.  Typically the Company sells almost all of its residential
mortgage originations.  In 2009, the Company sold $163.1 million of
residential mortgage loans in the secondary market compared to $79.1 million in
2008.  This increase in secondary market sales resulted in a $1.2
million increase in gain on sale of loans.  The Company also had a
gain on sale of securities, net of impairment, of $1.8 million.  This
gain was the result of the sale of approximately $100 million of securities, as
part of a balance sheet repositioning strategy that produced a gain on sale of
securities of $2.0 million.  Offsetting this securities gain in 2009
was the recording of $221,000 of OTTI on various securities throughout the
year.  Additionally, in 2008 a loss on securities of $437,000 was
recorded.  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 this
sale, the Company did not record any brokerage fee income in 2009 which resulted
in a decrease in investment advisory services of $1.4 million for the
year.  Deposit fees decreased $444,000, or 6.5%, in
2009.  This decrease in deposit fees was primarily due to a $543,000
decrease of overdraft protection fees as customers exhibited conservative
management of their deposit accounts in 2009.  Offsetting this
decrease in deposit fees was an increase in commercial transaction account fees
of $128,000, primarily due to the growth of treasury management services in
2009.  The Company recorded a net loss on real estate owned of
$480,000 for the year ended December 31, 2009.  The loss was primarily
the result of a write down on other real estate owned of $468,000 related to a
former subdivision loan.  Trust and asset management fees increase
$173,000, or 32.2%, due to adding additional staff and the resulting fees
produced from their book of business.   Miscellaneous income
decreased $497,000, or 30.8%, due primarily to the decrease of $271,000 in
dividends received on FHLB stock.





Non
Interest Expenses


Non
interest expenses totaled $33.4 million for the year ended December 31, 2009, an
increase of $4.6 million, or 15.9%, compared to the year ended December 31,
2008. Included in the increase in non interest expenses were two one time
events; 1) the Company recorded an impairment charge of $1.4 million
representing the entire balance of goodwill during 2009.  For a
description of the goodwill impairment test see the goodwill discussion later in
this document; 2) in December of 2009, the Company entered into a balance sheet
repositioning strategy which included the prepayment of FHLB
advances.  The prepayment of $55.3 million of FHLB advances resulted
in a prepayment penalty of $3.8 million being charged in the fourth quarter of
2009.  FDIC insurance expense increased $1.5 million, due to a special
assessment charge of $454,000, as well as increased rates.  Loan
expenses increased $863,000 for 2009 to $1.6 million.  Loan expenses
in 2009 were negatively impacted by workout expenses associated with problem
loans.  These workout expenses increased overall loan expenses by
approximately $922,000.  Categories which decreased year over year in
non interest expenses include compensation and employee benefits and
marketing.  Compensation and employee benefits decreased $1.6 million,
or 10.0%.  These decreases were the net result of several factors
including; a) reduced bonus and vacation expense of $387,000; b) freezing the
Company pension plan in April of 2008 saved $354,000; c) $809,000 reduction from
the discontinuance of brokerage services; d) approximately $600,000 reduction in
wages due to a 10% reduction in the Company’s workforce in the third quarter of
2008.








- 9 -





Offsetting
these reductions in expense was a $577,000 increase in mortgage loan commissions
attributable to the refinancing activity in 2009.  Marketing expense
decreased $464,000 due to the timing of advertising associated with the name
change in 2008.  Excluding the two one time charges discussed above,
the Company’s non interest expense would have decreased $638,000, or
2.2%.





Income
Taxes


The
Company had an income tax credit of $3.6 million for the year ended December 31,
2009, a decrease of $6.2 million compared to the year ended December 31,
2008.  This decrease mirrors the decrease in pre-tax income of $17.0
million.  The Company currently has a deferred tax asset of $7.6
million.  The pretax loss experienced in 2009 was primarily due to
unusually high net charge offs of $11.7 million, which led to a $16.2 million
provision charge for the year.  For the three years ended December 31,
2008, the Company averaged $8.7 million of annual pretax income, and annual net
charge offs averaged $1.6 million.  Economic challenges exist which
are expected to keep net charge offs for 2010 above historical averages
experienced prior to 2009.  Management has reviewed industry trends
and expectations regarding net charge offs and considered the Company’s current
loan portfolio to determine the estimated impact of charge offs in future
periods.  Based on the core earnings of the Company in combination
with anticipated charge offs, management anticipates generating sufficient
pretax income over the next three years which would result in the realization of
the deferred tax asset, therefore no valuation allowance was established for the
deferred tax asset.




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).







- 10 -






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%.




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%.





FINANCIAL
CONDITION


The
Company's total assets increased $41.0 million to $1.0 billion at December 31,
2009, from $969.4 million at December 31, 2008.  Cash and cash
equivalents and securities available for sale increased $29.5 million and $58.5
million, respectively during 2009.  These increases were funded by a
$145.3 million increase in retail deposits.  The Company experienced
significant growth in retail deposits due to customers seeking the safety of
insured deposits. In addition, the Company benefited from significant market
disruption in its headquarter market of Columbus, Indiana.  The growth
in retail deposits was across all categories as demand, interest checking, money
market and certificates of deposit increased $9.2 million, or 12.8%, $59.3
million, or 53.4%, $50.6 million, or 32.3% and $24.6 million, or 7.8%,
respectively.  Due to the influx of retail deposits the Company
allowed wholesale deposits to decrease as maturity dates were
reached.  The entire brokered deposit portfolio of $5.4 million
matured and was not replaced in 2009.  Public fund certificates
decreased $10.3 million as certificates matured throughout the
year.  Portfolio loans decreased $63.0 million in 2009.  Due
to the economic challenges faced by many of the Company’s commercial loan
customers, loan balances declined due to charge offs, workouts and foreclosures.
Additionally, the economic downturn experienced in 2009 resulted in reduced
demand for commercial credit.  As a result, commercial and commercial
real estate loans decreased $28.2 million.  Residential lending
experienced increased refinancing activity in the low interest environment of
2009.  The Company sells almost all residential originations in the
secondary market and consumers who have equity available typically combine
second mortgage balances into first mortgages.  This refinance
activity resulted in residential mortgage loans and second and home equity loans
decreasing $22.7 million and $7.0 million, respectively.  Other
consumer loans decreased $5.2 million, or 25.4%.  This decrease was
due to the direct and indirect auto portfolio.  The Company’s decision
in prior years to exit the indirect auto lending business resulted in a $1.9
million decrease in the indirect auto portfolio.  The direct auto loan
business was highly competitive with this portfolio declining $2.6 million as
the auto industry offered zero percent loans and cash incentives to
customers.  Other assets increased $19.4 million primarily due to a
$9.3 million increase in commercial real estate owned balances, a $4.8 million
increase in prepaid FDIC insurance and an increase of $2.2 million in taxes
receivable.  The increase in commercial real estate owned was the
result of commercial loan relationships totaling $9.6 million which were
transferred to real estate owned status during 2009.  The prepaid FDIC
insurance was the result of the FDIC requiring the banking industry to prepay
three years of estimated deposit insurance premiums to replenish the FDIC
insurance fund.  The increase in taxes receivable was a result of the
$5.8 million net loss the Company experienced in 2009.  FHLB advances
decreased $74.9 million in 2009.  This decrease was the result of
maturities and a balance sheet repositioning strategy which resulted in the
prepayment of $55.3 million of FHLB advances.  As of December 31,
2009, shareholders’ equity was $84.9 million, a decrease of $7.1 million
compared to the prior year.  This decrease was primarily due to the
$5.8 million net loss and the $994,000 preferred stock dividends paid on the
21,500 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock,
Series A sold to the United States Treasury under the capital purchase
program.  The Company’s risk based capital, tier 1 risk based capital,
and tier one leverage ratios as of December 31, 2009 were 12.81%, 11.56% and
9.36%, respectively.




Fourth
Quarter 2009 Results


During
the fourth quarter of 2009, the Company had a net loss of $1.4 million or
$(0.50) diluted loss per common share compared to net income of $1.5 million or
$0.43 diluted earnings per common share during the fourth quarter of
2008.  The fourth quarter was negatively impacted by prepayment fees
on FHLB advances which totaled $3.8 million.  This expense was
partially offset by security gains of approximately $2.0
million.  Management estimates that as a result of the FHLB advance
prepayment, the Company’s net interest income will improve by approximately $2.0
million annually beginning in 2010 as compared to the annualized results from
the fourth quarter of 2009.







- 11 -




This
projected increase in net interest income is estimated to result in a net
interest margin of approximately 3.25% which would represent an increase of 38
basis points over the net interest margin in the fourth quarter of
2009.  Excluding the impact of the FHLB advance prepayment and the
securities sale gains, the Company’s net loss would have been reduced to
approximately $364,000 or $(0.20) diluted loss per common share for the fourth
quarter. The provision for loan losses totaled $3.4 million for the fourth
quarter which exceeded net charge offs for the quarter by
$943,000.   Total loans decreased $22.6 million for the quarter
led by commercial and commercial mortgage loans which decreased $16.7 million
for the quarter.  The commercial loan portfolio has continued to
decline due to the challenging credit market which has contributed to the
decrease in new commercial loan originations.  Also contributing to
the decrease in commercial loans during the quarter was the transfer of $9.6
million from loans to other real estate owned during the fourth
quarter.  Residential mortgage and consumer loans decreased $5.9
million for the quarter.  As substantially all new mortgage loans are
being sold in the secondary market, residential mortgage balances continue to
decline.  Decreases in the residential mortgage loan portfolio account
for $2.9 million of the decrease in consumer purpose loans for the
quarter.  Total retail deposits increased $15.7 million for the
quarter.    Management believes that deposit growth reflects
customer preference for insured bank deposits which provide safety of principal
balance plus interest.  Additionally, management believes that the
high level of deposit growth during the year was due in part to the banking
market disruption that occurred in the Company’s southeast Indiana
footprint.  Total wholesale funding decreased $55.5 million for the
quarter.  During the fourth quarter, the Company prepaid $55.3 million
of FHLB advances with a weighted average rate of 4.5% to reduce interest expense
and improve net interest margin in future periods as yields on investment
alternatives were in most cases substantially less than the rates being paid for
the advances.  Provision for loan losses totaled $3.4 million for the
quarter which represented significant increases over the comparable periods in
2008.  Net charge offs were $2.5 million for the fourth quarter and
included $2.2 million of commercial loan charge offs and $273,000 of consumer
loan charge offs.  Total non-performing assets increased $1.5 million
for the fourth quarter to $34.4 million at December 31,
2009.  Non-performing assets to total assets increased to 3.41% at
December 31, 2009 compared to 3.12% at September 30, 2009.  The ratio
of the allowance for loan losses to total loans increased to 1.78% at December
31, 2009 compared to 1.60% at September 30, 2009.





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, 2009 and December 31, 2008 is as
follows:





As
      Of
            Dec
      2009
            Dec
      2008Changes
      in Rates
            Net
      Interest
              Income
      % Change
            Net
      Interest
              Income
      % Change
            Interest
      Rate
              Risk
      Management
              Policy
      Guidelines+
      300 basis points
            (5.00)
            3.80
            (20.00)+
      200 basis points
            (3.04)
            2.68
            (15.00)+
      100 basis points
            (1.35)
            1.26
            (7.50)-
      100 basis points
            (3.11)
            0.26
            (7.50)-
      200 basis points
            (8.86)
            (3.61)
            (15.00)-
      300 basis points
            (11.70)
            (7.19)
            (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, expected cash flows, the creditworthiness of the issuer,
whether the Company intends to sell investments, and whether it is not
more-likely-than-not that the Company will be required to sell the investments
before recovery of their amortized cost basis, which may be
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.  During
2008, the Company redeemed its shares of the Shay AMF Ultra Short Mortgage Fund
for cash and securities after recognizing an OTTI loss on this equity
security.  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 for other than temporary impairment, management
considered the change in market value of the securities, the expectation for the
security’s future performance based on the receipt, or non receipt, of all
expected cash flows, Moody’s ratings where available, whether the Company intends to sell investments
and whether it is not more-likely-than-not that the Company will be required to
sell the investments before recovery of their amortized cost basis, which may be
maturity.  During 2009,
management identified 8 individual securities from the Shay redemption in kind
that were determined to have an other than temporary impairment in
value.  For each of these securities, the Company did not receive all
required cash flows in a particular period.  The current carrying
value for the securities at the time the cash flow default occurred was written
off.  The write off totaled $221,000 for 2009.  The
remaining portfolio of Shay redemption in kind securities is comprised of 83
securities with a book value of $2.3 million, at December 31, 2009. Management
has identified 56 securities with a total book value of $2.0 million at December
31, 2009 that have risk characteristics similar to the securities written off
during 2009.   However,  due to a combination of
payment performance, expected cash flows, market value performance and Moody’s
ratings, management has determined that this remaining portfolio did not have
additional other than temporary impairment at December 31, 2009.  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 $557,000 at the end of
2009.  The issuers of the two securities are two well capitalized
banks – one has a Moody’s rating of BAA3 and one has a Moody’s rating of
A1.  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
does not intend to sell these investments and it is not more-likely-than-not
that the Company will be required to sell the two investments before recovery of
their amortized cost basis, which may be maturity.  Based on
these criteria and expected cash flows, management determined the available for
sale portfolio did not have any other than temporary impairment.





GOODWILL


The
Company evaluated goodwill for impairment on a quarterly basis in
2009.  Impairment is the condition that exists when the carrying
amount of goodwill exceeds its implied fair value.  The guidance
requires a two step impairment test as of the measurement date to: 1) identify
potential goodwill impairment and 2) measure the amount of the goodwill
impairment loss to be recognized, if applicable.  Management analyzed
the estimated fair value of the Company using three methodologies: the
comparable transactions approach, the control premium approach and the
discounted cash flow approach.  In both the first and second quarter
analysis, the implied fair value of the Company was greater than the carrying
value.  Therefore, no impairment charge was required in the first or
second quarter of 2009.  As of September 30, 2009, management
determined from the analysis of goodwill that the aggregate fair value of the
Company was less than the carrying value.  Based on this conclusion,
management prepared a step two analysis calculating the fair value of the
Company’s financial assets and liabilities.  An application of the
fair value of the Company as calculated in step one, and the fair value of the
Company’s financial assets and liabilities as calculated in step two, resulted
in an estimated negative fair value of goodwill.  Since management
determined the fair value of goodwill was negative and therefore lower than the
carrying value, a full impairment charge of $1.4 million was recorded in
2009.






- 13 -





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
      2009
            
            
            Dec
      2008
            
            
            Dec
      2007
            
            
            Dec
      2006
            
            
            Dec
      2005Non-accruing
      loans:Residential
      mortgage loans
            
            $
            3,093
            
            
            $
            2,349
            
            
            $
            2,284
            
            
            $
            1,637
            
            
            $
            1,656Commercial
      and commercial mortgage loans
            
            
            15,892
            
            
            
            19,352
            
            
            
            7,622
            
            
            
            903
            
            
            
            966Second
      and home equity loans
            
            
            798
            
            
            
            696
            
            
            
            466
            
            
            
            200
            
            
            
            308Other
      consumer loans
            
            
            106
            
            
            
            137
            
            
            
            144
            
            
            
            112
            
            
            
            140Total
            
            
            19,889
            
            
            
            22,534
            
            
            
            10,516
            
            
            
            2,852
            
            
            
            3,07090
      days past due and still accruing loans:Residential
      mortgage loans
            
            
            131
            
            
            
            481
            
            
            
            64
            
            
            
            459
            
            
            
            456Commercial
      and commercial mortgage loans
            
            
            1,279
            
            
            
            37
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            
            1,410
            
            
            
            518
            
            
            
            64
            
            
            
            459
            
            
            
            456Troubled
      debt restructured
            
            
            499
            
            
            
            1,282
            
            
            
            874
            
            
            
            440
            
            
            
            809Total
      non-performing loans
            
            
            21,798
            
            
            
            24,334
            
            
            
            11,454
            
            
            
            3,751
            
            
            
            4,335Real
      estate owned
            
            
            12,627
            
            
            
            3,379
            
            
            
            311
            
            
            
            436
            
            
            
            271Total
      Non-Performing Assets
            
            $
            34,425
            
            
            $
            27,713
            
            
            $
            11,765
            
            
            $
            4,187
            
            
            $
            4,606Non-performing
      assets to total assets
            
            
            3.41
            %
            
            
            2.86
            %
            
            
            1.29
            %
            
            
            0.46
            %
            
            
            0.54
            %Non-performing
      loans to total loans
            
            
            2.95
            %
            
            
            3.03
            %
            
            
            1.51
            %
            
            
            0.54
            %
            
            
            0.70
            %Allowance
      for loan losses to non-performing loans
            
            
            60.16
            %
            
            
            35.30
            %
            
            
            60.87
            %
            
            
            175.90
            %
            
            
            155.78
            %





Total
non-performing assets increased $6.7 million to $34.4 million at December 31,
2009.  Total non performing loans decreased $2.5 million to $21.8
million at December 31, 2009.  However, the decrease in non performing
loans was offset by an increase in real estate owned of $9.2 million to $12.6
million at December 31, 2009.  As a result of the increase in the
allowance for loan losses combined with the decrease in non performing loans,
the coverage ratio (allowance for loan losses to non performing loans) increased
to 60.2% at December 31, 2009 from 35.3% at December 31, 2008.  Total
non performing loans include $17.2 million in commercial and commercial mortgage
loans.  Non performing commercial and commercial mortgage loans at
December 31, 2009 include 6 relationships that comprise $14.5 million, or 84%,
of the total non performing commercial and commercial mortgage
loans.  These 6 relationships are as follows:  3
relationships totaling $8.4 million relate to residential land/condominium
development; 2 relationships totaling $2.7 million relate to retail land
development, and 1 relationship totaling $3.4 million relates to a commercial
company and its principal owner.  At December 31, 2009, a specific
reserve of $997,000 was included in the allowance for loan losses related to
these 6 relationships.  In addition, non-performing residential
mortgage and second and home equity loans increased $394,000 and $102,000,
respectively.  Other real estate owned at December 31, 2009 included 4
properties/projects that total $11.7 million, or 93%, of the total balance
outstanding.  These 4 properties/projects all relate to residential
land/condominium development.








ALLOWANCE
FOR LOAN LOSSES


The
provision for loan losses was $16.2 million for the year ended December 31, 2009
which resulted in an increase in the balance of the allowance for loan losses to
$13.1 million at December 31, 2009 as compared to $8.6 million at December 31,
2008.  The allowance for loan losses as a percentage of total loans
increased to 1.78% at December 31, 2009 from 1.07% at December 31,
2008.





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.  The decrease of $28.2 million in commercial and commercial
mortgage loans experienced during 2009 was due to: the economic downturn which
continued throughout the year, net charge offs, and transfers to real estate
owned.  During 2009, the residential land development sector continued
to experience softening which began in 2008 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 2009 and
2008.  As the overall residential housing market slowed in
Indianapolis, demand for condominiums dropped substantially.  Overall,
the Company experienced declining credit quality trends during 2009 as was the
case in varying degrees for the banking industry as a whole.  The
declining credit quality trends were evidenced by increases in non-performing
assets during the year and net charge offs which significantly exceeded the
Company’s historical average.  Total non-performing assets increased
$6.7 million to $34.4 million during 2009.  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 2009, assets classified by
management as special mention or substandard that were not included in
non-performing assets increased $17.9 million to $43.6 million at December 31,
2009.  As a result, during 2009 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 $4.5 million, or
52.7%.  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.






- 14 -





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





As
      Of
            
            Dec
      2009
            
            
            Dec
      2008
            
            
            Dec
      2007
            
            
            Dec
      2006
            
            
            Dec
      2005Balance
      at beginning of period
            
            $
            8,589
            
            
            $
            6,972
            
            
            $
            6,598
            
            
            $
            6,753
            
            
            $
            7,864Provision
      for loan losses
            
            
            16,218
            
            
            
            4,292
            
            
            
            1,361
            
            
            
            850
            
            
            
            808Loan
      charge-offs:Residential
      mortgage loans
            
            
            (473
            )
            
            
            (499
            )
            
            
            (136
            )
            
            
            (84
            )
            
            
            (264
            )Commercial
      and commercial mortgage loans
            
            
            (10,124
            )
            
            
            (1,561
            )
            
            
            (698
            )
            
            
            (470
            )
            
            
            (1,315
            )Second
      and home equity loans
            
            
            (874
            )
            
            
            (339
            )
            
            
            (24
            )
            
            
            (67
            )
            
            
            (158
            )Other
      consumer loans
            
            
            (568
            )
            
            
            (642
            )
            
            
            (608
            )
            
            
            (706
            )
            
            
            (311
            )Total
      charge-offs
            
            
            (12,039
            )
            
            
            (3,041
            )
            
            
            (1,466
            )
            
            
            (1,327
            )
            
            
            (2,048
            )Recoveries:Residential
      mortgage loans
            
            
            31
            
            
            
            34
            
            
            
            14
            
            
            
            14
            
            
            
            10Commercial
      and commercial mortgage loans
            
            
            121
            
            
            
            58
            
            
            
            178
            
            
            
            115
            
            
            
            68Second
      and home equity loans
            
            
            15
            
            
            
            45
            
            
            
            22
            
            
            
            2
            
            
            
            1Other
      consumer loans
            
            
            178
            
            
            
            229
            
            
            
            265
            
            
            
            191
            
            
            
            50Total
      recoveries
            
            
            345
            
            
            
            366
            
            
            
            479
            
            
            
            322
            
            
            
            129Net
      charge-offs
            
            
            (11,694
            )
            
            
            (2,675
            )
            
            
            (987
            )
            
            
            (1,005
            )
            
            
            (1,919
            )Balance
      at End of Period
            
            $
            13,113
            
            
            $
            8,589
            
            
            $
            6,972
            
            
            $
            6,598
            
            
            $
            6,753Net
      charge-offs to average loans
            
            
            1.52
            %
            
            
            0.35
            %
            
            
            0.14
            %
            
            
            0.15
            %
            
            
            0.31
            %Allowance
      for loan losses to total loans
            
            
            1.78
            %
            
            
            1.07
            %
            
            
            0.92
            %
            
            
            0.95
            %
            
            
            1.09
            %





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
      2009
            
            
            Dec
      2008
            
            
            Dec
      2007
            
            
            Dec
      2006
            
            
            Dec
      2005Residential
      mortgage loans
            
            $
            910
            
            
            $
            741
            
            
            $
            1,153
            
            
            $
            1,355
            
            
            $
            1,858Commercial
      and commercial mortgage loans
            
            
            10,564
            
            
            
            6,493
            
            
            
            4,374
            
            
            
            3,856
            
            
            
            3,531Second
      and home equity loans
            
            
            1,152
            
            
            
            821
            
            
            
            762
            
            
            
            640
            
            
            
            567Other
      consumer loans
            
            
            487
            
            
            
            534
            
            
            
            683
            
            
            
            747
            
            
            
            797Total
      Allowance for Loan Losses
            
            $
            13,113
            
            
            $
            8,589
            
            
            $
            6,972
            
            
            $
            6,598
            
            
            $
            6,753





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, 2009, this included $400,000, $200,000
and $900,000 assigned to second mortgages and home equity loans, consumer loans
and commercial and commercial mortgage loans, respectively.  The
$900,000 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, 2009, the Company had $55.0
million in advances from the FHLB of Indianapolis.  As of that date,
the Company had commitments of approximately $124.8 million to fund lines of
credit and undisbursed portions of loans in process, loan originations of
approximately $35.5 million, letters of credit of $2.1 million, and commitments
to sell loans of $16.4 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, subject to certain limitations in
the first three years after issuance of the Series A Preferred
Stock.








- 15 -





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.  The U.S. Department of the 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 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.





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
            
            $
            223,805
            
            
            $
            102,146
            
            
            $
            11,583
            
            
            $
            1,998
            
            
            $
            339,532Long
      term debt
            
            
            -
            
            
            
            55,000
            
            
            
            -
            
            
            
            -
            
            
            
            55,000Long
      term compensation obligations
            
            
            264
            
            
            
            468
            
            
            
            460
            
            
            
            1,996
            
            
            
            3,188Commitments
      to extend credit:Commercial
      mortgage and commercial loans (1)
            
            
            93,200
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            93,200Residential
      mortgage loans
            
            
            12,606
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            12,606Revolving
      home equity lines of credit
            
            
            37,273
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            37,273Other
            
            
            17,217
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            17,217Standby
      letters of credit
            
            
            2,121
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,121Commitments
      to sell loans:Residential
      mortgage loans
            
            
            10,650
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10,650Commercial
      mortgage and commercial loans
            
            
            5,760
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,760Total
            
            $
            402,896
            
            
            $
            157,614
            
            
            $
            12,043
            
            
            $
            3,994
            
            
            $
            576,547





1)
            Commercial
      mortgage and commercial loan commitments to extend credit are presented
      net of the portion of participation interests due 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 $470,000, $491,000,
and $242,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.  As of December 31, 2009, future minimum annual rental
payments under these leases are as follows: (dollars in thousands)





Year
      Ended December
            
            Amount2010
            
            $
            4772011
            
            
            4742012
            
            
            3282013
            
            
            3202014
            
            
            316Thereafter
            
            
            2,736Total
      Minimum Operating Lease Payments
            
            $
            4,651






- 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





The
Financial Accounting Standards Board (FASB) Accounting Standards CodificationTM(Codification), the source of generally accepted accounting principles
(GAAP), 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 June
2009, the Financial Accounting Standards Board, (FASB) issued an accounting
standard which established the Codification to become the single source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities, with the exception of guidance issued by the U.S. Securities and
Exchange Commission (the SEC) and its staff.  All guidance contained
in the Codification carries an equal level of authority.  The
Codification is not intended to change GAAP, but rather is expected to simplify
accounting research by reorganizing current GAAP into approximately 90
accounting topics.  The Company adopted this accounting standard in
preparing the Consolidated Financial Statements for the period ended September
30, 2009.  The adoption of this accounting standard, which was
subsequently codified into ASC Topic 105, “Generally Accepted Accounting
Principles,” had no impact on retained earnings and will have no impact on the
Company’s financial position or results of operations.




In
December 2007, the FASB issued new accounting guidance on business
combinations.  The new guidance retains the fundamental requirements
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 guidance 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 guidance 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 guidance requires the acquirer to recognize
acquisition-related costs and restructuring costs separately from the business
combination as period expenses. This guidance 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 guidance 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
has determined the adoption of this guidance did not have a material effect on
the Company’s financial position or results of operations.





In
December 2007, the FASB issued new accounting guidance on
consolidations.  This new guidance 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 guidance 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 guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008.  Management has determined the adoption of this guidance did not
have a material effect on the Company’s financial position or results of
operations.





In March
2008, the FASB issued new accounting guidance on derivative instruments and
hedging activities.  This new guidance 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, and c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows.







- 17 -






This
guidance is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008.  Management has
determined the adoption of this guidance did not have a material effect on the
Company’s financial position or results of operations.





In May
2009, the FASB issued new accounting guidance on subsequent
events.  The objective of this guidance is to establish general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued.  The new accounting guidance was effective for financial
statements issued for fiscal years and interim periods ending after June 15,
2009.  Management has determined the adoption of this guidance did not
have a material effect on the Company’s financial position or results of
operations.





In June
2009, the FASB issued new accounting guidance related to accounting for
transfers of financial assets.  The Board’s objective in issuing this
new guidance is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a
transferor’s continuing involvement, if any, in transferred financial
assets.  This guidance is effective as of the beginning of the first
annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period and for interim and annual reporting
periods thereafter.  Earlier application is
prohibited.  This guidance must be applied to transfers occurring on
or after the effective date.  Management has determined the adoption
of this guidance did not have a material effect on the Company’s financial
position or results of operations.





In June
2009, the FASB issued new accounting guidance on consolidation of variable
interest entities, which include: 1) the elimination of the exemption for
qualifying special purpose entities, 2) a new approach for determining who
should consolidate a variable interest entity, and 3) changes to when it is
necessary to reassess who should consolidate a variable interest
entity.  This new guidance is effective as of the beginning of the
first annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period, and for interim and annual
reporting periods thereafter. Earlier application is
prohibited.  Management has determined the adoption of this guidance
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 operations. 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.








- 18 -








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 present
value of expected future cash flows, and the creditworthiness of the issuer.
Based on the results of these considerations and  because the Company
does not  intend to sell investments and it is not
more-likely-than-not that the Company will be required to sell the investments
before recovery of their amortized cost basis, which may be maturity, the
Company does not consider these investments to be other than temporarily
impaired. When a decline in value is considered to be other-than-temporary, the
cost basis of the security will be reduced and the credit portion of the loss is
recorded within non interest income in the consolidated statements of
operations.






- 19 -






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, 2009.  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, 2009, the Company’s
internal control over financial reporting is effective based on those
criteria.







- 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 sheets of Indiana Community
Bancorp as of December 31, 2009 and 2008, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended.  The Company's management is responsible for these financial
statements.  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 audits to obtain reasonable assurance about
whether the financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting in
2009.  Our 2009 audit included consideration of internal control
over financial reporting as a basis for designing auditing procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  Our
audits also 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 audits provide
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, 2009 and 2008, and the results of its operations and its cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the Unites States of America.














Indianapolis,
Indiana


March 12,
2010

























- 21 -








REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Shareholders of


Indiana
Community Bancorp (formerly Home Federal Bancorp)


Columbus,
Indiana





We have
audited the accompanying consolidated statement of operations, shareholders’
equity, and cash flows of Indiana Community Bancorp (formerly Home Federal
Bancorp) and subsidiaries (the "Company") for the year 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 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.  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 audit provides a reasonable basis
for our opinion.





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












Cincinnati,
Ohio


March 14,
2008

















- 22 -





CONSOLIDATED
BALANCE SHEETS


(dollars
in thousands except share data)


December
      31, 2009
            
            
            December
      31, 2008Assets:Cash
      and due from banks
            
            $
            10,808
            
            
            $
            22,352Interest
      bearing demand deposits
            
            
            41,253
            
            
            
            234Cash
      and cash equivalents
            
            
            52,061
            
            
            
            22,586Securities
      available for sale at fair value (amortized cost $149,031 and
      $90,957)
            
            
            149,633
            
            
            
            91,096Securities
      held to maturity at amortized cost (fair value $3,802 and
      $3,884)
            
            
            4,084
            
            
            
            4,467Loans
      held for sale (fair value $6,213 and $2,907)
            
            
            6,075
            
            
            
            2,856Portfolio
      loans:Commercial
      and commercial mortgage loans
            
            
            527,946
            
            
            
            556,133Residential
      mortgage loans
            
            
            97,551
            
            
            
            120,227Second
      and home equity loans
            
            
            97,071
            
            
            
            104,084Other
      consumer loans
            
            
            15,312
            
            
            
            20,532Unearned
      income
            
            
            (99
            )
            
            
            (241
            )Total
      portfolio loans
            
            
            737,781
            
            
            
            800,735Allowance
      for loan losses
            
            
            (13,113
            )
            
            
            (8,589
            )Portfolio
      loans, net
            
            
            724,668
            
            
            
            792,146Premises
      and equipment
            
            
            15,151
            
            
            
            15,323Accrued
      interest receivable
            
            
            3,533
            
            
            
            3,777Goodwill
            
            
            -
            
            
            
            1,394Other
      assets
            
            
            55,118
            
            
            
            35,728Total
      Assets
            
            $
            1,010,323
            
            
            $
            969,373Liabilities
      and Shareholders’ Equity:Liabilities:Deposits:Demand
            
            $
            80,938
            
            
            $
            71,726Interest
      checking
            
            
            170,226
            
            
            
            110,944Savings
            
            
            42,520
            
            
            
            40,862Money
      market
            
            
            207,089
            
            
            
            156,500Certificates
      of deposit
            
            
            339,025
            
            
            
            314,425Retail
      deposits
            
            
            839,798
            
            
            
            694,457Brokered
      deposits
            
            
            -
            
            
            
            5,420Public
      fund certificates
            
            
            507
            
            
            
            10,762Wholesale
      deposits
            
            
            507
            
            
            
            16,182Total
      deposits
            
            
            840,305
            
            
            
            710,639FHLB
      advances
            
            
            55,000
            
            
            
            129,926Short
      term borrowings
            
            
            -
            
            
            
            4,713Junior
      subordinated debt
            
            
            15,464
            
            
            
            15,464Other
      liabilities
            
            
            14,630
            
            
            
            16,619Total
      liabilities
            
            
            925,399
            
            
            
            877,361Commitments
      and ContingenciesShareholders'
      equity:No
      par preferred stock; Authorized:  2,000,000
    sharesIssued
      and outstanding:  21,500 and 21,500 shares;
      Liquidation
              preference
      $1,000 per share
            
            
            21,054
            
            
            
            20,962No
      par common stock; Authorized:  15,000,000 sharesIssued
      and outstanding:  3,358,079 and 3,358,079 shares
            
            
            21,060
            
            
            
            20,985Retained
      earnings, restricted
            
            
            42,862
            
            
            
            50,670Accumulated
      other comprehensive loss, net
            
            
            (52
            )
            
            
            (605
            )Total
      shareholders' equity
            
            
            84,924
            
            
            
            92,012Total
      Liabilities and Shareholders' Equity
            
            $
            1,010,323
            
            
            $
            969,373


See notes to consolidated financial
statements





- 23 -





CONSOLIDATED
STATEMENTS OF OPERATIONS


(dollars
in thousands except per share data)





Year
      Ended
            
            
            Year
      Ended
            
            
            Year
      EndedDec
      2009
            
            
            Dec
      2008
            
            
            Dec
      2007Interest
      Income:Short
      term investments
            
            $
            99
            
            
            $
            462
            
            
            $
            1,116Securities
            
            
            4,164
            
            
            
            2,878
            
            
            
            2,688Commercial
      and commercial mortgage loans
            
            
            30,192
            
            
            
            31,406
            
            
            
            31,304Residential
      mortgage loans
            
            
            6,192
            
            
            
            8,516
            
            
            
            10,471Second
      and home equity loans
            
            
            4,992
            
            
            
            6,186
            
            
            
            7,342Other
      consumer loans
            
            
            1,452
            
            
            
            1,890
            
            
            
            2,280Total
      interest income
            
            
            47,091
            
            
            
            51,338
            
            
            
            55,201Interest
      Expense:Checking
      and savings accounts
            
            
            1,679
            
            
            
            981
            
            
            
            1,761Money
      market accounts
            
            
            2,235
            
            
            
            2,867
            
            
            
            5,869Certificates
      of deposit
            
            
            10,733
            
            
            
            12,265
            
            
            
            14,317Total
      interest on retail deposits
            
            
            14,647
            
            
            
            16,113
            
            
            
            21,947Brokered
      deposits
            
            
            139
            
            
            
            426
            
            
            
            665Public
      funds
            
            
            77
            
            
            
            185
            
            
            
            47Total
      interest on wholesale deposits
            
            
            216
            
            
            
            611
            
            
            
            712Total
      interest on deposits
            
            
            14,863
            
            
            
            16,724
            
            
            
            22,659FHLB
      advances
            
            
            4,278
            
            
            
            5,059
            
            
            
            3,884Other
      borrowings
            
            
            1
            
            
            
            1
            
            
            
            8Junior
      subordinated debt
            
            
            411
            
            
            
            765
            
            
            
            1,110Total
      interest expense
            
            
            19,553
            
            
            
            22,549
            
            
            
            27,661Net
      interest income
            
            
            27,538
            
            
            
            28,789
            
            
            
            27,540Provision
      for loan losses
            
            
            16,218
            
            
            
            4,292
            
            
            
            1,361Net
      interest income after provision for loan losses
            
            
            11,320
            
            
            
            24,497
            
            
            
            26,179Non
      Interest Income:Gain
      on sale of loans
            
            
            2,630
            
            
            
            1,446
            
            
            
            1,497Gain
      on sale of securities available for sale
            
            
            2,046
            
            
            
            -
            
            
            
            -Other
      than temporary impairment losses
            
            
            (221
            )
            
            
            (437
            )
            
            
            -Investment
      advisory services
            
            
            -
            
            
            
            1,371
            
            
            
            1,874Service
      fees on deposit accounts
            
            
            6,347
            
            
            
            6,791
            
            
            
            6,574Loan
      servicing income, net of impairment
            
            
            530
            
            
            
            551
            
            
            
            571Net
      gain/(loss) on real estate owned
            
            
            (480
            )
            
            
            68
            
            
            
            115Trust
      and asset management fees
            
            
            711
            
            
            
            538
            
            
            
            571Miscellaneous
            
            
            1,115
            
            
            
            1,612
            
            
            
            1,652Total
      non interest income
            
            
            12,678
            
            
            
            11,940
            
            
            
            12,854Non
      Interest Expenses:Compensation
      and employee benefits
            
            
            14,257
            
            
            
            15,843
            
            
            
            16,426Occupancy
      and equipment
            
            
            3,854
            
            
            
            4,159
            
            
            
            4,086Service
      bureau expense
            
            
            1,891
            
            
            
            1,917
            
            
            
            1,637FDIC
      insurance expense
            
            
            1,785
            
            
            
            286
            
            
            
            84Marketing
            
            
            777
            
            
            
            1,241
            
            
            
            1,141Professional
      fees
            
            
            799
            
            
            
            919
            
            
            
            1,302Loan
      expenses
            
            
            1,559
            
            
            
            696
            
            
            
            365Communication
      expense
            
            
            688
            
            
            
            847
            
            
            
            892Goodwill
      impairment
            
            
            1,394
            
            
            
            -
            
            
            
            -FHLB
      advances prepayment fee
            
            
            3,813
            
            
            
            -
            
            
            
            -Miscellaneous
            
            
            2,586
            
            
            
            2,926
            
            
            
            3,841Total
      non interest expenses
            
            
            33,403
            
            
            
            28,834
            
            
            
            29,774Income
      (loss) before income taxes
            
            
            (9,405
            )
            
            
            7,603
            
            
            
            9,259Income
      tax provision (benefit)
            
            
            (3,556
            )
            
            
            2,600
            
            
            
            3,136Net
      Income (Loss)
            
            $
            (5,849
            )
            
            $
            5,003
            
            
            $
            6,123Basic
      Earnings (Loss)  per Common Share
            
            $
            (2.09
            )
            
            $
            1.47
            
            
            $
            1.75Diluted
      Earnings (Loss) per Common Share
            
            $
            (2.09
            )
            
            $
            1.47
            
            
            $
            1.72Basic
      weighted average number of shares
            
            
            3,358,079
            
            
            
            3,359,666
            
            
            
            3,492,615Dilutive
      weighted average number of shares
            
            
            3,358,079
            
            
            
            3,365,131
            
            
            
            3,560,603Dividends
      per share
            
            $
            0.26
            
            
            $
            0.64
            
            
            $
            0.80





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 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 of
              tax
      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 of
              tax
      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
            )
            
            
            92,012Comprehensive
      income:Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5,849
            )
            
            
            
            
            
            
            (5,849
            )Change
      in unrealized gain on securities available for sale, net of
      reclassification adjustment for realized gains of $1,236 and tax effect of
      $160
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            303
            
            
            
            303Change
      in supplemental retirement plan obligations, net of
              tax
      of $164
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            250
            
            
            
            250Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5,296
            )Amortization
      of discount on preferred stock
            
            
            
            
            
            
            92
            
            
            
            
            
            
            
            (92
            )
            
            
            
            
            
            
            -Preferred
      stock cash dividends ( per share)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (994
            )
            
            
            
            
            
            
            (994
            )Common
      stock compensation expense
            
            
            
            
            
            
            
            
            
            
            75
            
            
            
            
            
            
            
            
            
            
            
            75Common
      stock cash dividends ($.260 per share)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (873
            )
            
            
            
            
            
            
            (873
            )Balance
      at December 2009
            
            
            3,358,079
            
            
            $
            21,054
            
            
            $
            21,060
            
            
            $
            42,862
            
            
            $
            (52
            )
            
            $
            84,924





See notes
to consolidated financial statements





- 25 -








CONSOLIDATED
STATEMENTS OF CASH FLOWS


(dollars
in thousands)





Year
              Ended
            
            
            Year
              Ended
            
            
            Year
              EndedDec
      2009
            
            
            Dec
      2008
            
            
            Dec
      2007Cash
      Flows From / (Used In) Operating Activities:Net
      income (loss)
            
            $
            (5,849
            )
            
            $
            5,003
            
            
            $
            6,123Adjustments
      to reconcile net income to net cash from operating
    activities:Accretion
      of discounts, amortization and depreciation
            
            
            2,565
            
            
            
            1,352
            
            
            
            1,589Goodwill
      impairment
            
            
            1,394
            
            
            
            -
            
            
            
            -Provision
      for loan losses
            
            
            16,218
            
            
            
            4,292
            
            
            
            1,361Stock
      based compensation expense
            
            
            75
            
            
            
            155
            
            
            
            137Benefit
      for deferred income taxes
            
            
            (2,293
            )
            
            
            (834
            )
            
            
            (196
            )Net
      gain from sale of loans
            
            
            (2,630
            )
            
            
            (1,446
            )
            
            
            (1,497
            )(Gain)/loss
      on securities
            
            
            (1,825
            )
            
            
            437
            
            
            
            -(Income)/loss
      from joint ventures and net (gain)/loss from real estate
    owned
            
            
            44
            
            
            
            (10
            )
            
            
            (191
            )Loan
      fees deferred, net
            
            
            33
            
            
            
            175
            
            
            
            25Proceeds
      from sale of loans held for sale
            
            
            185,909
            
            
            
            130,589
            
            
            
            111,948Origination
      of loans held for sale
            
            
            (186,498
            )
            
            
            (124,887
            )
            
            
            (110,755
            )(Increase)/decrease
      in accrued interest and other assets
            
            
            (7,808
            )
            
            
            863
            
            
            
            960Decrease
      in other liabilities
            
            
            (1,740
            )
            
            
            (1,381
            )
            
            
            (3,373
            )Net
      Cash From / (Used In) Operating Activities
            
            
            (2,405
            )
            
            
            14,308
            
            
            
            6,131Cash
      Flows From / (Used In) Investing Activities:Net
      principal received/(disbursed) on loans
            
            
            55,946
            
            
            
            (50,799
            )
            
            
            (50,083
            )Proceeds
      from:Maturities/Repayments
      of:Securities
      held to maturity
            
            
            1,008
            
            
            
            255
            
            
            
            176Securities
      available for sale
            
            
            47,908
            
            
            
            29,891
            
            
            
            6,517Sales
      of:Securities
      available for sale
            
            
            138,424
            
            
            
            8,959
            
            
            
            4,464Real
      estate owned and other asset sales
            
            
            1,475
            
            
            
            1,255
            
            
            
            870Purchases
      of:Loans
            
            
            (16,113
            )
            
            
            (7,195
            )
            
            
            (18,515
            )Securities
      held to maturity
            
            
            (770
            )
            
            
            (100
            )
            
            
            (100
            )Securities
      available for sale
            
            
            (243,675
            )
            
            
            (70,744
            )
            
            
            (16,166
            )Return
      of joint ventures
            
            
            671
            
            
            
            -
            
            
            
            29Acquisition
      of/(cash paid for) brokerage business
            
            
            -
            
            
            
            (100
            )
            
            
            100Cash
      received from sale of brokerage business
            
            
            -
            
            
            
            650
            
            
            
            -(Acquisition)/disposal
      of property and equipment
            
            
            (1,154
            )
            
            
            (1,090
            )
            
            
            102Net
      Cash Used In Investing Activities
            
            
            (16,280
            )
            
            
            (89,018
            )
            
            
            (72,606
            )Cash
      Flows From / (Used In) Financing Activities:Net
      increase/(decrease) in deposits
            
            
            129,666
            
            
            
            3,088
            
            
            
            (19,608
            )Proceeds
      from advances from FHLB
            
            
            -
            
            
            
            85,000
            
            
            
            45,000Repayment
      of advances from FHLB
            
            
            (74,926
            )
            
            
            (54,423
            )
            
            
            (14,318
            )Net
      proceeds from/(net repayment of) overnight borrowings
            
            
            (4,713
            )
            
            
            4,693
            
            
            
            20Preferred
      stock and warrants issued
            
            
            -
            
            
            
            21,500
            
            
            
            -Common
      stock options exercised
            
            
            -
            
            
            
            -
            
            
            
            3,327Repurchase
      of common stock
            
            
            -
            
            
            
            (286
            )
            
            
            (10,976
            )Excess
      tax benefit related to stock based compensation
            
            
            -
            
            
            
            -
            
            
            
            339Payment
      of dividends on preferred stock
            
            
            (994
            )
            
            
            -
            
            
            
            -Payment
      of dividends on common stock
            
            
            (873
            )
            
            
            (2,828
            )
            
            
            (2,820
            )Net
      Cash From Financing Activities
            
            
            48,160
            
            
            
            56,744
            
            
            
            964NET
      INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            29,475
            
            
            
            (17,966
            )
            
            
            (65,511
            )Cash
      and cash equivalents, beginning of period
            
            
            22,586
            
            
            
            40,552
            
            
            
            106,063Cash
      and Cash Equivalents, End of Period
            
            $
            52,061
            
            
            $
            22,586
            
            
            $
            40,552Supplemental
      Information:Cash
      paid for interest
            
            $
            19,705
            
            
            $
            22,762
            
            
            $
            27,835Cash
      paid for income taxes
            
            $
            900
            
            
            $
            3,130
            
            
            $
            5,280Non
      Cash Items:Assets
      acquired through foreclosure
            
            $
            11,394
            
            
            $
            4,255
            
            
            $
            944Acquisition
      of broker dealer within accounts payable
            
            $
            -
            
            
            $
            100
            
            
            $
            200Goodwill
      impairment
            
            $
            1,394
            
            
            $
            -
            
            
            $
            -Securities
      received as a redemption in kind
            
            $
            -
            
            
            $
            3,027
            
            
            $
            -Dividends
      payable
            
            $
            -
            
            
            $
            -
            
            
            $
            678





See notes
to consolidated financial statements





- 26 -





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


For The
Years Ended December 31, 2009, 2008 and 2007





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 Bank 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, 2009 was $1.1
million.





One or
more of the financial institutions holding the Company’s cash accounts are
participating in the FDIC’s Transaction Account Guarantee
Program.  Under the program, through June 30, 2010, all
noninterest-bearing transaction accounts at these institutions are fully
guaranteed by the FDIC for the entire amount in the account.





For
financial institutions opting out of the FDIC’s Transaction Account Guarantee
Program or interest-bearing cash accounts, the FDIC’s insurance limits increased
to $250,000, effective October 3, 2008.  The increase in federally
insured limits is currently set to expire December 31, 2013.  At
December 31, 2009, the Company’s cash accounts exceeded federally insured limits
by approximately $41.3 million.  Included in this amount is
approximately $41.1 million with the Federal Reserve Bank.





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, with the exception of mortgage backed
securities and collateralized mortgage obligations, which are amortized over an
estimated average life.  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 operations. 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 present value of expected future cash flows,
and the creditworthiness of the issuer. Based on the results of these
considerations and  because the Company does not  intend to
sell investments and it is not more-likely-than-not that the Company will be
required to sell the investments before recovery of their amortized cost basis,
which may be maturity, the Company does not consider these investments to be
other than temporarily impaired. When a decline in value is considered to be
other-than-temporary, the cost basis of the security will be reduced and the
credit portion of the loss is recorded within non interest income in the
consolidated statements of operations.


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.





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 fair value less cost to sell.  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 an income statement account, which is
included in non interest income 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 accounting guidance, 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


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.





The
Company evaluates interest rate lock commitments issued on residential mortgage
loan commitments that will be held for resale, as well as commitments to sell
such loan commitments to investors, as free-standing derivative
instruments.  As of December 31, 2009 and 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.






- 28 -







Goodwill
and Other Intangible Assets


In
accordance with generally accepted accounting principles, (GAAP), the Company
annually evaluated goodwill for impairment as of September 30, 2009. Impairment
is the condition that exists when the carrying amount of goodwill exceeds its
implied fair value.  The guidance requires a two step impairment test
as of the measurement date to: 1) identify potential goodwill impairment and 2)
measure the amount of the goodwill impairment loss to be recognized, if
applicable.  Management analyzed the estimated fair value of the
Company using three methodologies: the comparable transactions approach, the
control premium approach and the discounted cash flow
approach.  Management determined from this analysis that the aggregate
fair value of the Company was less than the carrying value.  Based on
this conclusion, management prepared a step two analysis calculating the fair
value of the Company’s financial assets and liabilities.  An
application of the fair value of the Company as calculated in step one, and the
fair value of the Company’s financial assets and liabilities as calculated in
step two, resulted in an estimated negative fair value of
goodwill.  Since management determined the fair value of goodwill was
negative and therefore lower than the carrying value, a full impairment charge
of $1.4 million was recorded in the third quarter of 2009.





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 was 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 was 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 2008 and 2007 consolidated financial statements have
been made to conform to the 2009 presentation.





- 29 -





Earnings
(Loss) per Common Share


Earnings
(loss) 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 (loss) per share computations:





Year
      Ended
              Dec
      2009
            
            
            Year
      Ended
              Dec
      2008
            
            
            Year
      Ended
              Dec
      2007Basic
      Earnings per Common Share:Weighted
      average common shares
            
            
            3,358,079
            
            
            
            3,359,666
            
            
            
            3,492,615Diluted
      Earnings per Common Share:Weighted
      average common shares
            
            
            3,358,079
            
            
            
            3,359,666
            
            
            
            3,492,615Dilutive
      effect of stock options
            
            
            -
            
            
            
            5,465
            
            
            
            67,988Weighted
      average common and incremental shares
            
            
            3,358,079
            
            
            
            3,365,131
            
            
            
            3,560,603





Anti-dilutive
options are summarized as follows:





As
      Of
            
            Dec
      2009
            
            
            Dec
      2008
            
            
            Dec
      2007Anti-dilutive
      options
            
            
            300,965
            
            
            
            294,813
            
            
            
            123,224








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


Year
      Ended
              Dec
      2009
            
            
            Year
      Ended
              Dec
      2008
            
            
            Year
      Ended
              Dec
      2007Net
      income (loss)
            
            $
            (5,849
            )
            
            $
            5,003
            
            
            $
            6,123Less
      preferred stock dividend
            
            
            1,090
            
            
            
            59
            
            
            
            -Less
      amortization of preferred stock discount
            
            
            92
            
            
            
            5
            
            
            
            -Net
      income (loss) available to common shareholders
            
            $
            (7,031
            )
            
            $
            4,939
            
            
            $
            6,123Basic
      Earnings (Loss) per Common Share
            
            $
            (2.09
            )
            
            $
            1.47
            
            
            $
            1.75Diluted
      Earnings (Loss) per Common Share
            
            $
            (2.09
            )
            
            $
            1.47
            
            
            $
            1.72





Accumulated
Other Comprehensive Income


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





Accumulated
      BalanceYear
      Ended
              Dec
      2009
            
            
            Year
      Ended
              Dec
      2008
            
            
            Year
      Ended
              Dec
      2007Unrealized
      holding gains (losses) from securities available for sale
            
            $
            602
            
            
            $
            139
            
            
            $
            (245
            )Supplemental
      retirement program obligation
            
            
            (738
            )
            
            
            (1,151
            )
            
            
            (1,298
            )Net
      unrealized losses
            
            
            (136
            )
            
            
            (1,012
            )
            
            
            (1,543
            )Tax
      effect
            
            
            84
            
            
            
            407
            
            
            
            603Accumulated
      Other Comprehensive Loss, Net of Tax
            
            $
            (52
            )
            
            $
            (605
            )
            
            $
            (940
            )





Segments


In
accordance with accounting guidance, 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.





Stock
Based Compensation


At
December 31, 2009, the Company had share based employee compensation plans,
which are described more fully in Note 13.  The Company accounts for
these plans under the recognition and measurements principles of
GAAP.






- 30 -





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.




The
Company has 52.3% of its assets in commercial and commercial real estate
loans.  The following table segregates the commercial and commercial
real estate portfolio by property type, where the total of the property type
exceeds 1% of bank assets as of December 31, 2009. (dollars in
thousands)






Property
      Description
              
              BALANCE
              
              PERCENTAGE
                OF
      BANK
                ASSETSAccounts
      Receivable, Inventory, and Equipment
              
              50,025
              
              4.96%Office
      Building
              
              49,520
              
              4.91%Shopping
      Center
              
              41,110
              
              4.07%Land
      Only
              
              39,620
              
              3.92%Retail
      Business Store
              
              34,817
              
              3.45%Warehouse
              
              33,171
              
              3.29%Manufacturing
      Business/Industrial
              
              32,901
              
              3.26%Land
      Development Business
              
              28,956
              
              2.87%Land
      Development 1-4 Construction
              
              27,917
              
              2.77%Medical
      Building
              
              22,533
              
              2.23%Motel
              
              21,691
              
              2.15%Apartment
      Building
              
              18,494
              
              1.83%Life
      Insurance
              
              15,002
              
              1.49%Non-Margin
      Stock
              
              12,749
              
              1.26%Athletic/Recreational/School
              
              11,436
              
              1.13%Restaurant
              
              10,582
              
              1.05%


New
Accounting Pronouncements


In June
2009, the Financial Accounting Standards Board, (FASB) issued an accounting
standard which established the Codification to become the single source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities, with the exception of guidance issued by the U.S. Securities and
Exchange Commission (the SEC) and its staff.  All guidance contained
in the Codification carries an equal level of authority.  The
Codification is not intended to change GAAP, but rather is expected to simplify
accounting research by reorganizing current GAAP into approximately 90
accounting topics.  The Company adopted this accounting standard in
preparing the Consolidated Financial Statements for the period ended September
30, 2009.  The adoption of this accounting standard, which was
subsequently codified into ASC Topic 105, “Generally Accepted Accounting
Principles,” had no impact on retained earnings and will have no impact on the
Company’s financial position or results of operations.





In
December 2007, the FASB issued new accounting guidance on business
combinations.  The new guidance retains the fundamental requirements
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 guidance 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 guidance 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 guidance requires the acquirer to recognize
acquisition-related costs and restructuring costs separately from the business
combination as period expenses. This guidance 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 guidance 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
has determined the adoption of this guidance did not have a material effect on
the Company’s financial position or results of operations.





In
December 2007, the FASB issued new accounting guidance on
consolidations.  This new guidance 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 guidance 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 guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008.  Management has determined the adoption of this guidance did not
have a material effect on the Company’s financial position or results of
operations.






- 31 -





In March
2008, the FASB issued new accounting guidance on derivative instruments and
hedging activities.  This new guidance 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, and c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows.  This guidance is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008.  Management has determined the adoption of this
guidance did not have a material effect on the Company’s financial position or
results of operations.





In May
2009, the FASB issued new accounting guidance on subsequent
events.  The objective of this guidance is to establish general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued.  The new accounting guidance was effective for financial
statements issued for fiscal years and interim periods ending after June 15,
2009.  Management has determined the adoption of this guidance did not
have a material effect on the Company’s financial position or results of
operations.





In June
2009, the FASB issued new accounting guidance related to accounting for
transfers of financial assets.  The Board’s objective in issuing this
new guidance is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a
transferor’s continuing involvement, if any, in transferred financial
assets.  This guidance is effective as of the beginning of the first
annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period and for interim and annual reporting
periods thereafter.  Earlier application is
prohibited.  This guidance must be applied to transfers occurring on
or after the effective date.  Management has determined the adoption
of this guidance did not have a material effect on the Company’s financial
position or results of operations.





In June
2009, the FASB issued new accounting guidance on consolidation of variable
interest entities, which include: 1) the elimination of the exemption for
qualifying special purpose entities, 2) a new approach for determining who
should consolidate a variable interest entity, and 3) changes to when it is
necessary to reassess who should consolidate a variable interest
entity.  This new guidance is effective as of the beginning of the
first annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period, and for interim and annual
reporting periods thereafter. Earlier application is
prohibited.  Management has determined the adoption of this guidance
did not have a material effect on the Company’s financial position or results of
operations.







- 32 -





2.           SECURITIES


Securities
are summarized as follows: (dollars in thousands)





Dec
      2009
            
            
            Dec
      2008Amortized
            
            
            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
            
            
            410
            
            
            
            -
            
            
            
            -
            
            
            
            410
            
            
            
            100
            
            
            
            -
            
            
            
            -
            
            
            
            100Asset
      backed securities
            
            
            98
            
            
            
            -
            
            
            
            (11
            )
            
            
            87
            
            
            
            235
            
            
            
            8
            
            
            
            (16
            )
            
            
            227Collateralized
      mortgage obligations
            
            
            1,934
            
            
            
            50
            
            
            
            (362
            )
            
            
            1,622
            
            
            
            2,368
            
            
            
            65
            
            
            
            (653
            )
            
            
            1,780Mortgage
      backed securities
            
            
            867
            
            
            
            40
            
            
            
            -
            
            
            
            907
            
            
            
            989
            
            
            
            15
            
            
            
            (3
            )
            
            
            1,001Total
      Held to Maturity
            
            $
            4,084
            
            
            $
            91
            
            
            $
            (373
            )
            
            $
            3,802
            
            
            $
            4,467
            
            
            $
            89
            
            
            $
            (672
            )
            
            $
            3,884Available
      for Sale:Agency
      bonds
            
            $
            2,504
            
            
            $
            20
            
            
            $
            -
            
            
            $
            2,524
            
            
            $
            4,052
            
            
            $
            90
            
            
            $
            -
            
            
            $
            4,142Municipal
      bonds
            
            
            39,261
            
            
            
            1,073
            
            
            
            (166
            )
            
            
            40,168
            
            
            
            23,226
            
            
            
            462
            
            
            
            (79
            )
            
            
            23,609Collateralized
      mortgage obligations
            
            
            55,295
            
            
            
            259
            
            
            
            (103
            )
            
            
            55,451
            
            
            
            27,858
            
            
            
            215
            
            
            
            (94
            )
            
            
            27,979Mortgage
      backed securities
            
            
            10,906
            
            
            
            118
            
            
            
            (42
            )
            
            
            10,982
            
            
            
            18,083
            
            
            
            492
            
            
            
            (7
            )
            
            
            18,568Commercial
      paper
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            14,934
            
            
            
            -
            
            
            
            -
            
            
            
            14,934Corporate
      debt
            
            
            1,965
            
            
            
            -
            
            
            
            (557
            )
            
            
            1,408
            
            
            
            1,963
            
            
            
            -
            
            
            
            (940
            )
            
            
            1,023Bond
      money market funds
            
            
            39,025
            
            
            
            -
            
            
            
            -
            
            
            
            39,025
            
            
            
            766
            
            
            
            -
            
            
            
            -
            
            
            
            766Equity
      securities
            
            
            75
            
            
            
            -
            
            
            
            -
            
            
            
            75
            
            
            
            75
            
            
            
            -
            
            
            
            -
            
            
            
            75Total
      Available for Sale
            
            $
            149,031
            
            
            $
            1,470
            
            
            $
            (868
            )
            
            $
            149,633
            
            
            $
            90,957
            
            
            $
            1,259
            
            
            $
            (1,120
            )
            
            $
            91,096





Certain
securities, with amortized cost of $591,000 and fair value of $627,000 at
December 31, 2009, and amortized cost of $2.1 million and fair value of $2.1
million at December 31, 2008 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.  Certain securities, with amortized cost of $4.7 million and
fair value of $4.8 million at December 31, 2009, and 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, 2009 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
            
            $
            -
            
            
            $
            -
            
            
            
            -
            
            
            $
            1,000
            
            
            $
            1,013
            
            
            
            4.89
            %Due
      after 1 year through 5 years
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,504
            
            
            
            1,511
            
            
            
            2.01
            %Municipal
      bonds:Due
      in one year or less
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,363
            
            
            
            2,388
            
            
            
            4.77
            %Due
      after 1 year through 5 years
            
            
            535
            
            
            
            536
            
            
            
            7.51
            %
            
            
            10,014
            
            
            
            10,507
            
            
            
            5.31
            %Due
      after 5 years through 10 years
            
            
            240
            
            
            
            240
            
            
            
            7.85
            %
            
            
            26,884
            
            
            
            27,273
            
            
            
            5.10
            %Certificate
      of deposit:Due
      in one year or less
            
            
            410
            
            
            
            410
            
            
            
            1.38
            %
            
            
            -
            
            
            
            -
            
            
            
            -Asset
      backed securities
            
            
            98
            
            
            
            87
            
            
            
            1.77
            %
            
            
            -
            
            
            
            -
            
            
            
            -Collateralized
      mortgage obligations
            
            
            1,934
            
            
            
            1,622
            
            
            
            4.18
            %
            
            
            55,295
            
            
            
            55,451
            
            
            
            2.42
            %Mortgage
      backed securities
            
            
            867
            
            
            
            907
            
            
            
            4.84
            %
            
            
            10,906
            
            
            
            10,982
            
            
            
            3.19
            %Corporate
      debt:Due
      after 10 years
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,965
            
            
            
            1,408
            
            
            
            1.01
            %Bond
      money market funds
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            39,025
            
            
            
            39,025
            
            
            
            .01
            %Equity
      securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            75
            
            
            
            75
            
            
            
            -Total
            
            $
            4,084
            
            
            $
            3,802
            
            
            
            4.82
            %
            
            $
            149,031
            
            
            $
            149,633
            
            
            
            2.57
            %








- 33 -





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
      2009
            
            
            Dec
      2008
            
            
            Dec
      2007Proceeds
      from sales
            
            $
            138,424
            
            
            $
            8,959
            
            
            $
            4,464Gross
      gains on sales
            
            
            2,083
            
            
            
            -
            
            
            
            -Gross
      losses on sales
            
            
            37
            
            
            
            -
            
            
            
            -Other
      than temporary impairment  losses
            
            
            221
            
            
            
            437
            
            
            
            -Tax
      expense/benefit on realized security gains/losses
            
            
            723
            
            
            
            (173
            )
            
            
            -





During
2009, $221,000 of other than temporary impairment was recorded on held to
maturity securities.  The entire unrealized loss was considered to be
related to credit and the cost basis of these investments was reduced to zero
based on the Company’s analysis of expected cash flows.  Therefore, no
amounts were recognized in other comprehensive income.  During 2008,
$437,000 of other than temporary impairment was recorded on an equity security
which was subsequently redeemed.





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
      2009
            
            
            Dec
      2008
            
            
            Dec
      2007Taxable
      interest income
            
            $
            3,351
            
            
            $
            2,025
            
            
            $
            1,830Non-taxable
      interest income
            
            
            813
            
            
            
            853
            
            
            
            858Total
      Interest Income
            
            $
            4,164
            
            
            $
            2,878
            
            
            $
            2,688





At
December 31, 2009, the Company does not  intend to sell investments
and it is not more-likely-than-not that the Company will be required to sell the
investments before recovery of their amortized cost basis, which may be
maturity. Based on this analysis, the Company does not consider these
investments to be other than temporarily impaired.  Investments that
have been in a continuous unrealized loss position as of December 31, 2009 and
2008 are summarized as follows: (dollars in thousands)





As
      of December 31, 2009
            
            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
            
            
            $
            (6
            )
            
            $
            24
            
            
            $
            (5
            )
            
            $
            87
            
            
            $
            (11
            )Collateralized
      mortgage obligations
            
            
            12,008
            
            
            
            (111
            )
            
            
            913
            
            
            
            (354
            )
            
            
            12,921
            
            
            
            (465
            )Mortgage
      backed securities
            
            
            8,375
            
            
            
            (42
            )
            
            
            26
            
            
            
            -
            
            
            
            8,401
            
            
            
            (42
            )Corporate
      debt
            
            
            -
            
            
            
            -
            
            
            
            1,408
            
            
            
            (557
            )
            
            
            1,408
            
            
            
            (557
            )Municipal
      bonds
            
            
            10,188
            
            
            
            (140
            )
            
            
            638
            
            
            
            (26
            )
            
            
            10,826
            
            
            
            (166
            )Total
      Temporarily Impaired Securities
            
            $
            30,634
            
            
            $
            (299
            )
            
            $
            3,009
            
            
            $
            (942
            )
            
            $
            33,643
            
            
            $
            (1,241
            )





At
December 31, 2009, the Company had two securities in the available for sale
portfolio with a face amount of $2.0 million and an unrealized loss of
$557,000.  These two securities are rated A1 and BAA3 by Moodys
indicating these securities are considered of low to moderate 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.  Additionally, the Company had 35 securities in the held to
maturity portfolio with a face amount of $1.3 million and an unrealized loss of
$354,000.  These securities consisted of small balances ranging from
$1,000 to $188,000, with an average balance of $36,000.  Management
believes the small illiquid nature of these securities resulted in a depressed
market value.  As of December 31, 2009, all required cash flows had
been received on each of the 35 securities, an indication for receiving future
expected cash flows.





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
            )






- 34 -





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 $19.9
million at December 31, 2009, $22.5 million at December 31, 2008, and $10.5
million at December 31, 2007.  The Company would have recorded
interest income of $2.0 million, $1.3 million, and $958,000 for the years ended
December 31, 2009, 2008 and 2007 if loans on non-accrual status had been current
in accordance with their original terms.  Actual interest collected
and recognized was $404,000, $284,000, and $252,000 for the years ended December
31, 2009, 2008, and 2007, respectively.  The principal balance of
loans 90 days past due and still accruing totaled $1.4 million and $518,000 at
December 31, 2009 and 2008, 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, 2009, December 31, 2008, and December 31, 2007 on these
restructured loans was $499,000, $1.3 million, and $874,000,
respectively.





The
Company originates and purchases commercial and commercial mortgage loans, which
totaled $527.9 million and $556.1 million at December 31, 2009 and 2008,
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.  Collateral for
commercial and commercial mortgage 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
and commercial mortgage loans are considered to involve a higher degree of risk
than residential real estate loans.  However, commercial and
commercial mortgage loans generally carry a higher yield and are made for a
shorter term than residential 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, 2009 was $8.7
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 $15.6 million and $16.0 million at December 31, 2009 and 2008,
respectively.  As of December 31, 2009 and 2008, the Bank was in
compliance with this limitation.





Aggregate
loans to senior officers and directors included above were $4.2 million and $4.2
million as of December 31, 2009 and 2008, 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, 2009, loans of $3.4
million were disbursed to officers and directors and repayments of $3.4 million
were received from officers and directors.





At
December 31, 2009 and 2008, deposit overdrafts of $135,000 and $207,000,
respectively, were included in portfolio loans.


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





Year
      Ended
              Dec
      2009
            
            
            Year
      Ended
              Dec
      2008
            
            
            Year
      Ended
              Dec
      2007Beginning
      balance
            
            $
            8,589
            
            
            $
            6,972
            
            
            $
            6,598Provision
      for loan losses
            
            
            16,218
            
            
            
            4,292
            
            
            
            1,361Charge-offs
            
            
            (12,039
            )
            
            
            (3,041
            )
            
            
            (1,466
            )Recoveries
            
            
            345
            
            
            
            366
            
            
            
            479Ending
      Balance
            
            $
            13,113
            
            
            $
            8,589
            
            
            $
            6,972





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





As
      Of
            
            Dec
      2009
            
            
            Dec
      2008
            
            
            Dec
      2007Impaired
      loans with a valuation reserve
            
            $
            27,448
            
            
            $
            17,170
            
            
            $
            10,549Impaired
      loans with no valuation reserve
            
            
            11,132
            
            
            
            6,646
            
            
            
            841Total
      Impaired Loans
            
            $
            38,580
            
            
            $
            23,816
            
            
            $
            11,390Valuation
      reserve on impaired loans
            
            $
            2,935
            
            
            $
            2,087
            
            
            $
            956Average
      impaired loans
            
            $
            30,938
            
            
            $
            14,682
            
            
            $
            7,513Interest
      income recognized on impaired loans
            
            $
            575
            
            
            $
            325
            
            
            $
            297Cash
      basis interest included above
            
            $
            404
            
            
            $
            284
            
            
            $
            252





All loans
were analyzed based on collateral analysis.






- 35 -





4.
            LOAN
      SERVICING ACTIVITIES


At
December 31, 2009 and 2008, the Bank was servicing loans for others amounting to
$111.6 million and $94.6 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.





Net gain
on sale of loans was $2.6 million, $1.4 million, and $1.5 million for the years
ended December 31, 2009, 2008, and 2007, respectively.  The Bank is
obligated to repurchase certain loans sold to others that become delinquent as
defined by the various agreements.  At December 31, 2009 and 2008,
these obligations were approximately $2.1 million and $4.0 million,
respectively.  Management believes it is remote that, as of December
31, 2009, 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
      2009
            
            
            Dec
      2008Loans
            
            $
            2,782
            
            
            $
            3,203Securities
            
            
            751
            
            
            
            574Total
      Accrued Interest Receivable
            
            $
            3,533
            
            
            $
            3,777





6.
            PREMISES
      AND EQUIPMENT


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





As
      Of
            
            Dec
      2009
            
            
            Dec
      2008Land
            
            $
            2,485
            
            
            $
            2,521Buildings
      and improvements
            
            
            15,561
            
            
            
            15,730Furniture
      and equipment
            
            
            8,615
            
            
            
            8,831Total
            
            
            26,661
            
            
            
            27,082Accumulated
      depreciation
            
            
            (11,510
            )
            
            
            (11,759
            )Total
      Premises and Equipment
            
            $
            15,151
            
            
            $
            15,323





Depreciation
expense included in operations for the years ended December 31, 2009, 2008 and
2007 totaled $1.3 million, $1.4 million, and $1.5 million,
respectively.





7.
            DEPOSITS


Deposits
are summarized as follows: (dollars in thousands)





Dec
      2009
            
            
            Dec
      2008Amount
            
            
            Weighted
      Average Rate
            
            
            Amount
            
            
            Weighted
      Average RateNon-interest
      bearing
            
            $
            80,938
            
            
            
            
            
            
            $
            71,726Checking
            
            
            170,226
            
            
            
            1.19
            %
            
            
            110,944
            
            
            
            1.04
            %Savings
            
            
            42,520
            
            
            
            0.15
            %
            
            
            40,862
            
            
            
            0.15
            %Money
      market
            
            
            207,089
            
            
            
            0.99
            %
            
            
            156,500
            
            
            
            0.90
            %Total
      transaction accounts
            
            
            500,773
            
            
            
            0.83
            %
            
            
            380,032
            
            
            
            0.69
            %Certificates
      accounts:Less
      than one year
            
            
            44,316
            
            
            
            1.20
            %
            
            
            148,093
            
            
            
            2.95
            %12-23
      months
            
            
            92,532
            
            
            
            2.52
            %
            
            
            24,920
            
            
            
            3.72
            %24-35
      months
            
            
            137,466
            
            
            
            3.32
            %
            
            
            90,520
            
            
            
            3.90
            %36-59
      months
            
            
            46,046
            
            
            
            3.94
            %
            
            
            34,772
            
            
            
            4.29
            %60-120
      months
            
            
            19,172
            
            
            
            4.06
            %
            
            
            32,302
            
            
            
            4.36
            %Total
      certificate accounts
            
            
            339,532
            
            
            
            2.95
            %
            
            
            330,607
            
            
            
            3.55
            %Total
      Deposits
            
            $
            840,305
            
            
            
            1.69
            %
            
            $
            710,639
            
            
            
            2.02
            %




Certificate
accounts include certificates of deposit and wholesale deposits.  At
December 31, 2009 and 2008, certificate accounts in amounts of $100,000 or more
totaled $101.9 million and $102.2 million, respectively.






- 36 -




A summary
of certificate accounts by scheduled maturities at December 31, 2009 is as
follows: (dollars in thousands)




2010
              
              2011
              
              2012
              
              2013
              
              2014
              
              Thereafter
              
              Total1.99%
      or less
              $
              79,194
              $
              12,216
              $
              358
              $
              69
              $
              -
              $
              -
              $
              91,8372.00%
      - 2.99%
              
              53,126
              
              31,175
              
              3,935
              
              5,126
              
              1,291
              
              1,402
              
              96,0553.00%
      - 3.99%
              
              29,315
              
              16,732
              
              2,161
              
              4,124
              
              100
              
              534
              
              52,9664.00%
      - 4.99%
              
              61,659
              
              16,158
              
              17,269
              
              548
              
              325
              
              62
              
              96,021Over
      5.00
              
              511
              
              1,466
              
              676
              
              -
              
              -
              
              -
              
              2,653Total
      Certificate Accounts
              $
              223,805
              $
              77,747
              $
              24,399
              $
              9,867
              $
              1,716
              $
              1,998
              $
              339,532







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





Year
      Ended
              Dec
      2009
            
            
            Year
      Ended
              Dec
      2008
            
            
            Year
      Ended
              Dec
      2007Checking
            
            $
            1,614
            
            
            $
            918
            
            
            $
            1,698Savings
            
            
            65
            
            
            
            63
            
            
            
            63Money
      market
            
            
            2,235
            
            
            
            2,867
            
            
            
            5,869Certificates
      accounts
            
            
            10,949
            
            
            
            12,876
            
            
            
            15,029Total
      Interest Expense
            
            $
            14,863
            
            
            $
            16,724
            
            
            $
            22,659





Aggregate
deposits to senior officers and directors included above were $4.4 million as of
December 31, 2009.  Such deposits 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 depositors.







8.
            FEDERAL
      HOME LOAN BANK ADVANCES


The
Company was eligible to borrow from the FHLB additional amounts up to $83.5
million and $56.8 million at December 31, 2009 and 2008,
respectively.  The following FHLB advances were secured by assets
totaling $286.5 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
              Rate2010
            
            $
            -
            
            
            
            -2011
            
            
            -
            
            
            
            -2012
            
            
            -
            
            
            
            -2013
            
            
            55,000
            
            
            
            2.99
            %2014
            
            
            -
            
            
            
            -Thereafter
            
            
            -
            
            
            
            -Total
      FHLB Advances
            
            $
            55,000
            
            
            
            2.99
            %





At
December 31, 2009, FHLB advances totaling $55.0 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, require
quarterly distributions of interest and 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.





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.





- 37 -





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


Effective
February 2, 2009, the Company entered into a credit agreement with Cole Taylor
Bank under which the Company has the authority to borrow, repay and reborrow, up
to $5 million during a period ending June 14, 2010, none of which was used as of
December 31, 2009.  Advances are to bear interest at a floating
variable rate equal to the prevailing three-month LIBOR rate plus 2.25% per
annum (2.5% on December 31, 2009); in no event shall the rate be less than
5.0%.  Interest is payable quarterly and the repayment of advances is
secured by a pledge of the Bank’s capital stock.





The
Company had a revolving note with Bank of America, N.A with an available balance
of $17.5 million which matured February 15, 2009 and has now
expired.  The outstanding balance was zero at December 31,
2008.





Other
Borrowings


The
Company has a $5.0 million overdraft line of credit with the Federal Home Loan
Bank, none of which was used as of December 31, 2009.  The line of
credit had a balance of $4.7 million as of December 31, 2008.  The
line of credit accrues interest at a variable rate (2.5% on December 31,
2009).  The Company also has letters of credit for $283,000 and
$289,000, as of December 31, 2009 and 2008, respectively, none of which was used
as of either year end.




10.
            INCOME
      TAXES


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





Year
      Ended
            
            
            Year
      Ended
            
            
            Year
      EndedDec
      2009
            
            
            Dec
      2008
            
            
            Dec
      2007Current:Federal
            
            $
            (1,263
            )
            
            $
            2,666
            
            
            $
            2,610State
            
            
            -
            
            
            
            768
            
            
            
            722DeferredFederal
            
            
            (1,671
            )
            
            
            (646
            )
            
            
            (164
            )State
            
            
            (622
            )
            
            
            (188
            )
            
            
            (32
            )Income
      Tax Provision (Benefit)
            
            $
            (3,556
            )
            
            $
            2,600
            
            
            $
            3,136





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
      2009
            
            
            Dec
      2008
            
            
            Dec
      2007Income
      tax provision (benefit) at federal statutory rate
            
            $
            (3,197
            )
            
            $
            2,584
            
            
            $
            3,148State
      tax, net of federal tax benefit (provision)
            
            
            (411
            )
            
            
            383
            
            
            
            456Tax
      exempt interest
            
            
            (291
            )
            
            
            (303
            )
            
            
            (300
            )Increase
      in cash surrender value
              of
      life insurance
            
            
            (166
            )
            
            
            (175
            )
            
            
            (171
            )Impairment
      of goodwill
            
            
            474
            
            
            
            -
            
            
            
            -Community
      development tax credit
            
            
            (108
            )
            
            
            -
            
            
            
            -Other,
      net
            
            
            143
            
            
            
            111
            
            
            
            3Income
      Tax Provision (Benefit)
            
            $
            (3,556
            )
            
            $
            2,600
            
            
            $
            3,136






- 38 -




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, 2009 and 2008,
respectively.  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.
      2009
            
            
            Dec.
      2008Deferred
      tax assets:Bad
      debt reserves, net
            
            $
            5,450
            
            
            $
            3,388Capital
      loss on securities available for sale
            
            
            247
            
            
            
            165Sale
      leaseback gain
            
            
            649
            
            
            
            700Other
            
            
            308
            
            
            
            168Deferred
      compensation
            
            
            2,285
            
            
            
            2,415Total
      deferred tax assets
            
            
            8,939
            
            
            
            6,836Deferred
      tax liabilities:Difference
      in basis of fixed assets
            
            
            480
            
            
            
            402FHLB
      dividend
            
            
            204
            
            
            
            204Unrealized
      gain on securities available for sale
            
            
            208
            
            
            
            50Deferred
      fees
            
            
            440
            
            
            
            544Total
      deferred tax liabilities
            
            
            1,332
            
            
            
            1,200Net
      Deferred Tax Asset
            
            $
            7,607
            
            
            $
            5,636





No
valuation allowance was deemed necessary for the deferred tax
asset.  The Company’s tax years still subject to examination by taxing
authorities are years subsequent to 2005.




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, 2009, the
Company and the Bank met all capital adequacy requirements to which they were
subject.





As of
December 31, 2009, 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.






- 39 -







A summary
of capital amounts and ratios as of December 31, 2009 and 2008:


(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, 2009Total
      risk-based capital(to
      risk-weighted assets)Indiana
      Bank and Trust Company
            
            $
            104,060
            
            
            
            12.20
            %
            
            $
            68,222
            
            
            
            8.0
            %
            
            $
            85,278
            
            
            
            10.0
            %Indiana
      Community Bancorp Consolidated
            
            $
            109,383
            
            
            
            12.81
            %
            
            $
            68,289
            
            
            
            8.0
            %
            
            $
            85,361
            
            
            
            10.0
            %Tier
      1 risk-based capital(to
      risk-weighted assets)Indiana
      Bank and Trust Company
            
            $
            93,370
            
            
            
            10.95
            %
            
            $
            34,111
            
            
            
            4.0
            %
            
            $
            51,167
            
            
            
            6.0
            %Indiana
      Community Bancorp Consolidated
            
            $
            98,683
            
            
            
            11.56
            %
            
            $
            34,144
            
            
            
            4.0
            %
            
            $
            51,217
            
            
            
            6.0
            %Tier
      1 leverage capital(to
      average assets)Indiana
      Bank and Trust Company
            
            $
            93,370
            
            
            
            8.86
            %
            
            $
            42,140
            
            
            
            4.0
            %
            
            $
            52,675
            
            
            
            5.0
            %Indiana
      Community Bancorp Consolidated
            
            $
            98,683
            
            
            
            9.36
            %
            
            $
            42,172
            
            
            
            4.0
            %
            
            $
            52,715
            
            
            
            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, 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
            %





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 in dividends
to its sole shareholder Indiana Community Bancorp for the year ended December
2008.  The Bank did not request regulatory approval to pay any
dividends to the Company for the year ended December 2009 and the Bank does not
anticipate requesting regulatory approval to pay any dividends to the Company in
2010.





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 .








- 40 -





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.




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 $271,000, $626,000 and $1.2
million for the years ended December 2009, 2008 and 2007,
respectively.  Cash contributions to the multi-employer pension plan
for these same periods were $335,000, $208,000 and $1.2 million,
respectively.  The Company chose 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, 2009 and 2008, and amount recognized in the Company's consolidated
statements of income for the years ended December 31,2009,2008 and 2007, as well as the
projected benefit cost for 2010:  (dollars in thousands)





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





A
reconciliation of the prior and ending balances of the Benefit Obligation for
2009 and 2008 is as follows: (dollars in thousands)





Dec
      2009
            
            
            Dec
      2008Benefit
      obligation at beginning of year
            
            $
            4,257
            
            
            $
            4,162Interest
      cost
            
            
            228
            
            
            
            242Service
      cost
            
            
            104
            
            
            
            104Actuarial
      (gain)/loss
            
            
            (324
            )
            
            
            (48
            )Benefits
      paid during year
            
            
            (208
            )
            
            
            (203
            )Benefit
      Obligation at End of Year (unfunded status)
            
            $
            4,057
            
            
            $
            4,257





The
liability recognized in the balance sheet at December 31, 2009 and 2008 was $4.1
million and $4.3 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
      2009
            
            
            Dec
      2008Net
      loss, net of tax of ($155) and ($297)
            
            $
            236
            
            
            $
            453Prior
      service cost, net of tax of ($138) and ($159)
            
            
            209
            
            
            
            242Total
            
            $
            445
            
            
            $
            695






- 41 -




Other
changes in plan assets and benefit obligations recognized in other comprehensive
income are as follows for the years ended December 31, 2009 and 2008: (dollars
in thousands)





Dec
      2009
            
            
            Dec
      2008Net
      gain, net of tax of $143 and $37
            
            $
            (217
            )
            
            $
            (56
            )Amortization
      of prior service cost, net of tax of $21 and $21
            
            
            (33
            )
            
            
            (33
            )Total
      recognized in other comprehensive income
            
            $
            (250
            )
            
            $
            (89
            )Total
      recognized in net periodic benefit cost and other comprehensive income,
      net of tax of ($3) and ($118)
            
            $
            4
            
            
            $
            180





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 zero and $54,000, respectively.  As of
December 31, 2009 and 2008, the projected benefit obligation was $4.1 million
and $4.3 million, respectively.





Prior
service cost is amortized over the estimated remaining employee service lives of
approximately nine years.  The Company expects to make no
contributions to the plan in 2010.  The Bank anticipates paying
benefits over the next five years and in the aggregate for the five years
thereafter as follows:  2010 - $264,000, 2011 - $264,000, 2012 -
$204,000, 2013 - $230,000, 2014 - $230,000 and  2015 through 2019 -
$1,996,000.




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 1.5% of an
individual’s total eligible salary.  The Company contributed $255,000,
$244,000 and $136,000, during the years ended December 31, 2009, 2008 and 2007,
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, 2009, the plans were authorized to
grant additional options to purchase 329,925 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 $75,000, $155,000 and
$137,000 in the income statements for the years ended December 31, 2009, 2008,
and 2007, respectively.  The related income tax benefit recognized in
the same years was $28,000, $53,000, and $46,000 respectively.





No
options were granted during the years ended December 31, 2009 and
2007.  The weighted average grant date fair value of options granted
during the year ended December 31, 2008 was $2.48.  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.






- 42 -




The
following is the stock option activity for the years ended December 31, 2009,
2008 and 2007 and the stock options outstanding at the end of the respective
periods:





Options
            
            Shares
            
            
            Weighted
      Average
              Exercise
      Price
            
            Weighted
      Average
              Life
              (in
      years)
            
            Aggregate
              Intrinsic
              ValueOutstanding
      December 31, 2006
            
            
            607,493Forfeited
            
            
            (53,531
            )Exercised
            
            
            (148,010
            )Outstanding
      December 31, 2007
            
            
            405.952Granted
            
            
            68,500Forfeited
            
            
            (81,174
            )Outstanding
      December 31, 2008
            
            
            393,278
            
            
            $
            22.80Forfeited
            
            
            (92,313
            )
            
            
            22.98Outstanding
      December 31, 2009
            
            
            300,965
            
            
            $
            22.75
            
            5.1
            
            $
            -Exercisable
      at December 31, 2009
            
            
            265,400
            
            
            $
            22.82
            
            4.7
            
            $
            -





Options
outstanding at December 31, 2009 include vested options and options expected to
vest.  As of December 31, 2009, 2008, and 2007, there was
approximately $29,000, $103,000 and $89,000 of unrecognized compensation cost
related to the unvested shares, respectively.  The December 31, 2009
cost is expected to be recognized over the remaining vesting period, which
approximates 2 years.  No options were exercised in 2009 and
2008.  During 2007, the Company received $3.3 million from stock
options exercised.  Additionally, the Company received a tax benefit
from options which had been exercised of $339,000 in 2007.





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
      2009
            
            
            Dec
      2008Commitments
      to extend credit:Commercial
      mortgage and commercial loans (1)
            
            $
            93,200
            
            
            $
            107,476Residential
      mortgage loans
            
            
            12,606
            
            
            
            34,641Revolving
      home equity lines of credit
            
            
            37,273
            
            
            
            39,633Other
            
            
            17,217
            
            
            
            18,565Standby
      letters of credit
            
            
            2,121
            
            
            
            2,922Commitments
      to sell loans:Residential
      mortgage loans
            
            
            10,650
            
            
            
            31,990Commercial
      mortgage and commercial loans
            
            
            5,760
            
            
            
            -





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






- 43 -


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 $470,000, $491,000,
and $242,000 for the years ended December 31, 2009, 2008, and 2007,
respectively.  As of December 31, 2009, future minimum annual rental
payments under these leases are as follow: (dollars in thousands)





Year
      Ended December
            
            Amount2010
            $
            4772011
            
            4742012
            
            3282013
            
            3202014
            
            316Thereafter
            
            2,736Total
      Minimum Operating Lease Payments
            $
            4,651






15.
            FAIR
      VALUE OF FINANCIAL INSTRUMENTS





Fair
value is defined 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.  GAAP established 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 and 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.  Bond money
market funds are included in Level 1.  If quoted market prices are not
available, then fair values are estimated by using pricing models and quoted
prices of securities with similar characteristics.  The fair value
measurements consider observable data that may include dealer quotes, market
spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade
execution data, market consensus prepayment speeds, credit information and the
bond’s terms and conditions.  Level 2 securities include
collateralized mortgage obligations, mortgage backed securities, corporate debt,
and agency and municipal bonds.  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.






- 44 -





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 fair value hierarchy in which the fair value
measurements fall at December 31, 2009 and 2008.  (dollars in
thousands)





Fair
      Value Measurements UsingQuoted Prices in Active Markets for Identical Assets
            
            
            Significant
      Other Observable Inputs
            
            
            Significant
      Unobservable InputsLevel
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            Fair
      ValueDecember
      31, 2009Agency
      bonds
            
            $
            -
            
            
            $
            2,524
            
            
            $
            -
            
            
            $
            2,524Municipal
      bonds
            
            
            -
            
            
            
            40,168
            
            
            
            -
            
            
            
            40,168Collateralized
      mortgage obligations
            
            
            -
            
            
            
            55,451
            
            
            
            -
            
            
            
            55,451Mortgage
      backed securities
            
            
            -
            
            
            
            10,982
            
            
            
            -
            
            
            
            10,982Corporate
      debt
            
            
            -
            
            
            
            1,408
            
            
            
            -
            
            
            
            1,408Bond
      money market funds
            
            
            39,025
            
            
            
            -
            
            
            
            -
            
            
            
            39,025Equity
      securities
            
            
            -
            
            
            
            -
            
            
            
            75
            
            
            
            75Securities
      Available for Sale
            
            $
            39,025
            
            
            $
            110,533
            
            
            $
            75
            
            
            $
            149,633December
      31, 2008Agency
      bonds
            
            $
            -
            
            
            $
            4,142
            
            
            $
            -
            
            
            $
            4,142Municipal
      bonds
            
            
            -
            
            
            
            23,609
            
            
            
            -
            
            
            
            23,609Collateralized
      mortgage obligations
            
            
            -
            
            
            
            27,979
            
            
            
            -
            
            
            
            27,979Mortgage
      backed securities
            
            
            -
            
            
            
            18,568
            
            
            
            -
            
            
            
            18,568Commercial
      paper
            
            
            -
            
            
            
            14,934
            
            
            
            -
            
            
            
            14,934Corporate
      debt
            
            
            -
            
            
            
            1,023
            
            
            
            -
            
            
            
            1,023Bond
      money market funds
            
            
            766
            
            
            
            -
            
            
            
            -
            
            
            
            766Equity
      securities
            
            
            -
            
            
            
            -
            
            
            
            75
            
            
            
            75Securities
      Available for Sale
            
            $
            766
            
            
            $
            90,255
            
            
            $
            75
            
            
            $
            91,096





There was
no change between the beginning and ending balance for the 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, 2009.


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








- 45 -





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 fair value hierarchy in which the fair
value measurements fall at December 31, 2009 and 2008.  (dollars in
thousands)





Fair
      Value Measurements UsingQuoted Prices in Active Markets for Identical Assets
            
            
            Significant
      Other Observable Inputs
            
            
            Significant
      Unobservable InputsLevel
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            Fair
      ValueDecember
      31, 2009Impaired
      loans
            
            
            -
            
            
            
            -
            
            
            
            25,205
            
            
            
            25,205Other
      real estate owned
            
            
            -
            
            
            
            -
            
            
            
            2,081
            
            
            
            2,081December
      31, 2008Impaired
      loans
            
            
            -
            
            
            
            -
            
            
            
            15,019
            
            
            
            15,019





At
December 31, 2009, collateral dependent impaired loans which had an evaluation
adjustment during 2009 had an aggregate cost of $27.3 million and had been
written down to a fair value of $25.2 million measured using Level 3 inputs
within the fair value hierarchy.  At December 31, 2008, collateral
dependent impaired loans 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 and
discounting factors.





At
December 31, 2009, other real estate owned was reported at fair value less cost
to sell of $2.1 million measured using Level 3 inputs within the fair value
hierarchy.  Level 3 inputs for other real estate owned included third
party appraisals adjusted for cost to sell.





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





Dec
      2009
            
            
            Dec
      2008Carrying
              Value
            
            
            Fair
              Value
            
            
            Carrying
              Value
            
            
            Fair
              ValueAssets:Cash
      and cash equivalents
            
            $
            52,061
            
            
            $
            52,061
            
            
            $
            22,586
            
            
            $
            22,586Securities
      available for sale
            
            
            149,633
            
            
            
            149,633
            
            
            
            91,096
            
            
            
            91,096Securities
      held to maturity
            
            
            4,084
            
            
            
            3,802
            
            
            
            4,467
            
            
            
            3,884Loans
      held for sale
            
            
            6,075
            
            
            
            6,213
            
            
            
            2,856
            
            
            
            2,907Loans,
      net
            
            
            724,668
            
            
            
            735,599
            
            
            
            792,146
            
            
            
            795,812Accrued
      interest receivable
            
            
            3,533
            
            
            
            3,533
            
            
            
            3,777
            
            
            
            3,777Federal
      Home Loan Bank stock
            
            
            8,329
            
            
            
            8,329
            
            
            
            8,329
            
            
            
            8,329Liabilities:Deposits
            
            
            840,305
            
            
            
            845,691
            
            
            
            710,639
            
            
            
            719,224FHLB
      advances
            
            
            55,000
            
            
            
            55,022
            
            
            
            129,926
            
            
            
            130,868Junior
      subordinated debt
            
            
            15,464
            
            
            
            4,154
            
            
            
            15,464
            
            
            
            15,481Short-term
      borrowings
            
            
            -
            
            
            
            -
            
            
            
            4,713
            
            
            
            4,713Advance
      payments by borrowers for taxes and insurance
            
            
            157
            
            
            
            157
            
            
            
            369
            
            
            
            369Accrued
      interest payable
            
            
            176
            
            
            
            176
            
            
            
            328
            
            
            
            328Financial
      Instruments:Commitments
      to extend credit
            
            
            71
            
            
            
            71
            
            
            
            135
            
            
            
            135





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.






- 46 -





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.  Loans held
for sale are based on current market prices.





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.  Fair
value of Junior Subordinated Debt is based on quoted market prices for a similar
liability when traded as an asset in an active market.





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, 2009.  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
      2009
            
            
            Dec
      2008Condensed Balance Sheets(Parent Company
      only)Assets:Cash
            
            $
            4,425
            
            
            $
            842Investment
      in subsidiary
            
            
            95,333
            
            
            
            99,943Receivable
      from subsidiary
            
            
            -
            
            
            
            21,500Other
            
            
            953
            
            
            
            712Total
      Assets
            
            $
            100,711
            
            
            $
            122,997Liabilities:Junior
      subordinated debt
            
            $
            15,464
            
            
            $
            15,464Payable
      to subsidiary
            
            
            -
            
            
            
            15,306Other
            
            
            323
            
            
            
            215Total
      liabilities
            
            
            15,787
            
            
            
            30,985Shareholders'
      equity
            
            
            84,924
            
            
            
            92,012Total
      Liabilities and Shareholders' Equity
            
            $
            100,711
            
            
            $
            122,997





Period
      Ended
            
            Dec
      2009
            
            
            Dec
      2008
            
            
            Dec
      2007Condensed Statements of
      Operations (Parent Company
      only)Dividends
      from subsidiary
            
            $
            -
            
            
            $
            2,732
            
            
            $
            11,246Interest
      on securities
            
            
            12
            
            
            
            23
            
            
            
            33Total
      income
            
            
            12
            
            
            
            2,755
            
            
            
            11,279Interest
      on junior subordinated debt
            
            
            411
            
            
            
            765
            
            
            
            1,110Interest
      on long term debt
            
            
            -
            
            
            
            -
            
            
            
            6Non
      interest expenses
            
            
            598
            
            
            
            801
            
            
            
            820Total
      expenses
            
            
            1,009
            
            
            
            1,566
            
            
            
            1,936Income
      (loss) before taxes and change in undistributed earnings of
      subsidiary
            
            
            (997
            )
            
            
            1,189
            
            
            
            9,343Applicable
      income tax benefit
            
            
            (386
            )
            
            
            (545
            )
            
            
            (689
            )Income
      (loss) before change in undistributed earnings of
    subsidiary
            
            
            (611
            )
            
            
            1,734
            
            
            
            10,032Increase/(decrease)
      in undistributed earnings of subsidiary
            
            
            (5,238
            )
            
            
            3,269
            
            
            
            (3,909
            )Net
      Income (Loss)
            
            $
            (5,849
            )
            
            $
            5,003
            
            
            $
            6,123






- 47 -






Period
      Ended
            
            Dec
      2009
            
            
            Dec
      2008
            
            
            Dec
      2007Condensed Statements of Cash
      Flows (Parent
      Company only)Operating
      Activities:Net
      income/(loss)
            
            $
            (5,849
            )
            
            $
            5,003
            
            
            $
            6,123Adjustments
      to reconcile net income to net cash provided by operating
      activities:Increase
      in other assets
            
            
            (241
            )
            
            
            (3
            )
            
            
            (131
            )Increase/(decrease)
      in other liabilities
            
            
            (198
            )
            
            
            22
            
            
            
            1,026(Increase)/decrease
      in undistributed earnings of subsidiary
            
            
            5,238
            
            
            
            (3,269
            )
            
            
            3,909Net
      cash provided/(used) by operating activities
            
            
            (1,050
            )
            
            
            1,753
            
            
            
            10,927Investing
      Activities:Investment
      in subsidiary
            
            
            (15,000
            )
            
            
            -
            
            
            
            -Net
      cash used by investing activities
            
            
            (15,000
            )
            
            
            -
            
            
            
            -Financing
      Activities:Payment
      of dividends on preferred stock
            
            
            (994
            )
            
            
            -
            
            
            
            -Payment
      of dividends on common stock
            
            
            (873
            )
            
            
            (2,828
            )
            
            
            (2,820
            )Preferred
      stock and warrants issued
            
            
            21,500
            
            
            
            -
            
            
            
            -Repurchase
      shares of common stock
            
            
            -
            
            
            
            (286
            )
            
            
            (10,976
            )Excess
      tax benefit related to stock based compensation
            
            
            -
            
            
            
            -
            
            
            
            339Exercise
      of stock options
            
            
            -
            
            
            
            -
            
            
            
            3,327Net
      cash provided/(used) by financing activities
            
            
            19,633
            
            
            
            (3,114
            )
            
            
            (10,130
            )Net
      increase/(decrease) in cash
            
            
            3,583
            
            
            
            (1,361
            )
            
            
            797Cash
      at beginning of period
            
            
            842
            
            
            
            2,203
            
            
            
            1,406Cash
      at End of Period
            
            $
            4,425
            
            
            $
            842
            
            
            $
            2,203







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, subject to certain limitations in the first three
years after of the issuance of the Series A Preferred Stock.  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.






- 48 -





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, 2009 (Three months ended)
            
            Mar
      31
              2009
            
            
            Jun
      30
              2009
            
            
            Sep
      30
              2009
            
            
            Dec
      31
              2009Total
      interest income
            
            $
            11,876
            
            
            $
            11,656
            
            
            $
            11,783
            
            
            $
            11,776Total
      interest expense
            
            
            4,947
            
            
            
            4,982
            
            
            
            4,950
            
            
            
            4,674Net
      interest income
            
            
            6,929
            
            
            
            6,674
            
            
            
            6,833
            
            
            
            7,102Provision
      for loan losses
            
            
            2,098
            
            
            
            6,788
            
            
            
            3,899
            
            
            
            3,433Net
      interest income (loss) after provision for loan losses
            
            
            4,831
            
            
            
            (114
            )
            
            
            2,934
            
            
            
            3,669Gain/(loss)
      on securities
            
            
            -
            
            
            
            -
            
            
            
            (37
            )
            
            
            1,862Non
      interest income
            
            
            3,043
            
            
            
            2,736
            
            
            
            2,352
            
            
            
            2,722Non
      interest expenses
            
            
            7,233
            
            
            
            7,465
            
            
            
            8,001
            
            
            
            10,704Income
      (loss) before income taxes
            
            
            641
            
            
            
            (4,843
            )
            
            
            (2,752
            )
            
            
            (2,451
            )Income
      tax provision (benefit)
            
            
            201
            
            
            
            (2,001
            )
            
            
            (674
            )
            
            
            (1,082
            )Net
      Income (Loss)
            
            $
            440
            
            
            $
            (2,842
            )
            
            $
            (2,078
            )
            
            $
            (1,369
            )Basic
      earnings (loss) per common share
            
            $
            0.05
            
            
            $
            (0.93
            )
            
            $
            (0.71
            )
            
            $
            (0.50
            )Diluted
      earnings (loss) per common share
            
            $
            0.05
            
            
            $
            (0.93
            )
            
            $
            (0.71
            )
            
            $
            (0.50
            )Cash
      dividends per share
            
            $
            0.120
            
            
            $
            0.120
            
            
            $
            0.010
            
            
            $
            0.010Stock
      sales price range:  High (1)
            
            $
            14.00
            
            
            $
            13.92
            
            
            $
            12.50
            
            
            $
            9.20Low
            
            $
            8.50
            
            
            $
            12.22
            
            
            $
            8.50
            
            
            $
            6.80








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 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 (benefit)
            
            
            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








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


As of
December 31, 2009, the Company had 344 holders of record of its
shares.





19.
Subsequent Event


Subsequent
events have been evaluated through the date the financial statements were
issued.  As of that date the Company did not have any subsequent
events to report.








- 49 -