SECURITIES & EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K





(Mark
One)





X     Annual report pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934





For
the fiscal year ended December 31, 2009





or





Transition
report pursuant to Section 13 or 15(d) or the Securities Exchange Act of
1934





For
the transition period from ___________ to _____________








Commission file number:      0-18847





INDIANA
COMMUNITY BANCORP


(Exact
name of registrant as specified in its charter)





Indiana35-1807839


(State
or other jurisdiction(I.R.S.
Employer


of
incorporation or organization)Identification No.)





501 Washington Street,
Columbus, Indiana         47201


(Address
of Principal Executive Offices)(Zip Code)





Registrant’s
telephone number including area code: (812)
376-3323





Securities
registered pursuant to Section 12(b) of the Act:





Title of each class:                    Name
of each exchange on which registered:


Common
Stock                                    The
NASDAQ Stock Market LLC





Securities
registered pursuant to Section 12(g) of the Act:





None














Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the


Securities
Act.     YES  [  ]    NO
[X]





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section


15(d) of
the Act.    
YES  [  ]    NO [X]





Indicate
by check mark whether the Registrant (l) has filed all reports required to be
filed by Section 13


or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter


period
that the Registrant was required to file such reports) and (2) has been subject
to such filing


requirements
for the past 90 days.      YES  [X]   NO  [  ]





Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate


Website,
if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of


Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period


that the
Registrant was required to submit and post such
files.     YES  [  ]   NO  [  ]





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K


(229.405
of this chapter) is not contained herein, and will not be contained, to the best
of Registrant's


knowledge,
in definitive proxy or information statements incorporated by reference in Part
III of this


Form 10-K
or any amendment to this Form 10-K.  [  ]





Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer,


or a
smaller reporting company.  See the definitions of “large accelerated
filer”, “accelerated filer” and “smaller


reporting
company” in Rule 12b-2 of the Exchange Act.





Large
accelerated filer [  ]     Accelerated filer
[  ]     Non-accelerated filer [X]     Smaller
reporting company [  ]





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).


YES  [  ]                      NO
[X]





The
aggregate market value of the issuer's voting stock held by non-affiliates, as
of June 30, 2009, was $38.5
million.





The
number of shares of the registrant's Common Stock, no par value, outstanding as
of March 9, 2010, was 3,358,079 shares.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the Annual Report to Shareholders for the year ended December 31, 2009, are
incorporated into Part II.


Portions
of the Proxy Statement for the annual meeting of shareholders to be held on
April 27, 2010, are incorporated


into Part
I and Part III.














INDIANA
      COMMUNITY BANCORPFORM
      10-KINDEXPart
      IForward
      Looking Statements
            3Item
      1.
            Business
            3Item
      1A.
            Risk
      Factors
            25Item
      1B.
            Unresolved
      Staff Comments
            28Item
      2.
            Properties
            28Item
      3.
            Legal
      Proceedings
            30Item
      3.5
            Executive
      Officers of INDIANA COMMUNITY BANCORP
            30Item
      4.
            Reserved
            30Part
      IIItem
      5.
            Market
      for Registrant's Common Equity, Related Stockholder Matters, And Issuer
      Purchases of
      Equity Securities
            30Item
      6.
            Selected
      Financial Data
            31Item
      7.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            31Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market Risk
            31Item
      8.
            Financial
      Statements and Supplementary Data
            31Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            31Item
      9A(T).
            Controls
      and Procedures
            32Item
      9B.
            Other
      information
            32Part
      IIIItem
      10.
            Directors,
      Executive Officers, and Corporate Governance of the
    Registrant
            32Item
      11.
            Executive
      Compensation
            32Item
      12
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            32Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            33Item
      14.
            Principal
      Accountant Fees and Services
            33Part
      IVItem
      15.
            Exhibits
      and Financial Statement Schedules
            33Signatures
            
            34

















FORWARD
LOOKING STATEMENTS





This Annual Report on Form 10-K (“Form
10-K”) 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 Form 10-K
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 Form 10-K are cautioned that any such
forward looking statements are not guarantees of future events or performance
and involve risks and uncertainties, and that actual results may differ
materially from those in the forward looking statements as a result of various
factors.  The accompanying information contained in this Form 10-K
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, the
effects of economic conditions resulting from the current turmoil in the
financial services industry, including depressed demand in the housing market,
changes in the financial condition of the 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 proceedings.





PART
I


Item
1.  Business





General





Indiana Community Bancorp (the
"Company" or "ICB") is an Indiana corporation organized as a bank holding
company authorized to engage in activities permissible for a bank holding
company.  The principal asset of the Company consists of 100% of the
issued and outstanding capital stock of Indiana Bank and Trust Company (the
“Bank”).





Indiana Bank and Trust Company began
operations in Seymour, Indiana under the name New Building and Loan Association
in 1908.  The Bank received its federal charter and changed its name
to Home Federal Savings and Loan Association in 1950.  On November 9,
1983, Home Federal Savings and Loan Association became a federal savings bank
and its name was changed to Home Federal Savings Bank. On January 14, 1988, Home
Federal Savings Bank converted to stock form and on March 1, 1993, Home Federal
Savings Bank reorganized by converting each outstanding share of its common
stock into one share of common stock of the Company, thereby causing the Company
to be the holding company of Home Federal Savings Bank.  On December
31, 2001 the Bank, a member of the Federal Reserve System, completed a charter
conversion to an Indiana commercial bank.  On September 24, 2002, the
Company announced a change in its fiscal year end from June 30 to December
31.  On October 22, 2002, Home Federal Savings Bank changed its name
to HomeFederal Bank.





On March 1, 2008, HomeFederal Bank
changed its name to Indiana Bank and Trust Company.  The Bank
currently provides services through its main office at 501 Washington Street in
Columbus, Indiana, eighteen full service branches located in south central
Indiana and the STAR network of automated teller machines at fourteen locations
in Seymour, Columbus, North Vernon, Osgood, Salem, Madison, Batesville,
Greensburg, Greenwood and Indianapolis.  As a result, the Bank serves
primarily Bartholomew, Jackson, Jefferson, Jennings, Scott, Ripley, Decatur,
Marion, Johnson and Washington Counties in Indiana.  The Bank also
participates in the nationwide electronic funds transfer networks known as Plus
System, Inc. and Cirrus System.





Online banking and telephone banking
are also available to the Bank customers.  Online Banking services,
including Online Bill Payment, are accessed through the Company’s website, www.myindianabank.com.  In
addition to online banking services, the Company also makes available, free of
charge at the website, the Company’s annual report on Form 10-K, its proxy
statement, quarterly reports on Form 10-Q, current reports on Form 8-K and any
amendments to those reports filed pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after such
material is electronically filed with the SEC.  The information on the
Company’s website is not incorporated into this Form 10-K.





Management analyzes the operation of
Indiana Community Bancorp assuming one operating segment, community banking
services.  The Bank directly, and through its subsidiaries indirectly,
offers a wide range of consumer and commercial community banking
services.  These services include: (i) residential real estate loans;
(ii) commercial and commercial real estate loans; (iii) checking accounts; (iv)
regular and term savings accounts and savings certificates; (v) consumer loans;
(vi) debit cards; (vii) business credit cards; (viii) Individual Retirement
Accounts and Keogh plans; (ix) trust services; and (x) commercial demand deposit
accounts.






- 3 -





The Bank’s primary source of revenue is
interest from lending activities.  Its principal lending activity is
the origination of commercial real estate loans secured by mortgages on the
underlying property and commercial loans through the cultivation of profitable
business relationships.  These loans constituted 63.2% of the Bank’s
loans at December 31, 2009.  The Bank also originates one-to-four
family residential loans, the majority of which are sold servicing
released.  At December 31, 2009 one-to-four family residential loans
were 12.2% of the Bank’s lending portfolio.  In addition, the Bank
makes secured and unsecured consumer related loans including consumer auto,
second mortgage, home equity, mobile home, and savings account
loans.  At December 31, 2009, approximately 15.2% of its loans were
consumer-related loans.  The Bank also makes construction loans, which
constituted 9.1% of the Bank's loans at December 31, 2009.





Loan
Portfolio Data





The
following two tables set forth the composition of the Bank’s loan portfolio by
loan type and security type as of the dates indicated.  The third
table represents a reconciliation of gross loans receivable after consideration
of unearned income and the allowance for loan losses.













Dec
      31, 2009
            
            
            Dec
      31, 2008
            
            
            Dec
      31, 2007
            
            
            Dec
      31, 2006
            
            
            Dec
      31, 2005Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            PercentTYPE
      OF LOAN
            
            
            
            
            
            
            
            
            
            
            (Dollars
      in Thousands)First
      mortgage loans:One-to-four
      family residential loans
            
            $
            89,611
            
            
            
            12.2
            %
            
            $
            105,440
            
            
            
            13.1
            %
            
            $
            124,088
            
            
            
            16.6
            %
            
            $
            150,639
            
            
            
            22.0
            %
            
            $
            162,212
            
            
            
            26.3
            %Loans
      on property under construction
            
            
            67,382
            
            
            
            9.1
            %
            
            
            96,672
            
            
            
            12.1
            %
            
            
            92,982
            
            
            
            12.4
            %
            
            
            58,013
            
            
            
            8.5
            %
            
            
            44,321
            
            
            
            7.2
            %Loans
      on unimproved acreage
            
            
            1,965
            
            
            
            0.3
            %
            
            
            1,753
            
            
            
            0.2
            %
            
            
            2,342
            
            
            
            0.3
            %
            
            
            1,496
            
            
            
            0.2
            %
            
            
            1,615
            
            
            
            0.3
            %Second
      mortgage, home equity
            
            
            97,071
            
            
            
            13.1
            %
            
            
            104,084
            
            
            
            13.0
            %
            
            
            103,560
            
            
            
            13.8
            %
            
            
            102,713
            
            
            
            15.1
            %
            
            
            87,893
            
            
            
            14.3
            %Commercial,
      commercial mortgage, and multi-family loans
            
            
            466,539
            
            
            
            63.2
            %
            
            
            472,495
            
            
            
            59.0
            %
            
            
            399,694
            
            
            
            53.3
            %
            
            
            335,069
            
            
            
            49.1
            %
            
            
            283,573
            
            
            
            46.1
            %Consumer
      loans
            
            
            3,490
            
            
            
            0.5
            %
            
            
            4,229
            
            
            
            0.5
            %
            
            
            4,011
            
            
            
            0.5
            %
            
            
            3,949
            
            
            
            0.6
            %
            
            
            3,988
            
            
            
            0.6
            %Auto
      loans
            
            
            9,730
            
            
            
            1.3
            %
            
            
            14,223
            
            
            
            1.8
            %
            
            
            20,609
            
            
            
            2.7
            %
            
            
            26,356
            
            
            
            3.9
            %
            
            
            27,335
            
            
            
            4.4
            %Mobile
      home loans
            
            
            423
            
            
            
            0.1
            %
            
            
            784
            
            
            
            0.1
            %
            
            
            1,258
            
            
            
            0.2
            %
            
            
            1,806
            
            
            
            0.3
            %
            
            
            2,537
            
            
            
            0.4
            %Savings
      accounts loans
            
            
            1,669
            
            
            
            0.2
            %
            
            
            1,296
            
            
            
            0.2
            %
            
            
            1,467
            
            
            
            0.2
            %
            
            
            2,372
            
            
            
            0.3
            %
            
            
            2,266
            
            
            
            0.4
            %Gross
      loans receivable
            
            $
            737,880
            
            
            
            100.0
            %
            
            $
            800,976
            
            
            
            100.0
            %
            
            $
            750,011
            
            
            
            100.0
            %
            
            $
            682,413
            
            
            
            100.0
            %
            
            $
            615,740
            
            
            
            100.0
            %Type
      of SecurityResidential:One-to-four
      family
            
            $
            193,857
            
            
            
            26.2
            %
            
            $
            223,471
            
            
            
            27.9
            %
            
            $
            245,015
            
            
            
            32.7
            %
            
            $
            267,623
            
            
            
            39.2
            %
            
            $
            265,322
            
            
            
            43.1
            %Multi-dwelling
      units
            
            
            18,893
            
            
            
            2.6
            %
            
            
            19,954
            
            
            
            2.5
            %
            
            
            19,597
            
            
            
            2.6
            %
            
            
            18,621
            
            
            
            2.7
            %
            
            
            19,612
            
            
            
            3.2
            %Commercial
      and commercial real estate
            
            
            507,853
            
            
            
            68.8
            %
            
            
            535,266
            
            
            
            66.8
            %
            
            
            455,712
            
            
            
            60.8
            %
            
            
            360,190
            
            
            
            52.8
            %
            
            
            293,065
            
            
            
            47.6
            %Mobile
      home
            
            
            423
            
            
            
            0.1
            %
            
            
            784
            
            
            
            0.1
            %
            
            
            1,258
            
            
            
            0.2
            %
            
            
            1,806
            
            
            
            0.3
            %
            
            
            2,537
            
            
            
            0.4
            %Savings
      account
            
            
            1,669
            
            
            
            0.2
            %
            
            
            1,296
            
            
            
            0.2
            %
            
            
            1,467
            
            
            
            0.2
            %
            
            
            2,372
            
            
            
            0.3
            %
            
            
            2,266
            
            
            
            0.4
            %Auto
            
            
            9,730
            
            
            
            1.3
            %
            
            
            14,223
            
            
            
            1.8
            %
            
            
            20,609
            
            
            
            2.7
            %
            
            
            26,356
            
            
            
            3.9
            %
            
            
            27,335
            
            
            
            4.4
            %Other
      consumer
            
            
            3,490
            
            
            
            0.5
            %
            
            
            4,229
            
            
            
            0.5
            %
            
            
            4,011
            
            
            
            0.5
            %
            
            
            3,949
            
            
            
            0.6
            %
            
            
            3,988
            
            
            
            0.6
            %Land
      acquisition
            
            
            1,965
            
            
            
            0.3
            %
            
            
            1,753
            
            
            
            0.2
            %
            
            
            2,342
            
            
            
            0.3
            %
            
            
            1,496
            
            
            
            0.2
            %
            
            
            1,615
            
            
            
            0.3
            %Gross
      loans receivable
            
            $
            737,880
            
            
            
            100.0
            %
            
            $
            800,976
            
            
            
            100.0
            %
            
            $
            750,011
            
            
            
            100.0
            %
            
            $
            682,413
            
            
            
            100.0
            %
            
            $
            615,740
            
            
            
            100.0
            %Loans
      Receivable-NetGross
      loans receivable
            
            $
            737,880
            
            
            
            101.8
            %
            
            $
            800,976
            
            
            
            101.1
            %
            
            $
            750,011
            
            
            
            101.0
            %
            
            $
            682,413
            
            
            
            101.0
            %
            
            $
            615,740
            
            
            
            101.1
            %Deduct:Unearned
      income
            
            
            (99
            )
            
            
            0.0
            %
            
            
            (241
            )
            
            
            0.0
            %
            
            
            (165
            )
            
            
            0.0
            %
            
            
            (153
            )
            
            
            0.0
            %
            
            
            (299
            )
            
            
            0.0
            %Allowance
      for loan losses
            
            
            (13,113
            )
            
            
            -1.8
            %
            
            
            (8,589
            )
            
            
            -1.1
            %
            
            
            (6,972
            )
            
            
            -1.0
            %
            
            
            (6,598
            )
            
            
            -1.0
            %
            
            
            (6,753
            )
            
            
            -1.1
            %Net
      loans receivable
            
            $
            724,668
            
            
            
            100.0
            %
            
            $
            792,146
            
            
            
            100.0
            %
            
            $
            742,874
            
            
            
            100.0
            %
            
            $
            675,662
            
            
            
            100.0
            %
            
            $
            608,688
            
            
            
            100.0
            %







- 4 -







The
following tables summarize the contractual maturities for the Bank’s loan
portfolio (including participations) for the fiscal periods indicated and the
interest rate sensitivity of loans due after one year:








Balance
            
            
            
            
            
            
            
            
            Maturities
      in FiscalOutstanding
            
            
            
            
            
            
            
            
            
            
            
            2013
            
            
            2015
            
            
            2020
            
            
            2025At
      Dec 31,
            
            
            
            
            
            
            
            
            
            
            
            To
            
            
            to
            
            
            to
            
            
            and2009
            
            
            2010
            
            
            2011
            
            
            2012
            
            
            2014
            
            
            2019
            
            
            2024
            
            
            thereafterReal
      estate
            
            $
            437,896
            
            
            $
            68,022
            
            
            $
            25,058
            
            
            $
            25,986
            
            
            $
            79,907
            
            
            $
            142,602
            
            
            $
            23,220
            
            
            $
            73,101Construction
      loans
            
            
            67,382
            
            
            
            39,292
            
            
            
            9,399
            
            
            
            36
            
            
            
            7,000
            
            
            
            4,590
            
            
            
            -
            
            
            
            7,065Commercial
      loans
            
            
            120,219
            
            
            
            72,391
            
            
            
            3,599
            
            
            
            10,612
            
            
            
            17,257
            
            
            
            16,360
            
            
            
            -
            
            
            
            -Consumer
      loans
            
            
            112,383
            
            
            
            3,984
            
            
            
            2,961
            
            
            
            3,858
            
            
            
            14,053
            
            
            
            19,139
            
            
            
            14,429
            
            
            
            53,959Total
            
            $
            737,880
            
            
            $
            183,689
            
            
            $
            41,017
            
            
            $
            40,492
            
            
            $
            118,217
            
            
            $
            182,691
            
            
            $
            37,649
            
            
            $
            134,125











Interest
      Rate Sensitivity:Due
      After December 31, 2010Fixed
            
            
            Variable
      RateRate
            
            
            And
      Balloon(Dollars
      in Thousands)Real
      estate
            
            $
            78,254
            
            
            $
            291,620Construction
      loans
            
            
            743
            
            
            
            27,347Commercial
      loans
            
            
            21,601
            
            
            
            26,227Consumer
      loans
            
            
            51,956
            
            
            
            56,443Total
            
            $
            152,554
            
            
            $
            401,637





Residential
Mortgage Loans





The Bank is authorized to make
one-to-four family residential loans without any limitation as to interest rate
amount (within State usury laws) or number of interest rate
adjustments.  Pursuant to federal regulations, if the interest rate is
adjustable, the interest rate must be correlated with changes in a readily
verifiable index.  The Bank also makes residential and commercial
mortgage loans secured by mid-size multi-family dwelling units and apartment
complexes.  The residential mortgage loans included in the Bank’s
portfolio are primarily conventional loans.  As of December 31, 2009
$97.6 million, or 13.2%, of the Bank's total loan portfolio consisted of
residential first mortgage loans, $89.6 million, or 12.2%, of which were secured
by one-to-four family homes.





Many of the residential mortgage loans
currently offered by the Bank have adjustable rates. These loans generally have
interest rates that adjust (up or down) annually, with maximum rates that vary
depending upon when the loans are written and contractual floors and ceilings.
The adjustment for the majority of these loans is currently based upon the
weekly average of the one-year Treasury constant maturity rate.





The rates offered on the Bank's
adjustable-rate and fixed-rate residential mortgage loans are competitive with
the rates offered by other financial institutions in its south central and
central Indiana market area.





Although the Bank's residential
mortgage loans are written for amortization terms up to 30 years, due to
prepayments and refinancing, its residential mortgage loans in the past have
generally remained outstanding for a substantially shorter period of time than
the maturity terms of the loan contracts.  Any residential mortgage
loan which has a loan-to-value ratio is excess of 80% requires credit
enhancement in the form of private mortgage insurance.





All of the residential mortgages the
Bank currently originates include "due on sale" clauses, which give the Bank the
right to declare a loan immediately due and payable in the event that, among
other things, the borrower sells or otherwise disposes of the real property
subject to the mortgage and the loan is not repaid.  The Bank utilizes
the due on sale clause as a means of protecting the funds loaned by insuring
payoff on sale of the property collateralizing the loan.






- 5 -





Under applicable banking policies, the
Bank must establish loan-to-value ratios consistent with supervisory
loan-to-value limits.  The supervisory limits are 65% for raw land
loans, 75% for land development loans, 80% for construction loans consisting of
commercial, multi-family and other non-residential construction, and 85% for
improved property.  Multi-family construction includes condominiums
and cooperatives.  A loan-to-value limit has been established at 90%
total loan-to-value for permanent mortgage or home equity loans on
owner-occupied one-to-four family residential property.  However, for
any reason a loan with a loan-to-value ratio that equals or exceeds 90% at
origination, an institution should require appropriate credit enhancement in the
form of either mortgage insurance or readily marketable
collateral.  The Board of Directors of the Bank approved a set of
loan-to-value ratios consistent with these supervisory limits.





It may be appropriate in individual
cases to originate loans with loan-to-value ratios in excess of the FDIC limits
based on the support provided by other credit factors.  The aggregate
amount of all loans in excess of these limits should not exceed 100% of total
capital.  Moreover, loans for all commercial, agricultural,
multi-family or other non-one-to-four family residential properties in excess of
the FDIC limits should not exceed 30% of total capital.  As of
December 31, 2009, the Bank was in compliance with the above
limits.





Commercial
and Commercial Mortgage Loans





At December 31, 2009, 55.3% of the
Bank's total loan portfolio consisted of mortgage loans secured by commercial
real estate.  Commercial construction and development loans were 8.2%
of the total loan portfolio.  These properties consisted primarily of
condominiums, multi-family housing, office buildings, warehouses, motels,
shopping centers, nursing homes, manufacturing plants, and churches located in
central or south central Indiana. The commercial mortgage loans are generally
adjustable-rate loans, written for terms not exceeding 10 years, and generally
require an 80% loan-to-value ratio. Commitments for these loans in excess of
$5.0 million must be approved in advance by the Bank’s Board of
Directors.  The largest such loan as of December 31, 2009 had a
balance of $9.8 million.  At that date, virtually all of the Bank's
commercial real estate loans consisted of loans secured by real estate located
in Indiana.





Collateral for the Bank's commercial
loans includes accounts receivable, inventory, equipment, real estate, other
fixed assets, and securities.  Terms of these loans are normally for
up to five years and have adjustable rates tied to the reported prime rate and
treasury indexes.  As of December 31, 2009, $120.2 million, or 16.3%,
of the Bank's total loan portfolio consisted of commercial loans.





Generally, commercial and commercial
mortgage loans involve greater risk to the Bank than residential
loans.  However, commercial and commercial mortgage loans generally
carry a higher yield and are made for a shorter term than residential
loans.  Commercial and commercial mortgage loans typically involve
large loan balances to single borrowers or groups of related
borrowers.  In addition, the payment experience on loans secured by
income-producing properties is typically dependent on the successful operation
of the related project and thus may be subject to adverse conditions in the real
estate market or in the general economy.





Construction
Loans





The Bank offers conventional short-term
construction loans.  At December 31, 2009, 9.1% of the Bank's total
loan portfolio consisted of construction loans.  Normally, a 95% or
less loan-to-value ratio is required from owner-occupants of residential
property, an 80% loan-to-value ratio is required from persons building
residential property for sale or investment purposes, and an 80% loan-to-value
ratio is required for commercial property.  Construction loans are
also made to builders and developers for the construction of residential or
commercial properties on a to-be-occupied or speculative
basis.  Construction normally must be completed in six to nine months
for residential loans.  The largest such loan on December 31, 2009 was
$7.0 million.





Consumer
Loans





Consumer-related loans, consisting of
second mortgage and home equity loans, mobile home loans, automobile loans,
loans secured by savings accounts and other consumer loans were $112.4 million
on December 31, 2009 or approximately 15.2% of the Bank's total loan
portfolio.





Second mortgage loans are made for
terms of 1 - 20 years, and are fixed-rate, fixed term or variable-rate line of
credit loans.  The Bank's minimum for such loans is $5,000. The Bank
will loan up to 90% of the appraised value based on the product and borrower
qualifications of the property, less the existing mortgage
amount(s).  As of December 31, 2009, the Bank had $40.7 million of
second mortgage loans, which equaled 5.5% of its total loan
portfolio.  The Bank markets home equity credit lines, which are
adjustable-rate loans.  As of December 31, 2009, the Bank had $56.4
million drawn on its home equity credit lines, or 7.6% of its total loan
portfolio, with $37.3 million of additional credit available to its borrowers
under existing home equity credit lines.






- 6 -





Automobile loans are generally made for
terms of up to six years.  The vehicles are required to be for
personal or family use only.  As of December 31, 2009, $9.7 million,
or 1.3%, of the Bank's total loan portfolio consisted of automobile
loans.





As of December 31, 2009, $423,000, or
0.1%, of the Bank's total loan portfolio consisted of mobile home
loans.  The Bank discontinued the origination of mobile home loans
during the year 2008.





Loans secured by savings account
deposits may be made up to 95% of the pledged savings collateral at a rate 2%
above the rate of the pledged savings account or a rate equal to the Bank's
highest seven-year certificate of deposit rate, whichever is
higher.  The loan rate will be adjusted as the rate for the pledged
savings account changes.  As of December 31, 2009, $1.7 million, or
0.2%, of the Bank's total loan portfolio consisted of savings account
loans.





Although consumer-related loans
generally involve a higher level of risk than one-to-four family residential
mortgage loans, their relatively higher yields, lower average balance, and
shorter terms to maturity are helpful in the Bank's asset/liability
management.





Origination,
Purchase and Sale of Loans





The Bank originates residential loans
in conformity with standard underwriting criteria of the Federal Home Loan
Mortgage Corporation ("Freddie Mac"), the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Bank (“FHLB”), to assure maximum
eligibility for possible resale in the secondary market.  Although the
Bank currently has authority to lend anywhere in the United States, it has
confined its loan origination activities primarily to the central and south
central Indiana area.  The Bank's loan originations are generated
primarily from referrals from real estate brokers, builders, developers and
existing customers, newspaper, radio and periodical advertising, the internet
and walk-in customers.  The Bank's loan approval process is intended
to assess the borrower's ability to repay the loan, the viability of the loan
and the adequacy of the value of the property that will secure the
loan.





The Bank studies the employment, credit
history, and information on the historical and projected income and expenses of
its individual mortgagors to assess their ability to repay its mortgage
loans.  Additionally, the Bank utilizes Freddie Mac's Loan Prospector
and Fannie Mae’s Desktop Underwriter as origination, processing, and
underwriting tools.  It uses independent appraisers to appraise the
property securing its loans.  It requires title insurance evidencing
the Bank's valid lien on its mortgaged real estate and a mortgage survey or
survey coverage on all first mortgage loans and on other loans when
appropriate.  The Bank requires fire and extended coverage insurance
in amounts at least equal to the value of the insurable improvements or the
principal amount of the loan, whichever is lower.  It may also require
flood insurance to protect the property securing its interest.  When
private mortgage insurance is required, borrowers must make monthly payments to
an escrow account from which the Bank makes disbursements for taxes and
insurance.  Otherwise, such escrow arrangements are
optional.





The procedure for approval of loans on
property under construction is the same as for residential mortgage loans,
except that the appraisal obtained evaluates the building plans, construction
specifications and estimates of construction costs, in conjunction with the land
value.  The Bank also evaluates the feasibility of the construction
project and the experience and track record of the builder or
developer.





Consumer loans are underwritten on the
basis of the borrower's credit history and an analysis of the borrower's income
and expenses, ability to repay the loan and the value of the collateral, if
any.





In order to generate loan fee income
and recycle funds for additional lending activities, the Bank seeks to sell
loans in the secondary market.  Loan sales can enable the Bank to
recognize significant fee income and to reduce interest rate risk while meeting
local market demand. The Bank sold $185.9 million of loans in the fiscal year
ended December 31, 2009.  The Bank's current lending policy is to sell
all conforming residential mortgage loans.  Typically the Bank retains
loans that are non salable, non owner occupied, or in construction in its
portfolio.  The Bank may sell participating interests in commercial
real estate loans in order to share the risk with other
lenders.  Mortgage loans held for sale are carried at the lower of
cost or market value, determined on an aggregate basis.  Loans are
sold with the servicing released on conforming loans, Veteran's Administration
("VA"), Federal Housing Administration ("FHA") and Indiana Housing Finance
Authority ("IHFA") loans.






- 7 -





Management believes that purchases of
loans and loan participations may be desirable and evaluates potential purchases
as opportunities arise.  Such purchases can enable the Bank to take
advantage of favorable lending markets in other parts of the state, diversify
its portfolio and limit origination expenses.  Any participation it
acquires in commercial real estate loans requires a review of financial
information on the borrower, a review of the appraisal on the property by a
local designated appraiser, an inspection of the property by a senior loan
officer, and a financial analysis of the loan. The seller generally performs
servicing of loans purchased.  At December 31, 2009, others serviced
approximately 2.9%, or $21.4 million, of the Bank's gross loan
portfolio.





The
following table shows loan activity for the Bank during the periods
indicated:





Dec
      31, 2009
            
            
            Dec
      31, 2008
            
            
            Dec
      31, 2007(Dollars
      in Thousands)Gross
      loans receivable at beginning of period
            
            $
            800,976
            
            
            $
            750,011
            
            
            $
            682,413Loans
      Originated:Mortgage
      loans and contracts:Construction
      loans:Residential
            
            
            19,386
            
            
            
            32,798
            
            
            
            29,812Commercial
            
            
            11,897
            
            
            
            54,610
            
            
            
            76,255Permanent
      loans:Residential
            
            
            39,617
            
            
            
            37,762
            
            
            
            46,189Commercial
            
            
            38,207
            
            
            
            74,044
            
            
            
            34,162Refinancing
            
            
            128,326
            
            
            
            36,030
            
            
            
            33,718Other
            
            
            924
            
            
            
            1,866
            
            
            
            2,045Total
            
            
            238,357
            
            
            
            237,110
            
            
            
            221,181Commercial
            
            
            84,649
            
            
            
            129,650
            
            
            
            154,877Consumer
            
            
            10,374
            
            
            
            13,001
            
            
            
            17,384Total
      loans originated
            
            
            333,380
            
            
            
            379,761
            
            
            
            394,442Loans
      purchased:Residential
            
            
            -
            
            
            
            -
            
            
            
            -Other
            
            
            16,113
            
            
            
            7,195
            
            
            
            18,515Total
      loans originated and purchased
            
            
            349,493
            
            
            
            386,956
            
            
            
            412,957Real
      estate loans sold
            
            
            185,909
            
            
            
            130,589
            
            
            
            111,948Loan
      repayments and other deductions
            
            
            226,680
            
            
            
            205,402
            
            
            
            233,411Total
      loans sold, loan repayments and other deductions
            
            
            412,589
            
            
            
            335,991
            
            
            
            345,359Net
      loan activity
            
            
            (63,096
            )
            
            
            50,965
            
            
            
            67,598Gross
      loans receivable at end of period
            
            
            737,880
            
            
            
            800,976
            
            
            
            750,011Unearned
      Income and Allowance for Loan Losses
            
            
            (13,212
            )
            
            
            (8,830
            )
            
            
            (7,137
            )Net
      loans receivable at end of period
            
            $
            724,668
            
            
            $
            792,146
            
            
            $
            742,874






A commercial bank generally may not
make any loan to a borrower or its related entities if the total of all such
loans by the commercial bank exceeds 15% of its capital (plus up to an
additional 10% of capital in the case of loans fully collateralized by readily
marketable collateral).  The maximum amount that the Bank could have
loaned to one borrower and the borrower’s related entities at December 31, 2009,
under the 15% of capital limitation was $15.6 million.  At that date,
the highest outstanding balance of loans by the Bank to one borrower and related
entities was approximately $12.6 million, an amount within such loans-to-one
borrower limitations.





Origination
and Other Fees





The Bank realizes income from loan
related fees for originating loans, collecting late charges and fees for other
miscellaneous loan services.  The Bank charges origination fees that
range from 0% to 1.0% of the loan amount.  The Bank also charges
processing fees of $150 to $225, underwriting fees from $0 to $150 and a $200
fee for any loan closed by the Bank personnel.  In addition, the Bank
makes discount points available to customers for the purpose of obtaining a
discounted interest rate.  The points vary from loan to loan and are
quoted on an individual basis.  The Bank amortizes costs and fees
associated with originating a loan over the life of the loan as an adjustment to
the yield earned on the loan.  Late charges are assessed fifteen days
after payment is due.






- 8 -


Non-performing
Assets





The Bank assesses late charges on real
estate related loans if a payment is not received by the 15th day following its
due date.  Any borrower whose payment was not received by this time is
mailed a past due notice.  At the same time the notice is mailed, the
delinquent account is downloaded to a PC- based collection system and assigned
to a specific collector.  Initial attempts at contact are made by
branch personnel.  The collector will attempt to make contact with the
customer via a phone call to resolve any problem that might exist.  If
contact by phone is not possible, mail, in the form of preapproved form letters,
will be used commencing on the 30th day following a specific due
date.  Between the 30th and 45th day following any due date, or at the
time a second payment has become due, if no contact has been made with the
customer, a personal visit will be conducted by a Collection Department employee
or the Loan Liquidation Specialist to interview the customer and inspect the
property to determine the borrower's ability to repay the
loan.  Prompt follow up is a goal of the Collection Department with
any and all delinquencies.





When an advanced stage of delinquency
appears (generally around the 60th day of delinquency) and if repayment cannot
be expected within a reasonable amount of time, the Bank will make a
determination of how to proceed to protect the interests of both the customer
and the Bank.  It may be necessary for the borrower to attempt to sell
the property at the Bank's request.  If a resolution cannot be
arranged, the Bank will consider avenues necessary to obtain title to the
property which includes foreclosure and/or accepting a deed-in-lieu of
foreclosure, whichever may be most appropriate.  However, the Bank
attempts to avoid taking title to the property if at all possible.





The Bank has acquired certain real
estate in lieu of foreclosure by acquiring title to the real estate and then
reselling it.  The Bank performs an updated title check of the
property and, if needed, an appraisal on the property before accepting such
deeds.





On December 31, 2009, the Bank held
$12.6 million of real estate and other repossessed collateral acquired as a
result of foreclosure, voluntary deed, or other means.  Such assets
are classified as "real estate owned" until sold.  When property is so
acquired, it is recorded at fair market value less estimated cost to sell at the
date of acquisition, and any subsequent write down resulting from this is
charged to losses on real estate owned.  Interest accrual ceases on
the date of acquisition.  All costs incurred from the acquisition date
in maintaining the property are expensed.  Significant improvements
made in the property that will have a documented positive effect in value may be
capitalized.





Consumer loan borrowers who fail to
make payments are contacted promptly by the Collection Department in an effort
to cure any delinquency.  A notice of delinquency is sent 10 days
after any specific due date when no payment has been received.  The
delinquent account is downloaded to a PC-based collection system and assigned to
a specific collector.  Initial attempts at contact are made by branch
personnel.  The loan collector will then attempt to contact the
borrower via a phone call after the 30th day of delinquency if satisfactory
arrangements for resolution have not been previously agreed upon.





Continued follow-up in the form of
phone calls, letters, and personal visits (when necessary) will be conducted to
resolve delinquency.  If a consumer loan delinquency continues and
advances to the 60-90 days past due status, a determination will be made by the
Bank on how to proceed.  When a consumer loan reaches 90 days past
due, the Bank determines the loan-to-value ratio by performing an inspection of
the collateral (if any).  The Bank may initiate action to obtain the
collateral (if any), or collect the debt through available legal
remedies.  Collateral obtained as a result of loan default is retained
by the Bank as an asset until sold or otherwise disposed.





The table below sets forth the amounts
and categories of the Bank's non-performing assets (non-accrual loans, loans
past due 90 days or more, real estate owned and other repossessed assets) for
the last five years.  It is the policy of the Bank that all earned but
uncollected interest on conventional loans be reviewed monthly to determine if
any portion thereof should be classified as uncollectible, for any portion that
is due but uncollected for a period in excess of 90 days.  The
determination is based upon factors such as the loan amount outstanding as a
percentage of the appraised value of the property and the delinquency record of
the borrower.








- 9 -







Dec
      31, 2009
            
            
            Dec
      31, 2008
            
            
            Dec
      31, 2007
            
            
            Dec
      31, 2006
            
            
            Dec
      31, 2005Non-performing
      Assets:Loans:Non-accrual
            
            $
            19,889
            
            
            $
            22,534
            
            
            $
            10,516
            
            
            $
            2,852
            
            
            $
            3,070Past
      due 90 days or more and still accruing
            
            
            1,410
            
            
            
            518
            
            
            
            64
            
            
            
            459
            
            
            
            456Restructured
      loans
            
            
            499
            
            
            
            1,282
            
            
            
            874
            
            
            
            440
            
            
            
            809Total
      non-performing loans
            
            
            21,798
            
            
            
            24,334
            
            
            
            11,454
            
            
            
            3,751
            
            
            
            4,335Real
      estate owned, net (1)
            
            
            12,603
            
            
            
            3,335
            
            
            
            286
            
            
            
            416
            
            
            
            266Other
      repossessed assets, net
            
            
            24
            
            
            
            44
            
            
            
            25
            
            
            
            20
            
            
            
            5Total
      non-performing assets (2)
            
            $
            34,425
            
            
            $
            27,713
            
            
            $
            11,765
            
            
            $
            4,187
            
            
            $
            4,606Total
      non-performing assets to total assets
            
            
            3.41
            %
            
            
            2.86
            %
            
            
            1.29
            %
            
            
            0.46
            %
            
            
            0.54
            %Non-performing
      loans with uncollected interest
            
            $
            20,388
            
            
            $
            23,494
            
            
            $
            10,986
            
            
            $
            2,935
            
            
            $
            3,070







(1)
            Refers
      to real estate acquired by the Bank through foreclosure or voluntary deed
      foreclosure, net of reserve.(2)
            At
      December 31, 2009, 9.4% of the Bank’s non-performing assets consisted of
      residential mortgage loans, 2.3% consistedof
      home equities/second mortgages,
              29.0%
      consisted of commercial real estate loans, 20.8% consisted of commercial
      loans,0.3%
      consisted of consumer-related loans, 1.5% consisted of restructured
      loans,
              1.8%
      consisted of residential real estateowned,
      34.8% consisted of commercial real estate owned and 0.1% consisted of
      other repossessed assets.






For
the year ended December 31, 2009, the income that would have been recorded under
original terms on the above non-accrual and restructured loans was $2.0 million
compared to actual income recorded of $406,000.  At December 31, 2009,
the Bank had approximately $3.6 million in loans that were 30-89 days past
due.  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
and other repossessed assets 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 includes 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.





Securities





The Bank's investment portfolio
consists primarily of mortgage-backed securities, collateralized mortgage
obligations, U.S. Treasury obligations, U.S. Government agency obligations,
corporate debt and municipal bonds.  At December 31, 2009, December
31, 2008 and December 31, 2007, the Bank had approximately $153.7 million,
$95.6 million and $63.9 million in investments, respectively.





The Bank's investment portfolio is
managed by its officers in accordance with an investment policy approved by the
Board of Directors.  The Board reviews all transactions and activities
in the investment portfolio on a quarterly basis.  The Bank does not
purchase corporate debt securities which are not rated in one of the top four
investment grade categories by one of several generally recognized independent
rating agencies.  The Bank's investment strategy has enabled it to (i)
shorten the average term to maturity of its assets, (ii) improve the yield on
its investments, (iii) meet federal liquidity requirements and (iv) maintain
liquidity at a level that assures the availability of adequate
funds.





Effective March 31, 2002, the Bank
transferred the management of approximately $90 million in securities to its
wholly-owned subsidiary, Home Investments, Inc.  Home Investments,
Inc., a Nevada corporation, holds, services, manages, and invests that portion
of the Bank’s investment portfolio as may be transferred from time to time by
the Bank to Home Investments, Inc.  Home Investments, Inc’s investment
policy mirrors that of the Bank.  At December 31, 2009, of the $153.7
million in consolidated investments owned by the Bank, $148.6 million was held
by Home Investments, Inc.








- 10 -





Source
of Funds





General





Deposits have traditionally been the
primary source of funds of the Bank for use in lending and investment
activities.  In addition to deposits, the Bank derives funds from loan
amortization, prepayments, borrowings from the FHLB of Indianapolis and income
on earning assets.  While loan amortization and income on earning
assets are relatively stable sources of funds, deposit inflows and outflows can
vary widely and are influenced by prevailing interest rates, money market
conditions and levels of competition.  Borrowings may be used to
compensate for reductions in deposits or deposit inflows at less than projected
levels and may be used on a longer-term basis to support expanded
activities.  See "Source of Funds -- Borrowings."





Deposits





Consumer and commercial deposits are
attracted principally from within the Bank's primary market area through the
offering of a broad selection of deposit instruments including checking
accounts, fixed-rate certificates of deposit, NOW accounts, individual
retirement accounts, health savings accounts, savings accounts and commercial
demand deposit accounts.  Deposit account terms vary, with the
principal differences being the minimum balance required, the amount of time the
funds remain on deposit and the interest rate.  To attract funds, the
Bank may pay higher rates on larger balances within the same maturity
class.





Under regulations adopted by the FDIC,
well-capitalized insured depository institutions (those with a ratio of total
capital to risk-weighted assets of not less than 10%, with a ratio of core
capital to risk-weighted assets of not less than 6%, with a ratio of core
capital to total assets of not less than 5% and which have not been notified
that they are in troubled condition) may accept brokered deposits without
limitations.  Undercapitalized institutions (those that fail to meet
minimum regulatory capital requirements) are prohibited from accepting brokered
deposits.  Adequately capitalized institutions (those that are neither
well-capitalized nor undercapitalized) are prohibited from accepting brokered
deposits unless they first obtain a waiver from the FDIC.  Under these
standards, the Bank would be deemed a well-capitalized
institution.  At December 31, 2009, the Bank had no brokered
deposits.





An undercapitalized institution may not
solicit deposits by offering rates of interest that are significantly higher
than the prevailing rates of interest on insured deposits (i) in such
institution's normal market areas or (ii) in the market area in which such
deposits would otherwise be accepted.





The Bank on a periodic basis
establishes interest rates to be paid, maturity terms, service fees and
withdrawal penalties.  Determination of rates and terms are predicated
on funds acquisition and liquidity requirements, rates paid by competitors,
growth goals, federal regulations, and market area of solicitation.





The
following table sets forth, by nominal interest rate categories, the composition
of deposits of the Bank at the dates indicated:





Dec
      31, 2009
            
            
            Dec
      31, 2008
            
            
            Dec
      31, 2007(Dollars
      in Thousands)Non-interest bearing and below 2.00%
            
            
            $
            568,127
            
            
            $
            419,407
            
            
            $
            174,1522.00%
      - 2.99%
            
            
            
            120,538
            
            
            
            36,572
            
            
            
            63,0193.00%
      - 3.99%
            
            
            
            52,966
            
            
            
            133,717
            
            
            
            146,4804.00%
      - 4.99%
            
            
            
            96,021
            
            
            
            114,390
            
            
            
            164,6495.00%
      - 5.99%
            
            
            
            2,653
            
            
            
            6,434
            
            
            
            158,705Over 6.00%
            
            
            
            0
            
            
            
            119
            
            
            
            546Total
            
            
            $
            840,305
            
            
            $
            710,639
            
            
            $
            707,551








- 11 -





The
following table sets forth the change in dollar amount of deposits in the
various accounts offered by the Bank for the periods indicated.







DEPOSIT
      ACTIVITY(Dollars
      in Thousands)Balance
            
            
            
            
            
            
            
            
            Balance
            
            
            
            
            
            
            
            
            Balanceat
            
            
            
            
            
            
            
            
            at
            
            
            
            
            
            
            
            
            atDec
      31,
            
            
            %
      of
            
            
            Increase
            
            
            Dec
      31,
            
            
            %
      of
            
            
            Increase
            
            
            Dec
      31,
            
            
            %
      of
            
            
            Increase2009
            
            
            Deposits
            
            
            (Decrease)
            
            
            2008
            
            
            Deposits
            
            
            (Decrease)
            
            
            2007
            
            
            Deposits
            
            
            (Decrease)Withdrawable:Non-interest
      bearing
            
            $
            80,938
            
            
            
            9.6
            %
            
            $
            9,212
            
            
            $
            71,726
            
            
            
            10.1
            %
            
            $
            1,998
            
            
            $
            69,728
            
            
            
            9.9
            %
            
            $
            (3,076
            )Statement
      savings
            
            
            42,520
            
            
            
            5.1
            %
            
            
            1,658
            
            
            
            40,862
            
            
            
            5.8
            %
            
            
            3,349
            
            
            
            37,513
            
            
            
            5.3
            %
            
            
            (4,197
            )Money
      market savings
            
            
            207,089
            
            
            
            24.6
            %
            
            
            50,589
            
            
            
            156,500
            
            
            
            22.0
            %
            
            
            (29,303
            )
            
            
            185,803
            
            
            
            26.3
            %
            
            
            20,198Checking
            
            
            170,226
            
            
            
            20.3
            %
            
            
            59,282
            
            
            
            110,944
            
            
            
            15.6
            %
            
            
            7,320
            
            
            
            103,624
            
            
            
            14.6
            %
            
            
            (25,401
            )Total
      Withdrawable
            
            
            500,773
            
            
            
            59.6
            %
            
            
            120,741
            
            
            
            380,032
            
            
            
            53.5
            %
            
            
            (16,636
            )
            
            
            396,668
            
            
            
            56.1
            %
            
            
            (12,476
            )Certificates:Less
      than one year
            
            
            44,316
            
            
            
            5.3
            %
            
            
            (103,777
            )
            
            
            148,093
            
            
            
            20.8
            %
            
            
            (51,231
            )
            
            
            199,324
            
            
            
            28.2
            %
            
            
            71,43612
      to 23 months
            
            
            92,532
            
            
            
            11.0
            %
            
            
            67,612
            
            
            
            24,920
            
            
            
            3.5
            %
            
            
            9,904
            
            
            
            15,016
            
            
            
            2.1
            %
            
            
            (19,693
            )24
      to 35 months
            
            
            137,466
            
            
            
            16.3
            %
            
            
            46,946
            
            
            
            90,520
            
            
            
            12.7
            %
            
            
            43,586
            
            
            
            46,934
            
            
            
            6.6
            %
            
            
            (25,915
            )36
      to 59 months
            
            
            46,046
            
            
            
            5.5
            %
            
            
            11,274
            
            
            
            34,772
            
            
            
            4.9
            %
            
            
            27,262
            
            
            
            7,510
            
            
            
            1.1
            %
            
            
            (2,574
            )60
      to 120 months
            
            
            19,172
            
            
            
            2.3
            %
            
            
            (13,130
            )
            
            
            32,302
            
            
            
            4.6
            %
            
            
            (9,797
            )
            
            
            42,099
            
            
            
            5.9
            %
            
            
            (30,386
            )Total
      certificate accounts
            
            
            339,532
            
            
            
            40.4
            %
            
            
            8,925
            
            
            
            330,607
            
            
            
            46.5
            %
            
            
            19,724
            
            
            
            310,883
            
            
            
            43.9
            %
            
            
            (7,132
            )Total
      deposits
            
            $
            840,305
            
            
            
            100.0
            %
            
            $
            129,666
            
            
            $
            710,639
            
            
            
            100.0
            %
            
            $
            3,088
            
            
            $
            707,551
            
            
            
            100.0
            %
            
            $
            (19,608
            )






The
following table represents, by various interest rate categories, the amount of
deposits maturing during each of the three years following December 31, 2009,
and the percentage of such maturities to total deposits.  Matured
certificates which have not been renewed as of December 31, 2009 have been
allocated based upon certain rollover assumptions.


DEPOSITS
      MATURITIES(Dollars
      in Thousands)1.99%
              
              
              
              2.00%
              
              
              
              3.00%
              
              
              
              4.00%or
              
              
              or
              
              
              or
              
              
              or
              
              
              Over
              
              
              
              
              
              Percent ofless
              
              
              
              2.99%
              
              
              
              3.99%
              
              
              
              4.99%
              
              
              
              5.00%
              
              
              Total
              
              
              TotalCertificate
      accounts maturing in the year     
      ending:December
      31, 2010
              
              $
              79,194
              
              
              $
              53,126
              
              
              $
              29,315
              
              
              $
              61,659
              
              
              $
              511
              
              
              $
              223,805
              
              
              
              65.9
              %December
      31, 2011
              
              
              12,216
              
              
              
              31,175
              
              
              
              16,732
              
              
              
              16,158
              
              
              
              1,466
              
              
              
              77,747
              
              
              
              22.9
              %December
      31, 2012
              
              
              358
              
              
              
              3,935
              
              
              
              2,161
              
              
              
              17,269
              
              
              
              676
              
              
              
              24,399
              
              
              
              7.2
              %Thereafter
              
              
              69
              
              
              
              7,819
              
              
              
              4,758
              
              
              
              935
              
              
              
              -
              
              
              
              13,581
              
              
              
              4.0
              %Total
              
              $
              91,837
              
              
              $
              96,055
              
              
              $
              52,966
              
              
              $
              96,021
              
              
              $
              2,653
              
              
              $
              339,532
              
              
              
              100.0
              %








- 12 -





Included
in the deposit totals in the above table are savings certificates of deposit
with balances exceeding $100,000.  The majority of these deposits are
from regular customers of the Bank.  The following table provides a
maturity breakdown at December 31, 2009, of certificates of deposits with
balances greater than $100,000, by various interest rate
categories.




ACCOUNTS
      GREATER THAN $100,000(Dollars
      in Thousands)1.99%
              
              
              
              2.00%
              
              
              
              3.00%
              
              
              
              4.00%or
              
              
              or
              
              
              or
              
              
              or
              
              
              Over
              
              
              
              
              
              Percent ofless
              
              
              
              2.99%
              
              
              
              3.99%
              
              
              
              4.99%
              
              
              
              5.00%
              
              
              Total
              
              
              TotalCertificate
      accounts maturing in the year
      ending:December
      31, 2010
              
              $
              24,349
              
              
              $
              15,330
              
              
              $
              8,186
              
              
              $
              19,940
              
              
              $
              218
              
              
              $
              68,023
              
              
              
              66.8
              %December
      31, 2011
              
              
              2,824
              
              
              
              11,670
              
              
              
              4,531
              
              
              
              4,033
              
              
              
              933
              
              
              
              23,991
              
              
              
              23.5
              %December
      31, 2012
              
              
              -
              
              
              
              557
              
              
              
              740
              
              
              
              5,736
              
              
              
              103
              
              
              
              7,136
              
              
              
              7.0
              %Thereafter
              
              
              -
              
              
              
              1,153
              
              
              
              1,523
              
              
              
              100
              
              
              
              -
              
              
              
              2,776
              
              
              
              2.7
              %Total
              
              $
              27,173
              
              
              $
              28,710
              
              
              $
              14,980
              
              
              $
              29,809
              
              
              $
              1,254
              
              
              $
              101,926
              
              
              
              100.0
              %
  Borrowings





The Bank relies upon advances
(borrowings) from the FHLB of Indianapolis to supplement its supply of lendable
funds, meet deposit withdrawal requirements and to extend the term of its
liabilities.  This facility has historically been the Bank's major
source of borrowings.  Advances from the FHLB of Indianapolis are
typically secured by the Bank's stock in the FHLB of Indianapolis, a portion of
the Bank’s investment securities and a portion of the Bank's mortgage
loans.





Each FHLB credit program has its own
interest rate, which may be fixed or variable, and a range of
maturities.  Subject to the express limits in FIRREA, the FHLB of
Indianapolis may prescribe the acceptable uses to which these advances may be
put, as well as limitations on the size of the advances and repayment
provisions.  At December 31, 2009, the Bank had advances totaling
$55.0 million outstanding from the FHLB of Indianapolis.





On September 15, 2006, the Company
entered into several agreements providing for the private placement of
$15,000,000 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, Sterns & 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
$15,464,000 in principal amount of Junior Subordinated Debt Securities (the
“Debentures”) from the Company pursuant to an Indenture (the “Indenture”)
between the Company and Bank of America National Association, as trustee (the
“Trustee”).





The Common Securities and Capital
Securities will mature in 30 years, will require quarterly distributions and
will bear a floating variable rate equal to the prevailing three-month LIBOR
rate plus 1.65% per annum. Interest on the Capital Securities and Common
Securities is payable quarterly in arrears each December 15, March 15, June 15
and September 15.  The Company may redeem the Capital Securities and
the Common Securities, in whole or in part, without penalty, on or after
September 15, 2011, or earlier upon the occurrence of certain events described
below with the payment of a premium upon redemption; provided, however, that
until December 12, 2011, while the U.S. Department of Treasury (the “Treasury”)
holds the preferred stock of the Company issued under the TARP Capital Purchase
Program such redemption may not occur without the consent of the
Treasury.





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.






- 13 -





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.  Notwithstanding the foregoing, until December 12, 2011,
while the Treasury holds the preferred stock of the Company issued under the
TARP Capital Purchase Program, redemption of the Debentures would require the
Treasury’s consent. 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.





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 following table sets forth the
maximum amount of each category of short-term borrowings (borrowings with
remaining maturities of one year or less) outstanding at any month-end during
the periods shown and the average aggregate balances of short-term borrowings
for such periods.





Year
            
            
            
            Year
            
            
            
            YearEnded
            
            
            
            Ended
            
            
            
            Ended(Dollars
      in Thousands)
            
            Dec
      31, 2009
            
            
            
            Dec
      31, 2008
            
            
            
            Dec
      31, 2007Official
      check overnight remittance
            $
            -
            
            
            $
            344
            
            
            $
            232FHLB
      overnight borrowings
            $
            -
            
            
            
            4,713
            
            
            
            -FHLB
      advances
            $
            19,500
            
            
            $
            31,850
            
            
            $
            31,850Bank
      of America short term borrowings
            $
            -
            
            
            $
            -
            
            
            $
            985Average
      amount of total
              short-term
      borrowings outstanding
            $
            19,652
            
            
            $
            31,895
            
            
            $
            23,668






The
following table sets forth the amount of short-term FHLB advances outstanding at
period end


during
the period shown and the weighted average rate of such FHLB
advances.





(Dollars
      in Thousands)
            
            Dec
      31, 2009
            
            Dec
      31, 2008
            
            Dec
      31, 2007FHLB
      advances:Amount
            $
            -
            $
            19,500
            $
            31,850Weighted
      average rate
            
            -
            
            3.2%
            
            4.9%





Subsidiaries
and Other Operations





The Bank organized a subsidiary under
Nevada law, Home Investments, Inc., (“HII”).  Effective March 31,
2002, the Bank transferred the management of approximately $90 million in
securities to HII.  Home Investments, Inc. holds, services, manages,
and invests that portion of the Bank’s investment portfolio as may be
transferred from time to time by the Bank to HII.  Home Investments
Inc.’s, investment policy mirrors that of the Bank.  At December 31,
2009, of the $153.7 million in consolidated investments owned by the Bank,
$148.6 million was held by Home Investments, Inc.





As of January 26, 2010, the Company
dissolved HomeFed Financial Corporation, (“HFF”), a subsidiary corporation
organized under Indiana law.  At December 31, 2009, the Company’s
aggregate investment in HFF consisted of $722,000 in a cash
account.  HFF had a 14% interest in Consortium Partners, a Louisiana
partnership, which owned 50% of the outstanding shares of the Family Financial
Holdings, Inc. of New Orleans, Louisiana ("Family Financial").  The
remaining 50% of the outstanding shares of Family Financial were owned
proportionately by the partners of Consortium Partners.  HFF
liquidated its interest in Consortium Partners and Family Financial Holdings,
Inc. and received a liquidation payment of $671,000 in May of 2009.






- 14 -





The Bank has also engaged in
full-service securities brokerage services activities through an arrangement
with Raymond James Financial Services.  During the third quarter of
2008, the Company chose to discontinue offering brokerage services through
Raymond James and the brokerage business was sold to the brokers who had been
serving these customers.  For the year ended December 31, 2008, the
Bank received $1.4 million in commissions from its Raymond James financial
activities.





Employees





As of December 31, 2009, the Company
employed 212 persons on a full-time basis and 33 persons on a part-time or
temporary basis.  None of the Company’s employees are represented by a
collective bargaining group.  Management considers its employee
relations to be excellent.





Competition





The Bank operates in south central
Indiana and makes almost all of its loans to, and accepts almost all of its
deposits from, residents of Bartholomew, Jackson, Jefferson, Jennings, Johnson,
Scott, Ripley, Washington, Decatur and Marion counties in Indiana.





The Bank is subject to competition from
various financial institutions, including state and national banks, state and
federal thrift associations, credit unions and other companies or firms,
including brokerage houses, that provide similar services in the areas of the
Bank's home and branch offices.  Also, in Seymour, Columbus, North
Vernon, Batesville, and the Greenwood area, the Bank must compete with banks and
savings institutions in Indianapolis.  To a lesser extent, the Bank
competes with financial and other institutions in the market areas surrounding
Cincinnati, Ohio and Louisville, Kentucky.  The Bank also competes
with money market funds that currently are not subject to reserve requirements,
and with insurance companies with respect to its Individual Retirement and
annuity accounts.





Under current law, bank holding
companies may acquire thrifts.  Thrifts may also acquire banks under
federal law.  Affiliations between banks and thrifts based in Indiana
have increased the competition faced by the Bank and the Company.  See
“Branching and Acquisitions.”





The Gramm-Leach-Bliley Act allows
insurers and other financial service companies to acquire banks; removes various
restrictions that previously applied to bank holding company ownership of
securities firms and mutual fund advisory companies; and establishes the overall
regulatory structure applicable to bank holding companies that also engage in
insurance and securities operations.  These provisions in the Act may
increase the level of competition the Bank faces from securities firms and
insurance companies.





The
primary factors influencing competition for deposits are interest rates, service
and convenience of office locations.  Competition is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels, and other factors that
are not readily predictable.





REGULATION





Both the Company and the Bank operate
in highly regulated environments and are subject to supervision, examination and
regulation by several governmental regulatory agencies, including the Board of
Governors of the Federal Reserve System (the “Federal Reserve”), the Federal
Deposit Insurance Corporation (the “FDIC”), and the Indiana Department of
Financial Institutions (the “DFI”). The laws and regulations established by
these agencies are generally intended to protect depositors, not shareholders.
Changes in applicable laws, regulations, governmental policies, income tax laws
and accounting principles may have a material effect on the Company’s business
and prospects. The following summary is qualified by reference to the statutory
and regulatory provisions discussed.





Indiana
Community Bancorp





The Bank Holding Company Act.
Because the Company owns all of the outstanding capital stock of the Bank, it is
registered as a bank holding company under the federal Bank Holding Company Act
of 1956 and is subject to periodic examination by the Federal Reserve and
required to file periodic reports of its operations and any additional
information that the Federal Reserve may require.






- 15 -





Investments, Control, and
Activities. With some limited exceptions, the Bank Holding Company Act
requires every bank holding company to obtain the prior approval of the Federal
Reserve before acquiring another bank holding company or acquiring more than 5%
of the voting shares of a bank (unless it already owns or controls the majority
of such shares).





Bank holding companies are prohibited,
with certain limited exceptions, from engaging in activities other than those of
banking or of managing or controlling banks. They are also prohibited from
acquiring or retaining direct or indirect ownership or control of voting shares
or assets of any company which is not a bank or bank holding company, other than
subsidiary companies furnishing services to or performing services for their
subsidiaries, and other subsidiaries engaged in activities which the Federal
Reserve determines to be so closely related to banking or managing or
controlling banks as to be incidental to these operations. The Bank Holding
Company Act does not place territorial restrictions on such nonbank
activities.





The Gramm-Leach Bliley Act of 1999
allows a bank holding company to qualify as a “financial holding company” and,
as a result, be permitted to engage in a broader range of activities that are
“financial in nature” and in activities that are determined to be incidental or
complementary to activities that are financial in nature. The Gramm-Leach-Bliley
Act amends the Bank Holding Company Act of 1956 to include a list of activities
that are financial in nature, and the list includes activities such as
underwriting, dealing in and making a market in securities, insurance
underwriting and agency activities and merchant banking. The Federal Reserve is
authorized to determine other activities that are financial in nature or
incidental or complementary to such activities. The Gramm-Leach-Bliley Act also
authorizes banks to engage through financial subsidiaries in certain of the
activities permitted for financial holding companies.





In order for a bank holding company to
engage in the broader range of activities that are permitted by the
Gramm-Leach-Bliley Act (1) all of its depository institutions must be well
capitalized and well managed and (2) it must file a declaration with the Federal
Reserve that it elects to be a “financial holding company.”  In
addition, to commence any new activity permitted by the Gramm-Leach-Bliley Act,
each insured depository institution of the financial holding company must have
received at least a “satisfactory” rating in its most recent examination under
the Community Reinvestment Act. The Company is not currently a financial holding
company.





Dividends. The Federal
Reserve’s policy is that a bank holding company experiencing earnings weaknesses
should not pay cash dividends exceeding its net income or which could only be
funded in ways that weaken the bank holding company’s financial health, such as
by borrowing. Additionally, the Federal Reserve possesses enforcement powers
over bank holding companies and their non-bank subsidiaries to prevent or remedy
actions that represent unsafe or unsound practices or violations of applicable
statutes and regulations. Among these powers is the ability to proscribe the
payment of dividends by banks and bank holding companies.





Source of Strength. In
accordance with Federal Reserve policy, the Company is expected to act as a
source of financial strength to the Bank and to commit resources to support the
Bank in circumstances in which the Company might not otherwise do
so.





Indiana
Bank and Trust Company





General Regulatory
Supervision. The Bank as an Indiana commercial bank and a member of the
Federal Reserve System is subject to examination by the DFI and the Federal
Reserve. The DFI and the Federal Reserve regulate or monitor virtually all areas
of the Bank’s operations. The Bank must undergo regular on-site examinations by
the Federal Reserve and DFI and must submit periodic reports to the Federal
Reserve and the DFI.





Lending Limits. Under Indiana
law, the Bank may not make a loan or extend credit to a single or related group
of borrowers in excess of 15% of its unimpaired capital and surplus. Additional
amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if
such loans or extensions of credit are fully secured by readily marketable
collateral, including certain debt and equity securities but not including real
estate. At December 31, 2009, the Bank did not have any loans or extensions of
credit to a single or related group of borrowers in excess of its lending
limits.





Deposit Insurance. Deposits
in the Bank are insured by the Deposit Insurance Fund of the FDIC up to a
maximum amount, which is generally $250,000 per depositor until December 31,
2013, subject to aggregation rules. The Bank is subject to deposit insurance
assessments by the FDIC pursuant to its regulations establishing a risk-related
deposit insurance assessment system, based upon the institution’s capital levels
and risk profile. Under the FDIC’s risk-based assessment system, insured
institutions are assigned to one of four risk-weighted categories based on
supervisory evaluations, regulatory capital levels, and certain other factors
with less risky institutions paying lower assessments. An institution’s
assessment rate depends upon the category to which it is assigned. There are
also adjustments to a bank’s initial assessment rates based on levels of
long-term unsecured debt, secured liabilities in excess of 25% of domestic
deposits and, for certain institutions, brokered deposit levels. For 2009,
initial assessments ranged from 12 to 45 basis points of assessable deposits,
and the Bank is currently paying assessments at the rate of 15 basis points for
each $100 of insured deposits. The Bank is also subject to assessment for the
Financing Corporation (FICO) to service the interest on its bond obligations.
The amount assessed on individual institutions, including the Bank, by FICO is
in addition to the amount paid for deposit insurance according to the
risk-related assessment rate schedule. These assessments will continue until the
FICO bonds are repaid between 2017 and 2019. During 2009, the FICO assessment
rate ranged between 1.02 and 1.14 basis points for each $100 of insured deposits
per quarter. For the first quarter of 2010, the FICO assessment rate is 1.06
basis points. The Bank expensed deposit insurance assessments (including the
FICO assessments) of $1.8 million during the year ended December 31, 2009.
Future increases in deposit insurance premiums or changes in risk classification
would increase the Bank’s deposit related costs.






- 16 -





Due to the recent difficult economic
conditions, deposit insurance per account owner has been raised to $250,000 for
all types of accounts until December 31, 2013. In addition, the FDIC adopted an
optional Temporary Liquidity Guarantee Program by which, for a fee, noninterest
bearing transaction accounts would receive unlimited insurance coverage until
June 30, 2010 and, for a fee, certain senior unsecured debt issued by
institutions and their holding companies between October 13, 2008 and October
31, 2009 would be guaranteed by the FDIC through December 31, 2012. The Bank
made the business decision to participate in the unlimited noninterest bearing
transaction account coverage and the Bank and the Company elected to participate
in the unsecured debt guarantee program, but do not expect to issue any
guaranteed debt under the program. The assessments for unlimited noninterest
bearing transaction account coverage were 10 basis points per $100 of insured
deposits during 2009 and will be 15 basis points per $100 of insured deposits
during the first six months of 2010.  The assessments for unsecured
debt guarantee program coverage ranged from 50 to 100 basis points per annum per
$100 of debt depending on the maturity of the debt.





The FDIC is authorized to set the
reserve ratio for the Deposit Insurance Fund at between 1.15% and 1.5% of
estimated insured deposits. The designated reserve ratio is currently 1.25%. As
a result of the deterioration in banking and economic conditions and recent
failures of banks, the reserve ratio was .22% as of June 30, 2009. The FDIC has
7 years to attain a reserve ratio of 1.15%. The FDIC adopted an interim rule
that imposed a special assessment of 20 basis points as of June 30, 2009, which
was collected on September 30, 2009. The special assessment for the Bank paid on
September 30, 2009, was 454,000.





On December 20, 2009, banks were
required to pay the third quarter FDIC assessment and to prepay estimated
insurance assessments for the years 2010 through 2012 on that date. The
pre-payment did not affect the Bank’s earnings on that date.  The Bank
paid an aggregate of $5.5 million in premiums on December 30, 2009, $4.8 million
of which constituted prepaid premiums.





The Federal Deposit Insurance
Corporation has authority to increase insurance assessments. A significant
increase in insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the bank. Management cannot
predict what insurance assessment rates will be in the future.





The FDIC may terminate the deposit
insurance of any insured depository institution if the FDIC determines, after a
hearing, that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe and unsound condition to continue operations or has
violated any applicable law, regulation, order or any condition imposed in
writing by, or written agreement with, the FDIC. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a permanent
termination of insurance if the institution has no tangible
capital.





Transactions with Affiliates and
Insiders. The Bank is subject to limitations on the amount of loans or
extensions of credit to, or investments in, or certain other transactions with,
affiliates and on the amount of advances to third parties collateralized by the
securities or obligations of affiliates. Furthermore, within the foregoing
limitations as to amount, each covered transaction must meet specified
collateral requirements. Compliance is also required with certain provisions
designed to avoid the acquisition of low quality assets. The Bank is also
prohibited from engaging in certain transactions with certain affiliates unless
the transactions are on terms substantially the same, or at least as favorable
to such institution or its subsidiaries, as those prevailing at the time for
comparable transactions with nonaffiliated companies.





Extensions of credit by the Bank to its
executive officers, directors, certain principal shareholders, and their related
interests generally must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with third parties, and not involve more than the normal risk of
repayment or present other unfavorable features.





Dividends. Under Indiana law,
the Bank is prohibited from paying dividends in an amount greater than its
undivided profits, or if the payment of dividends would impair the Bank’s
capital. Moreover, the Bank is required to obtain the approval of the DFI and
the Federal Reserve for the payment of any dividend if the aggregate amount of
all dividends paid by the Bank during any calendar year, including the proposed
dividend, would exceed the sum of the Bank’s retained net income for the year to
date combined with its retained net income for the previous two years. For this
purpose, “retained net income” means the net income of a specified period,
calculated under the consolidated report of income instructions, less the total
amount of all dividends declared for the specified period.






- 17 -





Federal law generally prohibits the
Bank from paying a dividend to its holding company if the depository institution
would thereafter be undercapitalized. The FDIC may prevent an insured bank from
paying dividends if the bank is in default of payment of any assessment due to
the FDIC. In addition, payment of dividends by a bank may be prevented by the
applicable federal regulatory authority if such payment is determined, by reason
of the financial condition of such bank, to be an unsafe and unsound banking
practice.





Branching and Acquisitions.
Branching by the Bank requires the approval of the Federal Reserve and the DFI.
Under current law, Indiana chartered banks may establish branches throughout the
state and in other states, subject to certain limitations. Congress authorized
interstate branching, with certain limitations, beginning in 1997. Indiana law
authorizes an Indiana bank to establish one or more branches in states other
than Indiana through interstate merger transactions and to establish one or more
interstate branches through de novo branching or the acquisition of a branch.
There are some states where the establishment of de novo branches by
out-of-state financial institutions is prohibited.





Capital Regulations. The
federal bank regulatory authorities have adopted risk-based capital guidelines
for banks and bank holding companies that are designed to make regulatory
capital requirements more sensitive to differences in risk profiles among banks
and bank holding companies and account for off-balance sheet items. Risk-based
capital ratios are determined by allocating assets and specified off-balance
sheet commitments to four risk weighted categories of 0%, 20%, 50%, or 100%,
with higher levels of capital being required for the categories perceived as
representing greater risk.





The capital guidelines divide a bank
holding company’s or bank’s capital into two tiers. The first tier (“Tier I”)
includes common equity, certain non-cumulative perpetual preferred stock and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and certain other intangible assets (except mortgage servicing rights
and purchased credit card relationships, subject to certain limitations).
Supplementary (“Tier II”) capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions. Banks and bank holding companies are required to maintain a
total risk-based capital ratio of 8%, of which 4% must be Tier I capital. The
federal banking regulators may, however, set higher capital requirements when a
bank’s particular circumstances warrant. Banks experiencing or anticipating
significant growth are expected to maintain capital ratios, including tangible
capital positions, well above the minimum levels.





Also required by the regulations is the
maintenance of a leverage ratio designed to supplement the risk-based capital
guidelines. This ratio is computed by dividing Tier I capital, net of all
intangibles, by the quarterly average of total assets. The minimum leverage
ratio is 3% for the most highly rated institutions, and 1% to 2% higher for
institutions not meeting those standards. Pursuant to the regulations, banks
must maintain capital levels commensurate with the level of risk, including the
volume and severity of problem loans, to which they are exposed.




- 18 -





The
following is a summary of the Company’s and the Bank’s regulatory capital and
capital requirements at December 31, 2009.





To
      Be Categorized As“Well
      Capitalized”Under
      PromptFor
      Capital
            
            
            Corrective
      ActionActual
            
            
            Adequacy
      Purposes
            
            
            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
            %





Prompt Corrective Regulatory Action.Federal law provides the federal banking regulators with broad powers to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators’ powers depends on whether the
institution in question is “well capitalized,” “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized,” or “critically
undercapitalized,” as defined by regulation. Depending upon the capital category
to which an institution is assigned, the regulators’ corrective powers
include:  requiring the submission of a capital restoration plan;
placing limits on asset growth and restrictions on activities; requiring the
institution to issue additional capital stock (including additional voting
stock) or to be acquired; restricting transactions with affiliates; restricting
the interest rate the institution may pay on deposits; ordering a new election
of directors of the institution; requiring that senior executive officers or
directors be dismissed; prohibiting the institution from accepting deposits from
correspondent banks; requiring the institution to divest certain subsidiaries;
prohibiting the payment of principal or interest on subordinated debt; and,
ultimately, appointing a receiver for the institution. At December 31, 2009, the
Bank was categorized as "well capitalized," meaning that the Bank’s total
risk-based capital ratio exceeded 10%, the Bank’s Tier I risk-based capital
ratio exceeded 6%, the Bank’s leverage ratio exceeded 5%, and the Bank was not
subject to a regulatory order, agreement or directive to meet and maintain a
specific capital level for any capital measure.





Other Regulations. Interest
and other charges collected or contracted for by the Bank are subject to state
usury laws and federal laws concerning interest rates. The Bank’s loan
operations are also subject to federal laws applicable to credit transactions,
such as the:





·
            Truth-In-Lending
      Act, governing disclosures of credit terms to consumer
      borrowers;




·
            Home
      Mortgage Disclosure Act of 1975, requiring financial institutions to
      provide information to enable the public and public officials to
      determine whether a financial institution is fulfilling its obligation to
      help meet the housing needs of the community it
  serves;




·
            Equal
      Credit Opportunity Act, prohibiting discrimination on the basis of race,
      creed or other prohibited factors in extending
  credit;




·
            Fair
      Credit Reporting Act of 1978, governing the use and provision of
      information to credit reporting
agencies;




·
            Fair
      Debt Collection Act, governing the manner in which consumer debts may be
      collected by collection agencies;
and




·
            Rules
      and regulations of the various federal agencies charged with the
      responsibility of implementing such federal
  laws.






- 19 -





The deposit operations of the Bank also
are subject to the:





·
            Right
      to Financial Privacy Act, which imposes a duty to maintain confidentiality
      of consumer financial records and prescribes procedures for complying with
      administrative subpoenas of financial records;
  and




·
            Electronic
      Funds Transfer Act, and Regulation E issued by the Federal Reserve to
      implement that Act, which governs automatic deposits to and withdrawals
      from deposit accounts and customers’ rights and liabilities arising from
      the use of automated teller machines and other electronic banking
      services.




State Bank Activities.Under
federal law, as implemented by regulations adopted by the FDIC, FDIC-insured
state banks are prohibited, subject to certain exceptions, from making or
retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law, as implemented by FDIC
regulations, also prohibits FDIC-insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that
is not permitted for a national bank or its subsidiary, respectively, unless the
bank meets, and could continue to meet, its minimum regulatory capital
requirements and the FDIC determines that the activity would not pose a
significant risk to the deposit insurance fund of which the bank is a member.
Impermissible investments and activities must be divested or discontinued within
certain time frames set by the FDIC. It is not expected that these restrictions
will have a material impact on the operations of the Bank.





Enforcement Powers. Federal
regulatory agencies may assess civil and criminal penalties against depository
institutions and certain “institution-affiliated parties,” including management,
employees, and agents of a financial institution, as well as independent
contractors and consultants such as attorneys and accountants and others who
participate in the conduct of the financial institution’s affairs. In addition,
regulators may commence enforcement actions against institutions and
institution-affiliated parties. Possible enforcement actions include the
termination of deposit insurance. Furthermore, regulators may issue
cease-and-desist orders to, among other things, require affirmative action to
correct any harm resulting from a violation or practice, including restitution,
reimbursement, indemnifications or guarantees against loss. A financial
institution may also be ordered to restrict its growth, dispose of certain
assets, rescind agreements or contracts, or take other actions as determined by
the regulator to be appropriate.





Recent Legislative
Developments. The global and U.S. economies have in past months
significantly reduced business activity as a result of, among other factors,
disruptions in the financial system during the past two years. Dramatic declines
in the housing market during the past year, with falling home prices and
increasing foreclosures and unemployment, have resulted in significant
write-downs of asset values by financial institutions, including
government-sponsored entities and major commercial and investment banks. These
write-downs, initially of mortgage-backed securities but spreading to credit
default swaps and other derivative securities, have caused many financial
institutions to seek additional capital, to merge with larger and stronger
institutions and, in some cases, to fail.





Reflecting concern about the stability
of the financial markets generally and the strength of counterparties, many
lenders and institutional investors have reduced funding to borrowers, including
other financial institutions. The availability of credit, confidence in the
financial sector, and level of volatility in the financial markets have been
significantly adversely affected as a result. In some cases, the markets have
produced downward pressure on stock prices and credit capacity for certain
issuers without regard to those issuers’ underlying financial
strength.





In response to the financial crises
affecting the banking system and financial markets and going concern threats to
investment banks and other financial institutions, on October 3, 2008, the
Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law.
Pursuant to the EESA, the U.S. Department of Treasury (the “Treasury”) has the
authority to, among other things, purchase up to $700 billion of mortgages,
mortgage-backed securities and certain other financial instruments from
financial institutions for the purpose of stabilizing and providing liquidity to
the U.S. financial markets.





In response to the financial crises
affecting the banking system, on October 14, 2008, the Treasury announced it
would offer to qualifying U.S. banking organizations the opportunity to sell
preferred stock, along with warrants to purchase common stock, to the Treasury
on what may be considered attractive terms under the Troubled Asset Relief
Program (“TARP”) Capital Purchase Program (the “CPP”). The CPP allows financial
institutions, like the Company, to issue non-voting preferred stock to the
Treasury in an amount ranging between 1% and 3% of its total risk-weighted
assets.




- 20 -





Although both the Company and the Bank
met all applicable regulatory capital requirements and were well capitalized,
the Company determined that obtaining additional capital pursuant to the CPP for
contribution in whole or in part to the Bank was advisable. As a result, the
Company decided to participate in the CPP Program and sold $21.5 million in its
Fixed Rate Cumulative Preferred Stock, Series A to the Treasury on December 12,
2008.





The general terms of the preferred
stock issued by the Company under the CPP are as follows:





·
            Dividends
      at the rate of 5% per annum, payable quarterly in arrears, are required to
      be paid on the preferred stock for the first five years and dividends at
      the rate of 9% per annum are required thereafter until the stock is
      redeemed by the Company;




·
            Without
      the prior consent of the Treasury, the Company will be prohibited from
      increasing its common stock dividends or repurchasing its common stock for
      the first three years while Treasury is an
  investor;




·
            During
      the first three years the preferred stock is outstanding, the Company will
      be prohibited from repurchasing such preferred stock, except with the
      proceeds from a sale of Tier 1 qualifying common or other preferred stock
      of the Company in an offering that raises at least 25% of the initial
      offering price of the preferred stock sold to the Treasury ($5,375,000).
      After the first three years, the preferred stock can be redeemed at any
      time with any available cash;




·
            Under
      the CPP, the Company also issued to the Treasury warrants entitling the
      Treasury to buy 188,707 shares of the Company’s common stock at an
      exercise price of $17.09 per share;
and




·
            The
      Company agreed to certain compensation restrictions for its senior
      executive officers and restrictions on the amount of executive
      compensation which is tax
deductible.







On
February 17, 2009, President Obama signed into law the American Recovery and
Reinvestment Act of 2009 (the “ARRA”).  The ARRA amends, among other
things, the TARP Program legislation by directing the U.S. Treasury Department
to issue regulations implementing strict limitations on compensation paid or
accrued by financial institutions, like us, participating in the TARP
Program.  These limitations are to include:





·
            A
      prohibition on paying or accruing bonus, incentive or retention
      compensation for our President and Chief Executive Officer, other than
      certain awards of long-term restricted stock or bonuses payable under
      existing employment agreements;





·
            A
      prohibition on making any payments to the executive officers of the
      Company and the next five most highly compensated employees for departure
      from the Company other than compensation earned for services rendered or
      accrued benefits;





·
            Subjecting
      bonus, incentive and retention payments made to the executive officers of
      the Company and the next 20 most highly compensated employees to repayment
      (clawback) if based on statements of earnings, revenues, gains or other
      criteria that are later found to be materially
      inaccurate;





·
            A
      prohibition on any compensation plan that would encourage manipulation of
      reported earnings;





·
            Establishment
      by the Board of Directors of a company-wide policy regarding excessive or
      luxury expenditures including office and facility renovations, aviation or
      other transportation services and other activities or events that are not
      reasonable expenditures for staff development, reasonable performance
      incentives or similar measures in the ordinary course of
      business;





·
            Submitting
      a “say-on-pay” proposal to a non-biding vote of shareholders at future
      annual meetings, whereby shareholders vote to approve the compensation of
      executives as disclosed pursuant to the executive compensation disclosures
      included in the proxy statement;
and





·
            A
      review by the U.S. Department of Treasury of any bonus, retention awards
      or other compensation paid to the executive officers of the Company and
      the next 20 most highly compensated employees prior to February 17, 2009
      to determine if such payments were excessive and negotiate for the
      reimbursement of such excess
payments.






- 21 -




On June 10, 2009, Treasury issued an
interim final rule implementing and providing guidance on the executive
compensation and corporate governance provisions of EESA, as amended by
ARRA.  The regulations were published in the Federal Register on June
15, 2009, and set forth the following requirements:





·
            Evaluation
      of employee compensation plans and potential to encourage excessive risk
      or manipulation of earnings.





·
            Compensation
      committee discussion, evaluation and review of senior executive officer
      compensation plans and other employee compensation plans to ensure that
      they do not encourage unnecessary and excessive
  risk.





·
            Compensation
      committee discussion, evaluation and review of employee compensation plans
      to ensure that they do not encourage manipulation of reported
      earnings.





·
            Compensation
      committee certification and disclosure requirements regarding evaluation
      of employee compensation plans.





·
            “Clawback”
      of bonuses based on materially inaccurate financial statements or
      performance metrics.





·
            Prohibition
      on golden parachute payments.





·
            Limitation
      on bonus payments, retention awards and incentive
      compensation.





·
            Disclosure
      regarding perquisites and compensation consultants; prohibition on
      gross-ups.





·
            Luxury
      or excessive expenditures policy.





·
            Shareholder
      advisory resolution on executive
compensation.





·
            Annual
      compliance certification by principal executive officer and principal
      financial officer.





·
            Establishment
      of the Office of the Special Master for TARP Executive Compensation with
      authority to review certain payments and compensation
      structures.





ARRA was followed by numerous actions
by the Federal Reserve, Congress, Treasury, the SEC and others to address the
current liquidity and credit crisis that has followed the sub-prime meltdown
that commenced in 2007. These measures include homeowner relief that encourage
loan restructuring and modification; the establishment of significant liquidity
and credit facilities for financial institutions and investment banks; the
lowering of the federal funds rate; emergency action against short selling
practices; a temporary guaranty program for money market funds; the
establishment of a commercial paper funding facility to provide back-stop
liquidity to commercial paper issuers; coordinated international efforts to
address illiquidity and other weaknesses in the banking sector; and legislation
that would require creditors that transfer loans and securitizations of loans to
maintain a material portion (generally at least 10%) of the credit risk of the
loans transferred or securitized.





In addition, the House Financial
Services Committee has approved several elements of a plan of the Obama
Administration providing for broad and complex financial regulatory reform. In
particular, a bill to establish the Consumer Financial Protection Agency
(“CFPA”) was passed by the Committee. Though differing in significant respects
from the Administration’s original proposal, the version passed by the Committee
would grant the CFPA broad rulemaking, interpretative, supervisory, examination,
and enforcement authority over financial services providers such as the Company.
The CFPA proposal and other aspects of the Administration’s plan remain
controversial, and many obstacles exist to achieving the Administration’s goal
of enacting these reforms in 2010.





On October 22, 2009, the Federal
Reserve issued proposed supervisory guidance designed to ensure that incentive
compensation practices of banking organizations are consistent with safety and
soundness. Uncertainty exists regarding the interpretation and application of
this guidance, and the impact of the guidance on recruitment, retention and
motivation of key officers and employees.





It is not clear at this time what
impact the EESA, ARRA, the TARP Capital Purchase Program, the Temporary
Liquidity Guarantee Program, other liquidity and funding and other initiatives
of the Federal Reserve and other agencies that have been previously announced,
and any additional programs that may be initiated in the future will have on the
financial markets and the other difficulties described above, including the
extreme levels of volatility and limited credit availability currently being
experienced, or on the U.S. banking and financial industries and the broader
U.S. and global economies. Further adverse effects could have an adverse effect
on the Company and its business.






- 22 -





Effect of Governmental Monetary
Policies. The Bank’s earnings are affected by domestic economic
conditions and the monetary and fiscal policies of the United States government
and its agencies. The Federal Reserve’s monetary policies have had, and are
likely to continue to have, an important impact on the operating results of
commercial banks through its power to implement national monetary policy in
order, among other things, to curb inflation or combat a recession. The monetary
policies of the Federal Reserve have major effects upon the levels of bank
loans, investments and deposits through its open market operations in United
States government securities and through its regulation of the discount rate on
borrowings of member banks and the reserve requirements against member bank
deposits. It is not possible to predict the nature or impact of future changes
in monetary and fiscal policies.





Federal
Home Loan Bank System





The Bank is a member of the FHLB of
Indianapolis, which is one of twelve regional FHLBs. Each FHLB serves as a
reserve or central bank for its members within its assigned region. The FHLB is
funded primarily from funds deposited by banks and savings associations and
proceeds derived from the sale of consolidated obligations of the FHLB system.
It makes loans to members (i.e., advances) in accordance with policies and
procedures established by the Board of Directors of the FHLB. All FHLB advances
must be fully secured by sufficient collateral as determined by the FHLB. The
Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB
System, including the FHLB of Indianapolis.





As a member of the FHLB, the Bank is
required to purchase and maintain stock in the FHLB of Indianapolis in an amount
equal to at least 1% of its aggregate unpaid residential mortgage loans, home
purchase contracts, or similar obligations at the beginning of each year. At
December 31, 2009, the Bank's investment in stock of the FHLB of Indianapolis
was $8.3 million. The FHLB imposes various limitations on advances such as
limiting the amount of certain types of real estate-related collateral to 30% of
a member's capital and limiting total advances to a member. Interest rates
charged for advances vary depending upon maturity, the cost of funds to the FHLB
of Indianapolis and the purpose of the borrowing.





The FHLBs
are required to provide funds for the resolution of troubled savings
associations and to contribute to affordable housing programs through direct
loans or interest subsidies on advances targeted for community investment and
low- and moderate-income housing projects. For the year ended December 31, 2009,
dividends paid by the FHLB of Indianapolis to the Bank totaled approximately
$239,000, for an annualized rate of 2.9%. See Item 1A, Risk Factors,” “Financial
Problems at the Federal Home Loan Bank of Indianapolis May Adversely Affect Our
Ability to Borrow Monies in the Future and Our Income.”





Limitations
on Rates Paid for Deposits





Regulations promulgated by the FDIC
place limitations on the ability of insured depository institutions to accept,
renew or roll over deposits by offering rates of interest which are
significantly higher than the prevailing rates of interest on deposits offered
by other insured depository institutions having the same type of charter in the
institution's normal market area. Under these regulations, "well-capitalized"
depository institutions may accept, renew or roll such deposits over without
restriction, "adequately capitalized" depository institutions may accept, renew
or roll such deposits over with a waiver from the FDIC (subject to certain
restrictions on payments of rates) and "undercapitalized" depository
institutions may not accept, renew or roll such deposits over. The regulations
contemplate that the definitions of "well-capitalized," "adequately-capitalized"
and "undercapitalized" will be the same as the definition adopted by the
agencies to implement the corrective action provisions of federal law.
Management does not believe that these regulations will have a materially
adverse effect on the Bank's current operations.





Federal
Reserve System





Under regulations of the Federal
Reserve, the Bank is required to maintain reserves against its transaction
accounts (primarily checking accounts) and non-personal money market deposit
accounts. The effect of these reserve requirements is to increase the Bank's
cost of funds. The Bank is in compliance with its reserve
requirements.





Federal
Securities Law





The shares of Common Stock of the
Company are registered with the Securities and Exchange Commission, (the “SEC”)
under the Securities Exchange Act of 1934 (the "1934 Act"). The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the 1934 Act and the rules of the SEC thereunder. If the
Company has fewer than 300 shareholders, it may deregister its shares under the
1934 Act and cease to be subject to the foregoing requirements.






- 23 -




Shares of Common Stock held by persons
who are affiliates of the Company may not be resold without registration unless
sold in accordance with the resale restrictions of Rule 144 under the Securities
Act of 1933 (the "1933 Act"). If the Company meets the current public
information requirements under Rule 144, each affiliate of the Company who
complies with the other conditions of Rule 144 (including a six-month holding
period for restricted securities and conditions that require the affiliate's
sale to be aggregated with those of certain other persons) will be able to sell
in the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks.





Community
Reinvestment Act Matters





Federal law requires that ratings of
depository institutions under the Community Reinvestment Act of 1977 ("CRA") be
disclosed. The disclosure includes both a four-unit descriptive rating -- using
terms such as satisfactory and unsatisfactory -- and a written evaluation of
each institution's performance. Each FHLB is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the FHLBs. The standards take into account a
member's performance under the CRA and its record of lending to first-time
homebuyers. The FHLBs have established an "Affordable Housing Program" to
subsidize the interest rate of advances to member associations engaged in
lending for long-term, low- and moderate-income, owner-occupied and affordable
rental housing at subsidized rates. The Bank is participating in this program.
The examiners have determined that the Bank has a satisfactory record of meeting
community credit needs.





Taxation





Federal
Taxation





The Company and its subsidiaries file a
consolidated federal income tax return. The consolidated federal income tax
return has the effect of eliminating intercompany distributions, including
dividends, in the computation of consolidated taxable income. Income of the
Company generally would not be taken into account in determining the bad debt
deduction allowed to the Bank, regardless of whether a consolidated tax return
is filed. However, certain "functionally related" losses of the Company would be
required to be taken into account in determining the permitted bad debt
deduction which, depending upon the particular circumstances, could reduce the
bad debt deduction.





The Bank is required to compute its
allocable deduction using the experience method. Reserves taken after 1987 using
the percentage of taxable income method generally must be included in future
taxable income over a six-year period, although a two-year delay may be
permitted for institutions meeting a residential mortgage loan origination test.
The Bank began recapturing approximately $2.3 million over a six-year period
beginning in fiscal 1999, and has now included all of those reserves in its
income. In addition, the pre-1988 reserve, in which no deferred taxes have been
recorded, will not have to be recaptured into income unless (i) the Bank no
longer qualifies as a bank under the Code, or (ii) excess dividends are paid out
by the Bank.





Depending on the composition of its
items of income and expense, a bank may be subject to the alternative minimum
tax. A bank must pay an alternative minimum tax equal to the amount (if any) by
which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain tax preferences and
adjustments, including depreciation deductions in excess of that allowable for
alternative minimum tax purposes, tax-exempt interest on most private activity
bonds issued after August 7, 1986 (reduced by any related interest expense
disallowed for regular tax purposes), the amount of the bad debt reserve
deduction claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
and before any alternative tax net operating loss). AMTI may be reduced only up
to 90% by net operating loss carryovers, but alternative minimum tax paid that
is attributable to most preferences (although not to post-August 7, 1986
tax-exempt interest) can be credited against regular tax due in later
years.





State
Taxation





The Bank is subject to Indiana's
Financial Institutions Tax ("FIT"), which is imposed at a flat rate of 8.5% on
"adjusted gross income."  "Adjusted gross income," for purposes of
FIT, begins with taxable income as defined by Section 63 of the Internal Revenue
Code, and thus, incorporates federal tax law to the extent that it affects the
computation of taxable income. Federal taxable income is then adjusted by
several Indiana modifications. Other applicable state taxes include generally
applicable sales and use taxes plus real and personal property
taxes.




- 24 -





Item
1A. Risk Factors





In analyzing whether to make or
continue an investment in the Company, investors should consider, among other
factors, the following:





The Current Economic Environment
Poses Challenges For Us and Could Adversely Affect Our Financial Condition and
Results of Operations. We are operating in a challenging and uncertain
economic environment, including generally uncertain national conditions and
local conditions in our markets. The capital and credit markets have been
experiencing volatility and disruption for more than 24 months. The risks
associated with our business become more acute in periods of a slowing economy
or slow growth. Financial institutions continue to be affected by sharp declines
in the real estate market and constrained financial markets. We retain direct
exposure to the residential and commercial real estate markets, and we are
affected by these events.





Our loan portfolio includes commercial
real estate loans, residential mortgage loans, and construction and land
development loans. Continued declines in real estate values, home sales volumes
and financial stress on borrowers as a result of the uncertain economic
environment, including job losses, could have an adverse effect on our borrowers
or their customers, which could adversely affect our financial condition and
results of operations. In addition, the current recession or further
deterioration in local economic conditions in our markets could drive losses
beyond that which is provided for in our allowance for loan losses and result in
the following other consequences: increases in loan delinquencies, problem
assets and foreclosures may increase; demand for our products and services may
decline; deposits may decrease, which would adversely impact our liquidity
position; and collateral for our loans, especially real estate, may decline in
value, in turn reducing customers’ borrowing power, and reducing the value of
assets and collateral associated with our existing loans.





The Soundness of Other Financial
Institutions Could Adversely Affect Us.
Financial services institutions are interrelated as a result of trading,
clearing, counterparty, or other relationships. We have exposure to many
different industries and counterparties, and we routinely execute transactions
with counterparties in the financial services industry, including brokers and
dealers, commercial banks, investment banks, mutual and hedge funds, and other
institutional clients. Many of these transactions expose us to credit risk in
the event of default by our counterparty or client. In addition, our credit risk
may be exacerbated when the collateral held by us cannot be realized or is
liquidated at prices not sufficient to recover the full amount of the loan or
derivative exposure due us. There is no assurance that any such losses would not
materially and adversely affect our results of operations or
earnings.





Impact of Recent and Future
Legislation. Congress
and the Treasury Department have recently adopted legislation and taken actions
to address the disruptions in the financial system and declines in the housing
market. It has also proposed additional legislation that could materially affect
the financial industry, such as the Obama Administration’s broad and complex
plan for financial regulatory reform. See “Regulation -- Recent Legislative
Developments.”  It is not clear at this time what impact the Emergency
Economic Stabilization Act (“EESA”), TARP, ARRA, other liquidity and funding
initiatives of the Treasury and other bank regulatory agencies that have been
previously announced, and any additional programs that may be initiated in the
future, will have on the financial markets and the financial services industry.
The actual impact that EESA and such related measures undertaken to alleviate
the credit crisis will have generally on the financial markets, including the
levels of volatility and limited credit availability currently being
experienced, is unknown. The failure of such measures to help stabilize the
financial markets and a continuation or worsening of current financial market
conditions could materially and adversely affect our business, financial
condition, results of operations, access to credit or the trading price of our
common stock. Finally, there can be no assurance regarding the specific impact
that such measures may have on us—or whether (or to what extent) we will be able
to benefit from such programs.





In addition to the legislation
mentioned above, federal and state governments could pass additional legislation
responsive to current credit conditions. As an example, the Bank could
experience higher credit losses because of federal or state legislation or
regulatory action that reduces the amount the Bank’s borrowers are otherwise
contractually required to pay under existing loan contracts. Also, the Bank
could experience higher credit losses because of federal or state legislation or
regulatory action that limits its ability to foreclose on property or other
collateral or makes foreclosure less economically feasible.






- 25 -





Difficult Market Conditions Have
Adversely Affected Our Industry.We are
particularly exposed to downturns in the U.S. housing market. Declines in the
housing market over the past two years, with falling home prices and increasing
foreclosures, unemployment and under-employment, have negatively impacted the
credit performance of mortgage loans and securities and resulted in significant
write-downs of asset values by financial institutions, including
government-sponsored entities, major commercial and investment banks, and
regional financial institutions such as our Company. Reflecting concern about
the stability of the financial markets generally and the strength of
counterparties, many lenders and institutional investors have reduced or ceased
providing funding to borrowers, including to other financial institutions. This
market turmoil and tightening of credit have led to an increased level of
commercial and consumer delinquencies, lack of consumer confidence, increased
market volatility and widespread reduction of business activity generally. The
resulting economic pressure on consumers and lack of confidence in the financial
markets have adversely affected our business, financial condition and results of
operations. We do not expect that the difficult conditions in the financial
markets are likely to improve significantly in the near future. A worsening of
these conditions would likely exacerbate the adverse effects of these difficult
market conditions on us and others in the financial institutions industry. In
particular, we may face the following risks in connection with these
events:





·
            We
      expect to face increased regulation of our industry. Compliance with such
      regulation may increase our costs and limit our ability to pursue business
      opportunities.




·
            Our
      ability to assess the creditworthiness of our customers may be impaired if
      the models and approaches we use to select, manage and underwrite our
      customers become less predictive of future
  behaviors.




·
            The
      process we use to estimate losses inherent in our credit exposure requires
      difficult, subjective and complex judgments, including forecasts of
      economic conditions and how these economic predictions might impair the
      ability of our borrowers to repay their loans, which may no longer be
      capable of accurate estimation which may, in turn, impact the reliability
      of the process.




·
            Our
      ability to borrow from other financial institutions on favorable terms or
      at all could be adversely affected by further disruptions in the capital
      markets or other events, including actions by rating agencies and
      deteriorating investor
expectations.




·
            Competition
      in our industry could intensify as a result of the increasing
      consolidation of financial services companies in connection with current
      market conditions.




·
            We
      may be required to pay significantly higher deposit insurance premiums
      because market developments have significantly depleted the insurance fund
      of the Federal Deposit Insurance Corporation and reduced the ratio of
      reserves to insured deposits.




Current Levels of Market Volatility
Are Unprecedented.The
capital and credit markets have been experiencing volatility and disruption for
more than a year. In some cases, the markets have produced downward pressure on
stock prices and credit availability for certain issuers without regard to those
issuers’ underlying financial strength. If current levels of market disruption
and volatility continue or worsen, our ability to access capital may be
adversely affected which, in turn, could adversely affect our business,
financial condition and results of operations.





Financial Problems at the Federal
Home Loan Bank of Indianapolis May Adversely Affect Our Ability to Borrow Monies
in the Future and Our Income. At December 31, 2009, the Bank owned $8.3
million of stock of the Federal Home Loan Bank of Indianapolis (“FHLBI”) and had
outstanding borrowings of approximately $55.0 million from the FHLBI. The FHLBI
stock entitles us to dividends from the FHLBI. The Company recognized dividend
income of approximately $145,000 in 2009. Due to various financial difficulties
in the financial institution industry in 2008, including the write-down of
various mortgage-backed securities held by the FHLBI (which lowered its
regulatory capital levels), the FHLBI temporarily suspended dividends during the
1st quarter of 2009. When the dividends were finally paid, they were reduced by
75 basis points from the dividend rate paid for the previous quarter. Moreover,
the net income of the FHLBI in 2009 declined from that in 2008. Continued and
additional financial difficulties at the FHLBI could further reduce or eliminate
the dividends we receive from the FHLBI.





At December 31, 2009, the Bank’s total
borrowing capacity from the FHLBI was $138.5 million. Generally, the loan terms
from the FHLBI are better than the terms the Bank can receive from other sources
making it cheaper to borrow money from the FHLBI. Continued and additional
financial difficulties at the FHLBI could reduce or eliminate our additional
borrowing capacity with the FHLBI which could force us to borrow money from
other sources. Such other monies may not be available when we need them or, more
likely, will be available at higher interest rates and on less advantageous
terms, which will impact our net income and could impact our ability to
grow.






- 26 -





Additional Increases in Insurance
Premiums. The
Federal Deposit Insurance Corporation (“FDIC”) insures the Bank’s deposits up to
certain limits. The FDIC charges us premiums to maintain the Deposit Insurance
Fund. The Bank elected to participate in the FDIC’s Temporary Liquidity
Guarantee Program, which resulted in an increase in its insurance premiums.
Current economic conditions have increased as a result of bank failures. The
FDIC takes control of failed banks and ensures payment of deposits up to insured
limits using the resources of the Deposit Insurance Fund. The FDIC has
designated the Deposit Insurance Fund long-term target reserve ratio at 1.25
percent of insured deposits. Due to recent bank failures, the FDIC insurance
fund reserve ratio has fallen below 1.15 percent, the statutory minimum. At June
30, 2009, the ratio was .22%. The FDIC has seven years to reach the statutory
minimum reserve ratio of 1.15%.





The FDIC expects a higher ratio of
insured institution failures in the next few years, which may result in a
continued decline in the reserve ratio.  The FDIC has recently made
changes to the deposit insurance assessment system requiring riskier
institutions to pay a larger share of premiums. See “Indiana Bank and Trust
Company -- Deposit Insurance.”  Our FDIC insurance premiums (including
FICO assessments) were $1.8 million in 2009 including the special assessment of
$454,000, compared to $286,000 in 2008 including the reduction for one-time
assessment credits of $399,000.





Due to the anticipated continued
failures of unaffiliated FDIC-insured depository institutions and the increased
premiums noted above, we anticipate that our FDIC deposit insurance premiums
could increase significantly in the future which would adversely impact our
future earnings.





Future Reduction in Liquidity in the
Banking System. The
Federal Reserve Bank has been providing vast amounts of liquidity in to the
banking system to compensate for weaknesses in short-term borrowing markets and
other capital markets. A reduction in the Federal Reserve’s activities or
capacity could reduce liquidity in the markets, thereby increasing funding costs
to the Bank or reducing the availability of funds to the Bank to finance its
existing operations.





Our Participation in the TARP
Capital Purchase Program May Adversely Affect the Value of Our Common Stock and
the Rights of Our Common Stockholders. The terms of the preferred stock
the Company issued under the TARP CPP could reduce investment returns to the
Company’s common stockholders by restricting dividends, diluting existing
shareholders’ ownership interests, and restricting capital management practices.
Without the prior consent of the Treasury, the Company will be prohibited from
increasing its common stock dividends or repurchasing shares of its common stock
for the first three years while the Treasury holds the preferred
stock.





Also, the preferred stock requires
quarterly dividends to be paid at the rate of 5% per annum for the first five
years and 9% per annum thereafter until the stock is redeemed by the Company.
The payments of these dividends will decrease the excess cash the Company
otherwise has available to pay dividends on its common stock and to use for
general corporate purposes, including working capital. There is no guarantee
that the Company will have or be able to raise sufficient capital to repurchase
the preferred stock before the end of the first five years of its
issuance.





Finally, the Company will be prohibited
from continuing to pay dividends on its common stock unless it has fully paid
all required dividends on the preferred stock issued to the Treasury. Although
the Company fully expects to be able to pay all required dividends on the
preferred stock (and to continue to pay dividends on its common stock at current
levels), there is no guarantee that it will be able to do so in the
future.





Concentrations of Real Estate Loans
Could Subject the Company to Increased Risks in the Event of a Real Estate
Recession or Natural Disaster. A significant portion of the Company’s
loan portfolio is secured by real estate. The real estate collateral in each
case provides an alternate source of repayment in the event of default by the
borrower and may deteriorate in value during the time the credit is extended. A
further weakening of the real estate market in our primary market area could
result in an increase in the number of borrowers who default on their loans and
a reduction in the value of the collateral securing their loans, which in turn
could have an adverse effect on our profitability and asset quality. If we are
required to liquidate the collateral securing a loan to satisfy the debt during
a period of reduced real estate values, our earnings and capital could be
adversely affected. Historically, Indiana has experienced, on occasion,
significant natural disasters, including tornadoes and floods. The availability
of insurance for losses for such catastrophes is limited. Our operations could
also be interrupted by such natural disasters. Acts of nature, including
tornadoes and floods, which may cause uninsured damage and other loss of value
to real estate that secures our loans or interruption in our business
operations, may also negatively impact our operating results or financial
condition.





Federal and State Government
Regulations Could Adversely Affect Us. The banking industry is heavily
regulated. These regulations are intended to protect depositors, not
shareholders. As discussed in this Form 10-K, the Company and its subsidiaries
are subject to regulation and supervision by the FDIC, the Board of Governors of
the Federal Reserve System, the Indiana Department of Financial Institutions,
and the SEC. The burden imposed by federal and state regulations puts banks at a
competitive disadvantage compared to less regulated competitors such as finance
companies, mortgage banking companies and leasing companies. In particular, the
monetary policies of the Federal Reserve Board have had a significant effect on
the operating results of banks in the past, and are expected to continue to do
so in the future. Among the instruments of monetary policy used by the Federal
Reserve Board to implement its objectives are changes in the discount rate
charged on bank borrowings and changes in the reserve requirements on bank
deposits. It is not possible to predict what changes, if any, will be made to
the monetary polices of the Federal Reserve Board or to existing federal and
state legislation or the effect that such changes may have on the future
business and earnings prospects of the Company.






- 27 -





Credit Risk Could Adversely Affect Our
Operating Results or Financial Condition. One of the greatest risks facing
lenders is credit risk -- that is, the risk of losing principal and interest due
to a borrower’s failure to perform according to the terms of a loan agreement.
During the past few years, the banking industry experienced increasing trends in
problem assets and credit losses which resulted from weakening national economic
trends and a decline in housing values. The Company’s home equity and home
equity line of credit portfolios have experienced some increase in delinquency
and foreclosures have occurred; driven primarily by mortgage foreclosures on
loans serviced by non-company owned first mortgages. The potential for
foreclosures instituted by outside servicers represents additional potential
credit risk. While management attempts to provide an allowance for loan losses
at a level adequate to cover probable incurred losses based on loan portfolio
growth, past loss experience, general economic conditions, information about
specific borrower situations, and other factors, future adjustments to reserves
may become necessary, and net income could be significantly affected, if
circumstances differ substantially from assumptions used with respect to such
factors.





Exposure to Local Economic Conditions
Could Have an Adverse Impact on the Company. Company's primary market area for
deposits and loans encompasses counties in central and southern Indiana, where
all of its offices are located. Most of the Company's business activities are
within this area. The Company has experienced growth of the commercial and
commercial real estate portfolios, primarily in the Indianapolis
market.  This area of the Company’s market has experienced more
difficulties in the residential and development areas than the rest of our
market area. These concentrations expose the Company to risks resulting from
changes in the local economies. Additionally, pressure has intensified on
consumer budgets due to sharp increases in unemployment rates and property taxes
in the Company’s market areas. An economic slowdown in these areas could have
the following consequences, any of which could hurt our business:





·
            Loan
      delinquencies may increase;




·
            Problem
      assets and foreclosures may
increase;




·
            Demand
      for the products and services of the Bank may decline;
  and




·
            Collateral
      for loans made by the Bank, especially real estate, may decline in value,
      in turn reducing customers' borrowing power, and reducing the value of
      assets and collateral associated with existing loans of the
      Bank.







Interest Rate Risk Could Adversely
Affect Our Operations. The Company's earnings depend to a great extent upon the
level of net interest income, which is the difference between interest income
earned on loans and investments and the interest expense paid on deposits and
other borrowings. Interest rate risk is the risk that the earnings and capital
will be adversely affected by changes in interest rates. While the Company
attempts to adjust its asset/liability mix in order to limit the magnitude of
interest rate risk, interest rate risk management is not an exact science.
Rather, it involves estimates as to how changes in the general level of interest
rates will impact the yields earned on assets and the rates paid on liabilities.
Moreover, rate changes can vary depending upon the level of rates and
competitive factors. From time to time, maturities of assets and liabilities are
not balanced, and a rapid increase or decrease in interest rates could have an
adverse effect on net interest margins and results of operations of the Company.
Volatility in interest rates can also result in disintermediation, which is the
flow of funds away from financial institutions into direct investments, such as
U.S. Government and corporate securities and other investment vehicles,
including mutual funds, which, because of the absence of federal insurance
premiums and reserve requirements, generally pay higher rates of return than
financial institutions.





Competition Could Make it Harder for
the Company to Achieve its Financial Goals. The Company faces strong competition
from other banks, savings institutions and other financial institutions that
have branch offices or otherwise operate in the Company’s market area, as well
as many other companies now offering a range of financial services. Many of
these competitors have substantially greater financial resources and larger
branch systems than the Company. In addition, many of the Bank’s competitors
have higher legal lending limits than does the Bank. Particularly intense
competition exists for sources of funds including savings and retail time
deposits and for loans, deposits and other services that the Bank offers. As a
result of the repeal of the Glass Steagall Act, which separated the commercial
and investment banking industries, all banking organizations face increasing
competition.





Item
1B. Unresolved Staff Comments





Not Applicable





Item
2.  Properties.





At December 31, 2009, the Bank
conducted its business from its main office at 501 Washington Street, Columbus,
Indiana and 18 other
full-service branches and a commercial loan office in
Indianapolis.  The Bank owns a building that it uses for certain
administrative operations located at 3801 Tupelo Drive, Columbus,
Indiana.  Information concerning these properties, as of December 31,
2009, is presented in the following table:


- 28 -




Net
      Book Valueof
      Property,
            
            ApproximateDescription
      and
            Owned
      or
            
            
            Furniture
      and
            
            Square
            
            LeaseAddress
            Leased
            
            
            Fixtures
            
            Footage
            
            ExpirationPrincipal
      Office
              501
      Washington Street
            Owned
            
            $
            3,402,504
            
            21,600
            
            N/AAdministrative
      Operations Office:3801
      Tupelo Drive, Columbus
            Owned
            
            $
            2,727,450
            
            16,920
            
            N/ABranch
      Offices:Columbus
      Branches:1020
      Washington Street
            Owned
            
            $
            356,867
            
            800
            
            N/A3805
      25th
      Street
            Leased
            
            $
            109,007
            
            5,800
            
            09/20222751
      Brentwood Drive
            Leased
            
            $
            140,467
            
            3,200
            
            09/20224330
      West Jonathon Moore Pike
            Owned
            
            $
            458,824
            
            2,600
            
            N/A1901
      Taylor Road
            Leased
            
            $
            16,182
            
            400
            
            03/2012Hope
      Branch
              8475
      North State Road 9, Suite 4
            Leased
            
            $
            89,379
            
            1,500
            
            03/2012Austin
      Branch
              2879
      North US Hwy 31
            Owned
            
            $
            445,130
            
            2,129
            
            N/ABrownstown
      Branch
              101
      North Main Street
            Leased
            
            $
            26,153
            
            2,400
            
            Year
      to YearNorth
      Vernon Branch111
      North State Street
            Owned
            
            $
            178,012
            
            1,900
            
            N/AOsgood
      Branch
              820
      South Buckeye Street
            Owned
            
            $
            108,496
            
            1,280
            
            N/ASalem
      Branch
              1208
      South Jackson
            Owned
            
            $
            532,989
            
            1,860
            
            N/ASeymour
      Branches:222
      W. Second Street
            Leased
            
            $
            269,955
            
            9,200
            
            09/20221117
      East Tipton Street
            Leased
            
            $
            94,006
            
            6,800
            
            09/2022Batesville
      Branch
              114
      State Rd 46 East
            Owned
            
            $
            444,792
            
            2,175
            
            N/AMadison
      Branch
              201
      Clifty Drive
            Owned
            
            $
            372,071
            
            2,550
            
            N/AGreensburg
      Branch
              1801
      Greensburg Crossing
            Owned
            
            $
            591,579
            
            1,907
            
            N/AIndianapolis
      Branches:8740
      South Emerson Avenue
            Owned
            
            $
            1,840,708
            
            5,000
            
            N/A1510
      West Southport Road
            Owned
            
            $
            1,751,556
            
            3,100
            
            N/AIndianapolis
      Commercial Loan Office10
      West Market Street, Suite 1600
            Leased
            
            $
            162,468
            
            5,632
            
            12/2011Building
      Under Construction1420
      North State Street, North Vernon
            Owned
            
            $
            1,032,035
            
            N/A
            
            N/A







- 29 -




Item
3. Legal Proceedings.





The Company and the Bank are involved
from time to time as plaintiff or defendant in various legal actions arising in
the normal course of business. While the ultimate outcome of these proceedings
cannot be predicted with certainty, it is the opinion of management that the
resolution of these proceedings should not have a material effect on the
Company’s consolidated financial position or results of operations.





Item
3.5. Executive Officers of Indiana Community Bancorp.





Presented below is certain information
regarding the executive officers of ICB who are not also directors.





Position
      with ICBMark
      T. Gorski
            Executive
      Vice President, Treasurer, andChief
      Financial Officer and SecretaryCharles
      R. Farber
            Executive
      Vice President





Mark T. Gorski (age 45) has been
employed by the Bank as Executive Vice President, Treasurer and Chief Financial
Officer since July 1, 2005. From January 2001 to June 2002 he served as the
Chief Financial Officer of Fifth Third Bank, Indianapolis. From June 2002 to
June 2003 he served as Internal Reporting and Budgeting Manager of Fifth Third
Bank, Cincinnati. From June 2003 to June 2005, he served as Director of Private
Client Services of Fifth Third Bank, Indianapolis.





Charles R. Farber (age 60) has been
employed by the Bank since March 2002 as its Executive Vice President.  He
served as Law Firm Administrator for the Indianapolis, Indiana law firm Locke
Reynolds LLP from 2000 to 2002. Prior thereto, he served for 28 years at Peoples
Bank and Trust Company in Indianapolis, Indiana, with his final position at
Peoples Bank and Trust being Executive Vice President.





Item
4. Reserved.





PART
II





Item
5. Market for Registrant's Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities.





The Company’s common stock ("Common
Stock") is quoted on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ"), National Global Market, under the symbol
"INCB."  For certain information related to the stock prices and
dividends paid by the Company, see “Quarterly Results of Operations" on page
48
of Indiana Community Bancorp’s Shareholder Annual Report for the year
ended December 31, 2009 (the "Shareholder Annual Report"). As of December 31,
2009, there were 344 shareholders of record of the Company's Common
Stock.





It is currently the policy of ICB's
Board of Directors to continue to pay quarterly dividends, but any future
dividends are subject to the Board's discretion based on its consideration of
ICB's operating results, financial condition, capital, income tax
considerations, regulatory restrictions and other factors. Moreover, as a result
of the Company’s participation in the TARP program, it may not increase
quarterly dividends above $0.12 per share during the three year period
ended December 12, 2011, without the consent of the Treasury Department, unless
the Treasury no longer holds the preferred stock it received under the TARP
Program.





Since ICB has no independent operations
or other subsidiaries to generate income, its ability to accumulate earnings for
the payment of cash dividends to its shareholders is directly dependent upon the
ability of the Bank to pay dividends to the Company. For a discussion of the
regulatory limitations on the Bank’s ability to pay dividends see Item 1,
“Business-Regulation – Indiana Bank and Trust Company - Dividends”, and on the
Company’s ability to pay dividends, see Item 1, “Business-Regulation – Indiana
Community Bancorp - Dividends”.





Income of the Bank appropriated to bad
debt reserves and deducted for federal income tax purposes is not available for
payment of cash dividends or other distributions to ICB without the payment of
federal income taxes by the Bank on the amount of such income deemed removed
from the reserves at the then-current income tax rate. At December 31, 2009,
none of the Bank's retained income represented bad debt deductions for which no
federal income tax provision had been made. See "Taxation--Federal Taxation" in
Item 1 hereof.






- 30 -





On December 12, 2008, the Company sold
to the Treasury Department 21,500 shares of its Fixed Rate Cumulative Preferred
Stock, Series A (“Series A Preferred Stock”) and issued a warrant for 188,707
shares of its common stock at an exercise price of $17.09 per share. The shares
of preferred stock and the warrant were issued in a private placement exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended.





The following table provides
information on the Company’s repurchases of shares of its common stock during
the quarter ended December 31, 2009.





(a)
            
            
            (b)
            
            
            (c)
            
            
            (d)Period
            
            Total
      number of shares purchased
            
            
            Average
      price paid per share
            
            
            Total
      number of shares purchased as part of publicly announced plans or programs
      (1)
            
            
            Maximum
      number of shares that may yet be purchased under the plans or programs
      (1)October
      2009
            
            
            -
            
            
            $
            00.00
            
            
            
            -
            
            
            
            156,612November
      2009
            
            
            -
            
            
            $
            00.00
            
            
            
            -
            
            
            
            156,612December
      2009
            
            
            -
            
            
            $
            00.00
            
            
            
            -
            
            
            
            156,612Fourth Quarter
            
            
            -
            
            
            $
            00.00
            
            
            
            -
            
            
            
            156,612








(1) On
January 22, 2008, the Company announced a stock repurchase program to repurchase
on the open market up to 5% of the Company’s outstanding shares of common stock
or 168,498 such shares. Such purchases will be made in block or open market
transactions, subject to market conditions. The program has no expiration date.
Any future stock repurchases will require the consent of the Treasury Department
for a period of three years ending December 11, 2011, while the Treasury holds
the Series A Preferred Stock.





The disclosures regarding equity
compensation plans required by Reg. § 229.201(d) is set forth in Item 12
hereof.





Item
6. Selected Financial Data.





The information required by this item
is incorporated by reference to the material under the heading "Summary of
Selected Consolidated Financial Data" on page 4
of the Shareholder Annual Report.





Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.





The information required by this item
is incorporated by reference to pages 5 to
19 of the Shareholder Annual Report.





Item
7A. Quantitative and Qualitative Disclosures About Market Risk.





The information required by this item
is incorporated by reference to page 12
of the Shareholder Annual Report.





Item
8. Financial Statements and Supplementary Data.





The Company's Consolidated Financial
Statements and Notes thereto contained on pages 23 to
49 of the Shareholder Annual Report are incorporated herein by reference.
The Company’s Quarterly Results of Operations contained on page 49
of the Shareholder Annual Report are incorporated herein by
reference.





Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.





There are no such changes and
disagreements during the applicable period.






- 31 -





Item
9A(T). Controls and Procedures.





Evaluation of Disclosure Controls
and Procedures. As of December 31, 2009, an evaluation was carried out
under the supervision and with the participation of the Company’s management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).
Based on their evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that as of December 31, 2009, the Company’s disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms and are designed
to ensure that information required to be disclosed in these reports is
accumulated and communicated to management as appropriate to allow timely
decisions regarding required disclosure.





Annual Report on Internal Control
Over Financial Reporting. Management’s Report on Internal Controls is
included on page 20
of the Shareholder’s Annual Report and is incorporated herein by
reference.





The Annual Report does not include an
attestation report of the Company’s registered public accounting firm regarding
internal control over financial reporting.  Management’s report was
not subject to attestation by its registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only Management’s Report on Internal Controls in this Annual
Report.





Changes in Internal Controls.
Our Chief Executive Officer and Chief Financial Officer have concluded that,
during the Company’s fiscal quarter ended December 31, 2009, there have been no
changes in the Company’s internal control over financial reporting identified in
connection with the Company’s evaluation of controls that occurred during the
Company's last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.





Item
9B. Other Information





Not applicable.





PART
III





Item
10. Directors, Executive Officers, and Corporate Governance.





The information required by this item
with respect to directors is incorporated by reference to page 5 to 9 of
the Company's Proxy Statement for its annual shareholder meeting to be held in
April 2010 (the "2010 Proxy Statement"). Information concerning the Company's
executive officers who are not also directors is included in Item 3.5 in Part I
of this report.





The information required by this item
with respect to the compliance with Section 16(a) of the Securities Exchange Act
of 1934 is incorporated by reference to the section entitled “Section 16(a)
Beneficial Ownership Reporting Compliance” of the 2010 Proxy
Statement.





The information concerning director
nominating procedures is incorporated by reference to page 5 of the 2010
Proxy Statement.





The information required by this item
with respect to members of the Company’s Audit Committee and whether any such
members qualify as an Audit Committee Financial Expert is incorporated by
reference to page 8
of the 2010 Proxy Statement.





The Company has adopted an Ethics
Policy that applies to all officers, employees, and directors of the Company and
its subsidiaries.





Item
11. Executive Compensation.





The information required by this item
with respect to executive compensation is incorporated by reference to page
10
through page 18 of the 2010 Proxy Statement.





Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.





Other information required by this item
is incorporated by reference to pages 4 to 5of the 2010 Proxy Statement.





The Equity Compensation Plan
information required by this Item 12 is incorporated by reference to page
25 of the 2010 Proxy Statement.






- 32 -





Item
13. Certain Relationships and Related Transactions, and Director
Independence.





Financial
      Statements
            Page
      in 2010
              Shareholder
              Annual
      ReportReport
      of BKD LLP Independent Registered Public Accounting Firm
            21Report
      of Deloitte & Touche LLP Independent Registered Public Accounting
      Firm
            22Consolidated
      Balance Sheets as of December 31, 2009 and December 31,
    2008
            23Consolidated
      Statements of Operations for the years ended December 31,
      2009,December
      31, 2008 and December 31, 2007.
            24Consolidated
      Statements of Shareholders’ Equity for the years endedDecember
      31, 2009, December 31, 2008 and December 31, 2007.
            25Consolidated
      Statements of Cash Flows for the years ended December 31,
      2009,December
      31, 2008 and December 31, 2007.
            26Notes
      to Consolidated Financial Statements
            27(b)  The
      exhibits filed herewith or incorporated by reference herein are
      setforth
      on the Exhibit Index on page 36.(c)  All
      schedules are omitted as the required information either is not applicable
      or isincluded
      in the Consolidated Financial Statements or related notes.





The information required by this item is incorporated by reference to the
sections entitled “Transactions with Related Persons” and “Corporate Governance
– Director Independence” in the 2010 Proxy Statement.





Item
14. Principal Accountant Fees and Services.





The information required by this item
is incorporated by reference to the section titled “Accountant’s Fees” in the
2010 Proxy Statement.





PART
IV





Item
15. Exhibits and Financial Statement Schedules.





(a) List the following documents filed
as a part of the report:





- 33 -








SIGNATURESPursuant
      to the requirements of Section 13 or 15(d) the Securities Exchange Act of
      1934, as amended, the Registrant has duly caused this report to be signed
      on behalf of the undersigned, thereto duly authorized, this 12th
      day of March 2010.INDIANA
      COMMUNITY BANCORPDATE: March12,2010
            By:    /S/ John K. Keach,
      Jr.John
      K. Keach, Jr., President andChief
      Executive OfficerPursuant
      to the requirements of the Securities Exchange Act of 1934, as amended,
      this report has been signed below by the following persons on behalf of
      the Registrant and in the capacities indicated on this 12thday of March 2010./s/Mark T.
      Gorski
            /s/John
      K. Keach, Jr.Mark
      T Gorski, Executive
            John
      K. Keach, Jr.,Vice
      President, Treasurer
            Chairman
      of the Board,Chief
      Financial Officer and Secretary
            President
      and Chief(Principal
      Financial Officer)
            Executive
      Officer(Principal
      Executive Officer)/s/Melissa A.
      McGill
            /s/John
      K. Keach, Jr.Melissa
      A. McGill,
            John
      K. Keach, Jr., DirectorSr.
      Vice President and Controller(Principal
      Accounting Officer)/s/Harvard W. Nolting,
      Jr.
            /s/John
      T. BeattyHarvard
      W. Nolting, Jr., Director
            John
      T. Beatty, Director/s/David W.
      Laitinen
            /s/Harold
      ForceDavid
      W. Laitinen, Director
            Harold
      Force, Director/s/John M.
      Miller
            /s/
      William J. BlaserJohn
      M. Miller, Director
            William
      J. Blaser, Director








- 34 -





EXHIBIT
INDEX


Reference
to


Regulation
S-KSequential


Exhibit
Number                                                           DocumentPage Number





3(a)         Articles
of Incorporation (incorporated by reference from Exhibit B to
Registrant's


Registration Statement on Form S-4
(Registration No. 33-55234))





3(b)        
Code of By-Laws (incorporated by reference from Exhibit 3.1 to
Registrant's


Form 8-K filed July 28,
2009)





3(c)         Certificate
of Designations for Series A Preferred Stock (incorporated by
reference


from Exhibit 3.1 to Registrant’s Form
8-K filed December 16, 2008)





4(a)         Articles of
Incorporation (incorporated by reference from Exhibit B to
Registrant's


Registration
Statement on Form S-4 (Registration No.33-55234))





4(b)         Code
of By-Laws (incorporated by reference from Exhibit 3.1 to
Registrant's


Form 8-K dated November 27,
2007)





4(c)         Form
of Certificate for Series A Preferred Stock (incorporated by
reference


from Exhibit 4.1 to Registrant’s Form
8-K filed December 16, 2008)





4(d)         Warrant
for Purchase of Shares of Common Stock (incorporated by reference


from Exhibit 4.2 to
Registrant’s Form 8-K filed December 16, 2008)





10(a)       
1995 Stock Option Plan (incorporated by reference from Exhibit A to Registrant's
Proxy


Statement for its 1995 annual
shareholder meeting); amendment thereto is (incorporated by


reference to Exhibit 10.1 of
Registrant’s Form 8-K dated March 28, 2005)





10(b)       
1999 Stock option plan incorporated by reference to Exhibit J to the
registrant’s Proxy


Statement for its 1999 annual
shareholder’s meeting; amendment thereto is


incorporated by reference to
Exhibit 10.1 of the Registrant's Form 8-K dated


March 28, 2005





10(c)       2001
Stock Option Plan (incorporated by reference from Exhibit B to the
Registrant's


Proxy Statement for its 2001 annual
shareholder meeting); amendment thereto is


incorporated by reference to Exhibit
10.1 of Registrant’s Form 8-K dated March 28, 2005





10(d)       
Form of Non-Qualified Stock Option Agreement (incorporated by reference to
Exhibit 10.2


to Registrant’s form 8-K dated
March 28, 2005)





10(e)       
Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit
10(aw) to


Registrant’s Form 10-K for the
fiscal year ended December 31, 2005)





10(f)       
Form of Indiana Community Bancorp Indianapolis Market Growth Plan
(incorporated


by reference to Exhibit 10.1 of
Registrant’s Form 8-K dated November 28, 2006)





10(g)       
Form of Award Agreement under Indiana Community Bancorp Indianapolis Market
Growth


Plan (incorporated by reference
from Exhibit 10.2 to Registrant’s Form 8-K dated November


28, 2006)





10(h)       
Indiana Community Bancorp Long-Term Incentive Plan (incorporated by reference
to


Exhibit 10.1 to Registrant’s
Form 8-K filed May 31, 2005)





10(i)       
Form of Indiana Community Bancorp Long-Term Incentive Plan Award Agreement
(incorporated


by reference to Exhibit 10.1 to
Registrant’s Form 8-K filed April 23, 2008)





10(j)        Excess
Benefit Plan Agreement between the Bank and John K. Keach, Jr.


dated April 1, 2001 (incorporated by
reference to Exhibit 10 (f) of Registrant’s


Form 10-K for the year ended June 30,
2001); First Amendment thereto effective


January 1, 2005, is incorporated by
reference to Exhibit 10.4 to Registrant’s Form


8-K filed July 27, 2007










10(k)       
Supplemental Executive Retirement Plan with John K. Keach, Jr. dated April 1,
2001
 (incorporated by reference from
Exhibit 10(n) to Registrant’s Form 10-K for the year
 ended June 30, 2002); First
Amendment thereto effective January 1, 2005, is incorporated
 by reference to Exhibit 10.5
to Registrant’s Form 8-K filed July 24, 2007
 
 10(l)       
Supplemental Executive Retirement Agreement with Mark T. Gorski
effective
 July 1, 2005 (incorporated by
reference to Exhibit 10.4 to Registrant’s Form 8-K dated
 November 22, 2005); first
amendment thereto dated November 3, 2005 (incorporated
 by reference to Exhibit 10(j)
of Registrant’s Form 10-K for the fiscal year ended December
 31, 2005); second amendment
thereto effective July 1, 2005, is incorporated by reference
 to Exhibit 10.6 to Registrant’s
Form 8-K filed July 27, 2007
 
 10(m)       Amended
and Restated Supplemental Executive Retirement Income Agreement for
Charles
 R. Farber effective January 1,
2005 (incorporated by reference to Exhibit 10.8 to Registrant’s
 Form 8-K filed July 27,
2007)
 
 10(o)       
Director Deferred Fee Agreement between the Bank and John Beatty
(incorporated
 by reference to Exhibit 10.2 of
Registrant’s Form 8-K dated November 22, 2005); First
 Amendment thereto effective January
1, 2006 is incorporated by reference to Exhibit
 10.1 to Registrant’s Form 8-K filed
July 24, 2007
  10(p)       
Director Deferred Fee Agreement between the Bank and Harold Force (incorporated
by
 reference to Exhibit 10.1 of
Registrant’s Form 8-K dated November 22, 2005);
 First Amendment thereto effective
January 1, 2006, is incorporated by reference to
 Exhibit 10.2 to Registrant’s Form 8-K
filed July 24, 2007
 
 10(q)       
Director Deferred Fee Agreement between the Bank and David W.
Laitinen
 (incorporated by reference to
Exhibit 10.3 of Registrant’s 8-K dated November 22, 2005);
 First Amendment thereto
is incorporated by reference to Exhibit 10.3 to Registrant’s
 Form 8-K filed July 24,
2007
 
 10(r)       
Director Deferred Compensation Agreement with William Nolting (incorporated by
reference
 from Exhibit 10(ag) to
Registrant’s Form 10-K for the fiscal year ended June 30, 1992);
first
 and second amendments thereto
(incorporated by reference from Exhibit 10(ag) to
 Registrant's Form 10-K for the
year ended June 30, 1998)
 
 10(s)       
Placement Agreement, dated September 13, 2006, among Indiana Community Bancorp,
the
 Home Federal Statutory Trust I,
and Cohen & Company (incorporated by reference to Exhibit 1.1
 of Registrant’s Form 8-K dated
September 15, 2006)
 
 10(t)       
Indenture dated as of September 15, 2006, between Indiana Community Bancorp and
LaSalle
 Bank National Association as
Trustee (incorporated by reference to Exhibit 4.1 of Registrant’s
 Form 8-K dated September 15,
2006)
 
 10(u)       
Amended and Restated Declaration of Trust of HomeFederal Statutory Trust I,
dated as
 of September 15, 2006
(incorporated by reference to Exhibit 4.2 of Registrant’s Form 8-K
 dated September 15,
2006)
 
 10(v)       
Guarantee Agreement of Indiana Community Bancorp dated as of September 15,
2006
 (incorporated by reference to
Exhibit 10.1 of Registrant’s Form 8-K dated September 15, 2006)
 
 10(w)       
Letter Agreement dated December 12, 2008 by and between Registrant and the
United States
 Department of the Treasury,
including the Securities Purchase Agreement - Standard Terms
 incorporated by reference
therein (incorporated by reference from Exhibit 10.1 to
Registrant’s
 Form 8-K filed December 16,
2008)















13           Indiana
Community Bancorp Annual Report December 31, 2008





14           Code
of Ethics (incorporated by reference to Exhibit 14 of Registrant’s Form10-K
for


the fiscal year ended December 31,
2003)





21           Subsidiaries
of the Registrant





23.1         Independent
Registered Public Accounting Firm Consent










31.1         Certification
of John K. Keach, Jr. required by 12 C.F.R. § 240.13a-14(a)





31.2         Certification
of Mark T. Gorski required by 12 C.F.R. § 240.13a-14(a)





32           Certification
pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of
the


Sarbanes-Oxley Act of
2002





33           TARP
First Fiscal Year Certification of John K. Keach, Jr.





34           TARP
First Fiscal Year Certification of Mark T. Gorski