form10k.htm

10-K 1 form10k.htm 10K FOR REPORTING PERIOD 12/31/2009 form10k.htm

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

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)

Indiana 35-1807839

(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 BANCORP

	FORM 10-K

	INDEX

Part I
Forward Looking Statements			3

Item 1.		Business	3

Item 1A.		Risk Factors	25

Item 1B.		Unresolved Staff Comments	28

Item 2.		Properties	28

Item 3.		Legal Proceedings	30

Item 3.5		Executive Officers of INDIANA COMMUNITY BANCORP	30

Item 4.		Reserved	30

Part II
Item 5.		Market for Registrant's Common Equity, Related Stockholder Matters, And Issuer Purchases of Equity Securities	30

Item 6.		Selected Financial Data	31

Item 7.		Management's Discussion and Analysis of Financial Condition and Results of Operations	31

Item 7A.		Quantitative and Qualitative Disclosures About Market Risk	31

Item 8.		Financial Statements and Supplementary Data	31

Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	31

Item 9A(T).		Controls and Procedures	32

Item 9B.		Other information	32

Part III
Item 10.		Directors, Executive Officers, and Corporate Governance of the Registrant	32

Item 11.		Executive Compensation	32

Item 12		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	32

Item 13.		Certain Relationships and Related Transactions, and Director Independence	33

Item 14.		Principal Accountant Fees and Services	33

Part IV
Item 15.		Exhibits and Financial Statement Schedules	33

Signatures			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.

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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, 2005
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
TYPE 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 Security
Residential:
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-Net
Gross 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	%

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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 Fiscal
	Outstanding								2013		2015		2020		2025
	At Dec 31,								To		to		to		and
	2009		2010		2011		2012		2014		2019		2024		thereafter
Real estate	$	437,896	$	68,022	$	25,058	$	25,986	$	79,907	$	142,602	$	23,220	$	73,101
Construction loans		67,382		39,292		9,399		36		7,000		4,590		-		7,065
Commercial 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		53,959
Total	$	737,880	$	183,689	$	41,017	$	40,492	$	118,217	$	182,691	$	37,649	$	134,125

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

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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.

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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.

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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		$	682,413
Loans Originated:
Mortgage loans and contracts:
Construction loans:
Residential		19,386			32,798			29,812
Commercial		11,897			54,610			76,255
Permanent loans:
Residential		39,617			37,762			46,189
Commercial		38,207			74,044			34,162
Refinancing		128,326			36,030			33,718
Other		924			1,866			2,045
Total		238,357			237,110			221,181

Commercial		84,649			129,650			154,877
Consumer		10,374			13,001			17,384
Total loans originated		333,380			379,761			394,442

Loans purchased:
Residential		-			-			-
Other		16,113			7,195			18,515
Total loans originated and purchased		349,493			386,956			412,957

Real estate loans sold		185,909			130,589			111,948
Loan repayments and other deductions		226,680			205,402			233,411
Total loans sold, loan repayments and other deductions		412,589			335,991			345,359

Net loan activity		(63,096	)		50,965			67,598
Gross loans receivable at end of period		737,880			800,976			750,011
Unearned 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.

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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.

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

Total 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% consisted of 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 estate owned, 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.

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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	$	174,152
	2.00% - 2.99%		120,538		36,572		63,019
	3.00% - 3.99%		52,966		133,717		146,480
	4.00% - 4.99%		96,021		114,390		164,649
	5.00% - 5.99%		2,653		6,434		158,705
Over 6.00%			0		119		546
Total		$	840,305	$	710,639	$	707,551

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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								Balance
	at								at								at
	Dec 31,		% of			Increase			Dec 31,		% of			Increase			Dec 31,		% of			Increase
	2009		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	%		20,198
Checking		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	%		71,436
12 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 of
	less			2.99%		3.99%		4.99%		5.00%	Total		Total
Certificate 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	%

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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 of
	less			2.99%		3.99%		4.99%		5.00%	Total		Total
Certificate 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.

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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		Year
		Ended		Ended		Ended
(Dollars in Thousands)		Dec 31, 2009		Dec 31, 2008		Dec 31, 2007
Official check overnight remittance	$	-	$	344	$	232
FHLB overnight borrowings	$	-		4,713		-
FHLB advances	$	19,500	$	31,850	$	31,850
Bank of America short term borrowings	$	-	$	-	$	985
Average 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, 2007
FHLB advances:
Amount	$	-	$	19,500	$	31,850
Weighted 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.

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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.

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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.

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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.

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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.

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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 Prompt
						For Capital					Corrective Action
	Actual					Adequacy Purposes					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2009
Total 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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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:

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			Net Book Value
			of Property,	Approximate
Description and	Owned or		Furniture and	Square	Lease
Address	Leased		Fixtures	Footage	Expiration
Principal Office 501 Washington Street	Owned	$	3,402,504	21,600	N/A

Administrative Operations Office:
3801 Tupelo Drive, Columbus	Owned	$	2,727,450	16,920	N/A


Branch Offices:
Columbus Branches:
1020 Washington Street	Owned	$	356,867	800	N/A
3805 25th Street	Leased	$	109,007	5,800	09/2022
2751 Brentwood Drive	Leased	$	140,467	3,200	09/2022
4330 West Jonathon Moore Pike	Owned	$	458,824	2,600	N/A
1901 Taylor Road	Leased	$	16,182	400	03/2012

Hope Branch 8475 North State Road 9, Suite 4	Leased	$	89,379	1,500	03/2012

Austin Branch 2879 North US Hwy 31	Owned	$	445,130	2,129	N/A

Brownstown Branch 101 North Main Street	Leased	$	26,153	2,400	Year to Year

North Vernon Branch
111 North State Street	Owned	$	178,012	1,900	N/A

Osgood Branch 820 South Buckeye Street	Owned	$	108,496	1,280	N/A

Salem Branch 1208 South Jackson	Owned	$	532,989	1,860	N/A

Seymour Branches:
222 W. Second Street	Leased	$	269,955	9,200	09/2022
1117 East Tipton Street	Leased	$	94,006	6,800	09/2022

Batesville Branch 114 State Rd 46 East	Owned	$	444,792	2,175	N/A

Madison Branch 201 Clifty Drive	Owned	$	372,071	2,550	N/A

Greensburg Branch 1801 Greensburg Crossing	Owned	$	591,579	1,907	N/A

Indianapolis Branches:
8740 South Emerson Avenue	Owned	$	1,840,708	5,000	N/A
1510 West Southport Road	Owned	$	1,751,556	3,100	N/A

Indianapolis Commercial Loan Office
10 West Market Street, Suite 1600	Leased	$	162,468	5,632	12/2011

Building Under Construction
1420 North State Street, North Vernon	Owned	$	1,032,035	N/A	N/A

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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 ICB

	Mark T. Gorski	Executive Vice President, Treasurer, and
		Chief Financial Officer and Secretary

	Charles 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.

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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		-		156,612
November 2009		-	$	00.00		-		156,612
December 2009		-	$	00.00		-		156,612
Fourth 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.

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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 5 of 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.

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

Financial Statements	Page in 2010 Shareholder Annual Report
Report of BKD LLP Independent Registered Public Accounting Firm	21

Report of Deloitte & Touche LLP Independent Registered Public Accounting Firm	22

Consolidated Balance Sheets as of December 31, 2009 and December 31, 2008	23

Consolidated Statements of Operations for the years ended December 31, 2009,
December 31, 2008 and December 31, 2007.	24

Consolidated Statements of Shareholders’ Equity for the years ended
December 31, 2009, December 31, 2008 and December 31, 2007.	25

Consolidated Statements of Cash Flows for the years ended December 31, 2009,
December 31, 2008 and December 31, 2007.	26

Notes to Consolidated Financial Statements	27

(b) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page 36.

(c) All schedules are omitted as the required information either is not applicable or is
included 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:

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SIGNATURES


Pursuant 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 BANCORP
DATE: March 12, 2010	By: /S/ John K. Keach, Jr.
	John K. Keach, Jr., President and
	Chief Executive Officer

Pursuant 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 12th day 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., Director
Sr. Vice President and Controller
(Principal Accounting Officer)

/s/Harvard W. Nolting, Jr.	/s/John T. Beatty
Harvard W. Nolting, Jr., Director	John T. Beatty, Director

/s/David W. Laitinen	/s/Harold Force
David W. Laitinen, Director	Harold Force, Director

/s/John M. Miller	/s/ William J. Blaser
John M. Miller, Director	William J. Blaser, Director

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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

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

23.2 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