2001 10K

10-K 1 homf10k-62001.htm FORM 10-K 6-2001 2001 10K

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 June 30, 2001

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
--------

HOME FEDERAL BANCORP
(Exact name of registrant as specified in its charter)

United States 35-1807839
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

222 West Second Street, Seymour, Indiana 47274
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number including area code: (812) 522-1592
--------------

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

None

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

Common Stock, no par value
and
Common Share Purchase Rights
----------------------------
(Title of Class)

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 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. X

The aggregate market value of the issuer's voting stock held by non-affiliates,
as of August 29, 2001, was $75.1 million.

The number of shares of the registrant's Common Stock, no par value, outstanding
as of August 29, 2001, was 4,426,136 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to Shareholders for the year ended June 30, 2001,
are incorporated into Part II. Portions of the Proxy Statement for the 2001
annual meeting of shareholders are incorporated into Part I and Part III.

Exhibit Index on Page 40
Page 2 of 43 Pages

HOME FEDERAL BANCORP

FORM 10-K

INDEX

Forward Looking Statements 4

Item 1. Business......................................................... 4

Item 2. Properties....................................................... 33

Item 3. Legal Proceedings................................................ 34

Item 4. Submission of Matters to a Vote of Security Holders.............. 34

Item 4.5 Executive Officers of Home Federal Bancorp....................... 34

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................. 35

Item 6. Selected Financial Data.......................................... 36

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 36

Item 7.A Quantitative and Qualitative Disclosures About Market Risk....... 36

Item 8. Financial Statements and Supplementary Data...................... 37

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 37

Item 10. Directors and Executive Officers of the Registrant............... 37

Item 11. Executive Compensation........................................... 37

Item 12. Security Ownership of Certain Beneficial Owners and Management... 37

Item 13. Certain Relationships and Related Transactions................... 37

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 38

SIGNATURES.................................................................. 39

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, unanticipated
conversion expenses, increases in compensation and employee expenses or
unanticipated results in pending legal proceedings.

PART I

Item 1. Business
General
Home Federal Bancorp (the "Company" or "HFB") is an Indiana corporation
organized in August, 1990 to become a unitary savings and loan holding company.
The principal asset of the Company consists of 100% of the issued and
outstanding capital stock of Home Federal Savings Bank ("Home Federal" or the
"Bank" or "HFSB").

Home Federal began operations in Seymour, Indiana under the name New
Building and Loan Association in 1908, and 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 converted to stock form and on March 1, 1993, Home
Federal 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. Home Federal currently provides services
through its main office at 222 West Second Street in Seymour, Indiana, sixteen
full service branches located in south central Indiana, a loan production office
located in greater Indianapolis and the MAC network of automated teller machines
at fourteen locations in Seymour, Columbus, North Vernon, Bloomington,
Edinburgh, Shelbyville and Batesville. On line banking and telephone banking are
also available to Home Federal Savings Bank customers. As a result, Home Federal
serves primarily Bartholomew, Jackson, Jefferson, Jennings, Scott, Ripley,
Decatur and Washington Counties in Indiana. Home Federal also participates in
the nationwide electronic funds transfer networks known as Plus System, Inc. and
Cirrus System.

Management analyzes the operation of Home Federal Bancorp assuming one
operating segment, community banking services. Home Federal directly and,
through its service corporation subsidiary, indirectly offers a wide range of
consumer and commercial community banking services. These services include: (i)
residential and commercial real estate loans; (ii) NOW checking accounts; (iii)
regular and term savings accounts and savings certificates; (iv) full-service
securities brokerage services; (v) consumer loans; (vi) debit cards; (vii)
credit cards; (viii) annuity and life insurance products; (ix) Individual
Retirement Accounts and Keogh plans; (x) commercial loans; (xi) real estate
development; (xii) trust services: and (xiii) commercial demand deposit
accounts.

Home Federal's primary source of revenue is interest from lending
activities. Its principal lending activity is the origination of conventional
mortgage loans to enable borrowers to purchase or refinance one- to four-family
residential real property. These loans are generally secured by first mortgages
on the property. Virtually all of the real estate loans originated by Home
Federal are secured by properties located in Indiana, although Home Federal has
authority to make or purchase real estate loans throughout the United States. In
addition, Home Federal makes secured and unsecured consumer related loans
(including consumer auto loans, second mortgage, home equity, credit cards,
mobile home, and savings account loans) and commercial loans secured by
mortgages on the underlying property. At June 30, 2001, approximately 19.4% of
its loans were consumer-related loans and 21.6% of its loans were commercial
mortgage and multi-family loans. Home Federal also makes construction loans,
which constituted 9.6% of Home Federal's loans at June 30, 2001. Finally, Home
Federal makes commercial loans, which constituted 10.5% of its loans at June 30,
2001.

Lending Activities

Loan Portfolio Data

The following two tables set forth the composition of Home Federal's loan
porfolio by loan type and security type as of the dates indicated. The
third table represents a reconciliation of gross loans receivable after
consideration of undisbursed portions of loans in process, deferred loans,
the allowance for loan losses, unearned discounts on loans and purchase
discounts.
At June 30,
-----------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
TYPE OF LOAN
--------------------------------------------------------------------------------------------------------------------------------------------------
First mortgage loans: (Dollars in Thousands)
One-to-four family residential loans $ 270,124 38.2% $ 282,555 41.3% $ 248,846 41.0% $ 268,133 43.6% $ 300,531 50.1%
Commercial and multi-family .......... 153,169 21.6% 102,974 15.1% 107,908 17.8% 97,469 15.8% 79,696 13.3%
Loans on property under construction . 67,789 9.6% 89,248 13.0% 65,997 10.9% 77,227 12.5% 54,504 9.1%
Loans on unimproved acreage .......... 5,017 0.7% 17,440 2.5% 11,611 1.9% 4,664 0.8% 4,192 0.7%
Second mortgage, home equity ........... 94,140 13.3% 85,300 12.5% 68,873 11.3% 65,321 10.6% 63,658 10.6%
Commercial loans ....................... 74,687 10.5% 60,948 8.9% 56,956 9.4% 50,890 8.3% 43,112 7.2%
Consumer loans ......................... 5,864 0.8% 9,446 1.4% 9,250 1.5% 10,347 1.7% 11,017 1.8%
Auto loans ............................. 25,852 3.6% 22,587 3.3% 21,764 3.6% 23,194 3.8% 23,086 3.8%
Mobile home loans ...................... 8,308 1.2% 9,963 1.5% 12,048 2.0% 14,349 2.3% 16,613 2.8%
Savings accounts loans ................. 3,738 0.5% 3,625 0.5% 3,826 0.6% 4,071 0.7% 3,989 0.7%
----- --- ----- --- ----- --- ----- --- ----- ---
Gross loans receivable ........... $ 708,688 100.0% $ 684,086 100.0% $ 607,079 100.0% $ 615,665 100.0% $ 600,398 100.0%
========= ===== ========== ===== ========== ===== ========== ===== ========== =====

TYPE OF SECURITY
Residential:
One-to-four family ............... $ 388,770 55.0% $ 409,174 59.9% $ 347,049 57.2% $ 366,319 59.5% $ 397,962 66.3%
Multi-dwelling units ............. 34,008 4.8% 32,937 4.8% 30,358 5.0% 19,003 3.1% 22,166 3.7%
Commercial real estate ................. 162,444 22.9% 117,966 17.2% 114,217 18.8% 122,828 20.0% 78,261 13.0%
Commercial ............................. 74,687 10.5% 60,948 8.9% 56,956 9.4% 50,890 8.3% 43,112 7.2%
Mobile home ............................ 8,308 1.2% 9,963 1.5% 12,048 2.0% 14,349 2.3% 16,613 2.8%
Savings account ........................ 3,738 0.5% 3,625 0.5% 3,826 0.6% 4,071 0.7% 3,989 0.7%
Auto ................................... 25,852 3.6% 22,587 3.3% 21,764 3.6% 23,194 3.8% 23,086 3.8%
Other consumer ......................... 5,864 0.8% 9,446 1.4% 9,250 1.5% 10,347 1.7% 11,017 1.8%
Land acquisition ....................... 5,017 0.7% 17,440 2.5% 11,611 1.9% 4,664 0.8% 4,192 0.7%
----- --- ------ --- ------ --- ----- --- ----- ---
Gross loans receivable ........... $ 708,688 100.0% $ 684,086 100.0% $ 607,079 100.0% $ 615,665 100.0% $ 600,398 100.0%
========= ===== ========== ===== ========== ===== ========== ===== ========== =====

LOANS RECEIVABLE-NET
Gross loans receivable ................. $ 708,688 105.1% $ 684,086 104.9% $ 607,079 103.4% $ 615,665 105.8% $ 600,398 104.3%
Deduct:
Undisbursed portion of loans in process (27,999) -4.2% (26,628) -4.1% (15,285) -2.6% (28,691) -4.9% (20,519) -3.6%
Deferred net loan fees ................. (447) -0.1% (502) -0.1% (527) -0.1% (690) -0.1% (560) -0.1%
Allowance for loan losses .............. (5,690) -0.8% (4,949) -0.8% (4,349) -0.7% (4,243) -0.7% (3,649) -0.6%
Unearned discounts ..................... -- 0.0% -- 0.0% -- 0.0% (1) 0.0% (5) 0.0%
Purchase discount ...................... -- 0.0% -- 0.0% -- 0.0% -- 0.0% (41) 0.0%
----- --- ------ --- ------ --- ----- --- ----- ---
Net loans receivable ............. $ 674,552 100.0% $ 652,007 100.0% $ 586,918 100.0% $ 582,040 100.0% $ 575,624 100.0%
========= ====== ========== ===== ========== ===== ========== ===== ========== =====

The following tables summarize the contractual maturities for Home
Federal's loan portfolio (including participations and mortgage-backed
certificates) for the fiscal periods indicated and the interest rate
sensitivity of loans due after one year:

Balance Maturities in Fiscal
Outstanding 2005 2007 2012 2016
At June 30, to to to and
2001 2002 2003 2004 2006 2011 2016 thereafter
---- ---- ---- ---- ---- ---- ---- ----------
(In Thousands)

Real estate ............. $428,310 $ 74,828 $ 9,515 $ 4,233 $ 12,444 $104,434 $ 67,865 $154,991
Mortgage-backed
certificates,
collateralized
mortgage obligations 45,043 220 -- 627 1,261 12,386 908 29,641
Construction Loans ...... 67,789 19,591 18,231 2,827 267 1,034 4,930 20,909
Commercial loans ........ 74,687 34,748 4,328 5,874 12,706 11,248 2,387 3,396
Other loans ............. 137,902 13,947 7,615 16,259 48,233 23,362 13,773 14,713
-------- -------- -------- -------- -------- -------- -------- --------
Total .............. $753,731 $143,334 $ 39,689 $ 29,820 $ 74,911 $152,464 $ 89,863 $223,650
======== ======== ======== ======== ======== ======== ======== ========

Interest Rate Sensitivity:

Due After June 30, 2002
---------------------
Fixed Variable Rate
Rate and Balloon
---- -----------
(In Thousands)

Real estate ............................. $ 56,480 $297,002
Mortgage-backed certificates,
collateralized mortgage obligations 43,614 1,209
Construction Loans ...................... 170 48,028
Commercial loans ........................ 15,381 24,558
Other loans ............................. 73,857 50,098
-------- --------
Total ............................. $189,502 $420,895
======== =========

Residential Mortgage Loans

Approximately 99.4% of Home Federal's residential mortgage lending
activity, exclusive of refinances, involves the origination of loans secured by
one-to four-family residential properties. Home Federal is authorized to make
one-to four-family residential loans without any limitation as to interest rate,
amount, 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. Home Federal also makes residential and
commercial mortgage loans secured by mid-size multi-family dwelling units and
apartment complexes. The residential mortgage loans included in Home Federal's
portfolio are primarily conventional loans. As of June 30, 2001, $297.0 million,
or 41.9%, of Home Federal's total loan portfolio consisted of residential first
mortgage loans, $270.1 million, or 38.2%, of which were secured by one- to
four-family homes.

Many of the residential mortgage loans currently offered by Home Federal
have adjustable rates. These loans generally have interest rates which adjust
(up or down) semi-annually or annually, with maximum rates which 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 Home Federal's adjustable-rate and fixed-rate
residential mortgage loans are competitive with the rates offered by other
financial institutions in its south central Indiana market area.

Although Home Federal'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.

All of the residential mortgages Home Federal currently originates include
"due on sale" clauses, which give Home Federal 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. Home Federal utilizes the due on sale clause as a means of
protecting the funds loaned by insuring payoff on property sale.

The Office of Thrift Supervision (the "OTS") requires institutions it
regulates to establish loan- to-value ratios consistent with their supervisory
loan-to-value limits. The supervisory limits adopted by the OTS 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 not been established for permanent
mortgage or home equity loans on owner-occupied one-to four-family residential
property. However, for any such loan with a loan-to-value ratio that 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 Home Federal Savings 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 OTS 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 percent of total capital. Moreover, loans for all
commercial, agricultural, multi-family or other non-one-to four-family
residential properties should not exceed 30% of total capital.

Commercial Mortgage Loans

At June 30, 2001, 22.0% of Home Federal's total loan portfolio consisted of
mortgage loans secured by commercial real estate. These properties consisted
primarily of apartment buildings, 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, are written for terms not exceeding 20 years, and require
an 85% loan-to-value ratio. Commitments for these loans in excess of $1 million
must be approved in advance by Home Federal's Board of Directors. The largest
such loan as of June 30, 2001, had a balance of $5.0 million. At that date, all
of Home Federal's commercial real estate loans consisted of loans secured by
real estate located in Indiana.

Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA"), a thrift's portfolio of commercial real estate loans is limited
to 400% of its capital. Also, FIRREA's Qualified Thrift Lender test limits the
amount of commercial real estate loans made by thrifts. See "Regulation
--Qualified Thrift Lender." Home Federal currently complies with the commercial
real estate loan limitation, and neither that limitation nor the Qualified
Thrift Lender test significantly limits the ability of Home Federal to make
commercial real estate loans in its market area.

Generally, commercial mortgage loans involve greater risk to Home Federal
than do residential loans. 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

Home Federal offers conventional short-term construction loans. At June 30,
2001, 9.6% of Home Federal'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 months for residential loans. The
largest such loan on June 30, 2001, was $6.7 million.

Consumer Loans

Federal laws and regulations permit federally chartered savings
institutions to make secured and unsecured consumer loans in an aggregate amount
of up to 35% of the institution's total assets. In addition, a federally
chartered savings institution has lending authority above the 35% limit for
certain consumer loans, such as property improvement loans and loans secured by
savings accounts. However, the Qualified Thrift Lender test places some
restrictions on the ability of thrifts to make consumer loans. See "Regulation
-- Qualified Thrift Lender."

Consumer-related loans, consisting of second mortgage and home equity
loans, mobile home loans, automobile loans, loans secured by savings accounts
and consumer loans were $137.9 million on June 30, 2001, or approximately 19.4%
of Home Federal's total loan portfolio.

Second mortgage loans are made for terms of 1 - 15 years, and are
fixed-rate and variable rate line of credit loans. Home Federal's minimum for
such loans is $5,000. Home Federal will loan up to 90% of the appraised value of
the property, less the existing mortgage amount(s). As of June 30, 2001, Home
Federal had $42.6 million of second mortgage loans, which equaled 6.0% of its
total loan portfolio. Home Federal aggressively markets home equity credit
lines, which are adjustable-rate loans. As of June 30, 2001, Home Federal had
$51.5 million drawn on its home equity loans, or 7.3% of its total loan
portfolio, with $76.2 million of additional credit available to its borrowers
under existing home equity loans.

Automobile loans are generally made for terms of up to five years. The
vehicles are required to be for personal or family use only. As of June 30,
2001, $25.9 million, or 3.6%, of Home Federal's total loan portfolio consisted
of automobile loans.

As of June 30, 2001, $8.3 million, or 1.2%, of Home Federal's total loan
portfolio consisted of mobile home loans. Generally, these loans are made for
terms of one year for each $1,000.00 of the sales price, with a maximum term of
15 years. On new mobile home loans, Home Federal requires a loan-to-value ratio
of 125% of the manufacturer's invoice price plus sales tax or 90% of the actual
sales price, whichever is lower. Also, Home Federal makes loans for previously
occupied mobile homes up to a 90% loan-to-value ratio based upon the actual
sales price or value as appraised, whichever is lower.

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 Home Federal'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 June 30, 2001, $3.7 million, or
0.5%, of Home Federal'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 and shorter terms to maturity are believed to be helpful in Home
Federal's asset/liability management.

Commercial Loans

Collateral for Home Federal's commercial loans includes manufacturing
equipment, real estate, inventory, accounts receivable, and securities. Terms of
these loans are normally for up to ten years and have adjustable rates tied to
the reported prime rate and treasury indexes. Generally, commercial loans are
considered to involve a higher degree of risk than residential real estate
loans. However, commercial loans generally carry a higher yield and are made for
a shorter term than real estate loans. As of June 30, 2001, $74.7 million, or
10.5%, of Home Federal's total loan portfolio consisted of commercial loans.

Origination, Purchase and Sale of Loans

Home Federal originates residential loans in conformity with standard
underwriting criteria of the Federal Home Loan Mortgage Corporation ("FHLMC")
and the Federal National Mortgage Association ("FNMA") to assure maximum
eligibility for possible resale in the secondary market. Although Home Federal
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. Home Federal's loan originations are generated primarily from
referrals from real estate brokers, builders, developers and existing customers,
newspaper, radio and periodical advertising and walk-in customers. Home
Federal'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.

Home Federal studies the employment, credit history, and information on the
historical and projected income and expenses of its individual and corporate
mortgagors to assess their ability to repay its mortgage loans. Additionally,
HFSB utilizes Freddie Mac's Loan Prospector and Fannie Mae's Desktop Underwriter
as origination, processing, and underwriting tools. It uses its staff appraisers
or independent appraisers to appraise the property securing its loans. It
requires title insurance or abstracts accompanied by an attorney's opinion
evidencing Home Federal'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. Home Federal requires fire and extended coverage insurance in
amounts at least equal to the principal amount of the loan. 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 Home Federal 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. Home Federal 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 and servicing income and recycle funds for
additional lending activities, Home Federal seeks to sell loans in the secondary
market. Loan sales can enable Home Federal to recognize significant fee income
and to reduce interest rate risk while meeting local market demand. Home Federal
sold $132.5 million of fixed-rate loans in the fiscal year ended June 30, 2001.
Home Federal's current lending policy is to sell fixed-rate residential mortgage
loans exceeding 10 year maturities. In addition, when in the opinion of
management cash flow demands and asset/liability concerns warrant, Home Federal
will consider keeping fixed-rate loans with 15 year maturities. Typically Home
Federal retains adjustable-rate loans in portfolio. Home Federal 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 lower of
cost or market value, determined on an aggregate basis. The servicing is
retained on most loan sales except Veteran's Administration ("VA"), Federal
Housing Administration ("FHA") and Indiana Housing Finance Authority ("IHFA")
loans.

When loans are sold, Home Federal typically retains the responsibility for
collecting and remitting loan payments, inspecting the properties securing the
loans, making certain that monthly principal and interest payments and real
estate tax payments are made on behalf of borrowers, and otherwise servicing the
loans. Home Federal receives a servicing fee for performing these services. The
amount of fees received by Home Federal varies, but is generally calculated as
an amount equal to 25 basis points per annum on the outstanding principal amount
of the loans serviced. The servicing fee is recognized as income over the life
of the loans. At June 30, 2001, Home Federal serviced $484.6 million of loans
sold to other parties. Gains and losses on sale of loans, loan participations
and mortgage-backed securities are recognized at the time of sale.

Management believes that purchases of loans and loan participations may be
desirable and evaluates potential purchases as opportunities arise. Such
purchases can enable Home Federal 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
does servicing of loans purchased. At June 30, 2001, others serviced
approximately 2.4%, or $16.8 million, of Home Federal's gross loan portfolio.

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

Year Ended June 30,
2001 2000 1999
---- ---- ----
(Dollars in Thousands)

Gross loans receivable at beginning of periods ............ $ 684,086 $ 607,079 $ 615,665
--------- --------- ---------
Loans Originated:
Mortgage loans and contracts:
Construction loans:
Residential ....................................... 38,838 51,992 39,624
Commercial ........................................ 48,752 18,889 14,547
Permanent loans:
Residential ....................................... 138,016 127,636 122,428
Commercial ........................................ 29,723 13,936 27,219
Refinancing .......................................... 83,017 32,104 169,425
Other ................................................ 1,515 844 1,527
--------- --------- ---------
Total ............................................. 339,861 245,401 374,770

Commercial ............................................... 50,060 45,816 73,439
Consumer ................................................. 37,155 36,555 34,501
--------- --------- ---------
Total loans originated ............................... 427,076 327,772 482,710

Loans purchased:
Residential .......................................... 441 -- --
Other ................................................ 8,694 4,044 4,917
--------- --------- ---------
Total loans originated and purchased .............. 436,211 331,816 487,627

Real estate loans sold ................................... 132,517 46,082 217,530
Loan repayments and other deductions ..................... 279,092 208,727 278,683
--------- --------- ---------
Total loans sold, loan repayments and other deductions 411,609 254,809 496,213

Net loan activity ........................................ 24,602 77,007 (8,586)
--------- --------- ---------
Gross loans receivable at end of period .................. 708,688 684,086 607,079
Adjustments .............................................. (34,136) (32,079) (20,161)
--------- --------- ---------

Net loans receivable at end of period .................... $ 674,552 $ 652,007 $ 586,918
========= ========= =========

Under FIRREA, a savings association generally may not make any loan to a
borrower or its related entities if the total of all such loans by the savings
association exceeds 15% of its capital (plus up to an additional 10% of capital
in the case of loans fully collateralized by readily marketable collateral);
provided, however, that loans up to $500,000 irrespective of the percentage
limitations may be made and certain housing development loans of up to $30
million or 30% of capital, whichever is less, are permitted. The maximum amount
that Home Federal could have loaned to one borrower and the borrower's related
entities at June 30, 2001, under the 15% of capital limitation was $12.7
million. At that date, the highest outstanding balance of loans by Home Federal
to one borrower and related entities was approximately $12.5 million, an amount
within such loans-to-one borrower limitations.

Origination and Other Fees

Home Federal realizes income from fees for originating loans, late charges,
NOW account fees and fees for other miscellaneous services. Home Federal charges
origination fees that range from 0% to 1.0% of the loan amount. In addition Home
Federal charges processing fees of $150.00 to $225.00 and underwriting fees of
from $0 to $150.00. Late charges are assessed fifteen days after payment is due.
Home Federal also receives commissions on full-service securities brokerage
transactions which its subsidiary, Home Savings Corporation, offers to its
customers.

Non-performing Assets

Home Federal assesses late charges on mortgage 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 loan service representative. The loan service
representative will attempt to make contact with the customer via a phone call
to efficiently and effectively 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 25th day following a specific due date. Between the 30th
and 45th day following any due date, or at the time a second payment has come
due, if no contact has been made with the customer, a personal visit will be
conducted by a Loan Service Department employee 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 Loan Service 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, Home Federal will make a determination of how to proceed to
protect the interests of both the customer and Home Federal. It may be necessary
for the borrower to attempt to sell the property at Home Federal's request. If a
resolution cannot be arranged, Home Federal will consider avenues necessary to
obtain title to the property which include foreclosure and/or accepting a
deed-in-lieu of foreclosure, whichever may be most appropriate. However, Home
Federal attempts to avoid taking title to the property if at all possible.

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

On June 30, 2001, Home Federal held $1.3 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 the lower of cost or fair market
value less estimated cost to sell at the date of acquisition and any subsequent
write down resulting there from is charged to the allowance for losses on real
estate owned. Interest accrual ceases on the date of acquisition and all costs
incurred from that date in maintaining the property are expensed.

Consumer loan borrowers who fail to make payments are contacted promptly by
the loan service department in an effort to effectively and efficiently 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 loan service
representative. The loan service representative will then attempt to contact the
borrower via a phone call.

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 Home Federal on how to proceed. When a consumer
loan reaches 90 days past due Home Federal determines the loan to value ratio by
performing an inspection of the collateral (if any). Home Federal may initiate
action to obtain collateral (if any) or collect the debt through the legal
remedies available. Collateral obtained as a result of loan default is retained
by Home Federal as an asset until sold or otherwise disposed.

The table below sets forth the amounts and categories of Home Federal'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 Home Federal 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
amount outstanding of the loan as a percentage of the appraised value of the
property and the delinquency record of the borrower.

At June 30,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Non-performing Assets:
Loans:
Non-accrual ......................... $6,351 $2,422 $3,509 $3,992 $2,930
Past due 90 days or more ............ -- -- -- -- 40
Restructured loans .................. 879 632 61 -- 1
Total non-performing loans .................... 7,230 3,054 3,570 3,992 2,971
Real estate owned, net (1) .......... 1,238 1,210 1,936 117 51
Other repossessed assets, net ....... 60 25 114 125 88
------ ------ ------ ------ ------
Total non-performing assets ................... $8,528 $4,289 $5,620 $4,234 $3,110
====== ====== ====== ====== ======

Total non-performing assets to total assets (2) .99% .52% .75% 0.59% 0.46%

Loans with allowance for uncollected interest . $6,440 $2,422 $3,509 $3,992 $2,930

(1) Refers to real estate acquired by Home Federal through foreclosure,
voluntary deed, or insubstance foreclosure, net of reserve.

(2) At June 30, 2001, 30.7% of Home Federal's non-performing assets
consisted of residential mortgage loans, 5.9% consisted of home
equities/second mortgages, 32.6% consisted of commercial real estate loans,
2.7% consisted of commercial loans, 2.6% consisted of consumer-related
loans, 10.3% consisted of restructured loans and 15.2% consisted of real
estate owned and other repossessed assets.

For the year ended June 30, 2001, the income that would have been recorded
under original terms on the above non-accrual and restructured loans was
$432,000 compared to actual income recorded of $220,000. At June 30, 2001, Home
Federal had approximately $5.0 million in loans that were 30-89 days past due.

The allowance for loan losses represents amounts available to absorb losses
inherent in the loan portfolio. Loans or portions thereof are charged to the
allowance when losses are considered probable. Recoveries of amounts previously
charged off are added to the allowance and provisions for loan losses are
charged or credited to earnings to bring the allowance to a level considered
appropriate by management.

For the year ended June 30, 2001, Home Federal charged off loans totaling
$1.0 million and realized recoveries of $80,000 on previously charged-off loans.
Based on management's continuing review of the loan portfolio, growth in
commercial and commercial real estate loans, historical charge-offs and current
economic conditions, Home Federal recorded a charge to earnings of $1.7 million
to adjust the allowance to $5.7 million as of June 30, 2001.

Investments

Home Federal's investment portfolio consists primarily of mortgage-backed
securities, collateralized mortgage obligations, overnight funds with the FHLB
of Indianapolis, U.S. Treasury obligations, U.S. Government agency obligations,
corporate debt and municipal bonds. At June 30, 2001, 2000, and 1999, Home
Federal had approximately $97.2 million, $107.2 million and $90.0 million in
investments, respectively.

Home Federal'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
monthly basis. Home Federal 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. Home Federal'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.

The standard measure of liquidity for the thrift industry is the ratio of
cash and eligible investments to a certain percentage of net withdrawable
savings and borrowings due within one year. On March 14, 2001 the OTS issued an
interim final rule eliminating the requirement that each savings association
maintain an average daily balance of liquid assets of at least four percent of
its liquidity base. However, the rule does require each savings association to
maintain sufficient liquidity to ensure its safe and sound operation. At June
30, 2001, Home Federal had liquid assets of $107.0 million, and a liquidity
ratio of 17.2%.

Source Of Funds

General

Deposits have traditionally been the primary source of funds of Home
Federal for use in lending and investment activities. In addition to deposits,
Home Federal 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 "-- Borrowings."

Deposits

Consumer and commercial deposits are attracted principally from within Home
Federal'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, savings accounts and
commercial demand deposit accounts. Home Federal does not actively solicit or
advertise for deposits outside of the counties in which its branches are
located. 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, Home Federal pays 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, Home Federal would be deemed a well-capitalized institution. At June
30, 2001 Home Federal had $15.0 million in 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.

Home Federal on a periodic basis establishes interest rates 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 Home Federal at the dates indicated:

At June 30,
2001 2000 1999
---- ---- ----
(Dollars in Thousands)

Non-interest bearing and below 2.99% $138,395 $138,205 $136,598
3.00% - 4.99% ...................... 210,408 65,983 225,362
5.00% - 6.99% ...................... 184,058 347,428 216,808
Over 7.00% ......................... 43,682 21,277 1,114

-------- -------- --------
Total .............................. $576,543 $572,893 $579,882
======== ======== ========

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

DEPOSIT ACTIVITY
(Dollars in Thousands)

Balance Balance Balance
at at at
June 30, % of Increase June 30, % of Increase June 30, % of Increase
2001 Deposits (Decrease) 2000 Deposits (Decrease) 1999 Deposits (Decrease)
---- -------- ---------- ---- -------- ---------- ---- -------- ----------

Withdrawable:
Non-interest bearing ........... $ 41,323 7.2% $ 1,828 $ 39,495 6.9% $ 3,963 $ 35,532 6.1% $ 1,596
Passbook ....................... 43,253 7.5% (1,530) 44,783 7.8% (3,243) 48,026 8.3% (804)
Money market savings ........... 131,514 22.8% 23,084 108,430 19.0% 1,844 106,586 18.4% 12,370
NOW ............................ 53,819 9.3% (108) 53,927 9.4% 887 53,040 9.1% 4,952
------ --- ---- ------ --- --- ------ --- -----
Total Withdrawable ....... 269,909 46.8% 23,274 246,635 43.1% 3,451 243,184 41.9% 18,114
------- ---- ------ ------- ---- ----- ------- ---- ------
Certificates:
Less than one year ............. 40,628 7.0% (16,515) 57,143 10.0% (30,356) 87,499 15.1% 6,619
12 to 23 months ................ 124,845 21.7% (1,457) 126,302 22.0% 11,394 114,908 19.8% 13,824
24 to 35 months ................ 94,207 16.3% (387) 94,594 16.5% 18,680 75,914 13.1% (7,561)
36 to 59 months ................ 11,909 2.1% 1,701 10,208 1.8% (1,700) 11,908 2.1% (7,795)
60 to 120 months ............... 35,045 6.1% (2,966) 38,011 6.6% (8,458) 46,469 8.0% (7,000)
-- --- ------ --- ------ ------ --- ------ ------ --- ------
Total certificate accounts 306,634 53.2% (19,624) 326,258 56.9% (10,440) 336,698 58.1% (1,913)
------- ---- ------- ------- ---- ------- ------- ---- ------
Total deposits ....... $576,543 100.0% $ 3,650 $572,893 100.0% $ (6,989) $579,882 100.0% $ 16,201
======== ===== ======== ======== ===== ======== ======== ===== ========

The following table represents, by various interest rate categories, the
amounts of deposits maturing during each of the three years following June 30,
2001, and the percentage of such maturities to total deposits. Matured
certificates which have not been renewed as of June 30, 2001 have been allocated
based upon certain rollover assumptions.

DEPOSIT MATURITIES
(Dollars in Thousands)

3.99% 4.00 5.00 6.00 7.00
or to to to to Percent of
less 4.99% 5.99% 6.99% 9.00% Total Total
---- ----- ----- ----- ----- ----- -----
Certificate accounts maturing in
the twelve-month period ending:

June 30, 2002.................... $ 5,513 $ 57,652 $ 41,970 $ 96,541 $ 16,362 $218,038 71.1%
June 30, 2003.................... 5 11,854 10,119 13,112 26,555 61,645 20.1%
June 30, 2004.................... -- 2,171 6,335 1,193 23 9,722 3.2%
Thereafter ...................... -- 1,699 8,862 5,926 742 17,229 5.6%
---- ----- ----- ----- --- ------ ---
$ 5,518 $ 73,376 $ 67,286 $116,772 $ 43,682 $306,634 100.0%
======== ======== ======== ======== ======== ======== =====

Included in the deposit totals in the above table are savings certificates
of deposit with balances of over $100,000. The majority of these deposits are
from regular customers of Home Federal, excluding $15.0 million which were from
brokered deposits. The following table provides a breakdown at June 30, 2001 of
certificates of greater than $100,000 by maturity.

ACCOUNTS GREATER THAN $100,000
(Dollars in Thousands)

3.00 4.00 5.00 6.00 7.00
to to to to to Percent of
3.99% 4.99% 5.99% 6.99% 7.99% Total Total
----- ----- ----- ----- ----- ----- -----

Certificate accounts maturing in
the twelve-month period ending:

June 30, 2002..................... $ 1,100 $23,950 $ 7,040 $34,136 $ 7,004 $73,230 83.0%
June 30, 2003..................... -- 587 1,384 2,428 4,630 9,029 10.2%
June 30, 2004..................... -- -- 1,468 459 -- 1,927 2.2%
Thereafter ...................... -- -- 458 2,945 669 4,072 4.6%
----- ------ ------ ------ ------ ------ ---
$ 1,100 $24,537 $10,350 $39,968 $12,303 $88,258 100.0%
======= ======= ======= ======= ======= ======= =====

Borrowings

Home Federal 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 Home Federal's major source of borrowings. Advances from the
FHLB of Indianapolis are typically secured by Home Federal's stock in the FHLB
of Indianapolis and a portion of Home Federal's first mortgage loans.

Each FHLB credit program has its own interest rate, which may be fixed or
variable, and 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 June 30, 2001, Home Federal had advances totaling $192.1 million
outstanding from the FHLB of Indianapolis.

The Company has a revolving note with LaSalle Bank N.A. whereby the Company
may borrow up to $12.5 million. The note accrues interest at a variable rate
based on the ninety-day London inter bank offering rate ("LIBOR"), on the date
of the draw, plus 150 basis points. Interest payments are due ninety days after
the date of any principal draws made on the loan and every ninety days
thereafter. On February 13, 2001 the Company modified the payment terms of the
$11.2 million principal balance to allow for principal payments on the maturity
dates of the three interest rate swaps the Company entered into on the same
date. Maturities of senior debt based on maximum scheduled payments as of June
30, 2001 are: 2003 - $2.0 million, 2004 - $4.6 million and 2006 - $4.6 million.
Any remaining principal balance is due by February 15, 2006. The Company used
the funds attained to buy back shares of the Company's common stock. The note is
collateralized by the assets of the Company. Under terms of the agreement, the
Company is bound by certain restrictive debt covenants relating to earnings, net
worth and various financial ratios. As of June 30, 2001, the Company was in
compliance with the debt covenants.

Effective February 13, 2001, the company entered into three interest rate
swap agreements with LaSalle Bank N.A. In the first agreement the Company
will make fixed rate payments at 5.45% and receive variable rate payments at the
three month LIBOR index on a notional amount of $2.0 million. The maturity date
of the first swap agreement is May 1, 2003. In the second agreement the Company
will make fixed rate payments at 5.6% and receive variable rate payments at the
three month LIBOR on a notional amount of $4.6 million. The maturity date of the
second swap agreement is May 1, 2004. In the third agreement the Company will
make fixed rate payments at 5.77% and receive variable rate payments at the
three month LIBOR on a notional amount of $4.6 million. The maturity date of the
third swap agreement is February 1, 2006. The three interest rate swaps are
accounted for on a settlement basis. The Company is exposed to credit loss in
the event of nonperformance by LaSalle Bank N.A for the net interest rate
differential when floating rates exceed the fixed maximum rate. However, the
Company does not anticipate nonperformance by the counter party.

Other than the FHLB advances and the Senior Debt, Home Federal's only
borrowings in recent years have been short-term borrowings. 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.

For the year ended June 30,
2001 2000 1999
---- ---- ----
(Dollars in Thousands)

FHLB advances ............................... $73,500 $70,900 $34,500
Official check overnight remittance ......... $ 4,961 $ 5,150 $ 6,273
Money Order remittance ...................... $ 53 $ 54 $ 57
FHLB overnight remittance ................... $ 2,875 $ 2,325 $ 420
Average amount of total short-term borrowings
outstanding ............................... $57,222 $39,878 $26,309

The following table sets forth the amount of short term FHLB advances
outstanding at year end during the period shown and the weighted average rate of
such FHLB advances.

At the year ended June 30,
2001 2000 1999
---- ---- ----
(Dollars in Thousands)
FHLB advances:
Amount................. $ 39,900 $ 69,900 $ 11,300
Weighted average rate.. 5.8% 6.5% 6.1%

See Note 9 in the Notes to Consolidated Financial Statements included in
the 2001 Shareholder Annual Report incorporated into Item 8 hereof for a
description of the terms of these borrowings.

Service Corporation Subsidiaries

Federal savings banks generally may invest up to 2% of their assets in
service corporations and make loans to such subsidiaries and joint ventures in
which such subsidiaries are participants in an aggregate amount not exceeding 2%
of an association's assets, plus an additional 1% of assets if the amount over
2% is used for specified community or inner-city development purposes. In
addition, federal regulations permit associations to make specified types of
loans to such subsidiaries (other than special- purpose finance subsidiaries),
in which the association owns more than 10% of the stock, in an aggregate amount
not exceeding 50% of the association's regulatory capital if the association's
regulatory capital is in compliance with applicable regulations.

One of Home Federal's subsidiaries, Home Savings Corporation ("HSC"), an
Indiana corporation, is currently engaged in three types of activities: (i) real
estate development; (ii) sales of life insurance products and annuities; and
(iii) full-service securities brokerage services. With the exception of its
securities brokerage services, all of HSC's activities are conducted through
joint ventures in which it is an equity investor.

HSC has undertaken these activities as a part of Home Federal's business
strategy of diversifying its operations. This diversification is related to
traditional activities in which Home Federal has expertise, and often involves a
similar pool of potential customers. Additionally, the diversification provides
opportunities to earn income that is not as sensitive to changes in interest
rates as is net interest income, and to meet the needs of its customers by
becoming a full-service financial center. Although these activities create a
potential for a higher rate of return than mortgage lending, either directly
through operations or indirectly through appreciation in value of the business
or real property, these activities involve greater and different risks than
those associated with thrift lending and can affect adversely the savings
association's regulatory capital calculations. See "Regulation -- Regulatory
Capital." At June 30, 2001, Home Federal's aggregate investment in HSC,
including loans, was $10.1 million. For the year ended June 30, 2001, HSC
reported income of $811,000 from these operations. HSC's office is located at
222 West Second Street, Seymour, Indiana. The consolidated statements of
operations of Home Federal and its subsidiaries included elsewhere herein
includes the operations of HSC. Intercompany balances and transactions have been
eliminated in the consolidation.

The following table sets forth certain information regarding each of the
joint ventures in which HSC was involved at June 30, 2001.

Date
HSC Loans from Home
Entered Savings Corp.
into the Equity Outstanding
Name Type of Project Project Investment June 30, 2001
---- --------------- ------- ---------- -------------
Consortium Partners Owns Family Financial Life Insurance 11/31/83 $ 767,000 $ -
Company of New Orleans
Coventry Associates Real Estate development 8/31/89 $ 20,000 $ -
in Seymour, Indiana
Heritage Woods II Rental Apartment project of low income 11/15/89 $ 67,000 $ -
housing (22 units)
Broadmoor North /Heathfield Real estate development 12/15/99 $ 1,508,000 $ 1,457,000
in Columbus, Indiana
Home-Breeden Real estate development 7/1/94 $ 2,104,000 $ 1,609,000
in Columbus, Indiana
Crystal Lake at River Ridge Single family homes in Indianapolis, 11/29/97 $ 1,478,000 $ 1,652,000
Indiana
Bloomington Technology Industrial park in Bloomington, Indiana 11/10/97 $ 569,000 $ -
Park, LLC
Courtyard Homes at Single family homes in Indianapolis, 6/14/99 $ 3,562,000 $ 3,476,000
Sycamore Springs, LLC Indiana

HSC has a 14% interest in Consortium Partners, a Louisiana partnership,
which owns 50% of the outstanding shares of the Family Financial Life Insurance
Company of New Orleans ("Family Financial"). The remaining 50% of the
outstanding shares of Family Financial is owned proportionately by the partners
of Consortium Partners. Family Financial sells life, accident, and health
insurance as well as annuity products to the customers of the partners'
parent-thrifts. HSC receives (1) dividends paid on Family Financial shares owned
directly by it, (2) a pro rata allocation of dividends received on shares held
by Consortium Partners, which are divided among the partners based on the
actuarially determined value of Family Financial's various lines of insurance
generated by customers of these partners, and (3) commissions on sales of
insurance products made to customers. For the year ended June 30, 2001, Home
Federal had income of $409,000, on a consolidated basis, from commissions and
dividends paid on Family Financial activities.

HSC markets Raymond James Financial full-service securities brokerage
services. For the year ended June 30, 2001, HSC received $415,000 in commissions
from its Raymond James Financial activities.

In August, 1989, HSC entered into a financing agreement with Greemann Real
Estate, Inc. to purchase and develop Coventry Place, a residential real estate
subdivision in Seymour, Indiana. HSC is entitled to 65% of the net profit after
the payment of all interest, development and sales fees.

In November, 1989, HSC invested $184,000 as a limited partner in Heritage
Woods II, a low income housing project in Columbus, Indiana. HSC received
low-income housing tax credits for 10 years from this project and must maintain
the investment for 15 years to avoid any tax credit recapture.

On December 15, 1999, HSC entered into a joint venture agreement with
Breeden Investment Group, Inc. to develop a 100 lot residential real estate
subdivision ("Broadmoor North/Heathfield"). Broadmoor North/Heathfield is
located on the north central side of Columbus, Indiana. Loan documents were
executed on December 23, 1999 for land acquisition and development of phases I
and II in an amount not to exceed $2.2 million. In addition to interest on the
loan, HSC will receive 35% of the profits after all interest, development and
sales costs.

On July 1, 1994, HSC entered into a joint venture agreement with Breeden
Investment Group, Inc. to develop a 320 lot starter home subdivision with
additional multi-family and commercial land ("McCullough's Run"). McCullough's
Run is located on the east side of Columbus, Indiana. Loan documents were
executed on July 1, 1994 for land acquisition and development of phases I and
II. Subsequent closings have encompassed the balance of six phases and on March
6, 2000 loan documents were executed in an amount not to exceed $2.1 million.
The outstanding loan balance of $1.6 million as of June 30, 2000, reflects the
development costs to date of all six phases, the condominium site and commercial
acreage. HSC is entitled to 50% of the profit from sale of lots within
McCullough's Run.

On November 29, 1997, HSC entered into an LLC agreement with Curtis
Enterprises, Inc., and Gary B. Warstler to build up to eighty-five single family
homes at Crystal Lake at River Ridge in northern Indianapolis, Indiana. On May
1, 2000, the LLC agreement was amended when Mr. Warstler desired to withdraw
from the LLC and assign his percentage share in the LLC equally between the two
remaining members. The LLC purchases finished lots from RN Thompson Development
Corporation. HSC has provided a line of credit in the amount of $3 million to
build the homes. HSC is entitled to one third of the profits from homes started
before Mr. Warstler withdrew and 50% of the profits from homes started after Mr.
Warstler withdrew. An agreement has been signed with RN Thompson Development
Corporation to buy back the 10 undeveloped lots owned by the LLC.

On November 10, 1997 HSC entered into an LLC agreement with
Wininger-Stolberg HC, II, Inc. to develop the Bloomington Technology Park in
Bloomington, IN. The City of Bloomington and Monroe County are providing an
$800,000 grant to build infrastructure. HSC will provide a matching amount. The
eighty-two acre site was purchased from Otis Elevator Company, Inc. and work
started late spring, 1998. HSC is entitled to a fee of $150,000 and 50% of all
profit from the sale of lots in Bloomington Technology Park.

On June 14, 1999, HSC entered into an LLC agreement with Curtis
Enterprises, Inc. to build 54 homes at Courtyard Homes at Sycamore Springs, a
planned community in Indianapolis, Indiana. The LLC purchased the land and will
develop lots and build the homes. HSC has provided a line of credit in the
amount of $5 million to build the homes, and is entitled to one third of the
profits from the home sales.

Home Federal also organized another service corporation subsidiary under
Indiana law, HomeFed Financial Corp., as a financing subsidiary to issue
subordinated debt, collateralized mortgage obligations, and similar securities.
This corporation is currently a shell corporation and has never engaged in any
business operations.

Employees

As of June 30, 2001, Home Federal employed 259 persons on a full-time basis
and 5 persons on a part-time basis. None of Home Federal's employees are
represented by a collective bargaining group. Management considers its employee
relations to be excellent.

Competition

Home Federal 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, Scott, Ripley, Washington, Decatur, Monroe and
Marion counties in Indiana.

Home Federal is subject to competition from various financial institutions,
including state and national banks, state and federal thrift associations, and
other companies or firms, including brokerage houses, that provide similar
services in the areas of Home Federal's home and branch offices. Also, in
Seymour, Columbus, North Vernon and Batesville, Home Federal must compete with
banks and savings institutions in Indianapolis. To a lesser extent, Home Federal
competes with financial and other institutions in the market areas surrounding
Cincinnati, Ohio and Louisville, Kentucky. Home Federal also competes with money
market funds which 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. To date, several bank holding company
acquisitions of healthy thrifts in Indiana have been completed. Affiliations
between banks and thrifts based in Indiana have increased the competition faced
by Home Federal and the Company. See "Acquisitions or Dispositions and
Branching."

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

General

Home Federal, as a federally chartered stock savings bank, is a member of
the Federal Home Loan Bank System ("FHLB System") and its deposits are insured
by the Savings Association Insurance Fund ("SAIF") which is administered by the
FDIC. Home Federal is subject to extensive regulation by the OTS. Federal
associations may not enter into certain transactions unless certain regulatory
tests are met or they obtain prior governmental approval, and the associations
must file reports with the OTS about their activities and their financial
condition. Periodic compliance examinations of Home Federal are conducted by the
OTS that has, in conjunction with the FDIC in certain situations, examination
and enforcement powers. This supervision and regulation is intended primarily
for the protection of depositors and federal deposit insurance funds. Home
Federal is also subject to certain reserve requirements under regulations of the
Board of Governors of the Federal Reserve System ("FRB").

An OTS regulation establishes a schedule for the assessment of fees upon
all savings associations to fund the operations of the OTS and a schedule of
fees for the various types of applications and filings made by savings
associations with the OTS. The OTS has established a marginal assessment rate
for calculating the semi-annual assessment payable by savings associations that
decreases as the asset size of a savings association increases, and includes a
fixed-cost component that is assessed on all savings associations. The
assessment rate that applies to a savings association depends upon the
institution's size, condition, and the complexity of its operations. Home
Federal's semi-annual assessment under this revised regulation is approximately
$83,000.

Home Federal is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
its own securities, and limitations upon other aspects of banking operations. In
addition, the activities and operations of Home Federal are subject to a number
of additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and anti-trust
laws.

Federal Home Loan Bank System

Home Federal 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, Home Federal 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 June 30, 2001, Home Federal's
investment in stock of the FHLB of Indianapolis was $ 9.9 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 fiscal year ended June
30, 2001, dividends paid by the FHLB of Indianapolis to Home Federal totaled
approximately $788,000 for an annual rate of 8.2%.

Liquidity

The Financial Regulatory Relief and Economic Efficiency Act of 2000, which
was signed into law on December 27, 2000, repealed the former statutory
requirement that all savings associations maintain an average daily balance of
liquid assets in a minimum amount of not less than 4% or more than 10% of their
withdrawable accounts plus short-term borrowings. The OTS adopted an interim
final rule in March 2001 that implemented this revised statutory requirement,
although savings associations remain subject to the OTS regulation that requires
them to maintain sufficient liquidity to ensure their safe and sound operation.

Insurance of Deposits

Deposit Insurance. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the BIF for commercial banks and
state savings banks and the SAIF for savings associations and banks that have
acquired deposits from savings associations. The FDIC is required to maintain
designated levels of reserves in each fund. In 1996, the reserves of the SAIF
were below the level required by law, primarily because a significant portion of
the assessments paid into the SAIF had been used to pay the cost of prior thrift
failures, while the reserves of the BIF met the levels required by law. However,
on September 30, 1996, provisions designed to recapitalize the SAIF and
eliminate the premium disparity between the BIF and the SAIF were signed into
law. See "--Assessments" below.

Assessments. The FDIC is authorized to establish separate annual assessment
rates for deposit insurance for members of the BIF and members of the SAIF. The
FDIC may increase assessment rates for either fund if necessary to restore the
fund's ratio of reserves to insured deposits to the target level within a
reasonable time and may decrease these rates if the target level has been met.
The FDIC has established a risk-based assessment system for both SAIF and BIF
members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital level and the FDIC's level of supervisory
concern about the institution.

On September 30, 1996, legislation was enacted to recapitalize the SAIF and
eliminate the significant premium disparity between the BIF and the SAIF. Under
the new law, Home Federal was charged a one-time special assessment equal to
$.657 per $100 in assessable deposits at March 31, 1995. Home Federal recognized
this one-time assessment as a non-recurring operating expense of $3,001,000,
($1,726,000 after tax), during the three-month period ending September 30, 1996,
and Home Federal paid the assessment on November 27, 1996. The assessment was
fully deductible for both federal and state income tax purposes. Beginning
January 1, 1997, Home Federal's annual deposit insurance premium was reduced
from .23% to .0644% of total assessable deposits. In addition to the assessment
for deposit insurance, savings institutions are required to pay on bonds issued
in the late 1980s by Financing Corporation ("FICO"), which is a
federally-chartered corporation that was organized to provide some of the
financing to resolve the thrift crisis in the 1980s. During 1998, FICO payments
for SAIF members approximated 6.10 basis points, while BIF members paid 1.22
basis points. By law, payments on Financing Corporation obligations have been
shared equally between BIF members and SAIF members since January 1, 2000.

Although Congress has considered merging the SAIF and the BIF, until then,
savings associations with SAIF deposits may not transfer deposits into the BIF
system without paying various exit and entrance fees. Such exit and entrance
fees need not be paid if a SAIF institution converts to a bank charter or merges
with a bank, as long as the resulting bank continues to pay applicable insurance
assessments to the SAIF, and as long as certain other conditions are met.

Regulatory Capital

Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations with the highest supervisory rating for
safety and soundness maintain "core capital" of at least 3% of total assets. All
other savings associations must maintain core capital of at least 4% to 5%. Core
capital is generally defined as common stockholders' equity (including retained
income), noncumulative perpetual preferred stock and related surplus, certain
minority equity interests in subsidiaries, qualifying supervisory goodwill,
purchased mortgage servicing rights and purchased credit card relationships
(subject to certain limits) less nonqualifying intangibles. Under the tangible
capital requirement, a savings association must maintain tangible capital (core
capital less all intangible assets except purchased mortgage servicing rights
which may be included after making the above-noted adjustments in an amount up
to 100% of tangible capital) of at least 1.5% of total assets. Under the
risk-based capital requirements, a minimum amount of capital must be maintained
by a savings association to account for the relative risks inherent in the type
and amount of assets held by the savings association. The risk-based capital
requirement requires a savings association to maintain capital (defined
generally for these purposes as core capital plus general valuation allowances
and permanent or maturing capital instruments such as preferred stock and
subordinated debt less assets required to be deducted) equal to 8.0% of
risk-weighted assets. Assets are ranked as to risk in one of four categories
(0-100%) with a credit risk-free asset such as cash requiring no risk-based
capital and an asset with a significant credit risk such as a non-accrual loan
being assigned a factor of 100%. At June 30, 2001, based on the capital
standards then in effect, Home Federal was in compliance with all capital
requirements.

The OTS has delayed implementation of a rule, which sets forth the
methodology for calculating an interest rate risk component to be incorporated
into the OTS regulatory capital rule. Under the rule, only savings associations
with "above normal" interest rate risk (institutions whose portfolio equity
would decline in value by more than 2% of assets in the event of a hypothetical
200-basis point move in interest rates) will be required to maintain additional
capital for interest rate risk under the risk-based capital framework. A savings
association with an "above normal" level of exposure will have to maintain
additional capital equal to one-half the difference between its measured
interest rate risk (the most adverse change in the market value of its portfolio
resulting from a 200-basis point move in interest rates divided by the estimated
market value of its assets) and 2%, multiplied by the market value of its
assets. That dollar amount of capital is in addition to a savings association's
existing risk-based capital requirement. Although the OTS has decided to delay
implementation of this rule, it will continue to closely monitor the level of
interest rate risk at individual savings associations and it retains the
authority, on a case-by-case basis, to impose additional capital requirements
for individual savings associations with significant interest rate risk. The OTS
recently updated its standards regarding the management of interest rate risk to
include summary guidelines to assist savings associations in determining their
exposures to interest rate risk.

In periods of rapidly changing interest rates, the Bank's balance sheet is
subject to significant fluctuations in market value (interest rate risk
exposure). However, as the delayed interest rate risk rules proposed by the OTS
currently read, the Bank at June 30, 2001, would have no additional capital
requirement. The Bank's management continues to monitor its interest rate risk
position.

The following is a summary of Home Federal's regulatory capital and capital
requirements at June 30, 2001:

To Be Categorized
As "Well Capitalized"
Under Prompt
For Capital Corrective Action
(dollars in thousands) Actual Adequacy Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------------------
As of June 30, 2001
Tangible capital (to total assets) $68,907 8.09% $12,773 1.50% N/A N/A
Core capital (to total assets) ... $68,907 8.09% $34,061 4.00% N/A N/A
Total risk-based capital
(to risk-weighted assets) ..... $73,442 11.13% $52,795 8.00% $65,993 10.00%
Tier 1 risk-based capital
(to risk-weighted assets) ..... $68,907 10.44% N/A N/A $39,596 6.00%
Tier 1 leverage capital
(to average assets) ........... $68,907 8.07% N/A N/A $42,687 5.00%

If an association is not in compliance with its capital requirements, the
OTS is required to prohibit asset growth and to impose a capital directive that
may restrict, among other things, the payment of dividends and officers'
compensation. In addition to these sanctions, the OTS and the FDIC generally are
authorized to take enforcement actions against a savings association that fails
to meet its capital requirements, which actions may include restrictions on
operations and banking activities, the imposition of a capital directive, a
cease and desist order, civil money penalties or harsher measures such as the
appointment of a receiver or conservator or a forced merger into another
institution.

Prompt Corrective Regulatory Action

The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, federal bank regulatory authorities to
take "prompt corrective action" with respect to institutions that do not meet
minimum capital requirements. For these purposes, FedICIA establishes five
capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At June 30,
2001, Home Federal was categorized as "well capitalized," meaning that Home
Federal's total risk-based capital ratio exceeded 10%, Home Federal's Tier I
risk-based capital ratio exceeded 6%, Home Federal's leverage ratio exceeded 5%,
and Home Federal was not subject to a regulatory order, agreement or directive
to meet and maintain a specific capital level for any capital measure.

Limitations on Rates Paid for Deposits

Regulations promulgated by the FDIC pursuant to FedICIA 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 FedICIA. Management does not believe that these regulations
will have a materially adverse effect on Home Federal's current operations.

Loans to One Borrower

Under OTS regulations, Home Federal 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. In some cases, a savings association
may lend up to 30% of unimpaired capital and surplus to one borrower for
purposes of developing domestic residential housing, provided that the
association meets its regulatory capital requirements and the OTS authorizes the
association to use this expanded lending authority. At June 30, 2001, Home
Federal did not have any loans or extensions of credit to a single or related
group of borrowers in excess of its regulatory lending limits. Management does
not believe that the loans-to-one-borrower limits will have a significant impact
on Home Federal's business operations or earnings.

Capital Distributions Regulation

The OTS regulation that applies to "capital distributions" by savings
associations define a capital distribution as a distribution of cash or other
property to a savings association's owners, made on account of their ownership.
This definition includes a savings association's payment of cash dividends to
shareholders, or any payment by a savings association to repurchase, redeem,
retire, or otherwise acquire any of its shares or debt instruments that are
included in total capital, and any extension of credit to finance an affiliate's
acquisition of those shares or interests. The regulation does not apply to
dividends consisting only of a savings association's shares or rights to
purchase such shares.

The regulation exempts certain savings associations from filing either a
notice or an application with the OTS before making any capital distribution.
The regulation requires a savings association to file an application for
approval of a proposed capital distribution with the OTS if the association is
not eligible for expedited treatment under OTS's application processing rules,
or the total amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings association's net income for that year to date plus the savings
association's retained net income for the preceding two years (the "retained net
income standard"). At June 30, 2001, Home Federal's retained net income standard
was $11.2 million. A savings association must also file an application for
approval of a proposed capital distribution if, following the proposed
distribution, the association would not be at least adequately capitalized under
the OTS prompt corrective action regulations, or if the proposed distribution
would violate a prohibition contained in any applicable statute, regulation, or
agreement between the association and the OTS or the FDIC.

The OTS capital distribution regulation requires a savings association to
file a notice of a proposed capital distribution in lieu of an application if
the association or the proposed capital distribution do not meet the conditions
described above, and: (1) the savings association will not be at least well
capitalized (as defined under the OTS prompt corrective action regulations)
following the capital distribution; (2) the capital distribution would reduce
the amount of, or retire any part of the savings association's common or
preferred stock, or retire any part of debt instruments such as notes or
debentures included in the association's capital under the OTS capital
regulation; or (3) the savings association is a subsidiary of a savings and loan
holding company. Because Home Federal is a subsidiary of a savings and loan
holding company, this latter provision will require, at a minimum, that Home
Federal file a notice with the OTS 30 days before making any capital
distributions to the Company.

In addition to these regulatory restrictions, Home Federal's Plan of
Conversion imposes additional limitations on the amount of capital distributions
it may make to the Company. The Plan of Conversion requires Home Federal to
establish and maintain a liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders and prohibits Home Federal
from making capital distributions to the Company if its net worth would be
reduced below the amount required for the liquidation account.

Safety and Soundness Standards

In 1995, the federal banking agencies adopted final safety and soundness
standards for all insured depository institutions. The standards, which were
issued in the form of guidelines rather than regulations, relate to internal
controls, information systems, internal audit systems, loan underwriting and
documentation, compensation and interest rate exposure. In general, the
standards are designed to assist the federal banking agencies in identifying and
addressing problems at insured depository institutions before capital becomes
impaired. If an institution fails to meet these standards, the appropriate
federal banking agency may require the institution to submit a compliance plan.
Failure to submit a compliance plan may result in enforcement proceedings. In
1996, the federal banking agencies added asset quality, earnings standards and
interest rate sensitivity to the safety and soundness guidelines.

Real Estate Lending Standards

OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies.

The association's written real estate lending policies must be reviewed and
approved by the association's board of directors at least annually. Further,
each association is expected to monitor conditions in its real estate market to
ensure that its lending policies continue to be appropriate for current market
conditions.

Federal Reserve System

Under regulations of the Board of Governors of the Federal Reserve Board
(the "FRB"), Home Federal is required to maintain reserves against its
transaction accounts (primarily checking and NOW accounts) and non-personal
money market deposit accounts. The effect of these reserve requirements is to
increase Home Federal's cost of funds. Home Federal is in compliance with its
reserve requirements. A federal savings association, like other depository
institutions maintaining reservable accounts, may borrow from the FRB "discount
window," to meet these requirements but the FRB's regulations require the
savings association to exhaust other reasonable alternative sources, including
borrowing from its regional FHLB, before borrowing from the FRB. FedICIA imposes
certain limitations on the ability of undercapitalized depository institutions
to borrow from FRBs.

Savings and Loan Holding Company Regulation

The Company is regulated as a "non-diversified savings and loan holding
company" within the meaning of the Home Owners' Loan Act, as amended (the
"HOLA"), and subject to regulatory oversight of the Director of the OTS. As
such, the Company is registered with the OTS and is thereby subject to OTS
regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, Home Federal is subject to
certain restrictions in its dealings with the Company and with other companies
affiliated with the Company.

In general, the HOLA prohibits a savings and loan holding company, without
obtaining the prior approval of the Director of the OTS, from acquiring control
of another savings association or savings and loan holding company or retaining
more than 5% of the voting shares of a savings association or of another holding
company which is not a subsidiary. The HOLA also restricts the ability of a
director or officer of the Company, or any person who owns more than 25% of the
Company's stock, from acquiring control of another savings association or
savings and loan holding company without obtaining the prior approval of the
Director of the OTS.
The Company currently operates as a unitary savings and loan holding
company. Prior to the enactment of the GLB Act on November 12, 1999, there were
no restrictions on the permissible business activities of a unitary savings and
loan holding company. The GLB Act included a provision that prohibits any new
unitary savings and loan holding company, defined as a company that acquires a
thrift after May 4, 1999, from engaging in commercial activities. This provision
also includes a grandfather clause, however, that permits a company that was a
savings and loan holding company as of May 4, 1999, or had an application to
become a savings and loan holding company on file with the OTS as of that date,
to acquire and continue to control a thrift and to continue to engage in
commercial activities. Because the Company qualifies under this grandfather
provision, the GLB Act did not affect the Company's authority to engage in
diversified business activities.

Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. ___ See
"--Qualified Thrift Lender." At June 30, 2001, Home Federal's asset composition
was in excess of that required to qualify Home Federal as a QTL.

If the Holding Company were to acquire control of another savings
association other than through a merger or other business combination with Home
Federal, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, the activities of the Holding Company and any of
its subsidiaries (other than Home Federal or other subsidiary savings
associations) would thereafter be subject to further restrictions. HOLA provides
that, among other things, no multiple savings and loan holding company or
subsidiary thereof which is not a savings association shall commence or continue
for a limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity other than (i) furnishing
or performing management services for a subsidiary savings association, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings association,
(iv) holding or managing properties used or occupied by a subsidiary savings
association, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by the FSLIC by regulation as of March 5, 1987,
to be engaged in by multiple holding companies or (vii) those activities
authorized by the FRB as permissible for bank holding companies, unless the
Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
must also be approved by the Director of the OTS prior to being engaged in by a
multiple holding company.

The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the savings association to be acquired as of March 5,
1987, or if the laws of the state in which the savings association to be
acquired is located specifically permit associations to be acquired by
state-chartered associations or savings and loan holding companies located in
the state where the acquiring entity is located (or by a holding company that
controls such state-chartered savings associations). Also, the Director of the
OTS may approve an acquisition resulting in a multiple savings and loan holding
company controlling savings associations in more than one state in the case of
certain emergency thrift acquisitions.

No subsidiary saving association of a savings and loan holding company may
declare or pay a dividend on its permanent or nonwithdrawable stock unless it
first gives the Director of the OTS 30 days advance notice of such declaration
and payment. Any dividend declared during such period, or without the giving of
such notice, shall be invalid.

Acquisitions or Dispositions and Branching

The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the Board of Governors of the
Federal Reserve Board (the "FRB") restrict the branching authority of savings
associations acquired by bank holding companies. Savings associations acquired
by bank holding companies may be converted to banks if they continue to pay SAIF
premiums, but as such they become subject to branching and activity restrictions
applicable to banks.

Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.

The OTS has adopted regulations that permit nationwide branching to the
extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss. 7701(a)(19) of the Code or the asset
composition test of ss. 7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.

Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in
other states and, with state consent and subject to certain limitations, allows
banks to acquire out-of-state branches either through merger or de novo
expansion. The State of Indiana enacted legislation establishing interstate
branching provisions for Indiana state-chartered banks consistent with those
established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana
Branching Law, which became effective in 1996, authorizes Indiana banks to
branch interstate by merger or de novo expansion, provided that such
transactions are not permitted to out-of-state banks unless the laws of their
home states permit Indiana banks to merge or establish de novo banks on a
reciprocal basis.

Transactions with Affiliates

Home Federal is subject to Sections 22(h), 23A and 23B of the Federal
Reserve Act, which restrict financial transactions between banks and their
directors, executive officers and affiliated companies. The statute limits
credit transactions between a bank or savings association and its executive
officers and its affiliates, prescribes terms and conditions for bank affiliate
transactions deemed to be consistent with safe and sound banking practices, and
restricts the types of collateral security permitted in connection with a bank's
extension of credit to an affiliate.

Federal Securities Law

The shares of Common Stock of the Holding Company are registered with the
SEC under the Securities Exchange Act of 1934 (the "1934 Act"). The Holding
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 Holding Company has fewer than 300 shareholders, it may
deregister its shares under the 1934 Act and cease to be subject to the
foregoing requirements.

Shares of Common Stock held by persons who are affiliates of the Holding
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 Holding Company meets the current public information requirements
under Rule 144, each affiliate of the Holding Company who complies with the
other conditions of Rule 144 (including a one-year holding period 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) l
% of the outstanding shares of the Holding Company or (ii) the average weekly
volume of trading in such shares during the preceding four calendar weeks.

Qualified Thrift Lender

Savings associations must meet a QTL test, which requires a savings
association to have at least 65% of its portfolio assets, invested in "qualified
thrift investments" on a monthly average basis in 9 out of every 12 months.
Qualified thrift investments under the QTL test include primarily residential
mortgages and related investments including certain mortgage-related securities.
Portfolio assets under the QTL test include all of an association's assets less
(i) goodwill and other intangibles, (ii) the value of property used by the
association to conduct its business, and (iii) its liquid assets as required to
be maintained under law up to 20% of total assets.

A savings association which fails to meet the QTL test must either convert
to a bank (but its deposit insurance assessments and payments will be those of
and paid to SAIF) or be subject to the following penalties: (i) it may not enter
into any new activity except for those permissible for a national bank and for a
savings association; (ii) its branching activities shall be limited to those of
a national bank; (iii) it shall not be eligible for any new FHLB advances; and
(iv) it shall be bound by regulations applicable to national banks respecting
payment of dividends. Three years after failing the QTL test, the association
must (i) dispose of any investment or activity not permissible for a national
bank and a savings association and (ii) repay all outstanding FHLB advances. If
such a savings association is controlled by a savings and loan holding company,
then such holding company must, within a prescribed time period, become
registered as a bank holding company and become subject to all rules and
regulations applicable to bank holding companies (including restrictions as to
the scope of permissible business activities).

A savings association failing to meet the QTL test may requalify as a QTL
if it thereafter meets the QTL test. In the event of such requalification, it
shall not be subject to the penalties described above. A savings association
which subsequently again fails to qualify under the QTL test shall become
subject to all of the described penalties without application of any waiting
period.

At June 30, 2001, 68.1% of Home Federal's portfolio assets (as defined on
that date) were invested in qualified thrift investments (as defined on that
date), and therefore Home Federal's asset composition was in excess of that
required to qualify Home Federal as a QTL. Home Federal does not expect to
significantly change its lending or investment activities in the near future,
and therefore expects to continue to qualify as a QTL, although there can be no
such assurance.

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. Home Federal
is participating in this program. The examiners have determined that Home
Federal has an outstanding record of meeting community credit needs.

Taxation

Federal Taxation

The Holding Company and its subsidiary file a consolidated federal income
tax return on the accrual basis for each fiscal year ending June 30. 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 Holding Company generally would not
be taken into account in determining the bad debt deduction allowed to Home
Federal, regardless of whether a consolidated tax return is filed. However,
certain "functionally related" losses of the Holding 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.

Historically, savings associations, such as Home Federal, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, Home Federal is no longer able to use the percentage of
taxable income method of computing its allocable tax bad debt deduction. Home
Federal is required to compute its allocable deduction using the experience
method. As a result of the repeal of the percentage of taxable income 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. Home Federal began recapturing
approximately $2.5 million over a six-year period beginning in fiscal 1999.
In addition, the pre-1988 reserve, in which no deferred taxes have been
recorded, will not have to be recaptured into income unless (i) Home Federal no
longer qualifies as a bank under the Code, or (ii) excess dividends are paid out
by Home Federal.

Depending on the composition of its items of income and expense, a savings
institution may be subject to the alternative minimum tax. A savings institution
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

Home Federal 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 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.

Home Federal's state income tax returns have not been audited in the last
five years.

Current Accounting Issues

Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations," was issued in July 2001. SFAS 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method.

Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill
and Other Intangible Assets," was issued in July 2001. Under SFAS 142, goodwill
amortization ceases when the new standard is adopted. The new rules also require
an initial goodwill impairment assessment in the year of adoption and at least
annual impairment tests thereafter. On July 1, 2001, the Company early adopted
SFAS 142, as permitted. As a result, annual goodwill amortization of
approximately $101,000 will cease. Management has determined that any impairment
charge resulting from the adoption of SFAS 142 will not be significant.

Item 2. Properties.

At June 30, 2001, Home Federal conducted its business from its main
office at 222 West Second Street, Seymour, Indiana, 16 full-service branches,
and one loan origination office. Home Federal owns two buildings that it uses
for certain administrative operations located at 218 West Second Street,
Seymour, and 211 Chestnut Street, Seymour. The headquarters of its Raymond James
operations, conducted through its service corporation subsidiary, are located at
501 Washington Street, Columbus, Indiana. Information concerning these
properties, as of June 30, 2001, is presented in the following table:

Net Book Value of
Property, Approximate
Description and Owned or Furniture and Square Lease
Address Leased Fixtures Footage Expiration
(Dollars in Thousands)
Principal Office
222 West Second Street Owned $ 1,796 9,200 N/A

Operations Center
218 West Second Street Owned $ 495 20,000 N/A

Loan Processing Center
211 North Chestnut Owned $ 366 5,130 N/A

Branch Offices:
Columbus Branches:
501 Washington Street Owned $ 4,509 21,600 N/A
1020 Washington Street Owned $ 459 800 N/A
3805 25th Street Owned $ 325 5,800 N/A
2751 Brentwood Drive Owned $ 436 3,200 N/A
4330 West Jonathon Moore Pike Owned $ 618 2,600 N/A

Hope Branch 1/2 Owned $ 43 2,000
332 Jackson Street 1/2 Leased 4/2002

Austin Branch
67 West Main Street Owned $ 57 3,600 N/A

Brownstown Branch Month to
101 North Main Street Leased $ 24 2,400 Month

North Vernon Branches
111 North State Street Owned $ 359 1,900 N/A
1540 North State Street Leased $ 29 1,600 10/2002

Osgood Branch
South Buckeye Street Owned $ 107 1,280 N/A

Salem Branch
1208 South Jackson Owned $ 767 1,860 N/A

Seymour Branch
1117 East Tipton Street Owned $ 472 6,800 N/A

Batesville Branch
12 West Pearl Street Owned $ 605 2,175 N/A

Madison Branch
201 Clifty Drive Owned $ 428 2,550 N/A

Greensburg Branch
115 East North Street Leased $ 17 2,440 Month to Month

Loan Origination Office:
-----------------------
10204 Lantern Rd.
Fishers, Indiana Leased $ 3 1,000 7/04

Home Federal owns its computer and data processing equipment that is used
for accounting, financial forecasting, and general ledger work. Home Federal
also has contracted for the data processing and reporting services of NCR
headquartered in Dayton, Ohio until October 2001. In October 2001, the data
processing and reporting services will be converted to Bisys headquartered in
Cherry Hill, New Jersey. The contract with Bisys expires in October 2006.

Item 3. Legal Proceedings.

The Bank has sued one of its depositors in the Jackson County Circuit Court
in Brownstown, Indiana, to recover amounts lost as a result of his cashing of
bad checks (in the aggregate amount of $298,000), plus treble damages, costs,
and fees. The depositor has counterclaimed for damages resulting from certain
actions the Bank has taken to protect its rights with respect to this matter,
including the freezing of the depositor's savings account at the Bank. The
depositor and his wife have filed for bankruptcy and this case has been stayed
pending the bankruptcy proceeding.

Item 4. Submission of Matters to a Vote of Security Holders.

No matter was submitted to the Company's or Home Federal's shareholders
during the quarter ended June 30, 2001.

Item 4.5. Executive Officers of Home Federal Bancorp.

Presented below is certain information regarding the executive officers of
HFB who are not also directors.
Position with HFB
-----------------
Gerald L. Armstrong Chief Operating Officer and
Executive Vice President

S. Elaine Pollert Senior Vice President
Retail Banking

Lawrence E. Welker Executive Vice President, Treasurer,
Chief Financial Officer and Secretary

Gerald L. Armstrong (age 60) has been employed by Home Federal since
February, 1992 as its Executive Vice President, and Chief Operating Officer.
Before being employed by Home Federal, he was President, Chief Executive Officer
and a Director of Seymour National Bank, a commercial bank located in Seymour,
Indiana.

S. Elaine Pollert (age 40) has been employed by Home Federal since 1986.
She was elected Vice President Branch Administration in 1989 and Senior Vice
President Retail Banking in 1996.

Lawrence E. Welker (age 53) has been employed by Home Federal since 1979.
He was Controller from 1979 to 1982. In 1982, he was elected as Chief Financial
Officer and Treasurer, and in 1994 he became an Executive Vice President.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

HFB's common stock ("Common Stock") is quoted on the National Association
of Securities Dealers Automated Quotation System ("NASDAQ"), National Market
System, under the symbol "HOMF." For certain information related to the stock
prices and dividends paid by HFB, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Quarterly Results of
Operations" on page 6 of HFB's 2001 Shareholder Annual Report (the "Shareholder
Annual Report"). As of June 30, 2001, there were 506 shareholders of record of
HFB's Common Stock.

It is currently the policy of HFB'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 HFB's operating results, financial
condition, capital, income tax considerations, regulatory restrictions and other
factors.

Since HFB 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 Home Federal to pay
dividends to the Company.

Under OTS regulations, a converted savings association may not declare or
pay cash dividends if the effect would be to reduce its net worth below the
amount required for the liquidation account created at the time it converted. In
addition, under OTS regulations, the extent to which a savings association may
make a "capital distribution," which includes, among other things, cash
dividends, is limited. See "Regulation--Capital Distributions Regulation" in
Item 1 hereof. Prior notice of any dividend to be paid by Home Federal to the
Company will have to be given to the OTS.

Income of Home Federal appropriated to bad debt reserves and deducted for
federal income tax purposes is not available for payment of cash dividends or
other distributions to HFB without the payment of federal income taxes by Home
Federal on the amount of such income deemed removed from the reserves at the
then-current income tax rate. At June 30, 2001, approximately $2.4 million of
Home Federal'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.

Unlike Home Federal, generally there is no regulatory restriction on the
payment of dividends by HFB, subject to the determination of the Director of the
OTS that there is reasonable cause to believe that the payment of dividends
constitutes a serious risk to the financial safety, soundness or stability of
Home Federal. Indiana law, however, would prohibit HFB from paying a dividend
if, after giving effect to the payment of that dividend, HFB would not be able
to pay its debts as they become due in the usual course of business or HFB's
assets would be less than the sum of its total liabilities plus preferential
rights of holders of preferred stock, if any.

On November 22, 1994, the Board of Directors of HFB declared a dividend of
one common share purchase right (a "Right" or "Rights") for each outstanding
share of Common Stock. The dividend was paid on December 6, 1994 to the
shareholders of record as of November 22, 1994. If and when the Rights become
exercisable, each Right will entitle the registered holder to purchase from HFB
one Common Share at a purchase price of $80.00 (the "Purchase Price"), subject
to adjustment as described in the Rights Agreement between the Company and
LaSalle National Bank, Chicago, Illinois, (the "Rights Agreement") which
specifies the terms of the Rights. The Rights will be represented by the
outstanding Common Share certificates and the Rights cannot be bought, sold or
otherwise traded separately from the Common Shares until the "Distribution
Date," which is the earliest to occur of (i) 10 calendar days following a public
announcement that a person or group (an "Acquiring Person") has (a) acquired
beneficial ownership of 15% or more of the outstanding Common Shares or (b)
become the beneficial owner of an amount of the outstanding Common Shares (but
not less than 10%) which the Board of Directors determines to be substantial and
which ownership the Board of Directors determines is intended or may be
reasonably anticipated, in general, to cause HFB to take actions determined by
the Board of Directors to be not in HFB's best long-term interests (an "Adverse
Person"), or (ii) 10 business days following the commencement or announcement of
an intention to make a tender offer or exchange offer the consummation of which
would result in the beneficial ownership by a person or group of 30% or more of
such outstanding Common Shares.

The Rights have certain anti-takeover effects. The Rights may cause
substantial dilution to a person or group that attempts to acquire HFB on terms
not approved by the Board of Directors of HFB, except pursuant to an offer
conditioned on a substantial number of Rights being acquired. The Rights should
not interfere with any merger or other business combination approved by the
Board of Directors since the Rights may be redeemed by HFB at $.01 per Right
prior to the time that a person or group has acquired beneficial ownership of
15% or more of the Common Shares.

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 5 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
7 to 15 of the Shareholder Annual Report.

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

The OTS requires each thrift institution to calculate the estimated change
in the institution's net portfolio value ("NPV") assuming an instantaneous,
parallel shift in the Treasury yield curve of 100 to 300 basis points either up
or down in 100 basis point increments. NPV represents the sum of future cash
flows of liabilities discounted to present value. The OTS permits institutions
to utilize the OTS' model, which is based upon data submitted in the
institution's quarterly thrift financial reports.

In estimating the NPV of mortgage loans and mortgage-backed securities, the
OTS model utilizes various price indications and prepayment rates. At June 30,
2001, these price indications varied from 78.10 to 115.49 for fixed rate
mortgages and mortgage-backed securities and varied from 89.24 to 108.99 for
adjustable rate mortgages and mortgage-backed securities. Prepayment rates
for June 30, 2001, ranged from a constant prepayment rate ("CPR") of 6% to a CPR
of 37%.

The value of deposit accounts appears on both the asset and liability side
of the NPV calculation in the OTS model. In estimating the value of certificate
of deposit accounts, ("CDs"), retail price estimates represent the value of the
liability implied by the CD and reflect the difference between the CD coupon and
secondary-market CD rates. As of June 30, 2001, the retail CD price
assumptions varied from 79.10 to 120.97. The retail CD intangible prices
represent the value of the "customer relationship" due to the rollover of CD
deposits and are an intangible asset for the Bank. As of June 30, 2001, the
retail CD intangible price assumptions varied from 0.01 to 1.08.

Other deposit accounts such as transaction accounts, money market deposit
accounts, passbook accounts and non-interest-bearing accounts are valued at 100%
of their respective outstanding balances in all seven interest rate scenarios on
the liability side of the OTS model. On the asset side of the model, intangible
prices are used to reflect the value of the "customer relationship" of the
various types of deposit accounts. As of June 30, 2001, the intangible prices
for transaction accounts, money market deposit accounts, passbook accounts and
non-interest bearing accounts varied from 4.64 to 18.83, 2.31 to 12.10, 5.79 to
18.65 and 3.46 to 15.66, respectively.

The following table sets forth the Bank's interest rate sensitivity of NPV as of
June 30, 2001. (dollars in thousands)

Net Portfolio Value NPV as % of PV of Assets
-----------------------------------------------------------------------
Change
In Rates $ Amount $ Change % Change NPV Ratio Change
-----------------------------------------------------------------------
+300 bp 104,802 (4,117) (4) 12.05 % (7) bp
+200 bp 107,346 (1,573) (1) 12.19 % 7 bp
+100 bp 108,827 (92) - 12.23 % 11 bp
0 bp 108,919 - - 12.12 % -
-100 bp 106,411 (2,509) (2) 11.76 % (36) bp
-200 bp 102,994 (5,925) (5) 11.31 % (81) bp
-300 bp 99,065 (9,854) (9) 10.81 % (131) bp

Item 8. Financial Statements and Supplementary Data.

The Company's Consolidated Financial Statements and Notes thereto contained
on pages 16 to 34 of the Shareholder Annual Report are incorporated herein by
reference. HFB's Quarterly Results of Operations contained on page 6 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.

PART III

Item 10. Directors and Executive Officers of the Registrant.

The information required by this item with respect to directors is
incorporated by reference to pages 2 to 4 of the Company's Proxy Statement for
its 2001 annual shareholder meeting (the "2001 Proxy Statement"). Information
concerning the Company's executive officers who are not also directors is
included in Item 4.5 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 page 17 of the 2001 Proxy Statement.

Item 11. Executive Compensation.

The information required by this item with respect to executive
compensation is incorporated by reference to page 4, the first paragraph of page
6 and page 7 (beginning with Remuneration of Named Executive Officers) of the
2001 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

The information referred by this item is incorporated by reference to pages
1 to 3 of the 2001 Proxy Statement.

Item 13. Certain Relationships and Related Transactions.

The information required by this item is incorporated by reference to page
12 of the 2001 Proxy Statement.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) List the following documents filed as a part of the report:

Financial Statements
-------------------- Page in 2001
Shareholder
Annual Report
Consolidated Balance Sheets as of June 30, 2001 and 2000 16

Consolidated Statements of Income for each of the years in the three-year
period ended June 30, 2001 17

Consolidated Statements of Shareholders' Equity for each of the years in the
three-year period ended June 30, 2001 18

Consolidated Statements of Cash Flows for each of the years in the three-year
period ended June 30, 2001 19

Notes to Consolidated Financial Statements 20

Report of Deloitte & Touche LLP Independent Auditors 34

(b) Reports on Form 8-K
Registrant has filed no reports on Form 8-K for the quarter ending June
30, 2001.

(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.

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 21st day of
September, 2001.

HOME FEDERAL BANCORP
DATE: September 21, 2001 /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 21st day of September,
2001.

/s/ Lawrence E. Welker /s/ John K. Keach. Jr.
----------------------- ----------------------
Lawrence E. Welker, 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
----------------------
Melissa A. McGill,
Vice President and Controller /s/John K. Keach. Jr.
(Principal Accounting Officer) ---------------------
John K. Keach, Jr,Director

/s/ Gregory J. Pence /s/ John T. Beatty
-------------------- ------------------
Gregory J. Pence, Director John T. Beatty, Director

/s/Lewis Essex /s/ Harold Force
----------------- ----------------------
Lewis Essex, Director Harold Force, Director

/s/ David W. Laitinen /s/ Harvard W. Nolting. Jr.
--------------------- ---------------------------
David W. Laitinen, Director Harvard W. Nolting, Jr., Director

EXHIBIT INDEX
Reference to
Regulation S-K Sequential
Exhibit Number Document Page 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 C
to Registrant's Registration Statement on From S-4
(Registration No. 33-55234)).

4(a) Article 6 of the Articles of Incorporation
(incorporated by reference from Exhibit B to Registrant's
Registration Statement on Form S-4 (Registration
No.33-55234)).

4(b) Article III of the Code of By-Laws (incorporated by reference from
Exhibit C to Registrant's Registration Statement on From S-4
(Registration No. 33-55234)).

10(a) Stock Option Plan (incorporated by reference from Exhibit 10(a) to
Registrant's Registration Statement on Form S-4
(Registration No. 33-55234)).

10(b) 1993 Stock Option Plan (incorporated by reference from Exhibit 10(b)
to Registrant's Form 10-K for the year ended June 30, 1994).

10(c) Employment Agreement with Lawrence E. Welker (incorporated by
reference from Exhibit 10(c) to Registrants Registration Statement on
Form S-4 (Registration No. 33-55234)); first, second and third
Amendments thereto incorporated by reference to Exhibit 10(c) of
Registrant's Form 10-K for the year ended June 30, 1998; fourth
amendment thereto.

10(d) Employment Agreement with John K. Keach, Jr. (incorporated by
reference from Exhibit 10(d) to Registrant's Registration Statement on
Form S-4 (Registration No. 33-55234)); first, second and third
amendments thereto incorporated by reference to Exhibit 10(d) of
Registrant's Form 10-K for the year ended June 30, 1998; fourth
amendment thereto.

10(f) Home Federal Savings Bank Excess Benefit Plan Agreement
with John K. Keach, Jr. dated April 1, 2001.

10(g) 1999 Stock option plan incorporated by reference
to Exhibit J to the registrant's proxy statement for it's
1999 Annual shareholder's meeting.

10(i) Stock Option Agreement with Harvard W. Nolting, Jr. (incorporated by
reference from Exhibit 10(i) to Home Federal Savings Bank's Form 10-K
for the fiscal year ended June 30, 1991).

10(j) Stock Option Agreement with David W. Laitinen (incorporated by
reference from Exhibit 10(j) to Home Federal Savings Bank's Form 10-K
for the fiscal year ended June 30, 1991).

10(k) Stock Option Agreement with John T. Beatty (incorporated by reference
from Exhibit 10(k) to Home Federal Savings Bank's Form 10-K for the
fiscal year ended June 30, 1991).

10(l) Stock Option Agreement with Harold Force (incorporated by reference
from Exhibit 10(l) to Home Federal Savings Bank's Form 10-K for the
fiscal year ended June 30, 1991).

10(n) Supplemental Executive Retirement Plan with John K. Keach, Jr.
dated April 1, 2001.

10(o) Supplemental Executive Retirement Plan with Lawrence E. Welker
dated April 1, 2001

10(p) Supplemental Executive Retirement Plan with Elaine Pollert dated
April 1, 2001.

10(v) Deferred Compensation Agreement with John K.
Keach, Sr. (incorporated by reference from Exhibit 10(v) to
Home Federal Savings Bank Form 10-K for the fiscal year
ended June 30, 1992) and First Amendment to Deferred
Compensation Agreement (incorporated by reference from
Exhibit 10(v) to Registrant's Form 10-K for the year ended
June 30, 1994) and Second Amendment to Deferred Compensation
Agreement (incorporated by reference from Exhibit 10(v) to
Registrant's Form 10-K for the year ended June 30, 1998).

10(w) Employment Agreement with S. Elaine Pollert
(incorporated by reference from Exhibit l0(w) to Home
Federal Savings Bank Form 10-K for the fiscal year ended
June 30, 1998); and First Amendment to Employment Agreement
(incorporated by reference from Exhibit 10(w) to
Registrant's Form 10-K for the year ended June 30, 1998);
second amendment thereto.

10(x) Supplemental Executive Retirement Plan with Gerald L. Armstrong dated
April 1, 2001.

10(y) Employment Agreement with Gerald L. Armstrong
(incorporated by reference from Exhibit l0(aa) to Home
Federal Savings Bank Form 10-K for the fiscal year ended
June 30, 1992). First amendment thereto dated November 22,
1994. (Incorporated by reference from Exhibit 10(f) to the
Form 10-K for the fiscal year ended June 30,1998); Second
Amendment thereto dated April 30, 1996 (incorporated by
reference from exhibit 10(f) to registrant's Form 10-K for
the fiscal year ended June 30, 1998); third amendment
thereto.

10(ab) Stock Option Agreement with Gerald L. Armstrong (incorporated by
reference from Exhibit 10(ab) to Home Federal Savings Bank Form
10-K for the fiscal year ended June 30, 1992).

10(ac) Director Deferred Compensation Agreement with
John Beatty (incorporated by reference from Exhibit l0(ac)
to Home Federal Savings Bank Form 10-K for the fiscal year
ended June 30, 1992); first and second amendments thereto
(incorporated by reference from Exhibit 10(ac) to
Registrant's Form 10-K for the year ended June 30, 1998).

10(ad) Director Deferred Compensation Agreement with
Lewis Essex (incorporated by reference from Exhibit 10(ad)
to Home Federal Savings Bank Form 10-K for the fiscal year
ended June 30, 1992); first and second amendments thereto
(incorporated by reference from Exhibit 10(ad) to
Registrant's Form 10-K for the year ended June 30, 1998).

10(ae) Director Deferred Compensation Agreement with
Harold Force (incorporated by reference from Exhibit 10(ae)
to Home Federal Savings Bank Form l0-K for the fiscal year
ended June 30, 1992); first, second and third amendments
thereto (incorporated by reference from Exhibit 10(ae) to
Registrant's Form 10-K for the year ended June 30, 1998).

10(af) Director Deferred Compensation Agreement with
David W. Laitinen (incorporated by reference from Exhibit
10(af) to Home Federal Savings Bank Form 10-K for the fiscal
year ended June 30, 1992); first, second and third
amendments thereto (incorporated by reference from Exhibit
10(af) to Registrant's Form 10-K for the year ended June 30,
1998).

10(ag) Director Deferred Compensation Agreement with
William Nolting (incorporated by reference from Exhibit
10(ag) to Home Federal Savings Bank 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(ah) Non-Qualified Stock Option Agreement, dated December 22, 1992,
with John T. Beatty (incorporated by reference from Exhibit 10(ah) to
Registrant's Form 10-K for the year ended June 30, 1994).

10(ai) Non-Qualified Stock Option Agreement, dated December 22, 1992,
with Lewis W. Essex (incorporated by reference from Exhibit 10(ai) to
Registrant's Form 10-K for the year ended June 30, 1994).

10(aj) Non-Qualified Stock Option Agreement, dated December 22, 1992,
with Harold Force (incorporated by reference from Exhibit 10(aj) to
Registrant's Form 10-K for the year ended June 30, 1994).

10(ak) Non-Qualified Stock Option Agreement, dated December 22, 1992,
with David W. Laitinen (incorporated by reference from Exhibit 10(ak)
to Registrant's Form 10-K for the year ended June 30, 1994).

10(al) Non-Qualified Stock Option Agreement, dated December 22, 1992,
with Harvard W. Nolting, Jr (incorporated by reference from Exhibit 10
(al) to Registrant's Form 10-K for the year ended June 30, 1994).

10(am) Non-Qualified Stock Option Agreement, dated August 24,1993,
with John T. Beatty (incorporated by reference from Exhibit 10(am)
to Registrant's Form 10-K for the year ended June 30, 1994).

10(an) Non-Qualified Stock Option Agreement, dated August 24,1993,
with Lewis W. Essex (incorporated by reference from Exhibit 10(an)
to Registrant's Form 10-K for the year ended June 30, 1994).

10(ao) Non-Qualified Stock Option Agreement, dated August 24, 1993,
with Harold Force (incorporated by reference from Exhibit 10(ao)
to Registrant's Form 10-K for the year ended June 30, 1994).

10(ap) Non-Qualified Stock Option Agreement, dated August 24, 1993,
with David W. Laitinen (incorporated by reference from Exhibit 10(ap)
to Registrant's Form 10-K for the year ended June 30, 1994).

10(aq) Non-Qualified Stock Option Agreement, dated August 24, 1993,
with Harvard W. Nolting, Jr. (incorporated by reference from Exhibit 10
(aq) to Registrant's Form 10-K for the year ended June 30, 1994).

10(ar) Rights Agreement, dated as of November 22, 1994,
between Registrant and LaSalle National Bank, Chicago,
Illinois, as Rights Agent (incorporated by reference from
Exhibit 1 to Registrant's Registration Statement on Form 8-A
filed with the SEC on December 5, 1994), first amendment
thereto dated November 25, 1994.

10(as) 1995 Stock Option Plan (incorporated by reference
from Exhibit A to Registrant's Proxy Statement for its 1995
annual shareholder meeting).

13 2001 Shareholder Annual Report.

21 Subsidiaries of the Registrant (incorporated
by reference from Exhibit 21 to Registrant's Form 10-K for
the year ended June 30, 1993).

23.1 Independent Auditors' Consent.