To Our Shareholders

In that context, 1999, more than most years, has been a time for taking stock. For Home Federal, fiscal year 1999 was another period of solid performance. For the year, we reported net income of $10,477,000, or $1.95 diluted earnings per share, compared to $10,390,000, or $1.90 diluted earnings per share, for the prior year.

And yet 1999 has also been a year of transition. For example, what could only be described as a modern-day bull market in mortgage refinancing-a major contributor to our income statement in recent years-essentially expired during the last quarter of fiscal year 1999, underscoring the need for us to continually seek new and diverse sources of income. We pride ourselves on staying abreast of changes in our marketplace and to adjusting competitively to changes in the economy. This year, we also foresee a need to prepare for changes in the regulatory environment. While we are uncertain of the outcome, we feel that the current discussions in Washington, as they relate to financial modernization, will not have an overall negative effect on our business strategies.

And so the events of fiscal year 1999 have had dual significance for all of us at Home Federal. We recognize that no institution can survive for 91 years without foresight and fundamental strengths in day-to-day management, qualities we feel were fully reflected in our recent performance. This performance was recognized in the SNL Securities publication, ThriftINVESTOR, in which Home Federal Bancorp ranked 15th among the top 100 largest publicly-owned thrifts. The ranking is based on measurements of profitability, efficiency, credit quality and earnings per share growth. This recognition is certainly something we are proud of. However, we know that finding comfort in historical performance is a poor way to plan for the future.

We know-in part through wisdom gained through past experience-that times and circumstances change for all businesses. Economies, markets, policies and products all change, and, perhaps most importantly, opportunities change. Our challenge in these transitional times is to prudently recast our traditional, 20th Century strategies to meet the opportunities of the 21st. Accordingly, we have chosen this year as a time to thoroughly analyze every aspect of our business-and to prepare to begin the year 2000 with a fresh approach to each.

For example, we have placed even greater importance on the diversification of our loan portfolio, with particular emphasis on general commercial lending activities and commercial real estate lending. We are encouraged by our progress in this area and fully intend to tap into our existing and ever-expanding markets to the greatest extent possible. This strategy provides Home Federal with the potential for offering both commercial and consumer services to this valuable market segment.

Additionally, we continue to allocate resources to the development of other non-interest income sources, such as fee-based services, which can effectively diversify our income stream.We made significant progress in this regard by combining our trust and brokerage service areas into one unit, Home Federal Investment Management Services. During the year we also joined forces with the Frank Russell Investment Management group of Tacoma, Washington. Through this partnership, we will further enhance our ability to offer Home Federal's customers a comprehensive range of financial products and services- including investment counseling and management services, personal and employee benefit trust and brokerage services, and estate administration services.

We have also expanded our activity in the realm of joint ventures. This area is one that has seen considerable growth over the past few years; income earned from joint ventures increased 63% between 1995 and 1999, and we expect that number to increase again in fiscal year 2000.

In addition to diversifying our income sources, we are striving to increase customer convenience while also decreasing expenses. We understand that our customers are more geographically diverse than ever, and we are using aggressively-marketed contemporary technology- such as our new Web site (www.homf.com) and Online Banking services-to make it easier for our customers to contact us and to avail themselves of our products and services. These innovative channels position Home Federal as a leader in delivery technology in our marketplace.

Ironically, the same wondrous new technology that makes it possible for us to offer electronic banking products and customer services is also threatening to disarm customer confidence in our operations as we approach New Year's Day 2000. Home Federal technology managers have been implementing and testing all electronic data systems for Year 2000 compliance since 1997, and we have been communicating news of our preparatory actions and contingency measures to our customers. We have great confidence in our level of preparation and are working to see that our suppliers are equally well prepared.

Today, our southeastern Indiana service area, which prospered through the last decade, continues to enjoy economic diversification and steady growth-key factors in assuring that its prosperity will continue. Our intent is that Home Federal will continue to contribute to that prosperity-and to share in it as well.

As we progress through these exciting times, we thank each of our predecessors and present-day partners, including our employees and shareholders, for their commitments to helping this institution prosper throughout the 20th Century-and for their contributions toward its preparedness for the challenges that await it in the 21st.

Sincerely,

John K. Keach, Sr.
Chairman of the Board

John K. Keach, Jr.
President and Chief Executive Officer