1
            Letter
                to Shareholders8
            Selected
                Consolidated Financial Data9
            Quarterly
                Results of Operations10
            Management’s
                Discussion & Analysis23
            Management’s
                Assessment as to the Effectiveness of Internal Control over Financial
                Reporting24
            Reports
                of Independent Registered Public Accounting Firm26
            Consolidated
                Balance Sheets27
            Consolidated
                Statements of Income28
            Consolidated
                Statements of Shareholders’ Equity29
            Consolidated
                Statements of Cash Flows30
            Notes
                to Consolidated Financial Statements47
            Board
                of Directors & Officers of Home Federal Bancorp & Executive
                Officers of HomeFederal Bank







**To
      Our Shareholders**





For
      all
      of us associated with Home Federal Bancorp, the year 2005 was marked by steady
      progress, as well as reflective analysis of our recent performance, our markets,
      and our plans for a purposeful and profitable future.





Our
      achievements last year were encouraging and provide a solid foundation for
      such
      planning. Earnings grew by 18 percent during the year and earnings per share
      by
      26 percent. An increase of $58.1 million in retail deposits represented a 10
      percent gain over the previous year, and we saw a return of our credit quality
      ratios to historical levels. Given the economic environment and competition
      in
      today’s marketplace, we are pleased with our accomplishments in
      2005.







“A
      progressive bank is a builder of communities, regional economies and personal
      prosperity—an institution that creates growth and grows in turn from the
      economic activities it helps generate.”


—John
      K.
      Keach, Jr.




-
            1
            -




**Home
      Federal: FRAMEWORK for the Future**





To
      many,
      a bank is in essence an organization that manages and lends money. To the
      knowledgeable observer, however, a progressive bank is a builder of communities,
      regional economies and personal prosperity—an institution that creates growth
      and grows in turn from the economic activities it helps generate. That is the
      role that we, and our predecessors, have cast for HomeFederal Bank for almost
      100 years.





Travel
      in
      any direction through our market area and you will see the results of our
      work—the thousands of businesses and homes that represent the professional and
      personal success of our customers. Because of this ongoing economic development,
      it follows that we must continually adapt to the changing business environment
      we help set in motion. Looking at it another way, we realize that we must
      occasionally update our own economic development model as we help others
      implement theirs.





During
      2005 we reviewed a number of our own growth strategies, taking into
      consideration the trends depicted by our recent performance as well as a
      pragmatic appraisal of the economic evolution of the markets we serve. The
      results of this “remodeling” provide the cornerstones for our work in
      2006.









-
            2
            -







Our
      two
      newest offices, including the Southport branch shown here, provide us with
      a
      strong position in the growing southern Indianapolis market. We are pleased
      with
      the success we have had in introducing a new customer base to our retail and
      commercial product lines.





**Building
      profitability and shareholder value**





In
      our
      highly competitive industry, profitability is the result of selectively
      providing those products most useful to our customer base, at a fair price.
      Rather than simply expanding our offerings, we have chosen to narrow our focus.
      For example, we have promoted—and continue to actively promote—contemporary
      programs such as high-balance money market accounts and free checking. One
      result of these promotions was net growth in retail checking accounts of 4.7
      percent in 2005. The substantial growth in retail deposits was designed to
      replace wholesale funding, serving to lower our costs and increase our franchise
      value.





Last
      July, the Board of Directors approved the Bancorp’s ninth stock repurchase
      program. We believe such stock repurchases can increase long-term shareholder
      value through their positive impact on earnings per share and return on equity.
      Under this program, we repurchased 321,400 shares during the 2005 fiscal
      year.












-
            3
            -




**Building
      new markets**





At
      HomeFederal Bank, we do not endorse growth for growth’s sake, but we do actively
      seek opportunities in new markets that can benefit from our blend of flexible
      products and personalized service. We have made substantial commitments to
      one
      such market, the southern Indianapolis metropolitan region, and have been
      pleased with the success of our new initiatives there. The number of households
      served in this sector has grown to almost 900, and deposit balances have
      exceeded our expectations and now total over $30 million.





This
      year, we will implement a number of additional marketing efforts, many of which
      will be targeted to customers in the southern Indianapolis region. Already
      in
      2006, we had great success with a certificate of deposit promotion, which was
      responsible for expanding our customer base in this growing market. In addition,
      we are enhancing the sales training and management tools available to our
      employees who are working to develop opportunities in this and other market
      areas.










Jan
      Sprague is the owner of nine Holiday Inn Express & Suites, Hampton Inn &
Suites, and Comfort Inn hotels. She is a successful entrepreneur we are
      privileged to work with, and we are proud to be her partner. Jan is pictured
      with Senior Vice President John Schilling.




-
            4
            -





Delbert
        Kilgas, founder of Excel Manufacturing in Seymour Indiana, is shown here
        with
        Senior Vice President Chris Harrison. Excel Manufacturing serves a loyal
        customer base with local, national, and international reach. We are honored
        to
        have them as our valued customer.
  
 **Building
        business loans and deposits**
 With
        little growth in the commercial real estate markets, we have focused on
        repositioning our commercial credits and have placed greater emphasis on
        enhancing credit quality. At the same time, we have purposefully decreased
        the
        size of our portfolio, demonstrating greater discipline in the quality of
        the
        transactions we pursue. One result was a significant improvement in the quality
        of our assets—to levels we will strive to maintain in the future. We have also
        adopted stronger credit administration policies and have added more experienced
        lenders and support personnel in this critical area.
 
 Through
        the addition of highly-qualified managers with years of commercial banking
        experience, we have embarked on a structured sales campaign to develop
        additional high-quality commercial business. During 2005 we completed more
        than
        5,000 calls to present and potential customers, enhancing the quality of
        our
        service, growing market share, and building on our already-strong reputation
        as
        a reliable provider of top-quality products and customer service.
  -
              5
              -
  
  
 
 Business
        Development Manager Lou Ann Woodall, Senior Vice President Keith Luken, and
        Assistant Vice President Diane Trout-Cummins are representative of the many
        knowledgeable and dedicated employees at HomeFederal Bank. They have contributed
        to the Bank’s success through market share growth, significant mortgage
        originations, and innovative marketing campaigns.
 
  **Building
        non-interest income**
 
 In
        2005,
        we set the stage for providing new streams of non-interest income. We marketed
        aggressively to promote our retail checking products, thus creating significant
        account growth and an opportunity to earn service fees on these
        transaction-oriented accounts.
  In
        the
        year ahead, we will continue the retail checking promotion as well as introduce
        a high-yield checking product. Another area of growth is that of the trust
        and
        brokerage operations. In 2005, we partnered with a respected financial services
        advisor who brings his loyal and satisfied client base. As a result of this
        partnership and of additional business development efforts in this service
        area,
        our assets under management grew from just under $173 million to almost $255
        million for net growth of over 47 percent last year.
  **Building
          trust through regulatory compliance**
 In
          recent years, we have found ourselves in an even more demanding regulatory
          environment that impacts organizations and their customers throughout the
          business community. To assure others of our continuing compliance with
          the many
          complex laws and regulations that govern our work in the financial services
          industry, we are investing in software enhancements that will assist in
          monitoring compliance in critical areas; requiring ongoing training for
          HomeFederal employees; and expanding our compliance department to meet
          the needs
          of our organization in this increasingly complex regulatory environment.
          We feel
          strongly that there is no substitute for trust in business relationships,
          particularly those that involve the transfer and safekeeping of financial
          assets.
 
 -
              6
              -
 
 **Building
        management strength**
 
 Any
        blueprint for new construction is only as strong as the talent, dedication
        and
        execution of the architects and builders who transform it into something
        of
        value. In many different areas, including finance, marketing, and information
        technology, we have worked diligently to attract new employees, searching
        for
        those with skill sets that both complement and enhance those of the existing
        management team. Building organizational strength through management strength
        remains one of our top priorities.
 
 In
        addition to recognizing those who are part of our team, I would like to take
        this opportunity to thank Larry Welker, who retired as Executive Vice President
        and Chief Financial Officer in June of 2005 after having served HomeFederal
        for
        over 25 years. We wish him continued success and a most enjoyable
        retirement.
 
 
 **Building
        a better future for all our stakeholders**
 
 Big
        plans
        are not necessarily grandiose, but they are meaningful, forward-looking tools
        of
        any scale that allow leaders to maximize their organization’s performance. That
        aptly describes the plans we have put in place to build upon that which we
        have
        invested in for almost 100 years, and to guide HomeFederal toward a more
        rewarding and more prosperous future.
 
 Sincerely,
 
 /s/
        John
        K. Keach, Jr.
 
 John
        K.
        Keach, Jr.
 Chairman
        of the Board
 and
        Chief
        Executive Officer
  -
            7
            -
 
  **SUMMARY
          OF SELECTED CONSOLIDATED FINANCIAL DATA**
 (in
        thousands except per share data)
  **Year**
                **Ended**
              
              **Year**
                **Ended**
              
              **Year**
                **Ended**
              
              **Six**
                **Months**
                **Ended**
              
              **Year**
                **Ended**
              
              **Year**
                **Ended****Dec
                  2005**
              
              **Dec
                  2004**
              
              **Dec
                  2003**
              
              **Dec
                  2002**
              
              **June
                  2002**
              
              **June
                  2001****Selected
                  Balance Sheet Data:**Total
                  assets
              
              $
              850,654
              
              $
              868,207
              
              $
              853,328
              
              $
              886,505
              
              $
              856,012
              
              $
              863,393Cash
                  and cash equivalents
              
              
              53,736
              
              
              52,320
              
              
              34,178
              
              
              53,692
              
              
              44,478
              
              
              35,424Loans
                  held for sale
              
              
              4,795
              
              
              2,617
              
              
              6,272
              
              
              30,560
              
              
              6,302
              
              
              12,383Securities
                  available for sale
              
              
              123,351
              
              
              124,790
              
              
              123,638
              
              
              114,440
              
              
              114,989
              
              
              80,316Securities
                  held to maturity
              
              
              1,806
              
              
              1,779
              
              
              1,828
              
              
              3,026
              
              
              3,493
              
              
              7,296Loans
                  receivable, net
              
              
              608,556
              
              
              629,490
              
              
              630,672
              
              
              628,883
              
              
              631,815
              
              
              674,552Deposits
              
              
              657,339
              
              
              640,181
              
              
              588,666
              
              
              609,358
              
              
              577,480
              
              
              576,543Borrowings
              
              
              101,041
              
              
              139,899
              
              
              169,162
              
              
              187,744
              
              
              188,680
              
              
              207,608Shareholders'
                  equity
              
              
              73,038
              
              
              77,364
              
              
              84,022
              
              
              77,794
              
              
              77,086
              
              
              72,044**Selected
                  Operations Data:**Interest
                  income
              
              $
              44,976
              
              $
              42,746
              
              $
              45,602
              
              $
              26,240
              
              $
              56,298
              
              $
              64,757Interest
                  expense
              
              
              19,817
              
              
              19,159
              
              
              22,264
              
              
              13,145
              
              
              30,635
              
              
              39,516Net
                  interest income
              
              
              25,159
              
              
              23,587
              
              
              23,338
              
              
              13,095
              
              
              25,663
              
              
              25,241Provision
                  for loan losses
              
              
              808
              
              
              1,770
              
              
              1,268
              
              
              1,221
              
              
              1,423
              
              
              1,680Net
                  interest income after provision for loan losses
              
              
              24,351
              
              
              21,817
              
              
              22,070
              
              
              11,874
              
              
              24,240
              
              
              23,561Gain
                  on sale of loans
              
              
              1,539
              
              
              2,651
              
              
              7,628
              
              
              3,740
              
              
              4,456
              
              
              1,975Gain
                  (loss) on sale of securities
              
              
              -
              
              
              -
              
              
              (83
              )
              
              4
              
              
              92
              
              
              (196
              )Other
                  income
              
              
              8,757
              
              
              7,032
              
              
              7,133
              
              
              3,125
              
              
              7,841
              
              
              7,241Other
                  expense
              
              
              25,576
              
              
              23,793
              
              
              22,085
              
              
              10,375
              
              
              20,045
              
              
              17,513Income
                  before income taxes
              
              
              9,071
              
              
              7,707
              
              
              14,663
              
              
              8,368
              
              
              16,584
              
              
              15,068Income
                  tax provision
              
              
              2,969
              
              
              2,544
              
              
              5,020
              
              
              3,071
              
              
              6,245
              
              
              5,519**Net
                  Income**
              
              **$**
              **6,102**
              
              **$**
              **5,163**
              ****
              **$**
              **9,643**
              ****
              **$**
              **5,297**
              ****
              **$**
              **10,339**
              ****
              **$**
              **9,549**Basic
                  earnings per common share
              
              $
              1.57
              
              $
              1.25
              
              $
              2.26
              
              $
              1.23
              
              $
              2.34
              
              $
              2.13Diluted
                  earnings per common share
              
              $
              1.53
              
              $
              1.21
              
              $
              2.15
              
              $
              1.17
              
              $
              2.25
              
              $
              2.07Cash
                  dividends per share
              
              $
              0.75
              
              $
              0.75
              
              $
              0.70
              
              $
              0.31
              
              $
              0.58
              
              $
              0.55**Selected
                  Financial and Statistical Data:**Return
                  on average assets (2)
              
              
              0.71
              %
              
              0.60
              %
              
              1.10
              %
              
              1.21
              %
              
              1.20
              %
              
              1.12
              %Return
                  on average shareholders' equity (2)
              
              
              8.19
              %
              
              6.50
              %
              
              11.95
              %
              
              13.59
              %
              
              13.73
              %
              
              13.76
              %Interest
                  rate spread during the period (2)
              
              
              3.19
              %
              
              2.97
              %
              
              2.84
              %
              
              3.19
              %
              
              3.20
              %
              
              3.13
              %Net
                  interest margin on average earning assets (2)
              
              
              3.22
              %
              
              3.00
              %
              
              2.91
              %
              
              3.26
              %
              
              3.27
              %
              
              3.22
              %Average
                  shareholders' equity to average assets
              
              
              8.68
              %
              
              9.17
              %
              
              9.20
              %
              
              8.93
              %
              
              8.76
              %
              
              8.15
              %Efficiency
                  ratio (1)
              
              
              73.77
              %
              
              71.53
              %
              
              67.03
              %
              
              57.01
              %
              
              57.02
              %
              
              50.75
              %Nonperforming
                  loans to total loans
              
              
              0.70
              %
              
              2.01
              %
              
              0.60
              %
              
              0.71
              %
              
              0.57
              %
              
              1.02
              %Nonperforming
                  assets to total assets
              
              
              0.54
              %
              
              1.71
              %
              
              0.66
              %
              
              0.70
              %
              
              0.70
              %
              
              0.99
              %Loss
                  allowance to nonperforming loans
              
              
              155.78
              %
              
              61.23
              %
              
              193.11
              %
              
              151.12
              %
              
              171.34
              %
              
              78.70
              %Loss
                  allowance to total loans
              
              
              1.09
              %
              
              1.23
              %
              
              1.16
              %
              
              1.08
              %
              
              1.01
              %
              
              0.82
              %Dividend
                  payout ratio
              
              
              47.67
              %
              
              59.22
              %
              
              31.08
              %
              
              25.12
              %
              
              24.45
              %
              
              25.53
              %Loan
                  servicing portfolio
              
              $
              588,503
              
              $
              605,040
              
              $
              611,636
              
              $
              564,856
              
              $
              551,402
              
              $
              484,628Allowance
                  for loan losses
              
              $
              6,753
              
              $
              7,864
              
              $
              7,506
              
              $
              7,172
              
              $
              6,451
              
              $
              5,690Number
                  of full service offices
              
              
              19
              
              
              18
              
              
              18
              
              
              17
              
              
              17
              
              
              17
  
 (1)
              Operating
                  expenses as a percentage of the sum of net interest income and
                  non-interest income, excluding real estate income and expenses,
                  securities
                  gains and losses, gains and losses on sale of loans, amortization
                  of
                  intangibles, mortgage servicing rights ("MSR") amortization, impairment
                  of
                  MSR and non-recurring items.
 (2)
              For
                  comparative purposes, the December 2002 ratios have been
                  annualized.
 
 -
              8
              -
 
 **QUARTERLY
        RESULTS OF OPERATIONS**
 (in
        thousands except share data)
  The
        following table presents certain selected unaudited data relating to results
        of
        operations for the three month periods ending on the dates
        indicated.
 **Three
                    Months Ended****Fiscal
                    Year Ended December 31, 2005**
                
                **March
                    31, 2005**
                
                **June
                    30, 2005**
                
                **Sept
                    30, 2005**
                
                **Dec
                    31, 2005**Total
                    interest income
                
                $
                10,773
                
                $
                11,142
                
                $
                11,504
                
                $
                11,557Total
                    interest expense
                
                
                4,703
                
                
                4,791
                
                
                5,071
                
                
                5,252Net
                    interest income
                
                
                6,070
                
                
                6,351
                
                
                6,433
                
                
                6,305Provision
                    for loan losses
                
                
                146
                
                
                112
                
                
                331
                
                
                219Net
                    interest income after provision for loan losses
                
                
                5,924
                
                
                6,239
                
                
                6,102
                
                
                6,086Gain
                    on sale of loans
                
                
                343
                
                
                346
                
                
                459
                
                
                391Other
                    income
                
                
                2,089
                
                
                2,171
                
                
                2,165
                
                
                2,332Other
                    expense
                
                
                6,345
                
                
                6,567
                
                
                6,303
                
                
                6,361Income
                    before income taxes
                
                
                2,011
                
                
                2,189
                
                
                2,423
                
                
                2,448Income
                    tax provision
                
                
                662
                
                
                736
                
                
                815
                
                
                756**Net
                    Income**
                
                **$**
                **1,349**
                ****
                **$**
                **1,453**
                ****
                **$**
                **1,608**
                ****
                **$**
                **1,692**Basic
                    earnings per common share
                
                $
                0.34
                
                $
                0.37
                
                $
                0.42
                
                $
                0.44Diluted
                    earnings per common share
                
                $
                0.33
                
                $
                0.36
                
                $
                0.41
                
                $
                0.43Cash
                    dividends per share
                
                $
                0.188
                
                $
                0.188
                
                $
                0.188
                
                $
                0.188Stock
                    sales price range:  High (1)
                
                $
                26.10
                
                $
                25.49
                
                $
                25.45
                
                $
                25.60Low
                
                $
                25.00
                
                $
                24.00
                
                $
                24.25
                
                $
                24.28
  **Three
                  Months Ended****Fiscal
                  Year Ended December 31, 2004**
              
              **March
                  31, 2004**
              
              **June
                  30, 2004**
              
              **Sept
                  30, 2004**
              
              **Dec
                  31, 2004**Total
                  interest income
              
              $
              10,722
              
              $
              10,634
              
              $
              10,534
              
              $
              10,856Total
                  interest expense
              
              
              4,940
              
              
              4,784
              
              
              4,741
              
              
              4,694Net
                  interest income
              
              
              5,782
              
              
              5,850
              
              
              5,793
              
              
              6,162Provision
                  for loan losses
              
              
              246
              
              
              35
              
              
              1,887
              
              
              (398
              )Net
                  interest income after provision for loan losses
              
              
              5,536
              
              
              5,815
              
              
              3,906
              
              
              6,560Gain
                  on sale of loans
              
              
              683
              
              
              939
              
              
              435
              
              
              594Other
                  income
              
              
              1,709
              
              
              1,918
              
              
              1,681
              
              
              1,724Other
                  expense
              
              
              5,797
              
              
              5,783
              
              
              5,715
              
              
              6,498Income
                  before income taxes
              
              
              2,131
              
              
              2,889
              
              
              307
              
              
              2,380Income
                  tax provision
              
              
              744
              
              
              975
              
              
              (29
              )
              
              854**Net
                  Income**
              
              **$**
              **1,387**
              
              $
              **1,914**
              ****
              **$**
              **336**
              ****
              **$**
              **1,526**Basic
                  earnings per common share
              
              $
              0.32
              
              $
              0.46
              
              $
              0.08
              
              $
              0.38Diluted
                  earnings per common share
              
              $
              0.31
              
              $
              0.45
              
              $
              0.08
              
              $
              0.37Cash
                  dividends per share
              
              $
              0.188
              
              $
              0.188
              
              $
              0.188
              
              $
              0.188Stock
                  sales price range:  High (1)
              
              $
              28.22
              
              $
              27.17
              
              $
              25.88
              
              $
              25.75Low
              
              $
              26.00
              
              $
              24.90
              
              $
              24.46
              
              $
              23.46
 
 (1)
              The
                  Company's common stock trades on the NASDAQ National Market under
                  the
                  symbol "HOMF."
 As
            of
            December 31, 2005, the Company had 423 holders of record of its
            shares.
 
 -
                  9
                  -
  **MANAGEMENT'S
            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION** **AND
            RESULTS OF OPERATIONS**
 
 **FORWARD
            LOOKING STATEMENTS**
 This
            Annual Report contains statements, which constitute forward looking statements
            within the meaning of the Private Securities Litigation Reform Act of
            1995.
            These statements appear in a number of places in this Annual Report and
            include
            statements regarding the intent, belief, outlook, estimate or expectations
            of
            the Company (as defined below), its directors or its officers primarily
            with
            respect to future events and the future financial performance of the
            Company.
            Readers of this Annual Report are cautioned that any such forward looking
            statements are not guarantees of future events or performance and involve
            risks
            and uncertainties, and that actual results may differ materially from
            those in
            the forward looking statements as a result of various factors. The accompanying
            information contained in this Annual Report identifies important factors
            that
            could cause such differences. These factors include changes in interest
            rates,
            loss of deposits and loan demand to other financial institutions, substantial
            changes in financial markets, changes in real estate values and the real
            estate
            market, regulatory changes, changes in the financial condition of issuers
            of the
            Company’s investments and borrowers, changes in the economic condition of the
            Company’s market area, increases in compensation and employee expenses, or
            unanticipated results in pending legal or regulatory proceedings.
 
 The
            following financial information presents an analysis of the asset and
            liability
            structure of Home Federal Bancorp and a discussion of the results of
            operations
            for each of the periods presented in the Annual Report as well as a discussion
            of Home Federal Bancorp’s sources of liquidity and capital
            resources.
 
 **HOLDING
            COMPANY BUSINESS**
 Home
            Federal Bancorp (the “Company") is organized as a bank holding company
            authorized to engage in activities permissible for a financial holding
            company
            and owns all of the outstanding capital stock of HomeFederal Bank (the
“Bank").
            The business of the Bank and therefore, the Company, is providing consumer
            and
            business banking services to certain markets in the south-central portions
            of
            the State of Indiana. The Bank does business through 19 full service
            banking
            offices.
 
 **GENERAL**
 The
            Bank's earnings in recent years reflect the fundamental changes that
            have
            occurred in the regulatory, economic and competitive environment in which
            commercial banks operate. The Bank's earnings are primarily dependent
            upon its
            net interest income. Interest income is a function of the average balances
            of
            loans and investments outstanding during a given period and the average
            yields
            earned on such loans and investments. Interest expense is a function
            of the
            average amount of deposits and borrowings outstanding during the same
            period and
            the average rates paid on such deposits and borrowings. Net interest
            income is
            the difference between interest income and interest expense.
 
 The
            Bank
            is subject to interest rate risk to the degree that its interest-bearing
            liabilities, primarily deposits and borrowings with short- and medium-term
            maturities, mature or reprice more rapidly, or on a different basis,
            than its
            interest-earning assets. While having liabilities that mature or reprice
            more
            frequently on average than assets will be beneficial in times of declining
            interest rates, such an asset/liability structure will result in lower
            net
            income or net losses during periods of rising interest rates, unless
            offset by
            other factors such as non-interest income. The Bank's net income is also
            affected by such factors as fee income and gains or losses on sale of
            loans.
 
 **OVERVIEW**
 In
            reviewing the Company’s performance in 2005 several factors contributed to the
            results for the year. The two primary areas of focus during 2005 were
            to improve
            the net interest margin and to improve credit quality. To improve net
            interest
            margin in the face of a rising interest rate environment, the Company
            focused on
            generating retail deposit growth and used this additional funding to
            repay
            higher cost Federal Home Loan Bank (FHLB) advances and wholesale deposits.
            During 2005, retail deposits grew $58.1 million while FHLB advances decreased
            $38.8 million and wholesale deposits decreased $40.5 million. By shifting
            funding to less costly retail deposits, the Company was able to minimize
            the
            increase in interest cost during 2005. The rate paid on interest bearing
            liabilities increased by 10 basis points during 2005 while the yield
            on interest
            earning assets increased by 32 basis points resulting in a 22 basis point
            increase in net interest margin to 3.22% for 2005. To improve credit
            quality,
            management focused on the resolution of two large commercial credits
            totaling
            $7.2 million which were originally classified as non-performing during
            the third
            quarter of 2004. The final disposition of assets related to the two large
            commercial loans occurred during the second quarter of 2005. As a result,
            total
            non-performing assets decreased $10.2 million or 69.0% to $4.6 million
            at
            December 31, 2005. Non-performing assets to total assets decreased to
            .54% at
            December 31, 2005 from 1.71% at December 31, 2004, while non-performing
            loans to
            total loans decreased to .70% at December 31, 2005 from 2.01% at December
            31,
            2004. The current non-performing asset ratios are more indicative of
            the
            historical quality of the loan portfolio.
  -
                10
                -
  Total
            other income increased $613,000 in 2005 due primarily to increases in
            deposit
            fees and investment advisory revenue. Deposit fees increased 16.5% for
            the year
            due to strong deposit account growth while investment advisory revenue
            increased
            17.1% for the year due to increased production in established markets.
            In
            addition, retail brokerage revenue was enhanced in the fourth quarter
            through
            the acquisition of a book of business located on the south side of
            Indianapolis.
 
 Total
            other expenses increased $1.8 million for 2005 in large part due to increased
            compensation expense and marketing expenses associated primarily with
            additional
            expansion in the two branch office locations on the south side of Indianapolis.
            The Company ended 2005 with $27.8 million in retail deposits in these
            locations
            - an increase of $17.6 million for the year.
 
 In
            summary, the Company faces several challenges in 2006 and subsequent
            years. The
            major challenges for 2006 will be loan growth, the impact of the interest
            rate
            environment on net interest margins and the increasing cost of regulatory
            compliance. Loan growth has been a challenge in recent years. However,
            the two
            locations on the south side of Indianapolis provide opportunities for
            commercial
            and retail loan growth. With 2006 beginning with an inverted yield curve,
            there
            will continue to be pressure to maintain current levels of net interest
            margin.
            Thus, earning asset growth along with continued efforts to shift the
            balance
            sheet away from residential mortgage loans and wholesale funding sources
            toward
            commercial loans and retail deposits will have a major impact on net
            interest
            margins for 2006. Finally, the Company will closely monitor expenses
            in 2006,
            but costs associated with regulatory compliance - added personnel and
            system
            costs - are expected to continue to increase.
 
 **ASSET/LIABILITY
            MANAGEMENT**
 The
            Bank
            follows a program designed to decrease its vulnerability to material
            and
            prolonged increases in interest rates. This strategy includes 1) selling
            certain
            longer term, fixed rate loans from its portfolio; 2) increasing the origination
            of adjustable rate loans; 3) improving its interest rate gap by increasing
            the
            interest rate sensitivity by shortening the maturities of its interest-earning
            assets and extending the maturities of its interest-bearing liabilities;
            and 4)
            increasing its non-interest income.
 
 A
            significant part of the Bank's program of asset and liability management
            has
            been the increased emphasis on the origination of adjustable rate and/or
            short-term loans, which include adjustable rate residential mortgages
            and
            construction loans, commercial loans, and consumer-related loans. The
            Bank
            continues to offer fixed rate residential mortgage loans. The Bank retains
            the
            servicing on most of the 15-year and 30-year loans sold, thereby increasing
            non-interest income. The proceeds of these loan sales are used to reinvest
            in
            other interest-earning assets or to repay wholesale borrowings.
 
 The
            Bank
            continues to assess methods to stabilize interest costs and match the
            maturities
            of liabilities to assets. Retail deposit specials are competitively priced
            to
            attract deposits in the Bank’s market area. When retail deposit funds become
            unavailable due to competition, the Bank employs FHLB advances and brokered
            deposits to maintain the necessary liquidity to fund lending operations.
 
 The
            Bank
            has endeavored to spread its maturities of FHLB advances over a three
            to five
            year period so that only a limited amount of advances comes due each
            year. This
            avoids a concentration of maturities in any one year and thus reduces
            the risk
            of having to renew all advances when rates may not be favorable.
 
 The
            Bank
            applies early withdrawal penalties to protect the maturity and cost structure
            of
            its deposits and utilizes longer term fixed rate borrowings when the
            cost and
            availability permit the proceeds of such borrowings to be invested
            profitably.
  -
                11
                -
  **INTEREST
            RATE SPREAD**
 The
            following table sets forth information concerning the Bank's interest-earning
            assets, interest-bearing liabilities, net interest income, interest rate
            spreads
            and net yield on average interest-earning assets during the periods indicated
            (including amortization of net deferred fees which are considered adjustments
            of
            yields). Average balance calculations were based on daily balances. (dollars
            in
            thousands)
 
 **Year
                      Ended**
                  
                  **Year
                      Ended**
                  
                  **Year
                      Ended****Dec
                      2005**
                  
                  **Dec
                      2004**
                  
                  **Dec
                      2003****Average**
                    **Balance**
                  
                  **Interest**
                  
                  **Average**
                    **Yield/Rate**
                  
                  **Average**
                    **Balance**
                  
                  **Interest**
                  
                  **Average**
                    **Yield/Rate**
                  
                  **Average**
                    **Balance**
                  
                  **Interest**
                  
                  **Average**
                    **Yield/Rate**Interest-earning
                      assets:Residential
                      mortgage loans
                  
                  $
                  185,815
                  
                  $
                  10,828
                  
                  
                  5.83
                  %
                  $
                  198,228
                  
                  $
                  10,926
                  
                  
                  5.51
                  %
                  $
                  219,059
                  
                  $
                  13,155
                  
                  
                  6.01
                  %Commercial
                      real estate mortgages
                  
                  
                  217,251
                  
                  
                  13,697
                  
                  
                  6.30
                  %
                  
                  229,131
                  
                  
                  13,811
                  
                  
                  6.03
                  %
                  
                  221,860
                  
                  
                  13,927
                  
                  
                  6.28
                  %Home
                      equities/ second mortgages
                  
                  
                  82,416
                  
                  
                  5,656
                  
                  
                  6.86
                  %
                  
                  77,868
                  
                  
                  5,439
                  
                  
                  6.98
                  %
                  
                  76,754
                  
                  
                  5,708
                  
                  
                  7.44
                  %Commercial
                      loans
                  
                  
                  105,550
                  
                  
                  6,939
                  
                  
                  6.57
                  %
                  
                  99,294
                  
                  
                  5,544
                  
                  
                  5.58
                  %
                  
                  93,713
                  
                  
                  5,414
                  
                  
                  5.78
                  %Consumer
                      loans
                  
                  
                  34,846
                  
                  
                  2,490
                  
                  
                  7.15
                  %
                  
                  34,437
                  
                  
                  2,652
                  
                  
                  7.70
                  %
                  
                  36,167
                  
                  
                  3,109
                  
                  
                  8.60
                  %Securities
                  
                  
                  131,046
                  
                  
                  4,652
                  
                  
                  3.55
                  %
                  
                  125,743
                  
                  
                  4,109
                  
                  
                  3.27
                  %
                  
                  123,273
                  
                  
                  3,932
                  
                  
                  3.19
                  %Interest-bearing
                      deposits
                  
                  
                  23,299
                  
                  
                  714
                  
                  
                  3.06
                  %
                  
                  20,518
                  
                  
                  265
                  
                  
                  1.29
                  %
                  
                  30,567
                  
                  
                  357
                  
                  
                  1.17
                  %**Total
                      interest-earning assets (1)**
                  
                  **$**
                  **780,223**
                  
                  **$**
                  **44,976**
                  
                  
                  **5.76**
                  **%**
                  **$**
                  **785,219**
                  ****
                  **$**
                  **42,746**
                  
                  
                  **5.44**
                  **%**
                  **$**
                  **801,393**
                  
                  **$**
                  **45,602**
                  
                  
                  **5.69**
                  **%**Interest-bearing
                      liabilities:DepositsTransaction
                      accounts
                  
                  
                  340,964
                  
                  $
                  2,981
                  
                  
                  0.87
                  %
                  $
                  314,519
                  
                  $
                  1,442
                  
                  
                  0.46
                  %
                  $
                  296,267
                  
                  $
                  2,060
                  
                  
                  0.70
                  %Certificate
                      accounts
                  
                  
                  306,789
                  
                  
                  10,284
                  
                  
                  3.35
                  %
                  
                  303,917
                  
                  
                  9,390
                  
                  
                  3.09
                  %
                  
                  305,506
                  
                  
                  10,144
                  
                  
                  3.32
                  %FHLB
                      advances
                  
                  
                  108,525
                  
                  
                  5,743
                  
                  
                  5.29
                  %
                  
                  141,210
                  
                  
                  7,627
                  
                  
                  5.40
                  %
                  
                  163,369
                  
                  
                  9,221
                  
                  
                  5.64
                  %Other
                      borrowings
                  
                  
                  14,346
                  
                  
                  809
                  
                  
                  5.64
                  %
                  
                  15,127
                  
                  
                  700
                  
                  
                  4.63
                  %
                  
                  16,312
                  
                  
                  839
                  
                  
                  5.14
                  %**Total
                      interest-bearing liabilities**
                  
                  **$**
                  **770,624**
                  
                  **$**
                  **19,817**
                  ****
                  ****
                  **2.57**
                  **%**
                  **$**
                  **774,773**
                  ****
                  **$**
                  **19,159**
                  ****
                  ****
                  **2.47**
                  **%**
                  **$**
                  **781,454**
                  ****
                  **$**
                  **22,264**
                  
                  
                  **2.85**
                  **%****Net
                      Interest Income**
                  
                  
                  
                  
                  **$**
                  **25,159**
                  
                  
                  
                  
                  
                  
                  
                  **$**
                  **23,587**
                  
                  
                  
                  
                  
                  
                  
                  **$**
                  **23,338****Net
                      Interest Rate Spread**
                  
                  
                  
                  
                  
                  
                  
                  
                  **3.19**
                  **%**
                  
                  
                  
                  
                  
                  
                  
                  **2.97**
                  **%**
                  
                  
                  
                  
                  
                  
                  
                  **2.84**
                  **%****Net
                      Earning Assets**
                  
                  **$**
                  **9,599**
                  
                  
                  
                  
                  
                  
                  
                  **$**
                  **10,446**
                  
                  
                  
                  
                  
                  
                  
                  **$**
                  **19,939****Net
                      Interest Margin (2)**
                  
                  
                  
                  
                  
                  
                  
                  
                  **3.22**
                  **%**
                  
                  
                  
                  
                  
                  
                  
                  **3.00**
                  **%**
                  
                  
                  
                  
                  
                  
                  
                  **2.91**
                  **%****Average
                      Interest-earning****Assets
                      to Average****Interest-bearing
                      Liabilities**
                  
                  
                  **101.25**
                  **%**
                  
                  
                  
                  
                  
                  
                  
                  **101.35**
                  **%**
                  
                  
                  
                  
                  
                  
                  
                  **102.55**
                  **%**
 
 (1)
                  Average
                      balances are net of non-performing
                      loans.
 (2)
                  Net
                      interest income divided by the average balance of interest-earning
                      assets.
  -
                12
                -
  **RATE/VOLUME
            ANALYSIS**
 The
            following table sets forth the changes in the Bank's interest income
            and
            interest expense resulting from changes in interest rates and changes
            in the
            volume of interest-earning assets and interest-bearing liabilities. Changes
            not
            solely attributable to volume or rate changes have been allocated in
            proportion
            to the changes due to volume or rate. (in thousands)
 **Year
                        Ended**
                    
                    **Year
                        Ended****Dec
                        2005 vs. Dec 2004**
                    
                    **Dec
                        2004 vs. Dec 2003****Increase/(Decrease)**
                    
                    **Increase/(Decrease)****Due
                        to**
                      **Rate**
                    
                    **Due
                        to**
                      **Volume**
                    
                    **Total**
                      **Change**
                    
                    **Due
                        to**
                      **Rate**
                    
                    **Due
                        to**
                      **Volume**
                    
                    **Total**
                      **Change****Interest
                        Income on Interest-Earning Assets:**Residential
                        mortgage loans
                    
                    $
                    1,038
                    
                    $
                    (1,136
                    )
                    $
                    (98
                    )
                    $
                    (1,033
                    )
                    $
                    (1,196
                    )
                    $
                    (2,229
                    )Commercial
                        real estate loans
                    
                    
                    894
                    
                    
                    (1,008
                    )
                    
                    (114
                    )
                    
                    (656
                    )
                    
                    540
                    
                    
                    (116
                    )Home
                        equities/second mortgages
                    
                    
                    (92
                    )
                    
                    309
                    
                    
                    217
                    
                    
                    (354
                    )
                    
                    85
                    
                    
                    (269
                    )Commercial
                        loans
                    
                    
                    1,030
                    
                    
                    365
                    
                    
                    1,395
                    
                    
                    (169
                    )
                    
                    299
                    
                    
                    130Consumer
                        loans
                    
                    
                    (193
                    )
                    
                    31
                    
                    
                    (162
                    )
                    
                    (313
                    )
                    
                    (144
                    )
                    
                    (457
                    )Securities
                    
                    
                    365
                    
                    
                    178
                    
                    
                    543
                    
                    
                    97
                    
                    
                    80
                    
                    
                    177Interest-bearing
                        deposits
                    
                    
                    409
                    
                    
                    40
                    
                    
                    449
                    
                    
                    44
                    
                    
                    (136
                    )
                    
                    (92
                    )**Total**
                    
                    
                    3,451
                    
                    
                    (1,221
                    )
                    
                    2,230
                    
                    
                    (2,384
                    )
                    
                    (472
                    )
                    
                    (2,856
                    )**Interest
                        Expense on Interest-Bearing Liabilities:**Deposits
                        - Transaction accounts
                    
                    
                    1,409
                    
                    
                    130
                    
                    
                    1,539
                    
                    
                    (754
                    )
                    
                    136
                    
                    
                    (618
                    )Certificate
                        accounts
                    
                    
                    804
                    
                    
                    90
                    
                    
                    894
                    
                    
                    (701
                    )
                    
                    (53
                    )
                    
                    (754
                    )FHLB
                        advances
                    
                    
                    (151
                    )
                    
                    (1,733
                    )
                    
                    (1,884
                    )
                    
                    (384
                    )
                    
                    (1,210
                    )
                    
                    (1,594
                    )Other
                        borrowings
                    
                    
                    143
                    
                    
                    (34
                    )
                    
                    109
                    
                    
                    (81
                    )
                    
                    (58
                    )
                    
                    (139
                    )**Total**
                    
                    
                    2,205
                    
                    
                    (1,547
                    )
                    
                    658
                    
                    
                    (1,920
                    )
                    
                    (1,185
                    )
                    
                    (3,105
                    )**Net
                        Change in Net Interest Income**
                    
                    **$**
                    **1,246**
                    ****
                    **$**
                    **326**
                    ****
                    **$**
                    **1,572**
                    ****
                    **$**
                    **(464**
                    **)**
                    **$**
                    **713**
                    ****
                    **$**
                    **249**
 -
                  13
                  -
 
 **RESULTS
            OF OPERATIONS**
 Comparison
            of Year Ended December 31, 2005 and Year
            Ended December 31, 2004 :
 
 **General**
 The
            Company reported net income of $6.1  million
            for the year ended December 31, 2005 .
            This
            compared to net income of $ 5.2 million
            for the year ended December 31, 2004, representing an increase of $939,000
            or
            18 .2 %.
 
 **Net
            Interest Income**
 Net
            interest income increased
            $1.6 million, or
            6 .7 %,
            for
            the year ended December 31, 2005 ,
            compared to the year ended December 31, 2004. The increase in net interest
            income was primarily due to the changing mix of the Bank’s interest earning
            assets and interest bearing liabilities. Total interest income for the
            year
            ended December 31, 2005 ,
            increased $2 .2 million,
            or 5 .2 %,
            as
            compared to the year ended December 31, 2004 .
            The
            average balance of total interest earning assets decreased $5.0 million
            for the
            year. However, this decrease was offset by a 32 basis point increase
            in yield on
            interest-earning assets for the year due primarily to the impact of rising
            interest rates throughout 2005. The balances of lower yielding residential
            mortgage loans and commercial real estate mortgage loans decreased $9.1
            million and $20.1 million, respectively, while home equity loans increased
            $7.5 million.
            Total interest expense for the year ended December 31, 2005 increased $658,000, or 3 .4 %,
            as
            compared to the year ended December 31, 2004 .
            The
            increase was due primarily to the impact of rising interest rates throughout
            2005. During periods of rising interest rates, banks generally see rates
            on
            interest bearing liabilities increase more rapidly than rates on interest
            earning assets. However, during 2005, growth in retail deposits provided
            funds
            to repay higher cost wholesale funding sources. The continued growth
            in checking
            and money market accounts increased the balance of interest bearing transaction
            accounts $27 .6 million
            while retail certificates of deposit increased $30.5 million for the
            year. The
            increase in retail deposits was used to pay down higher costing FHLB
            advances
            which decreased $38 .8 million
            during the year ended December 31, 2005 .
            As a
            result of the mix shift noted above along with rising interest rates
            during the
            year, the yield on interest earning assets increased 32 basis points
            for the
            year while the rate paid on interest bearing liabilities increased 10
            basis
            points. The Company was able to minimize the increase in rates paid on
            interest
            bearing liabilities which resulted in an increase in net interest margin
            of 22
            basis points to 3.22% for 2005.
  **Provision
            for Loan Losses**
 Provision
            for loan losses was $808,000 for the year ended December 31, 2005, a
            decrease of
            $962,000 from $1.8 million in 2004. The decrease in provision for loan
            losses
            resulted from the overall improvement in the credit quality of the loan
            portfolio as compared to the prior year. Non-performing assets to total
            assets
            decreased to .54% at December 31, 2005 from 1.71% at December 31, 2004
            and
            nonperforming loans to gross loans decreased to .70% at December 31,
            2005 from
            2.01% at December 31, 2004. During 2004, two large commercial loans totaling
            $7.2 million were classified as non-performing and additional provision
            for loan
            losses was recorded to cover anticipated losses on these loans. The final
            disposition of these two commercial loans occurred during 2005 and there
            was no
            significant impact of these loans on the provision for loan losses during
            2005.
 
 **Other
            Income**
 Other
            income was $1 0.3 million
            for the year ended December 31, 2005, an increase of $613,000, or 6 .3 %,
            compared to the year ended December 31, 2004 .
            The
            increase in other income was due primarily to increases in deposit service
            fees
            and investment advisory revenue. Total deposit fees increased $486,000
            or 16.5%
            during 2005 due primarily to growth in transaction accounts for the year.
            Total
            investment advisory revenue increased $311,000 or 17.1% during 2005 due
            primarily to increased retail brokerage fee income. During 2005, retail
            brokerage fee income increased $132,000 or 13.4% due to increased production
            in
            established markets along with fee income from a book of business acquired
            in
            the Indianapolis market during the fourth quarter. Retail brokerage fee
            income
            is anticipated to increase during 2006 as fee income from the newly acquired
            book of business was only included in the results for two months of 2005.
            In
            addition, income from joint ventures increased $271,000 to $443,000 for
            2005.
            Sales results from these projects were stronger in 2005 resulting in
            the
            increased income. However, due to the current status of the remaining
            projects
            along with the requirement for the Bank to divest of any remaining investments
            in joint venture projects by the end of 2006, income from these projects
            is
            expected to decrease in 2006.
 
 During
            2005, fee income associated with mortgage banking activities has fluctuated
            significantly as compared to 2004. Mortgage banking fee income is comprised
            of
            two primary sources - gain on sale of loans originated and sold in the
            secondary
            market and loan servicing income. Gain on sale of loans was $1.5 million
            for the
            year ended December 31, 2005, a decrease of $1.1 million or 41.9%, compared
            to
            the year ended December 31, 2004. The decrease is due primarily to significantly
            lower levels of mortgage originations in 2005 compared to 2004. Mortgage
            loan
            origination levels during the first half of 2004 were inflated by higher
            levels
            of refinance activity due to historically low interest rate levels. Loan
            servicing income was $1.4 million for the year ended December 31, 2005,
            an
            increase of $700,000 or 107.0%, compared to the year ended December 31,
            2004.
            The primary reason for the increase in loan servicing fees related to
            the timing
            and fluctuation in the impairment charge/recovery. The originated mortgage
            servicing rights asset is reviewed for impairment each quarter. The impairment
            charge is the recognition of the change in the value of mortgage servicing
            rights that result from changes in interest rates and loan prepayment
            speeds.
            For 2005, the impairment recovery was $549,000 compared to $95,000 in
            2004. The
            remaining balance of impairment reserve at December 31, 2005 was $425,000.
            Future impairment charges or recoveries will depend on future interest
            rate
            changes and the effect that they have on prepayment speeds. If rates
            decline,
            there may be more impairment charges; if rates rise, impairment charges
            previously recorded may be recovered.
  -
                14
                -
 
 **Other
            Expenses**
 Other
            expenses totaled $25.6 million for the year ended December 31, 2005,
            an increase
            of $1.8 million or 7.5%, compared to the year ended December 31, 2004.
            The
            expense increases were primarily related to compensation and employee
            benefits,
            occupancy and equipment, and marketing. Compensation and employee benefits
            increased $1.1 million due to personnel cost associated with staffing
            of new
            branch office locations on the south side of Indianapolis and increased
            expenses
            related to the Bank’s pension plans. Occupancy and equipment expenses increased
            $513,000 due to the addition of a new branch office on the south side
            of
            Indianapolis and costs associated with the relocation of the Company’s
            operations center to a new facility during 2005. Marketing expense increased
            $392,000 due primarily to additional amounts spent to promote new branch
            offices
            on the south side of Indianapolis and to promote the free checking product.
            Miscellaneous expenses decreased $298,000 due primarily to a reduction
            in
            professional fees. In the prior year, non-recurring professional fees
            were
            incurred to assist in the implementation, documentation and testing related
            to
            compliance with requirements of Sarbanes Oxley legislation.
 
 
 **RESULTS
            OF OPERATIONS**
 Comparison
            of Year Ended December 31, 2004 and Year
            Ended December 31, 2003 :
 
 **General**
 The
            Company reported net income of $5.2 million for the year ended December
            31, 2004 .
            This
            compared to net income of $9.6 million for the year ended December 31,
            2003,
            representing a decrease of $4.5 million or 46.5%.
 
 **Net
            Interest Income**
 Net
            interest income increased
            $249,000, or 1.1 %,
            for
            the year ended December 31, 2004 ,
            compared to the year ended December 31, 2003 .
            The
            increase in net interest income was primarily due to the changing mix
            of the
            Bank’s average assets and liabilities. Total interest income for the year
            ended
            December 31, 2004 ,
            decreased $ 2.9 million,
            or 6.3 %,
            as
            compared to the year ended December 31, 2003 .
            The
            decrease in interest income was due primarily to the 25 basis
            point decrease in yield on interest-earning assets for the year ended
            December
            31, 2004 as
            compared to the prior year. In addition, the increase in non-performing
            loans
            contributed to the decline in net interest income. Total interest expense
            for
            the year ended December 31, 2004 decreased $ 3.1 million,
            or 14.0 %,
            as
            compared to the year ended December 31, 2003 .
            This
            decrease was due to a 38 basis
            point decrease in the cost of interest-bearing liabilities for the year
            ended
            December 31, 2004 as
            compared to the prior year. The continued growth in checking and money
            market
            accounts increased the average balance of lower cost interest bearing
            transaction accounts $18.3 million. The average balance of higher cost
            FHLB
            advances decreased $22.2 million as retail deposits were used to repay
            advances
            during the year. The result of the balance sheet mix was a 9 basis point
            increase in net interest margin as a result of the cost of interest-bearing
            liabilities declining more rapidly than the yield on assets. As the Federal
            Reserve raised short term interest rates in 2004, it had the effect of
            slowing
            the decline in yields of interest-bearing assets while the cost of
            interest-bearing liabilities continued to decline because of longer term
            liabilities maturing and repricing at what were still relatively low
            rates.
 
 **Provision
            for Loan Losses**
 Provision
            for loan losses was $1.8 million for the year ended December 31, 2004,
            an
            increase of $502,000 from $1.3 million in 2003. The increase in the provision
            from loan losses during 2004 resulted primarily for the deterioration
            in asset
            quality of two commercial loans totaling $7.2 million.
 
 -
                15
                -
 **Other
            Income**
 Other
            income was $9.7 million for the year ended December 31, 2004, a decrease
            of $5.0
            million, or 34.0%, compared to the year ended December 31, 2003. This
            decrease
            was due primarily to a decrease of $5.0 million in gain on sale of loans
            that
            was due to reduced loan originations and reduced loan sales. The year
            ended
            December 31, 2003 was a record year for the Company in both loan originations
            and sale of loans. The reduction in originations and sales of loans during
            2004
            was due to a slightly higher loan rate environment in 2004 that reduced
            loan
            refinancing activity, as fewer homeowners had mortgages with rates higher
            than
            prevailing market rates. Additional increases in service fees on deposit
            accounts, loan servicing income, and investment advisory revenue were
            offset by
            decreases in income from joint ventures. The joint venture income decreased
            because of a large gain on a project sale in 2003 which did not recur
            in 2004.
  **Other
            Expenses**
 Other
            expenses totaled $23.8 million for the year ended December 31, 2004,
            an increase
            of $ 1.7 million,
            or 7.7 %,
            compared to the year ended December 31, 2003. The expense increase was
            primarily
            related to compensation and employee benefits. Compensation and employee
            benefits increased $ 1.3 million
            due to various factors including increased staffing, normal salary increases,
            and increased expenses related to the Bank’s pension plans. The amount of contra
            personnel expense deferred in loan origination costs decreased $1.0 million
            compared to the prior year which had the effect of raising compensation
            expense
            by the same amount. The reduced loan activity in 2004 caused the decrease
            in the
            amount of deferred loan origination costs. The decrease in contra personnel
            expense was partially offset by reduced loan commissions of approximately
            $479,000. Occupancy and equipment expense increased due to increased
            technology
            expenditures and the opening of a new branch on the south side of
            Indianapolis.
 
 For
            the
            year ended December 31, 2004, miscellaneous expenses increased $151,000.
            Included in these expenses were professional fees of $598,000 associated
            with
            the required implementation of Sarbanes Oxley legislation. Approximately
            $406,000 were one time costs associated with the initial implementation
            of
            Sarbanes Oxley.
 
 
 **FINANCIAL
            CONDITION**
 The
            Company's total assets de creased $17.6
            million to $850.7 million at December 31, 2005 ,
            from
            $ 868.2 million
            at December 31, 2004 .
            Total
            loans decreased $20.9 million due to a $29.2 million decrease in commercial
            and
            residential mortgage loans partially offset by a $7.5 million increase
            in home
            equity loans. The decrease in commercial real estate loans resulted from
            efforts
            to improve credit quality which resulted in some large loans being refinanced
            by
            other institutions in addition to prepayment on a few large projects
            that were
            completed more quickly than anticipated. The decrease in residential
            mortgage
            loans resulted from customer preference for fixed rate mortgage loans
            during the
            recent low interest rate environment. As the Bank sells fixed rate mortgage
            loans, the balances in the portfolio declined during the year as new
            adjustable
            rate mortgage originations did not keep pace with repayments of existing
            loans.
            Total retail deposits increased $58.1 million compared to December 31,
            2004. The
            increase in retail deposits was comprised of a $6.1 million increase
            in
            non-interest bearing checking accounts, a $21.5 million increase in interest
            bearing transaction accounts and a $30.5 million increase in consumer
            certificates of deposit. The increase in retail deposits has been used
            to pay
            down higher cost wholesale deposits and FHLB advances, which have declined
            $40.5
            million and $38.8 million respectively during the year.
 
 Shareholders’
            equity decreased $4 .3 million
            to $73 .0 million.
            During 2005, the Company repurchased 321,400 shares representing approximately
            8.0% of shares outstanding at a total cost of $8.1 million.
 
 
 **INTEREST
            RATE SENSITIVITY**
 Interest
            rate risk is the exposure to adverse changes in net interest income due
            to
            changes in interest rates. Interest rate sensitivity for the Company
            is a result
            of repricing, option, and basis risks. Repricing risk represents timing
            mismatches in the Company’s ability to alter contractual rates earned on
            financial assets or paid on liabilities in response to changes in market
            interest rates. For example, if interest-bearing liabilities reprice
            or mature
            more quickly than interest-earning assets, an increase in market rates
            could
            adversely affect net interest income. Conversely, if interest-bearing
            liabilities reprice or mature more quickly than interest-earning assets,
            a
            decrease in market rates could positively affect net interest income.
            Option
            risk arises from embedded options present in many financial instruments
            such as
            loan prepayment options and deposit early withdrawal options. These provide
            customers opportunities to take advantage of directional changes in rates,
            which
            could have an adverse impact on the Company’s net interest income. Basis risk
            refers to the potential for changes in the underlying relationship between
            market rates or indices, which subsequently result in a narrowing of
            the spread
            earned on a loan or investment relative to its cost of funds.
 -
                  16
                  -
  Net
            interest income represents the Company’s principal component of income.
            Consistency of the Company’s net interest income is largely dependent upon the
            effective management of interest rate risk. The Company has established
            risk
            measures, limits and policy guidelines in its Interest Rate Risk Management
            Policy. The responsibility for management of interest rate risk resides
            with the
            Company’s Asset/Liability Committee, (“ALCO”), with oversight by the Board of
            Directors. The Company uses an earnings simulation analysis that measures
            the
            sensitivity of net interest income to various interest rate movements.
            The
            base-case scenario is established using current interest rates. The comparative
            scenarios assume an immediate parallel shock in increments of 100 basis
            point
            rate movements. The interest rate scenarios are used for analytical purposes
            and
            do not necessarily represent management’s view of future market movements.
            Rather, these are intended to provide a measure of the degree of volatility
            interest rate movements may introduce into the earnings of the Company.
            Modeling
            the sensitivity of earnings to interest rate risk is highly dependent
            on
            numerous assumptions embedded in the model. These assumptions include,
            but are
            not limited to, management’s best estimates of the effect of changing interest
            rates on the prepayment speeds of certain assets and liabilities, projections
            for activity levels in each of the product lines offered by the Company
            and
            historical behavior of deposit rates and balances in relation to changes
            in
            interest rates. These assumptions are inherently uncertain, and as a
            result, the
            model cannot precisely measure net interest income or precisely predict
            the
            impact of fluctuations in interest rates on net interest income. Actual
            results
            will differ from simulated results due to timing, magnitude, and frequency
            of
            interest rate changes as well as changes in market conditions. The Company’s
            12-month net interest income sensitivity profile as of fiscal year-end
            December
            31, 2005 is as
            follows:
 
 Changes
                      in Rates
                  Net
                      Interest
                    Income
                    %
                      Change+
                      300 basis points
                  3.14+
                      200 basis points
                  2.63+
                      100 basis points
                  1.05-
                      100 basis points
                  (2.14)-
                      200 basis points
                  (4.26)-
                      300 basis points
                  (5.79)
 
 
 **ASSET
            QUALITY**
 In
            accordance with the Company's classification of assets policy, management
            evaluates the loan and investment portfolio each month to identify substandard
            assets that may contain the potential for loss. In addition, management
            evaluates the adequacy of its allowance for possible loan losses.
 
 -
                17
                -
 **NON-PERFORMING
            ASSETS**
 The
            following table sets forth information concerning non-performing assets
            of the
            Bank. Real estate owned includes property acquired in settlement of foreclosed
            loans that is carried at net realizable value. (dollars in
            thousands)
   **As
                      Of**
                  
                  **Dec
                      2005**
                  
                  **Dec
                      2004**
                  
                  **Dec
                      2003**
                  
                  **Dec
                      2002**
                  
                  **June
                      2002**Non-accruing
                      loans:Residential
                      mortgages
                  
                  $
                  1,656
                  
                  $
                  1,249
                  
                  $
                  832
                  
                  $
                  1,749
                  
                  $
                  795Commercial
                      real estate mortgages
                  
                  
                  212
                  
                  
                  5,633
                  
                  
                  247
                  
                  
                  137
                  
                  
                  96Home
                      equities/second mortgages
                  
                  
                  308
                  
                  
                  410
                  
                  
                  591
                  
                  
                  606
                  
                  
                  740Commercial
                  
                  
                  754
                  
                  
                  2,094
                  
                  
                  647
                  
                  
                  566
                  
                  
                  461Consumer
                  
                  
                  140
                  
                  
                  149
                  
                  
                  182
                  
                  
                  206
                  
                  
                  189Total
                  
                  
                  3,070
                  
                  
                  9,535
                  
                  
                  2,499
                  
                  
                  3,264
                  
                  
                  2,281Accruing
                      loans:Residential
                      mortgages
                  
                  
                  456
                  
                  
                  168
                  
                  
                  1,125
                  
                  
                  1,166
                  
                  
                  1,094Commercial
                  
                  
                  -
                  
                  
                  -
                  
                  
                  5
                  
                  
                  -
                  
                  
                  -Consumer
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  16Total
                  
                  
                  456
                  
                  
                  168
                  
                  
                  1,130
                  
                  
                  1,166
                  
                  
                  1,110Troubled
                      debt restructured
                  
                  
                  809
                  
                  
                  3,141
                  
                  
                  258
                  
                  
                  316
                  
                  
                  374Total
                      non-performing loans
                  
                  
                  4,335
                  
                  
                  12,844
                  
                  
                  3,887
                  
                  
                  4,746
                  
                  
                  3,765Real
                      estate owned
                  
                  
                  271
                  
                  
                  2,019
                  
                  
                  1,739
                  
                  
                  1,472
                  
                  
                  2,239**Total
                      Non-Performing Assets**
                  
                  **$**
                  **4,606**
                  
                  **$**
                  **14,863**
                  ****
                  **$**
                  **5,626**
                  ****
                  **$**
                  **6,218**
                  ****
                  **$**
                  **6,004**Non-performing
                      assets to total assets
                  
                  
                  0.54
                  %
                  
                  1.71
                  %
                  
                  0.66
                  %
                  
                  0.70
                  %
                  
                  0.70
                  %Non-performing
                      loans to loans
                  
                  
                  0.70
                  %
                  
                  2.01
                  %
                  
                  0.60
                  %
                  
                  0.71
                  %
                  
                  0.57
                  %Allowance
                      for loan losses to non-performing loans
                  
                  
                  155.78
                  %
                  
                  61.23
                  %
                  
                  193.11
                  %
                  
                  151.12
                  %
                  
                  171.34
                  %
 
 
 In
            addition, at December 31, 2005
            and
            2004 ,
            there
            were $ 14.8 million
            and $19.6 million,
            respectively, in current performing loans that were classified as special
            mention or substandard for which potential weaknesses exist, which may
            result in
            the future inclusion of such items in the non-performing category.
 
 Total
            non-performing assets decreased $10.3
            million to
            $ 4.6 million
            at December 31, 2005 .
            This
            decrease resulted from an $ 8.5
            million decrease
            in non-performing loans and from a decrease of
            $1.8
            million in real
            estate owned. The decrease in non-performing loans related primarily
            to two
            commercial loans that are discussed in the following Allowance for Loan
            Losses
            section. These two loans totaled $7 .2 million.
 
 -
                18
                -
 **ALLOWANCE
            FOR LOAN LOSSES**
 The
            provision for loan losses for the fiscal year ended December 31, 2005 was
            $ 808,000 ,
            which
            resulted in an allowance for loan losses balance of $ 6.8 million
            as of December 31, 2005 as
            compared to $7.9 million as of December
            31, 2004. The decrease to the allowance for loan losses resulted from
            the final
            disposition during the second quarter of 2005 of two large commercial
            loans
            which were classified as non-performing in 2004. A portion of the charge
            offs
            related to the two large commercial loans was recorded in 2005; however,
            these
            amounts had been provided for in the previous year. Therefore, there
            was no
            significant impact of these loans on the provision for loan losses during
            2005.
 
 The
            allowance for loan losses as a percentage of total loans decreased to
            1.09% at
            December 31, 2005 from 1.23% at December 31, 2004. The reduction in this
            ratio
            is representative of the improvement in the overall credit quality of
            the loan
            portfolio. The improvement in credit quality is best reflected by the
            reduction
            in total non-performing assets. As a result of the decrease in non-performing
            assets, the Bank’s asset quality ratios reflected in the table above have
            returned to historical levels.
  The
            following table sets forth an analysis of the allowance for possible
            loan
            losses.
 **As
                            Of**
                        
                        **Dec
                            2005**
                        
                        **Dec
                            2004**
                        
                        **Dec
                            2003**
                        
                        **Dec
                            2002**
                        
                        **June
                            2002**Balance
                            at beginning of period
                        
                        $
                        7,864
                        
                        $
                        7,506
                        
                        $
                        7,172
                        
                        $
                        6,451
                        
                        $
                        5,690Provision
                            for loan losses
                        
                        
                        808
                        
                        
                        1,770
                        
                        
                        1,268
                        
                        
                        1,221
                        
                        
                        1,423Loan
                            charge-offs:Residential
                            mortgages
                        
                        
                        (264
                        )
                        
                        (88
                        )
                        
                        (176
                        )
                        
                        (74
                        )
                        
                        (137
                        )Commercial
                            real estate mortgages
                        
                        
                        (893
                        )
                        
                        (28
                        )
                        
                        (60
                        )
                        
                        -
                        
                        
                        (86
                        )Home
                            equities/second mortgages
                        
                        
                        (158
                        )
                        
                        (136
                        )
                        
                        (163
                        )
                        
                        (44
                        )
                        
                        (138
                        )Commercial
                        
                        
                        (422
                        )
                        
                        (993
                        )
                        
                        (255
                        )
                        
                        (240
                        )
                        
                        (38
                        )Consumer
                        
                        
                        (311
                        )
                        
                        (279
                        )
                        
                        (425
                        )
                        
                        (186
                        )
                        
                        (331
                        )Total
                            charge-offs
                        
                        
                        (2,048
                        )
                        
                        (1,524
                        )
                        
                        (1,079
                        )
                        
                        (544
                        )
                        
                        (730
                        )Recoveries:Residential
                            mortgages
                        
                        
                        10
                        
                        
                        16
                        
                        
                        28
                        
                        
                        18
                        
                        
                        3Commercial
                            real estate mortgages
                        
                        
                        42
                        
                        
                        9
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -Home
                            equities/second mortgages
                        
                        
                        1
                        
                        
                        2
                        
                        
                        -
                        
                        
                        -
                        
                        
                        1Commercial
                        
                        
                        26
                        
                        
                        51
                        
                        
                        65
                        
                        
                        1
                        
                        
                        8Consumer
                        
                        
                        50
                        
                        
                        34
                        
                        
                        52
                        
                        
                        25
                        
                        
                        56Total
                            recoveries
                        
                        
                        129
                        
                        
                        112
                        
                        
                        145
                        
                        
                        44
                        
                        
                        68Net
                            charge-offs
                        
                        
                        (1,919
                        )
                        
                        (1,412
                        )
                        
                        (934
                        )
                        
                        (500
                        )
                        
                        (662
                        )**Balance
                            at end of period**
                        
                        **$**
                        **6,753**
                        ****
                        **$**
                        **7,864**
                        ****
                        **$**
                        **7,506**
                        ****
                        **$**
                        **7,172**
                        ****
                        **$**
                        **6,451**Net
                            charge-offs to average loans
                        
                        
                        0.31
                        %
                        
                        0.22
                        %
                        
                        0.14
                        %
                        
                        0.08
                        %
                        
                        0.10
                        %Allowance
                            balance to total loans
                        
                        
                        1.09
                        %
                        
                        1.23
                        %
                        
                        1.16
                        %
                        
                        1.08
                        %
                        
                        1.01
                        %
 
 
 -
                19
                -
 **ALLOCATION
            OF THE ALLOWANCE FOR LOAN LOSSES**
 The
            following table indicates the portion of the loan loss reserve management
            has
            allocated to each loan type at December 31, 2005 :
            (dollars in thousands)
 Loan
                        type
                    
                    AllowanceResidential
                        mortgages
                    
                    $
                    1,858Commercial
                        real estate
                    
                    
                    1,718Home
                        equities/second mortgages
                    
                    
                    567Commercial
                        other
                    
                    
                    1,813Consumer
                        loans
                    
                    
                    797**Total
                        allowance for loan losses**
                    
                    **$**
                    **6,753**
 
 
 **LIQUIDITY
            AND CAPITAL RESOURCES**
 The
            Bank
            maintains its liquid assets at a level believed adequate to meet requirements
            of
            normal daily activities, repayment of maturing debt and potential deposit
            outflows. Cash flow projections are regularly reviewed and updated to
            assure
            that adequate liquidity is maintained. Cash for these purposes is generated
            through the sale or maturity of securities and loan prepayments and repayments,
            and may be generated through increases in deposits or borrowings. Loan
            payments
            are a relatively stable source of funds, while deposit flows are influenced
            significantly by the level of interest rates and general money market
            conditions.
 
 Borrowings
            may be used to compensate for reductions in other sources of funds such
            as
            deposits. As a member of the FHLB System, the Bank may borrow from the
            FHLB of
            Indianapolis. At December 31, 2005 ,
            the
            Bank had $ 86.6 million
            in borrowings from the FHLB of Indianapolis. As of that date, the Bank
            had
            commitments of approximately $135 .9 million
            to fund lines of credit and undisbursed portions of loans in process,
            loan
            originations of approximately $19 .2 million,
            letters of credit of $4 .0 million,
            and commitments to sell loans of $12 .9 million.
            In the opinion of management, the Bank has sufficient cash flow and borrowing
            capacity to meet current and anticipated funding commitments.
  The
            Bank's liquidity, represented by cash and cash equivalents, is a result
            of its
            operating, investing and financing activities. During the fiscal year
            ended
            December 31, 2005 ,
            there
            was a net increase
            of $1.4 million
            in cash and cash equivalents. The major uses of cash during the year
            were:
            originations of mortgages held for sale of $97 .7 million;
            purchases of investment and mortgage-backed securities of $37 .7 million;
            and repayment of FHLB advances of $52 .8 million.
            The major sources of cash provided during the year included $97 .1 million
            from selling fixed rate mortgage loans primarily to Federal National
            Mortgage
            Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”);
            maturities and sales of investment securities of $36 .4 million;
            and increases in deposits of $17 .2 million.
 
 **SIGNIFICANT
            COMMITMENTS**
 In
            the
            normal course of business, the Bank is a party to various activities
            that
            contain credit and market risk that are not reflected in the financial
            statements. Such activities include commitments to extend credit, selling
            loans,
            borrowing funds, and standby letters of credit. Commitments or extend
            credit,
            including loan commitments and standby letters of credit do not necessarily
            represent future cash requirements, in that these commitments often expire
            without being drawn upon. Commitments are summarized as follows: (in
            thousands)
  **CONTRACTUALLY
              OBLIGATED PAYMENTS AND OTHER COMMITMENTS**
 **Less**
                    **Than**
                    **1
                      year**
                  
                  **1-3**
                    **years**
                  
                  **4-5**
                    **years**
                  
                  **Greater**
                    **Than**
                    **5
                      years**
                  
                  **Total****Contractually
                      obligated payments due by period:**Certificates
                      of Deposits
                  
                  $
                  174,398
                  
                  $
                  96,426
                  
                  $
                  24,991
                  
                  $
                  3,875
                  
                  $
                  299,690Long
                      Term Debt
                  
                  
                  32,403
                  
                  
                  21,100
                  
                  
                  27,492
                  
                  
                  19,880
                  
                  
                  100,875Purchase
                      obligations
                  
                  
                  219
                  
                  
                  445
                  
                  
                  424
                  
                  
                  1,289
                  
                  
                  2,377**Commitments
                      to extend credit:**Commercial
                  
                  
                  75,368
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  75,368Residential
                      real estate
                  
                  
                  19,159
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  19,159Revolving
                      home equity lines of credit
                  
                  
                  58,818
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  58,818Other
                  
                  
                  1,754
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,754Standby
                      letters of credit
                  
                  
                  3,991
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3,991**Commitments
                      to sell loans:**Mortgage
                  
                  
                  6,439
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  6,439Commercial
                  
                  
                  6,413
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  6,413**Total**
                  
                  **$**
                  **378,962**
                  
                  **$**
                  **117,971**
                  
                  **$**
                  **52,907**
                  
                  **$**
                  **25,044**
                  
                  **$**
                  **574,884**
  Commitments
              to borrow or extend credit, including loan commitments and standby
              letters of
              credit do not necessarily represent future cash requirements, in that
              these
              commitments often expire without being drawn upon.
 -
                20
                -
 
 **OFF-BALANCE
            SHEET ARRANGEMENTS**
 The
            term
“off-balance sheet arrangement” generally means any transaction, agreement, or
            other contractual arrangement to which an entity unconsolidated with
            the Company
            is a party under which the Company has (i) any obligation arising under
            a
            guarantee contract, derivative instrument or variable interest; or (ii)
            a
            retained or contingent interest in assets transferred to such entity
            or similar
            arrangement that serves as credit, liquidity or market risk support for
            such
            assets. The Company does not have any off-balance sheet arrangements
            with
            unconsolidated entities that have or are reasonably likely to have a
            current or
            future effect on the Company’s financial condition, change in financial
            condition, revenues or expenses, results of operations, liquidity, capital
            expenditures or capital resources that are material to investors.
 
 **JOINT
            VENTURES**
 The
            Company has invested in joint ventures through its subsidiaries, Home
            Savings
            Corporation (“HSC”) and HomeFed Financial Corp. On December 31, 2001, the Bank
            changed its charter from a Federal savings bank charter to an Indiana
            commercial
            bank charter. Commercial banks are not permitted to participate in real
            estate
            development joint ventures. HSC is a partner in three real estate development
            joint ventures for which exit strategies have been either developed,
            or are
            currently being developed. The Company, as mandated by its charter change,
            is in
            the process of divesting itself of these investments by December 31,
            2006. The
            investments are accounted for by the equity method.
  **DERIVATIVE
            FINANCIAL INSTRUMENTS**
 Statement
            of Financial Accounting Standards No. 133, (“SFAS 133”), “Accounting for
            Derivative Instruments and Hedging Activities,” which establishes accounting and
            reporting standards for derivative instruments, including certain derivative
            instruments embedded in other contracts requires all derivatives, whether
            designated as a hedge, or not, to be recorded on the balance sheet at
            fair
            value. The Company designates its fixed rate and variable rate interest
            rate
            swaps as fair value and cash flow hedge instruments, respectively. If
            the
            derivative is designated as a fair value hedge, the changes in fair value
            of the
            derivative are recognized in earnings. If the derivative is designated
            as a cash
            flow hedge, the changes in fair value of the derivative are recorded
            in
            accumulated other comprehensive income (“OCI”), net of income taxes. The Company
            has only limited involvement with derivative financial instruments and
            does not
            use them for trading purposes. See Note 1 for further discussion of derivative
            financial instruments.
 
 **IMPACT
            OF INFLATION**
 The
            consolidated financial statements and related data presented herein have
            been
            prepared in accordance with accounting principles generally accepted
            in the
            United States of America. These principles require the measurement of
            financial
            position and operating results in terms of historical dollars, without
            considering changes in the relative purchasing power of money over time
            due to
            inflation. The primary assets and liabilities of commercial banks such
            as the
            Bank are monetary in nature. As a result, interest rates have a more
            significant
            impact on the Bank's performance than the effects of general levels of
            inflation. Interest rates do not necessarily move in the same direction
            or with
            the same magnitude as the price of goods and services. In the current
            interest
            rate environment, liquidity, maturity structure and quality of the Bank's
            assets
            and liabilities are critical to the maintenance of acceptable performance
            levels.
 
 **NEW
            ACCOUNTING PRONOUNCEMENTS**
 Statement
            of Financial Accounting Standards No. 123 - R, (“SFAS 123-R”), Revised 2004, is
            effective as of the beginning of the first interim or annual
            reporting period of the registrants’ first fiscal year beginning on or after
            June 15, 2005.This
            Statement is a revision of SFAS No. 123, “Accounting for Stock-Based
            Compensation.” This Statement focuses primarily on accounting for transactions
            in which an entity obtains employee services in share-based payment
            transactions.Managementdoes
            not
            believethe
            adoption ofSFAS
            No.
            123 - Rwill
            have a material effect on its consolidated financial
            statements.
 
 Emerging
            Issues Task Force, (“EITF”), Issue 03-1, “The Meaning of Other-Than-Temporary
            Impairment and Its Application to Certain Investments” provides guidance for
            determining when an investment is considered impaired (when fair value
            is less
            than cost), for evaluating whether impairment is other-than-temporary,
            and, if
            other-than-temporary, requiring recognition of an impairment loss equal
            to the
            difference between the investment's cost and its fair value.  
Generally, an impairment is considered other-than-temporary unless:  (a)
            the investor has the ability and intent to hold an investment for a reasonable
            period of time sufficient for a forecasted recovery of fair value equal
            to (or
            more than) the cost of the investment; and (b) evidence indicating that
            the cost
            of the investment is recoverable within a reasonable period of time outweighs
            evidence to the contrary.  The Financial Accounting Standards Board,
            (“FASB”), delayed the effective date for the measurement and recognition
            guidance contained in paragraphs 10 - 20 of EITF Issue 03-1 by FASB Staff
            Position, (“FSP”), EITF Issue 03-1-1, "Effective Date of Paragraphs 10-20 of
            EITF Issue No. 03-1, 'The Meaning of Other-Than-Temporary Impairment
            and Its
            Application to Certain Investments," posted September 30, 2004. The delay
            of the
            effective date for paragraphs 10-20 will be superseded concurrent with
            the final
            issuance of proposed FSP EITF Issue 03-1-a, "Implication Guidance for
            the
            Application of Paragraph 16 of EITF Issue No. 03-1, 'The Meaning of
            Other-Than-Temporary Impairment and Its Application to Certain Investments.“
Gross unrealized losses on available for sale securities and held to
            maturity
            securities were $2,863,000 and $21,000, respectively, at December 31,
            2005. Management has
            determined the
            adoption of EITF
            03-1
            and FSP EITF Issue 03-1-1 did
            not
            have a material effect on its consolidated financial statements.
 
 FSP
            Nos.
            FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its
            Application to Certain Investments”, was posted November 3, 2005. This FSP
            addresses the determination as to when an investment is considered impaired,
            whether that impairment is other than temporary, and the measurement
            of an
            impairment loss. This FSP also includes accounting considerations subsequent
            to
            the recognition of an other-than-temporary impairment and requires certain
            disclosures about unrealized losses that have not been recognized as
            other-than-temporary impairments. The guidance in this FSP amends FASB
            Statements No. 115, Accounting for Certain Investments in Debt and Equity
            Securities, and No. 124, Accounting for Certain Investments Held by
            Not-for-Profit Organizations, and APB Opinion No. 18, The Equity Method
            of
            Accounting for Investments in Common Stock. Management has
            determined the
            adoption of FSP Nos. FAS 115-1 and FAS 124-1 did
            not have a
            material effect on its consolidated financial statements.
  -
                21
                -
 
 **CRITICAL
            ACCOUNTING POLICIES**
 The
            notes
            to the consolidated financial statements contain a summary of the Company’s
            significant accounting policies. Certain of these policies are critical
            to the
            portrayal of the Company’s financial condition, since they require management to
            make difficult, complex or subjective judgments, some of which may relate
            to
            matters that are inherently uncertain. Management believes that its critical
            accounting policies include a determination of the allowance for loan
            losses and
            the valuation of mortgage servicing rights.
 
 **Allowance
            for Loan Losses**
 A
            loan is
            considered impaired when it is probable the Company will be unable to
            collect
            all contractual principal and interest payments due in accordance with
            the terms
            of the loan agreement. Impaired loans are measured based on the loan’s
            observable market price or the estimated fair value of the collateral
            if the
            loan is collateral dependent. The amount of impairment, if any, and any
            subsequent changes are included in the allowance for loan losses.
 
 The
            allowance for loan losses is established through a provision for loan
            losses.
            Loan losses are charged against the allowance when management believes
            the loans
            are uncollectible. Subsequent recoveries, if any, are credited to the
            allowance.
 
 The
            allowance for loan losses is maintained at a level management considers
            to be
            adequate to absorb probable loan losses inherent in the portfolio, based
            on
            evaluations of the collectibility and historical loss experience of loans.
            The
            allowance is based on ongoing assessments of the probable estimated losses
            inherent in the loan portfolio. The Company’s methodology for assessing the
            appropriate allowance level consists of several key elements, as described
            below.
 
 All
            delinquent loans that meet regulatory requirements are included on the
            Asset
            Watch List. The Asset Watch List is reviewed quarterly by the Asset Watch
            Committee for any classification beyond the regulatory rating based on
            a loan’s
            delinquency.
 
 Commercial
            and commercial real estate loans are individually risk rated pursuant
            to the
            loan policy. Homogeneous loans such as consumer and residential mortgage
            loans
            are not individually risk rated by management. They are risk rated based
            on
            historical portfolio data that management believes will provide a good
            basis for
            the loans' quality. For all loans not listed individually on the Asset
            Watch
            List, historical loss rates based on the last four years are the basis
            for
            developing expected charge-offs for each pool of loans.
 
 Historical
            loss rates for commercial and consumer loans may be adjusted for significant
            factors that, in management’s judgment, reflect the impact of any current
            conditions on loss recognition. Factors which management considers in
            the
            analysis include the effects of the local economy, trends in the nature
            and
            volume of loans (delinquencies, charge-offs, nonaccrual and problem loans),
            changes in the internal lending policies and credit standards, collection
            practices, and examination results from bank regulatory agencies and
            the
            Company’s credit review function.
 
 Finally,
            a portion of the allowance is maintained in recognition of the inherent
            inability to precisely determine the loss potential based on factors
            such as
            current economic conditions, trends in the Company’s loan portfolio delinquency,
            losses and recoveries, level of under performing and nonperforming loans,
            and
            concentrations of loans in any one industry.
 
 **Valuation
            of Mortgage Servicing Rights**
 The
            Company recognizes the rights to service mortgage loans as separate assets,
            which are included in other assets in the consolidated balance sheet.
            The total
            cost of loans when sold is allocated between loans and MSR’s based on the
            relative fair values of each. MSR’s are subsequently carried at the lower of the
            initial carrying value, adjusted for amortization, or fair value. MSR’s are
            evaluated for impairment based on the fair value of those rights. The
            Company
            uses a present value cash flow valuation model to establish the fair
            value of
            the MSR’s. Factors included in the calculation of fair value of the MSR’s
            include estimating the present value of future net cash flows, market
            loan
            prepayment speeds for similar loans, discount rates, servicing costs,
            and other
            economic factors. Servicing rights are amortized over the estimated period
            of
            net servicing revenue. It is likely that these economic factors will
            change over
            the life of the MSR’s, resulting in different valuations of the MSR’s. The
            differing valuations will affect the carrying value of the MSR’s on the balance
            sheet as well as the income recorded from loan servicing in the income
            statement.
  -
            22
            -
  **Management's
        Assessment as to the Effectiveness of Internal Control over Financial
        Reporting**
 
 The
        management of Home Federal Bancorp is responsible for establishing and
        maintaining adequate internal control over financial reporting. Internal
        control
        over financial reporting is defined in Rule 13A-15(f) or 15d-15(f) promulgated
        under the Securities Exchange Act of 1934 as a process designed by, or under
        the
        supervision of, a company’s principal executive and principal financial officers
        and effected by a company’s board of directors, management and other personnel,
        to provide reasonable assurance regarding the reliability of financial reporting
        and the preparation of financial statements for external purposes in accordance
        with generally accepted accounting principles and includes those policies
        and
        procedures that:
 
 Pertain
            to the maintenance of records that in reasonable detail accurately and
            fairly
            reflect the transactions and dispositions of the assets of the
            company;
        Provide
            reasonable assurance that transactions are recorded as necessary to permit
            preparation of financial statements in accordance with generally accepted
            accounting principles, and that receipts andexpenditures ofthe company are being made only in accordance with authorizations of
            management and directors of the company; and
        Provide
            reasonable assurance regarding prevention or timely detection of unauthorized
            acquisition, use or disposition of the company’s assets that could have a
            material effect on the financial statements. 
 Because
        of its inherent limitations, internal control over financial reporting may
        not
        prevent or detect misstatements. Projections of any evaluation of effectiveness
        to future periods are subject to the risk that controls may become inadequate
        because of changes in conditions, or that the degree of compliance with the
        policies or procedures may deteriorate.
 
 The
        Company’s management assessed the effectiveness of the Company’s internal
        control over financial reporting as of December 31, 2005 .
        In
        making this assessment, the Company’s management used the criteria set forth by
        the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
        in
        Internal Control-Integrated Framework.
 
 Based
        on
        our assessment, management believes that, as of December 31, 2005 ,
        the
        Company’s internal control over financial reporting is effective based on those
        criteria.
 
 The
        Company’s independent registered public accounting firm has issued an audit
        report on our assessment of the Company’s internal control over financial
        reporting. This report follows.
  -
            23
            -
  **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
   To
        the
        Board of Directors and Shareholders
 Home
        Federal Bancorp
 Columbus,
        Indiana
  We
        have
        audited management’s assessment, included in the accompanying Management’s
        Assessment as to the Effectiveness of Internal Control over Financial Reporting
        that Home Federal Bancorp and its subsidiaries (the “Company”) maintained
        effective internal control over financial reporting as of December 31,
        2005, based on criteria established in *Internal
        Control - Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission. The
        Company’s management is responsible for maintaining effective internal control
        over financial reporting and for its assessment of the effectiveness of internal
        control over financial reporting. Our responsibility is to express an opinion
        on
        management’s assessment and an opinion on the effectiveness of the Company’s
        internal control over financial reporting based on our audit.
  We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether effective
        internal control over financial reporting was maintained in all material
        respects. Our audit included obtaining an understanding of internal control
        over
        financial reporting, evaluating management’s assessment, testing, and evaluating
        the design and operating effectiveness of internal control, and performing
        such
        other procedures as we considered necessary in the circumstances. We believe
        that our audit provides a reasonable basis for our opinions.
  A
        company’s internal control over financial reporting is a process designed by, or
        under the supervision of, the company’s principal executive and principal
        financial officers, or persons performing similar functions, and effected
        by the
        company’s board of directors, management, and other personnel to provide
        reasonable assurance regarding the reliability of financial reporting and
        the
        preparation of financial statements for external purposes in accordance with
        generally accepted accounting principles. A company’s internal control over
        financial reporting includes those policies and procedures that (1) pertain
        to
        the maintenance of records that, in reasonable detail, accurately and fairly
        reflect the transactions and dispositions of the assets of the company; (2)
        provide reasonable assurance that transactions are recorded as necessary
        to
        permit preparation of financial statements in accordance with generally accepted
        accounting principles, and that receipts and expenditures of the company
        are
        being made only in accordance with authorizations of management and directors
        of
        the company; and (3) provide reasonable assurance regarding prevention or
        timely
        detection of unauthorized acquisition, use, or disposition of the company’s
        assets that could have a material effect on the financial
        statements.
  Because
        of the inherent limitations of internal control over financial reporting,
        including the possibility of collusion or improper management override of
        controls, material misstatements due to error or fraud may not be prevented
        or
        detected on a timely basis. Also, projections of any evaluation of the
        effectiveness of the internal control over financial reporting to future
        periods
        are subject to the risk that the controls may become inadequate because of
        changes in conditions, or that the degree of compliance with the policies
        or
        procedures may deteriorate.
  In
        our
        opinion, management’s assessment that the Company maintained effective internal
        control over financial reporting as of December 31, 2005, is fairly stated,
        in all material respects, based on the criteria established in *Internal
        Control - Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission. Also,
        in
        our opinion, the Company maintained, in all material respects, effective
        internal control over financial reporting as of December 31, 2005, based on
        the criteria established in *Internal
        Control - Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission.
  We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the consolidated financial statements of
        the
        Company as of and for the year ended December 31, 2005, and our report
        dated February 28, 2006 expressed an unqualified opinion on those financial
        statements.
  
 /s/
        Deloitte & Touche LLP
 Deloitte
        & Touche LLP
 Indianapolis,
        Indiana
 February
        28, 2006
  -
              24
              -
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  To
        the
        Board of Directors and Shareholders of
 Home
        Federal Bancorp
 Columbus,
        Indiana
 
 We
        have
        audited the accompanying consolidated balance sheets of Home Federal Bancorp
        and
        its subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the
        related consolidated statements of income, shareholders' equity, and cash
        flows
        for each of the three years in the period ended December 31, 2005. These
        consolidated financial statements are the responsibility of the Company's
        management. Our responsibility is to express an opinion on these financial
        statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, such consolidated financial statements present fairly, in all material
        respects, the financial position of the Home Federal Bancorp and subsidiaries
        at
        December 31, 2005 and 2004, and the results of their operations and their
        cash
        flows for each of the three years in the period ended December 31, 2005,
        in
        conformity with accounting principles generally accepted in the United States
        of
        America.
 
 We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the effectiveness of the Company's internal
        control over financial reporting as of December 31, 2005, based on the criteria
        established in *Internal
        Control—Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission and
        our
        report dated February 28, 2006 expressed an unqualified opinion on management's
        assessment of the effectiveness of the Company's internal control over financial
        reporting and an unqualified opinion on the effectiveness of the Company's
        internal control over financial reporting.
 
 
 /s/
        Deloitte & Touche LLP
 Deloitte
        & Touche LLP
 Indianapolis,
        Indiana
 February
        28, 2006
  -
            25
            -
  **CONSOLIDATED
        BALANCE SHEETS**
 (in
        thousands except share data)
 **Dec
                  2005**
              
              **Dec
                  2004****Assets:**Cash
              
              $
              30,642
              
              $
              24,729Interest-bearing
                  deposits
              
              
              23,094
              
              
              27,591Total
                  cash and cash equivalents
              
              
              53,736
              
              
              52,320Securities
                  available for sale at fair value (amortized cost $126,146
                  and$125,086)
              
              
              123,351
              
              
              124,790Securities
                  held to maturity at amortized cost (fair value $1,796
                  and$1,801)
              
              
              1,806
              
              
              1,779Loans
                  held for sale (fair value $4,859
                  and$2,653)
              
              
              4,795
              
              
              2,617Loans
                  receivable, net of allowance for loan losses of $6,753
                  and$7,864
              
              
              608,556
              
              
              629,490Investments
                  in joint ventures
              
              
              2,486
              
              
              3,550Federal
                  Home Loan Bank stock
              
              
              9,965
              
              
              9,965Accrued
                  interest receivable, net
              
              
              3,942
              
              
              3,700Premises
                  and equipment, net
              
              
              17,781
              
              
              15,855Real
                  estate owned
              
              
              271
              
              
              2,019Prepaid
                  expenses and other assets
              
              
              9,351
              
              
              8,909Cash
                  surrender value of life insurance
              
              
              12,919
              
              
              11,818Goodwill,
                  net
              
              
              1,695
              
              
              1,395**Total
                  Assets**
              
              **$**
              **850,654**
              ****
              **$**
              **868,207****Liabilities
                  and Shareholders' Equity:**Liabilities:Deposits
              
              $
              657,339
              
              $
              640,181Federal
                  Home Loan Bank advances
              
              
              86,633
              
              
              125,446Senior
                  debt
              
              
              14,242
              
              
              14,242Other
                  borrowings
              
              
              166
              
              
              211Advance
                  payments by borrowers for taxes and insurance
              
              
              121
              
              
              48Accrued
                  expenses and other liabilities
              
              
              19,115
              
              
              10,715Total
                  liabilities
              
              
              777,616
              
              
              790,843Commitsments
                  and contingenciesShareholders'
                  equityNo
                  par preferred stock; Authorized:2,000,000sharesIssued
                  and outstanding: NoneNo
                  par common stock; Authorized:15,000,000sharesIssued
                  and outstanding:3,815,657and4,027,991
              
              
              15,152
              
              
              13,514Retained
                  earnings, restricted
              
              
              59,723
              
              
              64,138Accumulated
                  other comprehensive loss, net
              
              
              (1,837
              )
              
              (288
              )Total
                  shareholders' equity
              
              
              73,038
              
              
              77,364**Total
                  Liabilities and Shareholders' Equity**
              
              **$**
              **850,654**
              ****
              **$**
              **868,207**
 
 See
        notes
        to consolidated financial statements
  -
            26
            -
  **CONSOLIDATED
        STATEMENTS OF INCOME**
 (in
        thousands except per share data)
 **Year**
                **Ended**
              
              **Year**
                **Ended**
              
              **Year**
                **Ended****Dec
                  2005**
              
              **Dec
                  2004**
              
              **Dec
                  2003****Interest
                  Income:**Loans
                  receivable
              
              $
              39,610
              
              $
              38,372
              
              $
              41,313Securities
                  available for sale and held to maturity
              
              
              4,652
              
              
              4,109
              
              
              3,932Other
                  interest income
              
              
              714
              
              
              265
              
              
              357Total
                  interest income
              
              
              44,976
              
              
              42,746
              
              
              45,602**Interest
                  Expense:**Deposits
              
              
              13,265
              
              
              10,832
              
              
              12,204Advances
                  from Federal Home Loan Bank
              
              
              5,743
              
              
              7,627
              
              
              9,221Other
                  borrowings
              
              
              809
              
              
              700
              
              
              839Total
                  interest expense
              
              
              19,817
              
              
              19,159
              
              
              22,264Net
                  interest income
              
              
              25,159
              
              
              23,587
              
              
              23,338Provision
                  for loan losses
              
              
              808
              
              
              1,770
              
              
              1,268Net
                  interest income after provision for loan losses
              
              
              24,351
              
              
              21,817
              
              
              22,070**Other
                  Income:**Gain
                  on sale of loans
              
              
              1,539
              
              
              2,651
              
              
              7,628Gain
                  (loss) on sale of securities available for sale
              
              
              -
              
              
              -
              
              
              (83
              )Income
                  from joint ventures
              
              
              443
              
              
              172
              
              
              668Insurance,
                  annuity income, other fees
              
              
              2,134
              
              
              1,823
              
              
              1,677Service
                  fees on checking accounts
              
              
              3,436
              
              
              2,950
              
              
              2,715Net
                  gain on real estate owned
              
              
              123
              
              
              211
              
              
              197Loan
                  servicing income, net of impairments
              
              
              1,354
              
              
              654
              
              
              575Miscellaneous
              
              
              1,267
              
              
              1,222
              
              
              1,301Total
                  other income
              
              
              10,296
              
              
              9,683
              
              
              14,678**Other
                  Expenses:**Compensation
                  and employee benefits
              
              
              14,502
              
              
              13,419
              
              
              12,110Occupancy
                  and equipment
              
              
              3,679
              
              
              3,166
              
              
              3,027Service
                  bureau expense
              
              
              1,103
              
              
              1,008
              
              
              957Federal
                  insurance premium
              
              
              88
              
              
              90
              
              
              95Marketing
              
              
              1,110
              
              
              718
              
              
              655Miscellaneous
              
              
              5,094
              
              
              5,392
              
              
              5,241Total
                  other expenses
              
              
              25,576
              
              
              23,793
              
              
              22,085Income
                  before income taxes
              
              
              9,071
              
              
              7,707
              
              
              14,663Income
                  tax provision
              
              
              2,969
              
              
              2,544
              
              
              5,020**Net
                  Income**
              
              **$**
              **6,102**
              ****
              **$**
              **5,163**
              ****
              **$**
              **9,643****Basic
                  Earnings per Common Share**
              
              **$**
              **1.57**
              ****
              **$**
              **1.25**
              ****
              **$**
              **2.26****Diluted
                  Earnings per Common Share**
              
              **$**
              **1.53**
              ****
              **$**
              **1.21**
              ****
              **$**
              **2.15**
 
 See
        notes
        to consolidated financial statements
  -
            27
            -
  **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS' EQUITY**
 (in
        thousands except share data)
 Shares
                Outstanding
              
              Common
                Stock
              
              Retained
                Earnings
              
              Accumulated
                Other
                Comprehensive
                Income
                  (Loss)
              
              Total
                Shareholders'
                Equity**Balance
                  at December 2002**
              
              
              4,228,859
              
              $
              9,184
              
              $
              68,156
              
              $
              454
              
              $
              77,794Comprehensive
                  income:Net
                  income
              
              
              
              
              
              
              
              
              9,643
              
              
              
              
              
              9,643Change
                  in unrealized gain on securities available for sale, net of
                  reclassification adjustment and tax effect
              
              
              
              
              
              
              
              
              
              
              
              (687
              )
              
              (687
              )Change
                  in fair value of cash flow hedge, net of tax
              
              
              
              
              
              
              
              
              
              
              
              203
              
              
              203Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,159Stock
                  options exercised
              
              
              224,346
              
              
              3,128
              
              
              
              
              
              
              
              
              3,128Stock
                  repurchased
              
              
              (140,400
              )
              
              (209
              )
              
              (3,366
              )
              
              
              
              
              (3,575
              )Tax
                  benefit related to exercise of non-qualified stock options
              
              
              
              
              
              513
              
              
              
              
              
              
              
              
              513Cash
                  dividends ($.700 per share)
              
              
              
              
              
              
              
              
              (2,997
              )
              
              
              
              
              (2,997
              )**Balance
                  at December 2003**
              
              
              4,312,805
              
              
              12,616
              
              
              71,436
              
              
              (30
              )
              
              84,022Comprehensive
                  income:Net
                  income
              
              
              
              
              
              
              
              
              5,163
              
              
              
              
              
              5,163Change
                  in unrealized loss on securities available for sale, net of
                  reclassification adjustment and tax effect
              
              
              
              
              
              
              
              
              
              
              
              (449
              )
              
              (449
              )Change
                  in fair value of cash flow hedge, net of tax
              
              
              
              
              
              
              
              
              
              
              
              191
              
              
              191Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,905Stock
                  options exercised
              
              
              83,485
              
              
              1,293
              
              
              
              
              
              
              
              
              1,293Stock
                  repurchased
              
              
              (368,299
              )
              
              (549
              )
              
              (9,404
              )
              
              
              
              
              (9,953
              )Tax
                  benefit related to exercise of non-qualified stock options
              
              
              
              
              
              154
              
              
              
              
              
              
              
              
              154Cash
                  dividends ($.750 per share)
              
              
              
              
              
              
              
              
              (3,057
              )
              
              
              
              
              (3,057
              )**Balance
                  at December 2004**
              
              
              4,027,991
              
              
              13,514
              
              
              64,138
              
              
              (288
              )
              
              77,364Comprehensive
                  income:Net
                  income
              
              
              
              
              
              
              
              
              6,102
              
              
              
              
              
              6,102Change
                  in unrealized loss on securities available for sale, net of
                  reclassification adjustment and tax effect
              
              
              
              
              
              
              
              
              
              
              
              (1,637
              )
              
              (1,637
              )Change
                  in fair value of cash flow hedge, net of tax
              
              
              
              
              
              
              
              
              
              
              
              88
              
              
              88Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,553Stock
                  options exercised
              
              
              109,066
              
              
              1,846
              
              
              
              
              
              
              
              
              1,846Stock
                  repurchased
              
              
              (321,400
              )
              
              (478
              )
              
              (7,608
              )
              
              
              
              
              (8,086
              )Tax
                  benefit related to exercise of non-qualified stock options
              
              
              
              
              
              270
              
              
              
              
              
              
              
              
              270Cash
                  dividends ($.750 per share)
              
              
              
              
              
              
              
              
              (2,909
              )
              
              
              
              
              (2,909
              )**Balance
                  at December 2005**
              
              
              **3,815,657**
              
              **$**
              **15,152**
              ****
              **$**
              **59,723**
              ****
              **$**
              **(1,837**
              **)**
              **$**
              **73,038**
 
 See
        notes
        to consolidated financial statements
  -
            28
            -
  **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**
 (in
          thousands)
 **Year**
                **Ended**
              
              **Year**
                **Ended**
              
              **Year**
                **Ended****Dec
                  2005**
              
              **Dec
                  2004**
              
              **Dec
                  2003****Cash
                  Flows From Operating Activities:**Net
                  income
              
              $
              6,102
              
              $
              5,163
              
              $
              9,643Adjustments
                  to reconcile net income to net cash from operating
                  activities:Accretion
                  of discounts, amortization and depreciation
              
              
              1,808
              
              
              2,161
              
              
              2,212Provision
                  for loan losses
              
              
              808
              
              
              1,770
              
              
              1,268Net
                  gain from sale of loans
              
              
              (1,539
              )
              
              (2,651
              )
              
              (7,628
              )Net
                  (gain) loss from sale of securities available for sale
              
              
              -
              
              
              -
              
              
              83Income
                  from joint ventures and net gain from real estate owned
              
              
              (566
              )
              
              (384
              )
              
              (865
              )Net
                  loan fees recognized
              
              
              (216
              )
              
              (79
              )
              
              (22
              )Proceeds
                  from sale of loans held for sale
              
              
              97,079
              
              
              143,661
              
              
              381,900Origination
                  of loans held for sale
              
              
              (97,717
              )
              
              (137,355
              )
              
              (349,984
              )Increase
                  in accrued interest and other assets
              
              
              (1,177
              )
              
              (1,522
              )
              
              (2,805
              )Increase
                  (decrease) in other liabilities
              
              
              7,713
              
              
              (370
              )
              
              336**Net
                  Cash From Operating Activities**
              
              
              **12,295**
              
              
              **10,394**
              
              
              **34,138****Cash
                  Flows From Investing Activities:**Net
                  principal received on loans
              
              
              22,062
              
              
              8,607
              
              
              7,570Proceeds
                  from:Maturities/Repayments
                  of:Securities
                  held to maturity
              
              
              461
              
              
              523
              
              
              1,304Securities
                  available for sale
              
              
              25,895
              
              
              26,266
              
              
              131,136Sales
                  of:Securities
                  available for sale
              
              
              10,048
              
              
              23,256
              
              
              40,078Real
                  estate owned and other asset sales
              
              
              1,706
              
              
              1,422
              
              
              2,328Purchases
                  of:Loans
              
              
              (1,720
              )
              
              (9,116
              )
              
              (10,605
              )Securities
                  available for sale
              
              
              (37,208
              )
              
              (51,998
              )
              
              (182,214
              )Securities
                  held to maturity
              
              
              (490
              )
              
              (471
              )
              
              (100
              )Investment
                  in joint ventures, net
              
              
              1,507
              
              
              2,124
              
              
              1,877Investment
                  in cash surrender value of life insurance
              
              
              (655
              )
              
              -
              
              
              -Acquisition
                  of property and equipment
              
              
              (2,353
              )
              
              (3,400
              )
              
              (2,557
              )**Net
                  Cash From Investing Activities**
              
              
              **19,253**
              
              
              **(2,787**
              **)**
              
              **(11,183**
              **)****Cash
                  Flows From Financing Activities:**Net
                  increase (decrease) in deposits
              
              
              17,158
              
              
              51,515
              
              
              (20,443
              )Proceeds
                  from advances from Federal Home Loan Bank
              
              
              14,000
              
              
              19,500
              
              
              14,700Repayment
                  of advances from Federal Home Loan Bank
              
              
              (52,813
              )
              
              (48,350
              )
              
              (32,039
              )Net
                  decrease from overnight borrowings
              
              
              (45
              )
              
              (413
              )
              
              (1,243
              )Common
                  stock options exercised, net of fractional shares paid
              
              
              1,846
              
              
              1,293
              
              
              3,128Repurchase
                  of common stock
              
              
              (8,086
              )
              
              (9,953
              )
              
              (3,575
              )Payment
                  of dividends on common stock
              
              
              (2,192
              )
              
              (3,057
              )
              
              (2,997
              )**Net
                  Cash From Financing Activities**
              
              
              **(30,132**
              **)**
              
              **10,535**
              
              
              **(42,469**
              **)**Net
                  increase (decrease) in cash and cash equivalents
              
              
              1,416
              
              
              18,142
              
              
              (19,514
              )Cash
                  and cash equivalents, beginning of period
              
              
              52,320
              
              
              34,178
              
              
              53,692**Cash
                  and Cash Equivalents, End of Period**
              
              **$**
              **53,736**
              ****
              **$**
              **52,320**
              ****
              **$**
              **34,178****Supplemental
                  Information:**Cash
                  paid for interest
              
              $
              19,955
              
              $
              19,207
              
              $
              22,398Cash
                  paid for income taxes
              
              $
              2,236
              
              $
              1,939
              
              $
              5,840Assets
                  acquired through foreclosure
              
              $
              1,262
              
              $
              2,086
              
              $
              3,606Goodwill
                  and identifiable intangible assets
              
              $
              400
              
              $
              -
              
              $
              -Real
                  estate owned transferred to property and equipment, net
              
              $
              1,173
              
              $
              -
              
              $
              -Dividends
                  payable
              
              $
              717
              
              $
              -
              
              $
              -
 
 See
        notes
        to consolidated financial statements
  -
            29
            -
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **For
        The Years Ended December 31, 2005, 2004 And 2003**
 
 **1.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING
                  POLICIES**
  The
        accounting policies of Home Federal Bancorp (the “Company") conform to
        accounting principles generally accepted in the United States of America
        and
        prevailing practices within the banking industry. A summary of the more
        significant accounting policies follows:
 
 **Basis
        of Presentation**
 The
        consolidated financial statements include the accounts of the Company and
        its
        wholly-owned subsidiaries, HomeFed Financial Corp. and HomeFederal Bank (the
        “Bank") and its wholly-owned subsidiaries. All significant intercompany balances
        and transactions have been eliminated.
 
 **Description
        of Business**
 The
        Company is a bank holding company. The Bank provides financial services to
        south-central Indiana through its main office in Columbus and 18 other
        full service banking offices.
 
 **Use
        of Estimates**
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the amounts reported in the financial
        statements and accompanying notes. Actual results could differ from those
        estimates. Estimates most susceptible to change in the near term include
        the
        allowance for loan losses, the valuation of mortgage servicing rights, the
        valuation of investments in joint ventures and the fair value of
        securities.
 
 **Cash
        and Cash Equivalents**
 All
        highly liquid investments with an original maturity of three months or less
        are
        considered to be cash equivalents.
 
 **Securities**
 Securities
        are required to be classified as held to maturity, available for sale or
        trading. Debt securities that the Company has the positive intent and ability
        to
        hold to maturity are classified as held to maturity. Debt and equity securities
        not classified as either held to maturity or trading securities are classified
        as available for sale. Only those securities classified as held to maturity
        are
        reported at amortized cost, with those available for sale and trading reported
        at fair value with unrealized gains and losses included in shareholders'
        equity
        or income, respectively. Premiums and discounts are amortized over the
        contractual lives of the related securities using the level yield method.
        Gain
        or loss on sale of securities is based on the specific identification
        method.
 
 **Loans
        Held for Sale**
 Loans
        held for sale consist of fixed rate mortgage loans conforming to established
        guidelines and held for sale to the secondary market. Mortgage loans held
        for
        sale are carried at the lower of cost or fair value determined on an aggregate
        basis. Gains and losses on the sale of these mortgage loans are included
        in
        other income.
 
 **Mortgage
        Servicing Rights**
 The
        Company recognizes the rights to service mortgage loans as separate assets,
        which are included in other assets in the consolidated balance sheet. The
        total
        cost of loans when sold is allocated between loans and MSR’s, based on the
        relative fair values of each. MSR’s are subsequently carried at the lower of the
        initial carrying value, adjusted for amortization, or fair value. MSR’s are
        evaluated for impairment based on the fair value of those rights. The Company
        uses a present value cash flow valuation model to establish the fair value
        of
        the MSR’s. Factors included in the calculation of fair value of the MSR’s
        include estimating the present value of future net cash flows, market loan
        prepayment speeds for similar loans, discount rates, servicing costs, and
        other
        economic factors. Servicing rights are amortized over the estimated period
        of
        net servicing revenue. It is likely that these economic factors will change
        over
        the life of the MSR’s, resulting in different valuations of the MSR’s. The
        differing valuations will affect the carrying value of the MSR’s on the balance
        sheet as well as the income recorded from loan servicing in the income
        statement.
  **Loans**
 Interest
        on real estate, commercial and installment loans is accrued over the term
        of the
        loans on a level yield basis. The recognition of interest income is discontinued
        when, in management’s judgment, the interest will not be collectible in the
        normal course of business.
 
 **Loan
        Origination Fees**
 Nonrefundable
        origination fees, net of certain direct origination costs, are deferred and
        recognized as a yield adjustment over the life of the underlying loan. Any
        unamortized fees on loans sold are credited to gain on sale of loans at the
        time
        of sale.
  -
            30
            -
 **Uncollected
        Interest**
 An
        allowance for the loss of uncollected interest is generally provided on loans
        which are more than 90 days past due. The only loans which are 90 days past
        due
        and do not have an allowance for the loss of interest, are loans where the
        Bank
        is guaranteed reimbursement of interest by either a mortgage insurance contract
        or by a government agency. If neither of these criteria is met, an allowance
        is
        established by a charge to interest income equal to all interest previously
        accrued, and income is subsequently recognized only to the extent that cash
        payments are received until, in management's judgment, the borrower's ability
        to
        make periodic interest and principal payments returns to normal, in which
        case
        the loan is returned to accrual status.
 
 **Allowance
        for Loan Losses**
 A
        loan is
        considered impaired when it is probable the Company will be unable to collect
        all contractual principal and interest payments due in accordance with the
        terms
        of the loan agreement. Impaired loans are measured based on the loan’s
        observable market price or the estimated fair value of the collateral if
        the
        loan is collateral dependent. The amount of impairment, if any, and any
        subsequent changes are included in the allowance for loan losses.
  The
        allowance for loan losses is established through a provision for loan losses.
        Loan losses are charged against the allowance when management believes the
        loans
        are uncollectible. Subsequent recoveries, if any, are credited to the
        allowance.
 
 The
        allowance for loan losses is maintained at a level management considers to
        be
        adequate to absorb probable loan losses inherent in the portfolio, based
        on
        evaluations of the collectibility and historical loss experience of loans.
        The
        allowance is based on ongoing assessments of the probable estimated losses
        inherent in the loan portfolio. The Company’s methodology for assessing the
        appropriate allowance level consists of several key elements, as described
        below.
 
 All
        delinquent loans that meet regulatory requirements are included on the Asset
        Watch List. The Asset Watch List is reviewed quarterly by the Asset Watch
        Committee for any classification beyond the regulatory rating based on the
        loans' delinquency.
 
 Commercial
        and commercial real estate loans are individually risk rated pursuant to
        the
        loan policy. Homogeneous loans such as consumer and residential mortgage
        loans
        are not individually risk rated by management. They are risk rated based
        on
        historical portfolio data that management believes will provide a good basis
        for
        the loans' quality. For all loans not listed individually on the Asset Watch
        List, historical loss rates based on the last four years are the basis for
        developing expected charge-offs for each pool of loans.
 
 Historical
        loss rates for commercial and consumer loans may be adjusted for significant
        factors that, in management’s judgment, reflect the impact of any current
        conditions on loss recognition. Factors which management considers in the
        analysis include the effects of the local economy, trends in the nature and
        volume of loans (delinquencies, charge-offs, nonaccrual and problem loans),
        changes in the internal lending policies and credit standards, collection
        practices, and examination results from bank regulatory agencies and the
        Company’s credit review function.
 
 Finally,
        a portion of the allowance is maintained in recognition of the inherent
        inability to precisely determine the loss potential based on factors such
        as
        current economic conditions, trends in the Company’s loan portfolio delinquency,
        losses and recoveries, level of under performing and nonperforming loans,
        and
        concentrations of loans in any one industry.
  **Real
        Estate Owned**
 Real
        estate owned represents real estate acquired through foreclosure or deed
        in lieu
        of foreclosure and is recorded at the lower of fair value or carrying amount.
        When property is acquired, it is recorded at net realizable value at the
        date of
        acquisition, with any resulting write-down charged against the allowance
        for
        loan losses. Any subsequent deterioration of the property is charged directly
        to
        real estate owned expense. Costs relating to the development and improvement
        of
        real estate owned are capitalized, whereas costs relating to holding and
        maintaining the properties are charged to expense.
 
 **Premises
        and Equipment**
 Premises
        and equipment are carried at cost less accumulated depreciation. Depreciation
        is
        computed on the straight-line method over estimated useful lives that range
        from
        three to thirty-nine years.
 
 **Derivative
        Financial Instruments**
 Statement
        of Financial Accounting Standards, (“SFAS”), No. 133, “Accounting for Derivative
        Instruments and Hedging Activities,” establishes accounting and reporting
        standards for derivative instruments, including certain derivative instruments
        embedded in other contracts. The Company records all derivatives, whether
        designated as a hedge, or not, on the balance sheet at fair value. The Company
        designates its fixed rate and variable rate interest rate swaps as fair value
        and cash flow hedge instruments, respectively. If the derivative is designated
        as a fair value hedge, the changes in fair value of the derivative and of
        the
        hedged item attributable to the hedged risk are recognized in earnings. If
        the
        derivative is designated as a cash flow hedge, the changes in fair value
        of the
        derivative and of the hedged item attributable to the hedged risk are recorded
        in accumulated OCI, net of income taxes.
  -
            31
            -
 The
        Company has only limited involvement with derivative financial instruments
        and
        does not use them for trading purposes. The Company has entered into interest
        rate swap agreements as a means of managing its interest rate exposure on
        certain fixed rate commercial loans and variable rate debt obligations. As
        of
        December 31 ,
        2005 ,
        the
        notional amount of the Company’s two outstanding fair value interest rate swaps
        on commercial loans was $ 4.9 million
        with maturities in 2008 and 2009, as discussed in Note 3. The notional amount
        of
        the Company’s outstanding cash flow interest rate swap on debt obligations was $4.6 million
        with maturity in 2006, as discussed in Note 10.
 
 As
        of
        December 31, 2005 ,
        the
        fair value of the fair value hedge was a liability of $ 181,000 .
        As of
        December 31, 2005 ,
        the
        fair value of the cash flow hedge was a liability of $ 18,000 .
        The
        total income statement impact resulting from the fair value and cash flow
        hedges
        was zero, as management has determined there to be no ineffectiveness in
        accordance with SFAS No. 133.
 
 **Goodwill**
 In
        accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the
        Company annually evaluates goodwill for impairment. Management determined
        that
        there was no impairment charge resulting from its annual impairment
        test.
 
 In
        the
        fourth quarter of 2005, the Company purchased a retail brokerage book of
        business on the south side of Indianapolis. This purchase increased goodwill
        $300,000.
 
 **Income
        Taxes**
 The
        Company and its wholly-owned subsidiaries file consolidated income tax returns.
        Deferred income tax assets and liabilities reflect the impact of temporary
        differences between amounts of assets and liabilities recorded for financial
        reporting purposes and basis of such assets and liabilities as measured by
        tax
        laws and regulations.
  Earnings
        per Common Share
 Earnings
        per share of common stock are based on the weighted average number of basic
        shares and dilutive shares outstanding during the year.
 The
        following is a reconciliation of the weighted average common shares for the
        basic and diluted earnings per share computations:
  **Year**
                **Ended**
                **Dec
                  2005**
              
              **Year**
                **Ended**
                **Dec
                  2004**
              
              **Year**
                **Ended**
                **Dec
                  2003**Basic
                  Earnings per Share:Weighted
                  average common shares
              
              
              3,897,501
              
              
              4,117,085
              
              
              4,267,257Diluted
                  Earnings per Share:Weighted
                  average common shares
              
              
              3,897,501
              
              
              4,117,085
              
              
              4,267,257Dilutive
                  effect of stock options
              
              
              95,554
              
              
              146,038
              
              
              216,088Weighted
                  average common and incremental shares
              
              
              3,993,055
              
              
              4,263,123
              
              
              4,483,345
 
 Anti-dilutive
        options are summarized as follows:
  **As
                  Of**
              
              **Dec
                  2005**
              
              **Dec
                  2004**
              
              **Dec
                  2003**Anti-dilutive
                  options
              
              
              128,974
              
              
              92,599
              
              
              -
  -
            32
            -
 **Comprehensive
        Income**
 The
        following is a summary of the Company's comprehensive income: (dollars in
        thousands)
 
 **Year**
                **Ended**
                **Dec
                  2005**
              
              **Year**
                **Ended**
                **Dec
                  2004**
              
              **Year**
                **Ended**
                **Dec
                  2003**Net
                  Income
              
              $
              6,102
              
              $
              5,163
              
              $
              9,643Other
                  comprehensive income (loss):Unrealized
                  holding losses from securities available for sale
              
              
              (2,500
              )
              
              (691
              )
              
              (1,127
              )Reclassification
                  adjustment for losses realized in income
              
              
              -
              
              
              -
              
              
              83Unrealized
                  gains from cash flow hedge
              
              
              145
              
              
              317
              
              
              336Net
                  unrealized losses
              
              
              (2,355
              )
              
              (374
              )
              
              (708
              )Tax
                  effect
              
              
              806
              
              
              116
              
              
              224Other
                  comprehensive loss, net of tax
              
              
              (1,549
              )
              
              (258
              )
              
              (484
              )**Comprehensive
                  Income**
              
              **$**
              **4,553**
              ****
              **$**
              **4,905**
              ****
              **$**
              **9,159**
 
 **Segments**
 In
        accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and
        Related Information,” management has concluded that the Company is comprised of
        a single operating segment, community banking activities, and has disclosed
        all
        required information relating to its one operating segment. Management considers
        parent company activity to represent an overhead function rather than an
        operating segment. The Company operates in one geographical area and does
        not
        have a single external customer from which it derives 10 percent or more
        of its
        revenue.
  **Stock
        Based Compensation**
 The
        Company has stock-based employee compensation plans, which are described
        more
        fully in Note 14. The Company accounts for those plans under the recognition
        and
        measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to
        Employees,” and related interpretations. No stock-based employee compensation
        cost is reflected in net income, as all options granted under those plans
        had an
        exercise price equal to the market value of the underlying common stock on
        the
        date of grant. The following table illustrates the effect on net income and
        earnings per share if the Company had applied the fair value recognition
        provisions of SFAS Statement No. 123, “Accounting for Stock-Based Compensation,”
to stock-based employee compensation. (dollars in thousands)
 
 (dollars
                  in thousands, except share data)
              
              **Year**
                **Ended**
                **Dec
                  2005**
              
              **Year**
                **Ended**
                **Dec
                  2004**
              
              **Year**
                **Ended**
                **Dec
                  2003**Net
                  income, as reported
              
              $
              6,102
              
              $
              5,163
              
              $
              9,643Deduct:
                  Total stock-based employee compensation expense determined under
                  fair
                  value based method for all awards, net of related tax
                  effects
              
              
              (226
              )
              
              (55
              )
              
              (206
              )Pro
                  forma net income
              
              $
              **5,876**
              
              $
              **5,108**
              
              $
              **9,437**Earnings
                  per share:Basic---as
                  reported
              
              $
              1.57
              
              $
              1.25
              
              $
              2.26Basic---pro
                  forma
              
              $
              1.51
              
              $
              1.24
              
              $
              2.21Diluted---as
                  reported
              
              $
              1.53
              
              $
              1.21
              
              $
              2.15Diluted---pro
                  forma
              
              $
              1.47
              
              $
              1.20
              
              $
              2.10
 
 The
        pro
        forma amounts are not representative of the effects on reported net income
        for
        future years.
 
 -
            33
            -
 **New
        Accounting Pronouncements**
 
 SFAS
        123-R (Revised 2004) is effective as of the beginning of the first interim
        or annual
        reporting period of the registrant’s first fiscal year beginning on or after
        June 15, 2005.This
        Statement is a revision of SFAS No. 123, “Accounting for Stock-Based
        Compensation.” This Statement focuses primarily on accounting for transactions
        in which an entity obtains employee services in share-based payment
        transactions.Managementdoes
        not
        believethe
        adoption ofSFAS
        No.
        123 - Rwill
        have a material effect on its consolidated financial
        statements.
 
 EITF
        Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application
        to Certain Investments” provides guidance for determining when an investment is
        considered impaired (when fair value is less than cost), for evaluating whether
        impairment is other-than-temporary, and, if other-than-temporary, requiring
        recognition of an impairment loss equal to the difference between the
        investment's cost and its fair value.   Generally, an impairment is
        considered other-than-temporary unless:  (a) the investor has the ability
        and intent to hold an investment for a reasonable period of time sufficient
        for
        a forecasted recovery of fair value equal to (or more than) the cost of the
        investment; and (b) evidence indicating that the cost of the investment is
        recoverable within a reasonable period of time outweighs evidence to the
        contrary.  The FASB, delayed the effective date for the measurement and
        recognition guidance contained in paragraphs 10 - 20 of EITF Issue 03-1 by
        FSP
        EITF Issue 03-1-1, "Effective Date of Paragraphs 10-20 of EITF Issue No.
        03-1,
        'The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
        Investments," posted September 30, 2004. The delay of the effective date
        for
        paragraphs 10-20 will be superseded concurrent with the final issuance of
        proposed FSP EITF Issue 03-1-a, "Implication Guidance for the Application
        of
        Paragraph 16 of EITF Issue No. 03-1, 'The Meaning of Other-Than-Temporary
        Impairment and Its Application to Certain Investments.“ Gross unrealized losses
        on available for sale securities and held to maturity securities were $2,863,000
        and $21,000, respectively, at December 31, 2005. Management has
        determined the
        adoption of EITF
        03-1
        and FSP EITF Issue 03-1-1 did
        not
        have a material effect on its consolidated financial statements.
 
 FSP
        Nos.
        FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its
        Application to Certain Investments”, was posted November 3, 2005. This FSP
        addresses the determination as to when an investment is considered impaired,
        whether that impairment is other than temporary, and the measurement of an
        impairment loss. This FSP also includes accounting considerations subsequent
        to
        the recognition of an other-than-temporary impairment and requires certain
        disclosures about unrealized losses that have not been recognized as
        other-than-temporary impairments. The guidance in this FSP amends FASB
        Statements No. 115, Accounting for Certain Investments in Debt and Equity
        Securities, and No. 124, Accounting for Certain Investments Held by
        Not-for-Profit Organizations, and APB Opinion No. 18, The Equity Method of
        Accounting for Investments in Common Stock. Management has
        determined the
        adoption of FSP Nos. FAS 115-1 and FAS 124-1  did
        not
        have a material effect on its consolidated financial
        statements.
  -
            34
            -
  **2.**
              **SECURITIES**
  Securities
        are summarized as follows: (in thousands)
 **December
                      31, 2005**
                  
                  **December
                      31, 2004****Amortized**
                  
                  **Gross
                      Unrealized**
                  
                  **Fair**
                  
                  **Amortized**
                  
                  **Gross
                      Unrealized**
                  
                  **Fair****Cost**
                  
                  **Gains**
                  
                  **Losses**
                  
                  **Value**
                  
                  **Cost**
                  
                  **Gains**
                  
                  **Losses**
                  
                  **Value****Held
                      to Maturity:**Municipal
                      bonds
                  
                  $
                  775
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  775
                  
                  $
                  1,020
                  
                  $
                  4
                  
                  $
                  -
                  
                  $
                  1,024Certificate
                      of deposit
                  
                  
                  100
                  
                  
                  -
                  
                  
                  -
                  
                  
                  100
                  
                  
                  100
                  
                  
                  -
                  
                  
                  -
                  
                  
                  100Mortgage
                      backed securities
                  
                  
                  931
                  
                  
                  11
                  
                  
                  (21
                  )
                  
                  921
                  
                  
                  659
                  
                  
                  20
                  
                  
                  (2
                  )
                  
                  677**Total
                      Held to Maturity**
                  
                  **$**
                  **1,806**
                  
                  **$**
                  **11**
                  ****
                  **$**
                  **(21**
                  **)**
                  **$**
                  **1,796**
                  ****
                  **$**
                  **1,779**
                  ****
                  **$**
                  **24**
                  ****
                  **$**
                  **(2**
                  **)**
                  **$**
                  **1,801****Available
                      for Sale:**Agency
                      bonds
                  
                  $
                  44,742
                  
                  $
                  -
                  
                  $
                  (847
                  )
                  $
                  43,895
                  
                  $
                  40,073
                  
                  $
                  35
                  
                  $
                  (182
                  )
                  $
                  39,926Municipal
                      bonds
                  
                  
                  22,834
                  
                  
                  14
                  
                  
                  (349
                  )
                  
                  22,499
                  
                  
                  15,293
                  
                  
                  162
                  
                  
                  (9
                  )
                  
                  15,446Collateralized
                      mortgage obligations
                  
                  
                  23,645
                  
                  
                  2
                  
                  
                  (598
                  )
                  
                  23,049
                  
                  
                  31,064
                  
                  
                  58
                  
                  
                  (216
                  )
                  
                  30,906Mortgage
                      backed securities
                  
                  
                  28,117
                  
                  
                  52
                  
                  
                  (950
                  )
                  
                  27,219
                  
                  
                  31,272
                  
                  
                  153
                  
                  
                  (273
                  )
                  
                  31,152Corporate
                      debt
                  
                  
                  1,929
                  
                  
                  -
                  
                  
                  (33
                  )
                  
                  1,896
                  
                  
                  1,926
                  
                  
                  45
                  
                  
                  (31
                  )
                  
                  1,940Equity
                      mutual funds
                  
                  
                  4,804
                  
                  
                  -
                  
                  
                  (86
                  )
                  
                  4,718
                  
                  
                  5,383
                  
                  
                  -
                  
                  
                  (38
                  )
                  
                  5,345Equity
                      securities
                  
                  
                  75
                  
                  
                  -
                  
                  
                  -
                  
                  
                  75
                  
                  
                  75
                  
                  
                  -
                  
                  
                  -
                  
                  
                  75**Total
                      Available for Sale**
                  
                  **$**
                  **126,146**
                  
                  **$**
                  **68**
                  ****
                  **$**
                  **(2,863**
                  **)**
                  **$**
                  **123,351**
                  ****
                  **$**
                  **125,086**
                  ****
                  **$**
                  **453**
                  ****
                  **$**
                  **(749**
                  **)**
                  **$**
                  **124,790**
 Certain
        securities, with amortized cost of $ 6.6 million
        and fair value of $ 6.5 million
        at December 31, 2005 and
        amortized cost and fair value of $8.9 million at December 31, 2004 were pledged
        as collateral for the Bank's treasury, tax and loan account at the Federal
        Reserve, for Federal Home Loan Bank Advances, and for certain trust, IRA
        and
        KEOGH accounts.
 
 The
        amortized cost and fair value of securities at December 31, 2005 by
        contractual maturity are summarized as follows: (in thousands)
 **Held
                    to Maturity**
                
                **Available
                    for Sale****Amortized**
                  **Cost**
                
                **Fair**
                  **Value**
                
                **Yield**
                
                **Amortized**
                  **Cost**
                
                **Fair**
                  **Value**
                
                **Yield**Agency
                    bonds:Due
                    in one year or less
                
                $
                -
                
                $
                -
                
                
                -
                
                $
                11,497
                
                $
                11,429
                
                
                2.97
                %Due
                    after 1 year through 5 years
                
                
                -
                
                
                -
                
                
                -
                
                
                33,245
                
                
                32,466
                
                
                3.62
                %Due
                    after 10 years
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Municipal
                    bonds:Due
                    in one year or less
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Due
                    after 1 year through 5 years
                
                
                -
                
                
                -
                
                
                -
                
                
                9,551
                
                
                9,386
                
                
                4.03
                %Due
                    after 5 years through 10 years
                
                
                535
                
                
                535
                
                
                7.43
                %
                
                12,966
                
                
                12,803
                
                
                5.39
                %Due
                    after 10 years
                
                
                240
                
                
                240
                
                
                7.77
                %
                
                317
                
                
                310
                
                
                5.50
                %Certificate
                    of deposit:Due
                    in one year or less
                
                
                100
                
                
                100
                
                
                4.30
                %
                
                -
                
                
                -
                
                
                -Collateralized
                    mortgage obligations
                
                
                -
                
                
                -
                
                
                -
                
                
                23,645
                
                
                23,049
                
                
                3.91
                %Mortgage
                    backed securities
                
                
                931
                
                
                921
                
                
                5.74
                %
                
                28,117
                
                
                27,219
                
                
                4.10
                %Corporate
                    debt:Due
                    after 10 years
                
                
                -
                
                
                -
                
                
                -
                
                
                1,929
                
                
                1,896
                
                
                4.01
                %Equity
                    mutual funds
                
                
                -
                
                
                -
                
                
                -
                
                
                4,804
                
                
                4,718
                
                
                3.97
                %Equity
                    securities
                
                
                -
                
                
                -
                
                
                -
                
                
                75
                
                
                75
                
                
                -**Total**
                
                **$**
                **1,806**
                
                **$**
                **1,796**
                ****
                ****
                **6.43**
                **%**
                **$**
                **126,146**
                ****
                **$**
                **123,351**
                
                
                **3.96**
                **%**
  Activities
        related to the sales of securities available for sale and called securities
        are
        summarized as follows: (in thousands)
 **Year**
                  **Ended**
                
                **Year**
                  **Ended**
                
                **Year**
                  **Ended****Dec
                    2005**
                
                **Dec
                    2004**
                
                **Dec
                    2003**Proceeds
                    from sales
                
                $
                10,048
                
                $
                23,256
                
                $
                40,078Gross
                    gains on sales
                
                
                -
                
                
                -
                
                
                37Gross
                    losses on sales
                
                
                -
                
                
                -
                
                
                120
  Taxable
          interest income and non-taxable interest income earned on the investment
          portfolio is summarized as follows: (in thousands)
 **Year**
                    **Ended**
                  
                  **Year**
                    **Ended**
                  
                  **Year**
                    **Ended****Dec
                      2005**
                  
                  **Dec
                      2004**
                  
                  **Dec
                      2003**Taxable
                      interest income
                  
                  $
                  4,111
                  
                  $
                  3,614
                  
                  $
                  3,564Non-taxable
                      interest income
                  
                  
                  541
                  
                  
                  495
                  
                  
                  368Total
                      interest income
                  
                  $
                  4,652
                  
                  $
                  4,109
                  
                  $
                  3,932
  -
            35
            -
 The
        majority of unrealized losses in the portfolio resulted from increases in
        market interest rates and not from deterioration in the creditworthiness
        of the
        issuer. The total number of security positions in the investment portfolio
        that
        were in an unrealized loss position at December 31, 2005 is 139 .
 
 Investments
        that have been in a continuous unrealized loss position for longer than one
        month as of December 31, 2005 are
        summarized as follows: (in thousands)
 **Less
                      than**
                    **Twelve
                      Months**
                  
                  **Twelve
                      Months**
                    **Or
                      Longer**
                  
                  **Total****Description
                      of Securities**
                  
                  **Fair**
                    **Value**
                  
                  **Unrealized**
                    **Losses**
                  
                  **Fair**
                    **Value**
                  
                  **Unrealized**
                    **Losses**
                  
                  **Fair**
                    **Value**
                  
                  **Unrealized**
                    **Losses**Agency
                      bonds
                  
                  $
                  16,856
                  
                  $
                  (261
                  )
                  $
                  26,041
                  
                  $
                  (587
                  )
                  $
                  42,897
                  
                  $
                  (848
                  )Collateralized
                      mortgage obligations
                  
                  
                  1,364
                  
                  
                  (17
                  )
                  
                  21,077
                  
                  
                  (580
                  )
                  
                  22,441
                  
                  
                  (597
                  )Mortgage
                      backed securities
                  
                  
                  6,574
                  
                  
                  (178
                  )
                  
                  19,417
                  
                  
                  (793
                  )
                  
                  25,991
                  
                  
                  (971
                  )Corporate
                      debt
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,896
                  
                  
                  (33
                  )
                  
                  1,896
                  
                  
                  (33
                  )Municipal
                      bonds
                  
                  
                  11,715
                  
                  
                  (205
                  )
                  
                  5,005
                  
                  
                  (96
                  )
                  
                  16,720
                  
                  
                  (301
                  )Equity
                      mutual funds
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3,710
                  
                  
                  (86
                  )
                  
                  3,710
                  
                  
                  (86
                  )**Total
                      Temporarily Impaired Securities**
                  
                  **$**
                  **36,509**
                  
                  **$**
                  **(661**
                  **)**
                  **$**
                  **77,146**
                  ****
                  **$**
                  **(2,175**
                  **)**
                  **$**
                  **113,655**
                  ****
                  **$**
                  **(2,836**
                  **)**
 
 **3.**
              **LOANS
                  RECEIVABLE**
  Loans
        receivable are summarized as follows: (in thousands)
  **As
                  Of**
              
              **Dec
                  2005**
              
              **Dec
                  2004**First
                  mortgage loans:Residential
                  single family
              
              $
              161,936
              
              $
              172,738Commercial
                  and multi-family
              
              
              177,748
              
              
              180,175Property
                  under construction
              
              
              57,161
              
              
              84,655Unimproved
                  land
              
              
              1,615
              
              
              2,730Home
                  equity
              
              
              40,710
              
              
              37,132Second
                  mortgage
              
              
              47,183
              
              
              43,214Commercial
              
              
              105,827
              
              
              105,495Mobile
                  home
              
              
              2,537
              
              
              3,289Automobile
              
              
              27,335
              
              
              24,921Consumer
              
              
              3,814
              
              
              4,157Savings
                  account
              
              
              2,266
              
              
              2,340Gross
                  loans receivable
              
              
              628,132
              
              
              660,846Allowance
                  for loan losses
              
              
              (6,753
              )
              
              (7,864
              )Deferred
                  loan fees, net
              
              
              (261
              )
              
              (476
              )Undisbursed
                  loan proceeds
              
              
              (12,562
              )
              
              (23,016
              )**Loans
                  Receivable, Net**
              
              **$**
              **608,556**
              ****
              **$**
              **629,490**
  The
        Bank
        originates both adjustable and fixed rate loans. The adjustable rate loans
        have
        interest rate adjustment limitations and are indexed to various indices.
        Adjustable residential mortgages are generally indexed to the one year Treasury
        constant maturity rate; adjustable consumer loans are generally indexed to
        the
        prime rate; adjustable commercial loans are generally indexed to either the
        prime rate or the one, three or five year Treasury constant maturity rate.
        Future market factors may affect the correlation of the interest rates the
        Bank
        pays on the short-term deposits that have been primarily utilized to fund
        these
        loans.
 
 The
        principal balance of loans on nonaccrual status totaled approximately
        $3 .1 million
        at December 31, 2005 and
        $9.5
        million at December 31, 2004. The Bank would have recorded interest income
        of $465,000 and  $906,000
        for the years ended December 31, 2005 and 2004
        if loans on non-accrual status had been current in accordance with their
        original terms. Actual interest received was $160,000
        and $407,000  for
        the
        years ended December 31, 2005 and
        2004, respectively. The Bank agreed to modify the terms of certain loans
        to
        customers who were experiencing financial difficulties. Modifications included
        forgiveness of interest, reduced interest rates and/or extensions of the
        loan
        term. The principal balance at December 31, 2005
        and December
        31, 2004 on these restructured loans was $809,000
        and $ 3.1
        million ,
        respectively.
 
 The
        Bank's primary lending area is south-central Indiana. Virtually all of the
        Bank's loans originated and purchased are to borrowers located within the
        state
        of Indiana. The Bank originates and purchases commercial real estate loans,
        which totaled $177.7 million and $180.2 million at December 31, 2005
        and 2004,
        respectively. These loans are considered by management to be of somewhat
        greater
        risk of collectibility due to the dependency on income production or future
        development of the real estate. Of the commercial real estate loans,
        $19 .6 million
        and $27.0 million were collateralized by multi-family residential property
        at
        December 31, 2005
        and 2004,
        respectively. The Bank also purchases and originates commercial loans.
        Collateral for HomeFederal Bank'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 indices. 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 December 31, 2005
        and
        2004, HomeFederal Bank's total loan portfolio consisted of commercial loans
        of
        $105.8 million and $105.5 million, respectively.
 
 -
            36
            -
 The
        Company has entered into two fair value interest rate swap agreements with
        KeyBank on two fixed rate commercial loans. In the first agreement the Company
        will receive variable rate payments at the thirty-day London inter bank offering
        rate (“LIBOR”) index and make fixed rate payments at 6.28%. The
        notional amount on the swap was $3.1 million as of December 31, 2005 .
        The
        thirty-day LIBOR was 4 .39 %
        at
        December 31, 2005 .
        The
        termination date of the first swap agreement is July 1, 2008. In the second
        agreement the Company will receive variable rate payments at thirty day LIBOR
        and make fixed rate payments at 6.24 %.
        The
        notional amount of the swap was $1.8 million as of December 31, 2005 .
        The
        termination date of the second swap agreement is January 2, 2009. The two
        interest rate swaps are settled on a net basis. The Company is exposed to
        losses, in the event of nonperformance by KeyBank, 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.
 
 Under
        the
        capital standards provisions of FIRREA, the loans-to-one-borrower limitation
        is
        generally 15% of unimpaired capital and surplus, which, for the Bank, was
        approximately $13 .4 million
        and $13.8 million at December 31, 2005
        and 2004,
        respectively. As of December 31, 2005
        and 2004,
        the Bank was in compliance with this limitation.
 
 Aggregate
        loans to officers and directors included above were $3.9 million and $5.2
        million as of December 31, 2005 and
        2004,
        respectively. Such loans are made in the ordinary course of business and
        are
        made on substantially the same terms as those prevailing at the time for
        comparable transactions with other borrowers. For the year ended December
        31, 2005 ,
        loans
        of $2.6 million were disbursed to officers and directors and repayments of
        $3.9
        million were received from officers and directors.
  An
        analysis of the allowance for loan losses is as follows: (in
        thousands)
 
 **Year**
                **Ended**
              
              **Year**
                **Ended**
              
              **Year**
                **Ended****Dec
                  2005**
              
              **Dec
                  2004**
              
              **Dec
                  2003**Beginning
                  balance
              
              $
              7,864
              
              $
              7,506
              
              $
              7,172Provision
                  for loan losses
              
              
              808
              
              
              1,770
              
              
              1,268Charge-offs
              
              
              (2,048
              )
              
              (1,524
              )
              
              (1,079
              )Recoveries
              
              
              129
              
              
              112
              
              
              145**Ending
                  Balance**
              
              $
              **6,753**
              
              $
              **7,864**
              
              $
              **7,506**
 
  The
        following is a summary of information pertaining to impaired loans: (in
        thousands)
 
 **As
                  Of**
              
              **Dec
                  2005**
              
              **Dec
                  2004**Impaired
                  loans with a valuation reserve
              
              $
              178
              
              $
              7,247Impaired
                  loans with no valuation reserve
              
              
              13,085
              
              
              10,457**Total
                  Impaired Loans**
              
              **$**
              **13,263**
              
              **$**
              **17,704**Valuation
                  reserve on impaired loans
              
              $
              137
              
              $
              912Average
                  impaired loans
              
              $
              15,817
              
              $
              16,263
  **4.**
                **MORTGAGE
                    BANKING ACTIVITIES**
  At
        December 31, 2005
        and 2004,
        the Bank was servicing loans for others amounting to $588.5 million and $605.0
        million, respectively. Net gain on sale of loans, exclusive of gain attributable
        to retained MSR’s was $983,000 for the year ended December 31, 2005
        and $1.6
        million for the year ended December 31, 2004. Servicing loans for others
        generally consists of collecting mortgage payments, maintaining escrow accounts,
        disbursing payments to investors and foreclosure processing. Loan servicing
        income includes servicing fees from investors and certain charges collected
        from
        borrowers, such as late payment fees.
  The
        Bank
        is obligated to repurchase certain loans sold to and serviced for others
        that
        become delinquent as defined by the various agreements. At December 31, 2005 and
        2004, these obligations were limited to approximately $499,000 and $70,000,
        respectively.
 
 The
        following analysis reflects the changes in mortgage servicing rights retained:
        (in thousands)
  **Period
                  Ended**
              
              **Dec
                  2005**
              
              **Dec
                  2004**Beginning
                  carrying value
              
              $
              2,974
              
              $
              3,383Additions
              
              
              556
              
              
              1,038Amortization
              
              
              (1,354
              )
              
              (1,542
              )Net
                  change in valuation allowance
              
              
              549
              
              
              95**Ending
                  Carrying Value**
              
              **$**
              **2,725**
              ****
              **$**
              **2,974**
 
 The
        carrying value approximates fair value at December 31, 2005 and
        2004. Fair value is estimated by discounting the net servicing income to
        be
        received over the estimated servicing term using a current market rate. The
        significant risk characteristics of the underlying loans used to stratify
        MSRs
        for impairment measurement were term and rate of note. The valuation allowance
        as of December 31, 2005
        and 2004 was
        $425,000 and $ 974,000 ,
        respectively. The estimated annual amortization expense for each of the next
        five years is $915,000,  $662,000,
        $420,000, $280,000, and $216,000.
  -
            37
            -
  **5.**
              **INVESTMENTS
                  IN JOINT VENTURES**
  The
        Company has invested in joint ventures through its subsidiaries, Home Savings
        Corporation (“HSC”) and HomeFed Financial Corp. On December 31, 2001, the Bank
        changed its charter from a Federal savings bank charter to an Indiana commercial
        bank charter. Commercial banks are not permitted to participate in real estate
        development joint ventures. At December 31, 2005, HSC is a partner in three
        real
        estate development joint ventures for which exit strategies are either
        developed, or are currently being developed. The Company, as mandated by
        the
        regulators, is in the process of divesting itself of these investments by
        December 31, 2006. The Company is not required to divest itself of its
        investment in Family Financial Holdings, Inc. or Heritage Woods. The investments
        are accounted for by the equity method. The Company’s interest in these
        investments is as follows: (in thousands)
 **As
                  Of**
              
              **Equity**
                **Interest**
              
              **Dec
                  2005**
              
              **Dec
                  2004**Family
                  Financial Holdings, Inc.
              
              
              14%
              
              $
              792
              
              $
              792Heritage
                  Woods
              
              
              33%
              
              
              27
              
              
              37Home-Breeden
              
              
              50%
              
              
              1,074
              
              
              1,410Sycamore
                  Springs
              
              
              33%
              
              
              550
              
              
              1,189Bloomington
                  Technology
              
              
              50%
              
              
              43
              
              
              122**Total
                  Investment**
              
              
              
              
              **$**
              **2,486**
              ****
              **$**
              **3,550**
 
 Summarized
        condensed unaudited financial statements for these joint ventures are as
        follows: (in thousands)
 **As
                  Of**
              
              **Dec
                  2005**
              
              **Dec
                  2004****Balance
                  Sheets:**Cash
              
              $
              2,064
              
              $
              1,308Investments
              
              
              2,639
              
              
              3,289Property
                  and equipment, net
              
              
              531
              
              
              557Inventory
                  of developed lots
              
              
              3,206
              
              
              4,383Other
                  assets
              
              
              1,134
              
              
              1,010**Total
                  Assets**
              
              **$**
              **9,574**
              ****
              **$**
              **10,547**Notes
                  payable
              
              $
              2,009
              
              $
              3,226Insurance
                  liabilities
              
              
              136
              
              
              -Other
                  liabilities
              
              
              108
              
              
              175Total
                  liabilities
              
              
              2,253
              
              
              3,401Shareholders’
                  equity
              
              
              7,321
              
              
              7,146**Total
                  Liabilities and Shareholders’ Equity**
              
              **$**
              **9,574**
              ****
              **$**
              **10,547**
 
 **Year**
                **Ended**
                **Dec
                  2005**
              
              **Year**
                **Ended**
                **Dec
                  2004**
              
              **Year**
                **Ended**
                **Dec
                  2003****Income
                  Statements****Income:**Insurance
                  premiums & commissions
              
              $
              261
              
              $
              335
              
              $
              1,353Investment
                  income
              
              
              230
              
              
              145
              
              
              201Net
                  lot sales
              
              
              1,508
              
              
              673
              
              
              2,189Other
                  income
              
              
              116
              
              
              119
              
              
              136Total
                  income
              
              
              2,115
              
              
              1,272
              
              
              3,879**Expenses:**Commissions
              
              
              270
              
              
              230
              
              
              883Insurance
                  benefits
              
              
              70
              
              
              98
              
              
              394Interest
                  expense
              
              
              128
              
              
              120
              
              
              148Other
                  expense
              
              
              668
              
              
              781
              
              
              920Total
                  expense
              
              
              1,136
              
              
              1,229
              
              
              2,345**Net
                  Income**
              
              **$**
              **979**
              ****
              **$**
              **43**
              ****
              **$**
              **1,534**
 The
        notes
        payable included $1.6 million and $2.5 million due to HSC and $202 ,000
        and $423,000
        due to the Bank at December 31, 2005
        and 2004,
        respectively.
 
 **6.**
              **ACCRUED
                  INTEREST RECEIVABLE**
  Accrued
        interest receivable consists of the following: (in thousands)
 **As
                  Of**
              
              **Dec
                  2005**
              
              **Dec
                  2004**Loans,
                  net of allowance of $164 and $452
              
              $
              3,089
              
              $
              2,942Securities
              
              
              802
              
              
              713Interest-bearing
                  deposits
              
              
              51
              
              
              45**Total
                  Accrued Interest Receivable**
              
              **$**
              **3,942**
              ****
              **$**
              **3,700**
 
 **7.**
              **PREMISES
                  AND EQUIPMENT**
  Premises
        and equipment consists of the following: (in thousands)
 **As
                  Of**
              
              **Dec
                  2005**
              
              **Dec
                  2004**Land
              
              $
              2,903
              
              $
              2,949Buildings
                  and improvements
              
              
              19,380
              
              
              16,926Furniture
                  and equipment
              
              
              9,556
              
              
              8,740Total
              
              
              31,839
              
              
              28,615Accumulated
                  depreciation
              
              
              (14,058
              )
              
              (12,760
              )**Total
                  Premises and Equipment**
              
              **$**
              **17,781**
              ****
              **$**
              **15,855**
 Depreciation
        expense included in operations for the years ended December 31, 2005, 2004
        and
        2003 totaled $1.6 million, $1.5 million, and $1.5 million,
        respectively.
 -
            38
            -
 **8.**
              **DEPOSITS**
  Deposits
        are summarized as follows: (in thousands)
 **Dec
                    2005**
                
                **Dec
                    2004****Amount**
                
                **Weighted**
                  **Average**
                  **Rate**
                
                **Amount**
                
                **Weighted**
                  **Average**
                  **Rate**Non-interest
                    bearing
                
                $
                66,294
                
                
                
                
                $
                60,150Checking
                    accounts
                
                
                98,123
                
                
                1.34
                %
                
                88,247
                
                
                0.63
                %Statement
                    savings
                
                
                46,014
                
                
                0.15
                %
                
                49,835
                
                
                0.15
                %Money
                    market savings
                
                
                147,218
                
                
                2.51
                %
                
                132,363
                
                
                1.09
                %Total
                    transaction accounts
                
                
                357,649
                
                
                1.42
                %
                
                330,595
                
                
                0.63
                %Certificates
                    of deposit:Less
                    than one year
                
                
                67,841
                
                
                3.59
                %
                
                55,187
                
                
                2.00
                %12-23
                    months
                
                
                37,196
                
                
                3.23
                %
                
                46,557
                
                
                1.90
                %24-35
                    months
                
                
                92,980
                
                
                3.04
                %
                
                92,673
                
                
                2.35
                %36-59
                    months
                
                
                14,053
                
                
                3.47
                %
                
                23,623
                
                
                3.98
                %60-120
                    months
                
                
                87,620
                
                
                4.73
                %
                
                91,546
                
                
                4.85
                %Total
                    certificate accounts
                
                
                299,690
                
                
                3.70
                %
                
                309,586
                
                
                3.09
                %**Total
                    Deposits**
                
                $
                **657,339**
                
                
                2.46
                %
                $
                **640,181**
                
                
                1.82
                %
  At
        December 31, 2005 and
        2004,
        certificates of deposit in amounts of $100,000 or more totaled $91 .7 million
        and $121.1 million, respectively.
  A
        summary
        of certificate accounts by scheduled maturities at December 31, 2005 is as
        follows: (in thousands)
  2006
              
              2007
              
              2008
              
              2009
              
              2010
              
              Thereafter
              
              Total1.99%
                  or less
              
              $
              6,568
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              6,5682.00%
                  - 2.99%
              
              
              56,159
              
              
              12,271
              
              
              491
              
              
              -
              
              
              -
              
              
              -
              
              
              68,9213.00%
                  - 3.99%
              
              
              61,347
              
              
              24,013
              
              
              7,535
              
              
              3,566
              
              
              3,308
              
              
              627
              
              
              100,3964.00%
                  - 4.99%
              
              
              42,410
              
              
              22,711
              
              
              4,161
              
              
              12,833
              
              
              3,008
              
              
              3,184
              
              
              88,3075.00%
                  - 5.99%
              
              
              7,434
              
              
              22,119
              
              
              2,061
              
              
              2,099
              
              
              10
              
              
              64
              
              
              33,787Over
                  6.00%
              
              
              480
              
              
              629
              
              
              435
              
              
              167
              
              
              -
              
              
              -
              
              
              1,711**Total
                  Certificate Amounts**
              
              **$**
              **174,398**
              ****
              **$**
              **81,743**
              ****
              **$**
              **14,683**
              ****
              **$**
              **18,665**
              ****
              **$**
              **6,326**
              ****
              **$**
              **3,875**
              ****
              **$**
              **299,690**
 
 A
        summary
        of interest expense on deposits is as follows: (in thousands)
 
 **Year**
                **Ended**
                **Dec
                  2005**
              
              **Year**
                **Ended**
                **Dec
                  2004**
              
              **Year**
                **Ended**
                **Dec
                  2003**Checking
                  accounts
              
              $
              467
              
              $
              283
              
              $
              176Statement
                  savings
              
              
              76
              
              
              92
              
              
              243Money
                  market savings
              
              
              2,437
              
              
              1,067
              
              
              1,277Certificates
                  of deposit
              
              
              10,285
              
              
              9,390
              
              
              10,508**Total
                  Interest Expense**
              
              **$**
              **13,265**
              ****
              **$**
              **10,832**
              ****
              **$**
              **12,204**
 
 
 -
            39
            -
 **9.**
              **FEDERAL
                  HOME LOAN BANK ADVANCES**
  The
        Bank
        was eligible to receive advances from the FHLB up to $ 112.6 million
        and $ 156.6 million
        at December 31, 2005
        and 2004.
        The Bank has pledged qualifying mortgage loans, securities and Federal Home
        Loan
        Bank stock as collateral on the following advances from the Federal Home
        Loan
        Bank: (in thousands)
 
 **Maturing
                  During**
                **Year
                  Ended**
                **December**
              
              **Amount**
              
              **Weighted**
                **Average**
                **Rate**2006
              
              $
              32,403
              
              
              5.49
              %2007
              
              
              9,250
              
              
              5.04
              %2008
              
              
              11,850
              
              
              4.26
              %2009
              
              
              2,000
              
              
              4.32
              %2010
              
              
              11,250
              
              
              5.08
              %Thereafter
              
              
              19,880
              
              
              5.20
              %**Total
                  FHLB Advances**
              
              $
              **86,633**
              
              
              **5.12**
              **%**
 
 
 **10.**
              **OTHER
                  BORROWINGS**
  **Senior
        Debt**
 The
        Company has a revolving note with LaSalle Bank N.A. whereby the Company may
        borrow $17.5 million. The note accrues interest at a variable rate based
        on the
        ninety-day LIBOR index, on the date of the draw, plus 150 basis points. The
        ninety-day LIBOR index was 4.54% at December 31, 2005. Interest payments
        are due
        ninety days after the date of any principal draws made on the loan and every
        ninety days thereafter. The Company used the funds to buy back shares of
        the
        Company's common stock. The assets of the Company collateralize the note.
        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
        December 31, 2005, the Company was in compliance with the debt covenants.
        The
        revolving note matured on February 15, 2006 and was renewed for a 3 year
        term.
        The new note accrues interest at a variable rate based on the ninety-day
        LIBOR
        index, on the date of the draw, plus 140 basis points. The borrowing limit,
        collateralization and debt covenants on the new note mirror the terms discussed
        above.
 
 As
        of
        December 31, 2005, the Company has a cash flow swap agreement with LaSalle
        Bank
        N.A. The Company has agreed to 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 interest rate swap is settled on a net 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. The swap agreement matured on February 1, 2006 and was not renewed
        by the
        Company.
  **Other
        Borrowings**
 In
        addition to the other borrowings scheduled below, the Bank has a $5.0 million
        overdraft line of credit with the Federal Home Loan Bank, none of which was
        used
        as of December 31, 2005
        or 2004.
        The Bank also had a letter of credit for $225 ,000 and
        $226,000, as of December 31, 2005 and
        2004, respectively, none of which was used as of either year end. (in
        thousands)
 
 **As
                  Of**
              
              **Dec
                  2005**
              
              **Dec
                  2004**Official
                  check overnight remittance
              
              $
              166
              
              $
              211**Total
                  Other Borrowings**
              
              **$**
              **166**
              ****
              **$**
              **211**
 
 **11.**
              **INCOME
                  TAXES**
  An
        analysis of the income tax provision is as follows: (in thousands)
 
 **Year**
                **Ended**
              
              **Year**
                **Ended**
              
              **Year**
                **Ended****Dec
                  2005**
              
              **Dec
                  2004**
              
              **Dec
                  2003**Current:Federal
              
              $
              2,514
              
              $
              2,541
              
              $
              3,020State
              
              
              281
              
              
              521
              
              
              549Deferred
              
              
              174
              
              
              (518
              )
              
              1,451**Income
                  Tax Provision**
              
              **$**
              **2,969**
              ****
              **$**
              **2,544**
              ****
              **$**
              **5,020**
  The
        difference between the financial statement provision and amounts computed
        by
        using the statutory rate of
        34% is
        reconciled as follows: (in thousands)
  **Period
                  Ended**
              
              **Dec
                  2005**
              
              **Dec
                  2004**
              
              **Dec
                  2003**Income
                  tax provision at federal statutory rate
              
              $
              3,084
              
              $
              2,621
              
              $
              4,986State
                  tax, net of federal tax benefit
              
              
              256
              
              
              207
              
              
              568Tax
                  exempt interest
              
              
              (206
              )
              
              (234
              )
              
              (180
              )Increase
                  in cash surrender value of life insurance
              
              
              (152
              )
              
              (156
              )
              
              (176
              )Other,
                  net
              
              
              (13
              )
              
              106
              
              
              (178
              )**Income
                  Tax Provision**
              
              **$**
              **2,969**
              
              **$**
              **2,544**
              
              **$**
              **5,020**
  The
        Company is allowed to deduct an addition to a reserve for bad debts in
        determining taxable income. This addition differs from the provision for
        loan
        losses for financial reporting purposes. No deferred taxes have been provided
        on
        the income tax bad debt reserves which total $6.0 million, for years prior
        to
        1988. This tax reserve for bad debts is included in taxable income of later
        years only if the bad debt reserves are subsequently used for purposes other
        than to absorb bad debt losses. Because the Company does not intend to use
        the
        reserves for purposes other than to absorb losses, deferred income taxes
        of
        $ 2.4  million were not
        provided at December 31, 2005
        and
        2004 ,
        respectively. Pursuant to Statement of Financial Accounting Standards No.
        109
        (“SFAS 109”), ”Accounting for Income Taxes,” the Company has recognized the
        deferred tax consequences of differences between the financial statement
        and
        income tax treatment of allowances for loan losses arising after June 30,
        1987.
  -
            40
            -
  The
        Company’s deferred income tax assets and liabilities, included in prepaid
        expenses and other assets, are as follows: (in thousands)
 
 **As
                  Of**
              
              **Dec.
                  2005**
              
              **Dec.
                  2004**Deferred
                  tax assets:Bad
                  debt reserves, net
              
              $
              2,687
              
              $
              3,062Unrealized
                  loss on securities available for sale
              
              
              970
              
              
              106Other
              
              
              67
              
              
              130Deferred
                  compensation
              
              
              1,415
              
              
              1,262Total
                  deferred tax assets
              
              
              5,139
              
              
              4,560Deferred
                  tax liabilities:Difference
                  in basis of fixed assets
              
              
              511
              
              
              472FHLB
                  dividend
              
              
              169
              
              
              166Deferred
                  fees
              
              
              325
              
              
              347Originated
                  mortgage servicing rights
              
              
              843
              
              
              885Other
              
              
              -
              
              
              33Total
                  deferred tax liabilities
              
              
              1,848
              
              
              1,903**Net
                  Deferred Tax Asset**
              
              **$**
              **3,291**
              ****
              **$**
              **2,657**
 
 
 **12.**
              **REGULATORY
                  MATTERS**
  The
        Company and the Bank are subject to various regulatory capital requirements
        administered by the federal banking agencies. Failure to meet minimum capital
        requirements can initiate certain mandatory - and possible additional
        discretionary - actions by regulators that, if undertaken, could have a direct
        material effect on the Bank’s financial statements. Under capital adequacy
        guidelines and the regulatory framework for prompt corrective action, the
        Bank
        must meet specific capital guidelines that involve quantitative measures
        of the
        Bank’s assets, liabilities and certain off-balance sheet items as calculated
        under regulatory guidance. The capital amounts and classification are also
        subject to qualitative judgments by the regulators about components, risk
        weightings, and other factors.
 
 Quantitative
        measures that have been established by regulation to ensure capital adequacy
        require the Company and the Bank to maintain minimum amounts and ratios (set
        forth in the following table), of total and Tier 1 capital (as defined in
        the
        regulations) to risk-weighted assets (as defined), and of Tier I capital
        (as
        defined) to average assets (as defined). As of December 31, 2005 ,
        the
        Company and the Bank met all capital adequacy requirements to which they
        were
        subject.
 
 As
        of
        December 31, 2005, the
        most
        recent notifications from the Federal Reserve categorized the Company and
        the
        Bank as “well capitalized” under the regulatory framework for prompt corrective
        action. To be categorized as “well capitalized” the Company must maintain
        minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as
        set
        forth in the table. There are no conditions or events since that notification
        that management believes have changed either entity’s category.
  -
            41
            -
  A
        summary
        of capital amounts and ratios as of December 31, 2005 and
        2004:
 (dollars
        in thousands)
  **Actual**
              
              **For
                  Capital**
                **Adequacy
                  Purposes**
              
              **To
                  Be Categorized As**
                **“Well
                  Capitalized”**
                **Under
                  Prompt**
                **Corrective
                  Action**
                **Provisions****Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**As
                  ofDecember
                  31, 2005Total
                  risk-based capital(to
                  risk-weighted assets)HomeFederal
                  Bank
              
              $
              89,532
              
              
              13.58
              %
              $
              52,759
              
              
              8.0
              %
              $
              65,949
              
              
              10.0
              %Home
                  Federal Bancorp Consolidated
              
              $
              79,734
              
              
              12.08
              %
              $
              52,822
              
              
              8.0
              %
              $
              66,028
              
              
              10.0
              %Tier
                  1 risk-based capital(to
                  risk-weighted assets)HomeFederal
                  Bank
              
              $
              82,779
              
              
              12.55
              %
              $
              26,379
              
              
              4.0
              %
              $
              39,569
              
              
              6.0
              %Home
                  Federal Bancorp Consolidated
              
              $
              72,981
              
              
              11.05
              %
              $
              26,411
              
              
              4.0
              %
              $
              39,617
              
              
              6.0
              %Tier
                  1 leverage capital(to
                  average assets)HomeFederal
                  Bank
              
              $
              82,779
              
              
              9.82
              %
              $
              33,724
              
              
              4.0
              %
              $
              42,155
              
              
              5.0
              %Home
                  Federal Bancorp Consolidated
              
              $
              72,981
              
              
              8.65
              %
              $
              33,760
              
              
              4.0
              %
              $
              42,201
              
              
              5.0
              %
 
  **Actual**
              
              **For
                  Capital**
                **Adequacy
                  Purposes**
              
              **To
                  Be Categorized As**
                **“Well
                  Capitalized”**
                **Under
                  Prompt**
                **Corrective
                  Action**
                **Provisions****Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**As
                  ofDecember
                  31, 2004Total
                  risk-based capital(to
                  risk-weighted assets)HomeFederal
                  Bank
              
              $
              92,117
              
              
              13.60
              %
              $
              54,173
              
              
              8.0
              %
              $
              67,717
              
              
              10.0
              %Home
                  Federal Bancorp Consolidated
              
              $
              84,122
              
              
              12.41
              %
              $
              54,238
              
              
              8.0
              %
              $
              67,798
              
              
              10.0
              %Tier
                  1 risk-based capital(to
                  risk-weighted assets)HomeFederal
                  Bank
              
              $
              84,253
              
              
              12.44
              %
              $
              27,087
              
              
              4.0
              %
              $
              40,630
              
              
              6.0
              %Home
                  Federal Bancorp Consolidated
              
              $
              76,258
              
              
              11.25
              %
              $
              27,119
              
              
              4.0
              %
              $
              40,679
              
              
              6.0
              %Tier
                  1 leverage capital(to
                  average assets)HomeFederal
                  Bank
              
              $
              84,253
              
              
              9.65
              %
              $
              34,921
              
              
              4.0
              %
              $
              43,652
              
              
              5.0
              %Home
                  Federal Bancorp Consolidated
              
              $
              76,258
              
              
              8.76
              %
              $
              34,804
              
              
              4.0
              %
              $
              43,505
              
              
              5.0
              %
 
 **Dividend
        Restrictions**
 The
        principal source of income and funds for the Company are dividends from the
        Bank. The Bank is subject to certain restrictions on the amount of dividends
        that it may declare without prior regulatory approval. In 2005, the Bank
        requested and received regulatory approval to pay $8.2 million to its sole
        shareholder Home Federal Bancorp. In 2006, the Bank anticipates requesting
        regulatory approval to pay dividends to the Company.
 
 -
            42
            -
 **13.**
              **EMPLOYEE
                  BENEFIT PLANS**
  **Multi-employer
        Pension Plan**
 The
        Bank
        participates in a noncontributory multi-employer pension plan covering all
        qualified employees. The trustees of the Financial Institutions Retirement
        Fund
        administer the plan. There is no separate valuation of the plan benefits
        or
        segregation of plan assets specifically for the Bank, because the plan is
        a
        multi-employer plan and separate actuarial valuations are not made with respect
        to each employer. However, as of June 30, 2005, the latest actuarial valuation,
        the total plan assets exceeded the actuarially determined value of accrued
        benefits. The Bank had contribution expenses of $1.3 million, $1.2 million
        and
        $815,000 for the years ended December 2005, 2004 and 2003, respectively.
        Cash
        contributions to the multi-employer pension plan for these same periods were
        $1.4 million, $2.1 million and $471,000, respectively.
  **Supplemental
        Retirement Plan**
 The
        Bank
        has entered into supplemental retirement agreements for certain officers.
        These
        agreements are unfunded. However,
        the Bank has entered into life insurance contracts to offset the expense
        of
        these agreements. Benefits under these
        arrangements are generally paid over a 15 year period. The following table
        sets
        forth the Plan's funded status and amount recognized in the Company's
        consolidated statements of income for the years ended December 31, 2005,
        2004
        and 2003:
 
 **Dec
                  2005**
              
              **Dec
                  2004**
              
              **Dec
                  2003**Economic
                  assumptions:Discount
                  rate
              
              
              5.8
              %
              
              6.5
              %
              
              6.5
              %Salary
                  rate
              
              
              4.0
              %
              
              4.0
              %
              
              4.0
              %Components
                  of net periodic pension expense:Interest
                  cost on projected benefit obligation
              
              $
              196,547
              
              $
              182,845
              
              $
              176,676Service
                  cost
              
              
              91,425
              
              
              67,743
              
              
              64,914Prior
                  service cost
              
              
              53,051
              
              
              217,161
              
              
              129,705**Net
                  periodic pension expense**
              
              **$**
              **341,023**
              ****
              **$**
              **467,749**
              ****
              **$**
              **371,295**
 
 A
        reconciliation of the prior and ending balances of the Projected Benefit
        Obligation, ("PBO") for 2005
        and 2004 is
        as follows:
 
 **Dec
                  2005**
              
              **Dec
                  2004**Projected
                  benefit obligation at beginning of year
              
              $
              3,111,976
              
              $
              3,002,400Interest
                  cost
              
              
              196,547
              
              
              182,845Service
                  cost
              
              
              91,425
              
              
              67,743Amendments
              
              
              10,615
              
              
              -Change
                  in discount rate
              
              
              248,283
              
              
              -Actuarial
                  loss
              
              
              53,313
              
              
              19,331Benefits
                  paid during year
              
              
              (189,669
              )
              
              (160,343
              )Projected
                  benefit obligation at end of year (unfunded status)
              
              **$**
              **3,522,490**
              ****
              **$**
              **3,111,976**
 
 A
        summary
        of the Plan's funded status at December 31, 2005
        and 2004 is
        as follows:
 
 **Dec
                  2005**
              
              **Dec
                  2004**Projected
                  benefit obligation
              
              $
              3,522,490
              
              $
              3,111,976Unrecognized
                  prior service cost
              
              
              (562,272
              )
              
              (604,711
              )Unrecognized
                  net acturarial loss
              
              
              (431,915
              )
              
              (130,319
              )**Accrued
                  pension liability**
              
              **$**
              **2,528,303**
              ****
              **$**
              **2,376,946**
  Prior
        service cost is amortized over the estimated remaining employee service lives
        of
        approximately nine years. The Bank expects to make contributions of $358,000 to the
        plan in 2006. The Bank anticipates paying benefits over the next five years
        and
        in the aggregate for the five years thereafter as follows: 2006 -
        $219,000, 2007 - $219,000, 2008 - $226,000, 2009 - $212,000, 2010 - $212,000
        and
        2011 through 2015 - $1,289,000.
 
 **401(k)
        Plan**
 The
        Bank
        has an employee thrift plan established for substantially all full-time
        employees. The Bank has elected to make matching contributions equal to 50%
        of
        the employee contributions up to a maximum of 1.5% of an individual's total
        eligible salary. The
        Bank
        contributed $121,000, $130,000 and $120,000, during the years ended December
        31,
        2005, 2004 and 2003, respectively, to this plan.
  -
            43
            -
  **14.**
              **STOCK
                  OPTIONS**
  The
        Company has stock option plans for the benefit of officers, other key employees
        and directors. As of December 31, 2005 ,
        the
        plans were authorized to grant additional options to purchase 271,631 shares
        of the Company's common stock. The option price is not to be less than the
        fair
        market value of the common stock on the date the option is granted, and the
        stock options are exercisable at any time within the maximum term of 10 years
        and one day from the grant date. The options are nontransferable and are
        forfeited upon termination of employment.
 
 The
        following is the stock option activity for the years ended December 31, 2005 ,
        2004
        and 2003 and the stock options outstanding at the end of the respective
        periods:
 
 
 Options
              
              Shares
              
              Weighted
                Average
                Exercise
                Price**Outstanding
                  December 31, 2002**
              
              
              **1,006,302**
              
              **$**
              **18.87**Granted
              
              
              8,724
              
              
              27.23Forfeited
              
              
              (19,412
              )
              
              23.03Exercised
              
              
              (224,346
              )
              
              13.94**Outstanding
                  December 31, 2003**
              
              
              **771,268**
              
              
              **20.30**Forfeited
              
              
              (1,125
              )
              
              26.56Exercised
              
              
              (83,485
              )
              
              15.49**Outstanding
                  December 31, 2004**
              
              
              **686,658**
              
              
              **20.87**Granted
              
              
              50,000
              
              
              25.07Forfeited
              
              
              (9,875
              )
              
              24.05Exercised
              
              
              (109,066
              )
              
              16.93**Outstanding
                  December 31,****2005**
              
              
              **617,717**
              
              
              **21.86**
  The
        following table is an analysis of the remaining weighted average life as
        of
        December 31, 2005 of the
        outstanding options within various exercise price ranges:
  **Exercise
                  Price**
              
              **Number
                  of Options**
              
              **Average
                  Life**$13.560
                  - $18.485
              
              
              181,347
              
              
              4.2$20.900
                  - $23.063
              
              
              285,948
              
              
              3.7$23.125
                  - $27.400
              
              
              150,422
              
              
              4.8**Total**
              
              
              **617,717**
              
              
              4.1
 
 
 The
        weighted average fair value of options granted was $ 5.00 for the
        year ended December 31, 2005. No
        options were granted during the year ended December 31, 2004 .
        The
        weighted average fair value of options granted was $5.91 for the year ended
        December 31, 2003. The fair value of the option grants was estimated on the
        date
        of grant using an option pricing model with the following assumptions: dividend
        yield ranging from 2.74%
        to
        3.07%, risk-free interest rates ranging from 3.23%
        to
        4.11% ,
        expected volatility ranging from 22.13%
        to
        25.77% and
        expected life of 5.65
        to
        5.91 years.
 
 **15.**
              **COMMITMENTS**
  **Financial
        Instruments with Off-Balance Sheet Risk**
 In
        the
        normal course of business, the Bank makes various commitments to extend credit
        that are not reflected in the accompanying consolidated financial statements.
        At
        December 31, 2005 and
        2004,
        the Bank had loan commitments approximating $33 .4
        million and
        $16.3  million,
        respectively, excluding undisbursed portions of loans in process. Loan
        commitments at December 31, 2005 ,
        included commitments to originate fixed rate loans with interest rates ranging
        from 5 .0%
        to
        8.0% totaling
        $7.6 million and adjustable rate loan commitments with interest rates ranging
        from 5.8 %
        to
        9.6% totaling
        $25.8 million. Commitments, which are disbursed subject to certain limitations,
        extend over various periods of time. Generally, unused commitments are cancelled
        upon expiration of the commitment term as outlined in each individual
        contract.
  Outstanding
        letters of credit were $4. 0 million
        and $2.5 million at December 31, 2005
        and 2004,
        respectively. Additionally, the Bank had approximately $6.4 million in
        commitments to sell fixed rate residential loans and $6.4 million in commitments
        to sell adjustable rate commercial loans at December 31, 2005 .
 
 The
        Bank's exposure to credit loss in the event of nonperformance by the other
        parties to the financial instruments for commitments to extend credit is
        represented by the contract amount of those instruments. The Bank uses the
        same
        credit policies and collateral requirements in making commitments as it does
        for
        on-balance sheet instruments.
 
 **Employment
        Agreements**
 The
        Company has entered into employment agreements with certain executive officers.
        Under certain circumstances provided in the agreements, the Company may be
        obligated to continue the officer's salary for a period of up to three
        years.
 
 -
            44
            -
 **16.**
              **FAIR
                  VALUE OF FINANCIAL
                  INSTRUMENTS**
  The
        disclosure of the estimated fair value of financial instruments is as follows:
        (in thousands)
 
 **December****2005**
              
              **December
                  2004****Carrying**
                **Value**
              
              **Fair**
                **Value**
              
              **Carrying**
                **Value**
              
              **Fair**
                **Value****Assets:**Cash
              
              $
              30,642
              
              $
              30,642
              
              $
              24,729
              
              $
              24,729Interest-bearing
                  deposits
              
              
              23,094
              
              
              23,094
              
              
              27,591
              
              
              27,591Securities
                  available for sale
              
              
              123,351
              
              
              123,351
              
              
              124,790
              
              
              124,790Securities
                  held to maturity
              
              
              1,806
              
              
              1,796
              
              
              1,779
              
              
              1,801Loans
                  held for sale
              
              
              4,795
              
              
              4,859
              
              
              2,617
              
              
              2,653Loans,
                  net
              
              
              608,556
              
              
              607,867
              
              
              629,490
              
              
              638,566Accrued
                  interest receivable
              
              
              3,942
              
              
              3,942
              
              
              3,700
              
              
              3,700Federal
                  Home Loan Bank stock
              
              
              9,965
              
              
              9,965
              
              
              9,965
              
              
              9,965**Liabilities:**Deposits
              
              
              657,339
              
              
              657,493
              
              
              640,181
              
              
              642,397Federal
                  Home Loan Bank advances
              
              
              86,633
              
              
              96,329
              
              
              125,446
              
              
              128,231Senior
                  debt
              
              
              14,242
              
              
              14,237
              
              
              14,242
              
              
              14,242Other
                  borrowings
              
              
              166
              
              
              166
              
              
              211
              
              
              211Advance
                  payments by borrowers for taxes and insurance
              
              
              121
              
              
              121
              
              
              48
              
              
              48Accrued
                  interest payable
              
              
              714
              
              
              714
              
              
              852
              
              
              852Commitments
              
              
              -
              
              
              -
              
              
              -
              
              
              -**Financial
                  Instruments:**Interest
                  rate swaps
              
              
              (199
              )
              
              (199
              )
              
              (594
              )
              
              (594
              )
 
 The
        Company, using available market information and appropriate valuation
        methodologies, has determined the estimated fair values of financial
        instruments. Considerable judgment is required in interpreting market data
        to
        develop the estimates of fair value. Accordingly, the estimates presented
        herein
        are not necessarily indicative of the amounts that the Company could realize
        in
        a current market exchange. The use of different market assumptions and/or
        estimation methodologies may have a material effect on the estimated fair
        value
        amounts.
 
 **Cash,
        Interest-bearing Deposits, Accrued Interest Receivable, Advance Payments
        by
        Borrowers for Taxes and Insurance, Accrued Interest Payable and Other
        Borrowings**
 The
        carrying amount as reported in the Consolidated Balance Sheets is a reasonable
        estimate of fair value.
 
 **Securities
        Held to Maturity and Available for Sale**
 Fair
        values are based on quoted market prices and dealer quotes.
  **Loans
        Held for Sale and Loans, net**
 The
        fair
        value is estimated by discounting the future cash flows using the current
        rates
        for loans of similar credit risk and maturities.
 
 **Federal
        Home Loan Bank Stock**
 The
        fair
        value is estimated to be the carrying value, which is par.
 
 **Deposits**
 The
        fair
        value of demand deposits, savings accounts and money market deposit accounts
        is
        the amount payable on demand at the reporting date. The fair value of
        fixed-maturity certificates of deposit is estimated, by discounting future
        cash
        flows, using rates currently offered for deposits of similar remaining
        maturities.
 
 **Federal
        Home Loan Bank Advances**
 The
        fair
        value is estimated by discounting future cash flows using rates currently
        available to the Company for advances of similar maturities.
 
 **Senior
        Debt**
 Rates
        currently available to the Company for debt with similar terms and remaining
        maturities are used to estimate fair value of existing debt.
 
 **Interest
        Rate Swaps**
 The
        fair
        value is derived from proprietary models based upon well-recognized financial
        principles which management believes provide a reasonable approximation of
        the
        fair value of the interest rate swap transactions.
 
 **Commitments**
 The
        commitments to originate and purchase loans have terms that are consistent
        with
        current market conditions. Accordingly, the Company estimated that the face
        amounts of these commitments approximate carrying values.
 
 The
        fair
        value estimates presented herein are based on information available to
        management at December 31, 2005 and
        2004.
        Although management is not aware of any factors that would significantly
        affect
        the estimated fair value amounts, such amounts have not been comprehensively
        revalued for purposes of these financial statements since that date, and,
        therefore, current estimates of fair value may differ significantly from
        the
        amounts presented herein.
  -
            45
            -
  **17.**
              **PARENT
                  COMPANY FINANCIAL
                  STATEMENTS**
  The
        condensed financial statements of Home Federal Bancorp are as follows: (in
        thousands)
 
 **As
                  of**
              
              **Dec
                  2005**
              
              **Dec
                  2004****Condensed
                  Balance Sheets***(Parent
                  Company only*)**Assets:**Cash
              
              $
              4,366
              
              $
              5,640Investment
                  in subsidiary
              
              
              83,688
              
              
              86,299Other
              
              
              72
              
              
              121**Total
                  Assets**
              
              **$**
              **88,126**
              ****
              **$**
              **92,060****Liabilities:**Senior
                  debt
              
              $
              14,242
              
              $
              14,242Other
              
              
              846
              
              
              454Total
                  liabilities
              
              
              15,088
              
              
              14,696Shareholders'
                  equity
              
              
              73,038
              
              
              77,364**Total
                  Liabilities and Shareholders' Equity**
              
              **$**
              **88,126**
              ****
              **$**
              **92,060**
 
 **Period
                  Ended**
              
              **Dec
                  2005**
              
              **Dec
                  2004**
              
              **Dec
                  2003****Condensed
                  Statements of Income***(Parent
                  Company only*)Dividends
                  from subsidiary
              
              $
              8,172
              
              $
              11,152
              
              $
              7,750Other
              
              
              176
              
              
              89
              
              
              560Total
                  income
              
              
              8,348
              
              
              11,241
              
              
              8,310Interest
                  on senior debt
              
              
              808
              
              
              698
              
              
              838Other
                  expenses
              
              
              971
              
              
              1,163
              
              
              751Total
                  expenses
              
              
              1,779
              
              
              1,861
              
              
              1,589Income
                  before taxes and change in undistributed earnings of
                  subisidiary
              
              
              6,569
              
              
              9,380
              
              
              6,721Applicable
                  income tax credit
              
              
              (507
              )
              
              (703
              )
              
              (403
              )Income
                  before change in undistributed earnings of subsidiary
              
              
              7,076
              
              
              10,083
              
              
              7,124Increase
                  (decrease) in undistributed earnings of subsidiary
              
              
              (974
              )
              
              (4,920
              )
              
              2,519**Net
                  Income**
              
              **$**
              **6,102**
              ****
              **$**
              **5,163**
              ****
              **$**
              **9,643**
 
 **Period
                  Ended**
              
              **Dec
                  2005**
              
              **Dec
                  2004**
              
              **Dec
                  2003****Condensed
                  Statements of Cash Flows***(Parent
                  Company only*)**Operating
                  Activities:**Net
                  income
              
              $
              6,102
              
              $
              5,163
              
              $
              9,643Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Decrease
                  in other assets
              
              
              49
              
              
              163
              
              
              162Increase
                  in accrued expenses and other liabilities
              
              
              750
              
              
              254
              
              
              85Increase
                  (decrease) in undistributed earnings of subsidiary
              
              
              974
              
              
              4,920
              
              
              (2,519
              )Net
                  cash provided by operating activities
              
              
              7,875
              
              
              10,500
              
              
              7,371**Financing
                  Activities:**Payment
                  of dividends
              
              
              (2,909
              )
              
              (3,057
              )
              
              (2,997
              )Repurchase
                  shares of common stock
              
              
              (8,086
              )
              
              (9,953
              )
              
              (3,575
              )Exercise
                  of stock options, net of fractional shares paid
              
              
              1,846
              
              
              1,293
              
              
              3,128Net
                  cash used in financing activities
              
              
              (9,149
              )
              
              (11,717
              )
              
              (3,444
              )Net
                  (decrease) increase in cash
              
              
              (1,274
              )
              
              (1,217
              )
              
              3,927Cash
                  at beginning of period
              
              
              5,640
              
              
              6,857
              
              
              2,930**Cash
                  at End of Period**
              
              **$**
              **4,366**
              ****
              **$**
              **5,640**
              ****
              **$**
              **6,857**
  -
            46
            -
  
  **Board
                      of Directors**
                  
                  **Shareholder****&
                      Officers of**
                  
                  **Information****Home
                      Federal Bancorp****Stock
                      Listing****Board
                      of Directors**
                  **Officers**
                  The
                      common stock of Home FederalJohn
                      K. Keach, Jr.
                  John
                      K. Keach, Jr.
                  Bancorp
                      is traded on the NationalChairman
                      of the Board, President and
                  Chairman
                      of the Board, President and
                  Association
                      of Securities Dealers Auto-Chief
                      Executive Officer,
                  Chief
                      Executive Officer
                  mated
                      Quotation System, National MarketHome
                      Federal Bancorp
                  
                  System,
                      under the symbol HOMF. HomeCharles
                      R. Farber
                  Federal
                      Bancorp stock appears in TheJohn
                      T. Beatty
                  Executive
                      Vice President
                  Wall
                      Street Journal under the abbreviationPresident,
                  
                  HomFedBcpIN,
                      and in other publicationsBeatty
                      Insurance, Inc.
                  Mark
                      T. Gorski
                  under
                      the abbreviation HFdBcp.Executive
                      Vice President,Harold
                      Force
                  Chief
                      Financial Officer,
                  **Transfer
                      Agent & Registrar**President,
                  Treasurer
                      and Secretary
                  To
                      change name, address orForce
                      Construction Company, Inc.
                  
                  ownership
                      of stock, to report lostS.
                      Elaine Pollert
                  certificates,
                      or to consolidateDavid
                      W. Laitinen, MD
                  Executive
                      Vice President
                  accounts,
                      contact:Orthopedic
                      SurgeonLaSalle
                      Bank N.A.John
                      R. Miller
                  **Executive
                      Officers**
                  c/o
                      Corporate Trust OperationsPresident,
                  **of
                      HomeFederal Bank**
                  135
                      South LaSalle Street, Room 1960Best
                      Beers, Inc.
                  
                  Chicago,
                      Illinois 60603John
                      K. Keach, Jr.
                  (800)
                      246-5761Harvard
                      W. Nolting, Jr.
                  Chairman
                      of the Board, President andRetired
                      from Nolting
                  Chief
                      Executive Officer
                  **General
                      Counsel**Foods,
                      Inc.
                  
                  Barnes
                      & ThornburgCharles
                      R. Farber
                  11
                      South Meridian StreetJohn
                      K. Keach, Sr.
                  Executive
                      Vice President
                  Indianapolis,
                      IN 46204Chairman
                      EmeritusRetired
                  Mark
                      T. Gorski
                  **Shareholder
                      & General Inquiries**Executive
                      Vice President,
                  Home
                      Federal Bancorp is required to fileThe
                      Directors of
                  Chief
                      Financial Officer,
                  an
                      Annual Report on Form 10-K for itsHome
                      Federal Bancorp
                  Treasurer
                      and Secretary
                  fiscal
                      year ended December 31, 2005,also
                      serve as Directors of
                  
                  with
                      the Securities and ExchangeHomeFederal
                      Bank.
                  S.
                      Elaine Pollert
                  Commission.Executive
                      Vice President**For
                      copies of the Home Federal**Melissa
                      A. McGill
                  **Bancorp
                      Annual Report, contact:**Senior
                      Vice President
                  Donna
                      MaxieController
                  Home
                      Federal Bancorp222
                      West Second StreetP.O.
                      Box 648Seymour,
                      IN 47274(812)
                      522-1592(877)
                      626-7000**For
                      financial information and security****analyst
                      inquiries, please contact:**Mark
                      T. GorskiHome
                      Federal Bancorp501
                      Washington StreetColumbus,
                      IN 47201(812)
                      522-1592(877)
                      626-7000**For
                      an online annual report or****shareholder
                      inquiries on the Web,****visit
                      us at:**www.homf.comVisit
                      our Web site atwww.homf.com
                      or call ustoll
                      free at (877) 626-7000.
  
    -
            47
            -
  
 map
                **Office
                    Locations**
                  
                  Seymour
                  222
                    W. Second Street
                  1117
                    E. Tipton Street
                  
                  Columbus
                  501
                    Washington Street
                  1020
                    Washington Street
                  3805
                    25th Street
                  2751
                    Brentwood Drive
                  4330
                    W. Jonathan Moore Pike
                  
                  Hope
                  8475
                    N. State Road 9
                  
                  Austin
                  67
                    W. Main Street
                  
                  North
                    Vernon
                  111
                    N. State Street
                  1540
                    N. State Street
                  
                  Osgood
                  820
                    S. Buckeye Street
                  
                  Batesville
                  114
                    State Road 46 East
                  
                  Madison
                  201
                    Clifty Drive
                  
                  Brownstown
                  101
                    N. Main Street
                  
                  Salem
                  1208
                    S. Jackson Street
                  
                  Greensburg
                  1801
                    Greensburg Crossing
                  
                  Indianapolis/Greenwood
                  8740
                    S. Emerson Avenue
                  1510
                    W. Southport Road
                  
                  Visit
                    our Web site at
                  www.homf.com
                    or call us
                  toll
                    free at (877) 626-7000.