FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contains forward-looking statements, which can be identified by the use of words such as "believes," "intends," "expects," "anticipates," "estimates" or similar expressions. Forward-looking statements include, but are not limited to:

• statements of our goals, intentions and expectations;

• statements regarding our business plans, prospects, growth and operating strategies;

• statements regarding the quality of our loan and investment portfolios; and

• estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

• general economic conditions, including real estate values, either nationally or in our market area, that are worse than expected;

• changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

• the credit risk of lending activities, including risks related to construction and development lending and commercial and small business banking;

• changes in the level and trend of loan delinquencies and write-offs;

• results of examinations by banking regulators;

• increased competitive pressures among financial services companies;

• changes in consumer spending, borrowing and savings habits;

• our ability to successfully manage our growth;

• changes in the value of mortgage servicing rights;

• legislative or regulatory changes that adversely affect our business;

• adverse changes in the securities markets; and

• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board.

Any of the forward-looking statements that made in the MD&A, this annual report and in other public statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements.

GENERAL

Home Federal Bancorp, Inc. ("Company"), is the parent company of Home Federal Bank ("Bank"), a community-based financial institution primarily serving the Boise, Idaho, and surrounding metropolitan area known as the Treasure Valley region of southwestern Idaho. We serve Ada, Canyon, Elmore and Gem counties through our 15 full-service banking offices and one loan center. We are in the business of attracting deposits from the public and utilizing those deposits to originate loans. We offer a wide range of loan products to meet the demands of our customers. Historically, lending activities have been primarily directed toward the origination of residential and commercial real estate loans. Real estate lending activities have been primarily focused on first mortgages on owner occupied, and one- to four-family residential properties. To an increasing extent in recent years, lending activities have also included the origination of residential and commercial construction and land development loans and home

equity loans. While continuing our commitment to residential lending, management expects commercial lending, including commercial real estate, builder finance and commercial business lending, to become increasingly important activities for us.

Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Changes in levels of interest rates affect our net interest income. We intend to diversity the mix of our assets by reducing the percentage of our assets that are lower-yielding residential loans and mortgage-backed securities and increasing the percentage of our assets consisting of commercial loans that we believe have higher risk-adjusted returns.

Our operating expenses consist primarily of compensation and benefits, occupancy and equipment, data processing, advertising, postage and supplies, professional services and deposit insurance premiums. Compensation and benefits consist primarily of the salaries and wages paid to our employees, non-cash expense related to our employee stock ownership plan ("ESOP"), payroll taxes, expenses for retirement and other employee benefits. Occupancy and equipment expenses, which are the fixed and variable costs of building and equipment, consist primarily of lease payments, taxes, depreciation charges, maintenance and costs of utilities.

Our results of operations may also be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities. See "Item 1A. Risk Factors" in this Annual Report on Form 10-K for additional discussion on the potential impacts of these items.

OVERVIEW

The fiscal year ended September 30, 2008, was a year of unprecedented change for our Company. Not only did we undertake significant internal reorganization, we endured, and are continuing to deal with, the most damaging national financial crisis in over 80 years.

The following list summarizes the key internal strategic initiatives undertaken by management during fiscal 2008:

††† In December 2007, shareholders approved the Conversion of old Home Federal Bancorp, which was reorganized from the mutual holding company structure to the stock holding company structure;

††† A new management team was put in place, including the Chief Executive Officer, Chief Financial Officer, Chief Lending Officer, Consumer Banking Officer, Chief Information Officer and Chief Credit Officer

††† We opened a branch in Nampa, Idaho, and nearly completed the construction of another branch in Boise, which was opened in October 2008;

††† We executed on our strategy to (a) increase commercial and consumer loans and reduce our reliance on one- to four- family residential loans, and (b) increase core deposits and reduce our reliance on high-cost certificates of deposit and borrowings;

††† We reorganized our credit administration and mortgage banking teams to improve loan portfolio and credit risk management and to improve efficiency in our mortgage program; and,

††† We hired several commercial lenders, including leaders specializing in commercial real estate, commercial business loans and builder finance.

To expand on our initiatives, we continued to execute and manage our long-term strategic plan during fiscal 2008, which is to diversify the balance sheet by increasing our commercial, commercial real estate ("CRE") and consumer loan portfolios and improve our funding mix by reducing borrowings and increasing core deposits.

The following table summarizes our progress during the year:

     (dollars in thousands)        September 30, 2008          September 30, 2007
                                Balance            Mix         Balance    Mix
     Loans, end of period:
      1-4 and multifamily           $233,346          50.1%    $278,724      57.6%
     residential
      Consumer and home               56,227         12.1        46,568      9.6
     equity
      Land development                18,674          4.0        21,899      4.5
      Commercial and                 157,118         33.8       136,945     28.3
     commercial real estate

     Funding, fiscal year
     average:
      Checking                      $114,473          20.9%    $127,834      20.6%
      Savings                         24,194          4.4        23,397      3.8
      Money market                    58,698         10.7        39,908      6.4
       Total core deposits           197,365         36.0       191,139     30.9

      Certificates of                193,002         35.2       226,522     36.6
     deposit
      FHLB borrowings                157,549         28.8       201,911     32.6

We have found that deposit growth continues to be challenging. According to the Federal Deposit Insurance Corporation, total deposits in Idaho fell 2.6% between June 2007 and June 2008. Competition for deposits continues to put upward pressure on marginal funding costs, despite falling market rates in the second half of fiscal 2008. Many large regional and national banks are encountering significant liquidity pressures because of their loan losses and their inability to access debt and capital markets. An increase in bank failures in calendar 2008 has resulted in concern among many depositors about the safety of their deposit accounts. These factors are exacerbating an already competitive environment for deposits, pushing deposit rate spreads over Treasury not yields significantly higher than historical trends. Often, we encounter competitors offering certificate of deposit rates that are higher than FHLB advance rates. This validates our strategic plan to reduce our reliance on term funding. During fiscal 2008, we were able to increase core deposits by 3.3%. However, we allowed $77.9 million of certificate accounts and FHLB advances to mature rather than to retain high-cost funding.

While we are disappointed that the total balances of our loan and deposit portfolios declined during the year, we recognize that the nation is experiencing the most disruptive economic environment for financial services companies in decades. According to the Federal Reserve Bank, national levels of consumer debt increased at a rate of 6.71% annually from June 2000 to June 2007 and debt service as a percentage of disposable income rose to over 18.1% in the second quarter of 2007 from 15.4% in the second quarter of 2000. Exotic mortgage products, led by subprime, Alt-A, and "option payment" loan programs, placed previously unqualified borrowers into homes they could not afford. The increase in home demand as a result of this dubious increase in the number of "qualified" borrowers pushed home values higher. In an effort to meet demand, homebuilders accelerated the acquisition and development of residential subdivision projects at inflated prices. As interest rates increased between fiscal years 2005 and 2007, commodity prices such as oil and corn skyrocketed. As a result, the consumer debt burden and cost of living increase brought a seven-year boom in housing to an abrupt end in the second half of 2007. The fallout in 2008 from this meltdown includes hundreds of billions of dollars in loan losses for financial institutions, a national economy that has begun to contract, the failure or Federal government seizure of several large financial institutions and investment banks, and over a trillion dollars of capital funds being committed to the financial services industry by the U.S. Treasury.

We did not develop a nontraditional mortgage program with subprime loans or other products with exotic features. None of our one- to four-family residential mortgage loans has negative amortization features. As a result of this disciplined approach, we have been able to avoid the significant losses many other banks have incurred. Nonetheless, the severity and pervasiveness of the current crisis has impacted us indirectly. The overinvestment in land development projects and overbuild of speculative residential homes has begun to depress home prices in the Treasure Valley. The downturn in the national and local economy is causing rapid increases in unemployment in our market areas, which results in increasing foreclosure and bankruptcy rates. The unemployment rate in the Boise City-Nampa MSA increased from 2.2% in September 2007 to 4.8% in September 2008 as a result of nearly 10,000 job losses during that period. While all of these indicators are well below national levels, we recognize the Treasure Valley is a small market MSA and the loss of one or two significant employment sources could have a dire effect on the local economy.

The increase in our nonperforming loans occurred primarily in our land development and speculative construction loan portfolios. While our exposure to land development is limited as a percentage of our loan portfolio, the uncertainty of land values and the length of time that may be needed to sell or develop the lots has, in our estimation, significantly impaired the collectable balance of some of these loans. While our commercial and commercial real estate portfolios performed well during 2008, the severity of the economic downturn could cause the performance of these loans to deteriorate rapidly. To prepare for such an outcome, our credit administration and loss mitigation teams were realigned to report directly to the President and Chief Executive Officer and we appointed a Chief Credit Officer who is independent of the lending team. We will closely monitor our commercial loan portfolio as we anticipate the likelihood of further economic stress.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This MD&A, as well as disclosures found elsewhere in this Annual Report on Form 10-K, are based upon the Company's consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements. These factors include, among other things, whether the estimates are significant to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including third parties or available prices, and sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be utilized under US GAAP.

Management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our financial statements. These policies relate to the determination of the allowance for loan losses and the associated provision for loan losses, the fair market value of capitalized mortgage servicing rights, as well as deferred income taxes and the associated income tax expense. Management reviews the allowance for loan losses for adequacy on a quarterly basis and establishes a provision for loan losses that it believes is sufficient for the loan portfolio growth expected and the loan quality of the existing portfolio. The carrying value of the capitalized mortgage servicing rights is also assessed on a quarterly basis. Income tax expense and deferred income taxes are calculated using an estimated tax rate and are based on management's and our tax advisor's understanding of our effective tax rate and the tax code. These estimates are reviewed by our independent auditor on an annual basis and by our regulators when they examine Home Federal Bank.

Allowance for Loan Losses. Management recognizes that losses may occur over the life of a loan and that the allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. Management assesses the allowance for loan losses on a quarterly basis by analyzing several factors including delinquency rates, charge-off rates and the changing risk profile of the Bank's loan portfolio, as well as local economic conditions such as unemployment rates, bankruptcies and vacancy rates of business and residential properties.

The Company believes that the accounting estimate related to the allowance for loan losses is a critical accounting estimate because it is highly susceptible to change from period to period, requiring management to make assumptions about probable incurred losses inherent in the loan portfolio at the balance sheet date. The impact of a sudden large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.

The Company's methodology for analyzing the allowance for loan losses consists of specific allocations on significant individual credits and a general allowance amount, including a range of losses. The specific allowance component is determined when management believes that the collectibility of an individually reviewed loan has been impaired and a loss is probable. The general allowance component relates to assets with no well-defined deficiency or weakness and takes into consideration loss that is inherent within the portfolio but has not been identified. The general allowance is determined by applying a historical loss percentage to various types of loans with similar characteristics and classified loans that are not analyzed specifically. Adjustments are made to historical loss percentages to reflect current economic and internal environmental factors, such as changes in underwriting standards and management, that may increase or decrease those loss factors. As a result of the imprecision in

calculating inherent and potential losses, a range is added to the general allowance to provide an allowance for loan losses that is adequate to cover losses that may arise as a result of changing economic conditions and other qualitative factors that may alter historical loss experience.

The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of actual loan charge-offs, net of recoveries.

The Company also estimates a reserve related to unfunded loan commitments. In assessing the adequacy of the reserve, the Company uses a similar approach used in the development of the allowance for loan losses. The reserve for unfunded loan commitments is included in other liabilities on the Consolidated Balance Sheets. The provision for unfunded commitments is charged to noninterest expense.

Mortgage Servicing Rights. Mortgage servicing rights represent the present value of the future loan servicing fees from the right to service loans for others. The most critical accounting policy associated with mortgage servicing is the methodology used to determine the fair value of capitalized mortgage servicing rights, which requires the development of a number of estimates, the most critical of which are the mortgage loan prepayment rate assumptions. The mortgage loan prepayment rate assumptions are significantly impacted by interest rates. In general, during periods of falling interest rates, the mortgage loans prepay faster and the value of mortgage servicing asset declines. Conversely, during periods of rising rates, the value of mortgage servicing rights generally increases due to slower rates of prepayments. The Company performs a quarterly review of mortgage servicing rights to assess changes in value. This review may include an independent appraisal by an outside party of the fair value of the mortgage servicing rights.

In August 2008, the Bank entered into an agreement to sell its mortgage servicing rights to another financial institution. The value of our mortgage servicing rights was reduced to the estimated purchase price at September 30, 2008. The sale is expected to be finalized on October 31, 2008, with the transfer of servicing to be complete by December 16, 2008. After the transfer, we will no longer service loans for others as we now sell residential mortgage loans in the secondary market with servicing released to the investor.

Deferred Income Taxes. Deferred income taxes are reported for temporary differences between items of income or expense reported in the financial statements and those reported for income tax purposes. Deferred taxes are computed using the asset and liability approach as prescribed in SFAS No. 109, Accounting for Income Taxes. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates that will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in an institution's income tax returns. The deferred tax provision for the year is equal to the net change in the net deferred tax asset from the beginning to the end of the year, less amounts applicable to the change in value related to investments available for sale. The effect on deferred taxes of a change in tax rates is recognized as income in the period that includes the enactment date. The primary differences between financial statement income and taxable income result from depreciation expense, mortgage servicing rights, loan loss reserves, deferred compensation, mark to market adjustments on our available for sale securities, and dividends received from the Federal Home Loan Bank of Seattle. Deferred income taxes do not include a liability for pre-1988 bad debt deductions allowed to thrift institutions that may be recaptured if the institution fails to qualify as a bank for income tax purposes in the future.

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2008, AND SEPTEMBER 30, 2007

Total assets increased $15.1 million, or 2.1%, to $725.1 million at September 30, 2008 from $710.0 million at September 30, 2007. The increase was primarily a result of the $87.8 million in net proceeds received from the Conversion completed in December 2007, which was partially offset by a decrease in deposits and borrowings during this same period of $31.7 million and $43.8 million, respectively. Total liabilities decreased $77.4 million, or 13.0%, to $519.9 million.

Assets. For the year ended September 30, 2008, total assets increased $15.1 million. The increases and decreases were primarily concentrated in the following asset categories:

                                                      Increase / (Decrease)
                           Balance at   Balance at
                           September    September
                              30,        30, 2007
                              2008                      Amount       Percent
                                              (in thousands)
          Cash and amounts
          due from
          depository
          institutions     $   23,270   $   20,588      $   2,682      13.0%
          Mortgage-backed
          securities,
          available for
          sale                188,787      162,258         26,529     16.4
          Loans
          receivable, net
          of allowance for
          loan losses         459,813      480,118       (20,305)     (4.2)

Cash and amounts due from depository institutions. The higher cash balance at September 30, 2008, is due to a portion of the proceeds from the Company's Conversion being invested in overnight funds and cash equivalents. In June 2008, the Company invested $5.0 million of excess cash in a certificate of deposit issued by the FHLB, which is scheduled to mature in December 2008. As discussed in greater detail below, competitive pricing for deposits has resulted in the runoff of some deposit balances, which was funded with some of the net proceeds received from the Conversion.

Securities. Mortgage-backed securities increased $26.5 million to $188.8 million at September 30, 2008, from $162.3 million at September 30, 2007. A significant portion of the proceeds from the Conversion were invested in mortgage-backed securities resulting in the increase. Repayments of principal totaled $31.1 million for the year ended September 30, 2008. Management decided to purchase mortgage-backed securities in order to quickly invest Conversion funds and to provide liquidity in future periods to fund loan growth with proceeds from principal repayments.

Nearly all of the Company's mortgage-backed securities are issued by U.S. Government-sponsored enterprises, primarily Fannie Mae and Freddie Mac. While the U.S. Government has recently affirmed its support for government-sponsored enterprises and the mortgage-backed securities they issued, significant deterioration in the financial strength of Fannie Mae, Freddie Mac or mortgage-backed security insurers may have a material effect on the valuation and performance of the Company's mortgage-backed securities portfolio in future periods. The Company does not own preferred stock issued by Fannie Mae or Freddie Mac.

Non-agency, also referred to as "private label," mortgage-backed securities had a fair value of $3.1 million at September 30, 2008, compared to their amortized cost of $3.4 million at September 30, 2008. The securities carried a rating of 'AAA' by Moody's and Standard & Poor's at that date. While spreads on all mortgage-backed securities, when compared to Treasury notes, have widened since June 2007, the value of private label mortgage-backed securities have fallen more and have been more volatile than securities issued by government-sponsored enterprises due to the deterioration of the national residential loan market. We have reviewed the delinquency status and average collateral coverage of the loans pooled in our private label securities portfolio and have concluded the securities were not other than temporarily impaired at September 30, 2008.

Loans. Loans receivable, net, decreased $20.3 million to $459.8 million at September 30, 2008, from $480.1 million at September 30, 2007. One-to four-family residential loans decreased $39.0 million as we sold nearly all of the one-to four-family loans that we originated. Consumer loans increased $9.7 million, led by a $10.0 million increase in home equity lines of credit and second mortgage loans. Commercial and commercial real estate loans increased $20.2 million to $157.1 million at September 30, 2008. We continue to make progress in building our commercial and small business banking programs, including the addition of an experienced commercial banking team to expand our existing commercial lending program. We will also emphasize other commercial banking activities, including business banking, cash management and other products associated with a full-service commercial bank. Construction loans decreased $11.1 million to $33.0 million at September 30, 2008, which reflects the significant slowdown in residential development in 2008.

Property and equipment. Property and equipment increased $2.9 million as a result of the opening of a newly constructed banking office in Nampa, Idaho, during fiscal 2008 and the construction of another office in Boise. At September 30, 2008, we had five branches in Wal-Mart supermarkets compared to six at September 30, 2007. We closed one in-store branch in fiscal 2008 in conjunction with the opening of the new banking office in Nampa. The banking office in Boise that was in process of construction at September 30, 2008, was opened in October 2008, at which time we closed our existing Fairview Office and relocated those customers to the new office. We plan to open two additional branches on Eagle Road in Boise and Meridian, Idaho, in late 2009; therefore, we anticipate continued increases in property and equipment as we implement our growth strategy.

Bank owned life insurance. The value of bank owned life insurance increased $422,000 to $11.6 million. The policy premiums are invested in six insurance . . .