General

Our profitability depends primarily on our net interest income, which is the difference between interest and dividend income on interest-earning assets, principally loans, investment securities and interest-earning deposits in other institutions, and interest expense on interest-bearing deposits and borrowings from the Federal Home Loan Bank of Dallas. Net interest income is dependent upon the level of interest rates and the extent to which such rates are changing. Our profitability also depends, to a lesser extent, on non-interest income, provision for loan losses, non-interest expenses and federal income taxes. Home Federal Bancorp, Inc. of Louisiana had net income of $1.9 million in fiscal 2011compared to net income of $670,000 in fiscal 2010.

Historically, our business consisted primarily of originating single-family real estate loans secured by property in our market area. Typically, single-family loans involve a lower degree of risk and carry a lower yield than commercial real estate, construction, commercial business and consumer loans. During fiscal 2009, we hired three commercial loan officers and began to offer commercial real estate loans, commercial business loans and real estate secured lines of credit which typically have higher rates and shorter terms than single-family loans. Although our loans continue to be primarily funded by certificates of deposit, which typically have a higher interest rate than passbook accounts, it is now our policy to require commercial customers to have a deposit relationship with us, which has increased our balance of NOW accounts in recent periods. The combination of these factors has resulted in higher interest rate spreads in fiscal 2011. Due to the low interest rate environment, we have sold substantially all of our fixed rate single-family residential loan originations in recent periods. We have also sold investment securities as available-for-sale to realize gains in the portfolio. Because of a decrease in our cost of funds and the volume increase of interest earning assets, our net interest margin increased during fiscal 2011 and our net interest income increased to $7.1 million for fiscal 2011 as compared to $5.7 million for fiscal 2010. We expect to continue to emphasize consumer and commercial lending in the future in order to improve the yield on our portfolio. In July, 2009, we began offering security brokerage and advisory services at our new agency office through Tipton Wealth Management. In the future, we expect to continue to diversify our services and may add an annuity product at our branch offices and brokered certificates of deposit also offered through Tipton Wealth Management.

Home Federal Bancorp's operations and profitability are subject to changes in interest rates, applicable statutes and regulations and general economic conditions, as well as other factors beyond our control.

Business Strategy

Our business strategy is focused on operating a growing and profitable community-oriented financial institution. Our current business strategy includes:

· Continuing to Grow and Diversify Our Loan Portfolio by, among other things, emphasizing our origination of commercial real estate and business loans. Home Federal Bancorp's traditional lending activity historically had been concentrated on the origination of single-family residential loans and, to a lesser degree, consumer loans. Beginning in 2009, we hired three senior commercial loan officers to develop a loan portfolio more consistent with that of a community bank. At June 30, 2011, our commercial real estate loans amounted to $32.8 million, or 25.9% of the total loan portfolio, compared to $15.4 million, or 16.4% at June 30, 2010. Our commercial business loans at June 30, 2011 amounted to $10.2 million or 8.1% of the total loan portfolio compared to $9.5 million, or 10.1% at June 30, 2010. Commercial real estate, commercial business, construction and development and consumer loans all typically have higher yields and are more interest sensitive than long-term single-family residential mortgage loans. We plan to continue to grow and diversify our loan portfolio, and we intend to continue to grow our holdings of commercial real estate and business loans.

· Diversify Our Products and Services. We intend to continue to emphasize increasing the amount of our commercial business products to provide a full-service banking relationship to our commercial customers. We have also introduced mobile and Internet banking and remote deposit capture, to better serve our commercial clients. Additionally, we have developed new deposit products focused on expanding our deposit base to new types of customers.

· Managing Our Expenses. In recent periods, we have incurred significant additional expenses related to personnel and infrastructure. While our total non-interest expense increased $1.3 million in fiscal 2011 compared to 2010, we expect such increases will moderate in the future.

· Enhancing Core Earnings. We expect to improve our interest rate spread by emphasizing commercial real estate and business loans which generally bear interest rates higher than residential real estate loans and selling most of our fixed rate residential mortgage loan originations. The weighted average yield on our loan portfolio for the year ended June 30, 2011 was 6.62% and average interest rate spread for the year ended June 30, 2011 was 3.09% as compared to 2.91% for the year ended June 30, 2010.

· Expanding Our Franchise in our Market Area and Contiguous Communities. We intend to pursue opportunities to expand our market area by opening additional de novo banking offices and possibly, through acquisitions of other financial institutions and banking related businesses (although we have no current plans, understandings or agreements with respect to any specific acquisitions). We expect to focus on contiguous areas to our current locations in Caddo and Bossier Parishes. Our first branch office in North Bossier opened in October 2010 and we may develop a site in South Bossier in the future.

· Maintain Our Asset Quality. At June 30, 2011, our non-performing assets totaled $114,000 or 0.05% of total assets. We had no real estate owned or troubled debt restructurings at June 30, 2011. We intend to continue to stress maintaining high asset quality even as we continue to grow our institution and diversity our loan portfolio.

· Cross-Selling Products and Services and Emphasizing Local Decision. We have promoted cross-selling products and services in our branch offices and emphasized our local decision making and streamlined loan approval process.

Critical Accounting Policies

In reviewing and understanding financial information for Home Federal Bancorp, you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements. These policies are described in Note 1 of the notes to our consolidated financial statements included in Item 8 of this document. Our accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.

Allowance for Loan Losses. We have identified the evaluation of the allowance for loan losses as a critical accounting policy where amounts are sensitive to material variation. The allowance for loan losses represents management's estimate for probable losses that are inherent in our loan portfolio but which have not yet been realized as of the date of our consolidated balance sheet. It is established through a provision for loan losses charged to earnings. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that management believes will cover known and inherent losses in the loan portfolio, based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impacted loans, value of collateral, estimated losses on our commercial and residential loan portfolios and general amounts for historical loss experience. All of these estimates may be susceptible to significant changes as more information becomes available.

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. Historically, our estimates of the allowance for loan loss have not required significant adjustments from management's initial estimates. In addition, the Office of the Comptroller of the Currency as an integral part of their examination processes, periodically reviews our allowance for loan losses. The Office of the Comptroller of the Currency may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management's estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.

Income Taxes. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various assets and liabilities and gives current recognition to changes in tax rates and laws. Realizing our deferred tax assets principally depends upon our achieving projected future taxable income. We may change our judgments regarding future profitability due to future market conditions and other factors. We may adjust our deferred tax asset balances if our judgments change.

Changes in Financial Condition

Home Federal Bancorp's total assets increased $48.2 million, or 26.0%, to $233.3 million at June 30, 2011 compared to $185.1 million at June 30, 2010. This increase was primarily due to an increase in loans receivable, net of $32.3 million, an increase in investment securities of $14.9 million, an increase of $5.6 million in cash surrender value of bank owned life insurance, an increase in premises and equipment of $888,000 and an increase in cash and cash equivalents of $762,000, compared to the prior year. These increases were partially offset by a decrease in loans available-for-sale of $6.8 million.

Loans receivable, net increased $32.3 million, or 34.7%, from $93.1 million at June 30, 2010 to $125.4 million at June 30, 2011. The increase in loans receivable, net was attributable primarily to increases in commercial real estate of $17.3 million, land loans of $2.8 million, construction loans of $2.5 million and commercial business loans of $783,000, at June 30, 2011 compared to June 30, 2010. One-to-four family residential loans increased $9.3 million, and home equity and second mortgage loans decreased $1.4 million at June 30, 2011 compared to the prior year period. At June 30, 2011, the balance of purchased loans approximated $8.8 million, which consisted solely of one-to-four family residential loans, including $8.7 million of loans from the mortgage originator in Arkansas. We did not purchase any loans in fiscal 2010 or 2011.

As part of implementing our business strategy, in recent periods we diversified the loan products we offer and increased our efforts to originate higher yielding commercial real estate loans and lines of credit and commercial business loans. In February 2009, we hired three commercial loan officers and began offering commercial real estate loans and lines of credit and commercial business loans which were deemed attractive due to their generally higher yields and shorter anticipated lives compared to single-family residential mortgage loans. As of June 30, 2011, Home Federal Bank had $32.8 million of commercial real estate loans and $10.2 million of commercial business loans compared to $15.4 million of commercial real estate loans and $9.5 million of commercial business loans at June 30, 2010. Although commercial loans are generally considered to have greater credit risk than other certain types of loans, we attempt to mitigate such risk by originating such loans in our market area to known borrowers.

Securities available-for-sale increased $11.4 million, or 17.8%, from $63.7 million at June 30, 2010 to $75.0 million at June 30, 2011. This increase resulted primarily from new investment acquisitions of $36.9 million, partially offset by the sale of securities, normal principal paydowns, and by market value declines in the portfolio. During the past two years, there have been significant loan prepayments due to the heavy volume of loan refinancing. However, with interest rates at their cyclical lows, management is reluctant to invest in long-term, fixed rate mortgage loans for the portfolio and instead sold the majority of the long-term, fixed rate mortgage loan production. Prior to fiscal 2010, we attempted to strengthen our interest-rate risk position and favorably structure our balance sheet to take advantage of a rising rate environment by purchasing investment securities classified as available-for-sale. New investment acquisitions during fiscal 2011 consisted of U.S. Government Agency Notes maturing within three years.

Cash and cash equivalents increased $762,000, or 8.6%, from $8.8 million at June 30, 2010 to $9.6 million at June 30, 2011. The net increase in cash and cash equivalents was attributable primarily to the growth in our deposits and sales and principal payments from our securities, offset by the funding of our loan growth and repayment of advances from the Federal Home Loan Bank.

Total liabilities increased $30.4 million, or 20.0%, from $151.8 million at June 30, 2010 to $182.1 million at June 30, 2011 due primarily to an increase of $35.9 million, or 30.5%, in our deposits, offset by a decrease in advances from the Federal Home Loan Bank of $4.6 million, or 14.7%. The increase in deposits was attributable primarily to increases in our NOW Accounts, money market accounts and certificates of deposit. Money market accounts increased $10.8 million as the result of an expansion of commercial deposit accounts. Certificates of deposit increased $11.8 million, or 15.9%, from $73.9 million at June 30, 2010 to $85.7 million at June 30, 2011. NOW accounts increased $6.3 million from $8.2 million at June 30, 2010 to $14.5 million at June 30, 2011 and non-interest bearing deposit accounts increased $4.9 million from $9.9 million at June 30, 2010 to $14.8 million at June 30, 2011.

Stockholders' equity increased $17.8 million, or 53.4%, to $51.2 million at June 30, 2011 from $33.4 million at June 30, 2010, due primarily to net proceeds from common stock issuance of $16.9 million from our second step conversion offering completed on December 22, 2010, net income of $1.9 million for the year ended June 30, 2011, and the vesting of restricted stock awards, stock options and release of employee stock ownership plan shares totaling $233,000. These increases were partially offset by decrease in the Company's accumulated other comprehensive income of $670,000, dividends paid of $511,000 and treasury stock acquisitions of $46,000 during the year ended June 30, 2011. The change in accumulated other comprehensive income was primarily due to the change in net unrealized loss on securities available for sale due to recent declines in interest rates. The net unrealized loss on securities available-for-sale is affected by interest rate fluctuations. Generally, an increase in interest rates will have an adverse impact while a decrease in interest rates will have a positive impact.

Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be.

                                                                                              June 30,
                                           Yield/                         2011                                       2010
                                            Rate                                       Average                                    Average
                                         at June 30,       Average                      Yield/       Average                      Yield/
                                            2011           Balance       Interest        Rate        Balance       Interest        Rate
                                                                               (Dollars in thousands)
Interest-earning assets:
   Investment
securities                                       2.91 %   $   67,024     $   2,627         3.92 %   $  78,880     $    3,942          5.00 %
   Loans
receivable                                       5.65        115,505         7,647         6.62        77,879          5,218          6.70
Interest-earning deposits                        0.19         14,793            23         0.16         7,163              9          0.13
     Total interest-earning assets               4.46 %      197,322        10,297         5.22 %     163,922          9,169          5.59 %
Non-interest-earning assets                                   10,444                                    4,787
     Total
assets                                                    $  207,766                                $ 168,709
Interest-bearing liabilities:
   Savings
accounts                                         0.52 %        6,125            25         0.41 %       5,588             23          0.41 %
   NOW
accounts                                         0.84         10,384            65         0.63         5,583             22          0.39
   Money market accounts                         0.96         27,542           260         0.94        14,377            183          1.27
   Certificate
accounts                                         2.34         78,971         1,929         2.44        67,981          2,010          2.96
     Total
deposits                                         1.78        123,022         2,279         1.85        93,529          2,238          2.39
FHLB
advances                                         2.85         26,630           907         3.41        35,529          1,219          3.43
     Total interest-bearing
liabilities                                      1.95 %      149,652         3,186         2.13 %     129,058          3,457          2.68 %
Non-interest-bearing liabilities:
   Non-interest bearing demand
accounts                                                      12,302                                    5,940
   Other
liabilities                                                    2,473                                    1,696
     Total
liabilities                                                  164,427                                  136,694
Total Stockholders' Equity(1)                                 43,339                                   32,015

     Total liabilities and equity                         $  207,766                                $ 168,709

Net interest-earning assets                               $   47,670                                $  34,864

Net interest income; average interest
rate spread(2)                                                           $   7,111         3.09 %                 $    5,712          2.91 %

Net interest margin(3)                                                                     3.60 %                                     3.48 %

Average interest-earning assets to
average
 interest-bearing liabilities                                                            131.85 %                                   127.01 %

(1) Includes retained earnings and accumulated other comprehensive loss.

(2) Interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average rate on interest-bearing liabilities.

(3) Net interest margin is net interest income divided by net average interest-earning assets.

Rate/Volume Analysis. The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected Home Federal Bancorp's interest income and interest expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) changes in rate (change in rate multiplied by current year volume), and (iii) total change in rate and volume. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.

                                                           2011 vs. 2010                                   2010 vs. 2009
                                                 Increase (Decrease)           Total            Increase (Decrease)           Total
                                                      Due to                  Increase                Due to                 Increase
                                               Rate             Volume       (Decrease)        Rate            Volume       (Decrease)
                                                                                   (In thousands)
Interest income:
Investment
securities                                   $    (723 )     $    (593 )   $     (1,316 )   $      39       $  (1,427 )   $     (1,388 )
Loans receivable,
net                                                (92 )         2,521            2,429          (126 )         3,103            2,977
Interest-earning
deposits                                             5              10               15           (23 )             7              (16 )

Total interest-earning
assets                                            (810 )         1,938            1,128          (110 )         1,683            1,573

Interest expense:
Savings
accounts                                            --               2                2            (3 )            (1 )             (4 )
NOW
accounts                                            22              21               43            (9 )            10                1
Money market
accounts                                           (90 )           167               77            55              90              145
Certificate
accounts                                          (406 )           325              (81 )        (605 )           239             (366 )

Total
deposits                                          (474 )           515               41          (562 )           338             (224 )
FHLB
advances                                            (8 )          (305 )           (313 )        (145 )           (12 )           (157 )
Total interest-bearing
liabilities                                       (482 )           210             (272 )        (707 )           326             (381 )

Increase (Decrease) in net interest income   $    (328 )     $   1,728     $      1,400     $     597       $   1,357     $      1,954

Comparison of Operating Results for the Years Ended June 30, 2011and 2010

General. Net income amounted to $1.9 million for the year ended June 30, 2011, reflecting an increase of $1.3 million compared to net income of $670,000 for the year ended June 30, 2010. This increase was due to an increase of $1.8 million in non-interest income and a $1.1 million increase in net interest income after provision for loan losses, offset by an increase of $1.3 million in non-interest expense, an increase of $265,000 in the provision for income taxes.

Net Interest Income. Net interest income amounted to $7.1 million for fiscal year 2011, an increase of $1.4 million, or 24.5%, compared to $5.7 million for fiscal year 2010. The increase was due primarily to an increase of $1.1 million in total interest income, and a $272,000 decrease in interest expense.

The average interest rate spread increased from 2.91% for fiscal 2010 to 3.09% for fiscal 2011 while the average balance of net interest-earning assets increased from $34.9 million to $47.7 million during the same periods. The percentage of average interest-earning assets to average interest-bearing liabilities increased to 131.85% for fiscal 2011 compared to 127.01% for fiscal 2010. The increase in the average interest rate spread reflects the decline in interest rates paid on interest bearing liabilities. Home Federal Bancorp's average cost of funds decreased 59 basis points in fiscal 2011 compared to fiscal 2010. Lower certificate of deposit interest rates in our market area led us to decrease the average rates paid on certificates of deposit 55 basis points in fiscal 2011 compared to fiscal 2010. Net interest margin increased to 3.60% in fiscal 2011 compared to 3.48% for fiscal 2010.

Interest income increased $1.1 million, or 12.3%, to $10.3 million for fiscal 2011 compared to $9.2 million for fiscal 2010. Such increase was primarily due to an increase in the average balance of loans receivable. A decrease in average yields on interest earning assets primarily resulted from the decrease in the average balance of investment securities due to security sales and normal principal payments and the purchase of low yielding short term U.S. Government agency securities. The increase in the average balance of loans receivable was primarily due to new loans originated by our new commercial lending activities. The average yield of the loan portfolio decreased 8 basis points during fiscal 2011.

Interest expense decreased $272,000, or 7.9%, to $3.2 million for fiscal 2011 compared to fiscal 2010 primarily as a result of decreases in the average rates paid on interest-bearing liabilities, partially offset by increases in the average balance of interest-bearing deposits.

. . .