First Saving Bank
Annual Report 2009

Plain-text annual report

FSFG 10-K 9/30/2009 Section 1: 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ⌧⌧⌧⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2009 OR oooo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission File Number: 1-34155 FIRST SAVINGS FINANCIAL GROUP, INC. (Exact name of registrant as specified in its charter) Indiana (State or other jurisdiction of incorporation or organization) 501 East Lewis & Clark Parkway, Clarksville, Indiana (Address of principal executive offices) 37-1567871 (I.R.S. Employer Identification No.) 47129 (Zip Code) Registrant’s telephone number, including area code: (812) 283-0724 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, par value $0.01 per share Name of each exchange on which registered Nasdaq Stock Market, LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ⌧ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ⌧ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ⌧ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer o Non-accelerated Filer o Accelerated Filer o Smaller Reporting Company ⌧ Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No ⌧ The aggregate market value of the voting and non-voting common equity held by nonaffiliates was $20.3 million, based upon the closing price of $9.60 per share as quoted on the Nasdaq Stock Market as of the last business day of the registrant’s most recently completed second fiscal quarter ended March 31, 2009. The number of shares outstanding of the registrant’s common stock as of December 24, 2009 was 2,414,940. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2010 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Submission of Matters to a Vote of Security Holders INDEX Part I Part II Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operation Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Item 5. Item 6. Item 7. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Item 9. Financial Statements and Supplementary Data Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Item 9A(T). Controls and Procedures Item 9B. Other Information Item 10. Item 11. Item 12. Item 13. Item 14. Directors, Executive Officers and Corporate Governance Executive Compensation Part III Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Part IV Item 15. Exhibits and Financial Statement Schedules SIGNATURES Page 1 17 20 21 22 22 22 23 25 47 47 47 47 48 48 48 48 49 49 49 This annual report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of First Savings Financial Group, Inc. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. First Savings Financial Group’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of First Savings Financial Group and its subsidiary include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in First Savings Financial Group’s market area, changes in real estate market values in First Savings Financial Group’s market area, changes in relevant accounting principles and guidelines and inability of third party service providers to perform. Additional factors that may affect our results are discussed in Item 1A to this Annual Report on Form 10-K titled “Risk Factors” below. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, First Savings Financial Group does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events. Unless the context indicates otherwise, all references in this annual report to “First Savings Financial Group,” “Company,” “we,” “us” and “our” refer to First Savings Financial Group and its subsidiaries. Item 1. BUSINESS General PART I First Savings Financial Group, Inc., an Indiana corporation, was incorporated in May 2008 to serve as the holding company for First Savings Bank, F.S.B. (the “Bank” or “First Savings Bank”), a federally-chartered savings bank. On October 6, 2008, in accordance with a Plan of Conversion adopted by its board of directors and approved by its members, the Bank converted from a mutual savings bank to a stock savings bank and became the wholly-owned subsidiary of First Savings Financial Group. In connection with the conversion, the Company issued an aggregate of 2,542,042 shares of common stock at an offering price of $10.00 per share. In addition, in connection with the conversion, First Savings Charitable Foundation was formed, to which the Company contributed 110,000 shares of common stock and $100,000 in cash. The Company’s common stock began trading on the Nasdaq Capital Market on October 7, 2008 under the symbol “FSFG”. First Savings Financial Group’s principal business activity is the ownership of the outstanding common stock of First Savings Bank. First Savings Financial Group does not own or lease any property but instead uses the premises, equipment and other property of First Savings Bank with the payment of appropriate rental fees, as required by applicable law and regulations, under the terms of an expense allocation agreement. Accordingly, the information set forth in this annual report including the consolidated financial statements and related financial data contained herein, relates primarily to the Bank. First Savings Bank operates as a community-oriented financial institution offering traditional financial services to consumers and businesses in its primary market area. We attract deposits from the general public and use those funds to originate primarily residential mortgage loans and, to a lesser but growing extent, commercial mortgage loans and commercial business loans. We also originate residential and commercial construction loans, multi-family loans, land and land development loans, and consumer loans. We conduct our lending and deposit activities primarily with individuals and small businesses in our primary market area. On September 30, 2009, First Savings Bank acquired Community First Bank (“Community First”), an Indiana-chartered commercial bank. The acquisition expanded First Savings Bank’s presence into Harrison, Crawford and Washington Counties in Indiana. See note 2 of the notes to consolidated financial statements beginning on page F-1 of this annual report. 1 Our website address is www.fsbbank.net. Information on our website should not be considered a part of this annual report. Market Area We are located in South Central Indiana along the axis of Interstate 65 and Interstate 64, directly across the Ohio River from Louisville, Kentucky. We consider Clark, Floyd, Harrison, Crawford and Washington counties, Indiana, in which all of our offices are located, and the surrounding areas to be our primary market area. The current top employment sectors in these counties are the private retail, service and manufacturing industries, which are likely to continue to be supported by the projected growth in population and median household income. These counties are well-served by barge transportation, rail service, and commercial and general aviation services, including the United Parcel Service’s major hub, which are located in our primary market area. Competition We face significant competition for the attraction of deposits and origination of loans. Our most direct competition for deposits has historically come from the several financial institutions, including credit unions, operating in our primary market area and from other financial service companies such as securities and mortgage brokerage firms, credit unions and insurance companies. We also face competition for investors’ funds from money market funds, mutual funds and other corporate and government securities. At June 30, 2009, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation, we held approximately 13.20%, 1.34%, 14.73%, 71.15% and 7.37% of the FDIC-insured deposits in Clark, Floyd, Harrison, Crawford and Washington Counties, Indiana, respectively. This data does not reflect deposits held by credit unions with which we also compete. In addition, banks owned by large national and regional holding companies and other community-based banks also operate in our primary market area. Some of these institutions are larger than us and, therefore, may have greater resources. Our competition for loans comes primarily from financial institutions, including credit unions, in our primary market area and from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from non-depository financial service companies entering the mortgage market, such as insurance companies, securities companies and specialty and captive finance companies. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the Internet, and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal law now permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry. Competition for deposits and the origination of loans could limit our growth in the future. Lending Activities The Bank is in the process of transforming the composition of its balance sheet from that of a traditional thrift institution to that of a commercial bank. We intend to continue to emphasize residential lending, primarily secured by owner-occupied properties, but also continue concentrating on ways to expand our consumer/retail banking capabilities and our commercial banking services with a focus on serving small businesses and emphasizing relationship banking in our primary market area. This transformation is enhanced by an expanded commercial lending staff dedicated to growing commercial real estate and commercial business loans. The largest segment of our loan portfolio is real estate mortgage loans, primarily one-to four- family residential loans, including non-owner occupied residential loans that were predominately originated before 2005, and, to a lesser but growing extent, commercial real estate and commercial business loans. We also originate residential and commercial construction loans, multi-family loans, land and land development loans, and consumer loans. We generally originate loans for investment purposes, although, depending on the interest rate environment and our asset/liability management goals, we may sell into the secondary market the 25-year and 30-year fixed-rate residential mortgage loans that we originate. We do not offer, and have not offered, Alt-A, sub-prime or no-documentation loans and acquired no such loans in the acquisition of Community First. 2 One-to Four-Family Residential Loans. Our origination of residential mortgage loans enables borrowers to purchase or refinance existing homes located in Clark, Floyd, Harrison, Crawford and Washington Counties, Indiana, and the surrounding areas. A significant portion of the residential mortgage loans that we had originated before 2005 are secured by non-owner occupied properties. Loans secured by non-owner occupied properties generally carry a greater risk of loss than loans secured by owner-occupied properties, and our non-performing loan balances have increased in recent periods primarily because of delinquencies in our non-owner occupied residential loan portfolio. See “Item 1A. Risk Factors – Risks Related to Our Business – Our concentration in non-owner occupied real estate loans may expose us to increased credit risk” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Analysis of Nonperforming and Classified Assets.” Since 2005, when we hired a new President and Chief Executive Officer, we have de-emphasized non-owner occupied residential mortgage lending and have focused, and intend to continue to focus, our residential mortgage lending primarily on originating residential mortgage loans secured by owner-occupied properties. Our residential lending policies and procedures conform to the secondary market guidelines. We generally offer a mix of adjustable rate mortgage loans and fixed-rate mortgage loans with terms of 10 to 30 years. Borrower demand for adjustable-rate loans compared to fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans as compared to an initially discounted interest rate and loan fees for multi-year adjustable-rate mortgages. The relative amount of fixed-rate mortgage loans and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment. The loan fees, interest rates and other provisions of mortgage loans are determined by us based on our own pricing criteria and competitive market conditions. Interest rates and payments on our adjustable-rate mortgage loans generally adjust annually after an initial fixed period that typically ranges from one to five years. Interest rates and payments on our adjustable-rate loans generally are adjusted to a rate typically equal to a margin above the one year U.S. Treasury index. The maximum amount by which the interest rate may be increased or decreased is generally one percentage point per adjustment period and the lifetime interest rate cap is generally six percentage points over the initial interest rate of the loan. However, a portion of the adjustable-rate mortgage loan portfolio has a maximum amount by which the interest rate may be increased or decreased of two percentage points per adjustment period and a lifetime interest rate cap generally of six percentage points over the initial interest rate of the loan. While one-to four-family residential real estate loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full either upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans on a regular basis. We do not offer loans with negative amortization and generally do not offer interest-only loans. We generally do not make conventional loans with loan-to-value ratios exceeding 80%, including that for non-owner occupied residential real estate loans whose loan-to-value ratios generally may not exceed 75%, or 65% where the borrower has more than five non-owner occupied loans outstanding. Non-owner occupied loans originated before 2005, however, were generally originated with loan-to-value ratios up to 80%. Loans with loan-to-value ratios in excess of 80% generally require private mortgage insurance. However, the total balance of residential mortgage loans secured by one-to-four family residential properties with loan-to-value ratios exceeding 90% and without private mortgage insurance or government guaranty at September 30, 2009 was $3.9 million, including $2.3 million acquired in the acquisition of Community First. We generally require all properties securing mortgage loans to be appraised by a board-approved independent appraiser. We also generally require title insurance on all first mortgage loans with principal balances of $250,000 or more. Borrowers must obtain hazard insurance, and flood insurance is required for all loans located flood hazard areas. 3 At September 30, 2009, our largest one-to four-family residential loan had an outstanding balance of $2.6 million. This loan, which was originated in November 2007 and is secured by 46 non-owner occupied properties, was performing in accordance with its original terms at September 30, 2009. Commercial Real Estate Loans. We offer fixed- and adjustable-rate mortgage loans secured by commercial real estate. Our commercial real estate loans are generally secured by small to moderately-sized office, retail and industrial properties located in our primary market area and are typically made to small business owners and professionals such as attorneys and accountants. We originate fixed-rate commercial real estate loans, generally with terms up to five years and payments based on an amortization schedule of 15 to 20 years, resulting in “balloon” balances at maturity. We also offer adjustable-rate commercial real estate loans, generally with terms up to five years and with interest rates typically equal to a margin above the prime lending rate or the London Interbank Offered Rate (LIBOR). Loans are secured by first mortgages, generally are originated with a maximum loan-to-value ratio of 80% and often require specified debt service coverage ratios depending on the characteristics of the project. Rates and other terms on such loans generally depend on our assessment of credit risk after considering such factors as the borrower’s financial condition and credit history, loan-to-value ratio, debt service coverage ratio and other factors. At September 30, 2009, our largest commercial real estate loan had an outstanding balance of $2.4 million. This loan, which was originated in July 2009 and is secured by a retail powersport vehicles dealership facility, was performing in accordance with its original terms at September 30, 2009. Construction Loans. We originate construction loans for one-to four-family homes and, to a lesser extent, commercial properties such as small industrial buildings, warehouses, retail shops and office units. Construction loans are typically for a term of 12 months with monthly interest only payments. Except for speculative loans, discussed below, repayment of construction loans typically comes from the proceeds of a permanent mortgage loan for which a commitment is typically in place when the construction loan is originated. We originate construction loans to a limited group of well-established builders in our primary market area and we limit the number of projects with each builder. Interest rates on these loans are generally tied to the prime lending rate. Construction loans, other than land development loans, generally will not exceed the lesser of 80% of the appraised value or 90% of the direct costs, excluding items such as developer fees, operating deficits or other items that do not relate to the direct development of the project. Generally, commercial construction loans require the personal guarantee of the owners of the business. We also offer construction loans for the financing of pre-sold homes, which convert into permanent loans at the end of the construction period. Such loans generally have a six-month construction period with interest only payments due monthly, followed by an automatic conversion to a 15-year to 30-year permanent loan with monthly payments of principal and interest. Occasionally, a construction loan to a builder of a speculative home will be converted to a permanent loan if the builder has not secured a buyer within a limited period of time after the completion of the home. We generally disburse funds on a percentage-of- completion basis following an inspection by a third party inspector. We also originate speculative construction loans to builders who have not identified a buyer for the completed property at the time of origination. At September 30, 2009, we had approved commitments for speculative construction loans of $8.2 million, of which $5.9 million was outstanding. We require a maximum loan-to-value ratio of 80% for speculative construction loans. At September 30, 2009, our largest construction loan relationship was for a commitment of $1.4 million, of which $886,000 was outstanding. This relationship was performing according to its original terms at September 30, 2009. Land and Land Development Loans. On a limited basis, we originate loans to developers for the purpose of developing vacant land in our primary market area, typically for residential subdivisions. Land development loans are generally interest-only loans for a term of 18 to 24 months. We generally require a maximum loan-to-value ratio of 75% of the appraisal market value upon completion of the project. We generally do not require any cash equity from the borrower if there is sufficient indicated equity in the collateral property. Development plats and cost verification documents are required from borrowers before approving and closing the loan. Our loan officers are required to personally visit the proposed development site and the sites of competing developments. We also originate loans to individuals secured by undeveloped land held for investment purposes. At September 30, 2009, our largest land loan development had an outstanding balance of $1.8 million. This loan was performing in accordance with its original terms at September 30, 2009. 4 Multi-Family Real Estate Loans. To a limited extent, we offer multi-family mortgage loans that are generally secured by properties in our primary market area. Multi-family loans are secured by first mortgages and generally are originated with a maximum loan-to-value ratio of 80% and generally require specified debt service coverage ratios depending on the characteristics of the project. Rates and other terms on such loans generally depend on our assessment of the credit risk after considering such factors as the borrower’s financial condition and credit history, loan-to-value ratio, debt service coverage ratio and other factors. At September 30, 2009, our largest multi-family mortgage loan had an outstanding balance of $3.3 million. This loan, which was originated in October 2008 and is secured by an apartment complex, was performing in accordance with its original terms at September 30, 2009. Consumer Loans. Although we offer a variety of consumer loans, our consumer loan portfolio consists primarily of home equity loans, both fixed-rate amortizing term loans with terms up to 15 years and adjustable rate lines of credit with interest rates equal to a margin above the prime lending rate. Consumer loans typically have shorter maturities and higher interest rates than traditional one-to four-family lending. We typically do not make home equity loans with loan-to-value ratios exceeding 90%, including any first mortgage loan balance. We also offer auto and truck loans, personal loans and boat loans. At September 30, 2009, $3.1 million, or 0.9% of our consumer loan portfolio was comprised of boat loans. We no longer are an active originator of boat loans. The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. Commercial Business Loans. We typically offer commercial business loans to small businesses located in our primary market area. Commercial business loans are generally secured by equipment and general business assets. Key loan terms and covenants vary depending on the collateral, the borrower’s financial condition, credit history and other relevant factors, and personal guarantees are typically required as part of the loan commitment. At September 30, 2009, our largest commercial business loan had an outstanding balance of $2.2 million. This loan, which was originated in March 2009 and is secured by contract assignments and accounts receivable, was performing in accordance with its original terms at September 30, 2009. Loan Underwriting Risks Adjustable-Rate Loans. While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate mortgages, an increased monthly mortgage payment required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits. Non-Owner Occupied Residential Real Estate Loans. Loans secured by rental properties represent a unique credit risk to us and, as a result, we adhere to special underwriting guidelines. Of primary concern in non-owner occupied real estate lending is the consistency of rental income of the property. Payments on loans secured by rental properties often depend on the maintenance of the property and the payment of rent by its tenants. Payments on loans secured by rental properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. To monitor cash flows on rental properties, we require borrowers and loan guarantors, if any, to provide annual financial statements and we consider and review a rental income cash flow analysis of the borrower and consider the net operating income of the property, the borrower’s expertise, credit history and profitability, and the value of the underlying property. We generally require collateral on these loans to be a first mortgage along with an assignment of rents and leases. Until recently, if the borrower had multiple loans for rental properties with us, the loans were not cross-collateralized. If the borrower holds loans on more than four rental properties, a loan officer or collection officer is generally required to inspect these properties annually to determine if they are being properly maintained and rented. Recently, we generally have limited these loan relationships to an aggregate total of $500,000. 5 Multi-Family and Commercial Real Estate Loans. Loans secured by multi-family and commercial real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in multi-family and commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to provide annual financial statements on multi-family and commercial real estate loans. In addition, some loans may contain covenants regarding ongoing cash flow coverage requirements. In reaching a decision on whether to make a multi-family or commercial real estate loan, we consider and review a global cash flow analysis of the borrower and consider the net operating income of the property, the borrower’s expertise, credit history and profitability, and the value of the underlying property. An environmental survey or environmental risk insurance is obtained when the possibility exists that hazardous materials may have existed on the site, or the site may have been impacted by adjoining properties that handled hazardous materials. Construction and Land and Land Development Loans. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the building. If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a building having a value which is insufficient to assure full repayment if liquidation is required. If we are forced to foreclose on a building before or at completion due to a default, we may be unable to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, speculative construction loans, which are loans made to home builders who, at the time of loan origination, have not yet secured an end buyer for the home under construction, typically carry higher risks than those associated with traditional construction loans. These increased risks arise because of the risk that there will be inadequate demand to ensure the sale of the property within an acceptable time. As a result, in addition to the risks associated with traditional construction loans, speculative construction loans carry the added risk that the builder will have to pay the property taxes and other carrying costs of the property until an end buyer is found. Land and land development loans have substantially similar risks to speculative construction loans. Consumer Loans. Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are secured by assets that depreciate rapidly, such as motor vehicles and boats. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. In the case of home equity loans, real estate values may be reduced to a level that is insufficient to cover the outstanding loan balance after accounting for the first mortgage loan balance. Consumer loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans. Commercial Business Loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment income or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value. 6 Loan Originations, Sales and Purchases. Loan originations come from a number of sources. The primary sources of loan originations are existing customers, walk-in traffic, advertising and referrals from customers. We generally sell in the secondary market long-term fixed-rate residential mortgage loans that we originate. We have not historically sold participation interests in loans that we have originated; however, $8.0 million of loans we acquired in the acquisition of Community First included sold participation interests of $4.8 million, for a net position of $3.2 million outstanding in our portfolio. We may sell participation interests in loans originated by us from time to time depending on various factors. Our decision to sell loans is based on prevailing market interest rate conditions, interest rate management, regulatory lending restrictions and liquidity needs. We have not historically purchased whole loans or participation interests to supplement our lending portfolio; however, we acquired $9.9 million of participation interests of loans in the acquisition of Community First. At September 30, 2009, our largest participation interest was $2.0 million. This loan, which was originated in August 2008 and is secured by single family residential real estate, was performing in accordance with its original terms at September 30, 2009. Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by our board of directors and management. Certain of our employees have been granted individual lending limits, which vary depending on the individual, the type of loan and whether the loan is secured or unsecured. Generally, all loan requests for lending relationships that exceed the individual officer lending limits, which is generally $250,000 secured or $50,000 unsecured, require committee or Board of Directors approval. Loans resulting in aggregated lending relationships in excess of $250,000 secured and $50,000 unsecured but less than $1.0 million require approval by the Officer Loan Committee and loans resulting in aggregated lending relationships in excess of $1.0 million but less than $2.5 million require approval of the Executive Loan Committee. The Executive Loan Committee consists of the President, Chief Operations Officer, Chief of Credit Administration, Senior Lending Officer and VP of Commercial Lending and the Officer Loan Committee consists of the same but also includes certain other officers designated by the Board of Directors. Loans resulting in aggregated lending relationships in excess of $2.5 million require approval by both the Executive Loan Committee and the Board of Directors. Loans to One Borrower. The maximum amount that we may lend to one borrower and the borrower’s related entities is limited, by regulation, to generally 15% of our stated capital and reserves. At September 30, 2009, our regulatory limit on loans to one borrower was $6.8 million. At that date, our largest lending relationship was $5.9 million, of which $5.7 million was outstanding, and was performing according to its original terms at that date. This loan relationship is secured by commercial real estate and the borrower’s personal residence. Loan Commitments. We issue commitments for residential and commercial mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to our customers. Generally, our loan commitments expire after 30 days. See note 14 to the notes to the consolidated financial statements beginning on page F-1 of this annual report. Investment Activities We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various government-sponsored agencies and of state and municipal governments, mortgage-backed securities, collateralized mortgage obligations and certificates of deposit of federally insured institutions. Within certain regulatory limits, we also may invest a portion of our assets in other permissible securities. As a member of the Federal Home Loan Bank of Indianapolis, we also are required to maintain an investment in Federal Home Loan Bank of Indianapolis stock. At September 30, 2009, our investment portfolio consisted primarily of U.S. government agency securities, mortgage backed securities and collateralized mortgage obligations issued by government sponsored enterprises, municipal securities and privately issued collateralized mortgage obligations acquired in the acquisition of Community First. We do not currently invest in trading account securities. 7 Our investment objectives are to provide and maintain liquidity, to establish an acceptable level of interest rate and credit risk, and to provide an alternate source of low-risk investments at a favorable return when loan demand is weak. Our board of directors has the overall responsibility for the investment portfolio, including approval of the investment policy. Messrs. Myers, our President and Chief Executive Officer, and Schoen, our Chief Financial Officer, are responsible for implementation of the investment policy and monitoring our investment performance. Our board of directors reviews the status of our investment portfolio on a quarterly basis, or more frequently if warranted. Deposit Activities and Other Sources of Funds General. Deposits, borrowings and loan repayments are the major sources of our funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions. Deposit Accounts. Deposits are attracted from within our primary market area through the offering of a broad selection of deposit instruments, including non-interest-bearing demand deposits (such as checking accounts), interest-bearing demand accounts (such as NOW and money market accounts), regular savings accounts and certificates of deposit. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, our liquidity needs, profitability to us, matching deposit and loan products and customer preferences and concerns. We generally review our deposit mix and pricing weekly. Our deposit pricing strategy has typically been to offer competitive rates on all types of deposit products, and to periodically offer special rates in order to attract deposits of a specific type or term. Borrowings. We use advances from the Federal Home Loan Bank of Indianapolis to supplement our investable funds. The Federal Home Loan Bank functions as a central reserve bank providing credit for member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank of Indianapolis and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness. We also utilize retail and broker repurchase agreements as sources of borrowings and may use brokered certificates of deposits from time to time depending on our liquidity needs and pricing of these facilities versus other funding alternatives. Personnel As of September 30, 2009, we had 125 full-time employees and 33 part-time employees, none of whom is represented by a collective bargaining unit. We believe our relationship with our employees is good. Subsidiaries The Company’s sole subsidiary is the Bank. The Bank has three subsidiaries, Southern Indiana Financial Corporation and FFCC, Inc., both of which are organized as Indiana corporations, and First Savings Investments, Inc., a Nevada Corporation. Southern Indiana Financial Corporation is an independent insurance agency, offering various types of annuities and life insurance policies. FFCC, Inc. was organized for the purposes of purchasing, holding and disposing of real estate owned. First Savings Investments, Inc. was organized on October 3, 2008 for the purpose of holding and managing a portion of the Bank’s investment securities portfolio. 8 REGULATION AND SUPERVISION First Savings Financial Group, as a savings and loan holding company, is required to file certain reports with, is subject to examination by, and otherwise must comply with the rules and regulations of the Office of Thrift Supervision. First Savings Financial Group is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws. First Savings Financial Group is listed on the Nasdaq Capital Market and it is subject to the rules of Nasdaq for listed companies. First Savings Bank is subject to extensive regulation, examination and supervision by the Office of Thrift Supervision, as its primary federal regulator, and the Federal Deposit Insurance Corporation, as its deposits insurer. First Savings Bank is a member of the Federal Home Loan Bank System and its deposit accounts are insured up to applicable limits by the Deposit Insurance Fund managed by the Federal Deposit Insurance Corporation. First Savings Bank must file reports with the Office of Thrift Supervision and the Federal Deposit Insurance Corporation concerning its activities and financial condition in addition to obtaining regulatory approvals before entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the Office of Thrift Supervision and, under certain circumstances, the Federal Deposit Insurance Corporation to evaluate First Savings Bank’s safety and soundness and compliance with various regulatory requirements. This regulatory structure is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the Office of Thrift Supervision, the Federal Deposit Insurance Corporation or Congress, could have a material adverse impact on First Savings Financial Group and First Savings Bank and their operations. Certain of the regulatory requirements that are applicable to First Savings Bank and First Savings Financial Group are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on First Savings Bank and First Savings Financial Group and is qualified in its entirety by reference to the actual statutes and regulations. Regulation of Federal Savings Associations Business Activities. Federal law and regulations, primarily the Home Owners’ Loan Act and the regulations of the Office of Thrift Supervision, govern the activities of federal savings banks, such as First Savings Bank. These laws and regulations delineate the nature and extent of the activities in which federal savings banks may engage. In particular, certain lending authority for federal savings banks, e.g., commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the institution’s capital or assets. Branching. Federal savings banks are authorized to establish branch offices in any state or states of the United States and its territories, subject to the approval of the Office of Thrift Supervision. Capital Requirements. The Office of Thrift Supervision’s capital regulations require federal savings institutions to meet three minimum capital standards: a 1.5% tangible capital to total assets ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS examination rating system) and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS system) and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The Office of Thrift Supervision regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for national banks. 9 The risk-based capital standard requires federal savings institutions to maintain Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision capital regulation based on the risks believed inherent in the type of asset. Core (Tier 1) capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. The Office of Thrift Supervision also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of the particular circumstances. At September 30, 2009, First Savings Bank met each of these capital requirements. See note 21 of the notes to consolidated financial statements beginning on page F-1 of this annual report. Prompt Corrective Regulatory Action. The Office of Thrift Supervision is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, a savings institution that has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be “undercapitalized.” A savings institution that has a total risk-based capital ratio of less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the Office of Thrift Supervision is required to appoint a receiver or conservator within specified time frames for an institution that is “critically undercapitalized.” An institution must file a capital restoration plan with the Office of Thrift Supervision within 45 days of the date it receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding company in the amount of the lesser of 5% of the association’s total assets when it became undercapitalized or the amount necessary to achieve full compliance at the time the association first failed to comply. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. “Significantly undercapitalized” and “critically undercapitalized” institutions are subject to more extensive mandatory regulatory actions. The Office of Thrift Supervision could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Loans to One Borrower. Federal law provides that savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. Subject to certain exceptions, a savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral. See “Item 1. Business — Loan Underwriting Risks — Loans to One Borrower.” Standards for Safety and Soundness. As required by statute, the federal banking agencies have adopted Interagency Guidelines Establishing Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the Office of Thrift Supervision determines that a savings institution fails to meet any standard prescribed by the guidelines, the Office of Thrift Supervision may require the institution to submit an acceptable plan to achieve compliance with the standard. Limitation on Capital Distributions. Office of Thrift Supervision regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to stockholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the Office of Thrift Supervision is required before any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under Office of Thrift Supervision regulations (i.e., generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the Office of Thrift Supervision. If an application is not required, the institution must still provide prior notice to the Office of Thrift Supervision of the capital distribution if, like First Savings Bank, it is a subsidiary of a holding company. If First Savings Bank’s capital were ever to fall below its regulatory requirements or the Office of Thrift Supervision notified it that it was in need of increased supervision, its ability to make capital distributions could be restricted. In addition, the Office of Thrift Supervision could prohibit a proposed capital distribution that would otherwise be permitted by the regulation, if the agency determines that such distribution would constitute an unsafe or unsound practice. 10 Qualified Thrift Lender Test. Federal law requires savings institutions to meet a qualified thrift lender test. Under the test, a savings association is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12-month period. A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. Subsequent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered “qualified thrift investments.” As of September 30, 2009, First Savings Bank maintained 84.7% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test. Transactions with Related Parties. First Savings Bank’s authority to engage in transactions with “affiliates” is limited by Office of Thrift Supervision regulations and Sections 23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve Board’s Regulation W. The term “affiliates” for these purposes generally means any company that controls or is under common control with an institution. First Savings Financial Group and any non-savings institution subsidiaries would be affiliates of First Savings Bank. In general, transactions with affiliates must be on terms that are as favorable to the institution as comparable transactions with non-affiliates. In addition, certain types of transactions are restricted to 10% of an institution’s capital and surplus with any one affiliate and 20% of capital and surplus with all affiliates. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from an institution. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. The Sarbanes-Oxley Act of 2002 generally prohibits a company from making loans to its executive officers and directors. However, that act contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such laws, First Savings Bank’s authority to extend credit to executive officers, directors and 10% stockholders (“insiders”), as well as entities such persons control, is limited. The law restricts both the individual and aggregate amount of loans First Savings Bank may make to insiders based, in part, on First Savings Bank’s capital position and requires certain board approval procedures to be followed. Such loans must be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. There are additional restrictions applicable to loans to executive officers. For information about transactions with our directors and officers, see “Item 13. Certain Relationships and Related Transactions, and Director Independence.” Enforcement. The Office of Thrift Supervision has primary enforcement responsibility over federal savings institutions and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership or conservatorship. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The Federal Deposit Insurance Corporation has authority to recommend to the Director of the Office of Thrift Supervision that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations. 11 Assessments. Federal savings banks are required to pay assessments to the Office of Thrift Supervision to fund its operations. The general assessments, paid on a semi- annual basis, are based upon the savings institution’s total assets, including consolidated subsidiaries, as reported in the institution’s latest quarterly thrift financial report, the institution’s financial condition and the complexity of its asset portfolio. Insurance of Deposit Accounts. First Savings Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation. The Deposit Insurance Fund is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006. Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned. For calendar 2008, assessments ranged from five to forty-three basis points of each institution’s deposit assessment base. Due to losses incurred by the Deposit Insurance Fund in 2008 from failed institutions, and anticipated future losses, the Federal Deposit Insurance Corporation adopted an across the board seven basis point increase in the assessment range for the first quarter of 2009. The Federal Deposit Insurance Corporation made further refinements to its risk-based assessment that were effective April 1, 2009, and effectively made the range seven to 771/2 basis points. The Federal Deposit Insurance Corporation may adjust the scale uniformly from one quarter to the next, except that no adjustment can deviate more than three basis points from the base scale without notice and comment rulemaking. No institution may pay a dividend if in default of the federal deposit insurance assessment. The Federal Deposit Insurance Corporation imposed on all insured institutions a special emergency assessment of five basis points of total assets minus tier 1 capital, as of June 30, 2009 (capped at ten basis points of an institution’s deposit assessment base on the same date) in order to cover losses to the Deposit Insurance Fund. That special assessment was collected on September 30, 2009. The Federal Deposit Insurance Corporation provided for similar special assessments during the final two quarters of 2009, if deemed necessary. However, in lieu of further special assessments, the Federal Deposit Insurance Corporation required insured institutions to prepay estimated quarterly risk-based assessments for the fourth quarter of 2009 through the fourth quarter of 2012. The estimated assessments, which include an assumed annual assessment base increase of 5%, was recorded as a prepaid expense asset as of December 30, 2009. As of December 31, 2009, and each quarter thereafter, a charge to earnings will be recorded for each regular assessment with an offsetting credit to the prepaid asset. Due to the recent difficult economic conditions, deposit insurance per account owner has been raised to $250,000 for all types of accounts until January 1, 2014. In addition, the FDIC adopted an optional Temporary Liquidity Guarantee Program by which, for a fee, noninterest-bearing transaction accounts would receive unlimited insurance coverage until December 31, 2009, subsequently extended until June 30, 2010, and certain senior unsecured debt issued by institutions and their holding companies within a specified time frame would be guaranteed by the FDIC through June 30, 2012, or, in certain cases, December 31, 2012. The Bank made the business decision to not participate in the unlimited noninterest-bearing transaction account coverage and the Bank and the Company opted to not participate in the unsecured debt guarantee program. In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. That payment is established quarterly and during the four quarters ending September 30, 2009 averaged 1.08 basis points of assessable deposits. The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future. Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation or the Office of Thrift Supervision. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. 12 Federal Home Loan Bank System. First Savings Bank is a member of the Federal Home Loan Bank System, which consists of twelve (12) regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. First Savings Bank, as a member of the Federal Home Loan Bank of Indianapolis, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank. At September 30, 2009, First Savings Bank complied with this requirement with an investment in Federal Home Loan Bank stock of $4.2 million. The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts in the late 1980s and to contribute funds for affordable housing programs. These requirements, and general economic conditions, could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future Federal Home Loan Bank advances increased, our net interest income would likely also be reduced. Community Reinvestment Act. Under the Community Reinvestment Act, as implemented by Office of Thrift Supervision regulations, a savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The Community Reinvestment Act does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the Community Reinvestment Act. The Community Reinvestment Act requires the Office of Thrift Supervision, in connection with its examination of a savings association, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The Community Reinvestment Act requires public disclosure of an institution’s rating and requires the Office of Thrift Supervision to provide a written evaluation of an association’s Community Reinvestment Act performance utilizing a four-tiered descriptive rating system. First Savings Bank received a “satisfactory” rating as a result of its most recent Community Reinvestment Act assessment. Other Regulations Interest and other charges collected or contracted for by First Savings Bank are subject to state usury laws and federal laws concerning interest rates. First Savings Bank’s operations are also subject to federal laws applicable to credit transactions, such as the: • • • • • • Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. 13 The operations of First Savings Bank also are subject to the: • • • • • Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; Electronic Funds Transfer Act and Regulation E promulgated thereunder, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check; Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the “USA PATRIOT Act”), which significantly expands the responsibilities of financial institutions, including savings and loan associations, in preventing the use of the U.S. financial system to fund terrorist activities. Among other provisions, it requires financial institutions operating in the United States to develop new anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations; and The Gramm-Leach-Bliley Act places limitations on the sharing of consumer financial information with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of personal financial information with unaffiliated third parties. Federal Reserve System The Federal Reserve Board regulations require savings institutions to maintain non-interest earning reserves against their transaction accounts (primarily Negotiable Order of Withdrawal (“NOW”) and regular checking accounts). For 2009, the regulations generally provided that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $44.4 million; a 10% reserve ratio is applied above $44.4 million. The first $10.3 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The amounts are adjusted annually and for 2010, require a 3% ratio for up to $55.2 million and an exception of $10.7 million. First Savings Bank complies with the foregoing requirements. Holding Company Regulation General. First Savings Financial Group is a nondiversified unitary savings and loan holding company within the meaning of federal law. The Gramm-Leach-Bliley Act of 1999 provides that no company may acquire control of a savings institution after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law and for multiple savings and loan holding companies as described below. Further, the Gramm-Leach-Bliley Act specifies that existing savings and loan holding companies may only engage in such activities. Upon any non-supervisory acquisition by First Savings Financial Group of another savings institution or savings bank that meets the qualified thrift lender test and is deemed to be a savings institution by the Office of Thrift Supervision, First Savings Financial Group would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would generally be limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Office of Thrift Supervision, and certain activities authorized by Office of Thrift Supervision regulation. However, the Office of Thrift Supervision has issued an interpretation concluding that multiple savings and loan holding companies may also engage in activities permitted for financial holding companies. 14 A savings and loan holding company is prohibited from, directly or indirectly, acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company, without prior written approval of the Office of Thrift Supervision, and from acquiring or retaining control of a depository institution that is not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision considers, among other things, the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the deposit insurance funds, the convenience and needs of the community and competitive factors. The Office of Thrift Supervision may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies; and (ii) the acquisition of a savings institution in another state if the laws of the state target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. Although savings and loan holding companies are not currently subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings institutions as described above. First Savings Bank must notify the Office of Thrift Supervision 30 days before declaring any dividend to First Savings Financial Group. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the Office of Thrift Supervision and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution. Acquisition of Control. Under the federal Change in Bank Control Act, a notice must be submitted to the Office of Thrift Supervision if any person (including a company), or group acting in concert, seeks to acquire “control” of a savings and loan holding company or savings association. An acquisition of “control” can occur upon the acquisition of 10% or more of the voting stock of a savings and loan holding company or savings institution or as otherwise defined by the Office of Thrift Supervision. Acquisition of 25% or more of voting stock is definitively deemed a change in control. Under the Change in Bank Control Act, the Office of Thrift Supervision has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that so acquires control would then be subject to regulation as a savings and loan holding company. Regulatory Restructuring Legislation The Obama Administration has proposed, and the House of Representatives and Senate are currently considering, legislation that would restructure the regulation of depository institutions. Proposals range from the merger of the Office of Thrift Supervision with the Office of the Comptroller of the Currency, which regulates national banks, to the creation of an independent federal agency that would assume the regulatory responsibilities of the Office of Thrift Supervision, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and Federal Reserve Board. The federal savings association charter would be eliminated and federal associations required to become banks under some proposals, although others would grandfather existing charters such as that of the Bank. Savings and loan holding companies would become regulated as bank holding companies under certain proposals. Also proposed is the creation of a new federal agency to administer and enforce consumer and fair lending laws, a function that is now performed by the depository institution regulators. The federal preemption of state laws currently accorded federally chartered depository institutions would be reduced under certain proposals as well. Enactment of any of these proposals would revise the regulatory structure imposed on the Bank, which could result in more stringent regulation. At this time, management has no way of predicting the contents of any final legislation, or whether any legislation will be enacted at all. Federal Securities Laws First Savings Financial Group’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. First Savings Financial Group is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934, as amended. 15 Federal Income Taxation General. We report our income on a fiscal year basis using the accrual method of accounting. The federal income tax laws apply to us in the same manner as to other corporations with some exceptions, including particularly our reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to us. For its 2009 fiscal year, First Savings Bank’s maximum federal income tax rate was 34%. First Savings Financial Group and First Savings Bank have entered into a tax allocation agreement. Because First Savings Financial Group owns 100% of the issued and outstanding capital stock of First Savings Bank, First Savings Financial Group and First Savings Bank are members of an affiliated group within the meaning of Section 1504(a) of the Internal Revenue Code, of which group First Savings Financial Group is the common parent corporation. As a result of this affiliation, First Savings Bank may be included in the filing of a consolidated federal income tax return with First Savings Financial Group and, if a decision to file a consolidated tax return is made, the parties agree to compensate each other for their individual share of the consolidated tax liability and/or any tax benefits provided by them in the filing of the consolidated federal income tax return. Our Federal income tax returns have not been audited during the last five years. Bad Debt Reserves. For fiscal years beginning before June 30, 1996, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for nonqualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995 and require savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves. Approximately $4.6 million of our accumulated bad debt reserves would not be recaptured into taxable income unless First Savings Bank makes a “non-dividend distribution” to First Savings Financial Group as described below. Distributions. If First Savings Bank makes “non-dividend distributions” to First Savings Financial Group, the distributions will be considered to have been made from First Savings Bank’s unrecaptured tax bad debt reserves, including the balance of its reserves as of December 31, 1987, to the extent of the “non-dividend distributions,” and then from First Savings Bank’s supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed, but not more than the amount of those reserves, will be included in First Savings Bank’s taxable income. Non-dividend distributions include distributions in excess of First Savings Bank’s current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of First Savings Bank’s current or accumulated earnings and profits will not be so included in First Savings Bank’s taxable income. The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if First Savings Bank makes a non-dividend distribution to First Savings Financial Group, approximately one and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 34% federal corporate income tax rate. First Savings Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves. State Taxation Indiana. Indiana imposes an 8.5% franchise tax based on a financial institution’s adjusted gross income as defined by statute. In computing adjusted gross income, deductions for municipal interest, U.S. Government interest, the bad debt deduction computed using the reserve method and pre-1990 net operating losses are disallowed. 16 Our state income tax returns have not been audited during the last five years. Item 1A. RISK FACTORS Our concentration in non-owner occupied real estate loans may expose us to increased credit risk. At September 30, 2009, $45.2 million, or 24.3% of our residential mortgage loan portfolio and 12.6% of our total loan portfolio, consisted of loans secured by non-owner occupied residential properties. Loans secured by non-owner occupied properties generally expose a lender to greater risk of non-payment and loss than loans secured by owner occupied properties because repayment of such loans depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. In addition, the physical condition of non-owner occupied properties is often below that of owner occupied properties due to lax property maintenance standards, which has a negative impact on the value of the collateral properties. Furthermore, some of our non-owner occupied residential loan borrowers have more than one loan outstanding with us. At September 30, 2009, we had 12 non-owner occupied residential loan relationships, each having an outstanding balance over $500,000, with aggregate outstanding balances of $15.4 million. Consequently, an adverse development with respect to one credit relationship may expose us to a greater risk of loss compared to an adverse development with respect to an owner occupied residential mortgage loan. At September 30, 2009, non-performing non-owner occupied residential loans amounted to $803,000. Non-owner occupied residential properties held as real estate owned amounted to $306,000 at September 30, 2009. For more information about the credit risk we face, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management.” Our recent emphasis on commercial real estate lending and commercial business lending may expose us to increased lending risks. At September 30, 2009, $85.0 million, or 23.6%, of our loan portfolio consisted of commercial real estate loans and commercial business loans. Subject to market conditions, we intend to increase our origination of these loans. Commercial real estate loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Commercial real estate loans also typically involve larger loan balances to single borrowers or groups of related borrowers both at origination and at maturity because many of our commercial real estate loans are not fully-amortizing, but result in “balloon” balances at maturity. Commercial business loans expose us to additional risks since they typically are made on the basis of the borrower’s ability to make repayments from the cash flow of the borrower’s business and are secured by non-real estate collateral that may depreciate over time. In addition, some of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship may expose us to a greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. At September 30, 2009, non-performing commercial business loans and non-performing commercial real estate loans totaled $572,000 and $1.1 million, respectively. For more information about the credit risk we face, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management.” Our unseasoned commercial real estate loan and commercial business loan portfolios may expose us to increased lending risks. A significant amount of our commercial real estate loans and commercial business loans are unseasoned, meaning that they were originated recently. Our limited experience with these loans does not provide us with a significant payment history pattern with which to judge future collectibility. Furthermore, these loans have not been subjected to unfavorable economic conditions. As a result, it may be difficult to predict the future performance of this part of our loan portfolio. These loans may have delinquency or charge-off levels above our expectations, which could adversely affect our future performance. 17 Our construction loan and land and land development loan portfolios may expose us to increased credit risk. At September 30, 2009, $33.4 million, or 9.27% of our loan portfolio consisted of construction loans, farmland and land and land development loans, and $8.2 million, or 36.9% of the construction loan portfolio, consisted of speculative construction loans at that date. While recently the demand for construction loans has decreased significantly due to the decline in the housing market, historically, construction loans, including speculative construction loans, have been a material part of our loan portfolio. Speculative construction loans are loans made to builders who have not identified a buyer for the completed property at the time of loan origination. Subject to market conditions, we intend to continue to emphasize the origination of construction loans and land and land development loans. These loan types generally expose a lender to greater risk of nonpayment and loss than residential mortgage loans because the repayment of such loans often depends on the successful operation or sale of the property and the income stream of the borrowers and such loans typically involve larger balances to a single borrower or groups of related borrowers. In addition, many borrowers of these types of loans have more than one loan outstanding with us so an adverse development with respect to one loan or credit relationship can expose us to significantly greater risk of non-payment and loss. Furthermore, we may need to increase our allowance for loan losses through future charges to income as the portfolio of these types of loans grows, which would hurt our earnings. For more information about the credit risk we face, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management.” Changing interest rates may hurt our earnings and asset value. Our net interest income is the interest we earn on loans and investments less the interest we pay on our deposits and borrowings. Our net interest margin is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates—up or down—could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yield catches up. Changes in the slope of the “yield curve”—or the spread between short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets. In addition, over the last year, the U.S. Federal Reserve has decreased its target rate for federal funds from 1.00% to 0.25%. Interest rate decreases can lead to increased prepayments of loans and mortgage-backed securities as borrowers refinance their loans to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such repayment proceeds into lower yielding investments, which would likely hurt our income. Changes in interest rates also affect the value of our interest-earning assets, and in particular our securities portfolio. Generally, the value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on stockholders’ equity. For further discussion of how changes in interest rates could impact us, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Risk Management — Interest Rate Risk Management.” We may fail to realize the anticipated benefits of the Community First acquisition. The success of the Community First acquisition depends primarily on our ability to successfully integrate the operations of Community First by, among other things, realizing anticipated cost savings, retaining Community First’s loan and deposit customers and its key personnel, and successfully managing any growth resulting from the acquisition. If we are unable to integrate Community First’s operations successfully, the anticipated benefits of the acquisition may not be fully realized, if at all, or may take longer to realize than expected, which may have a material adverse effect of our financial conditions and results of operations. 18 A downturn in the local economy or a decline in real estate values could hurt our profits. Substantially all of our loans are secured by real estate in Clark, Floyd, Harrison, Crawford and Washington Counties, Indiana, and the surrounding areas. As a result of this concentration, a downturn in the local economy could significantly increase nonperforming loans, which would hurt our profits. A decline in real estate values could lead to some of our mortgage loans becoming inadequately collateralized, which would expose us to greater risk of loss. Additionally, a decline in real estate values could hurt our portfolio of construction loans, nonresidential real estate loans, and land and land development loans and could reduce our ability to originate such loans. For a discussion of our primary market area, see “Item 1. Business — Market Area.” Strong competition within our primary market area could hurt our profits and slow growth. We face intense competition both in making loans and attracting deposits. This competition has made it more difficult for us to make new loans and attract deposits. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which would reduce net interest income. Competition also makes it more difficult to grow loans and deposits. At June 30, 2009, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation, we held approximately 13.20%, 1.34%, 14.73%, 71.15% and 7.37% of the FDIC-insured deposits in Clark, Floyd, Harrison, Crawford and Washington Counties, Indiana, respectively. Some of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our primary market area. See “Item 1. Business — Market Area” and “Item 1. Business — Competition” for more information about our primary market area and the competition we face. We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations. We are subject to extensive regulation, supervision and examination by the Office of Thrift Supervision, our chartering authority, and by the Federal Deposit Insurance Corporation, as insurer of our deposits. First Savings Financial Group is also subject to regulation and supervision by the Office of Thrift Supervision. Such regulation and supervision governs the activities in which an institution and its holding company may engage, and are intended primarily for the protection of the insurance fund and the depositors and borrowers of First Savings Bank rather than for holders of First Savings Financial Group common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. If our regulators require us to charge-off loans or increase our allowance for loan losses, our earnings would suffer. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. For a further discussion, see “Item 1. Business – Regulation and Supervision.” The current administration has also proposed comprehensive legislation intended to modernize regulation of the United States financial system. The proposed legislation contains several provisions that would have a direct impact on First Savings Financial Group and First Savings Bank. Under the proposed legislation, the federal savings association charter would be eliminated and the Office of Thrift Supervision would be consolidated with the Comptroller of the Currency into a new regulator, the National Bank Supervisor. The proposed legislation would also require First Savings Bank to convert to a national bank or a state-chartered institution. In addition, the proposed legislation would eliminate the status of “savings and loan holding company” and mandate that First Savings Financial Group register as a bank holding company. Registration as a bank holding company would represent a significant change because there are material differences between savings and loan holding company and bank holding company supervision and regulation. For example, bank holding companies above a specified asset size are subject to consolidated leverage and risk-based capital requirements whereas savings and loan holding companies are not subject to such requirements. The proposed legislation would also create the Consumer Financial Protection Agency, a new federal agency dedicated to administering and enforcing fair lending and consumer compliance laws with respect to financial products and services, which would create new regulatory requirements and increased regulatory compliance costs for us. If enacted, the proposed legislation may have a material impact on our operations. However, because any final legislation may differ significantly from the current administration’s proposal, the specific effects of the legislation cannot be evaluated at this time. 19 Expenses from operating as a public company and from new equity benefit plans will continue to adversely affect our profitability. Our noninterest expenses are impacted as a result of the financial, accounting, legal and various other additional expenses usually associated with operating as a public company. We also recognize additional annual employee compensation and benefit expenses stemming from the shares that are purchased or granted to employees and executives under the employee stock ownership plan and other new benefit plans. These additional expenses adversely affect our profitability. We recognize expenses for our employee stock ownership plan when shares are committed to be released to participants’ accounts and will recognize expenses for restricted stock awards and stock options over the vesting period of awards made to recipients. Our contribution to First Savings Charitable Foundation may not be tax deductible, which could hurt our profits. We believe that our contribution to First Savings Charitable Foundation, valued at $1.2 million, pre-tax, will be deductible for federal income tax purposes. However, we do not have any assurance that the Internal Revenue Service will grant tax-exempt status to the foundation. If the contribution is not deductible, we would not receive any tax benefit from the contribution. In addition, even if the contribution is tax deductible, we may not have sufficient profits to be able to use the deduction fully. In the event it is more likely than not that we will be unable to use the entire deduction, we will be required to establish a valuation allowance related to any deferred tax asset that has been recorded for this contribution. Item 1B. UNRESOLVED STAFF COMMENTS None. 20 Item 2. PROPERTIES We conduct our business through our main office and branch offices. The following table sets forth certain information relating to these facilities as of September 30, 2009. Location Main Office: Clarksville Main Office 501 East Lewis & Clark Parkway Clarksville, Indiana Branch Offices: Jeffersonville - Allison Lane Office 2213 Allison Lane Jeffersonville, Indiana Charlestown Office 1100 Market Street Charlestown, Indiana Floyd Knobs Office 3711 Paoli Pike Floyd Knobs, Indiana Georgetown Office 1000 Copperfield Drive Georgetown, Indiana Jeffersonville - Court Avenue Office 202 East Court Avenue Jeffersonville, Indiana Sellersburg Office 125 Hunter Station Way Sellersburg, Indiana Corydon – Hwy 62 Office 900 Hwy 62 NW Corydon, Indiana Corydon – Chestnut Street Office 117 E Chestnut Street Corydon, Indiana Salem Office 1336 S Jackson Street Salem, Indiana English Office 200 Indiana Avenue English, Indiana Marengo Office 125 W Old Short Street Marengo, Indiana Milltown Office 430 E State Road 64 Milltown, Indiana Leavenworth Office 510 Hwy 62 Leavenworth, Indiana Year Opened Owned/ Leased 1968 Owned Owned Owned Owned Owned Owned Owned Owned Leased Owned Owned Owned Owned Owned 1975 1993 1999 2003 1986 1995 1996 1994 1995 1925 1984 1983 1969 21 Item 3. LEGAL PROCEEDINGS Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market for Common Equity and Related Stockholder Matters The Company’s common stock is listed on the Nasdaq Capital Market (“Nasdaq”) under the trading symbol “FSFG.” The Company completed its initial public offering on October 6, 2008 and commenced trading on October 7, 2008. As of December 24, 2009, the Company had approximately 355 holders of record and 2,414,940 shares of common stock outstanding. The figure of shareholders of record does not reflect the number of person whose shares are in nominee or “street” name accounts through brokers. The following table sets forth the high and low sales prices for each full quarterly period during which the Company’s stock was traded during the past fiscal year. Because the Company’s stock did not begin trading until October 7, 2008, information is provided beginning with the quarter ended March 31, 2009. See Item 1, “Business—Regulation and Supervision—Limitation on Capital Distributions” and note 20 to the notes to the consolidated financial statements beginning on page F-1 of this annual report for information regarding dividend restrictions applicable to the Company. Fiscal Year Ended September 30, 2009: Fourth Quarter Third Quarter Second Quarter First Quarter Purchases of Equity Securities High Sale $ Low Sale Dividends Market price end of period $ 11.00 10.85 10.05 N/A 9.85 $ 9.59 8.99 N/A $ 0.00 0.00 0.00 N/A 10.70 9.85 9.60 N/A First Savings Financial Group did not purchase any shares of its common stock during the fiscal year ended September 30, 2009. 22 Item 6. SELECTED FINANCIAL DATA The following tables contain certain information concerning our consolidated financial position and results of operations, which is derived in part from our audited consolidated financial statements. The following is only a summary and should be read in conjunction with the audited consolidated financial statements and notes beginning on page F-1 of this annual report. (In thousands) Financial Condition Data: Total assets Cash and cash equivalents Securities available-for-sale Securities held-to-maturity Loans net Deposits Borrowings from Federal Home Loan Bank Stockholders’ equity (total equity before September 30, 2009) (In thousands) Operating Data: Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income Noninterest expense Income (loss) before income taxes Income tax expense (benefit) Net income (loss) Per Share Data: Net income - basic Net income - diluted Dividends $ $ $ $ 2009 2008 At September 30, 2007 2006 2005 480,811 $ 10,404 72,580 6,782 353,823 350,816 55,773 228,924 $ 21,379 10,697 8,456 174,807 189,209 8,000 203,321 $ 10,395 8,260 7,422 167,371 168,782 3,000 206,399 $ 15,223 5,897 8,219 166,695 175,891 – 205,796 14,651 7,039 11,602 163,676 175,451 – 52,877 29,720 29,662 28,850 28,487 For the Year Ended September 30, 2007 2008 2006 12,523 $ 5,972 6,551 1,540 5,011 1,054 6,555 (490) (300) (190) $ 13,078 $ 6,183 6,895 758 6,137 841 5,737 1,241 427 814 $ 12,223 $ 5,250 6,973 813 6,160 889 6,453 596 241 355 $ N/A N/A N/A N/A N/A N/A N/A N/A N/A 2005 10,874 4,255 6,619 336 6,283 1,306 5,601 1,988 784 1,204 N/A N/A N/A 2009 13,008 $ 4,440 8,568 819 7,749 1,263 9,231 (219) (252) 33 $ 0.01 0.01 0.00 23 2009 At or For the Year Ended September 30, 2007 2008 2006 2005 Performance Ratios: Return on average assets Return on average equity Interest rate spread (1) Net interest margin (2) Other expenses to average assets Efficiency ratio (3) Average interest-earning assets to average interest-bearing liabilities Average equity to average assets Capital Ratios: Tangible capital (4) Core capital (4) Risk-based capital (4) Asset Quality Ratios: Allowance for loan losses as a percent of total loans Allowance for loan losses as a percent of non-performing loans Net charge-offs to average outstanding loans during the period Non-performing loans as a percent of total loans Non-performing assets as a percent of total assets Other Data: Number of offices Number of deposit accounts (5) Number of loans (6) 0.01% (0.09)% 0.40% 0.17% 0.57% 0.06 3.41 3.93 3.90 93.90 125.66 21.84 (0.64) 2.97 3.38 3.11 86.19 113.15 14.07 2.78 3.48 3.77 2.79 74.16 108.61 14.24 1.24 3.49 3.74 3.13 82.08 109.23 13.91 7.55% 12.87% 14.56% 13.96% 7.55 12.32 12.87 22.09 14.56 24.70 13.96 23.36 4.32 3.34 3.50 2.66 70.68 107.59 13.24 13.82% 13.82 23.84 1.03% 0.98% 0.75% 0.51% 0.52% 70.06 104.72 117.16 50.61 55.79 0.38 1.49 1.44 14 32,689 6,552 0.64 0.94 0.96 7 16,831 2,188 0.21 0.64 1.27 7 17,525 2,216 0.51 1.01 1.79 7 17,962 2,325 0.16 0.93 1.14 7 17,930 2,516 (1) (2) (3) (4) (5) (6) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost on average interest-bearing liabilities. Tax exempt income is reported on a tax equivalent basis using a federal marginal tax rate of 34%. Represents net interest income as a percent of average interest-earning assets. Tax exempt income is reported on a tax equivalent basis using a federal marginal tax rate of 34%. Represents other expenses divided by the sum of net interest income and other income. Represents the capital ratios of only the Bank. The 2009 figure includes 16,455 deposit accounts acquired in the acquisition of Community First. The 2009 figure includes 4,595 loans acquired in the acquisition of Community First. 24 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Overview Income. 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. Other significant sources of pre-tax income are service charges (mostly from service charges on deposit accounts and loan servicing fees), increases in the cash surrender value of life insurance, fees from sale of mortgage loans originated for sale in the secondary market and commissions on sales of securities and insurance products. We also recognize income from the sale of securities. Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings. Expenses. The noninterest expenses we incur in operating our business consist of salaries and employee benefits expenses, occupancy expenses, data processing expenses, professional service fees, federal deposit insurance premiums and other miscellaneous expenses. Our noninterest expenses increased as a result of operating as a public company. These additional expenses consist primarily of legal and accounting fees, expenses of shareholder communications and meetings and stock exchange listing fees. Salaries and employee benefits consist primarily of: salaries and wages paid to our employees; payroll taxes; and expenses for health insurance, retirement plans and other employee benefits. Upon shareholder approval and adoption of new equity benefit plans, we will recognize additional annual employee compensation expenses. We cannot determine the actual amount of these new stock-related compensation and benefit expenses at this time because applicable accounting practices require that they be based on the fair market value of the shares of common stock at specific points in the future. Occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities. Depreciation of premises and equipment is computed using the straight-line method based on the useful lives of the related assets, which range from three to 50 years. Data processing expenses are the fees we pay to third parties for processing customer information, deposits and loans. Federal deposit insurance premiums are payments we make to the Federal Deposit Insurance Corporation for insurance of our deposit accounts. Our contribution to the charitable foundation is an additional operating expense that reduced net income during 2009. The significant expense resulting from the contribution to the foundation will not be a recurring one. Other expenses include expenses for advertising, office supplies, postage, telephone, insurance, regulatory assessments and other miscellaneous operating expenses. Critical Accounting Policies We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the allowance for loan losses to be our only critical accounting policy. 25 Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance at least quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectibility of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for loan losses and may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings. See note 4 of the notes to consolidated financial statements beginning on page F-1 of this annual report. Operating Strategy Our mission is to operate and grow a profitable community-oriented financial institution. We plan to achieve this by executing our strategy of: • • • • continuing our historical focus on residential mortgage lending but de-emphasizing residential mortgage lending secured by non-owner occupied properties; pursuing opportunities to increase commercial real estate lending and commercial business lending; providing exceptional customer service to attract and retain customers; and expanding our market share and market area by opening new branch offices and pursuing opportunities to acquire other financial institutions or branches. Continuing our historical focus on residential mortgage lending but de-emphasizing residential mortgage lending secured by non-owner occupied properties. Our predominant lending activity has been residential mortgage lending in our primary market area. A significant portion of the residential mortgage loans that we had originated before 2005 are secured by non-owner occupied properties. Loans secured by non-owner occupied properties generally carry a greater risk of loss than loans secured by owner-occupied properties, and our non-performing loan balances have increased in recent periods primarily because of delinquencies in our non-owner occupied residential loan portfolio. Since 2005, when we hired a new President and Chief Executive Officer, we have de-emphasized non-owner occupied residential mortgage lending and have focused, and intend to continue to focus, our residential mortgage lending primarily on originating residential mortgage loans secured by owner-occupied properties. At September 30, 2009, 51.6% of our total loans were residential mortgage loans and 24.3% of our residential mortgage loans were secured by non-owner occupied properties. We intend to expand our emphasis on residential mortgage lending because this type of lending generally carries lower credit risk and has contributed to our historically favorable asset quality. Pursuing opportunities to increase commercial real estate lending and commercial business lending. In recent periods, we have begun to focus on commercial real estate and commercial business lending and intend to continue this focus. Commercial real estate loans and commercial business loans give us the opportunity to earn more income because these loans have higher interest rates than residential mortgage loans in order to compensate for the increased credit risk. At September 30, 2009, commercial real estate loans and commercial business loans represented 13.4% and 10.3%, respectively, of our total loans. We intend to continue to pursue these lending opportunities in our primary market area. 26 Providing exceptional customer service to attract and retain customers. As a community-oriented financial institution, we emphasize providing exceptional customer service as a means to attract and retain customers. We deliver personalized service and respond with flexibility to customer needs. We believe that our community orientation is attractive to our customers and distinguishes us from the larger banks that operate in our primary market area. Expanding our market share and market area. The acquisition of Community First expanded our market area into Harrison, Crawford and Washington Counties, Indiana. We intend to continue to pursue opportunities to expand our market share and market area by seeking to open additional branch offices and pursuing opportunities to acquire other financial institutions or branches of other financial institutions in our primary market area and surrounding areas. Balance Sheet Analysis Cash and Cash Equivalents. At September 30, 2009 and September 30, 2008, cash and cash equivalents totaled $10.4 million and $21.4 million, respectively. Cash and cash equivalents decreased primarily due to the investment of the stock conversion proceeds which were held on deposit at September 30, 2008, offset by $4.0 million acquired in the acquisition of Community First. Loans. Our primary lending activity is the origination of loans secured by real estate. We originate one-to four-family mortgage loans, multifamily loans, commercial real estate loans, commercial business loans and construction loans. To a lesser extent, we originate various consumer loans including home equity lines of credit and credit cards. Residential mortgage loans comprise the largest segment of our loan portfolio. At September 30, 2009, these loans totaled $185.8 million, or 51.6% of total loans, compared to $113.5 million, or 64.2% of total loans at September 30, 2008. Total residential mortgage loan balances increased in 2009 primarily due to $77.3 million of these loans acquired in the acquisition of Community First, partially offset by repayments during 2009. We generally originate loans for investment purposes, although, depending on the interest rate environment, we typically sell 25-year and 30-year fixed-rate residential mortgage loans that we originate into the secondary market in order to limit exposure to interest rate risk and to earn noninterest income. Management intends to continue offering short-term adjustable rate residential mortgage loans and sell long-term fixed rate mortgage loans in the secondary market with servicing released. Commercial real estate loans totaled $48.1 million, or 13.4% of total loans at September 30, 2009, compared to $15.5 million, or 8.7% of total loans at September 30, 2008. The balance of commercial real estate loans has increased primarily due to $24.4 million of these loans acquired in the acquisition of Community First and management’s focus on originating these loans during 2009. In addition, we have had a greater opportunity to originate these loans during 2009 as a result of our increased commercial lending personnel and decreased competition in the marketplace. Management continues to focus on pursuing nonresidential loan opportunities in order to continue diversifying the loan portfolio. Multi-family real estate loans totaled $12.6 million, or 3.5% of total loans at September 30, 2009, compared to $3.3 million, or 1.9% of total loans at September 30, 2008. The balance of multi-family real estate loans increased primarily due to $4.0 million of these loans acquired in the acquisition of Community First, our increased commercial lending personnel and our offering of competitive short-term rates on these loans during 2009. Residential construction loans totaled $14.6 million, or 4.0% of total loans, at September 30, 2009 of which $8.2 million were speculative construction loans. At September 30, 2008, residential construction loans totaled $6.2 million, or 3.5% of total loans, of which $4.5 million were speculative loans. The increase in residential construction loan balances is due primarily to $10.2 million of these loans acquired in the acquisition of Community First, offset by less originations of such loans during 2009 due to the general slowdown in the housing market in our primary market area and, to a lesser extent, increased competition in the market for these loans. The Bank is a leading construction lender in its marketplace and management intends to aggressively pursue quality construction lending opportunities when the housing market recovers. 27 Commercial construction loans totaled $7.6 million, or 2.1% of total loans, at September 30, 2009 compared to $2.0 million, or 1.1% of total loans at September 30, 2008. Commercial construction loan balances increased primarily due to $7.2 million of these loans acquired in the acquisition of Community First, offset by the payoff by permanent financing of a $1.7 million commercial construction loan during 2009 and a general slowdown of commercial construction in our primary market area and increased competition in the marketplace for these loans. Land and land development loans totaled $11.2 million, or 3.1% of total loans at September 30, 2009, compared to $4.7 million, or 2.7% of total loans at September 30, 2008. The increase is due primarily due to $6.1 million of these loans acquired in the acquisition of Community First. These loans are primarily secured by vacant lots to be improved for residential and nonresidential development and farmland. Commercial business loans totaled $36.9 million, or 10.3% of total loans, at September 30, 2009 compared to $14.4 million, or 8.2% of total loans, at September 30, 2008. Commercial business loan balances increased primarily due to $20.6 million of these loans acquired in the acquisition of Community First and as a result of our increased commercial lending personnel. Consumer loans totaled $43.2 million, or 12.0% of total loans, at September 30, 2009 compared to $17.2 million, or 9.7% of total loans, at September 30, 2008. The total balance of consumer loans has increased primarily due to $26.6 million of these loans acquired in the acquisition of Community First. In general, consumer loans, including home equity lines of credit, unsecured loans and loans secured by deposits, have declined due to pay-downs, payoffs, charge-offs and management’s decision to focus on other lending opportunities with less inherent credit risk. 28 The following table sets forth the composition of our loan portfolio at the dates indicated. (Dollars in thousands) Real estate mortgage: Residential Commercial Multi-family Residential construction Commercial construction Land and land development Total Commercial business Consumer: Home equity lines of credit Auto loans Boat loans Other Total Total loans Reserve for uncollected interest Deferred loan origination fees and costs, net Undisbursed portion of loans in process Allowance for loan losses Loans, net 2009 Amount Percent 2008 Amount Percent At September 30, 2007 Amount Percent 2006 Amount Percent 2005 Amount Percent $ 185,800 48,090 12,584 14,555 7,648 11,189 279,866 51.61% $ 13.36 3.50 4.04 2.12 3.11 77.74 113,518 15,459 3,282 6,189 1,991 4,748 145,187 64.20% $ 8.74 1.86 3.50 1.13 2.69 82.12 104,297 18,364 1,275 11,583 3,265 5,022 143,806 60.33% $ 10.62 0.74 6.70 1.89 2.91 83.19 101,122 19,090 1,821 20,562 29 2,524 145,148 59.29% $ 11.19 1.07 12.06 0.02 1.48 85.11 105,150 11,738 1,640 22,110 2,800 2,917 146,355 61.62% 6.88 0.96 12.96 1.64 1.71 85.77 36,901 10.25 14,411 8.15 12,645 7.31 10,232 6.00 8,462 4.96 17,365 18,279 3,091 4,476 43,211 4.82 5.08 0.86 1.25 12.01 9,970 1,950 3,257 2,033 17,210 5.64 1.10 1.84 1.15 9.73 8,275 1,946 3,975 2,225 16,421 4.79 1.13 2.30 1.28 9.50 6,049 1,675 5,158 2,300 15,182 3.55 0.98 3.02 1.34 8.89 5,029 1,934 6,237 2,619 15,819 2.95 1.13 3.66 1.53 9.27 359,978 100.00% 176,808 100.00% 172,872 100.00% 170,562 100.00% 170,636 100.00% – (846) 3,306 3,695 353,823 $ – (795) 1,067 1,729 174,807 $ $ 29 - (618) 4,822 1,297 167,371 1 (335) 3,333 868 166,695 $ - (204) 6,282 882 163,676 $ Loan Maturity The following table sets forth certain information at September 30, 2009 regarding the dollar amount of loan principal repayments becoming due during the period indicated. The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity, are reported as due in one year or less. (Dollars in thousands) Amounts due in: One year or less More than one year to two years More than two years to three years More than three years to five years More than five years to ten years More than ten years to fifteen years More than fifteen years Total Residential Real Estate (1) Commercial Real Estate (2) Construction (3) Commercial Business Consumer Total Loans At September 30, 2009 $ $ 20,670 13,248 11,415 18,689 35,865 30,925 67,572 198,384 $ $ 17,498 10,741 8,591 10,071 7,081 3,066 2,231 59,279 $ $ 22,203 - - - - - - 22,203 $ $ 26,752 3,520 2,137 2,507 1,709 123 153 36,901 $ $ 11,569 7,070 5,527 7,738 6,939 4,316 52 43,211 $ $ 98,692 34,579 27,670 39,005 51,594 38,430 70,008 359,978 (1) (2) (3) Includes multi-family loans. Includes farmland and land and land development loans. Includes construction loans for which the Bank has committed to provide permanent financing. Fixed vs. Adjustable Rate Loans The following table sets forth the dollar amount of all loans at September 30, 2009 that are due after September 30, 2010, and have either fixed interest rates or adjustable interest rates. The amounts shown below exclude unearned loan origination fees. (In thousands) Residential real estate (1) Commercial real estate (2) Construction Commercial business Consumer Total (1) (2) Includes multi-family loans. Includes farmland and land and land development loans. Fixed Rates Adjustable Rates $ 120,120 $ 30,320 - 8,206 21,256 179,902 $ 57,594 $ 11,461 - 1,943 10,386 81,384 $ Total 177,714 41,781 - 10,149 31,642 261,286 $ 30 Loan Activity The following table shows loans originated, purchased and sold during the periods indicated. (In thousands) Total loans at beginning of period Loans originated: Residential real estate (1) Commercial real estate (2) Construction Commercial business Consumer Total loans originated Loans purchased Increase due to acquisition of Community First Deduct: Loan principal repayments Loan sales Net loan activity Total loans at end of period (1) (2) Includes multi-family loans. Includes land and land development loans. Year Ended September 30, 2008 2009 2007 $ 176,808 $ 172,872 $ 170,562 22,115 8,360 3,258 13,883 14,013 61,629 – 174,940 38,844 7,154 7,918 8,648 15,854 78,418 – – 25,203 7,956 23,597 12,798 13,916 83,470 – – (50,886) (2,513) 183,170 359,978 $ (72,603) (1,879) 3,936 176,808 $ (80,707) (453) 2,310 172,872 $ Securities Available for Sale. Our available for sale securities portfolio consists primarily of U.S. government agency debt securities, mortgage-backed securities and collateralized mortgage obligations issued by government sponsored enterprises, municipal bonds and privately issued collateralized mortgage obligations. Available for sale securities increased by $61.9 million from September 30, 2008 to September 30, 2009 primarily due to $48.9 million of these securities acquired in the acquisition of Community First, of which $32.2 million were mortgage backed securities issued by government sponsored enterprises, $11.2 million were privately issued collateralized mortgage obligations and $5.5 million were municipal bonds. These securities also increased due to purchases of $48.6 million of U.S. government agency securities, mortgage-backed securities and a collateralized mortgage obligation issued by government sponsored enterprises and municipal securities, offset by maturities and calls of $17.3 million, sales of $16.0 million and principal repayments of $2.8 million. The increase in available for sale securities, excluding those acquired in the acquisition of Community First, was primarily funded by increases in Federal Home Loan Bank advances, decreases in interest-earning deposits with banks, repayments on held to maturity securities and cumulative security portfolio earnings. Securities Held to Maturity. Our held to maturity securities portfolio consists primarily of mortgage-backed securities issued by government sponsored enterprises and a municipal bond. Held to maturity securities decreased by $1.7 million, or 19.8%, from September 30, 2008 to September 30, 2009 due primarily to principal repayments of $1.7 million. 31 The following table sets forth the amortized costs and fair values of our investment securities at the dates indicated. (In thousands) Securities available for sale: Agency bonds and notes Agency CMO Privately-issued CMO Privately-issued asset-backed Municipal Money market preferred stock Agency mortgage-backed securities Other equity securities Total Securities held to maturity: Agency bonds and notes Municipal Agency mortgage-backed securities Total 2009 Amortized Cost Fair Value $ $ $ $ 5,825 3,343 11,139 52 17,081 – 34,368 – 71,808 – 305 5,845 3,473 11,139 52 17,512 – 34,483 76 72,580 – 308 At September 30, 2008 Amortized Cost Fair Value 2007 Amortized Cost Fair Value $ 4,008 $ 1,891 – – 4,669 – – – $ 10,568 $ $ 4,059 1,900 – – 4,642 – – 96 10,697 $ – 307 – 310 $ $ 5,000 – – – 1,119 2,000 – – 8,119 4,000 309 $ 6,477 6,782 $ 6,746 7,054 $ 8,149 8,456 $ 8,181 8,491 $ 3,113 7,422 $ 5,006 – – – 1,115 2,000 – 139 8,260 4,000 304 3,091 7,395 The following table sets forth the activity in our investment securities portfolio during the periods indicated. (In thousands) Mortgage-backed securities: Mortgage-backed securities, beginning of period (1) Purchases Sales Maturities Repayments and prepayments Increase (decrease) in net unrealized gain Increase due to acquisition of Community First Net increase (decrease) in mortgage-backed securities Mortgage-backed securities, end of period (1) Investment securities: Investment securities, beginning of period (1) Purchases Sales Maturities Repayments and prepayments Gains (losses) on sales Increase (decrease) in net unrealized gain Acquired with Community First Net increase (decrease) in investment securities Investment securities, end of period (1) (1) At fair value. At or For the Year Ended September 30, 2008 2009 2007 $ $ $ $ 8,181 $ 4,005 – – (3,496) 352 32,187 33,048 41,229 $ 11,007 $ 44,547 (16,041) (17,300) (1,158) 100 529 16,721 27,398 38,405 $ 3,091 $ 6,040 – – (1,005) 55 – 5,090 8,181 $ 12,564 $ 7,577 – (9,000) (129) – (5) – (1,557) 11,007 $ 3,846 – – – (795) 40 – (755) 3,091 10,186 5,311 – (3,000) (1) – 68 – 2,378 12,564 32 The following table set forth the stated maturities and weighted average yields of debt securities at September 30, 2009. Weighted average yields on tax-exempt securities are presented on a tax equivalent basis using a federal marginal tax rate of 34%. Certain mortgage-backed securities and collateralized mortgage obligations have adjustable interest rates and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below. Weighted average yield calculations on investments available for sale do not give effect to changes in fair value that are reflected as a component of equity. One Year or Less More than One Year to Five Years More than Five Years to Ten Years More than Ten Years Total Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield (Dollars in thousands) Securities available for sale: Agency bonds and notes Agency CMO Privately-issued CMO Privately-issued asset-backed Municipal Agency mortgage-backed securities Total Securities held to maturity: Municipal Agency mortgage-backed securities Total Carrying Value – – – 52 4,342 – 4,394 – 578 578 $ $ – – – 0.83 3.08 – 3.05% $ – – – – 858 227 1,085 – – – – 7.08 7.28 7.12% $ 1,000 – – – 3,617 7,916 12,533 5.00 – – – 7.03 6.01 6.09% $ 4,845 3,473 11,139 – 8,695 26,340 54,492 5.23 5.23 1.60 – 7.54 5.28 4.74% $ 5,845 3,473 11,139 52 17,512 34,483 72,504 – 4.44 4.44% $ – 443 443 – 4.93 4.93% $ 305 300 605 5.84 4.83 5.34% $ – 5,156 5,156 – 5.18 5.18% $ 305 6,477 6,782 5.19 5.23 1.60 0.83 6.30 5.46 4.88% 5.84 5.08 5.12% As of September 30, 2009, we did not own any investment securities of a single issuer, other than U.S. government and agency securities, that had an aggregate book value in excess of 10% of the Company’s stockholders’ equity at that date. Deposits. Deposit accounts, generally obtained from individuals and businesses throughout our primary market area, are our primary source of funds for lending and investments. Our deposit accounts are comprised of noninterest-bearing accounts, interest-bearing savings, checking and money market accounts and certificates of deposits. Deposits increased $161.6 million from September 30, 2008 to September 30, 2009 primarily due to $179.5 million of deposits acquired in the acquisition of Community First, of which $19.0 million were noninterest-bearing, $38.1 million were interest-bearing checking, $25.9 million were money market deposit accounts, $17.1 million were interest-bearing savings and $79.3 million were time deposits. Excluding those deposits acquired in the acquisition of Community First, deposits would have decreased $17.9 million from September 30, 2008 to September 30, 2009 with noninterest-bearing checking decreasing by $469,000, interest-bearing checking decreasing by $21.1 million and offset by money market deposit accounts increasing $206,000, interest-bearing savings increasing $1.1 million and certificates of deposits increasing $2.4 million. The decrease in the interest-bearing checking accounts balance is primarily due to the elimination of the funds on deposit at September 30, 2008 for the stock conversion subscription orders of $20.5 million. In early 2007, we introduced free checking and sweep accounts. We believe that the introduction of these products has made us more competitive in attracting deposits during recent periods. The following table sets forth the balances of our deposit accounts at the dates indicated. (In thousands) Non-interest-bearing demand deposits NOW accounts Money market accounts Passbook accounts Certificates of deposit Total At September 30, 2008 2009 2007 $ $ 25,388 $ 56,398 34,715 36,132 198,183 350,816 $ 6,843 $ 39,340 8,565 17,974 116,487 189,209 $ 5,011 19,127 6,830 18,499 119,315 168,782 33 The following table indicates the amount of jumbo certificates of deposit by time remaining until maturity as of September 30, 2009, of which $4.4 million were brokered deposits maturing greater than twelve months from September 30, 2009 which were acquired in the acquisition of Community First. Jumbo certificates of deposit require minimum deposits of $100,000. Maturity Period Three months or less Over three through six months Over six through twelve months Over twelve months Total Amount (In thousands) 8,810 $ 14,949 12,564 21,214 57,537 $ The following table sets forth time deposits classified by rates at the dates indicated. (In thousands) 0.00 - 1.00% 1.01 - 2.00% 2.01 - 3.00% (1) 3.01 - 4.00% 4.01 - 5.00% 5.01 - 6.00% 6.01 - 7.00% 7.01 - 8.00% 8.01 - 9.00% (2) Total At September 30, 2008 2007 2009 5,791 $ 49,025 56,141 40,015 34,204 6,923 1,186 4,898 – 198,183 $ – $ – 37,847 22,816 38,666 4,869 1,153 4,878 6,258 116,487 $ – – 332 25,288 73,674 7,784 1,429 5,116 5,692 119,315 $ $ (1) (2) Includes $6.4 million of our pension plan assets invested in certificates of deposit at September 30, 2009. Represents the investment of our pension plan assets in certificates of deposit. The following table sets forth the amount and maturities of time deposits at September 30, 2009. (Dollars in thousands) 0.00 - 1.00% 1.01 - 2.00% 2.01 - 3.00% 3.01 - 4.00% 4.01 - 5.00% 5.01 - 6.00% 6.01 - 7.00% 7.01 - 8.00% Total Less Than One Year Amount Due More Than One Year to Two Years More Than Two Years to Three Years More Than Three Years Total Percent of Total Time Deposit Accounts $ $ 5,788 43,807 35,493 20,183 12,506 335 611 3,448 122,171 $ $ $ $ 3 4,798 10,577 4,548 7,217 4,250 575 1,333 33,301 34 – 325 8,362 6,916 9,620 684 – – 25,907 $ $ – 95 1,709 8,368 4,861 1,654 – 117 16,804 $ $ 5,791 49,025 56,141 40,015 34,204 6,923 1,186 4,898 198,183 2.92% 24.74 28.33 20.19 17.26 3.49 0.60 2.47 100.00% The following table sets forth deposit activity for the periods indicated. (In thousands) Beginning balance Increase due to acquisition of Community First Increase (decrease) before interest credited Interest credited Net increase (decrease) in deposits Ending balance Year Ended September 30, 2008 2009 2007 $ $ 189,209 $ 179,460 (21,633) 3,780 161,607 350,816 $ 168,782 $ – 15,241 5,186 20,427 189,209 $ 175,891 – (8,470) 1,361 (7,109) 168,782 Borrowings. We use borrowings from the Federal Home Loan Bank of Indianapolis (FHLBI) consisting of advances and borrowings under a line of credit arrangement to supplement our supply of funds for loans and investments. We also utilize retail and broker repurchase agreements as sources of borrowings. The following table sets forth certain information regarding the Bank’s use of Federal Home Loan Bank advances. (Dollars in thousands) Maximum amount of FHLB advances outstanding at any month-end during period $ Average FHLB advances outstanding during period Weighted average interest rate during period Balance outstanding at end of period Weighted average interest rate at end of period $ Year Ended September 30, 2008 2007 2009 $ 55,112 14,946 55,112 2.11% $ 1.20% $ 8,000 6,422 3.60% $ 8,000 3.36% 3,000 153 5.23% 3,000 4.88% Borrowings from the FHLBI increased $47.8 million from September 30, 2008 to September 30, 2009 primarily due to $29.7 million of advances acquired in the acquisition of Community First and advances drawn to fund the acquisition of Community First. Advances were also used to fund loan demand and to purchase available for sale securities. See note 10 to the notes to the consolidated financial statements beginning on page F-1 of this annual report for additional information regarding FHLBI borrowings. The Bank acquired a $1.3 million retail repurchase agreement and $15.9 million of broker repurchase agreements in the acquisition of Community First having weighted average rates of 0.63% and 1.62%, respectively, at September 30, 2009. Prior to the acquisition, the Bank has not utilized repurchase agreements as sources of borrowings. Since the transaction was consummated just prior to the close of business on September 30, 2009, the Bank had no average balances or weighted average interest rates during the period for repurchase agreements. See note 9 to the notes to the consolidated financial statements beginning on page F-1 of this annual report for additional information regarding repurchase agreements. Results of Operations for the Years Ended September 30, 2009 and 2008 Overview. The Company reported net income of $33,000 ($0.01 per share diluted; weighted average common shares outstanding of 2,315,498, as adjusted) for the year ended September 30, 2009, compared to a net loss of $190,000 for the year ended September 30, 2008. A significant factor that adversely affected net income for 2009 was the $1.2 million charitable contribution discussed in “Noninterest Expense” below. Excluding this charitable contribution, the Company would have realized net income of $766,000 ($0.35 per share diluted; weighted average common shares outstanding of 2,207,306, as adjusted) for the year ended September 30, 2009. The primary factor that contributed to the net loss for 2008 was a significant provision for loan losses related to the workout of problem loans to a large borrower. The collateral securing the loans was non-owner occupied, single-family residential real estate properties for which the condition and market value deteriorated significantly since the origination of the loans. 35 Net Interest Income. Net interest income increased $2.0 million, or 30.8%, from $6.6 million for the year ended September 30, 2008 to $8.6 million for the year ended September 30, 2009 primarily as the result of an increase in the interest rate spread from 2008 to 2009 and an increase in the ratio of average interest-earning assets to average interest-bearing liabilities from 113.15% for 2008 to 125.66% for 2009. The interest rate spread, the difference between the average tax-equivalent yield on interest-earning assets and the average cost of interest-bearing liabilities, increased from 2.97% in 2008 to 3.41% in 2009. This increase in the interest rate spread is primarily due to a decrease in the average cost of funds of 0.93% that more than offset the decrease in the average tax-equivalent yield on interest-earning assets of 0.49% when comparing the two years. Total interest income increased $485,000, or 3.9%, from $12.5 million for 2008 to $13.0 million for 2009. The increase was the result of an increase of $25.4 million, or 13.0%, in the average balance of earning assets from $195.9 million in 2008 to $221.3 million in 2009, partially offset by a decrease in the average tax-equivalent yield on interest-earning assets of 0.49% from 6.42% for 2008 to 5.93% for 2009. The average yield on interest-earning assets decreased primarily as a result of lower market interest rates. The average yield on interest- bearing deposits with banks, representing primarily overnight deposits with FHLBI, experienced the largest decreased from 2.46% for 2008 to 0.76% for 2009 as the economic slowdown resulted in a reduction in short-term market interest rates. Interest income on loans decreased $218,000, or 1.9%, from $11.6 million for 2008 to $11.4 million for 2009 due to a decrease in the average tax-equivalent yield from 6.74% in 2008 to 6.30% in 2009 as a result of lower market interest rates, partially offset by an increase in the average balance of loans outstanding. Average loans outstanding increased $8.6 million, or 5.0%, from $172.3 million in 2008 to $180.9 million in 2009. During 2009, in an effort to increase the size and diversity of the loan portfolio, the Bank offered competitive rates on short-term multi-family and commercial mortgage loans and was successful in originating these loans. The impact of lower market interest rates reduced the average tax-equivalent yield earned on loans. Interest income on investment securities increased $855,000, or 119.9%, from $713,000 for 2008 to $1.6 million for 2009 due primarily to an increase in the average balance of investment securities of $18.9 million, or 120.6%, from $15.7 million in 2008 to $34.6 million in 2009. The average tax-equivalent yield on investments securities was relatively consistent when comparing the two years of 4.74% in 2008 compared to 4.78% in 2009. During 2009, in an effort to increase the size and diversity of the asset portfolio, the Bank increased its investments in U.S. government agency debt securities, mortgage-backed securities and collateralized mortgage obligations issued by government sponsored enterprises and municipal bonds. Interest income on interest-bearing deposits with banks decreased $130,000, or 79.8%, as a result of a $2.2 million decrease in the average balance for 2009 compared to 2008 and a significant decrease in the average yield from 2.46% in 2008 to 0.76% in 2009. During 2009, in order to mitigate the effects of declining market interest rates, management focused on reducing excess liquidity by investing in higher yielding loans and investment securities. Total interest expense decreased $1.5 million, or 25.7%, as a result of a decrease in the average cost of funds from 3.45% in 2008 to 2.52% in 2009, partially offset by a $3.0 million increase in the average balance of interest-bearing liabilities from $173.1 in 2008 to $176.1 million in 2009. The average balance of interest-bearing deposits was $161.1 million in 2009 compared to $166.7 million in 2008 and the average cost of funds for deposits was 2.56% in 2009 compared to 3.44% in 2008. The average balance of FHLBI advances was $14.9 million in 2009 compared to $6.4 million in 2008 and the average cost of funds for advances was 2.11% in 2009 compared to 3.60% in 2008. The average cost of interest-bearing liabilities decreased for 2009 primarily as a result of a reduction in the rate offered on interest-bearing deposit and passbook savings accounts during 2009, the repricing of time deposits at lower market rates during 2009, and the use of advances from FHLBI during 2009. 36 Average Balances and Yields. The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest- earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Nonaccrual loans are included in average balances only. Loan fees are included in interest income on loans and are not material. Tax exempt income on loans and on investment and mortgage-backed securities has been calculated on a tax equivalent basis using a federal marginal tax rate of 34%. (Dollars in thousands) Assets: Interest-bearing deposits with banks Loans Investment securities Mortgage-backed securities Federal Home Loan Bank stock Total interest-earning assets Non-interest-earning assets Total assets Liabilities and equity: NOW accounts Money market deposit accounts Passbook accounts Certificates of deposit Total interest-bearing deposits Federal Home Loan Bank advances Total interest-bearing liabilities Non-interest-bearing deposits Other non-interest-bearing liabilities Total liabilities Total equity Total liabilities and equity Net interest income Interest rate spread Net interest margin Average interest-earning assets to average interest-bearing liabilities 2009 Interest and Dividends Average Balance Yield/ Cost Year Ended September 30, 2008 Interest and Dividends Average Balance Yield/ Cost 2007 Interest and Dividends Average Balance Yield/ Cost 34 11,393 1,138 516 46 13,127 94 109 45 3,877 4,125 315 4,440 $ $ $ $ 4,481 180,864 24,344 10,238 1,353 221,280 15,384 236,664 20,013 7,702 18,528 114,904 161,147 14,946 176,093 6,820 2,073 184,986 163 11,611 451 291 68 12,584 144 127 86 5,384 5,741 231 5,972 0.76% $ 6.30 4.67 5.04 3.40 5.93 $ $ 0.47 1.42 0.24 3.37 2.56 2.11 2.52 $ $ 6,638 172,272 9,511 6,144 1,336 195,901 15,109 211,010 21,391 7,134 17,923 120,263 166,711 6,422 173,133 5,823 2,363 181,319 602 11,720 566 166 65 13,119 148 137 296 5,594 6,175 8 6,183 2.46% $ 6.74 4.74 4.74 5.09 6.42 $ $ 0.67 1.78 0.48 4.48 3.44 3.60 3.45 $ $ 11,994 156,733 10,374 3,466 1,344 183,911 21,526 205,437 19,618 7,657 21,477 120,430 169,182 153 169,335 4,649 2,197 176,181 51,678 236,664 $ 29,691 211,010 $ 29,256 205,437 $ $ 8,687 $ 6,612 $ 6,936 3.41% 3.93% 125.66% 37 2.97% 3.38% 113.15% 5.02% 7.48 5.46 4.79 4.84 7.13 0.75 1.79 1.38 4.65 3.65 5.23 3.65 3.48% 3.77% 108.61% Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. Changes attributable to changes in both rate and volume have been allocated proportionally based on the absolute dollar amounts of change in each. (In thousands) Interest income: Interest-bearing deposits with banks Loans receivable Investment securities Mortgage-backed securities Other interest-earning assets Total interest-earning assets Interest expense: Deposits Federal Home Loan Bank advances Total interest-bearing liabilities Year Ended September 30, 2009 Compared to Year Ended September 30, 2008 Year Ended September 30, 2008 Compared to Year Ended September 30, 2007 Increase (Decrease) Due to Volume Rate Increase (Decrease) Due to Volume Rate Net Net $ (42) $ 705 694 206 1 1,564 (186) 122 (64) (87) $ (923) (7) 19 (23) (1,021) (1,430) (38) (1,468) 447 $ (129) $ (218) 687 225 (22) 543 (1,616) 84 (1,532) 2,075 $ (205) $ 671 (44) 127 - 549 (88) 225 137 412 $ (234) $ (780) (71) (2) 3 (1,084) (346) (2) (348) (736) $ (439) (109) (115) 125 3 (535) (434) 223 (211) (324) Net increase (decrease) in net interest income $ 1,628 $ Provision for Loan Losses. The provision for loan losses decreased $721,000 from $1.5 million for the year ended September 30, 2008 to $819,000 for the year ended September 30, 2009. As discussed above, the primary factor that contributed to the significant provision to loan losses for 2008 was the workout of problem loans of a large borrower and the deterioration of the collateral securing the loans due to substandard maintenance and disrepair. The provision for loan losses related to these nonperforming amounted to approximately $881,000 for 2008. It is management’s assessment that the allowance for loan losses at September 30, 2009 was adequate and appropriately reflected the inherent risk of loss in the Bank’s loan portfolio at that date. During 2009, the Bank had net charge-offs of $689,000 compared to $1.1 million for 2008 and the net loan portfolio growth was $6.2 million for 2009, excluding loans acquired in the acquisition of Community First of $172.9 million, compared to a net increase of $7.4 million for 2008. The loan portfolio growth for 2009 was primarily in the multi-family and commercial mortgage loans portfolio, which generally has a lower level of inherent credit risk than commercial business loans and consumer loans. The consistent application of management’s allowance for loan losses methodology resulted in an increase in the level of the allowance for loan losses consistent with the increase in nonperforming loans. See “Analysis of Nonperforming and Classified Assets” included herein. Noninterest Income. Noninterest income increased $209,000, or 19.8%, to $1.3 million for the year ended September 30, 2009 as compared $1.1 million for the year ended September 30, 2008. The Bank’s principal source of noninterest income is deposit account service charges. Service charges on deposits accounts increased $75,000 from $533,000 for 2008 to $608,000 for 2009 primarily due to an increased fee structure assessed to customers. Net gain on sales of mortgage loans was $29,000 for 2009 compared to $21,000 for 2008. The cash surrender value of life insurance increased from $159,000 for 2008 to $171,000 for 2009. Other noninterest income increased $14,000 from $341,000 for 2008 to $355,000 for 2009. The Company recognized net gains of $100,000 on sales of investment securities during 2009. The Company recognized no gains or losses on sales of investment securities during 2008. 38 Noninterest Expense. Noninterest expenses increased $2.7 million, or 40.8%, to $9.2 million for the year ended September 30, 2009 compared to $6.6 million for the year ended September 30, 2008. An increase in compensation and benefits expense represented $683,000 of the increase in noninterest expense, primarily due to $227,000 in ESOP compensation expense, as well as a reduction of $328,000 in compensation and benefits costs deferred in connection with loan originations as compared to the prior year. Occupancy and equipment expense increased $87,000 primarily as a result of increases in real estate taxes, building maintenance and depreciation expense. Data processing expense increased $48,000 due to increased customer banking activities and normal vendor fee increases. Professional fees increased $304,000 primarily due to operation as a public company, consulting fees related to Sarbanes-Oxley compliance and evaluation of the Bank’s current and prospective core processing vendors, and fees related to the organization and operation of the Bank’s investment subsidiary organized in October 2008. FDIC insurance premiums increased $255,000 primarily due to the special assessment for the quarter ended June 30, 2009 of $97,000, an increase in assessment rates and the exhaustion of prior credits during 2009. Charitable contributions increased $1.2 million when comparing the two periods primarily as a result of the $1.2 million one-time contribution to First Savings Charitable Foundation which was organized in connection with, and funded upon completion of, the Company’s initial public offering. The contribution consisted of $100,000 cash and 110,000 shares of Company common stock (issued at $10.00 per share). Net loss on foreclosed real estate decreased $287,000, primarily due to the sale of a substantial number of foreclosed real estate properties during 2008, of which a significant portion were the deteriorated non-owner occupied, single-family properties discussed above in “Provision for Loan Losses”. Other operating expenses increased $392,000 primarily due to increases in director fees, officer and employee training expenditures, fees associated with stock registration and regulatory compliance, and fees associated with administration of benefit plans. Income Tax Expense. The Company recognized an income tax benefit of $252,000 for the year ended September 30, 2009 compared to a tax benefit of $300,000 for the year ended September 30, 2008. The tax benefits for 2009 and 2008 are primarily due to pre-tax losses and increased tax-exempt sources of income for both years. See note 13 of the notes to consolidated financial statements beginning on page F-1 of this annual report. Risk Management Overview. Managing risk is essential to successfully managing a financial institution. Our most prominent risk exposures are credit risk, interest rate risk and market risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of interest income as a result of changes in interest rates. Market risk arises from fluctuations in interest rates that may result in changes in the values of financial instruments, such as available-for-sale securities that are accounted for on a mark-to-market basis. Other risks that we face are operational risks, liquidity risks and reputation risk. Operational risks include risks related to fraud, regulatory compliance, processing errors, technology and disaster recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue or in the value of our common stock once we become a public company. Credit Risk Management. Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans. When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status. When the loan becomes 15 days past due, a late notice is sent to the borrower and a late fee is assessed. When the loan becomes 30 days past due, a more formal letter is sent. Between 15 and 30 days past due, telephone calls are also made to the borrower. After 30 days, we regard the borrower as in default. The borrower may be sent a letter from our attorney and we may commence collection proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Generally, when a consumer loan becomes 60 days past due, we institute collection proceedings and attempt to repossess any personal property that secures the loan. Generally, we institute foreclosure proceedings when a loan is 60 days past due. Management informs the board of directors monthly of the amount of loans delinquent more than 30 days, all loans in foreclosure and repossessed property that we own. Analysis of Nonperforming and Classified Assets. We consider repossessed assets and loans that are 90 days or more past due to be nonperforming assets. Loans are generally placed on non-accrual status when they become 90 days delinquent at which time the accrual of interest ceases and the allowance for any uncollectible accrued interest is established and charged against operations. Typically, payments received on a non-accrual loan are first applied to the outstanding principal balance. 39 Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at the lower of its cost, which is the unpaid balance of the loan plus foreclosure costs, or fair market value at the date of foreclosure. Holding costs and declines in fair value after acquisition of the property result in charges against income. The following table provides information with respect to our nonperforming assets at the dates indicated. We had no troubled debt restructurings at any of the dates indicated. (Dollars in thousands) Non-accrual loans: Residential real estate Commercial real estate Multi-family Land and land development Construction Commercial business Consumer Total Accruing loans past due 90 days or more: Residential real estate Commercial real estate Construction Multi-family Land and land development Commercial business Consumer Total Total of non-accrual and 90 days or more past due loans Real estate owned Other non-performing assets Total non-performing assets Total non-performing loans to total loans Total non-performing loans to total assets Total non-performing assets and troubled debt restructurings to total assets $ $ 2009 2008 At September 30, 2007 2006 2005 $ 1,995 1,022 – 537 461 572 145 4,732 128 – 228 – – 67 119 542 5,274 1,589 64 6,927 $ 1.49% 1.10% $ 472 – – 33 – 119 174 798 678 – – – – – 175 853 1,651 390 146 2,187 $ 0.94% 0.72% $ 99 22 – 33 – – 277 431 572 104 – – – – – 676 1,107 1,278 198 2,583 $ 0.64% 0.54% $ 568 211 – – 418 9 368 1,574 – – – – – – 141 141 1,715 1,941 45 3,701 $ 1.01% 0.83% 1.44% 0.96% 1.27% 1.79% 221 15 – – – – 591 827 563 – – – – – 191 754 1,581 555 219 2,355 0.93% 0.77% 1.14% Federal regulations require us to review and classify our assets on a regular basis. In addition, the Office of Thrift Supervision has the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention. When we classify an asset as substandard or doubtful we may establish a specific allowance for loan losses. If we classify an asset as loss, we charge off an amount equal to 100% of the portion of the asset classified loss. 40 The following table shows the aggregate amounts of our classified assets at the dates indicated. (In thousands) Special mention assets Substandard assets Doubtful assets Loss assets Total classified assets 2009 At September 30, 2008 2007 $ $ 6,559 $ 8,080 1,216 – 15,855 $ 3,769 $ 1,650 618 – 6,037 $ 1,605 4,481 409 – 6,495 Classified assets includes loans that are classified due to factors other than payment delinquencies, such as lack of current financial statements and other required documentation, insufficient cash flows or other deficiencies, and, therefore, are not included as non-performing assets. Other than as disclosed in the above tables, there are no other loans where management has serious doubts about the ability of the borrowers to comply with the present loan repayment terms. Delinquencies. The following table provides information about delinquencies in our loan portfolio at the dates indicated. (Dollars in thousands) Residential real estate Commercial real estate Multi-family Construction Commercial business Land and land development. Consumer Total At September 30, 2009 At September 30, 2008 30-89 Days 90 Days or More 30-89 Days 90 Days or More Number of Loans 34 3 – 4 6 1 72 120 $ $ Principal Balance of Loans 2,328 94 – 316 701 28 622 4,089 Number of Loans 13 – – 3 2 1 27 46 $ $ Principal Balance of Loans 597 – – 432 80 33 221 1,363 Number of Loans Principal Balance of Loans Number of Loans 7 – – 1 1 – 17 26 $ $ 573 – – 35 36 – 118 762 9 – – 1 – 1 17 28 $ $ Principal Balance of Loans 570 – – 252 – 33 316 1,171 (Dollars in thousands) Residential real estate Commercial real estate Multi-family Construction Commercial business Land and land development.... Consumer Total At September 30, 2007 30-89 Days 90 Days or More Number of Loans Principal Balance of Loans Number of Loans 9 $ – – – 2 1 5 17 $ 629 – – – 295 400 171 1,495 9 $ 2 – – – 1 10 22 $ Principal Balance of Loans 589 116 – – – 33 194 932 Analysis and Determination of the Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings. Our methodology for assessing the appropriateness of the allowance for loan losses consists of: (1) a specific allowance required for identified problem loans; (2) a general valuation allowance on the remainder of the loan portfolio; and (3) an unallocated allowance to cover uncertainties that could affect management’s estimate of probable losses. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available to absorb losses in the loan portfolio. 41 Specific Allowance Required for Identified Problem Loans. We establish a specific allowance for loans that are classified as doubtful or substandard. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of the loan. General Valuation Allowance on the Remainder of the Loan Portfolio. We establish a general allowance for loans that are not currently classified in order to recognize the inherent losses associated with lending activities. The general allowance covers non-classified loans and is based on historical loss experience adjusted for qualitative factors such as changes in economic conditions, changes in the volume of past due and non-accrual loans and classified assets, changes in the nature and volume of the portfolio, changes in the value of underlying collateral for collateral dependent loans, concentrations of credit, and other factors. Unallocated Valuation Allowance. We establish an unallocated allowance to cover uncertainties that could affect management’s estimate of probable losses. Any unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimate specific and general losses in the loan portfolio. The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated. (Dollars in thousands) Residential real estate Commercial real estate Multi-family Construction Land and land development Commercial business Consumer Unallocated Total allowance for loan Losses Amount 1,493 271 – 302 258 444 927 – 3,695 $ $ 2009 % of Allowance to Total Allowance % of Loans in Category to Total Loans 40.40% 7.33 – 8.17 6.98 12.02 25.10 – 51.61% $ 13.36 3.50 6.17 3.11 10.25 12.00 – Amount 622 220 – – 50 196 641 – At September 30, 2008 % of Allowance to Total Allowance % of Loans in Category to Total Loans 35.97% 12.73 – – 2.89 11.34 37.07 – 64.20% $ 8.74 1.86 4.63 2.69 8.15 9.73 – Amount 267 137 – – – 268 625 – 2007 % of Allowance to Total Allowance % of Loans in Category to Total Loans 20.59% 10.56 – – – 20.66 48.19 – 60.33% 10.62 0.74 8.59 2.91 7.31 9.50 – 100.00% 100.00% $ 1,729 100.00% 100.00% $ 1,297 100.00% 100.00% (Dollars in thousands) Residential real estate Commercial real estate Multi-family Construction Land and land development Commercial business Consumer Unallocated Total allowance for loan Losses At September 30, % of Loans in Category to Total Loans Amount 2005 % of Allowance to Total Allowance % of Loans in Category to Total Loans 59.29% $ 11.19 1.07 12.08 1.48 6.00 8.89 – 100.00% $ 114 51 – – – 169 548 – 882 12.93% 5.78 – – – 19.16 62.13 – 100.00% 61.62% 6.88 0.96 14.60 1.71 4.96 9.27 – 100.00% Amount 88 118 – – – 157 505 – 868 $ $ 2006 % of Allowance to Total Allowance 10.14% 13.59 – – – 18.09 58.18 – 100.00% 42 Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that the Office of Thrift Supervision, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. The Office of Thrift Supervision may require us to increase our allowance for loan losses based on judgments different from ours. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations. Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated. (Dollars in thousands) Allowance for loan losses at beginning of period Provision for loan losses Charge offs: Residential real estate Commercial real estate Multi-family Land and land development Construction Commercial business Consumer Total charge-offs Recoveries: Residential real estate Non-residential real estate Multi-family Land and land development Construction Commercial business Consumer Total recoveries Net charge-offs (recoveries) Increase due to acquisition of Community First 2009 Year Ended September 30, 2007 2006 2008 $ $ 1,729 819 $ 1,297 1,540 580 – – – – 39 209 828 57 – – – – 82 139 689 1,836 1,085 – – – – – 153 1,238 – 110 – – – – 20 130 1,108 – $ 868 758 – 216 – – – 9 199 424 – – – – – 2 93 95 329 – $ 882 813 528 – – – – – 314 842 – – – – – – 15 15 827 – Allowance for loan losses at end of period $ 3,695 $ 1,729 $ 1,297 $ 868 $ 2005 805 336 30 – – – – 98 142 270 – – – – – – 11 11 259 – 882 Allowance for loan losses to non-performing loans Allowance for loan losses to total loans outstanding at the end of the period Net charge-offs (recoveries) to average loans outstanding during the period 70.06% 104.72% 117.16% 50.61% 55.79% 1.03% 0.98% 0.75% 0.51% 0.38% 0.64% 0.21% 0.51% 0.52% 0.16% Interest Rate Risk Management. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Our strategy for managing interest rate risk emphasizes: adjusting the maturities of borrowings; adjusting the investment portfolio mix and duration and generally selling in the secondary market substantially all newly originated one-to four-family residential real estate loans. We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments. 43 We have an Asset/Liability Management Committee, which includes members of management approved by the Board of Directors, to communicate, coordinate and control all aspects involving asset/liability management. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals. Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income and net income. Net Portfolio Value Analysis. We use a net portfolio value (NPV) analysis prepared by the Office of Thrift Supervision to review our level of interest rate risk. This analysis measures interest rate risk by capturing changes in net portfolio value of our cash flows from assets, liabilities and off-balance sheet items, based on a range of assumed changes in market interest rates. NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off- balance sheet items. These analyses assess the risk of loss in market risk-sensitive instruments in the event of a sudden and sustained 100 to 300 basis point increase or 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. The following table, which is based on information that we provide to the Office of Thrift Supervision, presents the change in our NPV at September 30, 2009 that would occur in the event of an immediate change in interest rates based on Office of Thrift Supervision assumptions, with no effect given to any steps that we might take to counteract that change. Basis Point (“bp”) Change in Rates Dollar Amount $ 300 200 100 0 (100) At September 30, 2009 Net Portfolio Value Dollar Change (Dollars in thousands) Percent Change Net Portfolio Value as a Percent of Portfolio Value of Assets NPV Ratio Change $ 54,822 58,789 60,928 62,282 62,242 (7,460) (3,493) (1,354) - (40) (12)% (6) (2) - - 11.22% 11.89 12.21 12.39 12.34 (117)bp (50)bp (18)bp - (5)bp The Office of Thrift Supervision uses various assumptions in assessing interest rate risk. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analyses presented in the foregoing tables. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, if there is a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table. Prepayment rates can have a significant impact on interest income. Because of the large percentage of loans and mortgage-backed securities we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that in turn affect the rate sensitivity position. When interest rates rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. Our asset sensitivity would be reduced if prepayments slow and vice versa. While we believe these assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity. 44 Liquidity Management. Liquidity is the ability to meet current and future short-term financial obligations. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities and borrowings from the Federal Home Loan Bank of Indianapolis. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest- earning deposits and securities and (4) the objectives of our asset/liability management policy. Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At September 30, 2009, cash and cash equivalents totaled $10.4 million. Securities classified as available-for-sale, amounting to $72.6 million at September 30, 2009, provide additional sources of liquidity. In addition, at September 30, 2009, we had the ability to borrow a total of approximately $60.0 million from the Federal Home Loan Bank of Indianapolis. At September 30, 2009, we had $55.8 million Federal Home Loan Bank borrowings outstanding. At September 30, 2009, we had $64.9 million in commitments to extend credit outstanding. Certificates of deposit due within one year of September 30, 2009 totaled $122.2 million, or 61.6% of certificates of deposit. We believe the large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods due to the recent low interest rate environment and local competitive pressure. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2010. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered. The following tables present certain of our contractual obligations as of September 30, 2009. (In thousands) Deferred director fee agreements Deferred compensation agreements (1) Operating lease obligations Repurchase agreements Federal funds purchased FHLB borrowings Total Total Less than One Year $ $ 350 247 3 17,239 1,180 55,773 74,792 $ $ $ $ Payments due by period One to Three Years 11 68 – 15,935 – 5,175 21,189 $ $ 6 31 3 1,304 1,180 37,311 39,835 Three to Five Years More Than Five Years 11 77 – – – 13,287 13,375 $ $ 322 71 – – – – 393 (1) Includes deferred compensation agreement with a former officer that calls for annual payments of $9,000 until his death. Our primary investing activities are the origination of loans and the purchase of securities. Our primary financing activities consist of activity in deposit accounts and Federal Home Loan Bank advances. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive. Occasionally, we offer promotional rates on certain deposit products to attract deposits. 45 Financing and Investing Activities The following table presents our primary investing and financing activities during the periods indicated. (In thousands) Investing activities: Loan purchases Loan originations Loan principal repayments Loan sales Proceeds from maturities and principal repayments of investment securities Proceeds from maturities and principal repayments of mortgage-backed securities Proceeds from sales of investment securities available- for-sale Proceeds from sales of mortgage-backed securities available-for-sale Purchases of investment securities Purchases of mortgage-backed securities Financing activities: Increase (decrease) in deposits Increase in Federal Home Loan Bank borrowings Year Ended September 30, 2008 2007 2009 $ – $ (61,629) 50,885 2,513 17,300 4,438 16,041 – (44,547) (4,005) – $ (78,418) 72,603 1,879 9,107 992 – – (7,577) (6,040) – (83,470) 80,707 453 3,000 789 – – (5,311) – (17,854) 18,061 20,427 5,000 (7,109) 3,000 Capital Management. We are subject to various regulatory capital requirements administered by the Office of Thrift Supervision, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2009, we exceeded all of our regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines. See “Item 1. Business — Regulation and Supervision — Regulation of Federal Savings Associations — Capital Requirement,” and note 21 of the notes to consolidated financial statements beginning on page F-1 of this annual report. Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For information about our loan commitments and unused lines of credit, see note 15 of the notes to consolidated financial statements beginning on page F-1 of this annual report. For the year ended September 30, 2009, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows. Impact of Recent Accounting Pronouncements For a discussion of the impact of recent accounting pronouncements, see note 1 of the notes to consolidated financial statements beginning on page F-1 of this annual report. Effect of Inflation and Changing Prices The consolidated financial statements and related financial data presented in this annual report have been prepared according to generally accepted accounting principles in the United States, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. 46 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated herein by reference to Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.” Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this item is included herein beginning on page F-1. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. Item 9A(T). CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. (b) Internal Controls Over Financial Reporting The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2009, utilizing the framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of September 30, 2009 is effective. Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements are prevented or timely detected. 47 All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, 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. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report. (c) Changes to Internal Control Over Financial Reporting There were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2009 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting. Item 9B. OTHER INFORMATION None. Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE PART III The information relating to the directors and officers of the Company, information regarding compliance with Section 16(a) of the Exchange Act and information regarding the audit committee and audit committee financial expert is incorporated herein by reference to the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders (the “Proxy Statement”). The Company has adopted a code of ethics and business conduct which applies to all of the Company’s and the Bank’s directors, officers and employees. A copy of the code of ethics and business conduct is available to stockholders on the Investor Relations portion of the Bank’s website at www.fsbbank.net. Item 11. EXECUTIVE COMPENSATION The information regarding executive compensation is incorporated herein by reference to the Proxy Statement. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement. (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement. (c) Changes in Control 48 Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant. (d) Equity Compensation Plan Information None. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information relating to the principal accountant fees and expenses is incorporated herein by reference to the Proxy Statement. Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (1) (2) The financial statements required in response to this item are incorporated by reference from Item 8 of this Annual Report on Form 10-K. All financial statement schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. (3) Exhibits No. Description 3.1 3.2 4.0 10.1 10.2 10.3 10.4 10.5 10.6 21.0 23.0 31.1 31.2 32.0 Articles of Incorporation of First Savings Financial Group, Inc. (1) Bylaws of First Savings Financial Group, Inc. (1) Specimen Stock Certificate of First Savings Financial Group, Inc. (1) Employment Agreement by and among First Savings Financial Group, Inc., First Savings Bank, F.S.B. and Larry W. Myers, dated October 7, 2009* (2) Employment Agreement by and among First Savings Financial Group, Inc., First Savings Bank, F.S.B. and John P. Lawson, Jr., dated October 7, 2009* (2) Employment Agreement by and among First Savings Financial Group, Inc., First Savings Bank, F.S.B. and Anthony A. Schoen, dated October 7, 2009* (2) Employment Agreement by and among First Savings Financial Group, Inc., First Savings Bank, F.S.B. and Samuel E. Eckart, dated October 7, 2009* (2) First Savings Bank, F.S.B. Employee Severance Compensation Plan* (2) First Savings Bank, F.S.B. Supplemental Executive Retirement Plan* (2) Subsidiaries of the Registrant Consent of Monroe Shine & Co., Inc. Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer Section 1350 Certificate of Chief Executive Officer and Chief Financial Officer * Management contract or compensatory plan, contract or arrangement (1) Incorporated herein by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-151636), as amended, initially filed with the (2) Incorporated herein by reference to the exhibits to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 8, Securities and Exchange Commission on June 13, 2008. 2009. 49 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES CONTENTS Report of Independent Registered Public Accounting Firm CONSOLIDATED BALANCE SHEETS CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY CONSOLIDATED STATEMENTS OF CASH FLOWS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-1 Page F-2 F-3 F-4 F-5 F-6 F-7 The Board of Directors First Savings Financial Group, Inc. Clarksville, Indiana Report of Independent Registered Public Accounting Firm We have audited the accompanying consolidated balance sheets of First Savings Financial Group, Inc. and Subsidiaries as of September 30, 2009 and 2008, and the related consolidated statements of income, changes in stockholders equity and cash flows for the years then ended. The Company's management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Savings Financial Group, Inc. and Subsidiaries as of September 30, 2009 and 2008, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. New Albany, Indiana November 13, 2009 MONROE SHINE & CO., INC. ♦ CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS F-2 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2009 AND 2008 (In thousands, except share and per share data) ASSETS Cash and due from banks Interest-bearing deposits with banks Total cash and cash equivalents Securities available for sale, at fair value Securities held to maturity (fair value of $7,054 in 2009 and $8,491 in 2008) Loans held for sale Loans, net of allowance for loan losses of $3,695 in 2009 and $1,729 in 2008 Federal Home Loan Bank stock, at cost Premises and equipment Foreclosed real estate Accrued interest receivable: Loans Securities Cash surrender value of life insurance Goodwill Core deposit intangible Other assets Total Assets LIABILITIES Deposits: Noninterest-bearing Interest-bearing Total deposits Federal funds purchased Repurchase agreements Borrowings from Federal Home Loan Bank Accrued interest payable Advance payments by borrowers for taxes and insurance Accrued expenses and other liabilities Total Liabilities COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock of $.01 par value per share Authorized 1,000,000 shares; none issued Common stock of $.01 par value per share Authorized 20,000,000 shares; issued 2,542,042 shares Additional paid-in capital Retained earnings - substantially restricted Accumulated other comprehensive income Unearned ESOP shares Total Stockholders' Equity Total Liabilities and Stockholders' Equity See notes to consolidated financial statements. F-3 $ $ $ 2009 2008 $ 8,359 2,045 10,404 72,580 6,782 317 353,823 4,170 9,916 1,589 1,607 493 3,931 5,882 2,741 6,576 5,378 16,001 21,379 10,697 8,456 - 174,807 1,336 4,242 390 770 160 3,755 - - 2,932 480,811 $ 228,924 $ 25,388 325,428 350,816 1,180 17,239 55,773 516 341 2,069 427,934 - 25 24,263 29,453 932 (1,796) 52,877 6,843 182,366 189,209 - - 8,000 143 398 1,454 199,204 - - - 29,420 300 - 29,720 $ 480,811 $ 228,924 (In thousands, except share and per share data) 2009 2008 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 30, 2009 AND 2008 INTEREST INCOME Loans, including fees Securities: Taxable Tax-exempt Dividend income Interest-bearing deposits with banks Total interest income INTEREST EXPENSE Deposits Borrowings from Federal Home Loan Bank Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses NONINTEREST INCOME Service charges on deposit accounts Net gain on sale of investment securities Net gain on sales of mortgage loans Increase in cash surrender value of life insurance Other income Total noninterest income NONINTEREST EXPENSE Compensation and benefits Occupancy and equipment Data processing Advertising Professional fees FDIC insurance premiums Charitable contributions Net loss on foreclosed real estate Other operating expenses Total noninterest expense Loss before income taxes Income tax benefit Net Income (Loss) Net income per common share: Basic Diluted Weighted average number of shares outstanding: Basic Diluted See notes to consolidated financial statements. F-4 $ 11,361 $ 1,402 166 46 33 13,008 4,125 315 4,440 8,568 819 7,749 608 100 29 171 355 1,263 3,787 902 647 167 520 277 1,211 88 1,632 9,231 (219) (252) 33 0.01 0.01 2,315,498 2,315,498 $ $ $ $ 11,579 657 56 68 163 12,523 5,741 231 5,972 6,551 1,540 5,011 533 - 21 159 341 1,054 3,104 815 599 142 216 22 42 375 1,240 6,555 (490) (300) (190) N/A N/A N/A N/A CONSOLIDATED BALANCE SHEETS CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 2009 AND 2008 (In thousands, except share and per share data) Balances at October 1, 2007 COMPREHENSIVE INCOME Net loss Other comprehensive income: Change in unrealized gain on securities available for sale, net of deferred income tax benefit of $5 Defined benefit pension plan: Net unrecognized gain, net of deferred income tax expense of $167 Amortization of transition asset, net of deferred income tax expense of $2 Amortization of prior service cost, net of deferred income tax benefit of $2 Total comprehensive income Balances at September 30, 2008 COMPREHENSIVE INCOME Net income Other comprehensive income: Change in unrealized gain on securities available for sale, net of deferred income tax expense of $319 Less: Reclassification adjustment for realized securties gains in earnings, net of tax benefit of $40 Defined benefit pension plan: Net unrecognized gain, net of deferred income tax expense of $135 Total comprehensive income Issuance of common stock Shares released by ESOP trust Balances at September 30, 2009 See notes to consolidated financial statements. Common Stock Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Net Unrealized Gain on Securities Available for Sale Defined Benefit Pension Plan Unearned ESOP Shares Total $ - $ - $ 29,610 $ 85 $ (33) $ - $ 29,662 - - - - - - - - - - (190) - - - - - (7) - - - - - 255 3 (3) - - - - - (190) (7) 255 3 (3) 58 $ - $ - $ 29,420 $ 78 $ 222 $ - $ 29,720 - - - - 25 - - - - - 24,269 (6) 33 - - - - - - 486 (60) - - - - - - 206 - - - - - - 33 486 (60) 206 665 (2,034) 22,260 238 232 $ 25 $ 24,263 $ 29,453 $ 504 $ 428 $ (1,796) $ 52,877 F-5 (In thousands) 2009 2008 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2009 AND 2008 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for loan losses Depreciation Amortization of premiums and accretion of discounts on securities, net Mortgage loans originated for sale Proceeds on sale of mortgage loans Gain on sale of mortgage loans Net realized and unrealized (gain) loss on foreclosed real estate Net gain on sale of investment securities Increase in cash value of life insurance Deferred income taxes ESOP compensation expense Contribution of common stock to charitable foundation (Increase) decrease in accrued interest receivable Decrease in accrued interest payable Change in other assets and liabilities, net Net Cash Provided By Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities available for sale Proceeds from sales of securities available for sale Proceeds from maturities of securities available for sale Purchase of securities held to maturity Proceeds from maturities of securities held to maturity Principal collected on mortgage-backed securities Net increase in loans Purchase of Federal Home Loan Bank Stock Investment in cash surrender value of life insurance Proceeds from sale of foreclosed real estate Purchase of premises and equipment Net cash paid in acquisition of Community First Bank Net Cash Used In Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits Increase in Federal Home Loan Bank line of credit Proceeds from Federal Home Loan Bank advances Repayment of Federal Home Loan Bank advances Net (increase) decrease in advance payments by borrowers for taxes and insurance Proceeds from issuance of common stock Net Cash Provided By Financing Activities Net Increase (Decrease) in Cash and Cash Equivalents Cash and cash equivalents at beginning of year Cash and Cash Equivalents at End of Year See notes to consolidated financial statements. F-6 $ 33 $ 819 301 215 (2,484) 2,513 (29) (21) (100) (176) (537) 227 1,100 (43) (33) 1,392 3,177 (48,552) 16,041 17,300 - - 4,438 (8,077) (34) - 155 (178) (16,548) (35,455) (17,854) 661 46,950 (29,550) (64) 21,160 21,303 (10,975) 21,379 $ 10,404 $ (190) 1,540 295 35 (1,858) 1,879 (21) 278 - (159) (129) - - 151 (33) (1,244) 544 (7,577) - 5,000 (6,040) 4,000 1,099 (8,941) - (3,000) 574 (168) - (15,053) 20,427 - 8,000 (3,000) 66 - 25,493 10,984 10,395 21,379 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations First Savings Financial Group, Inc. (the Company) is the thrift holding company of First Savings Bank, F.S.B. (the Bank), a wholly-owned subsidiary. The Bank is a federally- chartered savings bank which provides a variety of banking services to individuals and business customers through fourteen locations in southern Indiana. The Bank’s primary source of revenue is interest earned on residential mortgage loans. The Bank has three-wholly owned subsidiaries: First Savings Investments, Inc., a Nevada corporation that manages a portion of the Bank’s securities portfolio, Southern Indiana Financial Corporation which sells non-deposit investment products, and FFCC, Inc., which is currently inactive. On October 6, 2008, in accordance with a Plan of Conversion adopted by its board of directors and approved by its members, the Bank converted from a mutual savings bank to a stock savings bank and became the wholly-owned subsidiary of the Company. In connection with the conversion, the Company issued an aggregate of 2,542,042 shares of common stock at an offering price of $10.00 per share. In addition, in connection with the conversion, First Savings Charitable Foundation was formed, to which the Company contributed 110,000 shares of common stock and $100,000 in cash. The Company’s common stock began trading on the Nasdaq Capital Market on October 7, 2008 under the symbol “FSFG”. Accordingly, the reported results for the year ended September 30, 2008 relate solely to the operations of the Bank and its subsidiaries. Basis of Consolidation and Reclassifications The consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared with generally accepted accounting principles and conform to general practices in the banking industry. Intercompany balances and transactions have been eliminated. Certain prior year amounts have been reclassified to conform with current year presentation. Statements of Cash Flows For purposes of the statements of cash flows, the Company has defined cash and cash equivalents as cash and amounts due from banks and interest-bearing deposits with other banks. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate and other assets acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan losses and foreclosed real estate, management obtains independent appraisals for significant properties. F-7 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 Use of Estimates - continued A majority of the Bank’s loan portfolio consists of single-family residential and commercial real estate loans in the southern Indiana area. Accordingly, the ultimate collectibility of a substantial portion of the Bank’s loan portfolio and the recovery of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions. While management uses available information to recognize losses on loans and foreclosed real estate, further reductions in the carrying amounts of loans and foreclosed assets may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans and foreclosed real estate. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible the estimated losses on loans and foreclosed real estate may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated. Investment Securities Securities Available for Sale: Securities available for sale consist primarily of U.S. government agency debt securities, including mortgage-backed securities and collateralized mortgage obligations, municipal bonds, nonagency collateralized mortgage obligations and nonagency asset-back securities and are stated at fair value. Amortization of premium and accretion of discount are recognized in interest income using methods approximating the interest method over the period to maturity. Unrealized gains and losses, net of tax, on securities available for sale are included in other comprehensive income and the accumulated unrealized holding gains and losses are reported as a separate component of equity until realized. Realized gains and losses on the sale of securities available for sale are determined using the specific identification method and are included in other noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Securities Held to Maturity: U.S. government agency issued mortgage-backed securities and municipal debt securities for which the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premium and accretion of discount that are recognized in interest income using methods approximating the interest method over the period to maturity, adjusted for anticipated prepayments. Mortgage-backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by issuers of the securities. Declines in the fair value of individual available for sale and held to maturity securities below their amortized cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value. F-8 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (1 - continued) Derivative Financial Instruments The Company applies Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 815, Derivatives and Hedging, in accounting for derivative financial instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Derivative financial instruments are recognized in the consolidated balance sheet at fair value. Mortgage Banking Activities Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market value. Aggregate market value is determined based on the quoted prices under a “best efforts” sales agreement with a third party. Net unrealized losses are recognized through a valuation allowance by charges to income. Realized gains on sales of mortgage loans are included in noninterest income. Mortgage loans are sold with servicing released. Commitments to originate mortgage loans held for sale are considered derivative financial instruments to be accounted for at fair value. The Bank’s mortgage loan commitments subject to derivative accounting are fixed rate mortgage loan commitments at market rates when initiated. Fair value is estimated based on fees that would be charged on commitments with similar terms. The Bank had no outstanding commitments to originate fixed rate mortgage loans intended for sale in the secondary market at September 30, 2009. Loans and Allowance for Loan Losses The Bank grants real estate mortgage, commercial business and consumer loans. A substantial portion of the loan portfolio is represented by residential mortgage loans to customers in southern Indiana. The ability of the Bank’s customers to honor their contracts is dependent upon the real estate and general economic conditions in this area. Loans are stated at unpaid principal balances, less net deferred loan fees and the allowance for loan losses. Loan origination and commitment fees, as well as, certain direct costs of underwriting and closing loans are deferred and amortized as a yield adjustment to interest income over the lives of the related loans using the interest method. Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status. The recognition of income on a loan is discontinued and previously accrued interest is reversed, when interest or principal payments become ninety (90) days past due unless, in the opinion of management, the outstanding interest remains collectible. Past due status is determined based on contractual terms. Generally, by applying the cash receipts method, interest income is subsequently recognized only as received until the loan is returned to accrual status. The cash receipts method is used when the likelihood of further loss on the loan is remote. Otherwise, the Bank applies the cost recovery method and applies all payments as a reduction of the unpaid principal balance until the loan qualifies for return to accrual status. A loan is restored to accrual status when all principal and interest payments are brought current and the borrower has demonstrated the ability to make future payments of principal and interest as scheduled. The Bank’s practice is to charge off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrower’s failure to meet repayment terms, the borrower’s deteriorating or deteriorated financial condition, the depreciation of the underlying collateral, the loans classification as a loss by regulatory examiners, or for other reasons. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. F-9 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (1 - continued) Loans and Allowance for Loan Losses - continued The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Premises and Equipment The Company uses the straight line method of computing depreciation at rates adequate to amortize the cost of the applicable assets over their estimated useful lives. Items capitalized as part of premises and equipment are valued at cost. Maintenance and repairs are expensed as incurred. The cost and related accumulated depreciation of assets sold, or otherwise disposed of, are removed from the related accounts and any gain or loss is included in earnings. Goodwill and Other Intangibles Goodwill recognized in a business combination represents the excess of the cost of the acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. Goodwill is carried at its implied fair value and is evaluated for possible impairment at least annually or more frequently upon the occurrence of an event or change in circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. If the carrying amount of the goodwill exceeds its implied fair value, an impairment loss is recognized in earnings equal to that excess amount. The loss recognized cannot exceed the carrying amount of goodwill. After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis. F-10 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (1 - continued) Goodwill and Other Intangibles - continued Other intangible assets consist of acquired core deposit intangibles. Core deposit intangibles are amortized over the estimated economic lives of the acquired core deposits. The carrying amount of core deposit intangibles and the remaining estimated economic life are evaluated annually or whenever events or circumstances indicate the carrying amount may not be recoverable or the remaining period of amortization requires revision. After an impairment loss is recognized, the adjusted carrying amount of the intangible asset is its new accounting basis. Foreclosed Real Estate Foreclosed real estate includes both formally foreclosed property and in-substance foreclosed property. In-substance foreclosed properties are those properties for which the Bank has taken physical possession, regardless of whether formal foreclosure proceedings have taken place. At the time of foreclosure, foreclosed real estate is recorded at the lower of fair value less estimated costs to sell or cost, which becomes the property’s new basis. Any write- downs based on the property’s fair value at date of acquisition are charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and property held for sale is carried at the lower of the new cost basis or fair value less cost to sell. Costs incurred in maintaining foreclosed real estate and subsequent impairment adjustments to the carrying amount of a property, if any, are included in other noninterest expense. Securities Lending and Financing Arrangements Securities purchased under agreements to resell (reverse repurchase agreements) and securities sold under agreements to repurchase (repurchase agreements) are treated as collateralized lending and borrowing transactions, respectively, and are carried at the amounts at which the securities were initially acquired or sold. Benefit Plans The Bank has a defined benefit pension plan covering substantially all employees in the service of the Bank on June 30, 2008, the date the accrual of benefits and participation were frozen. It is the policy of the Bank to fund the maximum amount that can be deducted for federal income tax purposes but in amounts not less than the minimum amounts required by law. The Bank also provides a contributory defined contribution plan available to all eligible employees. On October 6, 2008, the Company established a leveraged employee stock ownership plan covering substantially all employees. The Company accounts for the employee stock ownership plan in accordance with ASC 718-40, Employee Stock Ownership Plans. Dividends declared on allocated shares are recorded as a reduction of retained earnings and paid to the participants’ accounts. As shares are committed to be released for allocation to participants’ accounts, compensation expense is recognized based on the average fair value of the shares and the shares become available for earnings per share calculations. F-11 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (1 - continued) Income Taxes When income tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while other positions are subject to some degree of uncertainty regarding the merits of the position taken or the amount of the position that would be sustained. The Company recognizes the benefits of a tax position in the consolidated financial statements of the period during which, based on all available evidence, management believes it is more-likely-than-not (more than 50 percent probable) that the tax position would be sustained upon examination. Income tax positions that meet the more-likely-than-not threshold are measured as the largest amount of income tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with the income tax positions claimed on income tax returns that exceeds the amount measured as described above is reflected as a liability for unrecognized income tax benefits in the consolidated balance sheet, along with any associated interest and penalties that would be payable to the taxing authorities, if there were an examination. Interest and penalties associated with unrecognized income tax benefits are classified as additional income taxes in the statement of income. Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred income taxes. Income tax reporting and financial statement reporting rules differ in many respects. As a result, there will often be a difference between the carrying amount of an asset or liability as presented the accompanying consolidated balance sheets and the amount that would be recognized as the tax basis of the same asset or liability computed based on the effects of tax positions recognized, as described in the preceding paragraph. These differences are referred to as temporary differences because they are expected to reverse in future years. Deferred income tax assets are recognized for temporary differences where their future reversal will result in future tax benefits. Deferred income tax assets are also recognized for the future tax benefits expected to be realized from net operating loss or tax credit carryforwards. Deferred income tax liabilities are recognized for temporary differences where their future reversal will result in the payment of future income taxes. Deferred income tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Advertising Costs Advertising costs are charged to operations when incurred. F-12 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (1 - continued) Recent Accounting Pronouncements The following are summaries of recently issued accounting pronouncements that impact the accounting and reporting practices of the Company: In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 160, Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51, (ASC Topic 810). This statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary. This statement amends ARB No. 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective for fiscal years beginning after January 1, 2009. This statement is not expected to have a material effect on the Company's consolidated financial position or results of operations. In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (Revised) (ASC Topic 805). This statement retains the fundamental requirements of SFAS No. 141 and requires the acquisition method of accounting (previously referred to as the purchase method by SFAS No. 141). The statement requires, among other things, the expensing of direct transaction costs, certain contingent assets and liabilities to be recognized at fair value and earn-out arrangements may be required to be measured at fair value and recognized each period in earnings. The statement is effective for transactions occurring after the beginning of the first annual reporting period beginning on or after December 15, 2008 with early adoption not permitted. The acquisition described in Note 2 was accounted for in accordance with SFAS No. 141 as the Company was not permitted to adopt the revised standard. The adoption is the revised standard is not expected to have a material effect on the Company’s financial position or results of operations. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an Amendment to SFAS No. 133, (ASC Topic 815). The statement applies to all derivative instruments accounted for under SFAS No. 133 (ASC Topic 815) and requires entities to provide greater transparency on how and why entities use derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133, and the effect the derivative instruments and related hedged items may have on financial position, the results of operations and cash flows. The statement is effective for fiscal years and interim periods beginning after November 15, 2008. As this statement impacts disclosures, the adoption of this statement did not have a material impact on the Company’s consolidated financial statements. On April 9, 2009, the FASB issued FASB Staff Position (FSP) FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, (ASC Topic 320). This FSP amends the other-than-temporary impairment guidance in U.S. generally accepted accounting principles for debt securities. Consistent with current requirements for recording other-than-temporary impairments, this FSP states that the amount of impairment loss recorded in earnings for a debt security will be the entire difference between the security’s cost and its fair value if the entity intends to sell the debt security prior to recovery or it is more-likely-than not that the entity will have to sell the debt security prior to recovery. If, however, the entity does not intend to sell the debt security or it concludes that it is more-likely-than-not that it will not have to sell the debt security prior to recovery, this FSP requires an entity to recognize the credit loss component of an other-than-temporary impairment of a debt security in earnings and the remaining portion of the impairment loss in other comprehensive income. The credit loss component of an other-than-temporary impairment must be determined based on an entity’s best estimate of cash flows expected to be collected. This FSP, which is effective for interim and annual periods ending after June 15, 2009, allows early adoption for periods ending after March 15, 2009, provided FSP FAS 157-4 (see below) is adopted at the same time. The Company adopted this FSP for the period ended June 30, 2009, and adoption did not have a material effect on the Company’s consolidated financial position or results of operations. F-13 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (1 - continued) Recent Accounting Pronouncements - continued Also on April 9, 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, (ASC Topic 820). This FSP provides additional guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased. It also provides guidance on identifying circumstances that indicate a transaction is not orderly. Determination of whether a transaction is orderly or not orderly in instances when there has been a significant decrease in the volume and level of activity for an asset or liability depends on an evaluation of facts and circumstances and requires the use of significant judgment. This FSP requires a company to disclose the inputs and valuation techniques used to measure fair value and to discuss changes in such inputs and valuation techniques, if any, that occurred during the reporting period. This FSP, which is effective for interim and annual periods ending after June 15, 2009, requires early adoption for periods ending after March 15, 2009 if an entity elects to adopt early FSP FAS 115-2 and FAS 124-2 (see above). The Company adopted this FSP for the period ended June 30, 2009, and adoption did not have a material effect on the Company’s consolidated financial position or results of operations. On April 9, 2009, the FASB issued FSP FAS 107-1 and APB 28-1, (ASC Topic 825). This FSP requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP, which is effective for interim reporting periods ending after June 15, 2009, allows early adoption for periods ending after March 15, 2009, only if an entity also elects to early adopt FSP FAS 157-4, FAS 115-2 and FAS 124-2. The Company adopted this FSP for the period ended June 30, 2009, and adoption did not have a material effect on the Company’s consolidated financial position or results of operations. In May 2009, the FASB issued SFAS No. 165, Subsequent Events, (ASC Topic 855). This statement establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, the statement provides: (a) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (b) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (c) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This statement is effective for interim or annual financial periods ending after June 15, 2009, and is applied prospectively. The adoption of this statement did not have a material effect on the Company's consolidated financial position or results of operations. F-14 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (1 - continued) Recent Accounting Pronouncements - continued In June 2009, the FASB issued two standards which change the way entities account for securitizations and special-purpose entities: SFAS No. 166, Accounting for Transfers of Financial Assets, (ASC Topic 860) and SFAS No. 167, Amendments to FASB Interpretation No. 46(R), (ASC Topic 810). SFAS No. 166 is a revision to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. This statement eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. SFAS No. 167 is a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. These new standards require a number of new disclosures. SFAS No. 167 requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. SFAS No. 166 enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity’s continuing involvement in transferred financial assets. These statements will be effective at the beginning of a reporting entity’s first fiscal year beginning after November 15, 2009. Early application is not permitted. The adoption of these statements is not expected to have a material effect on the Company's consolidated financial position or results of operations. In June 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-01 (formerly SFAS No. 168), Topic 105 – The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles. This statement establishes the FASB Accounting Standards CodificationTM(Codification) as the single source of authoritative U.S. generally accepted accounting principles (U.S. GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. This statement and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009. When effective, the Codification supersedes all existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. Following this statement, the FASB will not issue new standards in the form of statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to: (a) update the Codification; (b) provide background information about the guidance; and (c) provide the bases for conclusions on the change(s) in the Codification. The adoption of this statement did not have a material effect on the Company's consolidated financial statements. In August 2009, the FASB issued ASU No. 2009-05, “Fair Value Measurements and Disclosures, (Topic 820) – Measuring Liabilities at Fair Value”. This ASU provides amendments for fair value measurements of liabilities. It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques. ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance or fourth quarter 2009. The adoption of ASU 2009-05 is not expected to have a material effect on the Company’s consolidated financial position or results of operations. F-15 (2) ACQUISITION OF COMMUNITY FIRST BANK FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 On September 30, 2009, the Company acquired 100 percent of the outstanding common shares of Community First Bank, (Community First), a full service community bank located in Corydon, Indiana, pursuant to an Agreement and Plan of Merger dated April 28, 2009. The acquisition expanded the Company’s presence into Harrison, Crawford and Washington Counties, Indiana. The Company expects to benefit from growth in this market area as well as from expansion of the banking services provided to the existing customers of Community First. Pursuant to the terms of the merger agreement, Community First stockholders received $17.13 in cash for each share of Community First common stock for total cash consideration of $20.5 million. The Company also incurred $767,000 of direct, acquisition-related costs, which were capitalized as part of the purchase price. The transaction was accounted for using the purchase method of accounting. Since the transaction was effective the close of business on September 30, 2009, the operating results for 2009 relate solely to the operations of the Company and exclude the operations of Community First. Under the purchase method of accounting, the purchase price is assigned to the assets acquired and liabilities assumed based on their estimated fair values, net of applicable income tax effects. The excess of cost over the fair value of the acquired net assets of $5.9 million has been recorded as goodwill. Following is a condensed balance sheet showing the fair values of the assets acquired and the liabilities assumed as of the date of acquisition: Cash and interest-bearing deposits with banks Investment securities Loans, net Premises and equipment Goodwill arising in the acquisition Core deposit intangible Net deferred tax asset Other assets Total assets acquired Deposit accounts Federal funds purchased Repurchase agreements Borrowings from Federal Home Loan Bank Other liabilities Total liabilities assumed Net assets acquired (In thousands) 3,957 48,908 173,104 5,797 5,882 2,741 2,576 6,867 249,832 179,460 1,180 17,239 29,712 969 228,560 21,272 $ $ In accounting for the acquisition, $2.7 million was assigned to a core deposit intangible which is amortized over a weighted-average estimated economic life of 9.3 years. It is not anticipated that the core deposit intangible will have a significant residual value. No amount of the goodwill arising in the acquisition is deductible for income tax purposes. F-16 (2 – continued) FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, applies to a loan with evidence of deterioration of credit quality since origination, acquired by completion of a transfer for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. On the acquisition date the contractually required principal payments for all loans subject to ASC 310-30 was $4.0 million and the estimated fair value of these loans was $3.0 million. These loans were valued based on the estimated current liquidation value of the underlying collateral, because the expected cash flows are primarily based on the liquidation of the underlying collateral. ASC 310-30 prohibits a carryover or creation of an allowance for loan losses upon initial recognition of these loans and, therefore, no allowance for loan losses was reported in the consolidated balance sheet for these loans at September 30, 2009. The following unaudited pro forma combined results of operations assumes that the acquisition was consummated on October 1, 2007: Year Ended September 30, 2009 2008 (In thousands, except per share data) Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income Noninterest expenses Loss before income taxes Income tax benefit Net loss Net loss per common share, basic Net loss per common share, diluted $ $ $ $ $ 27,952 11,250 16,702 1,360 15,342 2,083 19,122 (1,697) (693) 29,603 15,818 13,785 1,891 11,894 (3,434) 13,527 (5,067) (1,990) (1,004) $ (3,077) (0.43) (0.43) N/A N/A In addition to combining the historical results of operations, the pro forma calculations consider the purchase accounting adjustments and nonrecurring charges directly related to the acquisition and the related tax effects. The pro forma calculations do not include any anticipated cost savings as a result of the acquisition. The pro forma results of operations are presented for informational purposes only and are not necessarily indicative of the actual results of operations that would have occurred had the Community First acquisition actually been consummated on October 1, 2007, or results that may occur in the future. F-17 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (3) INVESTMENT SECURITIES Investment securities have been classified according to management’s intent. The amortized cost of securities and their approximate fair values are as follows: (In thousands) September 30, 2009: Securities available for sale: Agency bonds and notes Agency mortgage-backed Agency CMO Privately-issued CMO Privately-issued ABS Municipal Subtotal – debt securities Equity securities Gross Amortized Unrealized Unrealized Gains Losses Gross Cost Fair Value $ 5,825 $ 34,368 3,343 11,139 52 17,081 71,808 - $ 20 115 130 - - 431 696 76 - $ - - - - - - - 5,845 34,483 3,473 11,139 52 17,512 72,504 76 Total securities available for sale $ 71,808 $ 772 $ - $ 72,580 Securities held to maturity: Agency mortgage-backed Municipal 6,477 305 269 3 - - 6,746 308 Total securities held to maturity $ 6,782 $ 272 $ - $ 7,054 September 30, 2008: Securities available for sale: Agency bonds and notes Agency CMO Municipal Subtotal – debt securities Equity securities $ 4,008 $ 1,891 4,669 10,568 - $ 51 9 - 60 96 - $ - 27 27 - 4,059 1,900 4,642 10,601 96 Total securities available for sale $ 10,568 $ 156 $ 27 $ 10,697 Securities held to maturity: Agency mortgage-backed Municipal Total securities held to maturity $ $ 8,149 $ 307 8,456 $ $ 48 3 51 $ 16 $ - 8,181 310 16 $ 8,491 F-18 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (3 – continued) The amortized cost and fair value of debt securities as of September 30, 2009 by contractual maturity are shown below. Expected maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty. (In thousands) Due within one year Due after one year through five years Due after five years through ten years Due after ten years Equity securities Collateralized mortgage obligations Mortgage-backed securities Asset-backed securities Available for Sale Amortized Cost Fair Value Held to Maturity Amortized Cost Fair Value $ 4,342 $ 851 4,514 13,199 22,906 - 14,482 34,368 52 4,342 $ 858 4,617 13,540 23,357 76 14,612 34,483 52 - $ 305 - - 305 - - 6,477 - $ 71,808 $ 72,580 $ 6,782 $ - 308 - - 308 - - 6,746 - 7,054 Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The Company had no securities with gross unrealized losses at September 30, 2009. At September 30, 2009, available for sale debt securities with an amortized cost and fair value of $3.8 million were pledged to secure federal funds borrowings. Certain other debt securities were pledged under repurchase agreements and to secure Federal Home Loan Bank advances at September 30, 2009. (See Notes 9 and 10) The Company realized gross gains on sales of available for sale U.S. government agency notes of $105,000 and gross losses on sales of available for sale U.S. government agency notes of $5,000 for the year ended September 30, 2009. The Company sold no securities during the year ended September 30, 2008. F-19 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (4) LOANS Loans at September 30, 2009 and 2008 consisted of the following: (In thousands) Real estate mortgage: 1-4 family residential Multi-family residential Commercial Residential construction Commercial construction Land and land development Commercial business loans Consumer: Home equity loans Auto loans Boat loans Other consumer loans Gross loans Deferred loan origination fees and costs, net Undisbursed portion of loans in process Allowance for loan losses Loans, net $ 2009 2008 185,800 $ 12,584 48,090 14,555 7,648 11,189 36,901 17,365 18,279 3,091 4,476 359,978 846 (3,306) (3,695) 113,518 3,282 15,459 6,189 1,991 4,748 14,411 9,970 1,950 3,257 2,033 176,808 795 (1,067) (1,729) $ 353,823 $ 174,807 Mortgage loans serviced for the benefit of others amounted to $668,000 and $810,000 at September 30, 2009 and 2008, respectively. The remaining balance of mortgage service rights from prior years was amortized to expense during the year ended September 30, 2007. No mortgage servicing rights have been capitalized since the year ended September 30, 1999. An analysis of the allowance for loan losses is as follows: (In thousands) Beginning balances Recoveries Loans charged-off Provision for loan losses Increase due to acquisition of Community First Ending balances 2009 2008 $ 1,729 $ 139 (828) 819 1,836 1,297 131 (1,239) 1,540 - $ 3,695 $ 1,729 At September 30, 2009, residential mortgage loans secured by one-to-four family residential properties without private mortgage insurance or government guaranty and with loan-to-value ratios exceeding 90% amounted to $3.9 million. F-20 (4 – continued) FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 At September 30, 2009 and 2008, the total recorded investment in nonaccrual loans amounted to $4.7 million and $798,000 respectively. The total recorded investment in loans past due ninety days or more and still accruing interest amounted to $542,000 and $853,000 at September 30, 2009 and 2008, respectively. Information about impaired loans and the related allowance for loan losses is presented below. (In thousands) At end of year: Impaired loans with related allowance Impaired loans with no allowance Total Allowance related to impaired loans Average balance of impaired loans during the year Interest income recognized in the statements of income during the periods of impairment Interest income received during the periods of impairment – cash method 2009 2008 $ $ $ 607 $ 4,667 5,274 $ 303 $ 2,461 18 28 617 1,034 1,651 318 2,064 33 49 Included in impaired loans with no related allowance at September 30, 2009 are $3.0 million of impaired loans acquired in the acquisition of Community First. (See Note 2) The Bank has entered into loan transactions with certain directors, officers and their affiliates (related parties). In the opinion of management, such indebtedness was incurred in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than normal risk of collectibility or present other unfavorable features. The Bank had loans to related parties of $9.5 million and $3.6 million at September 30, 2009 and 2008, respectively. The following is a summary of activity for related party loans: (In thousands) Beginning balance New loans and advances Repayments Reclassifications Increase due to acquisition of Community First Ending balance (5) PREMISES AND EQUIPMENT Premises and equipment consisted of the following: (In thousands) Land and land improvements Office buildings Furniture, fixtures and equipment Less accumulated depreciation Totals F-21 2009 2008 $ 3,585 $ 1,191 (724) (308) 5,755 $ 9,499 $ 3,270 1,329 (994) (20) - 3,585 2009 2008 $ 1,974 $ 8,581 2,977 3,616 $ 9,916 $ 1,343 4,195 2,362 3,658 4,242 (6) FORECLOSED REAL ESTATE FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 At September 30, 2009 and 2008, the Bank had foreclosed real estate held for sale of $1.6 million and $390,000, respectively. During the year ended September 30, 2009 and 2008, foreclosure losses in the amount of $400,000 and $1.1 million, respectively, were charged-off to the allowance for loan losses. There were no losses on subsequent writedowns of foreclosed real estate during fiscal year 2009. The losses on subsequent write downs of foreclosed real estate amounted to $103,000 in fiscal year 2008 and is aggregated with realized gains and losses from the sale of foreclosed real estate and real estate taxes and other expenses of holding foreclosed real estate. Net realized gain (loss) from the sale of foreclosed real estate amounted to $1,000 and $(175,000) for the years ended September 30, 2009 and 2008, respectively. Real estate taxes and other expenses of holding foreclosed real estate amounted to $88,000 and $96,000 for the years ended September 30, 2009 and 2008, respectively. The net loss is reported in noninterest expense. At September 30, 2009 and 2008, deferred gains on the sale of foreclosed real estate financed by the Bank amounted to $51,000 and $15,000, respectively. (7) GOODWILL AND OTHER INTANGIBLES Goodwill acquired in the acquisition of Community First is evaluated for impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the carrying amount is greater than its fair value. The Company recognized no amortization expense related to intangibles during the years ended September 30, 2009 or 2008. Estimated amortization expense for the core deposit intangible acquired in the acquisition of Community First for each of the ensuing five years and in the aggregate is as follows: Years ending September 30: 2010 2011 2012 2013 2014 2015 and thereafter Total (In thousands) $ $ 294 294 294 294 294 1,271 2,741 F-22 (8) DEPOSITS FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 The aggregate amount of time deposit accounts (certificates of deposit) with balances of $100,000 or more was $57.5 million and $30.3 million at September 30, 2009 and 2008, respectively. At September 30, 2009, scheduled maturities of certificates of deposit were as follows: Years ending September 30: 2010 2011 2012 2013 2014 and thereafter Total (In thousands) $ 122,171 33,301 25,907 4,137 12,667 $ 198,183 The Bank held deposits of $7.1 million and $4.8 million for related parties at September 30, 2009 and 2008, respectively. (9) REPURCHASE AGREEMENTS The Company acquired repurchase agreements in the acquisition of Community First. Repurchase agreements include retail repurchase agreements representing overnight borrowings from deposit customers and long-term repurchase agreements with broker-dealers. The repurchase agreements held by the Company were acquired Repurchase agreements are summarized as follows: Retail repurchase agreements Broker-dealer repurchase agreements: Long-term agreements: Maturing November 2011 Maturing December 2011 Total repurchase agreements Weighted Average Rate 2009 Amount (In thousands) 0.63% $ 1,304 1.60% 1.65% 10,635 5,300 $ 17,239 The debt securities underlying the retail repurchase agreements were under the control of the Bank at September 30, 2009. The securities underlying the broker-dealer repurchase agreements were delivered to the broker-dealer who arranged the transactions. At September 30, 2009, available for sale debt securities with an amortized cost and fair value of $1.3 million and $16.1 million were pledged to secure retail repurchase agreements and repurchase agreements with broker-dealers, respectively. F-23 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (10) BORROWINGS FROM FEDERAL HOME LOAN BANK At September 30, 2009 and 2008, borrowings from the Federal Home Loan Bank were as follows: (In thousands) Advances maturing in: 2010 2011 2013 Total advances Line of credit balance Total borrowings from Federal Home Loan Bank 2009 2008 Weighted Average Rate Amount Weighted Average Rate Amount 0.57% $ 0.98% 3.04% 0.47% $ 36,650 5,175 13,287 55,112 661 55,773 $ - - 3.36% - $ - - 8,000 8,000 - 8,000 The Bank entered into an Advances and Security Agreement with the Federal Home Loan Bank of Indianapolis (“FHLB”), allowing the Bank to initiate advances from the FHLB. The advances are secured under a blanket collateral agreement. At September 30, 2009 and 2008, the eligible blanket collateral included residential mortgage loans with carrying values of $173.0 million and $70.5 million, respectively. Also, the Bank has specifically pledged certain available for sale debt securities with an amortized cost and fair value of $8.2 million as collateral under the agreement as of September 30, 2009. No securities were specifically pledged at September 30, 2008. On November 6, 2008, the Bank entered into an Overdraft Line of Credit Agreement with the Federal Home Loan Bank of Indianapolis which established a line of credit not to exceed $1.0 million and was secured under the blanket collateral agreement. This agreement was subsequently modified to increase the line of credit to $2.0 million. This agreement was set to expire on November 6, 2009 but the line of credit agreement was extended for an additional year and the line of credit was increased to $5 million. At September 30, 2009, borrowings of $661,000 were outstanding under this agreement at a weighted average rate of 0.47%. F-24 (11) DEFERRED COMPENSATION PLANS FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 The Bank has deferred compensation agreements with former officers who are receiving benefits under these agreements. The agreements provide for the payment of specific benefits following retirement. Deferred compensation expense was $27,000 and $28,000 for the years ended September 30, 2009 and 2008, respectively. The Company has a directors’ deferred compensation plan whereby a director, at his election, defers a portion of his monthly director fees into an account with the Company. The Company accrues interest on the deferred obligation at an annual rate equal to the prime rate for the immediately preceding calendar quarter plus 2%, but in no event at a rate in excess of 8%. The deferral period extends to the director’s normal retirement age of 70. The benefits under the plan are payable for a period of fifteen years following normal retirement, however, the agreements provide for payment of benefits in the event of disability, early retirement, termination of service or death. Deferred compensation expense for this plan was $66,000 and $50,000 for the years ended September 30, 2009 and 2008, respectively. (12) BENEFIT PLANS Defined Benefit Plan: The Bank sponsors a defined benefit pension plan covering substantially all employees. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The Bank’s funding policy is to contribute the larger of the amount required to fully fund the plan’s current liability or the amount necessary to meet the funding requirements as defined by the Internal Revenue Code. Effective June 30, 2008, the board of directors elected to freeze the accrual of benefits and, as a result, each active participant’s pension benefit will be determined based on the participant’s compensation and duration of employment as of June 30, 2008, and compensation and employment after that date will not be taken into account in determining pension benefits under the plan. The Bank filed an application with the Internal Revenue Service in October 2008 in order to obtain approval to terminate the Plan. The Bank has determined to provide the over-funded balance of the Plan’s assets, if any, to its active participants upon full termination of the Plan which is expected to occur in the first calendar quarter of 2010. F-25 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (12 – continued) The following table sets forth the reconciliations of the benefit obligation, the fair value of plan assets, and the funded status of the Bank’s plan as of and for the years ended September 30, 2009 and 2008: (In thousands) Change in projected benefit obligation: Balance at beginning of year Service cost Interest cost Actuarial loss (gain) Curtailment Benefits paid Balance at end of year Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Benefits paid Fair value of plan assets at end of year Funded status Amounts recognized in the balance sheets consist of: Excess pension asset recognized in other assets Accumulated other comprehensive income Amounts recognized in accumulated other comprehensive income consist of the following: Net gain at end of fiscal year Deferred income tax expense Net amount recognized F-26 2009 5,051 - 376 (354) - (150) 4,923 6,198 361 - (147) 6,412 $ $ $ $ 1,489 $ 1,489 428 $ $ 709 (281) 428 $ $ 2008 4,958 197 302 766 (1,054) (118) 5,051 5,635 504 177 (118) 6,198 1,147 1,147 222 367 (145) 222 $ $ $ $ $ $ $ $ $ FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (12 – continued) Components of net periodic benefit expense and other amounts recognized in other accumulated comprehensive income are as follows: (In thousands) Net periodic benefit expense: Service cost Interest cost on projected benefit obligation Expected return on plan assets Amortization of transition asset Amortization of prior service cost Net periodic benefit expense Other changes in plan assets and benefit obligations recognized in other comprehensive income: Amortization of transition asset Amortization of prior service cost Total recognized in other comprehensive income Total recognized in net periodic pension benefit expense and other comprehensive income 2009 2008 - 376 (376) - - - - - - - $ $ $ 197 302 (370) (5) 5 129 5 (5) - 129 $ $ $ The unamortized estimated prior service cost and net transition asset existing at the date of adoption of SFAS No. 87 (ASC 715-30) remaining at the effective date of the curtailment of benefits was included in the determination of the net curtailment gain deferred as of September 30, 2008. The following are weighted average assumptions used to determine benefit obligations at June 30, 2009 and 2008 and net periodic benefit cost for the years then ended: Discount rate Rate of compensation increase Expected long-term return on plan assets 6.00% 3.50% 6.50% 6.17% 3.50% 6.50% The expected long-term return on plan assets assumption is based on a periodic review and modeling of the plan’s asset allocation and liability structure over a long-term horizon. Expectations of returns on each asset class are the most important of the assumptions used in the review and modeling and are based on reviews of historical data. The expected long-term rate of return on assets was selected from within the reasonable range of rates determined by (a) historical real returns, net of inflation, for the asset classes covered by the investment policy, and (b) projections of inflation over the long-term period during which benefits are payable to plan participants. F-27 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (12 - continued) The plan’s weighted-average asset allocations at June 30, 2009 and 2008 by asset category are as follows: Bank time deposits Bank demand deposits Total 2009 99.3% 0.7 100.0% 2008 99.4% 0.6 100.0% The plan’s target asset allocation for 2009 is 100% investment in bank deposits. Bank deposits include time and demand deposit liabilities of the Bank. The plan’s investment policy includes guidelines and procedures designed to ensure assets are invested in a manner necessary to meet expected future benefits earned by participants. The investment guidelines consider a broad range of economic conditions. The objective is to maintain investment portfolios that limit risk through prudent asset allocation parameters, achieve asset returns that meet or exceed the plan’s actuarial assumptions, and achieve asset returns that are competitive with like institutions employing similar investment strategies. The Bank periodically reviews the investment policy. The policy is established and administered in a manner so as to comply at all times with applicable government regulations. The Bank contributed $177 to the Plan for the fiscal year ended September 30, 2008 and made no contribution for the fiscal year ended September 30, 2009. The Bank does not anticipate a contribution to the Plan for the fiscal year ending September 30, 2010. The following estimated pension benefit payments, which reflect expected future service, as appropriate, are expected to be paid for years ending September 30: 2010 2011 2012 2013 2014 Years 2015-2019 Defined Contribution Plan: (In thousands) 123 $ 128 224 297 335 1,898 The Bank has a qualified contributory defined contribution plan available to all eligible employees. The plan allows participating employees to make tax-deferred contributions under Internal Revenue Code Section 401(k). Company contributions to the plan amounted to $123,000 and $104,000 for the years ended September 30, 2009 and 2008, respectively. F-28 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 Employee Stock Ownership Plan: On October 6, 2008, the Company established a leveraged employee stock ownership plan (“ESOP”) covering substantially all employees. The ESOP trust acquired 203,363 shares of Company common stock at a cost of $10.00 per share financed by a term loan with the Company. The employer loan and the related interest income are not recognized in the consolidated financial statements as the debt is serviced from Company contributions. Dividends payable on allocated shares are charged to retained earnings and are satisfied by the allocation of cash dividends to participant accounts. Dividends payable on unallocated shares are not considered dividends for financial reporting purposes. Shares held by the ESOP trust are allocated to participant accounts based on the ratio of the current year principal and interest payments to the total of the current year and future year’s principal and interest to be paid on the employer loan. Compensation expense is recognized based on the average fair value of shares released for allocation to participant accounts during the year with a corresponding credit to stockholders’ equity. Compensation expense recognized for the year ended September 30, 2009 amounted to $227,000. The fair value of unearned ESOP shares was $1.9 million at September 30, 2009. Company common stock held by the ESOP trust at September 30, 2009 was as follows: Allocated shares Unearned shares Total ESOP shares (13) INCOME TAXES 23,726 179,637 203,363 The Company and its subsidiaries file consolidated income tax returns. The components of the consolidated income tax expense (benefit) were as follows: (In thousands) Current Deferred 2009 $ 285 (537) (252) $ $ $ The reconciliation of income tax expense (benefit) with the amount which would have been provided at the federal statutory rate of 34 percent follows: (In thousands) Provision at federal statutory rate State income tax-net of federal tax benefit Tax-exempt interest income Increase in cash value of life insurance Other Net benefit for income taxes 2009 $ (74) (51) (66) (57) (4) (252) $ $ $ F-29 2008 (171) (129) (300) 2008 (167) (43) (35) (51) (4) (300) FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (13 - continued) Significant components of the Bank’s deferred tax assets and liabilities as of September 30, 2009 and 2008 are as follows: (In thousands) Deferred tax assets (liabilities): Allowance for loan losses Acquisition purchase accounting adjustments Charitable contributions carryover Deferred compensation plans Other-than-temporary impairment loss on available for sale securities State net operating loss and credit carryforwards Unrealized (gain) loss on securities available for sale Accumulated depreciation Deferred loan fees and costs, net Prepaid pension asset Federal Home Loan Bank stock dividends Interest rate cap contract Other $ $ 2009 1,266 1,805 403 214 149 72 175 (649) (458) (584) (137) (40) 60 Net deferred tax asset $ 2,276 $ 2008 676 - 14 199 - - (51) (358) (479) (429) (52) - (6) 486 The Company has charitable contributions carryovers of $1.2 million available to reduce federal taxable income in subsequent years. The charitable contribution carryovers expire for the years ending September 30, 2013 and 2014. The Company has Indiana net operating loss carryovers of $309,000 available to reduce Indiana taxable income in subsequent years. The Company also has Indiana enterprise zone tax credits of $46,000 available to reduce the Indiana tax liability in subsequent years. The net operating loss carryovers expire for the years ending September 30, 2023 and 2024. The enterprise zone tax credit carryovers expire for the years ending September 30, 2018 and 2019. At September 30, 2009 and 2008, the Company had no liability for unrecognized income tax benefits and does not anticipate any increase in the liability for unrecognized tax benefits during the next twelve months. The Company believes that its income tax positions would be sustained upon examination and does not anticipate any adjustments that would result in a material change to its financial position or results of operations. The Company files U.S. federal income tax returns and Indiana state income tax returns. Returns filed in these jurisdictions for tax years ended on or after September 30, 2006 are subject to examination by the relevant taxing authorities. Prior to October 1, 1996, the Bank was permitted by the Internal Revenue Code to deduct from taxable income an annual addition to a statutory bad debt reserve subject to certain limitations. Retained earnings at September 30, 2009 and 2008 include $4.6 million of cumulative deductions for which no deferred federal income tax liability has been recorded. Reduction of these reserves for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes subject to the then current corporate income tax rate. The unrecorded deferred liability on these amounts was $1.5 million at September 30, 2009 and 2008. Federal legislation enacted in 1996 repealed the use of the qualified thrift reserve method of accounting for bad debts for tax years beginning after December 31, 1995. As a result, the Bank discontinued the calculation of the annual addition to the statutory bad debt reserve using the percentage-of-taxable-income method and adopted the experience reserve method for banks. Under this method, the Bank computes its federal tax bad debt deduction based on actual loss experience over a period of years. The legislation also provided that the Bank will not be required to recapture its pre-1988 statutory bad debt reserves if it ceases to meet the qualifying thrift definitional tests and if the Bank continues to qualify as a “bank” under existing provisions of the Internal Revenue Code. F-30 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (14) COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, there are outstanding various commitments and contingent liabilities, such as commitments to extend credit and legal claims, which are not reflected in the accompanying consolidated financial statements. Commitments under outstanding standby letters of credit totaled $539,000 at September 30, 2009. The following is a summary of the commitments to extend credit at September 30, 2009 and 2008: (In thousands) Loan commitments: Fixed rate Adjustable rate Unused lines of credit on credit cards Undisbursed portion of home equity lines of credit Undisbursed portion of commercial and personal lines of credit Undisbursed portion of construction loans in process $ 2009 3,117 $ 2,202 2,437 34,598 19,194 3,306 Total commitments to extend credit $ 64,854 $ (15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK 2008 594 210 1,894 24,399 8,190 1,067 36,354 The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments (see Note 14). The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary by the Bank upon extension of credit, varies and is based on management’s credit evaluation of the counterparty. Standby letters of credit are conditional lending commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit. The Bank has not been obligated to perform on any financial guarantees and has incurred no losses on its commitments in 2009 or 2008. F-31 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (16) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following table summarizes the carrying value and estimated fair value financial instruments at September 30, 2009 and 2008. 2009 2008 (In thousands) Financial assets: Cash and due from banks Interest-bearing deposits in banks Securities available for sale Securities held to maturity Loans, net Mortgage loans held for sales Federal Home Loan Bank stock Accrued interest receivable Financial liabilities: Deposits Federal funds purchased Short-term repurchase agreements Long-term repurchase agreements Borrowings from Federal Home Loan Bank Accrued interest payable Advance payments by borrowers for taxes and insurance Derivative financial instruments included in other assets: Interest rate cap Off-balance-sheet financial instruments: Asset (liability) related to commitments to extend credit Carrying Amount Fair Value Carrying Amount Fair Value $ $ 8,359 2,045 72,580 6,782 8,359 $ 2,045 72,580 7,054 $ 5,378 16,001 10,697 8,456 5,378 16,001 10,697 8,491 353,823 360,157 174,807 174,437 317 4,170 2,100 350,816 1,180 1,304 15,935 55,773 516 341 202 - 317 4,170 2,100 354,194 1,180 1,304 15,935 56,184 516 348 202 39 - 1,336 930 189,209 - - - 8,000 143 398 - - - 1,336 930 191,590 - - - 7,825 143 404 - 10 The carrying amounts in the preceding table are included in the consolidated balances sheets under the applicable captions. The contract or notional amounts of the Bank’s financial instruments with off-balance-sheet risk are disclosed in Note 15. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate: Cash and Cash Equivalents For cash and short-term instruments, including cash and due from banks and interest-bearing deposits with banks, the carrying amount is a reasonable estimate of fair value. Debt and Equity Securities For marketable equity securities, the fair values are based on quoted market prices. For debt securities, the Company obtains fair value measurements from an independent pricing service and the fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. For Federal Home Loan Bank stock, a restricted equity security, the carrying amount is a reasonable estimate of fair value because it is not marketable. F-32 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (16 - continued) Loans The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and terms. The carrying amount of accrued interest receivable approximates its fair value. Deposits The fair value of demand and savings deposits and other transaction accounts is the amount payable on demand at the balance sheet date. The fair value of fixed-maturity time deposits is estimated by discounting the future cash flows using the rates currently offered for deposits with similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value. Borrowed Funds Borrowed funds include repurchase agreements and borrowings from the FHLB. Fair value for advances is estimated by discounting the future cash flows at current interest rates for advances of similar maturities. For federal funds purchased, repurchase agreements and FHLB line of credit borrowings, the carrying value is a reasonable estimate of fair value. Derivative Financial Instruments For derivative financial instruments, the fair values generally represent an estimate of the amount the Company would receive or pay upon termination of the agreement at the reporting date, taking into account the current interest rates, and exclusive of any accrued interest. Off-Balance-Sheet Financial Instruments Commitments to extend credit were evaluated and fair value was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, the fair value estimate considers the difference between current interest rates and the committed rates. (17) FAIR VALUE MEASUREMENTS Effective October 1, 2008, the Company adopted the provisions of ASC Topic 820 (formerly SFAS No. 157), “Fair Value Measurements,” for financial assets and financial liabilities. This statement is definitional and disclosure oriented and addresses how companies should approach measuring fair value when required by GAAP; it does not create or modify any current GAAP requirements to apply fair value accounting. ASC Topic 820 prescribes various disclosures about financial statement categories and amounts which are measured at fair value, if such disclosures are not already specified elsewhere in GAAP. The adoption of the standard did not have a material effect on the Company's consolidated financial statements. F-33 (17 - continued) FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels: Level 1: Level 2: Level 3: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted market price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. Inputs to the valuation methodology include quoted market prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted market prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means. Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets carried at fair value or the lower of cost or fair value. The table below presents the balances of financial assets measured at fair value on a recurring and nonrecurring basis as of September 30, 2009. The Company had no liabilities measured at fair value as of September 30, 2009. Assets Measured - Recurring Basis Securities available for sale Interest rate cap Assets Measured - Nonrecurring Basis Impaired loans Loans held for sale Foreclosed real estate Level 1 Level 2 Level 3 Total Carrying Value (In thousands) $ $ 76 - 72,504 202 $ - - - 4,971 317 1,589 $ - - - - - 72,580 202 4,971 317 1,589 In general, fair value is based upon quoted market prices, where available. If quoted market prices are not available, fair value is based on internally developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters or a matrix pricing model that employs the Bond Market Association’s standard calculations for cash flow and price/yield analysis and observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value, or the lower of cost or fair value. These adjustments may include unobservable parameters. Any such valuation adjustments have been applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. F-34 (17 - continued) FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 Securities Available for Sale. Securities classified as available for sale are reported at fair value on a recurring basis. These securities are classified as Level 1 of the valuation hierarchy where quoted market prices from reputable third-party brokers are available in an active market. If quoted market prices are not available, the Company obtains fair value measurements from an independent pricing service. These securities are reported using Level 2 inputs and the fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. Changes in fair value of securities available for sale are recorded in other comprehensive income, net of income tax effect. Derivative Financial Instruments. Derivative financial instruments consist of an interest rate cap contract. As such, significant fair value inputs can generally be verified by counterparties and do not typically involve significant management judgements (Level 2 inputs). Impaired Loans. Impaired loans are carried at the present value of estimated future cash flows using the loan's existing rate or the fair value of collateral if the loan is collateral dependent. Impaired loans are evaluated and valued at the time the loan is identified as impaired at the lower of cost or market value. For collateral dependent impaired loans, market value is measured based on the value of the collateral securing these loans and is classified as Level 2 in the fair value hierarchy. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and its fair value is generally determined based on real estate appraisals or other independent evaluations by qualified professionals. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. Loans Held for Sale. Loans held for sale are carried at the lower of cost or market value. The portfolio comprised of residential real estate loans and fair value is based on specific prices of underlying contracts for sales to investors. These measurements are carried at Level 2. Foreclosed Real Estate Held for Sale. Foreclosed real estate held for sale is reported at the lower of cost or fair value less estimated costs to dispose of the property using Level 2 inputs. The fair values are determined by real estate appraisals using valuation techniques consistent with the market approach using recent sales of comparable properties. In cases where such inputs are unobservable, the balance is reflected within the Level 3 hierarchy. There were no transfers in or out of Level 3 financial assets or liabilities for the year ended September 30, 2009. F-35 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (18) DERIVATIVE INSTRUMENTS The Company acquired an interest rate cap contract in the acquisition of Community First that is not designated as a hedge. Realized and unrealized gains and losses on derivatives not designated for hedge accounting are recognized in noninterest income. The following is a summary of the terms of the interest rate cap contract reported in the consolidated balance sheet in other assets at September 30, 2009: Strike Rate 7.50% Remaining Term Notional Amount Purchase Premium Unrealized Gain (Dollars in thousands) 7.8 years $10,000 $150 $52 Fair Value $202 The notional amounts of derivatives do not represent amounts exchanged by the parties, but provide the basis for calculating payments. For interest rate caps, the notional amounts are not a measure of exposure to credit or market risk. Counterparties to financial instruments expose the Company to credit-related losses in the event of nonperformance, but the Company does not expect any counterparties to fail to meet their obligations. The Company deals only with highly rated counterparties. The current credit exposure of derivatives is represented by the fair value of contracts at the reporting date. (Also see Note 16) (19) STOCKHOLDERS’ EQUITY Conversion and Offering As part of the conversion completed on October 6, 2008, the Bank became a wholly owned subsidiary of the Company which offered common stock to certain current and former deposit customers of the Bank in a subscription offering. The Company issued an aggregate of 2,432,042 shares of common stock as a result of the offering. In connection with the conversion, the Company contributed 110,000 common shares and $100,000 in cash to the First Saving Charitable Foundation. Expenses of the offering amounted to $1.1 million and were charged against the gross proceeds of the conversion. Liquidation Account Upon completion of its conversion from mutual to stock form, the Bank established a liquidation account in an amount equal to its retained earnings at March 31, 2008 totaling $29.3 million. The liquidation account will be maintained for the benefit of depositors as of the March 31, 2007 eligibility record date (or the June 30, 2008 supplemental eligibility record date) who maintain their deposits in the Bank after conversion. In the event of complete liquidation, and only in such an event, each eligible depositor will be entitled to receive a liquidation distribution from the liquidation account in the proportionate amount of the then current adjusted balance for deposits held, before any liquidation distribution may be made with respect to the stockholders. Except for the repurchase of stock and payment of dividends by the Bank, the existence of the liquidation account does not restrict the use or application of retained earnings of the Bank. F-36 (20) DIVIDEND RESTRICTION FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 As an Indiana corporation, the Company is subject to Indiana law with respect to the payment of dividends. Under Indiana law, the Company may pay dividends so long as it is able to pay its debts as they become due in the usual course of business and its assets exceed the sum of its total liabilities, plus the amount that would be needed, if the Company were to be dissolved at the time of the dividend, to satisfy any rights that are preferential to the rights of the persons receiving the dividend. The ability of the Company to pay dividends depends primarily on the ability of the Bank to pay dividends to the Company. The payment of dividends by the Bank is subject to regulation by the Office of Thrift Supervision (OTS). The Bank may not declare or pay a cash dividend or repurchase any of its capital stock if the effect thereof would cause the regulatory capital of the Bank to be reduced below regulatory capital requirements imposed by the OTS or below the amount of the liquidation account established upon completion of the conversion. (21) REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the OTS. Failure to meet minimum capital requirements can initiate certain mandatory–and possibly 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 accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible capital to adjusted total assets (as defined), Tier I (core) capital (as defined) to adjusted total assets, Tier I capital to risk-weighted assets (as defined), and of total risk-based capital (as defined) to risk-weighted assets. Management believes, as of September 30, 2009, that the Bank meets all capital adequacy requirements to which it is subject. F-37 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (21 - continued) As of September 30, 2009, the most recent notification from the OTS categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution’s category. The Bank’s actual capital amounts and ratios are also presented in the table. No amount was deducted from capital for interest-rate risk in either year. (Dollars in thousands) As of September 30, 2009: Total capital (to risk weighted assets) Tier I capital (to risk weighted assets) Tier I capital (to adjusted total assets) Tangible capital (to adjusted total assets) As of September 30, 2008: Total capital (to risk weighted assets) Tier I capital (to risk weighted assets) Tier I capital (to adjusted total assets) Tangible capital (to adjusted total assets) $ $ $ $ $ $ $ $ Actual Amount Ratio Minimum For Capital Adequacy Purposes: Ratio Amount Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions: Amount Ratio 38,876 12.32% $ 35,501 11.25% 25,236 N/A 8.00% $ 31,545 10.00% $ 18,927 35,501 35,501 7.55% $ 18,816 4.00% $ 7.55% $ 7,056 1.50% 23,520 N/A 6.00% 5.00% 30,827 22.09% $ 11,165 8.00% $ 13,956 10.00% 29,420 21.08% 29,420 29,420 12.87% $ 12.87% $ N/A 6,858 3,429 $ 8,374 4.00% $ 1.50% 11,429 N/A 6.00% 5.00% F-38 (22) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 When presented, basic earnings per share are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The Company had no dilutive potential common shares for the year ended September 30, 2009. Earnings per share information is presented below for the year ended September 30, 2009 Because the mutual to stock conversion was not completed until October 6, 2008, per share earnings data is not applicable for the year ended September 30, 2008. (In thousands, except for share and per share data) Basic: Earnings: Net income Shares: Weighted average common shares outstanding Net income per common share, basic $ 33 2,315,498 $ 0.01 Unearned ESOP shares are not considered as outstanding for purposes of computing weighted average common shares outstanding. (23) PARENT COMPANY CONDENSED FINANCIAL INFORMATION Condensed financial information for First Savings Financial Group, Inc. (parent company only) as of and for the period from October 8, 2008, the date of conversion, to September 30, 2009 follows: Assets: Cash and interest bearing deposits Other assets Investment in subsidiaries Liabilities and Equity: Accrued expenses Stockholders' equity Balance Sheets (In thousands) F-39 $ $ $ $ 6,988 866 45,056 52,910 33 52,877 52,910 (23 - continued) FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 Statements of Income (In thousands) Other operating expenses Loss before income taxes and equity in undistributed net income of subsidiaries Income tax benefit Loss before equity in undistributed net income of subsidiaries Equity in undistributed net income of subsidiaries Net income Statements of Cash Flows (In thousands) Operating Activities: Net income Adjustments to reconcile net income to cash used in operating activities: Equity in undistributed net income of subsidiaries Employee stock ownership plan expense Contribution of common stock to charitable foundation Net change in other assets and liabilities Net cash used in operating activities Financing Activities: Proceeds from issuance of common stock Investment in Bank Net cash provided by financing activities Net increase in cash and interest bearing deposits Cash and interest bearing deposits at beginning of year Cash and interest bearing deposits at end of year F-40 $ $ $ $ (1,675) (1,675) 602 (1,073) 1,106 33 33 (1,106) 227 1,100 (829) (575) 21,160 (13,597) 7,563 6,988 - 6,988 FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (24) CONCENTRATION OF CREDIT RISK At September 30, 2009, demand deposits due from correspondent banks were fully insured under the Federal Deposit Insurance Corporation’s Temporary Transaction Account Guarantee Program. At September 30, 2008, the Bank had a concentration of credit risk with a correspondent bank in excess of the federal deposit insurance limit of $3.8 million. (25) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (In thousands) Cash payments for: Interest Taxes Non-cash investing activities: Transfers from loans to foreclosed real estate Proceeds from sales of foreclosed real estate financed through loans (26) SUBSEQUENT EVENTS 2009 2008 $ 4,472 $ 243 1,327 241 6,005 262 1,295 1,361 The Company has evaluated whether any subsequent events that require recognition or disclosure in the accompanying consolidated financial statements and related notes thereto have taken place through December 30, 2009, the date these consolidated financial statements were issued. The Company has determined that there are no such subsequent events. F-41 (27) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (In thousands) September 30, 2009: Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income Noninterest expenses Income (loss) before income taxes Income tax expense (benefit) Net income (loss) Net income (loss) per common share, basic Net income (loss) per common share, diluted September 30, 2008: Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income Noninterest expenses Income (loss) before income taxes Income tax expense (benefit) Net income (loss) First Quarter Second Quarter Third Quarter Fourth Quarter $ $ $ $ $ $ 3,206 1,289 1,917 59 1,858 282 3,189 (1,049) (409) $ 3,098 1,076 2,022 69 1,953 253 1,862 344 69 $ 3,272 1,060 2,212 272 1,940 291 2,080 151 (2) (640) $ 275 $ 153 $ (0.29) $ 0.12 $ 0.06 $ (0.29) $ 0.12 $ 0.06 $ $ 3,207 1,540 1,667 94 1,573 224 1,521 276 92 $ 3,094 1,556 1,538 1,109 429 275 1,627 (923) (391) $ 3,143 1,470 1,673 333 1,340 252 1,561 31 (10) $ 184 $ (532) $ 41 $ F-42 3,432 1,015 2,417 419 1,998 437 2,100 335 90 245 0.10 0.10 3,079 1,406 1,673 4 1,669 303 1,846 126 9 117 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the SIGNATURES undersigned, thereunto duly authorized. Date: January 11, 2010 FIRST SAVINGS FINANCIAL GROUP, INC. By: /s/ Larry W. Myers Larry W. Myers President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Title /s/ Larry W. Myers Larry W. Myers /s/ Anthony A. Schoen Anthony A. Schoen /s/ John P. Lawson, Jr. John P. Lawson, Jr. /s/ Charles E. Becht, Jr. Charles E. Becht, Jr. /s/ Cecile A. Blau Cecile A. Blau /s/ Gerald Wayne Clapp, Jr. Gerald Wayne Clapp, Jr. /s/ Robert E. Libs Robert E. Libs /s/ Michael F. Ludden Michael F. Ludden /s/ Douglas A. York Douglas A. York President, Chief Executive Officer and Director (principal executive officer) Chief Financial Officer (principal accounting and financial officer) Chief Operations Officer and Director Director Director Director Director Director Director Date January 11, 2010 January 11, 2010 January 11, 2010 January 11, 2010 January 11, 2010 January 11, 2010 January 11, 2010 January 11, 2010 January 11, 2010 /s/ Samuel E. Eckart Samuel E. Eckart /s/ Vaughn K. Timberlake Vaughn K. Timberlake /s/ Frank N. Czeschin Frank N. Czeschin Director Director Director January 11, 2010 January 11, 2010 January 11, 2010 (Back To Top) Section 2: EX-21.0 Registrant First Savings Financial Group, Inc. Subsidiaries First Savings Bank, F.S.B. Southern Indiana Financial Corporation (1) FFCC, Inc. (1) First Savings Investments, Inc. (1) (1) Wholly owned subsidiary of First Savings Bank, F.S.B. (Back To Top) Section 3: EX-23.0 SUBSIDIARIES Percentage Ownership Exhibit 21.0 Jurisdiction or State of Incorporation Indiana United States Indiana Indiana Nevada 100% 100% 100% 100% Exhibit 23.0 CONSENT OF MONROE SHINE & CO., INC. We consent to the incorporation by reference in First Savings Financial Group, Inc.’s Registration Statement No. 333-154417 on Form S-8 of our report dated November 13, 2009 contained in the annual report for the year ended September 30, 2009 appearing in this Form 10-K. /s/ Monroe Shine & Co., Inc. New Albany, Indiana January 11, 2010 (Back To Top) Section 4: EX-31.1 I, Larry W. Myers, certify that: 1. I have reviewed this Annual Report on Form 10-K of First Savings Financial Group, Inc.: CERTIFICATION EXHIBIT 31.1 2. 3. 4. 5. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) (b) (c) (d) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to designed under our supervision, 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; Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as the end of the period covered by this annual report based on such evaluation; Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): (a) (b) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: January 11, 2010 (Back To Top) Section 5: EX-31.2 I, Anthony A. Schoen, certify that: /s/ Larry W. Myers Larry W. Myers President and Chief Executive Officer (principal executive officer) CERTIFICATION EXHIBIT 31.2 1. 2. 3. 4. 5. I have reviewed this Annual Report on Form 10-K of First Savings Financial Group, Inc.: Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) (b) (c) (d) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to designed under our supervision, 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; Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as the end of the period covered by this annual report based on such evaluation; Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: January 11, 2010 (Back To Top) Section 6: EX-32 /s/ Anthony A. Schoen Anthony A. Schoen Chief Financial Officer (principal financial and accounting officer) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADDED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 32.0 In connection with the Annual Report of First Savings Financial Group, Inc. (the “Company”) on Form 10-K for the year ended September 30, 2009 as filed with the Securities and Exchange Commission (the “Report”), the undersigned hereby certify, pursuant to 18 U.S.C. §1350, as added by § 906 of the Sarbanes-Oxley Act of 2002, that: (1) (2) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. /s/ Larry W. Myers Larry W. Myers President and Chief Executive Officer (principal executive officer) /s/ Anthony A. Schoen Anthony A. Schoen Chief Financial Officer (principal financial and accounting officer) Date: January 11, 2010 (Back To Top) 

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