FSFG 10-K 9/30/2010
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, 2010
¨¨¨¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
OR
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 ¨ 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 ¨ 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 ¨
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
¨ No ¨
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 ¨
Accelerated Filer ¨
Non-accelerated Filer ¨
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 ¨ No ⌧
The aggregate market value of the voting and non-voting common equity held by nonaffiliates was $26.7 million, based upon the closing price of $12.49 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, 2010.
The number of shares outstanding of the registrant’s common stock as of December 13, 2010 was 2,369,856.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2011 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
[Removed and reserved]
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.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
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
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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.
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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, 2010, which is
the most recent date for which data is available from the Federal Deposit Insurance Corporation, we held approximately 12.19%, 1.24%, 17.22%, 74.45% and 7.50% 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, allowing 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 to 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 the
Community First acquisition and 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, multi-family real estate, commercial real estate and commercial business loans. We also originate residential
and commercial construction 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.
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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, 2010 was $2.8 million, including $2.0 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.
At September 30, 2010, our largest one- to four-family residential loan had an outstanding balance of $2.3 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, 2010.
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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, 2010, our largest commercial real estate loan had an outstanding balance of $2.3 million. This loan, which was originated in August 2008 and is secured by a
retail powersport vehicles dealership facility, was performing in accordance with its original terms at September 30, 2010.
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, 2010, we
had approved commitments for speculative construction loans of $5.7 million, of which $4.2 million was outstanding. We require a maximum loan-to-value ratio of 80% for speculative
construction loans. At September 30, 2010, our largest construction loan relationship was for a commitment of $2.0 million, of which $1.1 million was outstanding. This relationship was
performing according to its original terms at September 30, 2010.
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, 2010,
our largest land development loan had an outstanding balance of $1.7 million. This loan was performing in accordance with its original terms at September 30, 2010.
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Multi-Family Real Estate Loans. 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, 2010, our largest multi-family mortgage loan had an outstanding balance of $3.1 million. This
loan, which was originated in October 2008, was performing in accordance with its original terms at September 30, 2010.
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 small 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. At September 30, 2010, our largest consumer loan was a home equity
line of credit with a commitment of $1.0 million, of which $1.0 million was outstanding. This loan, which was originated in May 2009 and is secured by a second mortgage on a personal
residence, was performing in accordance with its original terms at September 30, 2010.
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, 2010, our largest commercial business loan was for a commitment of $4.5
million, of which $3.4 million was outstanding. 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, 2010.
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.
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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.
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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, we acquired loans from Community First that included sold participation interests. At September 30, 2010, $7.2 million
of loans included sold participation interests of $4.1 million, for a net position of $3.1 million outstanding in our portfolio.
We have not historically purchased whole loans or participation interests to supplement our lending portfolio; however, we acquired participation interests of loans in the
acquisition of Community First. At September 30, 2010, we had participation interests of loans totaling $5.0 million and our largest participation interest with a single borrower was $1.9
million. This loan, which was originated in November 2005 and is secured by an apartment complex, was categorized as less than 30 days delinquent at September 30, 2010.
We may sell participation interests in loans originated by us or purchase participation interests in loans originated by other financial institutions from time to time depending
on various factors. Our decision to sell or purchase loans is based on prevailing market interest rate conditions, interest rate management, regulatory lending restrictions and liquidity
needs.
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, Area 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, 2010, our regulatory limit on loans to one borrower was $6.4 million. At that date, our largest lending relationship was $5.7 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 17 of the Notes to 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 U.S. government agencies and sponsored
enterprises 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, 2010, our investment portfolio consisted primarily of U.S. government agency and sponsored enterprises securities, mortgage backed securities and
collateralized mortgage obligations issued by U.S. government agencies and 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.
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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 and investment security 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, loan prepayments and investment security calls 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 have a federal funds purchased line of credit facility with another financial institution that is subject to continued borrower
eligibility and is intended to support short-term liquidity needs. 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, 2010, we had 130 full-time employees and 28 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.
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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.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), signed by the President on July 21, 2010, provides for the regulation and supervision of
federal savings associations like First Savings Bank to be transferred to the Office of the Comptroller of the Currency, the agency that regulates national banks. The Office of The
Comptroller of the Currency will assume primary responsibility for implementing and enforcing many of the laws and regulations applicable to federal savings associations. The transfer
will occur over a transition period of up to one year, subject to a possible six month extension. At the same time, the responsibility for supervising savings and loan holding companies
like First Savings Financial Group will be transferred to the Federal Reserve Board, which is the agency that regulates bank holding companies. The Dodd-Frank Act also provides for
the creation of a new agency, the Consumer Financial Protection Bureau, as an independent bureau of the Federal Reserve Board, to take over the implementation of federal consumer
financial protection and fair lending laws from the depository institution regulators. However, institutions of $10 billion or fewer in assets will continue to be examined for compliance
with such laws and regulations by, and subject to the enforcement authority of, the prudential regulator rather than the Consumer Financial Protection Bureau.
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.
The Dodd-Frank Act authorizes depository institutions to pay interest on demand deposits effective July 31, 2011. Depending upon competitive responses, that change could
have an adverse impact on First Savings Bank’s interest expense.
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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.
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, 2010, First Savings Bank met each of these capital requirements. See Note 24 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.
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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.
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. The Dodd-Frank Act also makes noncompliance with the qualified thrift
lender test subject to agency enforcement action for violation of law. As of September 30, 2010, First Savings Bank maintained 83.4% 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.
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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. The Office of the Comptroller of the Currency will assume the enforcement authority of the Office of
Thrift Supervision as part of the Dodd-Frank Act regulatory restructuring.
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. 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, and certain potential adjustments established by Federal Deposit Insurance Corporation regulations. Effective April 1, 2009, assessment rates range from seven to
77.5 basis points of assessable deposits. The Dodd-Frank Act requires the Federal Deposit Insurance Corporation to amend its procedures to base assessments on total assets less
tangible equity rather than deposits. The Federal Deposit Insurance Corporation has issued a proposed rule which, if finalized, would implement that directive in the second quarter of
2011. 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. 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, in order to cover losses to the Deposit Insurance Fund. That special assessment, in the amount
of $217,000, was collected on September 30, 2009. The Federal Deposit Insurance Corporation provided for similar 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. Such amount was $2.1 million for First Savings Bank. The estimated assessments, which include an
assumed annual assessment base increase of 5%, were recorded as a prepaid expense asset as of December 31, 2009. Beginning with the quarter ended March 31, 2010, and each quarter
thereafter, a charge to earnings will be recorded for each regular assessment with an offsetting credit to the prepaid asset until the prepaid asset balance is expended.
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Due to the recent difficult economic conditions, deposit insurance per account owner has been raised to $250,000. That limit was made permanent by the Dodd-Frank Act. In
addition, the Federal Deposit Insurance Corporation adopted an optional Temporary Liquidity Guarantee Program by which, for a fee, noninterest bearing transaction accounts would
receive unlimited insurance coverage until September 30, 2010, subsequently extended to December 31, 2010, with an additional possible extension up to December 31, 2011, and certain
senior unsecured debt issued by institutions and their holding companies between October 13, 2008 and October 31, 2009 would be guaranteed by the Federal Deposit Insurance
Corporation through June 30, 2012, or in some cases, December 31, 2012. First Savings Bank did not opt to participate in the unlimited noninterest bearing transaction account coverage
or the unsecured debt guarantee program. The Dodd-Frank Act adopted mandatory unlimited coverage for certain noninterest bearing transaction accounts from January 1, 2011 until
December 31, 2012.
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 ended September 30, 2010 averaged 1.04 basis points of assessable deposits.
These financing corporation payments will continue until the bonds mature in 2017 through 2019.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The Federal
Deposit Insurance Corporation must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase.
The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation.
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 First Savings 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 regulatory condition imposed in writing. The management of First
Savings Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.
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, 2010, 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.
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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.
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
14
•
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 2010, 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 $55.2 million; a 10% reserve ratio is applied above $55.2 million. The first $10.7 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 2011, require a 3% ratio for up
to $58.8 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.
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.
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Savings and loan holding companies are not currently subject to specific regulatory capital requirements. The Dodd-Frank Act, however, requires the Federal regulators to
promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than
those applicable to institutions themselves. That will mean that trust preferred securities and cumulative preferred stock will not be includable in Tier 1 capital unless issued prior to
May 19, 2010. There is a five year transition period before the capital requirements will apply to savings and loan holding companies. The Dodd-Frank Act also extends the “source of
strength” doctrine to savings and loan holding companies. The regulatory agencies must issue regulations requiring that all bank and savings and loan holding companies serve as a
source of strength to their subsidiary depository institutions.
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. 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 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
On July 21, 2010, President Obama signed the Dodd-Frank Act, which is legislation that restructures the regulation of depository institutions. In addition to eliminating the
Office of Thrift Supervision and creating the Consumer Financial Protection Bureau, the Dodd-Frank Act, among other things, requires changes in the way that institutions are assessed
for deposit insurance, mandates the imposition of consolidated capital requirements on savings and loan holding companies, requires that originators of securitized loans retain a
percentage of the risk for the transferred loans, reduces the federal preemption afforded to federal savings associations and contains a number of reforms related to mortgage
origination. Many of the provisions of the Dodd-Frank Act require the issuance of regulations before their impact on operations can be assessed by management. However, there is a
significant possibility that the Dodd-Frank Act will, at a minimum, result in increased regulatory burden and increased compliance and possibly interest expense costs for First Savings
Financial Group and First Savings Bank.
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.
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 2010 fiscal year, First Savings Bank’s maximum federal income tax rate was 34%.
16
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 required savings institutions to recapture or take into income certain
portions of their accumulated bad debt reserves. Further recapture of the Bank’s tax bad debt reserves is triggered if the Bank makes a “non-dividend distribution” to First Savings
Financial Group, as described below, or meets the definition of a “large bank” as defined in the Internal Revenue Code. Under the Internal Revenue Code, if a bank’s average adjusted
assets exceeds $500 million for any tax year it is considered a “large bank” and must utilize the specific charge-off method to compute bad debt deductions. Approximately $4.6 million
of our accumulated bad debt reserves would be recaptured into taxable income over one or more years if First Savings Bank makes a “non-dividend distribution” to First Savings
Financial Group or meets the definition of a “large bank” as defined in the Internal Revenue Code.
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 distribution 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.
Our state income tax returns have not been audited during the last five years.
17
Item 1A.
RISK FACTORS
Our concentration in non-owner occupied residential real estate loans may expose us to increased credit risk.
At September 30, 2010, $43.3 million, or 25.2% of our residential mortgage loan portfolio and 12.4% 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, 2010, we had 15 non-owner occupied
residential loan relationships, each having an outstanding balance over $500,000, with aggregate outstanding balances of $16.1 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, 2010, non-performing non-owner occupied residential loans amounted to $766,000. Non-owner occupied residential properties held as real estate owned amounted to
$249,000 at September 30, 2010. 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, 2010, $84.8 million, or 24.3%, 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, 2010, non-performing commercial business
loans and non-performing commercial real estate loans totaled $344,000 and $1.2 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 collectability. 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.
18
Our construction loan and land and land development loan portfolios may expose us to increased credit risk.
At September 30, 2010, $34.8 million, or 10.0% of our loan portfolio consisted of construction loans, and land and land development loans, and $5.7 million, or 22.3% 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.”
If the other-than-temporary-impairment is recorded in connection with our investment portfolio it could have a negative impact on our profitability.
Our investment portfolio consists primarily of U.S. government agency and sponsored enterprises securities, mortgage backed securities and collateralized mortgage
obligations issued by U.S. government agencies and sponsored enterprises, municipal bonds and privately-issued collateralized mortgage obligations. We must evaluate these
securities for other-than-temporary impairment loss (“OTTI”) on a periodic basis. During 2010 we recognized an other-than-temporary write-down charge to earnings of $60,000
representing the total amortized cost of a privately-issued asset-backed security. While we have no remaining privately-issued asset-backed securities, the privately-issued
collateralized mortgage obligations exhibit signs of weakness, which may necessitate an OTTI charge in the future should the financial condition of the pools deteriorate further. Also,
given the current economic environment and possible further deterioration in economic conditions, we may need to record an OTTI charge for our other investments should the issuers
of those securities experience financial difficulties. Any future OTTI charges could significantly impact our earnings.
The current economic environment poses significant challenges for the Company and could adversely affect the Company’s financial condition and results of operations.
The Company is currently operating in a challenging and uncertain economic environment, both nationally and in the local markets. Financial institutions continue to be
affected by sharp declines in financial and real estate values. Continued declines in real estate values and home sales, and an increase in the financial stress on borrowers stemming
from an uncertain economic environment, including rising unemployment, could have an adverse effect on the Bank’s borrowers or their customers, which could adversely impact the
repayment of its loan portfolio. The overall deterioration in economic conditions also could subject the Company to increased regulatory scrutiny. In addition, a further deterioration in
local economic conditions, could result in increases in loan delinquencies and problem assets and foreclosures and a decline in the value of the collateral securing loans in the Bank’s
portfolio. Also, a further deterioration in local economic conditions could drive the level of loan losses beyond the level the Company has provided for loan loss allowance, which could
necessitate an increase in the Company’s provision for loan losses, which would reduce earnings. Additionally, the demand for the Company’s products and services could be reduced,
which would adversely impact the Company’s liquidity and revenues.
19
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. Also, 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.
If the goodwill that we recorded in connection with a business acquisition becomes impaired, it could have a negative impact on our profitability.
Goodwill represents the amount of acquisition cost over the fair value of net assets we acquired in the purchase of another financial institution. We review goodwill for
impairment at least annually, or more frequently if events or changes in circumstances indicate the carrying value of the asset might be impaired. We determine impairment by
comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the periods in which they
become known. At September 30, 2010, our goodwill totaled $5.9 million. While we have recorded no such impairment charges since we initially recorded the goodwill, there can be no
assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition
and results of operations.
20
Recently enacted regulatory reform may have a material impact on our operations.
On July 21, 2010, the President signed into law The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act restructures
the regulation of depository institutions. Under the Dodd-Frank Act, the Office of Thrift Supervision will be merged into the Office of the Comptroller of the Currency, which regulates
national banks. Savings and loan holding companies will be regulated by the Federal Reserve Board. Also included is the creation of a new federal agency to administer consumer
protection 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 will be reduced as well. The Dodd-Frank Act also will impose consolidated capital requirements on savings and loan holding companies effective in five years,
which will limit our ability to borrow at the holding company and invest the proceeds from such borrowings as capital in the Bank that could be leveraged to support additional growth.
The Dodd-Frank Act contains various other provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in
2008-2009. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. The
Dodd-Frank Act may have a material impact on our operations, particularly through increased regulatory burden and compliance costs.
Increased and/or special FDIC assessments will hurt our earnings.
The recent economic recession has caused a high level of bank failures, which has dramatically increased FDIC resolution costs and led to a significant reduction in the
balance of the Deposit Insurance Fund. As a result, the FDIC has significantly increased the initial base assessment rates paid by financial institutions for deposit insurance. Increases
in the base assessment rate have increased our deposit insurance costs and negatively impacted our earnings. In addition, in May 2009, the FDIC imposed a special assessment on all
insured institutions. Our special assessment, which was reflected in earnings for the quarter ended June 30, 2009, was $217,000. In lieu of imposing an additional special assessment, the
FDIC required all institutions to prepay their assessments for all of 2010, 2011 and 2012, which for us totaled $2.1 million. Additional increases in the base assessment rate or additional
special assessments would negatively impact our earnings.
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, 2010, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation, we held
approximately 12.19%, 1.24%, 17.22%, 74.45% and 7.50% 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.
21
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.”
Item 1B.
UNRESOLVED STAFF COMMENTS
None.
22
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, 2010.
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 Office
900 Hwy 62 NW
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
Leavenworth Office
510 Hwy 62
Leavenworth, Indiana
Item 3.
LEGAL PROCEEDINGS
Year
Opened
Owned/
Leased
1968
Owned
1975
1993
1999
2003
1986
1995
1996
1995
1925
1984
1969
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
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.
[Removed and reserved]
23
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 13, 2010, the Company had approximately 326 holders of record and 2,369,856 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 two fiscal years.
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 23 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report for information
regarding dividend restrictions applicable to the Company.
The following table provides quarterly market price and dividend information per common share for the years ended September 30, 2010 and 2009 as reported by Nasdaq.
2010:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2009:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Sale
Low
Sale
Dividends
Market price
end of period
$
$
$
14.22
13.75
12.70
10.79
$
11.00
10.85
10.05
N/A
$
12.70
12.14
10.02
10.04
$
9.85
9.59
8.99
N/A
$
0.00
0.00
0.00
0.08
$
0.00
0.00
0.00
N/A
13.08
13.01
12.49
10.45
10.70
9.85
9.60
N/A
The Company has not currently established a cash dividend plan. However, the Company’s Board of Directors discusses and evaluates the establishment of a cash dividend
plan on an ongoing basis.
Purchases of Equity Securities
First Savings Financial Group did not purchase any shares of its common stock during the fourth quarter of the fiscal year ended September 30, 2010.
24
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 thereto 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)
$
2010
2009
At September 30,
2008
2007
2006
508,442 $
11,278
109,976
3,929
343,615
366,161
67,159
55,151
480,811 $
10,404
72,580
6,782
353,823
350,816
55,773
52,877
228,924 $
21,379
10,697
8,456
174,807
189,209
8,000
29,720
203,321 $
10,395
8,260
7,422
167,371
168,782
3,000
29,662
(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
$
$
$
2010
26,262 $
6,117
20,145
1,604
18,541
2,916
18,020
3,437
808
2,629 $
1.17 $
1.17
0.08
For the Year Ended September 30,
2008
2007
2009
12,523 $
5,972
6,551
1,540
5,011
1,054
6,555
(490)
(300)
(190) $
N/A
N/A
N/A
13,078 $
6,183
6,895
758
6,137
841
5,737
1,241
427
814 $
N/A
N/A
N/A
13,008 $
4,440
8,568
819
7,749
1,263
9,231
(219)
(252)
33 $
0.01
0.01
0.00
25
206,399
15,223
5,897
8,219
166,695
175,891
–
28,850
2006
12,223
5,250
6,973
813
6,160
889
6,453
596
241
355
N/A
N/A
N/A
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
Dividend payout ratio
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)
2010
At or For the Year Ended September 30,
2007
2008
2009
2006
0.53%
0.01%
(0.09)%
0.40%
0.17%
4.93
4.44
4.57
3.66
0.06
3.41
3.93
3.90
78.14
93.90
(0.64)
2.97
3.38
3.11
86.19
2.78
3.48
3.77
2.79
1.24
3.49
3.74
3.13
74.16
82.08
109.89
125.66
113.15
108.61
109.23
7.34
10.85
–
21.84
–
14.07
–
14.24
–
13.91
7.84%
7.55%
12.87%
14.56%
13.96%
7.84
12.77
7.55
12.32
12.87
22.09
14.56
24.70
13.96
23.36
1.09%
1.03%
0.98%
0.75%
0.51%
63.88
70.06
104.72
117.16
50.61
0.42
1.71
1.47
12
31,100
6,410
0.38
1.47
1.44
14
32,689
6,552
0.64
0.93
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
(1) 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%.
(2) 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%.
(3) Represents other expenses divided by the sum of net interest income and other income.
(4) Represents the capital ratios of only the Bank.
(5) The significant increase from 2008 to 2009 is due primarily to 16,455 deposit accounts acquired in the acquisition of Community First.
(6) The significant increase from 2008 to 2009 is due primarily to 4,595 loans acquired in the acquisition of Community First.
26
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
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 investment 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, advertising and other miscellaneous expenses. Our noninterest expenses increased primarily as a result of the acquisition
of Community First, the conversion of the Bank’s core operating system, the termination of the Bank’s defined benefit pension plan and the early retirement of several officers of the
Bank. These additional expenses consist primarily of compensation and benefits, occupancy and equipment expense, data processing expense and professional fees expense.
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. During 2010, we recognized additional annual employee compensation expenses due to the shareholder approval and adoption of a new equity incentive plan. We
will also recognize annual employee compensation expenses related to the equity incentive plan in future years. See Note 15 of the Notes to Consolidated Financial Statements
beginning on page F-1 of this annual report for additional information regarding the stock based compensation plans. During 2010, we also recognized $705,000 of charges related to the
termination of the defined benefit pension plan and $214,000 of severance compensation for the early retirement of several officers.
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. During 2010, we recognized $882,000 of nonrecurring
charges associated with the conversion of the Bank’s core operating system.
Professional fees expense represents the fees we pay to third parties for legal, accounting, investment advisory and other consulting services. During 2010, we recognized
$319,000 of nonrecurring fees associated with the conversion of the Bank’s core operating system and $60,000 of consulting fees related to Sarbanes-Oxley compliance.
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 was 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 office supplies, postage, telephone, insurance, regulatory assessments and other miscellaneous operating expenses.
27
Critical Accounting Policies
The accounting and reporting policies of the Company comply with accounting principles generally accepted in the United States of America and conform to general practices
within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and
assumptions. The financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding reported results. Critical
accounting policies are those policies that require management to make assumptions about matters that are highly uncertain at the time an accounting estimate is made; and different
estimates that the Company reasonably could have used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would
have a material impact on the Company’s financial condition, changes in financial condition or results of operations. Most accounting policies are not considered by management to be
critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements. These factors include, among other
things, whether the estimates are significant to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including third
parties or available prices, and sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be utilized under generally accepted
accounting principles. Significant accounting policies, including the impact of recent accounting pronouncements, are discussed in Note 1 of the Notes to Consolidated Financial
Statements. The policies considered to be critical accounting policies are described below.
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 5 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report.
Other-Than-Temporary Impairment of Securities. The Company reviews all investment securities with significant declines in fair value for potential other-than-temporary
impairment (“OTTI”) on a periodic basis. In evaluating the investment portfolio for OTTI, management considers the issuer’s credit rating, credit outlook, payment status and financial
condition, the length of time the investment has been in a loss position, the size of the loss position and other meaningful information. Generally changes in market interest rates that
result in a decline in value of an investment security are considered to be temporary, since the value of such investment can recover in the foreseeable future as market interest rates
return to their original levels. However, such declines in value that are due to the underlying credit quality of the issuer or other adverse conditions that cannot be expected to improve
in the foreseeable future, may be considered to be other-than-temporary. The Company recognizes credit-related OTTI on debt securities in earnings, while noncredit-related OTTI on
debt securities not expected to be sold is recognized in accumulated other comprehensive income. Management believes this is a critical accounting policy because this evaluation of
the underlying credit or analysis of other conditions contributing to the decline in value involves a high degree of complexity and requires us to make subjective judgments that often
require assumptions or estimates about various matters. During 2010 the Company recognized an other-than-temporary write-down charge to earnings of $60,000 representing the total
amortized cost of a privately-issued asset-backed security. The security was determined to be other-than-temporarily impaired because it matured during 2010 and the Company does
not anticipate recovering its investment in the security. See Note 4 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report for additional
information regarding OTTI.
28
Valuation Methodologies. In the ordinary course of business, management applies various valuation methodologies to assets and liabilities that often involve a significant
degree of judgment, particularly when active markets do not exist for the items being valued. Generally, in evaluating various assets for potential impairment, management compares the
fair value to the carrying value. Quoted market prices are referred to when estimating fair values for certain assets, such as investment securities. However, for those items for which
market-based prices do not exist, management utilizes significant estimates and assumptions to value such items. Examples of these items include goodwill and other intangible assets,
estimated present value of impaired loans, value ascribed to stock-based compensation and certain other financial investments. The use of different assumptions could produce
significantly different results, which could have material positive or negative effects on the Company’s results of operations.
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;
continuing to integrate the Community First offices, customers and product lines;
improving customer service and product offerings as a result of the core operating system conversion that was completed in August 2010;
providing exceptional customer service to attract and retain customers;
continuing to monitor asset quality and credit risk in the loan and investment portfolios;
recognizing improvements in noninterest income with respect to service charges on deposits as a result of restructuring deposit account types and fees, commission
income related to non-deposit investment products and gains on sales of mortgage loans sold in the secondary market;
recognizing decreases in noninterest expense as a result of the integration of Community First and the new core operating system;
expanding our market share and market area by opening new branch offices and pursuing opportunities to acquire other financial institutions or branches; and
increasing shareholder value through stock repurchase programs and potential future dividend plans.
29
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, 2010, 49.3% of
our total loans were residential mortgage loans and 25.2% 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, 2010, commercial real estate loans and commercial business loans represented 15.5% and 8.9%, respectively, of our total loans. We intend to
continue to pursue these lending opportunities in our primary market area.
Pursuing opportunities to increase commercial real estate lending and commercial business lending.
During 2010, we began to integrate the Community First offices and customers by integrating the core operating systems of the Bank and Community First onto a single core
operating system, which was successfully completed in August 2010. This single system permits Bank customers to utilize all twelve office locations, permits Bank officers and staff to
extract and monitor a standard set of information available from all office locations and allows the Bank to offer a uniform set of product offerings focus.
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, 2010 and 2009, cash and cash equivalents totaled $11.3 million and $10.4 million, respectively. The Bank is required to maintain
reserve balances on hand and with the Federal Reserve Bank which are unavailable for investment but interest-bearing and the average amount of those reserve balances for the year
ended September 30, 2010 was approximately $843,000.
30
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, 2010, these loans totaled $172.0 million, or 49.3% of total loans, compared to
$185.8 million, or 51.6% of total loans at September 30, 2009. Total residential mortgage loan balances decreased in 2010 primarily due to repayments. 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 $53.9 million, or 15.5% of total loans at September 30, 2010, compared to $48.1 million, or 13.4% of total loans at September 30, 2009. The
balance of commercial real estate loans has increased primarily due to greater opportunity to originate these loans during 2010 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 further diversify the loan portfolio.
Consumer loans totaled $36.8 million, or 10.5% of total loans, at September 30, 2010 compared to $43.2 million, or 12.0% of total loans, at September 30, 2009. In general,
consumer loans, including automobile loans, 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. The largest decrease in this portfolio occurred with automobile loans, which decreased
$4.9 million, or 26.7%, from September 30, 2009 to September 30, 2010.
Commercial business loans totaled $30.9 million, or 8.9% of total loans, at September 30, 2010 compared to $36.9 million, or 10.3% of total loans, at September 30,
2009. Commercial business loan balances decreased primarily due to repayments.
Multi-family real estate loans totaled $20.4 million, or 5.8% of total loans at September 30, 2010, compared to $12.6 million, or 3.5% of total loans at September 30, 2009. The
balance of multi-family real estate loans increased primarily due to our increased commercial lending personnel and our offering of competitive short-term rates on these loans during
2010.
Residential construction loans totaled $15.9 million, or 4.6% of total loans, at September 30, 2010 of which $5.7 million were speculative construction loans. At September 30,
2009, residential construction loans totaled $14.6 million, or 4.0% of total loans, of which $8.2 million were speculative loans. 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 has decreased the opportunity to originate these loans and grow this segment of the
portfolio. We intend to pursue quality construction lending opportunities as the housing market recovers.
Commercial construction loans totaled $9.9 million, or 2.8% of total loans, at September 30, 2010 compared to $7.6 million, or 2.1% of total loans at September 30, 2009. The
general slowdown of commercial construction in our primary market area and increased competition in the marketplace has decreased the opportunity to originate these loans and grow
this segment of the portfolio.
Land and land development loans totaled $9.1 million, or 2.6% of total loans at September 30, 2010, compared to $11.2 million, or 3.1% of total loans at September 30,
2009. These loans are primarily secured by vacant lots to be improved for residential and nonresidential development and farmland.
31
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
Other
Total
Total loans
2010
2009
At September 30,
2008
2007
2006
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
$ 172,007
53,869
20,360
15,867
9,851
9,076
281,030
49.33% $ 185,800
48,090
15.45
12,584
5.84
14,555
4.55
7,648
2.83
11,189
2.60
279,866
80.60
51.61% $ 113,518
15,459
13.36
3,282
3.50
6,189
4.04
1,991
2.12
4,748
3.11
145,187
77.74
64.20% $ 104,297
18,364
1,275
11,583
3,265
5,022
143,806
8.74
1.86
3.50
1.13
2.69
82.12
60.33% $ 101,122
19,090
10.62
1,821
0.74
20,562
6.70
29
1.89
2,524
2.91
145,148
83.19
59.29%
11.19
1.07
12.06
0.02
1.48
85.11
30,905
8.86
36,901
10.25
14,411
8.15
12,645
7.31
10,232
6.00
16,335
13,405
7,030
36,770
4.68
3.84
2.02
10.54
17,365
18,279
7,567
43,211
4.82
5.08
2.11
12.01
9,970
1,950
5,290
17,210
5.64
1.10
2.99
9.73
8,275
1,946
6,200
16,421
4.79
1.13
3.58
9.50
6,049
1,675
7,458
15,182
3.55
0.98
4.36
8.89
348,705
100.00%
359,978
100.00%
176,808
100.00%
172,872
100.00%
170,562
100.00%
Reserve for uncollected interest
Deferred loan origination fees and costs, net
Undisbursed portion of loans in process
Allowance for loan losses
Loans, net
–
(778)
2,057
3,811
$ 343,615
–
(795)
1,067
1,729
$ 174,807
-
(618)
4,822
1,297
$ 167,371
1
(335)
3,333
868
$ 166,695
–
(846)
3,306
3,695
$ 353,823
32
Loan Maturity
The following table sets forth certain information at September 30, 2010 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, 2010
$
$
27,914
13,985
12,575
15,470
36,623
28,104
57,696
192,367
$
$
25,191
12,157
8,478
7,412
5,449
2,457
1,801
62,945
$
$
25,718
-
-
-
-
-
-
25,718
$
$
20,607
3,219
2,435
2,506
1,884
132
122
30,905
$
$
12,247
7,340
5,182
5,260
5,600
1,141
-
36,770
$
$
111,677
36,701
28,670
30,648
49,556
31,834
59,619
348,705
(1) Includes multi-family loans.
(2) Includes farmland and land and land development loans.
(3) 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, 2010 that are due after September 30, 2011, 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) Includes multi-family loans.
(2) Includes farmland and land and land development loans.
33
Fixed Rates
Adjustable Rates
Total
$
$
108,684 $
26,792
-
7,591
13,758
156,825 $
55,769 $
10,962
-
2,707
10,765
80,203 $
164,453
37,754
-
10,298
24,523
237,028
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) Includes multi-family loans.
(2) Includes farmland and land and land development loans.
Year Ended September 30,
2009
2010
2008
$
359,978 $
176,808 $
172,872
22,980
7,386
9,762
10,050
6,999
57,177
–
–
(68,450)
–
(11,273)
348,705 $
19,630
8,360
3,258
13,883
14,013
59,144
–
174,940
(50,914)
–
183,170
359,978 $
36,986
7,154
7,918
8,648
15,854
76,560
–
–
(72,624)
–
3,936
176,808
$
Securities Available for Sale. Our available for sale securities portfolio consists primarily of U.S. government agency and sponsored enterprises securities, mortgage backed
securities and collateralized mortgage obligations issued by U.S. government agencies and sponsored enterprises, municipal bonds and privately-issued collateralized mortgage
obligations. Available for sale securities increased by $37.4 million from September 30, 2009 to September 30, 2010 primarily due to purchases of $102.8 million, which more than offset
maturities and calls of $32.6 million, sales of $23.5 million and principal repayments of $13.3 million. The increase in available for sale securities was primarily funded by increases in
deposits and Federal Home Loan Bank borrowings and the reinvestment of repayments on held to maturity securities and 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 $2.9 million, or 42.6%, from September 30, 2009 to September 30, 2010 due primarily to sales of $426,000 of securities on which a
substantial portion of the principal outstanding at acquisition had been collected, and principal repayments of $2.4 million.
34
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
Agency mortgage-backed securities
Other equity securities
Total
Securities held to maturity:
Municipal
Agency mortgage-backed securities
Total
2010
Amortized
Cost
Fair
Value
$
$
$
$
25,510
22,325
10,342
–
33,109
13,944
–
105,230
$
$
25,705
22,488
12,688
–
34,877
14,141
77
109,976
$
$
304
3,625
3,929
$
$
308
3,836
4,144
$
$
At September 30,
2009
Amortized
Cost
Fair
Value
2008
Amortized
Cost
Fair
Value
5,825 $
3,343
11,139
52
17,081
34,368
–
71,808 $
305 $
6,477
6,782 $
5,845
3,473
11,139
52
17,512
34,483
76
72,580
$
$
308
6,746
7,054
$
$
4,008
1,891
–
–
4,669
–
–
10,568
$
$
307
8,149
8,456
$
$
4,059
1,900
–
–
4,642
–
96
10,697
310
8,181
8,491
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
Net amortization of premiums and accretion of discounts on securities
Gains on sales
Increase 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
Net amortization of premiums and accretion of discounts on securities
Other than temporary impairment loss
Gains 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.
35
At or For the Year Ended
September 30,
2009
2008
2010
$
$
$
$
41,229 $
10,020
(20,244)
–
(12,356)
(849)
153
24
–
(23,252)
17,977 $
38,405 $
92,742
(3,666)
(32,605)
(3,366)
801
(60)
–
3,892
–
57,738
96,143 $
8,181 $
4,005
–
–
(3,454)
(42)
–
352
32,187
33,048
41,229 $
11,007 $
44,547
(16,041)
(17,300)
(985)
(173)
–
100
529
16,721
27,398
38,405 $
3,091
6,040
–
–
(992)
(13)
–
55
–
5,090
8,181
12,564
7,577
–
(9,000)
(107)
(22)
–
–
(5)
–
(1,557)
11,007
The following table sets forth the stated maturities and weighted average yields of debt securities at September 30, 2010. 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.
(Dollars in thousands)
Securities available for sale:
Agency bonds and notes
Agency CMO
Privately-issued CMO
Municipal
Agency mortgage-backed securities
Total
Securities held to maturity:
Municipal
Agency mortgage-backed securities
Total
Carrying
Value
$
$
$
$
–
–
–
178
–
178
304
–
304
One Year
or Less
Weighted
Average
Yield
More than
One Year to
Five Years
Carrying
Value
Weighted
Average
Yield
More than
Five Years to
Ten Years
Carrying
Value
Weighted
Average
Yield
More than
Ten Years
Carrying
Value
Weighted
Average
Yield
Total
Carrying
Value
Weighted
Average
Yield
–% $
–
–
6.18
–
6.18% $
–
–
–
965
194
1,159
2,025
–% $
3,389
–
–
–
5,994
6.27
2.59
2,328
5.65% $ 13,736
3.50% $ 23,680
19,099
1.36
12,688
–
27,740
6.61
2.22
11,619
4.11% $ 94,826
3.41% $ 25,705
22,488
2.84
12,688
12.33
34,877
6.28
3.47
14,141
5.34% $ 109,899
3.42%
2.62
12.33
6.34
3.26
5.19%
5.70% $
–
5.70% $
–
511
511
–% $
4.68
4.68% $
–
–
–
–% $
–
–% $
–
3,114
3,114
–% $
4.71
4.71% $
304
3,625
3,929
5.70%
4.71
4.79%
As of September 30, 2010, 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 $15.3 million from September 30, 2009 to September 30, 2010 primarily due to increases in noninterest-bearing checking of $3.5 million, interest-bearing
checking of $8.4 million, money market deposit accounts of $1.2 million, interest-bearing savings of $3.0 million and offset by a decrease in certificates of deposits of $760,000. We have
continued to develop and promote cash management services including sweep accounts and remote deposit capture during 2010 in order to increase the level of commercial deposit
accounts. We believe that the development and promotion of these products has made us more competitive in attracting commercial 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
Savings accounts
Certificates of deposit
Total
2010
At September 30,
2009
2008
$
$
28,853 $
64,831
35,950
39,104
197,423
366,161 $
25,388 $
56,398
34,715
36,132
198,183
350,816 $
6,843
39,340
8,565
17,974
116,487
189,209
36
The following table indicates the amount of jumbo certificates of deposit by time remaining until maturity as of September 30, 2010. 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
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
Amount
(In thousands)
8,792
$
12,241
8,090
23,319
52,442
$
2010
At September 30,
2009
2008
$
$
65,409 $
42,725
39,084
19,944
21,445
6,695
581
1,540
–
197,423 $
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
(1) Includes $6.4 million of our pension plan assets invested in certificates of deposit at September 30, 2009.
(2) Represents the investment of our pension plan assets in certificates of deposit at September 30, 2008.
The following table sets forth the amount and maturities of time deposits at September 30, 2010.
(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
Amount Due
Less Than
One Year
More Than
One Year to
Two Years
$
$
59,119
23,911
13,753
4,468
7,381
4,275
581
1,424
114,912
$
$
6,173
13,005
9,570
6,829
9,437
697
–
–
45,711
$
$
More Than
Two Years to
Three Years
36
3,299
1,228
2,061
1,461
–
–
–
8,085
More Than
Three Years
81
2,510
14,533
6,586
3,166
1,723
–
116
28,715
$
$
$
$
Percent of Total
Time Deposit
Accounts
Total
65,409
42,725
39,084
19,944
21,445
6,695
581
1,540
197,423
33.13%
21.64
19.80
10.10
10.86
3.39
0.30
0.78
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 in deposits
Ending balance
Year Ended September 30,
2009
2010
2008
$
$
350,816 $
–
12,865
2,480
15,345
366,161 $
189,209 $
179,460
(21,633)
3,780
161,607
350,816 $
168,782
–
15,241
5,186
20,427
189,209
37
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 borrowings.
(Dollars in thousands)
Maximum amount of FHLB borrowings outstanding at any month-end during period
Average FHLB borrowings 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,
2009
2010
2008
$
$
$
67,159
59,319
67,159
1.70%
$
1.66%
$
55,773
14,946
55,773
2.11%
$
1.20%
8,000
6,422
3.60%
8,000
3.36%
Borrowings from the FHLBI increased $11.4 million from September 30, 2009 to September 30, 2010. FHLBI borrowings are primarily used to fund loan demand and to purchase
available for sale securities. See Note 12 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report for additional information regarding FHLBI
borrowings.
The Bank acquired a retail repurchase agreement and broker repurchase agreements in the acquisition of Community First. Prior to the acquisition, the Bank had 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 2009 or 2008 for the repurchase agreements.
The following table sets forth certain information regarding the Bank’s use of borrowings under retail repurchase agreements.
(Dollars in thousands)
Maximum amount of retail repurchase agreements outstanding at any month-end during
period
Average retail repurchase agreements 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,
2009
2008
2010
$
$
$
1,312
1,308
0.50%
1,312
$
0.63%
$
1,304
–
–
1,304
$
0.63%
The following table sets forth certain information regarding the Bank’s use of borrowings under repurchase agreements with broker-dealers.
(Dollars in thousands)
Maximum amount of broker repurchase agreements outstanding at any month-end during
period
Average broker repurchase agreements 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,
2009
2008
2010
$
$
$
15,899
15,722
15,509
2.10%
$
1.62%
$
15,935
–
–
15,935
$
1.62%
–
–
–
–
–
–
–
–
–
–
See Note 11 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report for additional information regarding repurchase agreements.
38
Results of Operations for the Years Ended September 30, 2010 and 2009
Overview. The Company reported net income of $2.6 million ($1.17 per share diluted; weighted average common shares outstanding of 2,244,643, as adjusted) for the year
ended September 30, 2010, compared to 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.
During the year ended September 30, 2010, the Company recognized one-time pretax charges of $705,000 in connection with the termination and settlement of the Bank’s
defined benefit pension plan, $214,000 in severance compensation expense for the early retirement of several officers, $60,000 in professional fees for Sarbanes Oxley compliance
implementation, and $882,000 and $319,000 for data processing and professional fees, respectively, in connection with the conversion of the Bank’s core operating system, discussed in
“Noninterest Expense” below. A significant factor that adversely affected net income for 2009 was the $1.2 million charitable contribution discussed in “Noninterest Expense” below.
Net Interest Income. Net interest income increased $11.6 million, or 134.6%, from $8.6 million for the year ended September 30, 2009 to $20.1 million for the year ended
September 30, 2010 primarily as the result of increases in the average balance of interest earning assets and the interest rate spread from 2009 to 2010, despite a decrease in the ratio of
average interest-earning assets to average interest-bearing liabilities from 125.66% for 2009 to 109.89% for 2010. 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 3.41% in 2009 to 4.44% in 2010. This increase in the interest rate spread is
primarily due to a decrease in the average cost of funds of 1.03% when comparing the two years while the average tax-equivalent yield on interest-earning assets was 5.93% for both
2010 and 2009.
Total interest income increased $13.3 million, or 101.9%, from $13.0 million for 2009 to $26.3 million for 2010. The increase was the result of an increase of $228.4 million, or
103.2%, in the average balance of interest-earning assets from $221.3 million in 2009 to $449.7 million in 2009. The average tax-equivalent yield on interest-earning assets was 5.93% for
both 2010 and 2009. The increase in interest-earning assets primarily relates to the acquisition of Community First and an increase in the investment securities portfolio.
Interest income on loans increased $10.8 million, or 95.2%, from $11.4 million for 2009 to $22.2 million for 2010 due primarily to an increase in the average balance of loans
outstanding. The average tax-equivalent yield on loans was 6.30% in 2009 compared to 6.33% in 2010. Average loans outstanding increased $171.3 million, or 94.7%, from $180.9 million
in 2009 to $352.2 million in 2010. The increase in the average balance of loans outstanding primarily relates to the acquisition of Community First. In addition, during 2010 and 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 real estate mortgage loans and was successful
in originating these loans. These increases more than offset decreases in commercial business loans and consumer loans.
Interest income on investment securities increased $2.4 million, or 152.8%, from $1.6 million for 2009 to $4.0 million for 2010 due primarily to an increase in the average balance of
investment securities of $55.1 million, or 159.5%, from $34.6 million in 2009 to $89.7 million in 2010. The average tax-equivalent yield on investments securities was 4.78% in 2009
compared to 4.80% in 2010. The increase in average balance of investment securities primarily relates to the acquisition of Community First. In addition, during 2010 and in an effort to
maximize earnings and diversify the asset portfolio, the Bank increased its investments in U.S. government agency and sponsored enterprises securities, collateralized mortgage
obligations issued by U.S. government agencies and sponsored enterprises, and municipal bonds, while decreasing its investment in mortgage backed securities issued by U.S.
government agencies and sponsored enterprises.
Interest income on interest-bearing deposits with banks decreased $17,000, or 51.5%, as a result of a $867,000 decrease in the average balance for 2010 compared to 2009 and a
decrease in the average yield from 0.76% in 2009 to 0.44% in 2010. During 2010, 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.
39
Total interest expense increased $1.7 million, or 38.1%, due to a $233.2 million increase in the average balance of interest-bearing liabilities from $176.1 in 2009 to $409.3 million in
2010, which more than offset a decrease in the average cost of funds from 2.52% in 2009 to 1.49% in 2010. The average balance of interest-bearing deposits increased $171.8 million, or
106.6%, from $161.1 million in 2009 to $332.9 million in 2010 and the average cost of funds for deposits was 2.56% in 2009 compared to 1.43% in 2010. The average balance of borrowings
increased $61.5 million, or 411.0%, from $14.9 million in 2009 to $76.4 million in 2010 and the average cost of funds for borrowings was 2.11% in 2009 compared to 1.76% in 2010. The
increases in average balance of interest-bearing deposits and borrowings primarily relate to the acquisition of Community First. The average cost of interest-bearing liabilities decreased
for 2010 primarily as a result of a reduction in the rates offered on deposit accounts during 2010, the repricing of time deposits at lower market rates during 2010, and the use of lower-
cost borrowings during 2010.
40
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
Borrowings (1)
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
2010
Interest
and
Dividends
Average
Balance
Yield/
Cost
Year Ended September 30,
2009
Interest
and
Dividends
Average
Balance
Yield/
Cost
2008
Interest
and
Dividends
Average
Balance
Yield/
Cost
16
22,295
3,558
750
69
26,688
387
260
99
4,025
4,771
1,346
6,117
$
$
$
$
$
3,614
352,208
58,437
31,309
4,170
449,738
42,003
491,741
63,389
33,736
37,438
198,323
332,886
76,369
409,255
27,024
2,112
438,391
34
11,393
1,138
516
46
13,127
94
109
45
3,877
4,125
315
4,440
0.44% $
6.33
6.09
2.40
1.65
5.93
$
$
0.61
0.77
0.26
2.03
1.43
1.76
1.49
$
$
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
53,350
491,741
$
51,678
236,664
$
29,691
211,010
$
$
20,571
$
8,687
$
6,612
4.44%
4.57%
109.89%
3.41%
3.93%
125.66%
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
2.97%
3.38%
113.15%
(1) Includes Federal Home Loan Bank borrowings and repurchase agreements.
41
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
Net increase in net interest income
Year Ended September 30, 2010
Compared to
Year Ended September 30, 2009
Year Ended September 30, 2009
Compared to
Year Ended September 30, 2008
Increase (Decrease)
Due to
Volume
Rate
Increase (Decrease)
Due to
Volume
Rate
Net
Net
$
(6) $
10,848
1,988
314
31
13,175
1,103
1,074
2,177
10,998
$
$
(12) $
54
432
(80)
(8)
386
(457)
(43)
(500)
886
$
(18) $
10,902
2,420
234
23
13,561
646
1,031
1,677
11,884 $
(42) $
705
694
206
1
1,564
(186)
122
(64)
1,628
$
(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
Provision for Loan Losses. The provision for loan losses increased $785,000 from $819,000 for the year ended September 30, 2009 to $1.6 million for the year ended September
30, 2010. The increase in the provision for loan losses is primarily due to net charge-offs totaling $1.5 million, which was primarily the result of three borrowing relationships, consisting
of one secured by non-owner occupied investment properties ($142,000) and two secured by equity investments ($864,000). It is management’s assessment that the allowance for loan
losses at September 30, 2010 was adequate and appropriately reflected the inherent risk of loss in the Bank’s loan portfolio at that date.
During 2010, the Bank had net charge-offs of $1.5 million compared to $689,000 for 2009. The loan portfolio decreased $10.2 million from $353.8 million at September 30, 2009 to
$343.6 million at September 30, 2010, but experienced increases primarily in the multi-family and commercial mortgage loan portfolios, which generally have a lower level of inherent credit
risk than commercial business loans and consumer loans. Nonperforming loans increased $692,000 from $5.3 million for 2009 to $6.0 million for 2010, but increased primarily in the
residential real estate portfolio, which has a lower level of inherent risk than all other segments of the loan portfolio. 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 $1.7 million, or 130.9%, to $2.9 million for the year ended September 30, 2010 as compared $1.3 million for the year ended
September 30, 2009. The Bank’s principal source of noninterest income is deposit account service charges and this increased $1.0 million from $608,000 for 2009 to $1.6 million for
2010. Commission income increased $141,000 from $26,000 for 2009 to $167,000 for 2010, the earnings on life insurance increased $87,000 from $171,000 for 2009 to $258,000 for 2010, and
other income increased $330,000 from $329,000 for 2009 to $659,000 for 2010. In addition, the Company recognized additional net gains $102,000 and $53,000 on sales of mortgage loans
and securities available for sale, respectively, when comparing the two years. These increases and additional gains were partially offset by an other than temporary impairment loss on
securities of $60,000 and an unrealized loss on a derivative contract of $124,000 during 2010. The increases in services charges on deposits and other income, which relate primarily to
ATM surcharge and EFT interchange fee income, is primarily a result of acquired Community First deposit accounts.
42
Noninterest Expense. Noninterest expenses increased $8.8 million, or 95.5%, to $18.0 million for the year ended September 30, 2010 compared to $9.2 million for the year ended
September 30, 2009. An increase in compensation and benefits expense represented $5.1 million of the increase in noninterest expense, primarily due to additional personnel resulting
from the Community First acquisition, the one-time $705,000 cost related to the termination of the defined benefit pension plan and the $214,000 of severance compensation for the early
retirement of several officers. Occupancy and equipment expense and FDIC insurance premiums increased $1.2 million and $327,000, respectively, when comparing the two years,
primarily as a result of the Community First acquisition and an industry-wide increase in FDIC insurance premiums. Data processing expenses increased $1.2 million primarily as a result
of the Community First acquisition and the one-time charges of $882,000 associated with the conversion of the core operating system. Professional fees increased $421,000, primarily as
the result of $319,000 of fees associated with the conversion of the core operating system and $60,000 of consulting fees related to Sarbanes-Oxley compliance. Other operating expense
increased $1.4 million when comparing the two years, also primarily as a result of the Community First acquisition, including amortization of the acquired core deposit intangible of
$294,000. Charitable contributions decreased $1.2 million from 2009 to 2010 due to the $1.2 million one-time contribution to the First Savings Charitable Foundation during 2009.
Income Tax Expense. The Company recognized income tax expense of $808,000 for the year ended September 30, 2010, for an effective tax rate of 23.5%, compared to an
income tax benefit of $252,000 for 2009. The low effective tax rate for 2010 is due primarily to increased tax-exempt sources of income and the utilization of federal and state income tax
credits. The tax benefit for 2009 was due primarily to increased deferred tax assets related to the temporary timing difference generated by the charitable contribution to the First
Savings Charitable Foundation. See Note 16 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 obtains the approval of the Board of Directors
to proceed with foreclosure of property. Management informs the Board of Directors monthly of all loans in nonaccrual status, all loans in foreclosure and all repossessed property and
assets that we own.
43
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.
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. See Note 7 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report for additional
information regarding foreclosed real estate.
The following table provides information with respect to our nonperforming assets at the dates indicated. Included in nonperforming loans are loans for which the Bank has
modified the repayment terms, and therefore are considered to be troubled debt restructurings. The Bank had four troubled debt restructurings totaling $592,000, which were placed on
non-accrual status, as of September 30, 2010. We had no troubled debt restructurings classified as performing loans for the periods presented in the table.
(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
2010
2009
At September 30,
2008
2007
2006
$
$
2,695
843
–
–
526
207
302
4,573
594
327
272
–
–
137
63
1,393
5,966
1,331
171
7,468
$
$
1.71%
1.17%
$
1,995
1,022
–
537
461
572
145
4,732
128
–
228
–
–
67
119
542
$
472
–
–
33
–
119
174
798
678
–
–
–
–
–
175
853
5,274
1,589
64
6,927
$
1.47%
1.10%
1,651
390
146
2,187
$
0.93%
0.72%
$
99
22
–
33
–
–
277
431
572
104
–
–
–
–
–
676
1,107
1,278
198
2,583
$
0.64%
0.54%
1.47%
1.44%
0.96%
1.27%
44
568
211
–
–
418
9
368
1,574
–
–
–
–
–
–
141
141
1,715
1,941
45
3,701
1.01%
0.83%
1.79%
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 doubtful we may establish a specific valuation 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.
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
2010
At September 30,
2009
2008
$
$
7,610 $
12,332
3,221
–
23,163 $
6,559 $
8,080
1,216
–
15,855 $
3,769
1,650
618
–
6,037
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. Classified assets also include investment securities
that have experienced a downgrade of the security’s credit quality rating by various rating agencies.
At September 30, 2010, the Company held ten privately-issued CMO securities with an aggregate amortized cost of $2.1 million and fair value of $2.6 million that have been
downgraded to a substandard regulatory classification due to a downgrade of the security’s credit quality rating by various rating agencies. Based on the independent third party
analysis, the Bank expects to collect the contractual principal and interest cash flows for these securities and, as a result, no other-than-temporary impairment has been recognized on
the privately-issued CMO portfolio.
45
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
(Dollars in thousands)
Residential real estate
Commercial real estate
Multi-family
Construction
Commercial business
Land and land development
Consumer
Total
At September 30,
2010
At September 30,
2009
30-89 Days
90 Days or More
30-89 Days
90 Days or More
Number
of
Loans
25
5
1
1
6
1
33
72
$
$
Principal
Balance
of Loans
1,926
653
650
156
483
40
248
4,156
Number
of
Loans
34
6
–
6
5
–
13
64
$
$
Principal
Balance
of Loans
2,604
1,159
–
749
343
–
211
5,066
Number
of
Loans
Principal
Balance
of Loans
Number
of
Loans
34
3
–
4
6
1
72
120
$
$
2,328
94
–
316
701
28
622
4,089
13
–
–
3
2
1
27
46
$
$
Principal
Balance
of Loans
597
–
–
432
80
33
221
1,363
At September 30,
2008
30-89 Days
90 Days or More
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
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.
Specific Valuation Allowance Required for Identified Problem Loans. For doubtful loans that are also classified as impaired we establish a specific valuation allowance
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.
46
Unallocated Valuation Allowance. We may 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
1,242
600
369
218
62
891
429
–
3,811
2010
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
32.59%
15.74
9.68
5.72
1.63
23.38
11.26
–
100.00%
49.33% $
15.45
5.84
7.38
2.60
8.86
10.54
–
100.00% $
Amount
1,493
271
–
302
258
444
927
–
3,695
At September 30,
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
–
100.00%
51.61% $
13.36
3.50
6.17
3.11
10.25
12.00
–
100.00% $
At September 30,
$
(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
$
2007
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
20.59%
10.56
–
–
–
20.66
48.19
–
100.00%
60.33% $
10.62
0.74
8.59
2.91
7.31
9.50
–
100.00% $
Amount
88
118
–
–
–
157
505
–
868
Amount
267
137
–
–
–
268
625
–
1,297
Amount
622
220
–
–
50
196
641
–
1,729
2006
% of
Allowance
to Total
Allowance
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
–
100.00%
100.00%
% of
Loans in
Category
to Total
Loans
59.29%
11.19
1.07
12.08
1.48
6.00
8.89
–
10.14%
13.59
–
–
–
18.09
58.18
–
100.00%
100.00%
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.
47
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
Commercial real estate
Multi-family
Land and land development
Construction
Commercial business
Consumer
Total recoveries
Net charge-offs
Increase due to acquisition of Community First
2010
Year Ended September 30,
2008
2007
2009
$
$
3,695
1,604
$
1,729
819
$
1,297
1,540
334
–
–
5
–
964
340
1,643
68
–
–
–
–
–
87
155
1,488
–
580
–
–
–
–
39
209
828
57
–
–
–
–
–
82
139
689
1,836
1,085
–
–
–
–
–
153
1,238
–
110
–
–
–
–
20
130
1,108
–
2006
$
868
758
–
216
–
–
–
9
199
424
–
–
–
–
–
2
93
95
329
–
Allowance for loan losses at end of period
$
3,811
$
3,695
$
1,729
$
1,297
$
882
813
528
–
–
–
–
–
314
842
–
–
–
–
–
–
15
15
827
–
868
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 to average loans outstanding during the
period
63.88%
70.06%
104.72%
117.16%
50.61%
1.09%
0.42%
1.03%
0.38%
0.98%
0.64%
0.75%
0.21%
0.51%
0.51%
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; however, we acquired an interest rate cap contract in the acquisition of Community First. See Note 21 of the Notes to Consolidated
Financial Statements beginning on page F-1 of this annual report for additional information regarding the use of derivative instruments.
48
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, 2010 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
300
200
100
0
(100)
At September 30, 2010
$
Dollar
Amount
42,861
49,898
54,492
56,122
56,666
Net Portfolio Value
Dollar
Change
(Dollars in thousands)
(13,261)
$
(6,224)
(1,630)
-
544
Net Portfolio Value as a
Percent of
Portfolio Value of Assets
NPV Ratio
Change
Percent
Change
(24)%
(11)
(3)
-
1
8.63%
9.85
10.58
10.77
10.79
(214)bp
(92)bp
(19)bp
-
2bp
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.
49
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 FHLBI. 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.
The Bank regularly adjusts its 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.
The Bank’s 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, 2010, cash and cash equivalents totaled $11.3 million. Securities classified as available-for-sale, amounting to $110.0
million at September 30, 2010, provide additional sources of liquidity. At September 30, 2010, we had the ability to borrow a total of approximately $83.4 million from the FHLBI, of which
$67.2 million was borrowed and outstanding. See Note 12 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report for additional information
regarding FHLBI borrowings. In addition, we had the ability to borrow the lesser of $10 million or 25% of the Bank’s equity capital, excluding reserves, using a federal funds purchased
line of credit facility with another financial institution at September 30, 2010. The Bank had no outstanding federal funds purchased under the facility at September 30, 2010. See Note 10
of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report for additional information regarding federal funds purchased borrowings.
At September 30, 2010, the Bank had $47.9 million in commitments to extend credit outstanding. Certificates of deposit due within one year of September 30, 2010 totaled $114.9
million, or 58.2% 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, 2011. 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 Company is a separate legal entity from the Bank and must provide for its own liquidity to pay its operating expenses and other financial obligations, to pay any dividends
and to repurchase any of its outstanding common stock. The Company’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may
declare and pay to the Company in any calendar year, without the receipt of prior approval from the Office of Thrift Supervision (“OTS”) but with prior notice to OTS, cannot exceed net
income for that year to date plus retained net income (as defined) for the preceding two calendar years. At September 30, 2010, the Company had liquid assets of $3.7 million.
The following tables present certain of our contractual obligations as of September 30, 2010.
(In thousands)
Deferred director fee agreements
Deferred compensation agreements (1)
Operating lease obligations
Repurchase agreements
FHLB borrowings
Total
Total
Less than
One Year
Payments due by period
One to
Three Years
Three to
Five Years
More Than
Five Years
$
$
439
225
64
16,821
67,159
84,708
$
$
83
33
26
1,312
33,947
35,401
$
$
11
72
38
15,509
13,212
28,842
$
$
11
81
–
–
20,000
20,092
$
$
334
39
–
–
–
373
(1)
Includes deferred compensation agreement with a former officer that calls for annual payments of $9,000 until his death.
50
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 borrowings. 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.
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
Decrease in federal funds purchased
Decrease in repurchase agreements
Increase in Federal Home Loan Bank borrowings
$
Year Ended September 30,
2009
2008
2010
– $
(66,466)
68,007
7,848
35,971
12,356
3,666
20,244
(92,742)
(10,020)
15,345
(1,180)
(418)
11,386
– $
(61,629)
50,885
2,513
17,300
4,438
16,041
–
(44,547)
(4,005)
(17,854)
–
–
18,061
–
(78,418)
72,603
1,879
9,107
992
–
–
(7,577)
(6,040)
20,427
–
–
5,000
Capital Management. The Bank is 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, 2010, the Bank exceeded all of its regulatory capital requirements. The Bank is considered “well capitalized” under regulatory
guidelines. See “Item 1. Business — Regulation and Supervision — Regulation of Federal Savings Associations — Capital Requirement,” and Note 24 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 17 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report.
For the year ended September 30, 2010, 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.
51
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.
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. 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 Control 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, 2010, 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, 2010 is effective.
52
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.
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 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, 2010 that have materially affected, or are
reasonable likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
53
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 2011 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.
54
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
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
The following table sets forth information as of September 30, 2010 about Company common stock that may be issued under the Company’s equity compensation
plans. All plans were approved by the Company’s stockholders.
Plan category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
(c)
254,204 $
N/A
254,204 $
13.25
N/A
13.25
–
N/A
–
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.
55
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(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.
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
Description
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* (3)
First Savings Bank, F.S.B. Supplemental Executive Retirement Plan* (3)
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
Securities and Exchange Commission on June 13, 2008.
(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,
(3) 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 10,
2009.
2008.
56
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, 2010 and 2009, 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, 2010 and 2009, 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 5, 2010
MONROE SHINE & CO., INC. ♦ CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
F-2
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2010 AND 2009
(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 $4,144 in 2010 and $7,054 in 2009)
Loans held for sale
Loans, net of allowance for loan losses of $3,811 in 2010 and $3,695 in 2009
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
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
Unearned stock compensation
Less treasury stock, at cost - 127,102 shares
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
See notes to consolidated financial statements.
F-3
2010
2009
$
$
10,184
1,094
11,278
109,976
3,929
1,884
343,615
4,170
9,492
1,331
1,646
746
8,234
5,940
2,447
3,754
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
$
508,442
$
480,811
$
$
28,853
337,308
366,161
-
16,821
67,159
427
252
2,471
453,291
-
25
24,310
31,889
2,959
(1,501)
(1,202)
(1,329)
55,151
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
$
508,442
$
480,811
(In thousands, except share and per share data)
2010
2009
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2010 AND 2009
INTEREST INCOME
Loans, including fees
Securities:
Taxable
Tax-exempt
Dividend income
Interest-bearing deposits with banks
Total interest income
INTEREST EXPENSE
Deposits
Repurchase agreements
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 sales of securities available for sale
Other than temporary impairment loss on securities
Unrealized loss on derivative contract
Net gain on sales of mortgage loans
Increase in cash surrender value of life insurance
Gain on life insurance
Commission income
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
Income (loss) before income taxes
Income tax expense (benefit)
Net Income
Net income per common share:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
Dividends per share on common shares
See notes to consolidated financial statements.
F-4
$
22,213
$
3,296
668
69
16
26,262
4,771
337
1,009
6,117
20,145
1,604
18,541
1,637
153
(60)
(124)
131
258
95
167
659
2,916
8,925
2,125
1,838
360
941
604
22
149
3,056
18,020
3,437
808
2,629
$
1.17
1.17
$
$
$
$
$
11,361
1,402
166
46
33
13,008
4,125
-
315
4,440
8,568
819
7,749
608
100
-
-
29
171
-
26
329
1,263
3,787
902
647
167
520
277
1,211
88
1,632
9,231
(219)
(252)
33
0.01
0.01
2,244,643
2,244,643
2,315,498
2,315,498
$
0.08
$
-
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2010 AND 2009
(In thousands, except share and per share data)
Balances at October 1, 2008
COMPREHENSIVE INCOME
Net income
Other comprehensive income:
expense of $319
Change in unrealized gain on securities available for sale, net of deferred income tax
Less: Reclassification adjustment for realized securities gains in earnings, net of tax
expense of $40
Defined benefit pension plan:
Net unrecognized gain, net of tax expense of $135
Total comprehensive income
Issuance of common stock
Shares released by ESOP trust
Balances at September 30, 2009
COMPREHENSIVE INCOME
Net income
Other comprehensive income:
Change in unrealized gain on securities available for sale, net of deferred income tax
expense of $1,676
Less: Reclassification adjustment for realized securities gains in earnings, net of tax
expense of $52
Defined benefit pension plan:
Reclassification adjustment for recognized gain on settlement, net of income tax
expense of $281
Total comprehensive income
Cash dividends ($0.08 per share)
Shares released by ESOP trust
Purchase of common shares for restricted stock grants
Stock compensation expense
Purchase of 127,102 treasury shares
Balances at September 30, 2010
See notes to consolidated financial statements.
Common
Stock
Additional
Paid-in Capital
Retained
Earnings
Accumulated Other
Comprehensive Income
Net Unrealized
Gain on
Securities
Available for Sale
Defined
Benefit
Pension
Plan
Unearned
Stock
Compensation
and ESOP
Treasury
Stock
Total
$
-
$
-
$
29,420
$
78
$
222
$
-
$
-
$
29,720
-
-
-
-
25
-
-
-
-
-
24,269
(6)
33
-
-
-
-
-
-
486
(60)
-
-
-
-
-
-
206
-
-
-
-
-
-
(2,034)
238
-
-
-
-
-
-
33
486
(60)
206
665
22,260
232
$
25
$
24,263
$
29,453
$
504
$
428
$
(1,796)
$
-
$
52,877
-
-
-
-
-
-
-
-
-
-
-
-
-
-
29
(41)
59
-
2,629
-
-
-
-
(193)
-
-
-
-
2,556
(101)
-
-
-
-
-
-
-
-
-
(428)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
295
(1,347)
145
-
-
-
-
-
(1,329)
2,629
2,556
(101)
(428)
4,656
(193)
324
(1,388)
204
(1,329)
$
25
$
24,310
$
31,889
$
2,959
$
-
$
(2,703)
$
(1,329)
$
55,151
F-5
(In thousands)
2010
2009
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2010 AND 2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
Depreciation and amortization
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 on foreclosed real estate
Net gain on sales of securities available for sale
Other than temporary impairment loss on securities
Unrealized loss on derivative contract
Gain on life insurance
Increase in cash surrender value of life insurance
Deferred income taxes
ESOP and stock compensation expense
Contribution of common stock to charitable foundation
Increase 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
Principal collected on mortgage-backed securities
Net (increase) decrease in loans
Purchase of Federal Home Loan Bank stock
Investment in cash surrender value of life insurance
Proceeds from 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
Net decrease in federal funds purchased
Net decrease in repurchase agreements
Increase in Federal Home Loan Bank line of credit
Proceeds from Federal Home Loan Bank advances
Repayment of Federal Home Loan Bank advances
Net decrease in advance payments by borrowers for taxes and insurance
Purchase of treasury stock
Purchase of common shares for restricted stock grants
Dividends paid
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 period
Cash and Cash Equivalents at End of Period
See notes to consolidated financial statements.
$
2,629
$
1,604
1,172
51
(9,289)
7,848
(131)
(30)
(153)
60
124
(95)
(259)
251
532
-
(292)
(89)
909
4,842
(102,762)
23,910
32,605
15,722
7,856
-
(4,200)
251
970
(454)
-
(26,102)
15,345
(1,180)
(418)
6,261
98,439
(93,314)
(89)
(1,329)
(1,388)
(193)
-
22,134
874
10,404
$
11,278
$
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
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(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 twelve 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”.
Basis of Consolidation and Reclassifications
The consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared in accordance with generally accepted accounting
principles and conform to general practices within 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.
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.
F-7
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
Investment Securities
Securities Available for Sale: Securities available for sale consist primarily of mortgage-backed and other debt securities and are stated at fair value. The Company holds
mortgage-backed securities issued by the Government National Mortgage Association (GNMA), a U.S. government agency, and the Federal National Mortgage Association
(FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), government-sponsored enterprises, as well as privately-issued collateralized mortgage obligations and
other mortgage-backed securities. Mortgage-backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by issuers of
the securities. Collateralized mortgage obligations (CMOs) are complex mortgage-backed securities that restructure the cash flows and risks of the underlying mortgage
collateral. The Company also holds debt securities issued by government-sponsored agencies and municipal bonds. Amortization of premiums and accretion of discounts are
recognized in interest income using methods approximating the interest method over the period to maturity, adjusted for anticipated prepayments. 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: Debt securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of
premiums and accretion of discounts that are recognized in interest income using methods approximating the interest method over the period to maturity, adjusted for
anticipated prepayments. The Company classifies certain mortgage-backed securities and municipal obligations as held to maturity.
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.
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. At September 30, 2010, the Bank had commitments to
originate $755,000 in fixed-rate mortgage loans intended for sale in the secondary market after the loans are closed. Fair value is estimated based on fees that would be charged
on commitments with similar terms.
F-8
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(1 - continued)
Loans and Allowance for Loan Losses
Loans are stated at unpaid principal balances, less net deferred loan fees and the 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.
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 loan’s 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.
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.
F-9
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(1 - continued)
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. 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. 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.
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 noninterest expense.
Cash Surrender Value of Life Insurance
The Bank has purchased life insurance policies on certain directors, officers and key employees to help offset costs associated with the Bank’s compensation and benefit
programs. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value
adjusted for other charges or other amounts due that are probable at settlement.
F-10
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(1 - continued)
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 had 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. The Bank terminated and settled the plan in April 2010 following receipt of approval from the Internal Revenue Service. It was the policy of the Bank to fund the
maximum amount that could 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.
Stock Based Compensation
In December 2009, the Company adopted the 2010 Equity Incentive Plan (Plan) and the Plan was approved by the Company’s shareholders in February 2010. The Plan
provides for the award of stock options, restricted shares and performance shares. The Company has adopted the fair value based method of accounting for stock-based
compensation prescribed in ASC 718 for its stock plan.
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.
F-11
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(1 - continued)
Income Taxes - continued
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 in 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.
Recent Accounting Pronouncements
The following are summaries of recently issued accounting pronouncements that impact the accounting and reporting practices of the Company:
In June 2009, the FASB issued two standards which change the way entities account for securitizations and special-purpose entities: Statement of Financial Accounting
Standards (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 are 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.
F-12
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(1 - continued)
Recent Accounting Pronouncements - continued
In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, Improving Disclosures about Fair Value Measurements. This ASU amends ASC Topic
820 to provide users of financial statements with additional information regarding fair value. New disclosures required by the ASU include disclosures of significant transfers
between Level 1 and Level 2 and the reasons for such transfers, disclosure of the reasons for transfers in or out of Level 3 and that significant transfers into Level 3 be
disclosed separately from significant transfers out of Level 3, and disclosure of the valuation techniques used in connection with Level 2 and Level 3 valuations and the reason
for any changes in valuation methods. This ASU will generally be effective for interim and annual periods beginning after December 15, 2009. However, disclosures of
purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements will be effective for fiscal years beginning after December 15, 2010,
and for interim periods within those fiscal years. The adoption of this ASU did not have a material effect on the Company’s consolidated financial position or results of
operations.
In February 2010, the FASB issued ASU No. 2010-09, Amendments to Certain Recognition and Disclosure Requirements. The ASU requires Securities and Exchange
Commission (SEC) filers to evaluate subsequent events through the date the financial statements are issued and removes the requirement for SEC filers to disclose the date
through which subsequent events have been evaluated. The FASB believes these amendments alleviate potential conflicts with the SEC’s requirements. The ASU was
effective upon issuance for the Company. The adoption of this ASU did not have a material effect on the Company’s consolidated financial position or results of operations.
In April 2010, the FASB issued ASU No. 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset (Topic 310). Under
the amendments, modifications of loans that are accounted for within pools under Subtopic 310-30 do not result in the removal of those loans from the pool even if the
modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in
which the loan is included is impaired if expected cash flows for the pool change. However, loans within the scope of Subtopic 310-30 that are accounted for individually will
continue to be subject to the troubled debt restructuring accounting provisions. The ASU is effective for modifications of loans accounted for within pools under subtopic
310-30 occurring in the first interim or annual period ending after July 15, 2010. The adoption of this ASU did not have a material impact on the Company’s consolidated
financial position or results of operations.
In July 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The guidance requires
additional disclosure to facilitate financial statement users’ evaluation of the following: (1) the nature of credit risk inherent in the entity’s loan portfolio, (2) how that risk is
analyzed and assessed in arriving at the allowance for loan losses, and (3) the changes and reasons for those changes in the allowance for loan losses. For public companies,
increased disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010. Increased disclosures about activity that occurs during
a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The adoption of this ASU is not expected to have a material
impact on the Company’s consolidated financial position or results of operations.
F-13
(2)
ACQUISITION OF COMMUNITY FIRST BANK
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
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-14
(2 – continued)
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
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 for the year ended September 30, 2009 assumes that the acquisition was consummated on October 1, 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
12,176
15,776
1,360
14,416
2,083
19,122
(2,623)
(1,008)
(1,615)
(0.70)
(0.70)
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, 2008, or results that may occur in the future.
F-15
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(3)
RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve balances on hand and with the Federal Reserve Bank which are unavailable for investment but interest-bearing. The average amount
of those reserve balances for the year ended September 30, 2010 was approximately $843,000. The Bank was not required to maintain reserve balances on hand and with the
Federal Reserve Bank during the year ended September 30, 2009.
(4)
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, 2010:
Securities available for sale:
Agency bonds and notes
Agency mortgage-backed
Agency CMO
Privately-issued CMO
Municipal
Subtotal – debt securities
Equity securities
Total securities available for sale
Securities held to maturity:
Agency mortgage-backed
Municipal
Total securities held to maturity
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
Total securities available for sale
Securities held to maturity:
Agency mortgage-backed
Municipal
Total securities held to maturity
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
25,510 $
13,944
22,325
10,342
33,109
105,230
-
105,230 $
3,625 $
304
3,929 $
5,825 $
34,368
3,343
11,139
52
17,081
71,808
-
71,808 $
6,477 $
305
6,782 $
$
$
$
$
$
$
$
$
F-16
196 $
226
224
2,418
1,920
4,984
77
5,061 $
211 $
4
215 $
20 $
115
130
-
-
431
696
76
772 $
269 $
3
272 $
1 $
29
61
72
152
315
-
315 $
- $
-
- $
- $
-
-
-
-
-
-
-
- $
- $
-
- $
25,705
14,141
22,488
12,688
34,877
109,899
77
109,976
3,836
308
4,144
5,845
34,483
3,473
11,139
52
17,512
72,504
76
72,580
6,746
308
7,054
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(4 – continued)
The amortized cost and fair value of debt securities as of September 30, 2010 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
Available for Sale
Amortized
Cost
Fair
Value
Held to Maturity
Amortized
Cost
Fair
Value
$
174 $
910
7,595
49,940
58,619
-
32,667
13,944
178 $
965
8,019
51,420
60,582
77
35,176
14,141
304 $
-
-
-
304
-
-
3,625
$
105,230 $
109,976 $
3,929 $
308
-
-
-
308
-
-
3,836
4,144
Information pertaining to securities with gross unrealized losses at September 30, 2010, aggregated by investment category and the length of time that individual securities
have been in a continuous loss position, follows:
(Dollars in thousands)
Securities available for sale:
Continuous loss position less than twelve months:
Agency bonds and notes
Agency mortgage-backed
Agency CMO
Privately-issued CMO
Municipal bonds
Total securities available for sale
Number
of Investment
Positions
Gross
Fair
Value
Unrealized
Losses
$
1
6
4
6
2
$
1,999
3,837
5,901
290
3,233
19
$
15,260
$
1
29
61
72
152
315
At September 30, 2010, the Company did not have any securities held to maturity with an unrealized loss or securities that had been in a continuous loss position for more than
twelve months. 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 total available for sale debt securities in loss positions at September 30, 2010 have depreciated approximately 2.0% from the Bank’s amortized cost basis and are fixed and
variable rate securities with a weighted-average yield of 2.88% and a weighted-average coupon rate of 4.83%.
F-17
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(4 – continued)
U.S. government agency debt securities, including mortgage-backed securities and collateralized mortgage obligations, and municipal bonds in loss positions at September 30,
2010 had depreciated approximately 1.6% from the amortized cost basis. All of the federal agency and municipal securities are backed by federal government agencies,
government sponsored enterprises and municipal governments, or are secured by first mortgage loans and municipal project revenues.
At September 30, 2010, the six privately-issued CMO securities in loss positions had depreciated approximately 19.9% from the amortized cost basis and include securities
collateralized by home equity lines of credit or other mortgage-related loan products. All such investments except two securities with fair values totaling $26,000 and unrealized
losses of $7,000 at September 30, 2010 continued to be rated by a nationally recognized statistical rating organization as investment grade assets.
The unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the
securities are issued by the federal government, its agencies, or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of
the issuer’s financial condition. As management has the ability to hold debt securities to maturity, or for the foreseeable future if classified as available for sale, no declines are
deemed to be other-than-temporary.
The Company evaluates the existence of a potential credit loss component related to the decline in fair value of the privately-issued CMO portfolio each quarter using an
independent third party analysis. At September 30, 2010, the Company held ten privately-issued CMO securities with an aggregate amortized cost of $2.1 million and fair value
of $2.6 million that have been downgraded to a substandard regulatory classification due to a downgrade of the security’s credit quality rating by various rating
agencies. Based on the independent third party analysis, the Bank expects to collect the contractual principal and interest cash flows for these securities and, as a result, no
other-than-temporary impairment has been recognized on the privately-issued CMO portfolio. While management does not anticipate a credit-related impairment loss at
September 30, 2010, additional deterioration in market and economic conditions may have an adverse impact on the credit quality in the future.
During 2010 the Company recognized an other-than-temporary write-down charge to earnings of $60,000 representing the total amortized cost of a privately-issued asset-
backed security. The security was determined to be other-than-temporarily impaired because it matured during 2010 and the Company does not anticipate recovering its
investment in the security.
Certain available for sale debt securities were pledged under repurchase agreements and to secure federal funds borrowings and Federal Home Loan Bank borrowings at
September 30, 2010 and 2009. (see Notes 10, 11 and 12)
During the year ended September 30, 2010, the Company realized gross gains on sales of available for sale U.S. government agency mortgage-backed securities of $179,000 and
gross losses on sales of available for sale U.S. government agency mortgage-backed securities of $26,000. 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.
During the year ended September 30, 2010, debt securities with an amortized cost of $426,000 were transferred from held to maturity to the available for sale classification due to
a change in management’s intent because of balance sheet management considerations. A substantial portion of the principal outstanding at acquisition had been collected
on each of the securities prior to the transfer. The securities were sold upon transfer and gross realized gains of $6,000 and a gross realized loss of $1,000 were recognized.
F-18
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(5)
LOANS
Loans at September 30, 2010 and 2009 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
Other consumer loans
Gross loans
Deferred loan origination fees and costs, net
Undisbursed portion of loans in process
Allowance for loan losses
Loans, net
$
2010
2009
$
172,007
20,360
53,869
15,867
9,851
9,076
30,905
16,335
13,405
7,030
348,705
778
(2,057)
(3,811)
185,800
12,584
48,090
14,555
7,648
11,189
36,901
17,365
18,279
7,567
359,978
846
(3,306)
(3,695)
$
343,615
$
353,823
Mortgage loans serviced for the benefit of others amounted to $514,000 and $668,000 at September 30, 2010 and 2009, respectively. 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
2010
2009
$
$
3,695
155
(1,643)
1,604
-
$
3,811
$
1,729
139
(828)
819
1,836
3,695
At September 30, 2010, 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 $2.8 million.
F-19
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(5 – continued)
The total recorded investment in nonaccrual loans amounted to $4.6 million and $4.7 million at September 30, 2010 and 2009, respectively. The total recorded investment in
loans past due ninety days or more and still accruing interest amounted to $1.3 million and $542,000 at September 30, 2010 and 2009, 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
2010
2009
$
$
$
1,200 $
4,766
5,966 $
329 $
6,152
40
100
607
4,667
5,274
303
2,461
18
28
Included in impaired loans at September 30, 2010 are loans totaling $592,000 for which the Bank has modified the repayment terms, and therefore are considered to be troubled
debt restructurings. Included in impaired loans with no related allowance at September 30, 2010 are $1.7 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 following is a summary of activity for related party loans for the years ended September 30, 2010 and 2009:
(In thousands)
Beginning balance
New loans and advances
Repayments
Reclassifications
Increase due to acquisition of Community First
Ending balance
(6)
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
2010
2009
9,499 $
402
(3,174)
(293)
-
6,434 $
3,585
1,191
(724)
(308)
5,755
9,499
2010
2009
1,974
8,663
3,068
13,705
4,213
9,492
$
$
1,974
8,581
2,977
13,532
3,616
9,916
$
$
$
$
Depreciation expense of $878,000 and $301,000 was recognized for the years ended September 30, 2010 and 2009, respectively.
F-20
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(7)
FORECLOSED REAL ESTATE
At September 30, 2010 and 2009, the Bank had foreclosed real estate held for sale of $1.3 million and $1.6 million, respectively. During the years ended September 30, 2010 and
2009, foreclosure losses in the amount of $269,000 and $400,000, respectively, were charged-off to the allowance for loan losses. The losses on subsequent write downs of
foreclosed real estate amounted to $106,000 in fiscal year 2010 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. There were no losses on subsequent writedowns of foreclosed real estate during fiscal year 2009. Net realized gains from the
sale of foreclosed real estate amounted to $87,000 and $1,000 for the years ended September 30, 2010 and 2009, respectively. Real estate taxes and other expenses of holding
foreclosed real estate, net of income received from the operation of foreclosed real estate properties, amounted to $130,000 and $88,000 for the years ended September 30, 2010
and 2009, respectively. The net loss is reported in noninterest expense. Realized gains from the sale of foreclosed real estate totaling $51,000 and $20,000 were deferred for the
years ended September 30, 2010 and 2009, respectively, because the sales were financed by the Bank and did not qualify for recognition under generally accepted accounting
principles. At September 30, 2010 and 2009, aggregate deferred gains on the sale of foreclosed real estate financed by the Bank amounted to $101,000 and $51,000, respectively.
(8)
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. No impairment of goodwill was recognized during 2010 or 2009.
The changes in the carrying amount of goodwill for the years ended September 30, 2010 and 2009 are summarized as follows:
(In thousands)
Beginning balance
Community First acquisition
Additional consideration related to Community First acquisition
Ending balance
The following is a summary of other intangible assets subject to amortization:
(In thousands)
Acquired in Community First acquisition
Less accumulated amortization
Ending balance
2010
2009
5,882 $
-
58
5,940 $
-
5,882
-
5,882
2010
2009
2,741 $
(294)
2,447 $
2,741
-
2,741
$
$
$
$
Amortization expense of intangibles amounted to $294,000 for the year ended September 30, 2010. The Company recognized no amortization expense related to intangibles
during 2009. 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:
2011
2012
2013
2014
2015
2016 and thereafter
Total
(In thousands)
294
$
294
294
294
294
977
2,447
$
F-21
(9)
DEPOSITS
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
The aggregate amount of time deposit accounts (certificates of deposit) with balances of $100,000 or more was $52.4 million and $53.1 million at September 30, 2010 and 2009,
respectively.
At September 30, 2010, scheduled maturities of certificates of deposit were as follows:
Years ending September 30:
2011
2012
2013
2014
2015 and thereafter
Total
(In thousands)
$
114,912
45,711
8,085
7,043
21,672
$
197,423
The Bank held deposits of $4.5 million and $7.1 million for related parties at September 30, 2010 and 2009, respectively.
(10)
FEDERAL FUNDS PURCHASED
On May 21, 2010, the Bank entered into a federal funds purchased line of credit facility with another financial institution that established a line of credit not to exceed the lesser
of $10 million or 25% of the Bank’s equity capital excluding reserves. Availability under the line of credit is subject to continued borrower eligibility and expires on June 30,
2011 unless it is extended. The line of credit is intended to support short-term liquidity needs, and the agreement states that the Bank may borrow under the facility for up to
seven consecutive days without pledging collateral to secure the borrowing. At September 30, 2010, the Bank had no outstanding federal funds purchased under the facility.
At September 30, 2009, the Bank had an outstanding federal funds purchased balance of $1.2 million from another financial institution at an interest rate of 0.32%, secured by
available for sale debt securities with an amortized cost and fair value of $3.8 million.
(11)
REPURCHASE AGREEMENTS
Repurchase agreements include retail repurchase agreements representing overnight borrowings from deposit customers and long-term repurchase agreements with broker-
dealers.
Repurchase agreements are summarized as follows:
(In thousands)
Retail repurchase agreements
2010
2009
Weighted
Average
Rate
Amount
Weighted
Average
Rate
Amount
0.63% $
1,312
0.63% $
1,304
Broker-dealer repurchase agreements:
Long-term agreements:
Maturing November 2011
Maturing December 2011
Total repurchase agreements
1.60%
1.65%
10,342
5,167
$
16,821
1.60%
1.65%
$
10,635
5,300
17,239
F-22
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(11 – continued)
The debt securities underlying the retail repurchase agreements were under the control of the Bank at September 30, 2010 and 2009. The securities underlying the broker-dealer
repurchase agreements were delivered to the broker-dealer who arranged the transactions.
Information concerning borrowings under retail repurchase agreements as of and for the year ended September 30, 2010 is summarized as follows:
Weighted average interest rate during the year
Average balance during the year
Maximum month-end balance during the year
Available for sale debt securities underlying the agreements at September 30:
Amortized cost
Fair value
(In thousands)
$
$
0.50%
1,308
1,312
2,500
2,530
Information concerning borrowings under repurchase agreements with broker-dealers as of and for the year ended September 30, 2010 is summarized as follows:
Weighted average interest rate during the year
Average balance during the year
Maximum month-end balance during the year
Available for sale debt securities underlying the agreements at September 30:
Amortized cost
Fair value
Interest expense on repurchase agreements for the year ended September 30, 2010 is summarized as follows:
Broker-dealer repurchase agreements
Retail repurchase agreements
Total
F-23
(In thousands)
2.10%
15,722
15,899
15,939
16,233
(In thousands)
331
6
337
$
$
$
$
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(12)
BORROWINGS FROM FEDERAL HOME LOAN BANK
At September 30, 2010 and 2009, borrowings from the Federal Home Loan Bank were as follows:
(In thousands)
Advances maturing in:
2010
2011
2013
2015
Total advances
Line of credit balance
2010
2009
Weighted
Average
Rate
Amount
Weighted
Average
Rate
Amount
-
$
0.56%
3.04%
2.66%
-
27,025
13,212
20,000
60,237
0.57% $
0.98%
3.04%
-
0.47%
6,922
0.47%
36,650
5,175
13,287
-
55,112
661
55,773
Total borrowings from Federal Home Loan Bank
$
67,159
$
The Bank entered into an Advances, Pledge and Security Agreement with the Federal Home Loan Bank of Indianapolis (FHLBI), allowing the Bank to initiate advances from the
FHLBI. The advances are secured under a blanket collateral agreement. At September 30, 2010 and 2009, the eligible blanket collateral included residential mortgage loans with
carrying values of $176.1 million and $173.0 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, 2010.
On August 2, 2010, the Bank entered into an Overdraft Line of Credit Agreement with the FHLBI which established a line of credit not to exceed $10.0 million secured under the
blanket collateral agreement. This agreement expires on February 2, 2011. At September 30, 2010, borrowings of $6.9 million were outstanding under this agreement at a rate of
0.47%.
(13)
DEFERRED COMPENSATION PLANS
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 $24,000 and $27,000 for the years ended September 30, 2010 and 2009, 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 $98,000 and $66,000 for the years ended September 30, 2010 and 2009, respectively.
F-24
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(14)
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 Bank curtailed the accrual of benefits for active participants in the defined benefit pension plan. As a result of the curtailment, each active
participant’s pension benefit was determined based on the participant’s compensation and duration of employment as of June 30, 2008, and compensation and employment
after that date was not taken into account in determining pension benefits under the plan. In April 2010, the Bank received approval from the Internal Revenue Service to
terminate the plan. The termination of the plan and the settlement of the plan obligations resulted in the allocation of excess plan assets to the active plan participants in April
2010.
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, 2010 and 2009:
(In thousands)
Change in projected benefit obligation:
Balance at beginning of year
Interest cost
Actuarial loss (gain)
Benefits paid prior to settlement
Net settlement of benefit obligation
Balance at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Administrative expenses
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-25
2010
4,923 $
149
905
(89)
(5,888)
- $
6,412 $
60
(112)
(6,360)
- $
- $
- $
- $
- $
-
- $
$
$
$
$
$
$
$
$
$
2009
5,051
376
(354)
(150)
-
4,923
6,198
361
-
(147)
6,412
1,489
1,489
428
709
(281)
428
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(14 – continued)
Components of net periodic benefit expense are as follows:
(In thousands)
Net periodic benefit expense:
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of unrecognized gain
Net loss on settlement
Net periodic benefit expense
2010
2009
$
149
(72)
(2)
705
780
$
376
(376)
-
-
-
$
$
The following are the weighted average assumptions used to determine the benefit obligation at September 30, 2009 and net periodic benefit cost for 2010 and 2009:
Discount rate
Rate of compensation increase
Expected long-term return on plan assets
2010
5.25%
0.00%
2.25%
2009
6.00%
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-26
(14 - continued)
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
The plan’s asset allocation for 2010 and 2009 was 100% investment in bank deposits until the termination and final settlement occurred in April 2010. 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 made no contributions to the defined benefit pension plan for the fiscal years ended September 30, 2010 and 2009.
Defined Contribution Plan:
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 $186,000 and $123,000 for the years ended September 30, 2010 and 2009,
respectively.
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
years’ 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 years ended September 30, 2010 and 2009
amounted to $328,000 and $227,000, respectively. The fair value of unearned ESOP shares was $2.0 million at September 30, 2010. Company common stock held by the ESOP
trust at September 30, 2010 was as follows:
Allocated shares
Unearned shares
Total ESOP shares
53,233
150,130
203,363
F-27
(15)
STOCK BASED COMPENSATION PLANS
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
In December 2009, the Company adopted the 2010 Equity Incentive Plan (Plan), which the Company’s shareholders approved in February 2010. The Plan provides for the award
of stock options, restricted shares and performance shares. The aggregate number of shares of the Company’s common stock available for issuance under the Plan may not
exceed 355,885 shares. The Company may grant both non-statutory and statutory (i.e., incentive) stock options that may not have a term exceeding ten years. An award of a
performance share is a grant of a right to receive shares of the Company’s common stock contingent upon the achievement of specific performance criteria or other objectives
set at the grant date. Awards granted under the Plan may be granted either alone, in addition to, or in tandem with any other award granted under the Plan. The terms of the
Plan include a provision whereby all unearned options and shares become immediately exercisable and fully vested upon a change in control.
In April 2010, the Company funded a trust, administered by an independent trustee, which acquired 101,681 common shares in the open market at a price per share of $13.60 for
a total cost of $1.4 million. These acquired common shares were granted to directors, officers and key employees in the form of restricted stock in May 2010 at a price per share
of $13.25 for a total of $1.3 million. The difference between the purchase price and grant price of the common shares issued as restricted stock, totaling $41,000, was recognized
by the Company as a reduction of additional paid in capital. The vesting period of the restricted stock is five years beginning one year after the date of grant of the awards.
Compensation expense is measured based on the fair market value of the restricted stock at the grant date and is recognized ratably over the period during which the shares are
earned (the vesting period). Compensation expense related to restricted stock recognized for the year ended September 30, 2010 amounted to $145,000. A summary of the
Company’s nonvested restricted shares for the year ended September 30, 2010 is as follows:
Nonvested at beginning of year
Granted
Vested
Forfeited
Nonvested at end of year
Number
of
Shares
Weighted
Average
Grant-Date
Fair Value
-
101,681
(3,589)
-
$
98,092
$
-
13.25
13.25
-
13.25
The total fair value of restricted shares that vested during the year ended September 30, 2010 was $48,000.
In May 2010, the Company awarded 177,549 incentive and 76,655 non-statutory stock options to directors, officers and key employees. The options granted vest ratably over
five years and are exercisable in whole or in part for a period up to ten years from the date of the grant. Compensation expense is measured based on the fair market value of the
options at the grant date and is recognized ratably over the period during which the shares are earned (the vesting period). The fair market value of stock options granted was
estimated at the date of grant using the Binomial option pricing model. Expected volatilities are based on historical volatility of the Company’s stock and that of peer
institutions located in its geographic market area. The expected term of options granted represents the period of time that options are expected to be outstanding. The risk free
rate for the expected life of the options is based on the U.S. Treasury yield curve in effect at the grant date.
The fair value of options granted was determined using the following assumptions:
Expected dividend yield
Risk-free interest rate
Expected volatility
Expected life of options
Weighted average fair value at grant date
4.53%
2.82%
30.00%
7.5 years
3.09
$
F-28
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(15 - continued)
A summary of stock option activity under the plan as of September 30, 2010, and changes during the year then ended is presented below.
Outstanding at beginning of year
Granted
Exercised
Forfeited or expired
Outstanding at end of year
Exercisable at end of year
Number
of
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
-
254,204
-
-
$
254,204
$
8,972
$
-
13.25
-
-
13.25
13.25
9.6
$
9.6
$
-
-
The Company recognized compensation expense related to stock options of $59,000 for the year ended September 30, 2010. At September 30, 2010, there was $727,000 of
unrecognized compensation expense related to nonvested stock options, which will be recognized over the remaining vesting period.
(16)
INCOME TAXES
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
Income tax expense (benefit)
2010
$
557
251
808
$
$
$
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
Income tax expense (benefit)
$
2010
1,169
25
(292)
(87)
(7)
808
$
$
$
F-29
2009
285
(537)
(252)
2009
(74)
(51)
(66)
(57)
(4)
(252)
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(16 - continued)
Significant components of the Company’s deferred tax assets and liabilities as of September 30, 2010 and 2009 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
Accrued severance expense payable
Valuation allowance on foreclosed real estate and repossessed assets
Equity incentive plans
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
$
$
2010
1,403
1,178
348
239
79
87
83
49
44
(1,787)
(540)
(300)
-
(137)
(2)
42
Net deferred tax asset
$
786
$
2009
1,266
1,805
403
214
149
72
-
8
-
175
(649)
(458)
(584)
(137)
(40)
52
2,276
The Company has charitable contributions carryovers of $1.0 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 also has Indiana enterprise zone tax credits of $87,000 available to reduce the Indiana tax liability in
subsequent years. The enterprise zone tax credit carryovers expire for the years ending September 30, 2018, 2019 and 2020.
At September 30, 2010 and 2009, 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, 2007 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, 2010 and 2009 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, 2010 and 2009.
F-30
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(16 - continued)
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.
Recapture of the Bank’s tax bad debt reserves is triggered if the Bank meets the definition of a “large bank” as defined in the Internal Revenue Code. Under the Internal
Revenue Code, if a bank’s average adjusted assets exceeds $500 million for any tax year it is considered a “large bank” and must utilize the specific charge-off method to
compute bad debt deductions. This would result in the recapture of the Bank’s tax bad debt reserve described above over one or more years.
(17)
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 $1.4 million at September 30, 2010.
The following is a summary of the commitments to extend credit at September 30, 2010 and 2009:
(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
$
2010
$
3,329
2,819
2,070
19,547
18,039
2,057
Total commitments to extend credit
$
47,861
$
(18)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
2009
3,117
2,202
2,437
34,598
19,194
3,306
64,854
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 17). The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
F-31
(18 - continued)
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
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 2010 or 2009.
(19)
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying value and estimated fair value financial instruments at September 30, 2010 and 2009.
2010
2009
(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 sale
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 related to commitments to extend credit
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$
10,184 $
1,094
109,976
3,929
10,184 $
1,094
109,976
4,144
8,359 $
2,045
72,580
6,782
8,359
2,045
72,580
7,054
343,615
357,508
353,823
360,157
1,884
4,170
2,392
1,884
4,170
2,392
317
4,170
2,100
366,161
-
1,312
15,509
67,159
427
252
371,869
-
1,312
15,602
68,531
427
252
350,816
1,180
1,304
15,935
55,773
516
341
77
77
202
-
47
-
317
4,170
2,100
354,194
1,180
1,304
15,935
56,184
516
348
202
39
F-32
(19 - continued)
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
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 17.
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.
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. The fair value of long-term repurchase agreements and fixed rate term FHLB advances is
estimated by discounting the future cash flows using the current rates at which similar borrowings with the same remaining maturities could be obtained. For federal funds
purchased, short-term 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.
F-33
(20)
FAIR VALUE MEASUREMENTS
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
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.
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
tables below present the balances of financial assets measured at fair value on a recurring and nonrecurring basis as of September 30, 2010 and 2009. The Company had no
liabilities measured at fair value as of September 30, 2010 and 2009.
F-34
(20 - continued)
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
September 30, 2010:
Assets Measured - Recurring Basis
Securities available for sale:
Agency bonds and notes
Agency mortgage-backed
Agency CMO
Privately-issued CMO
Municipal
Equity securities
Total securities available for sale
Interest rate cap
Assets Measured - Nonrecurring Basis
Impaired loans
Loans held for sale
Foreclosed real estate
September 30, 2009:
Assets Measured - Recurring Basis
Securities available for sale:
Agency bonds and notes
Agency mortgage-backed
Agency CMO
Privately-issued CMO and ABS
Municipal
Equity securities
Total 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)
-
-
-
-
-
77
77
$
$
-
$
$
-
-
-
-
-
-
-
-
76
76
$
$
25,705
14,141
22,488
12,688
34,877
-
109,899
$
$
77
$
$
5,637
1,884
1,331
5,845
34,483
3,473
11,191
17,512
-
72,504
$
$
-
$
202
$
$
-
-
-
$
4,971
317
1,589
$
$
$
$
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
25,705
14,141
22,488
12,688
34,877
77
109,976
77
5,637
1,884
1,331
5,845
34,483
3,473
11,191
17,512
76
72,580
202
4,971
317
1,589
$
$
$
$
$
$
$
$
F-35
(20 - continued)
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
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.
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 judgments (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. Foreclosed real estate 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 years ended September 30, 2010 or 2009. In addition, there were no transfers into or out of Levels
1 and 2 of the fair value hierarchy during the years ended September 30, 2010 or 2009.
F-36
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(21)
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, 2010:
Strike
Rate
Remaining
Term
Notional
Amount
Purchase
Premium
Unrealized
Loss
Fair
Value
(Dollars in thousands)
7.50 %
6.8 years
$
10,000 $
150 $
73 $
77
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 19)
(22)
STOCKHOLDERS’ EQUITY
Liquidation Account
Upon completion of its conversion from mutual to stock form on October 6, 2008, 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-37
(23)
DIVIDEND RESTRICTION
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
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.
(24)
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 total risk-
based capital and Tier I capital to risk-weighted assets (as defined in the regulations), Tier I capital to adjusted total assets (as defined) and tangible capital to adjusted total
assets (as defined). Management believes, as of September 30, 2010, that the Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 2010, 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.
F-38
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(24 - continued)
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, 2010:
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, 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)
Actual
Amount
Ratio
Minimum
For Capital
Adequacy Purposes:
Amount
Ratio
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions:
Amount
Ratio
$
$
$
$
$
$
$
$
42,413
12.77% $
26,563
8.00% $
33,204
10.00%
38,931
11.72%
N/A
$
19,923
6.00%
38,931
7.84% $
19,870
4.00% $
24,838
5.00%
38,931
7.84% $
7,451
1.50%
N/A
38,876
12.32% $
25,236
8.00% $
31,545
10.00%
35,501
11.25%
N/A
$
18,927
6.00%
35,501
7.55% $
18,816
4.00% $
23,520
5.00%
35,501
7.55% $
7,056
1.50%
N/A
F-39
(25)
SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
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 outstanding for the years ended September 30, 2010 and 2009. Earnings per share information is presented below for the years ended September 30, 2010 and 2009.
(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
Years Ended September 30,
2009
2010
$
$
2,629
$
33
2,244,643
2,315,498
1.17
$
0.01
Unearned ESOP shares are not considered as outstanding for purposes of computing weighted average common shares outstanding.
(26)
PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial information for First Savings Financial Group, Inc. (parent company only) follows:
Assets:
Cash and interest bearing deposits
Other assets
Investment in subsidiaries
Liabilities and Equity:
Accrued expenses
Stockholders' equity
Balance Sheets
(In thousands)
F-40
As of September 30,
2010
2009
$
$
$
$
3,693 $
1,254
50,276
55,223 $
72 $
55,151
55,223 $
6,988
866
45,056
52,910
33
52,877
52,910
(26 - continued)
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
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
Years Ended September 30,
2010
2009
$
(865)
$
(1,675)
(865)
301
(564)
3,193
(1,675)
602
(1,073)
1,106
Net income
$
2,629
$
33
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
ESOP and stock compensation 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
Purchase of treasury stock
Purchase of common shares for restricted stock grants
Dividends paid
Net cash provided by (used in) financing activities
Net increase (decrease) 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-41
Years Ended September 30,
2010
2009
$
2,629 $
(3,193)
532
-
(353)
(385)
-
-
(1,329)
(1,388)
(193)
(2,910)
33
(1,106)
227
1,100
(829)
(575)
21,160
(13,597)
-
-
-
7,563
(3,295)
6,988
6,988
-
$
3,693 $
6,988
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(27)
CONCENTRATION OF CREDIT RISK
At September 30, 2010 and 2009, demand deposits due from correspondent banks were fully insured under the Federal Deposit Insurance Corporation’s Temporary Transaction
Account Guarantee Program.
(28)
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
Transfer of securities from held to maturity to available for sale
F-42
2010
2009
$
$
8,168
521
1,075
405
426
4,472
243
1,327
241
-
(29)
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
(In thousands)
September 30, 2010:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expenses
Income before income taxes
Income tax expense
Net income
Net income per common share, basic
Net income per common share, diluted
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
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
6,595
1,667
4,928
358
4,570
725
3,965
1,330
438
$
6,526
1,511
5,015
588
4,427
537
4,043
921
221
$
6,541
1,475
5,066
300
4,766
739
4,922
583
83
892
$
700
$
500
$
0.38
$
0.31
$
0.23
$
0.38
$
0.31
$
0.23
$
$
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
$
6,600
1,464
5,136
358
4,778
915
5,090
603
66
537
0.25
0.25
3,432
1,015
2,417
419
1,998
437
2,100
335
90
245
0.10
0.10
$
$
$
$
$
$
$
$
F-43
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: December 29, 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
/s/ Larry W. Myers
Larry W. Myers
/s/ Anthony A. Schoen
Anthony A. Schoen
/s/ John P. Lawson, Jr.
John P. Lawson, Jr.
/s/ Samuel E. Eckart
Samuel E. Eckart
/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/ Michael F. Ludden
Michael F. Ludden
/s/ Douglas A. York
Douglas A. York
Title
President, Chief Executive Officer
and Director
(principal executive officer)
Chief Financial Officer
(principal accounting and financial officer)
Date
December 29, 2010
December 29, 2010
Chief Operating Officer and Director
December 29, 2010
Executive Vice President and Director
December 29, 2010
Director
Director
Director
Director
Director
December 29, 2010
December 29, 2010
December 29, 2010
December 29, 2010
December 29, 2010
/s/ Vaughn K. Timberlake
Vaughn K. Timberlake
/s/ Frank N. Czeschin
Frank N. Czeschin
Director
Director
December 29, 2010
December 29, 2010
(Back To Top)
Section 2: EX-21
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
Subsidiaries
Percentage
Ownership
Jurisdiction or
State of Incorporation
Exhibit 21.0
Indiana
United States
Indiana
Indiana
Nevada
100%
100%
100%
100%
We consent to the incorporation by reference in First Savings Financial Group, Inc.’s Registration Statements on Form S-8 (File Nos. 333-154417 and 333-166430) of our report dated
November 5, 2010 contained in the annual report for the year ended September 30, 2010 appearing in this Form 10-K.
/s/ Monroe Shine & Co., Inc.
New Albany, Indiana
December 28, 2010
(Back To Top)
Section 4: EX-31.1
I, Larry W. Myers, certify that:
CERTIFICATION
1.
2.
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;
EXHIBIT 31.1
3.
4.
5.
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) 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;
(b) 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;
(c) 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;
(d) 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: December 29, 2010
(Back To Top)
Section 5: EX-31.2
/s/ Larry W. Myers
Larry W. Myers
President and Chief Executive Officer
(principal executive officer)
EXHIBIT 31.2
I, Anthony A. Schoen, certify that:
CERTIFICATION
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) 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;
(b) 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;
(c) 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;
(d) 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: December 29, 2010
/s/ Anthony A. Schoen
Anthony A. Schoen
Chief Financial Officer
(principal financial and accounting officer)
(Back To Top)
Section 6: EX-32
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, 2010 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)
December 29, 2010
(Back To Top)