Section 1: 10-K (ANNUAL REPORT)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
xxxx ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2012
OR
¨¨¨¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 1-34155
FIRST SAVINGS FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Indiana
(State or other jurisdiction of
incorporation or organization)
37-1567871
(I.R.S. Employer Identification No.)
501 East Lewis & Clark Parkway, Clarksville, Indiana
(Address of principal executive offices)
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 x
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 x
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 x 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 x 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. x
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 ¨
Non-accelerated Filer ¨
Accelerated Filer ¨
Smaller Reporting Company x
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held by nonaffiliates was $33.2 million, based upon the closing
price of $17.10 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, 2012.
The number of shares outstanding of the registrant’s common stock as of December 14, 2012 was 2,317,815.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2013 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
INDEX
Part I
Part II
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
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 Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Part III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
SIGNATURES
Part IV
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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.
PART I
Item 1. BUSINESS
General
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.
3
On July 6, 2012 First Savings Bank acquired the four Indiana branches of First Federal Savings Bank of Elizabethtown, Inc. (“First
Federal”), a Kentucky-chartered commercial bank, two of which were consolidated into the existing operations of First Savings Bank immediately
subsequent to the acquisition. The acquisition enhanced First Savings Bank’s presence in Harrison and Floyd Counties in Indiana.
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 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, 2012, which is the most recent date for which data is available from
the Federal Deposit Insurance Corporation, we held approximately 11.86%, 3.71%, 33.55%, 79.45% and 9.60% 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 in our primary market area and from other financial service providers,
such as mortgage companies, mortgage brokers and credit unions. 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.
4
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 or the
First Federal branches.
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% amounted to $9.1 million, of which some do not
have private mortgage insurance or government guaranty. 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 in flood hazard areas.
5
At September 30, 2012, our largest one- to four-family residential loan had an outstanding balance of $1.2 million. This loan, which was
originated in April 2003 and is secured by a personal residence, was performing in accordance with its original terms at September 30, 2012.
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, 2012, our largest commercial real estate loan had an outstanding balance of $3.2 million. This loan, which was originated
in April 2012 and is secured by a manufacturing facility, was performing in accordance with its original terms at September 30, 2012.
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, 2012, we had approved commitments for speculative construction loans of $7.8 million, of which $5.4 million was
outstanding. We require a maximum loan-to-value ratio of 80% for speculative construction loans. At September 30, 2012, our largest construction
loan relationship was for a commitment of $1.1 million, of which $1.0 million was outstanding. This relationship was performing according to its
original terms at September 30, 2012.
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, 2012, our largest land development loan had an outstanding balance of $1.5 million. This loan was
performing in accordance with its original terms at September 30, 2012.
6
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, 2012, our largest multi-family mortgage loan had an outstanding balance of $3.2 million. This
loan, which was originated in December 2010, was performing in accordance with its original terms at September 30, 2012.
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, 2012, 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, 2012.
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, 2012, our largest commercial business loan was for a commitment of $4.5 million, of which $3.8 million was
outstanding. This loan, which was originated in July 2008 and most recently renewed in February 2012 and is secured by contract assignments and
accounts receivable, was performing in accordance with its original terms at September 30, 2012.
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.
7
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.
8
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 increasingly sold participation interests in loans that we originated during the year ended
September 30, 2012. In addition, we acquired several loans from Community First that included sold participation interests. At September 30, 2012,
$19.3 million of loans included sold participation interests of $7.0 million, for a net position of $12.3 million outstanding in our portfolio.
We have not historically purchased whole loans or participation interests to supplement our lending portfolio; however, we acquired four
brokered whole loans during the year ended September 30, 2012. The loans were purchased at 0.90% of their principal balance and are secured by
multi-family and retail shopping centers located in Indiana. At September 30, 2012, the outstanding principal balance of these loans was $6.5 million
and the Bank’s carrying amount was $5.9 million. These loans were purchased in April 2012 and were performing in accordance with their original
terms at September 30, 2012.
In addition, we acquired participation interests of loans in the acquisition of Community First and also participated in a lending transaction
to a local hospital along with three additional financial institutions during 2011. At September 30, 2012, we had participation interests of loans
totaling $6.2 million and our largest participation interest with a single borrower was $2.4 million. This loan, which was originated in June 2011 and is
secured by a local county hospital facility, was performing in accordance with its original terms at September 30, 2012.
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, 2012, our regulatory limit on loans to one borrower was $10.1
million. At that date, our largest lending relationship was for a commitment of $5.8 million, of which $4.7 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 19 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report.
9
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, 2012, 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 and asset-backed securities acquired in the acquisition of Community First. We
have invested $5.0 million in a managed brokerage account that invests in small and medium lot, investment grade municipal bonds and these
securities are classified as trading account securities. The brokerage account is managed by an investment advisory firm registered with the U.S.
Securities and Exchange Commission. At September 30, 2012, trading account securities recorded at fair value totaled $3.6 million, comprised of
investment grade municipal bonds.
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.
10
Personnel
As of September 30, 2012, we had 156 full-time employees and 23 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, but is currently inactive. FFCC, Inc. participates
in the development and leasing of commercial real estate. First Savings Investments, Inc. was organized on October 3, 2008 for the purpose of
holding and managing an investment securities portfolio.
General
REGULATION AND SUPERVISION
First Savings Bank, as a federal savings association, is currently subject to extensive regulation, examination and supervision by the Office of
the Comptroller of the Currency, as its primary federal regulator, and by the Federal Deposit Insurance Corporation as the insurer of its deposits.
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 of the Federal Deposit Insurance Corporation. First Savings Bank must file reports with the Office of the Comptroller of the
Currency 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 the Comptroller of the
Currency 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 an adequate allowance for loan losses for regulatory purposes. Any change in such policies,
whether by the Office of the Comptroller of the Currency, 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 of 2010 (the “Dodd-Frank Act”) made extensive changes to the regulation
of First Savings Bank. Under the Dodd-Frank Act, the Office of Thrift Supervision was eliminated and responsibility for the supervision and
regulation of federal savings associations such as First Savings Bank was transferred to the Office of the Comptroller of the Currency on July 21,
2011. The Office of the Comptroller of the Currency is the agency that is primarily responsible for the regulation and supervision of national banks.
Additionally, the Dodd-Frank Act created a new Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board.
The Consumer Financial Protection Bureau assumed responsibility for the implementation of the federal financial consumer protection and fair
lending laws and regulations and has authority to impose new requirements. However, institutions of less than $10 billion in assets, such as First
Savings Bank, will continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the
enforcement authority of, their prudential regulators.
Certain of the regulatory requirements that are or will be 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.
Federal Banking Regulation
Business Activities. The activities of federal savings banks, such as First Savings Bank, are governed by federal laws and regulations. Those
laws and regulations delineate the nature and extent of the business 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.
11
Capital Requirements. The applicable capital regulations require savings associations to meet three minimum capital standards: a 1.5%
tangible capital to total assets ratio, a 4% Tier 1 capital to total assets 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 also
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 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 a national bank.
The risk-based capital standard for savings associations requires the maintenance of Tier 1 (core) and total capital (which is defined as core
capital and supplementary capital less certain specified deductions from total capital such as reciprocal holdings of depository institution capital
instruments and equity investments) 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 activities, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-
weight factor of 0% to 100%, assigned by the capital regulation based on the risks believed inherent in the type of asset. Tier 1 (core) capital is
generally 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 (Tier 2 capital) include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible debt 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 the Comptroller of the Currency 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 risks or circumstances. At
September 30, 2012, First Savings Bank met each of its capital requirements.
Basel III Proposal
In the summer of 2012, our primary federal regulators, published two notices of proposed rulemaking (the “2012 Capital Proposals”) that
would substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including First
Savings Financial Group and First Savings Bank, compared to the current U.S. risk-based capital rules, which are based on the international capital
accords of the Basel Committee on Banking Supervision (the “Basel Committee”) which are generally referred to as “Basel I.”
One of the 2012 Capital Proposals (the “Basel III Proposal”) addresses the components of capital and other issues affecting the numerator in
banking institutions’ regulatory capital ratios, and would implement the Basel Committee’s December 2010 framework, known as “Basel III,” for
strengthening international capital standards. The other proposal (the “Standardized Approach Proposal”) addresses risk weights and other issues
affecting the denominator in banking institutions’ regulatory capital ratios, and would replace the existing Basel I-derived risk weighting approach
with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee’s 2004 “Basel II” capital accords. Although
the Basel III Proposal was proposed to come into effect on January 1, 2013, the federal banking agencies jointly announced on November 9, 2012
that they do not expect any of the proposed rules to become effective on that date. As proposed, the Standardized Approach Proposal would come
into effect on January 1, 2015.
The federal banking agencies have not proposed rules implementing the final liquidity framework of Basel III, and have not determined to
what extent they will apply to U.S. banks that are not large, internationally active banks.
It is management’s belief that, as of September 30, 2012, First Savings Financial Group and First Savings Bank would meet all capital adequacy
requirements under the Basel III and Standardized Approach Proposals on a fully phased-in basis if such requirements were currently effective. The
regulations ultimately applicable to financial institutions may be substantially different from the Basel III final framework as published in December
2010 and the proposed rules issued in June 2012. Management will continue to monitor these and any future proposals submitted by our regulators.
Prompt Corrective Regulatory Action. The Office of the Comptroller of the Currency 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 association
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 association 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 association 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 the Comptroller of the Currency is
required to appoint a receiver or conservator within specified time frames for an institution that is “critically undercapitalized.” The regulation also
provides that a capital restoration plan must be filed with the Office of the Comptroller of the Currency within 45 days of the date a savings
association is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.”
Compliance with the plan must be guaranteed by any parent holding company up to the lesser of 5% of the savings association’s total assets when
it was deemed to be undercapitalized or the amount necessary to achieve compliance with applicable capital requirements. 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. The Office of the Comptroller of the Currency 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. Significantly and critically undercapitalized institutions are subject to additional mandatory and discretionary measures.
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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 existing 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. Effective
April 1, 2009, assessment rates ranged from seven to 77.5 basis points. On February 7, 2011, the Federal Deposit Insurance Corporation issued final
rules, effective April 1, 2011, implementing changes to the assessment rules resulting from the Dodd-Frank Act. Initially, the base assessment rates
will range from two and one half to 45 basis points. The rate schedules will automatically adjust in the future when the Deposit Insurance Fund
reaches certain milestones. No institution may pay a dividend if in default of the federal deposit insurance assessment.
The FDIC imposed on all insured institutions a special emergency assessment of five basis points of total assets minus Tier 1 capital, as of
September 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 was collected on September 30, 2009. The FDIC provided for similar assessments during the final two quarters of 2009, if
deemed necessary. In lieu of further special assessments, however, the FDIC required insured institutions to prepay estimated quarterly risk-based
assessments for the fourth quarter of 2009 through the fourth quarter of 2012. That pre-payment, which included an assumed assessment base
increase of 5%, was due December 30, 2009. The pre-payment was recorded as a prepaid expense asset as of December 30, 2009. As of December 31,
2009 and each quarter thereafter, a charge to earnings is recorded for each regular assessment with an offsetting credit to the prepaid asset.
Due to difficult economic conditions, deposit insurance per account owner was recently raised to $250,000. That change 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, non-interest bearing transaction accounts would receive unlimited insurance coverage until December 31, 2010 and certain senior
unsecured debt issued by institutions and their holding companies between October 13, 2008 and September 30, 2010 would be guaranteed by the
Federal Deposit Insurance Corporation through September 30, 2012, or in some cases, December 31, 2012. First Savings Bank did not opt to
participate in the unlimited coverage for noninterest bearing transaction accounts or the debt guarantee program.
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 condition imposed by the Federal Deposit Insurance Corporation or the Office of the
Comptroller of the Currency. The management of First Savings Bank does not know of any practice, condition or violation that might lead to
termination of deposit insurance.
Loans to One Borrower. Federal law provides that savings associations are generally subject to the limits on loans to one borrower
applicable to national banks. Generally, subject to certain exceptions, a savings association 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.
Qualified Thrift Lender Test. Federal law requires savings associations 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 but also including education, credit card and small business loans) in at least nine months out of each 12-month
period.
13
A savings association that fails the qualified thrift lender test is subject to certain operating restrictions and the Dodd-Frank Act also
specifies that failing the qualified thrift lender test is a violation of law that could result in an enforcement action and dividend limitations. As of
September 30, 2012, First Savings Bank maintained 84.43% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift
lender test.
Limitation on Capital Distributions. Federal regulations impose limitations upon all capital distributions by a savings association, including
cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations,
an application to and the prior approval of the Office of the Comptroller of the Currency is required before any capital distribution if the institution
does not meet the criteria for “expedited treatment” of applications under Office of the Comptroller of the Currency 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 the Comptroller of the Currency.
If an application is not required, the institution must still provide 30 days prior written notice to the Board of Governors of the Federal Reserve
System of the capital distribution if, like First Savings Bank, it is a subsidiary of a holding company, as well as an informational notice filing to the
Office of the Comptroller of the Currency. If First Savings Bank’s capital ever fell below its regulatory requirements or the Office of the Comptroller
of the Currency notified it that it was in need of increased supervision, its ability to make capital distributions could be restricted. In addition, the
Office of the Comptroller of the Currency could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by
the regulation, if the Office of the Comptroller of the Currency determines that such distribution would constitute an unsafe or unsound practice.
Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety
and Soundness in various areas such as internal controls and information systems, internal audit, loan documentation and credit underwriting,
interest rate exposure, asset growth and quality, earnings and compensation, fees and benefits. 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 the Comptroller of the Currency determines that a savings association fails to meet any standard prescribed by the
guidelines, the Office of the Comptroller of the Currency may require the institution to submit an acceptable plan to achieve compliance with the
standard.
Community Reinvestment Act. All federal savings associations have a responsibility under the Community Reinvestment Act and related
regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. An institution’s failure to
satisfactorily comply with the provisions of the Community Reinvestment Act could result in denials of regulatory applications. Responsibility for
administering the Community Reinvestment Act, unlike other fair lending laws, is not being transferred to the Consumer Financial Protection
Bureau. First Savings Bank received a “satisfactory” Community Reinvestment Act rating in its most recently completed examination.
Transactions with Related Parties. Federal law limits First Savings Bank’s authority to engage in transactions with “affiliates” (e.g., any
entity that controls or is under common control with First Savings Bank, including First Savings Financial Group and their other subsidiaries). The
aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings association. The
aggregate amount of covered transactions with all affiliates is limited to 20% of the savings association’s capital and surplus. Certain transactions
with affiliates are required to be secured by collateral in an amount and of a type specified by federal law. The purchase of low quality assets from
affiliates is generally prohibited. Transactions with affiliates must generally be on terms and under circumstances that are at least as favorable to the
institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings associations are
prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings association
may purchase the securities of any affiliate other than a subsidiary.
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The Sarbanes-Oxley Act of 2002 generally prohibits loans by First Savings Financial Group to its executive officers and directors. However,
the law 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% shareholders (“insiders”), as well as
entities such persons control, is limited. The laws limit both the individual and aggregate amount of loans that First Savings Bank may make to
insiders based, in part, on First Savings Bank’s capital level and requires that certain board approval procedures be followed. Such loans are
required to 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. Loans to executive officers are subject to additional limitations based on
the type of loan involved.
Enforcement. The Office of the Comptroller of the Currency currently has primary enforcement responsibility over savings associations and
has authority to bring actions against the institution and all institution-affiliated parties, including shareholders, and any attorneys, appraisers and
accountants who knowingly or recklessly participate in wrongful actions 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, conservatorship or termination of deposit insurance. 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 the authority to recommend to the
Office of the Comptroller of the Currency that enforcement action be taken with respect to a particular savings association. If action is not taken by
the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain violations.
Assessments. Savings associations are required to pay assessments to the Office of the Comptroller of the Currency to fund the agency’s
operations. The Comptroller of the Currency assessments paid by First Savings Bank for the fiscal year ended September 30, 2012 totaled $140,266.
Federal Home Loan Bank System. First Savings Bank is a member of the Federal Home Loan Bank System, which consists of 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.
First Savings Bank was in compliance with this requirement with an investment in Federal Home Loan Bank stock at September 30, 2012 of $5.4
million.
Federal Reserve Board System. The Federal Reserve Board regulations require savings associations to maintain non-interest earning
reserves against their transaction accounts (primarily Negotiable Order of Withdrawal (NOW) and regular checking accounts). The regulations
generally provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction
accounts up to and including $71.0 million; a 10% reserve ratio is applied above $71.0 million. The first $11.5 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
2012, require a 3% ratio for up to $71.0 million and an exemption of $11.5 million. First Savings Bank complies with the foregoing requirements. In
October 2008, the Federal Reserve Board began paying interest on certain reserve balances.
15
Other Regulations
First Savings Bank’s operations are also subject to federal laws applicable to credit transactions, including 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 laws such as 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 govern 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; and
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.
Holding Company Regulation
General. As a savings and loan holding company, First Savings Financial Group is subject to Federal Reserve Board regulations,
examinations, supervision, reporting requirements and regulations regarding its activities. In addition, the Federal Reserve Board has enforcement
authority over First Savings Financial Group and its non-savings institution subsidiaries. Among other things, this authority permits the Federal
Reserve Board to restrict or prohibit activities that are determined to be a serious risk to First Savings Bank.
Pursuant to federal law and regulations and policy, a savings and loan holding company such as First Savings Financial Group may generally
engage in the activities permitted for financial holding companies under Section 4(k) of the Bank Holding Company Act and certain other activities
that have been authorized for savings and loan holding companies by regulation.
Federal law prohibits a savings and loan holding company from, directly or indirectly or through one or more subsidiaries, acquiring more
than 5% of the voting stock of another savings association, or savings and loan holding company thereof, without prior written approval of the
Federal Reserve Board or from acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary holding company or savings
association. A savings and loan holding company is also prohibited from acquiring more than 5% of a company engaged in activities other than
those authorized by federal law or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings associations, the Federal Reserve Board must consider the financial and managerial
resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community and competitive factors.
The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company
controlling savings associations in more than one state, except: (i) the approval of interstate supervisory acquisitions by savings and loan holding
companies; and (ii) the acquisition of a savings association in another state if the laws of the state of the target savings association 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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Capital. Savings and loan holding companies are not currently subject to specific regulatory capital requirements. The Dodd-Frank Act,
however, requires the Federal Reserve Board 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 eliminate the
inclusion of certain instruments, such as trust preferred securities, from tier 1 capital. Instruments issued prior to May 19, 2010 will be grandfathered
for companies with consolidated assets of $15 billion or less. There is a five year transition period from the July 21, 2010 date of enactment of the
Dodd-Frank Act before the capital requirements will apply to savings and loan holding companies.
Source of Strength. The Dodd-Frank Act also extends the “source of strength” doctrine to savings and loan holding companies. The
regulatory agencies must promulgate regulations implementing the “source of strength” policy that holding companies act as a source of strength
to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
Federal savings banks must notify the Federal Reserve Board prior to paying a dividend to First Savings Financial Group. The Federal
Reserve Board may disapprove a dividend if, among other things, the Federal Reserve Board determines that the federal savings bank would be
undercapitalized on a pro forma basis or the dividend is determined to raise safety or soundness concerns.
Acquisition of First Savings Financial Group. Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal
Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan
holding company or savings association. Under certain circumstances, a change of control may occur, and prior notice is required, upon the
acquisition of 10% or more of the outstanding voting stock of the company or institution, unless the Federal Reserve Board has found that the
acquisition will not result in a change of control of First Savings Financial Group. Under the Change in Control Act, the Federal Reserve Board
generally 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 acquires control would then be subject to regulation as a
savings and loan holding company.
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 Taxation
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 2012 fiscal year, First Savings Bank’s maximum federal income tax rate was 34%.
First Savings Financial Group and First Savings Bank have entered into a tax allocation agreement. Because First Savings Financial Group
owns 100% of the issued and outstanding capital stock of First Savings Bank, First Savings Financial Group and First Savings Bank are members of
an affiliated group within the meaning of Section 1504(a) of the Internal Revenue Code, of which group First Savings Financial Group is the common
parent corporation. As a result of this affiliation, First Savings Bank may be included in the filing of a consolidated federal income tax return with
First Savings Financial Group and, if a decision to file a consolidated tax return is made, the parties agree to compensate each other for their
individual share of the consolidated tax liability and/or any tax benefits provided by them in the filing of the consolidated federal income tax return.
Our Federal income tax returns have not been audited during the last five years.
17
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. Approximately $4.6 million of our accumulated bad debt reserves would not be
recaptured into taxable income unless First Savings Bank makes a “non-dividend distribution” to First Savings Financial Group as described below.
Distributions. If First Savings Bank makes “non-dividend distributions” to First Savings Financial Group, the distributions will be
considered to have been made from First Savings Bank’s unrecaptured tax bad debt reserves, including the balance of its reserves as of December
31, 1987, to the extent of the “non-dividend distributions,” and then from First Savings Bank’s supplemental reserve for losses on loans, to the
extent of those reserves, and an amount based on the amount distributed, but not more than the amount of those reserves, will be included in First
Savings Bank’s taxable income. Non-dividend distributions include distributions in excess of First Savings Bank’s current and accumulated
earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of First Savings Bank’s current or accumulated earnings and profits will not be so included in First Savings Bank’s
taxable income.
The amount of additional taxable income triggered by a non-dividend 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.
Item 1A. RISK FACTORS
Our concentration in non-owner occupied residential real estate loans may expose us to increased credit risk.
At September 30, 2012, $39.0 million, or 20.4% of our residential mortgage loan portfolio and 9.8% 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, 2012, we had 13 non-owner occupied residential loan relationships, each having an outstanding balance over $500,000, with aggregate
outstanding balances of $12.9 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, 2012, non-performing
non-owner occupied residential loans amounted to $1.9 million. Non-owner occupied residential properties held as real estate owned amounted to
$283,000 at September 30, 2012. 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.”
18
Our recent emphasis on commercial real estate lending and commercial business lending may expose us to increased lending risks.
At September 30, 2012, $126.5 million, or 31.6%, of our loan portfolio consisted of commercial real estate loans and commercial business
loans. Subject to market conditions, we intend to increase our origination of these loans. Commercial real estate loans generally expose a lender to
greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the
successful operation of the property and the income stream of the borrowers. Commercial real estate loans also typically involve larger loan
balances to single borrowers or groups of related borrowers both at origination and at maturity because many of our commercial real estate loans
are not fully-amortizing, but result in “balloon” balances at maturity. Commercial business loans expose us to additional risks since they typically
are made on the basis of the borrower’s ability to make repayments from the cash flow of the borrower’s business and are secured by non-real
estate collateral that may depreciate over time. In addition, some of our commercial borrowers have more than one loan outstanding with us.
Consequently, an adverse development with respect to one loan or one credit relationship may expose us to a greater risk of loss compared to an
adverse development with respect to a one- to four-family residential mortgage loan. At September 30, 2012, non-performing commercial business
loans and non-performing commercial real estate loans totaled $164,000 and $902,000, 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.
Our construction loan and land and land development loan portfolios may expose us to increased credit risk.
At September 30, 2012, $28.3 million, or 7.1% of our loan portfolio consisted of construction loans, and land and land development loans,
and $7.8 million, or 48.4% of the construction loan portfolio, consisted of speculative construction loans at that date. While recently the demand for
construction loans has declined due to the decline in the housing market and tighter lending standards, 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.”
19
If an 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 and asset-backed securities. We must evaluate these securities for other-than-temporary impairment loss
(“OTTI”) on a periodic basis. The privately-issued collateralized mortgage obligations and asset-backed securities 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.
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. At September 30, 2012, approximately $242.1 million, or 61.5% of the total loan
portfolio, consisted of fixed-rate mortgage loans. This investment in fixed-rate mortgage loans exposes the Company to increased levels of interest
rate risk.
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.”
20
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, 2012, our goodwill totaled $7.9 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.
Recently enacted regulatory reform may have a material impact on our operations.
On July 21, 2010, the President signed into law the Dodd-Frank Act. The Dodd-Frank Act restructures the regulation of depository
institutions. Under the Dodd-Frank Act, the Office of Thrift Supervision, which formerly regulated the Bank, was merged into the Office of the
Comptroller of the Currency. Savings and loan holding companies, including First Savings Financial Group, are now regulated by the Board of
Governors of the Federal Reserve Board System. Also included is the creation of a new federal agency to administer consumer protection and fair
lending laws, a function that was formerly performed by the depository institution regulators. The federal preemption of state laws that was formerly
accorded federally chartered depository institutions has been reduced as well and State Attorneys General now have greater authority to bring a
suit against a federally chartered institution, such as First Savings Bank, for violations of certain state and federal consumer protection laws. The
Dodd-Frank Act also imposes 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 First Savings 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.
In addition to the enactment of the Dodd-Frank Act, the federal regulatory agencies recently have begun to take stronger supervisory actions
against financial institutions that have experienced increased loan losses and other weaknesses as a result of the current economic crisis. The
actions include the entering into of written agreements and cease and desist orders that place certain limitations on their operations. Federal bank
regulators recently have also been using with more frequency their ability to impose individual minimal capital requirements on banks, which
requirements may be higher than those imposed under the Dodd-Frank Act or which would otherwise qualify the bank as being “well capitalized”
under the Office of the Comptroller of the Currency’s prompt corrective action regulations. If we were to become subject to a supervisory agreement
or higher individual capital requirements, such action may have a negative impact on our ability to execute our business plans, as well as our ability
to grow, pay dividends or engage in mergers and acquisitions and may result in restrictions in our operations.
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.
21
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, 2012, which is the most
recent date for which data is available from the Federal Deposit Insurance Corporation, we held approximately 11.86%, 3.71%, 33.55%, 79.45% and
9.60% of the FDIC-insured deposits in Clark, Floyd, Harrison, Crawford and Washington Counties, Indiana, respectively. Some of the institutions
with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We
expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of
consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our primary market
area. See “Item 1. Business — Market Area” and “Item 1. Business — Competition” for more information about our primary market area and the
competition we face.
We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.
We are subject to extensive regulation, supervision and examination by the Office of the Comptroller of the Currency, 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 Federal Reserve Bank of St. Louis. 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, 2012.
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
Lanesville Office
7340 Main Street NE
Lanesville, Indiana
Elizabeth Office
8160 Beech Street SE
Elizabeth, Indiana
Year
Opened
Owned/
Leased
1968
Owned
1975
1993
1999
2003
1986
1995
1996
1995
1925
1984
1969
1948
1975
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
23
The Bank owns two former branch office locations that have been closed and consolidated into existing branch office operations. These
are located in Milltown and Georgetown, Indiana, valued at the aggregate amount of $600,000, held for sale and included in other assets at
September 30, 2012 on the balance sheet of the Consolidated Financial Statements beginning on page F-1 of this annual report.
The Company owns a 4.077 acre parcel of land in New Albany, Indiana, which it is developing for retail purposes through its subsidiary,
FFCC, Inc. The retail development is expected to include over 36,000 square feet of leasable class-A retail space and may include a future bank
branch location. See Note 6 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report for additional
information regarding the real estate development and construction.
Item 3. LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on
properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our
business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition,
results of operations or cash flows.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
24
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.” As of December 14,
2012, the Company had approximately 290 holders of record and 2,317,815 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. See Item 1, “Business—
Regulation and Supervision—Limitation on Capital Distributions” and Note 26 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 fiscal years ended September 30,
2012 and 2011 as reported by Nasdaq.
2012:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2011:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Sale
Low
Sale
Dividends
Market price
end of period
$
$
19.55 $
18.49
17.61
19.04
16.48 $
17.00
18.49
15.00
17.51 $
16.80
16.25
15.23
14.79 $
15.02
14.65
13.10
0.00 $
0.00
0.00
0.00
0.00 $
0.00
0.00
0.00
19.50
17.65
17.10
16.92
15.50
15.99
15.25
14.80
On November 16, 2012, the Company declared a special cash dividend of $0.40 per share on its outstanding common stock, payable on or
about December 31, 2012 to stockholders of record as of the close of business on November 30, 2012. The Company currently intends to adopt a
policy of paying regular cash dividends beginning during the first calendar quarter of 2013. However, the Company cannot guarantee that it will pay
dividends or that if paid, it will not reduce or eliminate dividends in the future.
25
Purchases of Equity Securities
The following table presents information regarding the Company’s stock repurchase activity during the quarter ended September 30, 2012:
Period
July 1, 2012 through July 31, 2012
August 1, 2012 through August 31, 2012
September 1, 2012 through September 30, 2012
Total
_______________
(a)
Total number
of shares
purchased
—
—
29,900 $
—
—
19.10
29,900 $
19.10
(b)
Average
price
paid per
share
(c)
Total number of
shares purchased
as part of publicly
announced plans or
programs (1)
(d)
Maximum number of
shares that may yet be
purchased under the
plans or programs
—
—
29,900
29,900
56,416
56,416
26,615
26,615
(1) On October 20, 2010, the Company announced that its Board of Directors authorized a stock repurchase program to acquire up to
120,747 shares, or 5.0% of the Company’s outstanding common stock. Under the program, repurchases are to be conducted through
open market purchases or privately negotiated transactions, and were to be made from time to time depending on market conditions
and other factors.
New Stock Repurchase Program
On November 16, 2012, the Company authorized a new stock repurchase program to acquire up to 230,217 shares, or approximately 10%, of
the Company’s outstanding common stock that will be outstanding upon completion of the current stock repurchase program. The Company’s
current repurchase program has 14,650 shares remaining to be purchased as of the close of trading on December 14, 2012. The new repurchases will
commence upon completion of the current repurchase program. Repurchases, which will be conducted through open market purchases or privately
negotiated transactions, will be made from time to time depending on market conditions and other factors. There is no guarantee as to the exact
number of shares to be repurchased by the Company. Repurchased shares will be held in treasury.
26
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)
(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)
Less: Preferred stock dividends declared
Net income (loss) available to common
shareholders
2012
2011
At September 30,
2010
2009
2008
638,913 $
38,791
152,543
7,848
389,067
494,234
53,062
537,086 $
27,203
108,577
9,506
354,432
387,626
53,137
508,442 $
11,278
109,976
3,929
343,615
366,161
67,159
480,811 $
10,404
72,580
6,782
353,823
350,816
55,773
228,924
21,379
10,697
8,456
174,807
189,209
8,000
82,926
76,601
55,151
52,877
29,720
2012
25,994 $
4,675
21,319
1,532
19,787
3,422
17,464
5,745
1,458
4,287
171
For the Year Ended September 30,
2010
2009
2011
25,983 $
5,385
20,598
1,605
18,993
3,008
16,308
5,693
1,679
4,014
115
26,262 $
6,117
20,145
1,604
18,541
2,916
18,020
3,437
808
2,629
-
13,008 $
4,440
8,568
819
7,749
1,263
9,231
(219)
(252)
33
-
$
4,116 $
3,899 $
2,629 $
33 $
2008
12,523
5,972
6,551
1,540
5,011
1,054
6,555
(490)
(300)
(190)
-
(190)
2008
Per Share Data:
Net income per common share, basic
Net income per common share, diluted
Dividends per common share
2012
$
For the Year Ended September 30,
2010
2009
2011
1.90 $
1.85
0.00
1.82 $
1.78
0.00
1.17 $
1.17
0.08
0.01
0.01
0.00
N/A
N/A
N/A
27
Performance Ratios:
Return on average assets
Return on average equity
Interest rate spread (1)
Net interest margin (2)
Other expenses to average assets
2012
At or For the Year Ended September 30,
2009
2010
2011
2008
0.75%
0.78%
0.53%
0.01%
(0.09)%
5.42
4.07
4.22
3.05
6.85
4.30
4.44
3.15
4.93
4.44
4.57
3.66
0.06
3.41
3.93
3.90
(0.64)
2.97
3.38
3.11
Efficiency ratio (3)
70.59
69.08
78.14
93.90
86.19
Average interest-earning assets to average
interest-bearing liabilities
116.16
111.98
109.89
125.66
113.15
Dividend payout ratio
Average equity to average assets
–
13.81
–
11.33
7.34
10.85
–
21.84
–
14.07
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)
10.12%
11.34%
7.84%
7.55%
12.87%
10.12
17.07
11.34
17.52
7.84
12.77
7.55
12.32
12.87
22.09
1.23%
1.29%
1.09%
1.03%
0.98%
84.12
63.70
63.88
70.06
104.72
0.35
1.46
2.21
0.21
2.02
2.01
0.42
1.71
1.47
0.38
1.47
1.44
14
36,259
6,072
12
29,777
5,777
12
31,100
6,410
14
32,689
6,552
0.64
0.93
0.96
7
16,831
2,188
(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. The
significant increase from 2011 to 2012 is due primarily to 5,826 deposit accounts acquired in the acquisition of the First Federal branches.
(6) The significant increase from 2008 to 2009 is due primarily to 4,595 loans acquired in the acquisition of Community First. The significant increase
from 2011 to 2012 is due primarily to 768 loans acquired in the acquisition of the First Federal branches.
28
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, commissions on
sales of securities and insurance products, and net realized and unrealized gains on trading account securities. 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, net losses on foreclosed real estate
and other miscellaneous expenses. Our noninterest expenses increased for the year ended September 30, 2012 when compared to 2011 primarily as a
result of nonrecurring expenses in 2012 relating to the acquisition and integration of the First Federal branches and advertising costs associated
with the rebranding of the Company with a new ‘look’ and logo during 2012. These 2012 additional expenses consisted primarily of professional
fees, data processing expense and advertising 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. We also recognize annual employee compensation expenses related to the equity incentive
plan as the equity incentive awards vest. See Note 17 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.
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. Our data
processing expenses increased in the year ended September 30, 2012 when compared to 2011 primarily as a result of nonrecurring expenses in 2012
relating to the integration of the First Federal branches with the Bank’s core operating system. These nonrecurring charges associated with the
integration of the First Federal branches with the Bank’s core operating system amounted to $327,000 during 2012.
Professional fees expense represents the fees we pay to third parties for legal, accounting, investment advisory and other consulting
services. Our professional fees expense increased in the year ended September 30, 2012 when compared to 2011 primarily as a result of nonrecurring
expenses in 2012 relating to the acquisition and integration of the First Federal branches and investment management fees for the managed trading
account. The 2012 nonrecurring charges associated with the acquisition and integration of the First Federal branches amounted to $194,000.
Federal deposit insurance premiums are payments we make to the Federal Deposit Insurance Corporation for insurance of our deposit
accounts.
Other expenses include expenses for office supplies, postage, telephone, insurance, regulatory assessments and other miscellaneous
operating expenses.
29
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 the 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 collectability 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 the Comptroller of
the Currency, 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. Note 1 of the Notes to Consolidated
Financial Statements beginning on page F-1 of this annual report describes the methodology used to determine the allowance for loan losses. The
Company has not made any substantive changes to its methodology for determining the allowance for loan losses during the fiscal year ended
September 30, 2012, and there have been no material changes in the assumptions or estimation techniques compared to prior years.
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. No other-than-temporary write-down charges to earnings were recognized during 2012 or
2011. See Note 4 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report for additional information regarding
OTTI.
30
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, foreclosed and other repossessed 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;
improving customer service and product offerings by leveraging the Bank’s investment in new technology including the core
operating system;
providing exceptional customer service to attract and retain customers;
promoting our presence, brand image and product offerings in our primarily market area using our newly designed logo and
marketing promotions that were launched in September 2011;
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;
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.
31
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, 2012, 47.7% of our total loans were residential mortgage loans and 20.4% 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, 2012, commercial real estate loans and
commercial business loans represented 22.6% and 9.0%, respectively, of our total loans. We intend to continue to pursue these lending
opportunities in our primary market area. In addition, the Company’s participation in the United States Department of the Treasury’s Small Business
Lending Fund program, as discussed further in Note 25 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual
report, also provides an incentive and capital to increase commercial lending.
Continuing to integrate the Community First and First Federal offices, customers and product lines.
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 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. In addition, during 2011 and 2012 we successfully rebranded all
office locations, including those operating under the Community First name, with a new ‘look’ and logo for First Savings Bank in order to provide
uniformity to our existing and prospective customer base. In 2012 we began to integrate the First Federal offices and customers into the existing
First Savings franchise.
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 2009 acquisition of Community First expanded our market area into Harrison, Crawford and Washington Counties, Indiana, while the
2012 acquisition of the First Federal branches enhanced our presence in Harrison and Floyd Counties, Indiana. As previously discussed, we
successfully rebranded the twelve office locations during 2011 and 2012 with a new look and logo for First Savings Bank and have also expanded
our marketing efforts as a result of such. In addition, 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.
32
Issuance of Preferred Stock under the U.S. Department of the Treasury’s Small Business Lending Fund
On August 11, 2011, First Savings Financial Group entered into and consummated a Securities Purchase Agreement (the “Purchase
Agreement”) with the Secretary of the Treasury, pursuant to which First Savings Financial Group issued 17,120 shares of Senior Non-Cumulative
Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”), having a liquidation amount per share equal to $1,000, for a total purchase price
of $17.1 million. The Purchase Agreement was entered into, and the Series A Preferred Stock was issued, pursuant to the Small Business Lending
Fund program, a $30 billion fund established under the Small Business Jobs Act of 2010, that encourages lending to small businesses by providing
capital to qualified community banks with assets of less than $10 billion. See Note 25 of the Notes to Consolidated Financial Statements beginning
of page F-1 of this annual report for additional information regarding the terms of the Series A Preferred Stock.
Balance Sheet Analysis
Cash and Cash Equivalents. At September 30, 2012 and 2011, cash and cash equivalents totaled $38.8 million and $27.2 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, 2012 was approximately $2.8 million.
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.
Residential mortgage loans comprise the largest segment of our loan portfolio. At September 30, 2012, these loans totaled $191.0 million, or
47.7% of total loans, compared to $169.4 million, or 46.7% of total loans at September 30, 2011. Total residential mortgage loan balances increased in
2012 primarily due to the loans acquired in the First Federal branch acquisition. 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 $90.3 million, or 22.6% of total loans at September 30, 2012, compared to $73.5 million, or 20.3% of total
loans at September 30, 2011. The balance of commercial real estate loans has increased primarily due to greater opportunity to originate these loans
during 2012 as a result of our increased commercial lending personnel. Management continues to focus on pursuing nonresidential loan
opportunities in order to further diversify the loan portfolio.
Consumer loans totaled $30.6 million, or 7.7% of total loans, at September 30, 2012 compared to $29.6 million, or 8.1% of total loans, at
September 30, 2011. Total consumer loan balances increased in 2012 primarily due to the loans acquired in the First Federal branch acquisition.
However, in general, organic 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. In the aggregate, home equity lines of credit increased $3.1 million, or 20.3%, while automobile loans decreased $1.6 million, or
16.4%, from September 30, 2011 to September 30, 2012. The Bank sold its $1.2 million credit card portfolio in May 2011, resulting in a net gain of
$104,000 on the sale.
Commercial business loans totaled $36.2 million, or 9.0% of total loans, at September 30, 2012 compared to $40.6 million, or 11.2% of total
loans, at September 30, 2011. The balance of commercial business loans has decreased primarily due to repayments, payoffs, charge-offs and
increased competition in the marketplace. Management continues to focus on pursuing commercial business loan opportunities in order to further
diversify the loan portfolio.
33
Multi-family real estate loans totaled $23.9 million, or 6.0% of total loans at September 30, 2012, compared to $24.9 million, or 6.9% of total
loans at September 30, 2011. The balance of multi-family real estate loans decreased primarily due to repayments.
Residential construction loans totaled $10.7 million, or 2.7% of total loans, at September 30, 2012 of which $6.4 million were speculative
construction loans. At September 30, 2011, residential construction loans totaled $8.0 million, or 2.2% of total loans, of which $6.3 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 somewhat decreased the opportunity to originate these loans and significantly grow this segment of the portfolio. We
intend to continue pursuing quality construction lending opportunities as the housing market continues to recover.
Commercial construction loans totaled $5.2 million, or 1.3% of total loans, at September 30, 2012 compared to $4.1 million, or 1.1% of total
loans at September 30, 2011. 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 $12.3 million, or 3.1% of total loans at September 30, 2012, compared to $12.9 million, or 3.6% of
total loans at September 30, 2011. These loans are primarily secured by vacant lots to be improved for residential and nonresidential development
and farmland. The general slowdown of residential and 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.
34
The following table sets forth the composition of our loan portfolio at the dates indicated.
(Dollars in thousands)
Real estate mortgage:
2012
Amount Percent
2011
Amount Percent
At September 30,
2010
Amount Percent
2009
Amount Percent
2008
Amount Percent
Residential
Commercial
Multi-family
Residential construction
Commercial construction
Land and land development
Total
$ 190,958
90,290
23,879
10,748
5,182
12,320
333,377
47.72% $ 169,353
73,513
22.56
24,909
5.97
8,002
2.69
4,144
1.29
12,947
3.08
292,868
83.31
46.65% $ 172,007
53,869
20.25
20,360
6.86
15,867
2.20
9,851
1.14
9,076
3.57
281,030
80.67
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
3.11
4,748
145,187
77.74
64.20%
8.74
1.86
3.50
1.13
2.69
82.12
Commercial business
36,189
9.04
40,628
11.19
30,905
8.86
36,901
10.25
14,411
8.15
Consumer:
Home equity lines of credit
Auto loans
Other
Total
18,294
8,219
4,114
30,627
4.57
2.05
1.03
7.65
15,210
9,827
4,514
29,551
4.19
2.71
1.24
8.14
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
Total loans
400,193
100.00% 363,047 100.00% 348,705 100.00% 359,978 100.00% 176,808
100.00%
Deferred loan origination fees
and costs, net
(382)
(558)
(778)
(846)
(795)
Undisbursed portion of loans in
process
Allowance for loan losses
Loans, net
6,602
4,906
$ 389,067
4,501
4,672
$ 354,432
2,057
3,811
$ 343,615
3,306
3,695
$ 353,823
1,067
1,729
$ 174,807
35
Loan Maturity
The following table sets forth certain information at September 30, 2012 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:
Residential
Real Estate
(1)
Commercial
Real Estate
(2)
Construction
(3)
Commercial
Business
Consumer
Total
Loans
At September 30, 2012
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
$
$
26,684 $
16,048
12,210
22,375
43,730
30,835
62,955
214,837 $
41,989 $
18,388
11,987
13,099
12,670
2,388
2,089
102,610 $
15,930 $
-
-
-
-
-
-
15,930 $
19,889 $
4,612
3,209
4,086
2,888
831
674
36,189 $
8,850 $
5,711
4,001
4,997
5,462
1,604
2
30,627 $
113,342
44,759
31,407
44,557
64,750
35,658
65,720
400,193
(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, 2012 that are due after September 30, 2013, 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.
36
Fixed Rates Adjustable Rates
$
112,015 $
44,037
-
12,469
7,730
176,251 $
$
76,138 $
16,584
-
3,831
14,047
110,600 $
Total
188,153
60,621
-
16,300
21,777
286,851
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 First Federal branches
Deduct:
Loan principal repayments
Loan sales
Net loan activity
Total loans at end of period
Year Ended September 30,
2011
2010
2012
$
363,047 $
348,705 $
359,978
28,403
29,622
8,239
8,936
8,379
83,579
5,923
32,408
33,968
26,313
4,440
17,327
6,260
88,308
–
–
22,980
7,386
9,762
10,050
6,999
57,177
–
–
(82,020)
(2,744)
37,146
400,193 $
(73,966)
–
14,342
363,047 $
(68,450)
–
(11,273)
348,705
$
(1) Includes multi-family loans.
(2) Includes farmland and land and land development loans.
Trading Account Securities. Our trading account securities represent an investment in a managed brokerage account in May 2012 that
invests in small and medium lot, investment grade municipal bonds. The brokerage account is managed by an investment advisory firm registered
with the U.S. Securities and Exchange Commission. At September 30, 2012, trading account securities recorded at fair value totaled $3.6 million,
comprised of investment grade municipal bonds. See Note 4 of the Notes to Consolidated Financial Statements beginning on page F-1 of this
annual report for additional information regarding trading account securities.
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 and asset-backed securities. Available for sale securities
increased by $44.0 million from September 30, 2011 to September 30, 2012 primarily due to purchases of $76.8 million and unrealized gains of $3.4
million, which more than offset maturities and calls of $12.7 million, sales of $2.2 million and principal repayments of $21.1 million.
Securities Held to Maturity. Our held to maturity securities portfolio consists primarily of mortgage-backed securities issued by
government sponsored enterprises and municipal bonds. Held to maturity securities decreased by $1.7 million from September 30, 2011 to September
30, 2012 primarily due to maturities and principal repayments of $1.6 million.
37
The following table sets forth the amortized costs and fair values of our investment securities at the dates indicated.
2012
At September 30,
2011
2010
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
15,940 $
16,064 $
12,762 $
12,866 $
25,510 $
25,705
(In thousands)
Securities available for sale:
Agency bonds and notes
Agency mortgage-backed
securities
Agency CMO
Privately-issued CMO
Privately-issued asset-backed
Municipal
Equity securities
Total
Securities held to maturity:
Agency mortgage-backed
securities
Municipal
Total
$
$
$
42,255
17,186
4,283
5,797
58,135
–
143,596 $
43,420
17,541
5,289
7,227
62,933
69
152,543 $
17,719
25,368
4,414
5,623
37,344
–
103,230 $
18,309
25,691
4,704
6,692
40,259
56
108,577 $
13,944
22,325
4,737
5,605
33,109
–
105,230 $
14,141
22,488
5,446
7,242
34,877
77
109,976
1,342 $
6,506
7,848 $
1,460 $
6,854
8,314 $
2,337 $
7,169
9,506 $
2,521 $
7,169
9,690 $
3,625 $
304
3,929 $
3,836
308
4,144
The following table sets forth the activity in our investment available for sale and held to maturity 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 in net unrealized gain
Acquired with Community First
Net increase in investment securities
Investment securities, end of period (1)
(1) At fair value.
38
At or For the Year Ended
September 30,
2011
2010
2012
$
$
$
$
20,830 $
33,762
–
–
(9,596)
(625)
–
509
–
24,050
44,880 $
97,437 $
43,014
(2,265)
(13,318)
(12,529)
242
–
30
3,366
–
18,540
115,977 $
17,977 $
9,157
(154)
–
(6,177)
(348)
9
366
–
2,853
20,830 $
96,143 $
39,813
(6,941)
(26,273)
(5,931)
474
–
95
57
–
1,294
97,437 $
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
The following table sets forth the stated maturities and weighted average yields of debt securities at September 30, 2012. 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 mortgage-backed securities
Agency CMO
Privately-issued CMO
Privately-issued ABS
Municipal
Total
Securities held to maturity:
Agency mortgage-backed securities
Municipal
Total
One Year
or Less
More than
One Year to
Five Years
More than
Five Years to
Ten Years
More than
Ten Years
Total
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
$
$
$
$
–
7
–
–
–
751
758
–
525
525
– % $
2.07
–
–
–
2.69
2.69% $
–
238
–
–
–
2,823
3,061
–% $
1,063
3.86
961
–
1,972
–
–
–
–
7,898
4.41
4.37% $ 11,894
2.20% $ 15,001
42,214
2.59
15,569
2.03
5,289
–
–
7,227
51,461
4.93
4.02% $ 136,761
2.28% $ 16,064
43,420
3.06
17,541
2.10
5,289
10.03
18.85
7,227
62,933
5.42
4.86% $ 152,474
2.27%
3.07
2.09
10.03
18.85
5.28
4.77%
–% $
5.25
5.25% $
–
2,405
2,405
–% $
5.88
5.88% $
–
2,108
2,108
–% $
6.94%
6.94% $
1,342
1,468
2,810
5.04% $
6.77
5.94% $
1,342
6,506
7,848
5.04%
6.37
6.15%
As of September 30, 2012, we did not own any investment securities of a single issuer that had an aggregate book value in excess of 10%
of the Company’s stockholders’ equity at that date, other than securities and obligations issued by U.S. government agencies and sponsored
enterprises.
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 $106.6 million from September 30, 2011 to September 30, 2012
due primarily to the deposits assumed in the acquisition of the First Federal branches totaling $116.5 million, which included noninterest-bearing
checking of $8.8 million, interest-bearing checking of $18.1 million, money market deposit accounts of $3.1 million, interest-bearing savings of $16.5
million and certificates of deposit of $70.0 million. In the aggregate, the Bank recognized increases in noninterest-bearing checking of $17.1 million,
interest-bearing checking of $32.6 million, money market deposit accounts of $24.7 million, interest-bearing savings of $20.4 million and certificates
of deposit of $11.8 million when comparing the two years. Brokered certificates of deposits decreased $29.7 million from $32.7 million at September
30, 2011 to $3.0 million at September 30, 2012. We have continued to promote relationship-oriented deposit accounts but at times utilize a certain
level of brokered certificates of deposit as a lower-cost alternative to retail certificates of deposit. In addition, we have continued to develop and
promote cash management services including sweep accounts and remote deposit capture during 2012 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
2012
At September 30,
2011
2010
$
$
50,502 $
100,438
64,186
62,610
216,498
494,234 $
33,426 $
67,801
39,511
42,191
204,697
387,626 $
28,853
64,831
35,950
39,104
197,423
366,161
39
The following table indicates the amount of jumbo certificates of deposit by time remaining until maturity as of September 30, 2012. Jumbo
certificates of deposit require minimum deposits of $100,000.
(In thousands)
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Total
Amount
9,370
13,287
14,469
34,663
71,789
$
$
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%
3.01 - 4.00%
4.01 - 5.00%
5.01 - 6.00%
6.01 - 7.00%
7.01 - 8.00%
Total
At September 30,
2011
2012
2010
$
$
88,816 $
66,867
43,106
10,523
5,313
1,873
–
–
216,498 $
102,036 $
36,736
34,934
14,869
13,488
2,519
115
–
204,697 $
65,409
42,725
39,084
19,944
21,445
6,695
581
1,540
197,423
The following table sets forth the amount and maturities of time deposits at September 30, 2012.
(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%
Total
Amount Due
More Than
One Year to
Two Years
More Than
Two Years to
Three Years
Less Than
One Year
More Than
Three Years
Total
Percent of Total
Time Deposit
Accounts
$
$
74,849 $
19,845
11,813
2,186
1,985
–
–
110,678 $
9,723 $
17,679
3,071
2,991
1,224
18
–
34,706 $
3,102 $
11,987
10,358
865
213
–
–
26,525 $
1,142 $
17,356
17,864
4,481
1,891
1,855
–
44,589 $
88,815
66,867
43,106
10,524
5,312
1,874
–
216,498
41.02%
30.89
19.91
4.86
2.45
0.87
–
100.00%
The following table sets forth deposit activity for the periods indicated.
(In thousands)
Beginning balance
Increase due to acquisition of First Federal branches
Increase (decrease) before interest credited
Interest credited
Net increase in deposits
Ending balance
Year Ended September 30,
2011
2012
2010
$
$
387,626 $
116,541
(14,215)
4,282
106,608
494,234 $
366,161 $
–
17,846
3,619
21,465
387,626 $
350,816
–
12,865
2,480
15,345
366,161
40
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 FHLBI borrowings.
(Dollars in thousands)
Maximum amount of FHLBI borrowings outstanding at
any month-end during period
$
Average FHLBI 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,
2011
2010
2012
$
98,381
67,346
53,062
1.68%
$
2.11%
$
78,162
63,990
53,137
1.71%
$
1.89%
67,159
59,319
1.70%
67,159
1.80%
The outstanding balance of borrowings from the FHLBI did not change significantly from September 30, 2011 to September 30, 2012. FHLBI
borrowings are primarily used to fund loan demand and to purchase available for sale securities. See Note 13 of the Notes to Consolidated Financial
Statements beginning on page F-1 of this annual report for additional information regarding FHLBI borrowings.
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,
2011
2010
2012
1,329
$
1,321
$
1,312
1,324
0.62%
1,329
$
0.50%
1,316
0.63%
1,321
$
0.63%
1,308
0.50%
1,312
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,
2011
2010
2012
$
15,047
$
15,473
$
15,899
2,785
2.09%
-
$
-
15,312
15,082
2.07%
$
1.62%
15,722
2.10%
15,509
1.62%
See Note 12 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report for additional information
regarding repurchase agreements.
Other Long-Term Debt. On July 27, 2012, FFCC, Inc. entered into a loan agreement with another financial institution to finance the retail
development project discussed in Note 6 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report. The loan
has a maximum commitment of $5 million and FFCC, Inc. had borrowed $2.1 million under the loan at September 30, 2012. See Note 14 of the Notes to
Consolidated Financial Statements beginning on page F-1 of this annual report for additional information regarding other long-term debt.
41
Results of Operations for the Years Ended September 30, 2012 and 2011
Overview. The Company reported net income of $4.3 million and net income available to common shareholders of $4.1 million ($1.85 per
common share diluted; weighted average common shares outstanding of 2,230,188, as adjusted) for the year ended September 30, 2012, compared to
net income of $4.0 million and net income available to common shareholders of $3.9 million ($1.78 per common share diluted; weighted average
common shares outstanding of 2,189,472, as adjusted) for the year ended September 30, 2011.
As discussed in “Noninterest Expense” below, the Company recognized nonrecurring pretax charges totaling $597,000 for the acquisition
and integration of the First Federal branches, including data processing costs of $327,000, professional fees of $194,000 and other miscellaneous
expenses of $76,000. During the year ended September 30, 2011, the Company recognized a nonrecurring pretax charge of $118,000 related to
severance compensation for the early retirement of several officers.
Net Interest Income. Net interest income increased $721,000, or 3.5%, from $20.6 million for the year ended September 30, 2011 to $21.3
million for the year ended September 30, 2012 primarily as the result of increases in the average balance of interest earning assets from 2011 to 2012
and the ratio of average interest-earning assets to average interest-bearing liabilities from 111.98% for 2011 to 116.16% for 2012, which more than
offset a decrease in the interest rate spread from 2011 to 2012. The interest rate spread, the difference between the average tax-equivalent yield on
interest-earning assets and the average cost of interest-bearing liabilities, decreased from 4.30% for 2011 to 4.07% for 2012 due primarily to a
decrease in the average tax-equivalent yield on interest-earning assets from 5.57% for 2011 to 5.11% for 2012, which more than offset a decrease in
the average cost of interest-bearing liabilities from 1.27% for 2011 to 1.04% for 2012.
Total interest income increased $11,000, and remained consistent at $26.0 million for both years 2011 and 2012. The slight increase in total
interest income is due primarily to an increase in the average balance of interest earning assets of $47.2 million from $475.5 million for 2011 to $522.7
million for 2012, which more than offset the change in total interest income due to a decrease in the average tax-equivalent yield on interest-earning
assets from 5.57% for 2011 to 5.11% for 2012. The increase in the average balance of interest-earning assets primarily relates to increases in the
average balance of loans of $22.6 million, investment securities of $19.3 million and interest-bearing deposits with banks of $4.7 million. The increase
in the average balance of loans is due primarily to the acquisition of the First Federal branches.
Interest income on loans decreased $76,000, or 0.4%, from $20.7 million for 2011 to $20.6 million for 2012 due primarily to a decrease in the
average tax-equivalent yield on loans from 5.96% for 2011 to 5.58% for 2012, which more than offset the change in interest income on loans due to
an increase in the average balance of loans outstanding of $22.6 million from $348.5 million for 2011 to $371.1 million for 2012. The increase in the
average balance of loans outstanding is due primarily to the acquisition of the First Federal branches, which primarily increased residential
mortgage and consumer loans, and an increase in commercial real estate loans. In an effort to increase the size and diversity of the loan portfolio,
the Bank offered competitive rates on short-term commercial real estate mortgage loans and was successful in originating these loans, which
minimized the attrition in the commercial business loan portfolio.
Interest income on investment securities increased $55,000, or 1.1%, and remained consistent at $5.2 million for both years 2011 and 2012.
The slight increase in interest income on investment securities is due primarily to an increase in the average balance of investment securities of
$19.3 million, or 16.3%, from $118.1 million for 2011 to $137.4 million for 2012, which more than offset the change in interest income on investment
securities due to a decrease in the average tax-equivalent yield on investments securities from 4.74% for 2011 to 4.26% for 2012. During 2012, in an
effort to maximize earnings and diversify the asset portfolio, the Bank increased its investments in mortgage backed securities issued by U.S.
government agencies and sponsored enterprises, and municipal bonds.
42
Total interest expense decreased $710,000, or 13.1%, due primarily to a decrease in the average cost of funds from 1.27% for 2011 to 1.04%
for 2012, which more than offset the change in total interest expense due to a $25.4 million increase in the average balance of interest-bearing
liabilities from $424.6 million for 2011 to $450.0 million for 2012. The average balance of interest-bearing deposits increased $34.3 million, or 10.0%,
from $344.0 million for 2011 to $378.3 million for 2012 and the average cost of funds for deposits was 1.15% for 2011 compared to 0.92% for 2012. The
increase in the average balance of deposits is due primarily to the acquisition of the First Federal branches. The average balance of borrowings
decreased $8.9 million, or 11.0%, from $80.6 million for 2011 to $71.7 million for 2012 and the average cost of funds for borrowings was 1.76% for 2011
compared to 1.67% for 2012. The average cost of interest-bearing liabilities decreased for 2012 primarily as a result of a reduction in the rates offered
on deposit accounts during 2012, the repricing of time deposits at lower market rates during 2012, and the use of a certain level of lower-cost
borrowings.
43
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 investment securities has been calculated on a tax
equivalent basis using a federal marginal tax rate of 34%.
2012
Interest
and
Dividends
Yield/
Cost
Average
Balance
Year Ended September 30,
2011
Interest
and
Dividends
Average
Balance
Yield/
Cost
2010
Interest
and
Dividends
Yield/
Cost
Average
Balance
9,346 $
371,066
104,715
32,635
11
20,709
5,066
785
0.12% $
5.58
4.84
2.41
4,609 $
348,522
101,760
16,381
18
20,766
5,100
504
0.39% $
5.96
5.01
3.08
3,614 $
352,208
58,437
31,309
16
22,295
3,558
750
0.44%
6.33
6.09
2.40
4,965
151
3.04
4,194
112
2.67
4,170
69
1.65
522,727
26,722
5.11
475,466
26,500
5.57
449,738
26,688
5.93
(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
49,979
572,706
42,068
517,534
42,003
$ 491,741
Liabilities and equity:
NOW accounts
Money market deposit
accounts
Passbook accounts
Certificates of deposit
Total interest-bearing
deposits
$
78,530 $
424
0.54
$
64,967 $
342
0.53
$
63,389 $
387
0.61
48,878
48,055
202,797
347
125
2,580
0.71
0.26
1.27
37,150
40,398
201,483
276
103
3,247
0.74
0.25
1.61
33,736
37,438
198,323
260
99
4,025
0.77
0.26
2.03
378,260
3,476
0.92
343,998
3,968
1.15
332,886
4,771
1.43
Borrowings (1)
71,743
1,199
1.67
80,618
1,417
1.76
76,369
1,346
1.76
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
450,003
4,675
1.04
424,616
5,385
1.27
409,255
6,117
1.49
40,304
3,325
493,632
79,074
31,485
2,793
458,894
58,640
27,024
2,112
438,391
53,350
$ 572,706
$
22,047
$ 517,534
$
21,115
$ 491,741
$
20,571
4.07%
4.22%
4.30%
4.44%
116.16%
111.98%
4.44%
4.57%
109.89%
(1) Includes Federal Home Loan Bank borrowings, repurchase agreements and other long-term debt.
44
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 (decrease) in net interest income
$
Year Ended September 30, 2012
Compared to
Year Ended September 30, 2011
Year Ended September 30, 2011
Compared to
Year Ended September 30, 2010
Increase (Decrease)
Due to
Increase (Decrease)
Due to
Volume
Rate
Net
Volume
Rate
Net
$
(21) $
(3,830)
201
360
22
(3,268)
14 $
3,773
(235)
(79)
17
3,490
488
(149)
339
(3,607) $
(980)
(69)
(1,049)
4,539 $
(7) $
(57)
(34)
281
39
222
(492)
(218)
(710)
932 $
4 $
(232)
2,027
(607)
-
1,192
(2) $
(1,297)
(485)
361
43
(1,380)
165
71
236
956 $
(968)
-
(968)
(412) $
2
(1,529)
1,542
(246)
43
(188)
(803)
71
(732)
544
Provision for Loan Losses. The provision for loan losses decreased $73,000, or 4.5%, from $1.6 million for the year ended September 30,
2011 to $1.5 million for the year ended September 30, 2012. During 2011, the Bank had net charge-offs of $744,000 compared to $1.3 million for 2012.
The gross loan portfolio increased $37.2 million from $363.0 million at September 30, 2011 to $400.2 million at September 30, 2012, primarily in the
residential real estate and commercial real estate mortgage portfolios. Nonperforming loans decreased $1.5 million from $7.3 million at September 30,
2011 to $5.8 million at September 30, 2012, due primarily to one borrower with outstanding loans totaling $1.9 million on non accrual status at
September 30, 2011 who has paid all of the loans current and was on accrual status at September 30, 2012. 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 net charge-offs during 2012. See “Analysis of Nonperforming and Classified Assets” included herein. It is management’s assessment
that the allowance for loan losses at September 30, 2012 was adequate and appropriately reflected the inherent risk of loss in the Bank’s loan
portfolio at that date.
Noninterest Income. Noninterest income increased $414,000, or 13.8%, from $3.0 million for the year ended September 30, 2011 to $3.4
million for the year ended September 30, 2012. The increase is due primarily to a gain of $324,000 on a life insurance policy during 2012, an increase
in net investment securities gains of $143,000 from $104,000 for 2011 to $247,000 for 2012, an increase in other income of $119,000 from $748,000 for
2011 to $867,000 for 2012 and an increase in commission income of $33,000 from $250,000 for 2011 to $283,000 for 2012. The increase in net securities
gains was due to gains on the trading account securities portfolio and the increase in other income was due primarily to increase in surcharge,
interchange and other fee income sources. These increases and additional gains were partially offset by a decrease in service charges on deposits
accounts of $77,000, which is the Bank’s principal source of noninterest income, a decrease in net gains on sales of loans of $91,000 from $288,000
for 2011 to $197,000 for 2012, and a decrease in earning on life insurance of $25,000 from $314,000 for 2011 to $289,000 for 2012. The decrease in
service charges on deposit accounts was due primarily to a decrease in overdraft fee income and the decrease in net gains on sales of loans was
due primarily to the sale of the Bank’s $1.2 million credit card portfolio in 2011, which resulted in a gain of $104,000 during 2011.
45
Noninterest Expense. Noninterest expenses increased $1.2 million, or 7.1%, from $16.3 million for the year ended September 30, 2011 $17.5
million for the year ended September 30, 2012. The increase was due primarily to increases in compensation and benefits expense of $326,000, data
processing expense of $292,000, advertising expense of $225,000, professional fees of $408,000, occupancy and equipment expense of $79,000, and
other operating expenses of $140,000, which more than offset decreases in FDIC insurance premiums of $107,000 and net losses on foreclosed real
estate of $207,000. The increase in compensation and benefits expense is due primarily to normal salary, wages and benefits increases, plus the
addition of employees as a result of the acquisition of the First Federal branches. The increase in advertising expense was due primarily to a
rebranding and advertising campaign for the Bank’s new ‘look’ and logo that was launched in September 2011. The increases in data processing
and professional fees expenses are due primarily to expenditures associated with the acquisition and integration of the First Federal branches. The
decrease in net losses on foreclosed real estate is due primarily to decreases in write-downs and net operating expenses related to foreclosed
properties during 2012, and a net gain on sales of foreclosed real estate during 2012 as compared to a net loss on sales during 2011.
Income Tax Expense. The Company recognized income tax expense of $1.5 million for the year ended September 30, 2012, for an effective
tax rate of 25.4%, compared to income tax expense of $1.7 million, for an effective tax rate of 29.5%, for the year ended September 30, 2011. The lower
effective tax rate for the year ended September 30, 2012 was due primarily to a higher level of tax exempt income for 2012. See Note 18 of the Notes to
Consolidated Financial Statements beginning on page F-1 of this annual report for additional information regarding income taxes.
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. The Company has implemented an enterprise risk management
structure during 2012 in order to better manage and mitigate these identified and perceived risks.
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.
46
Analysis of Nonperforming and Classified Assets. We consider non-accrual loans, troubled debt restructurings, 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 its fair market value less estimated costs to sell at the date of foreclosure. Holding costs and declines in
fair value after acquisition of the property result in charges against income. See Note 8 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
twenty-six troubled debt restructurings totaling $6.8 million, which were performing according to their terms and on accrual status, as of September
30, 2012. See Note 5 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report for additional information
regarding trouble debt restructurings.
$
(Dollars in thousands)
Non-accrual loans:
Residential real estate
Commercial real estate
Multi-family
Construction
Land and land development
Commercial business
Consumer
Total (1)
Accruing loans past due 90 days or more:
Residential real estate
Commercial real estate
Multi-family
Construction
Land and land development
Commercial business
Consumer
Total
Total non-performing loans
Trouble debt restructurings classified as performing loans:
Residential real estate
Commercial real estate
Multifamily
Commercial business
Consumer
2012
2011
At September 30,
2010
2009
2008
$
2,775
899
–
174
–
66
175
4,089
1,548
3
–
–
–
98
94
1,743
5,832
2,993
1,290
2,356
14
158
$
3,758
1,133
–
174
340
2
215
5,622
603
949
–
–
–
99
61
1,712
7,334
1,499
812
–
–
–
$
2,753
843
–
490
–
207
303
4,596
602
327
–
272
–
137
62
1,400
5,996
–
–
–
–
–
–
$
1,995
1,022
–
461
537
572
145
4,732
128
–
–
228
–
67
119
542
5,274
–
–
–
–
–
–
472
–
–
–
33
119
174
798
678
–
–
–
–
–
175
853
1,651
–
–
–
–
–
–
Total troubled debt restructurings classified as
performing loans
6,811
2,311
Real estate owned
Other non-performing assets
Total non-performing assets
1,481
–
14,124
$
1,028
126
10,799
$
1,331
171
7,498
$
1,589
64
6,927
$
390
146
2,187
$
Total non-performing loans to total loans
Total non-performing loans to total assets
Total non-performing assets to total assets
1.46%
0.91%
2.21%
2.02%
1.37%
2.01%
1.71%
1.17%
1.47%
1.47%
1.10%
1.44%
0.93%
0.72%
0.96%
(1) Total nonaccrual loans at September 30, 2010 includes four trouble debt restructurings totaling $592,000 that were on non-accrual
as of that date.
47
Federal regulations require us to review and classify our assets on a regular basis. In addition, the Office of the Comptroller of the
Currency 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, without establishment of a specific allowance or charge-off, 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 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 investment in classified assets at the dates indicated.
(In thousands)
Special mention assets
Substandard assets (1)
Doubtful assets
Loss assets
Total classified assets
2012
At September 30,
2011
2010
$
$
10,595 $
21,253
1,055
–
32,903 $
6,962 $
25,835
1,317
–
34,114 $
7,610
12,332
3,221
–
23,163
(1)
Includes substandard loans and investment securities.
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, 2012, the Company held eighteen privately-issued CMO and ABS securities with an aggregate amortized cost of $3.0
million and fair value of $3.9 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 an 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
or ABS portfolio. At September 30, 2011, the Company held twenty privately-issued CMO and ABS securities with an aggregate amortized cost of
$6.0 million and fair value of $7.0 million that had been downgraded to a substandard regulatory classification due to a downgrade of the security’s
credit quality rating by various rating agencies.
48
Delinquencies. The following table provides information about delinquencies in our loan portfolio at the dates indicated.
At September 30,
2012
At September 30,
2011
30-89 Days
90 Days or More
30-89 Days
90 Days or More
Number
of
Loans
Principal
Balance
of Loans
Number
of
Loans
Principal
Balance
of Loans
Number
of
Loans
Principal
Balance
of Loans
Number
of
Loans
Principal
Balance
of Loans
88 $
6,400
42 $
4,055
66 $
4,911
28 $
2,191
4
–
–
2
5
39
138 $
120
–
–
50
107
380
7,057
4
–
–
–
3
11
60 $
842
–
–
–
163
176
5,237
4
–
–
1
7
39
117 $
613
–
–
45
1,040
515
7,124
6
–
2
1
3
14
54 $
1,966
–
174
341
100
145
4,917
(Dollars in thousands)
Residential real
estate
Commercial real
estate
Multi-family
Construction
Land and land
development.
Commercial
business
Consumer
Total
At September 30,
2010
30-89 Days
90 Days or More
Number
of
Loans
Principal
Balance
of Loans
Number
of
Loans
25 $
5
1
1
1
6
33
72 $
1,926
653
650
156
40
483
248
4,156
34 $
6
–
6
–
5
13
64 $
Principal
Balance
of Loans
2,604
1,159
–
749
–
343
211
5,066
(Dollars in thousands)
Residential real estate
Commercial real estate
Multi-family
Construction
Land and land development
Commercial business
Consumer
Total
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 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 Allowance Required for Identified Problem Loans. For doubtful loans that are also classified as impaired we establish a specific
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 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.
49
Unallocated 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. There was no unallocated allowance for loan losses at September 30,
2012 and 2011.
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
Total allowance for loan
losses
Amount
$
2012
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
At September 30,
2011
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
Amount
Amount
2010
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
908
2,204
389
52
2
1,084
267
18.51%
44.92
7.93
1.06
0.04
22.10
5.44
47.72% $
22.56
5.97
3.98
3.08
9.04
7.65
833
1,314
604
56
53
1,525
287
17.83%
28.13
12.93
1.20
1.13
32.64
6.14
46.65% $
20.25
6.86
3.34
3.57
11.19
8.14
1,242
600
369
218
62
891
429
32.59%
15.74
9.68
5.72
1.63
23.38
11.26
49.33%
15.45
5.84
7.38
2.60
8.86
10.54
$
4,906
100.00%
100.00% $
4,672
100.00%
100.00% $
3,811
100.00%
100.00%
At September 30,
2009
2008
(Dollars in thousands)
Residential real estate
Commercial real estate
Multi-family
Construction
Land and land development
Commercial business
Consumer
Total allowance for loan losses
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
Amount
1,493
$
271
–
302
258
444
927
3,695
$
40.40%
7.33
–
8.17
6.98
12.02
25.10
100.00%
Amount
622
220
–
–
50
196
641
1,729
51.61% $
13.36
3.50
6.17
3.11
10.25
12.00
100.00% $
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
35.97%
12.73
–
–
2.89
11.34
37.07
100.00%
64.20%
8.74
1.86
4.63
2.69
8.15
9.73
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 the Comptroller of the Currency, in reviewing our loan
portfolio, will not require us to increase our allowance for loan losses. The Office of the Comptroller of the Currency 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.
50
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
Construction
Land and land development
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
2012
Year Ended September 30,
2010
2011
2009
$
$
4,672
1,532
$
3,811
1,605
$
3,695
1,604
$
1,729
819
510
543
85
–
–
33
304
1,475
109
–
–
–
–
2
66
177
1,298
–
651
68
–
8
–
86
287
1,100
79
–
–
–
–
214
63
356
744
–
334
–
–
–
5
964
340
1,643
68
–
–
–
–
–
87
155
1,488
–
580
–
–
–
–
39
209
828
57
–
–
–
–
–
82
139
689
1,836
2008
1,297
1,540
1,085
–
–
–
–
–
153
1,238
–
110
–
–
–
–
20
130
1,108
–
Allowance for loan losses at end of period
$
4,906
$
4,672
$
3,811
$
3,695
$
1,729
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
84.12%
63.70%
63.88%
70.06%
104.72%
1.23%
0.35%
1.29%
0.21%
1.09%
0.42%
1.03%
0.38%
0.98%
0.64%
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 23 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.
51
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.
Market Risk Analysis. An element in our ongoing process is to measure and monitor interest rate risk using a Net Interest Income at Risk
simulation to model the interest rate sensitivity of the balance sheet and to quantify the impact of changing interest rates on the Company. The
model quantifies the effects of various possible interest rate scenarios on projected net interest income over a one-year horizon. The model assumes
a semi-static balance sheet and measures the impact on net interest income relative to a base case scenario of hypothetical changes in interest rates
over twelve months and provides no effect given to any steps that management might take to counter the effect of the interest rate movements. The
scenarios include prepayment assumptions, changes in the level of interest rates, the shape of the yield curve, and spreads between market interest
rates in order to capture the impact from re-pricing, yield curve, option, and basis risks.
Results of our simulation modeling, which assumes an immediate and sustained parallel shift in market interest rates, project that the
Company’s net interest income could change as follows over a one-year horizon, relative to our base case scenario, based on September 30, 2012
financial information. The Company implemented the Net Interest Income at Risk simulation during 2012 and therefore does not have comparable
information for the year ended September 30, 2011.
Immediate Change
in the Level
of Interest Rates
300bp
200bp
100bp
Static
(100)bp
Percent
At September 30, 2012
One Year Horizon
Dollar
Change Change
(Dollars in thousands)
411
$
274
107
-
6
1.80%
1.20
0.47
-
0.03
The Company also has longer term interest rate risk exposure, which may not be appropriately measured by Net Interest Income at Risk
modeling, and therefore uses an Economic Value of Equity (“EVE”) interest rate sensitivity analysis in order to evaluate the impact of its interest
rate risk on earnings and capital. This is measured by computing the changes in net EVE for its cash flows from assets, liabilities and off-balance
sheet items in the event of a range of assumed changes in market interest rates. EVE modeling involves discounting present values of all cash flows
for on and off balance sheet items under different interest rate scenarios and provides no effect given to any steps that management might take to
counter the effect of the interest rate movements. The discounted present value of all cash flows represents the Company’s EVE and is equal to the
market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. The amount of base case EVE and its
sensitivity to shifts in interest rates provide a measure of the longer term re-pricing and option risk in the balance sheet.
52
Results of our simulation modeling, which assumes an immediate and sustained parallel shift in market interest rates, project that
Company’s EVE could change as follows, relative to our base case scenario, based on September 30, 2012 financial information.
At September 30, 2012
Immediate Change
in the Level
of Interest Rates
300bp
200bp
100bp
Static
(100)bp
Economic Value of Equity
Dollar
Amount Change Change
Percent
Dollar
Economic Value of Equity as a
Percent of Present Value of Assets
EVE Ratio
Change
(Dollars in thousands)
$
69,309 $
76,110
82,119
84,299
82,060
(14,990)
(8,189)
(2,180)
-
(2,239)
(17.78)%
(9.71)
(2.59)
-
(2.66)
11.99%
12.70
13.23
13.19
12.67
(120) bp
(49) bp
4 bp
- bp
(52) bp
The models are driven by expected behavior in various interest rate scenarios and many factors besides market interest rates affect the
Company’s net interest income and EVE. For this reason, we model many different combinations of interest rates and balance sheet assumptions to
understand its overall sensitivity to market interest rate changes. Therefore, as with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing tables and it’s recognized that the model outputs are not guarantees
of actual results. 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, in the event of a
change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from
those assumed in calculating the table.
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, 2012, cash and cash equivalents totaled $38.8
million. Securities classified as trading and available-for-sale, amounting to $3.6 million and $152.5 million, respectively, at September 30, 2012,
provide additional sources of liquidity. At September 30, 2012, we had the ability to borrow a total of approximately $108.0 million from the FHLBI, of
which $53.1 million was borrowed and outstanding. See Note 13 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,
2012. The Bank had no outstanding federal funds purchased under the facility at September 30, 2012. See Note 11 of the Notes to Consolidated
Financial Statements beginning on page F-1 of this annual report for additional information regarding federal funds purchased borrowings.
53
At September 30, 2012, the Bank had $55.3 million in commitments to extend credit outstanding. Certificates of deposit due within one year
of September 30, 2012 totaled $110.7 million, or 51.1% 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, 2013. 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 the Comptroller of the Currency (“OCC”) but with prior notice to OCC, cannot exceed net income for that
year to date plus retained net income (as defined) for the preceding two calendar years. At September 30, 2012, the Company had liquid assets of
$1.9 million.
The following tables present certain of our contractual obligations as of September 30, 2012.
(In thousands)
Deferred director fee agreements
Deferred compensation agreements (1)
Operating lease obligations
Repurchase agreements
FHLBI borrowings
Other long-term debt (2)
Total
Total
Less than
One Year
Payments due by period
One to
Three Years
Three to
Five Years
More Than
Five Years
$
$
574 $
175
26
1,329
53,062
2,132
57,298 $
5 $
37
22
1,329
18,062
71
19,256 $
9 $
81
4
–
20,000
151
20,245 $
9 $
57
–
–
15,000
163
15,229 $
551
–
–
–
–
1,747
2,298
(1)
(2)
Includes deferred compensation agreement with a former officer that calls for annual payments of $9,000 until his death.
Represents outstanding principal balance on a $5.0 million loan agreement with another financial institution to finance a retail development
project. The loan calls for 12 interest only monthly payments, followed by 107 monthly payments sufficient to fully amortize the loan over a 20
year period and a balloon payment of all outstanding principal and interest at maturity on July 27, 2022. Since the development is not
completed and the loan is not fully disbursed, future maturities of other long-term debt are based on the amount outstanding under the loan
agreement at September 30, 2012.
54
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 FHLBI 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
Year Ended September 30,
2011
2010
2012
$
(38,331) $
(93,666)
82,466
12,385
– $
(98,147)
71,898
13,229
–
(66,466)
69,891
7,848
securities
25,847
32,204
35,971
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 (decrease) in Federal Home Loan Bank borrowings
Increase other long-term debt
9,596
2,265
–
(43,014)
(33,763)
(9,933)
–
(15,074)
(75)
2,132
6,177
6,941
154
(39,813)
(9,157)
21,465
–
(418)
(14,022)
–
12,356
3,666
20,244
(92,742)
(10,020)
15,345
(1,180)
(418)
11,386
–
Capital Management. The Bank is subject to various regulatory capital requirements administered by the Office of the Comptroller of the
Currency, 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, 2012, 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 27 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 19 of the Notes to
Consolidated Financial Statements beginning on page F-1 of this annual report.
For the year ended September 30, 2012, 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.
55
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,
2012, 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, 2012 is effective.
56
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, 2013 that
have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
OTHER INFORMATION
None.
57
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 sections
captioned “Item 1 – Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Audit Committee” in the Company’s
Proxy Statement for the 2012 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 sections captioned “Director
Compensation” and “Executive Compensation” in the Proxy Statement.
58
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, 2012 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 sections captioned “Transactions with Related Persons” and “Director Independence” in the Proxy Statement.
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information relating to the principal accountant fees and expenses is incorporated herein by reference to the section captioned
“Ratification of the Independent Registered Public Accounting Firm” in the Proxy Statement.
59
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.
Description
3.1
3.2
3.3
4.0
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
21.0
23.0
31.1
31.2
32.0
Articles of Incorporation of First Savings Financial Group, Inc. (1)
Articles of Amendment to the Articles of Incorporation for the Series A Preferred Stock (2)
Bylaws of First Savings Financial Group, Inc. (1)
Specimen Stock Certificate of First Savings Financial Group, Inc. (1)
Amended and Restated Employment Agreement by and among First Savings Financial Group, Inc., First
Savings Bank, F.S.B. and Larry W. Myers, dated October 7, 2009* (3)
Amended and Restated 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* (3)
Amended and Restated Employment Agreement by and among First Savings Financial Group, Inc., First
Savings Bank, F.S.B. and Anthony A. Schoen, dated October 7, 2009* (3)
Amended and Restated Employment Agreement by and among First Savings Financial Group, Inc., First
Savings Bank, F.S.B. and Samuel E. Eckart, dated October 7, 2009* (3)
First Savings Bank, F.S.B. Employee Severance Compensation Plan* (4)
First Savings Bank, F.S.B. Supplemental Executive Retirement Plan* (4)
Securities Purchase Agreement, dated August 11, 2011, between the Company and the Secretary of the
Treasury with respect to the Series A Preferred Stock (2)
Amended and Restated Director Deferred Compensation Agreement * (1)
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.
Incorporated by reference to the exhibits to the Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 17, 2011.
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, 2009.
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, 2008.
(2)
(3)
(4)
60
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 undersigned, thereunto duly authorized.
SIGNATURES
Date: December 31, 2012
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
/s/ Vaughn K. Timberlake
Vaughn K. Timberlake
/s/ Frank N. Czeschin
Frank N. Czeschin
Title
Date
President, Chief Executive Officer
December 31, 2012
and Director
(principal executive officer)
Chief Financial Officer
(principal accounting and financial officer)
December 31, 2012
Chief Operating Officer and Director
December 31, 2012
Executive Vice President and Director
December 31, 2012
Director
Director
Director
Director
Director
Director
Director
December 31, 2012
December 31, 2012
December 31, 2012
December 31, 2012
December 31, 2012
December 31, 2012
December 31, 2012
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 COMPREHENSIVE 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
F-8
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
First Savings Financial Group, Inc.
Clarksville, Indiana
We have audited the accompanying consolidated balance sheets of First Savings Financial Group, Inc. and Subsidiaries as of September 30, 2012
and 2011, and the related consolidated statements of income, comprehensive 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 consolidated 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
audits 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, 2012 and 2011, and the results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the United States of America.
New Albany, Indiana
December 28, 2012
MONROE SHINE & CO., INC. ¨ CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
F-2
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2012 AND 2011
(In thousands, except share and per share data)
2012
2011
ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Total cash and cash equivalents
Trading account securities, at fair value
Securities available for sale, at fair value
Securities held to maturity (fair value of $8,314 in 2012 and $9,690 in 2011)
Loans held for sale
Loans, net of allowance for loan losses of $4,906 in 2012 and $4,672 in 2011
Federal Home Loan Bank stock, at cost
Real estate development and construction
Premises and equipment
Foreclosed real estate
Accrued interest receivable:
Loans
Securities
Cash surrender value of life insurance
Goodwill
Core deposit intangibles
Other assets
Total Assets
LIABILITIES
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Repurchase agreements
Borrowings from Federal Home Loan Bank
Other long-term debt
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 982,880 shares; none issued
Senior Non-Cumulative Perpetual Preferred Stock, Series A, $.01 par value; Authorized 17,120 shares;
issued 17,120 shares; aggregate liquidation preference of $17,120
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 - 212,361 shares (172,333 shares at September 30, 2011)
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
See notes to consolidated financial statements.
F-3
$
27,569 $
11,222
38,791
3,562
152,543
7,848
643
389,067
5,400
4,538
10,907
1,481
1,358
1,054
8,548
7,936
2,413
2,824
18,099
9,104
27,203
-
108,577
9,506
-
354,432
4,400
-
10,444
1,028
1,382
816
8,548
5,940
2,154
2,656
$
638,913 $
537,086
$
50,502 $
443,732
494,234
1,329
53,062
2,132
236
622
4,372
555,987
-
-
25
42,021
39,917
5,609
(1,198)
(682)
(2,766)
82,926
33,426
354,200
387,626
16,403
53,137
-
399
330
2,590
460,485
-
-
25
41,729
35,801
3,354
(1,343)
(942)
(2,023)
76,601
$
638,913 $
537,086
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2012 AND 2011
(In thousands, except share and per share data)
2012
2011
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 available for sale securities
Net gain on trading account securities
Unrealized loss on derivative contract
Net gain on sales of 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
Net loss on foreclosed real estate
Other operating expenses
Total noninterest expense
Income before income taxes
Income tax expense
Net Income
Preferred stock dividends declared
Net Income Available to Common Shareholders
Net income per common share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
$
20,611 $
20,687
3,999
1,222
151
11
25,994
3,476
67
1,132
4,675
21,319
1,532
19,787
1,254
30
217
(39)
197
289
324
283
867
3,422
9,079
1,875
1,343
609
979
368
199
3,012
17,464
5,745
1,458
4,287 $
171
4,116 $
1.90 $
1.85 $
4,315
851
112
18
25,983
3,968
325
1,092
5,385
20,598
1,605
18,993
1,331
104
-
(27)
288
314
-
250
748
3,008
8,753
1,796
1,051
384
571
475
406
2,872
16,308
5,693
1,679
4,014
115
3,899
1.82
1.78
2,163,552
2,230,188
2,144,141
2,189,472
$
$
$
$
See notes to consolidated financial statements.
F-4
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 2012 AND 2011
(In thousands)
Net Income
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the period
Income tax expense
Net of tax amount
Less: reclassification adjustment for realized gains included in net income
Income tax expense
Net of tax amount
Other Comprehensive Income
Comprehensive Income
See notes to consolidated financial statements.
F-5
2012
2011
$
4,287 $
4,014
3,446
(1,172)
2,274
(30)
11
(19)
2,255
769
(305)
464
(104)
35
(69)
395
$
6,542 $
4,409
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2012 AND 2011
Accumulated Unearned
Other
Stock
(In thousands, except share and per share data)
Preferred Common Additional
Stock Stock Paid-in Capital Earnings
Retained Comprehensive Compensation Treasury
Income
and ESOP Stock Total
Balances at October 1, 2010
$
Net income
Change in unrealized gain on securities available for
sale, net of reclassification adjustments and tax
effect
Preferred stock dividends declared
Stock compensation expense
Shares released by ESOP trust
Issuance of preferred stock - 17,120 shares
Stock options exercise - 8,972 shares
Purchase of 54,203 treasury shares
Balances at September 30, 2011
$
Net income
Change in unrealized gain on securities available for
sale, net of reclassification adjustments and tax
effect
Preferred stock dividends declared
Stock compensation expense
Shares released by ESOP trust
Purchase of 40,028 treasury shares
- $
-
25 $
24,310 $ 31,889 $
2,959 $
(2,703) $ (1,329) $55,151
-
-
4,014
-
-
- 4,014
-
-
-
-
395
-
-
395
(115)
199
-
85
13
17,120
-
15
-
-
-
-
-
-
(115)
261
-
460
157
-
255
-
- 17,120
104
119
-
(798)
(798)
-
-
-
-
25 $
41,729 $ 35,801 $
3,354 $
(2,285) $ (2,023) $76,601
-
-
-
-
-
-
-
4,287
-
-
- 4,287
-
-
185
107
-
-
2,255
(171)
-
-
-
-
-
-
-
-
-
- 2,255
-
(171)
261
-
446
144
-
251
-
(743)
(743)
-
-
-
-
- $
-
-
-
-
-
-
Balances at September 30, 2012
$
- $
25 $
42,021 $ 39,917 $
5,609 $
(1,880) $ (2,766) $82,926
See notes to consolidated financial statements.
F-6
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2012 AND 2011
(In thousands)
2012
2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
4,287 $
4,014
Provision for loan losses
Depreciation and amortization
Amortization of premiums and accretion of discounts on securities, net
Increase in trading account securities
Loans originated for sale
Proceeds on sales of loans
Net gain on sales of loans
Net realized and unrealized loss on foreclosed real estate
Net gain on sales of available for sale 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
(Increase) decrease in accrued interest receivable
Decrease in accrued interest payable
Change in other assets and liabilities, net
Net Cash Provided By Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale
Proceeds from sales of securities available for sale
Proceeds from maturities of securities available for sale
Proceeds from maturities of securities held to maturity
Principal collected on mortgage-backed securities
Net increase in loans
Purchase of Federal Home Loan Bank stock
Proceeds from redemption of Federal Home Loan Bank stock
Proceeds from sale of foreclosed real estate
Investment in real estate development and construction
Purchase of premises and equipment
Net cash received in acquisition of First Federal Savings Bank branches
Net Cash Provided By (Used In) Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits
Net decrease in repurchase agreements
Decrease in Federal Home Loan Bank line of credit
Proceeds from Federal Home Loan Bank advances
Repayment of Federal Home Loan Bank advances
Proceeds from other long-term debt
Net increase in advance payments by borrowers for taxes and insurance
Proceeds from the issuance of preferred stock
Exercise of stock options
Purchase of treasury stock
Dividends paid on preferred stock
Net Cash Provided By (Used In) Financing Activities
Net Increase in Cash and Cash Equivalents
Cash and cash equivalents at beginning of period
1,532
996
384
(3,562)
(10,087)
9,641
(197)
39
(30)
39
(324)
(289)
160
664
(144)
(185)
1,404
4,328
(76,777)
2,265
12,698
620
22,125
(4,732)
(1,000)
-
468
(4,538)
(856)
80,632
30,905
(9,933)
(15,074)
-
100,000
(100,075)
2,132
292
-
-
(743)
(244)
(23,645)
11,588
27,203
1,605
903
(126)
-
(9,839)
13,229
(288)
223
(104)
27
-
(314)
565
677
194
(28)
269
11,007
(48,970)
7,095
25,908
365
12,108
(14,540)
(351)
121
1,200
-
(1,562)
-
(18,626)
21,465
(418)
(6,922)
128,000
(135,100)
-
78
17,120
46
(725)
-
23,544
15,925
11,278
Cash and Cash Equivalents at End of Period
$
38,791 $
27,203
See notes to consolidated financial statements.
F-7
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 AND 2011
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
First Savings Financial Group, Inc. (the “Company”) is the thrift holding company of First Savings Bank, F.S.B. (the “Bank”), a wholly-
owned subsidiary. The Bank is a federally-chartered savings bank which provides a variety of banking services to individuals and
business customers through fourteen locations in southern Indiana. The Bank attracts deposits primarily from the general public and uses
those funds, along with other borrowings, primarily to originate residential mortgage, commercial mortgage, construction, commercial
business and consumer loans, and to a lesser extent, to invest in mortgage-backed securities and other securities.
The Bank has three-wholly owned subsidiaries: First Savings Investments, Inc., a Nevada corporation that manages a securities portfolio,
FFCC, Inc., which is an Indiana corporation that participates in commercial real estate development and leasing, and Southern Indiana
Financial Corporation, which is currently inactive.
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 accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America
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.
A majority of the Bank’s loan portfolio consists of single-family residential and commercial real estate loans in the southern Indiana area.
Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio and the recovery of the carrying amount of
foreclosed real estate are susceptible to changes in local market conditions.
F-8
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(1 - continued)
Use of Estimates - continued
While management uses available information to recognize losses on loans and foreclosed real estate, further reductions in the carrying
amounts of loans and foreclosed assets may be necessary based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review the estimated losses on loans and foreclosed real estate. Such
agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of
their examination. Because of these factors, it is reasonably possible the estimated losses on loans and foreclosed real estate may change
materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
Investment Securities
Trading Account Securities: Securities purchased with the intention of recognizing short-term profits or which are actively bought and
sold are classified as trading account securities and reported at fair value. The net realized and unrealized gains and losses on trading
account securities are reported in other noninterest income. Realized gains and losses on trading account securities are determined using
the specific identification method.
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 (“CMOs”), privately-issued
asset-backed securities (“ABSs”) 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. CMOs and ABSs 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 enterprises 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 Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value.
Investments in non-marketable equity securities such as Federal Home Loan Bank stock are carried at cost. Impairment testing on these
investments is based on applicable accounting guidance and the cost basis is reduced when impairment is deemed to be other-than-
temporary.
F-9
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(1 - continued)
Derivative Financial Instruments
The Company applies Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815,
Derivatives and Hedging, in accounting for derivative financial instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. Derivative financial instruments are recognized in the consolidated balance sheet at fair value.
Mortgage Banking Activities
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market value.
Aggregate market value is determined based on the quoted prices under a “best efforts” sales agreement with a third party. Net unrealized
losses are recognized through a valuation allowance by charges to income. Realized gains on sales of mortgage loans are included in
noninterest income. Mortgage loans are sold with servicing released.
Commitments to originate mortgage loans held for sale are considered derivative financial instruments to be accounted for at fair value.
The Bank’s mortgage loan commitments subject to derivative accounting are fixed rate mortgage loan commitments at market rates when
initiated. At September 30, 2012, the Bank had commitments to originate $262,000 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.
Loans and Allowance for Loan Losses
Loans Held for Investment
Loans are stated at unpaid principal balances, less net deferred loan fees and the allowance for loan losses. The Company grants real
estate mortgage, commercial business and consumer loans. A substantial portion of the loan portfolio is represented by residential and
commercial mortgage loans to customers in southern Indiana. The ability of the Company 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.
Nonaccrual Loans
The recognition of income on a loan is discontinued and previously accrued interest is reversed, when interest or principal payments
become 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 Company 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. Interest income on impaired loans is recognized using the cost recovery method, unless the
likelihood of further loss is considered remote.
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, which generally requires that the borrower demonstrate a period of
performance of at least six consecutive months.
F-10
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(1 - continued)
Loans and Allowance for Loan Losses - continued
Loan Charge-Offs
For portfolio segments other than consumer loans, the Company’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, depreciation of the underlying collateral, the loan’s classification as a loss by regulatory examiners, or for
other reasons. A partial charge-off is recorded on a loan when the uncollectibility of a portion of the loan has been confirmed, such as
when a loan is discharged in bankruptcy, the collateral is liquidated, a loan is restructured at a reduced principal balance, or other
identifiable events that lead management to determine the full principal balance of the loan will not be repaid. A specific reserve is
recognized as a component of the allowance for estimated losses on loans individually evaluated for impairment. Partial charge-offs on
nonperforming and impaired loans are included in the Company’s historical loss experience used to estimate the general component of the
allowance for loan losses as discussed below. Specific reserves are not considered charge-offs in management’s analysis of the allowance
for loan losses because they are estimates and the outcome of the loan relationship is undetermined. At September 30, 2012, the Company
had one outstanding loan of $480,000 on which a partial charge-off of $219,000 had been recorded. The Company had no loans
outstanding at September 30, 2011 on which a partial charge-off had been recorded.
Consumer loans are typically charged off at 90 days past due, or earlier if deemed uncollectible, unless the loans are in the process of
collection. Overdrafts are charged off after 45 days past due. Charge-offs are typically recorded on loans secured by real estate when the
property is foreclosed upon.
Allowance for Loan Losses
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 at least a quarterly basis by management and is based upon management’s periodic review
of the collectability 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 individually evaluated for
impairment or loans otherwise classified as doubtful, substandard, or special mention. For such loans that are 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-impaired loans and is based on historical loss experience adjusted for qualitative factors. The historical
loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most
recent 36-month period. This actual loss experience is then adjusted for qualitative factors based on the risks present for each portfolio
segment. The economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of
and trends in charge-offs and recoveries; trends in the volume and term of new loan originations; national and local economic trends and
conditions; changes in lending policies, procedures and practices; changes in the experience and ability of lending management and other
staff; changes in the quality and depth of the internal loan review process; trends in collateral valuation in the Company’s lending area;
and other factors as determined by management.
F-11
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(1 - continued)
The following portfolio segments are considered in the allowance for loan loss analysis: residential real estate, commercial real estate,
multi-family residential real estate, construction, land and land development, commercial business and consumer.
Residential real estate loans primarily consist of loans to individuals for the purchase or refinance of their primary residence, with a smaller
portion of the segment secured by non-owner-occupied residential investment properties. The risks associated with residential real estate
loans are closely correlated to the local housing market and general economic conditions, as repayment of the loans is primarily dependent
on the borrower’s or tenant’s personal cash flow and employment status.
Commercial real estate loans are comprised of loans secured by various types of collateral including office buildings, warehouses, retail
space and mixed use buildings located in the Company’s primary lending area. Risks related to commercial real estate lending are related to
the market value of the property taken as collateral, the underlying cash flows and general economic condition of the local real estate
market. Repayment of these loans is generally dependent on the ability of the borrower to attract tenants at lease rates that provide for
adequate debt service and can be impacted by local economic conditions which impact vacancy rates. The Company generally obtains
loan guarantees from financially capable parties for commercial real estate loans.
Multi-family residential real estate loans primarily consist of loans secured by apartment buildings and other multi-tenant developments.
Repayment of these loans is primarily dependent on the borrower’s ability to attract tenants and collect rents that provide for adequate
debt service. The risks associated with these loans are closely correlated to the local housing market and general economic conditions.
The Company’s construction loan portfolio consists of single-family residential properties, multi-family properties and commercial projects,
and includes both owner-occupied and speculative investment properties. Risks inherent in construction lending are related to the market
value of the property held as collateral, the cost and timing of constructing or improving a property, the borrower’s ability to use funds
generated by a project to service a loan until a project is completed, movements in interest rates and the real estate market during the
construction phase, and the ability of the borrower to obtain permanent financing.
Land and land development loans primarily consist of loans secured by farmland and vacant land held for long-term investment or
development. The risks associated with land and land development loans are related to the market value of the property taken as collateral
and the underlying cash flows for loans secured by farmland, and general economic conditions.
Commercial business loans includes lines of credit to businesses, term loans and letters of credit secured by business assets such as
equipment, accounts receivable, inventory, or other assets excluding real estate and are generally made to finance capital expenditures or
fund operations. Commercial loans contain risks related to the value of the collateral securing the loan and the repayment is primarily
dependent upon the financial success and viability of the borrower. As with commercial real estate loans, the Company generally obtains
loan guarantees from financially capable parties for commercial business loans.
Consumer loans consist primarily of home equity lines of credit and other loans secured by junior liens on the borrower’s personal
residence, home improvement loans, automobile and truck loans, boat loans, mobile home loans, loans secured by savings deposits and
other personal loans. The risks associated with these loans are related to the local housing market and local economic conditions including
the unemployment level.
There were no significant changes to the Company’s accounting policies or methodology used to estimate the allowance for loan losses
during the years ended September 30, 2012 and 2011.
F-12
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(1 - continued)
Loans and Allowance for Loan Losses – continued
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that the Company 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.
Values for collateral dependent loans are generally based on appraisals obtained from independent licensed real estate appraisers, with
adjustments applied for estimated costs to sell the property, costs to complete unfinished or repair damaged property and other known
defects. New appraisals are generally obtained for all significant properties when a loan is identified as impaired. Generally, a property is
considered significant if the value of the property is estimated to exceed $250,000. Subsequent appraisals are obtained as needed or if
management believes there has been a significant change in the market value of the property. In instances where it is not deemed
necessary to obtain a new appraisal, management would base its impairment and allowance for loan loss analysis on the original appraisal
with adjustments for current conditions based on management’s assessment of market factors and management’s inspection of the
property.
Troubled Debt Restructurings
The modification of a loan is considered to be a troubled debt restructuring (TDR) if the debtor is experiencing financial difficulties and the
Company grants a concession to the debtor that it would not otherwise consider. By granting the concession, the Company expects to
obtain more cash or other value from the debtor, or to increase the probability of receipt, than would be expected by not granting the
concession. The concession may include, but is not limited to, reduction of the stated interest rate of the loan, reduction of accrued
interest, extension of the maturity date or reduction of the face amount of the debt. A concession will be granted when, as a result of the
restructuring, the Company does not expect to collect all amounts due, including interest at the original stated rate. A concession may also
be granted if the debtor is not able to access funds elsewhere at a market rate for debt with similar risk characteristics as the restructured
debt. The Company’s determination of whether a loan modification is a TDR considers the individual facts and circumstances surrounding
each modification.
A TDR can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accrual status, depending on the individual
facts and circumstances of the borrower. Generally, a nonaccrual loan that is restructured in a TDR remains on nonaccrual status for a
period of at least six months following the restructuring to ensure that the borrower performs in accordance with the restructured terms
including consistent and timely payments.
Real Estate Development and Construction
Real estate that is developed and on which buildings are constructed for the purpose of leasing or sale to third parties by the Company is
stated at cost, including interest capitalized during the construction period, 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.
F-13
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(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 Company has taken physical possession, regardless of whether formal foreclosure
proceedings have taken place.
At the time of foreclosure, foreclosed real estate is recorded at its fair value less estimated costs to sell, 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.
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.
F-14
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(1 - continued)
Benefit Plans
The Bank provides a contributory defined contribution plan available to all eligible employees. The Company established a leveraged
employee stock ownership plan on October 6, 2008 that includes substantially all employees. The Company accounts for the employee
stock ownership plan in accordance with ASC Topic 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
The Company has adopted the fair value based method of accounting for stock-based compensation prescribed in ASC Topic 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.
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.
F-15
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(1 - continued)
Advertising Costs
Advertising costs are charged to operations when incurred.
Comprehensive Income
Comprehensive income consists of reported net income and other comprehensive income. Other comprehensive income refers to revenue,
expenses, gains and losses that are recorded as an element of equity but are excluded from reported net income. Other comprehensive
income includes changes in the unrealized gains and losses on securities available for sale.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Recent Accounting Pronouncements
The following are summaries of recently issued accounting pronouncements that impact the accounting and reporting practices of the
Company:
In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements by U.S. GAAP and IFRSs. The amendments in this ASU generally represent clarifications of FASB ASC Topic 820, but also
include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value
measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing
information about fair value measurements in accordance with U.S. GAAP and IFRSs. The amendments in this ASU are to be applied
prospectively. For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2011. Early
application by public entities is not permitted. The adoption of this ASU did not have any impact on the Company’s consolidated financial
position or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, Amendments to Topic 220, Comprehensive Income. Under the amendments in this ASU,
an entity has the option to present the total of comprehensive income, the components of net income, and the components of other
comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In
both choices, an entity is required to present each component of net income along with total net income, each component of other
comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU
eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders'
equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of
other comprehensive income must be reclassified to net income. The amendments in this ASU should be applied retrospectively. For public
entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early
adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition
disclosures. The adoption of this ASU did not have any impact on the Company’s consolidated financial position or results of operations.
ASU No. 2011-12 issued in December 2011 deferred the effective date of ASU No. 2011-05 related to the presentation of reclassifications of
items out of accumulated other comprehensive income. All other requirements of ASU No. 2011-05 were not affected by ASU No. 2011-12.
F-16
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(1 - continued)
In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210). The update requires an entity to disclose information
about offsetting and related arrangements to enable users of the financial statements to understand the effect of netting arrangements on
the entity’s financial position. The scope includes derivatives, sale and repurchase agreements and reverse sale and repurchase
agreements, and securities borrowing and securities lending arrangements. The amendments in the update are effective for annual
reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods, with disclosures required by the
amendments provided retrospectively for all comparative periods presented. The adoption of this update is not expected to have any
impact on the Company’s consolidated financial position or results of operations.
In October 2012, the FASB issued ASU No. 2012-06, Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition
Date as a Result of a Government-Assisted Acquisition of a Financial Institution. The update indicates that when a reporting entity
initially recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and subsequently a
change in the cash flows expected to be collected on the indemnification asset occurs, the reporting entity should subsequently account
for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification.
Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (that is, the lesser of the
term of the indemnification agreement and the remaining life of the indemnified assets). The amendments in the update are effective for
fiscal years, and interim periods within those years, beginning on or after December 15, 2012, and should be applied prospectively to any
new indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption. Early
adoption is permitted. The adoption of this update is not expected to have any impact on the Company’s consolidated financial position or
results of operations.
F-17
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(2) ACQUISITION OF BRANCHES
The Company acquired the Indiana branch offices of Elizabethtown, Kentucky-based First Federal Savings Bank of Elizabethtown, Inc.
(“First Federal”) on July 6, 2012, pursuant to an Agreement to Purchase Assets and Assume Liabilities dated February 8, 2012 (the
“Agreement”). The offices are located in Corydon, Elizabeth, Georgetown and Lanesville, Indiana. The Company has consolidated the
operations of the acquired Corydon and Georgetown offices with its existing Corydon and Georgetown offices because of their close
proximities. The acquisition expanded the Company’s presence in Harrison and Floyd Counties, Indiana, and 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 First
Federal.
Pursuant to the terms of the Agreement, the Company assumed certain deposit and other liabilities and purchased certain performing
loans, real estate and other assets associated with the four First Federal banking offices. The transaction was accounted for using the
purchase method of accounting. Under the purchase method of accounting, the purchase price was 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 $2.0 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
Loans, net
Premises and equipment
Goodwill arising in the acquisition
Core deposit intangible
Other assets
Total assets acquired
Deposit accounts
Other liabilities
Total liabilities assumed
(In thousands)
$
$
$
$
80,632
32,408
596
1,996
566
372
116,570
116,541
29
116,570
In accounting for the acquisition, $566,000 was assigned to a core deposit intangible which is amortized over a weighted-average estimated
economic life of 11.3 years. It is not anticipated that the core deposit intangible will have a significant residual value. The $2.0 million of
goodwill arising in the acquisition is deductible for income tax purposes.
ASC Topic 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. No loans with evidence of deterioration of credit quality were acquired in
the acquisition. The gross contractual amount receivable from the acquired loans was $30.4 million and the fair value of the acquired loans
was $32.4 million at the acquisition date. All contractual cash flows from the acquired loans were expected to be collected at the acquisition
date.
F-18
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(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 are
interest-bearing. The average amount of those reserve balances was approximately $2.8 million and $1.8 million for the years ended
September 30, 2012 and 2011, respectively.
(4) INVESTMENT SECURITIES
Investment securities have been classified according to management’s intent.
Trading Account Securities
On May 31, 2012, the Company invested in a managed brokerage account that invests in small and medium lot, investment grade municipal
bonds. The brokerage account is managed by an investment advisory firm registered with the U.S. Securities and Exchange Commission.
At September 30, 2012, trading account securities recorded at fair value totaled $3.6 million, comprised of investment grade municipal
bonds. During the year ended September 30, 2012, the Company reported net gains on trading account securities of $217,000, including net
realized gains on the sale of securities of $165,000 and net unrealized gains on securities still held as of the balance sheet date of $52,000.
Securities Available for Sale and Held to Maturity
The amortized cost of securities available for sale and held to maturity and their appropriate fair values are as follows:
(In thousands)
September 30, 2012:
Securities available for sale:
Agency bonds and notes
Agency mortgage-backed
Agency CMO
Privately-issued CMO
Privately-issued ABS
Municipal
Subtotal – debt securities 143,596
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Fair
Value
$
15,940 $
42,255
17,186
4,283
5,797
58,135
143,596
124 $
1,165
358
1,006
1,481
4,838
8,972
- $
-
3
-
51
40
94
-
16,064
43,420
17,541
5,289
7,227
62,933
152,474
69
Equity securities
-
69
Total securities available for sale
$
143,596 $
9,041 $
94 $
152,543
Securities held to maturity:
Agency mortgage-backed
Municipal
Total securities held to maturity
September 30, 2011:
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
$
$
$
1,342 $
6,506
7,848 $
118 $
348
466 $
- $
-
- $
1,460
6,854
8,314
12,762 $
17,719
25,368
4,414
5,623
37,344
103,230
104 $
590
330
417
1,118
2,915
5,474
- $
-
7
127
49
-
183
12,866
18,309
25,691
4,704
6,692
40,259
108,521
-
56
-
56
Total securities available for sale
$
103,230 $
5,530 $
183 $
108,577
Securities held to maturity:
Agency mortgage-backed
Municipal
Total securities held to maturity
2,337 $
7,169
184 $
-
9,506 $
184 $
- $
-
- $
2,521
7,169
9,690
$
$
F-19
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(4 – continued)
The amortized cost and fair value of available for sale and held to maturity debt securities as of September 30, 2012 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
Asset backed securities
Mortgage-backed securities
Available for Sale
Held to Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
750 $
2,731
8,333
62,261
74,075
-
21,469
5,797
42,255
751 $
2,823
8,961
66,462
78,997
69
22,830
7,227
43,420
525 $
2,405
2,108
1,468
6,506
-
-
-
1,342
539
2,492
2,220
1,603
6,854
-
-
-
1,460
$
143,596 $
152,543 $
7,848 $
8,314
Information pertaining to securities with gross unrealized losses at September 30, 2012, 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 CMO
Privately-issued ABS
Municipal obligations
Total less than twelve months
Continuous loss position more than twelve months:
Privately-issued ABS
Total more than twelve months
Total securities available for sale
Number
of Investment
Positions
Fair
Value
Gross
Unrealized
Losses
1 $
1
4
6
1
1
483 $
113
2,339
2,935
63
63
7 $
2,998 $
(3)
(6)
(40)
(49)
(45)
(45)
(94)
At September 30, 2012, the Company did not have any securities held to maturity with an unrealized loss.
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 Company to retain its
investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
F-20
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(4 – continued)
The total available for sale debt securities in loss positions at September 30, 2012 had depreciated approximately 3.0% from the Company’s
amortized cost basis and are fixed and variable rate securities with a weighted-average yield of 9.39% and a weighted-average coupon rate
of 4.49% at September 30, 2012.
U.S. government agency CMOs and municipal bonds in loss positions at September 30, 2012 had depreciated approximately 1.5% from the
Company’s amortized cost basis as of September 30, 2012. All of the agency and municipal securities are issued by U.S. government-
sponsored enterprises and municipal governments, and are generally secured by first mortgage loans and municipal project revenues.
The Company evaluates the existence of a potential credit loss component related to the decline in fair value of the privately-issued CMO
and ABS portfolios each quarter using an independent third party analysis. At September 30, 2012, the Company held eighteen privately-
issued CMO and ABS securities acquired in a 2009 bank acquisition with an aggregate carrying value of $3.0 million and fair value of $3.9
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.
At September 30, 2012, the two privately-issued ABS securities in loss positions had depreciated approximately 22.4% from the Company’s
carrying value and include securities collateralized by residential mortgage loans and residential home equity lines of credits. These two
securities had an aggregate fair value of $176,000 and an aggregate unrealized loss of $51,000 at September 30, 2012 and were rated below
investment grade by a nationally recognized statistical rating organization (“NRSRO”). Based on the independent third party analysis of
the expected cash flows, management has determined that the declines in value for these securities are temporary and, as a result, no other-
than-temporary impairment has been recognized on the privately-issued CMO and ABS portfolios. While the Company did not recognize a
credit-related impairment loss at September 30, 2012, additional deterioration in market and economic conditions may have an adverse
impact on the credit quality in the future and therefore, require a credit-related impairment charge.
The unrealized losses on agency securities and municipal bonds 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.
During the year ended September 30, 2012, the Company realized gross gains on sales of available for sale U.S. government agency notes
of $18,000 and municipal bonds of $12,000. The Company realized gross gains on sales of available for sale U.S. government agency
mortgage-backed securities of $9,000, U.S. government agency mortgage-backed securities of $27,000 and municipal bonds of $68,000 for
the year ended September 30, 2011.
During the year ended September 30, 2011, U.S. government agency mortgage-backed securities with total amortized costs of $145,000 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 a gross realized gain of $10,000 was recognized for the year ended
September 30, 2011.
F-21
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(4 – continued)
During the year ended September 30, 2011, municipal bonds with a total fair value at the date of transfer of $7.4 million were transferred
from available for sale to the held to maturity classification due to a change in management’s intent because of balance sheet management
considerations.
Certain available for sale debt securities were pledged under repurchase agreements during the years ended September 30, 2012 and 2011,
and may be pledged to secure federal funds borrowings and Federal Home Loan Bank (“FHLB”) borrowings. (see Notes 11, 12 and 13).
(5) LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at September 30, 2012 and 2011 consisted of the following:
(In thousands)
Real estate mortgage:
1-4 family residential
Commercial
Multifamily residential
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
$
2012
2011
190,958 $
90,290
23,879
10,748
5,182
12,320
36,189
18,294
8,219
4,114
400,193
382
(6,602)
(4,906)
169,353
73,513
24,909
8,002
4,144
12,947
40,628
15,210
9,827
4,514
363,047
558
(4,501)
(4,672)
Loans, net
$
389,067 $
354,432
Mortgage loans serviced for the benefit of others amounted to $189,000 and $241,000 at September 30, 2012 and 2011, respectively. No
mortgage servicing rights have been capitalized since the year ended September 30, 1999.
F-22
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(5 – continued)
The following table provides the components of the recorded investment in loans for each portfolio segment as of September 30, 2012:
Residential
Real Estate
Commercial
Real Estate Multifamily Construction
Land & Land
Development
Commercial
Business
Consumer Total
(In thousands)
Recorded Investment in Loans:
Principal loan balance
Accrued interest receivable
Net deferred loan origination fees and costs
$
190,958 $
90,290 $
23,879 $
9,328 $
12,320 $
36,189 $
30,627 $393,591
691
502
305
(75)
69
(6)
21
(41)
43
(5)
128
101
1,358
(13)
20
382
Recorded investment in loans
$
192,151 $
90,520 $
23,942 $
9,308 $
12,358 $
36,304 $
30,748 $395,331
Recorded Investment in Loans as Evaluated for
Impairment:
Individually evaluated for impairment
$
2,775 $
899 $
- $
174 $
- $
66 $
175 $
4,089
Collectively evaluated for impairment
188,671
89,425
23,942
9,134
12,358
36,238
30,537 390,305
Acquired with deteriorated credit quality
705
196
-
-
-
-
36
937
Recorded investment in loans
$
192,151 $
90,520 $
23,942 $
9,308 $
12,358 $
36,304 $
30,748 $395,331
F-23
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(5 – continued)
The following table provides the components of the recorded investment in loans for each portfolio segment as of September 30, 2011:
Residential
Real Estate
Commercial
Real Estate Multifamily Construction
Land & Land
Development
Commercial
Business
Consumer Total
(In thousands)
Recorded Investment in Loans:
Principal loan balance
Accrued interest receivable
Net deferred loan origination fees and costs
$
169,353 $
73,513 $
24,909 $
7,645 $
12,947 $
40,628 $
29,551 $358,546
622
619
335
(34)
84
(3)
18
(6)
59
(6)
148
116
1,382
(44)
32
558
Recorded investment in loans
$
170,594 $
73,814 $
24,990 $
7,657 $
13,000 $
40,732 $
29,699 $360,486
Recorded Investment in Loans as Evaluated for
Impairment:
Individually evaluated for impairment
$
3,758 $
1,133 $
- $
174 $
340 $
2 $
215 $
5,622
Collectively evaluated for impairment
166,427
72,100
24,990
7,483
12,660
40,730
29,444 353,834
Acquired with deteriorated credit quality
769
581
-
-
-
-
40
1,390
Recorded investment in loans
$
170,954 $
73,814 $
24,990 $
7,657 $
13,000 $
40,732 $
29,699 $360,846
F-24
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(5 – continued)
An analysis of the allowance for loan losses as of and for the year ended September 30, 2012 is as follows:
Residential
Real Estate
Commercial
Real Estate Multifamily Construction
Land & Land
Development
Commercial
Business
Consumer Total
(In thousands)
Changes in Allowance for Loan Losses:
Beginning balance
Provisions
Charge-offs
Recoveries
$
833 $
476
(510)
109
1,314 $
1,433
(543)
-
604 $
(130)
(85)
-
Ending balance
$
908 $
2,204 $
389 $
Ending Allowance Balance Attributable to
Loans:
Individually evaluated for impairment
$
- $
60 $
- $
Collectively evaluated for impairment
908
2,144
389
Acquired with deteriorated credit quality
-
-
-
Ending balance
$
908 $
2,204 $
389 $
56 $
(4)
-
-
52 $
- $
52
-
52 $
53 $
(51)
-
-
1,525 $
(410)
(33)
2
287 $ 4,672
218 1,532
(304) (1,475)
177
66
2 $
1,084 $
267 $ 4,906
- $
2
-
- $
14 $
74
1,084
253 4,832
-
-
-
2 $
1,084 $
267 $ 4,906
F-25
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(5 – continued)
An analysis of the allowance for loan losses as of and for the year ended September 30, 2011 is as follows:
Residential
Real Estate
Commercial
Real Estate Multifamily Construction
Land & Land
Development
Commercial
Business
Consumer Total
(In thousands)
Changes in Allowance for Loan Losses:
Beginning balance
Provisions
Charge-offs
Recoveries
$
1,242 $
163
(651)
79
600 $
782
(68)
-
369 $
235
-
-
218 $
(154)
(8)
-
62 $
(9)
-
-
891 $
506
(86)
214
429 $ 3,811
82 1,605
(287) (1,100)
356
63
Ending balance
$
833 $
1,314 $
604 $
56 $
53 $
1,525 $
287 $ 4,672
Ending Allowance Balance Attributable to
Loans:
Individually evaluated for impairment
$
84 $
70 $
- $
Collectively evaluated for impairment
749
1,244
604
Acquired with deteriorated credit quality
-
-
-
Ending balance
$
833 $
1,314 $
604 $
- $
56
-
56 $
- $
- $
31 $
185
53
1,525
256 4,487
-
-
-
-
53 $
1,525 $
287 $ 4,672
F-26
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(5 – continued)
The following table presents impaired loans individually evaluated for impairment as of and for the year ended September 30, 2012. The
Company did not recognize any interest income on impaired loans for the year ended September 30, 2012.
Loans with no related allowance recorded:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
Loans with an allowance recorded:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
Total:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
(In thousands)
$
2,775 $
745
-
174
-
66
97
3,161 $
772
-
174
-
65
99
- $
-
-
-
-
-
-
2,896
1,015
-
174
272
46
102
$
3,857 $
4,271 $
- $
4,505
$
$
$
- $
154
-
-
-
-
78
- $
146
-
-
-
-
78
- $
60
-
-
-
-
14
232 $
224 $
74 $
2,775 $
899
-
174
-
66
175
3,161 $
918
-
174
-
65
177
- $
60
-
-
-
-
14
125
214
-
-
-
-
118
457
3,021
1,229
-
174
272
46
220
$
4,089 $
4,495 $
74 $
4,962
F-27
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(5 – continued)
The following table presents impaired loans individually evaluated for impairment as of and for the year ended September 30, 2011. The
Company did not recognize any interest income on impaired loans for the year ended September 30, 2011.
Loans with no related allowance recorded:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
Loans with an allowance recorded:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
Total:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
(In thousands)
$
3,584 $
898
-
174
340
2
134
3,953 $
899
-
174
346
2
136
- $
-
-
-
-
-
-
2,690
950
-
279
295
62
160
$
5,132 $
5,510 $
- $
4,436
$
174 $
235
-
-
-
-
81
175 $
235
-
-
-
-
81
84 $
70
-
-
-
-
31
$
490 $
491 $
185 $
$
3,758 $
1,133
-
174
340
2
215
4,128 $
1,134
-
174
346
2
217
84 $
70
-
-
-
-
31
409
351
-
84
-
3
99
946
3,099
1,301
-
363
295
65
259
$
5,622 $
6,001 $
185 $
5,382
F-28
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(5 – continued)
Nonperforming loans consists of nonaccrual loans and loans over 90 days past due and still accruing interest. The following table presents the
recorded investment in nonperforming loans at September 30, 2012 and 2011:
At September 30, 2012
At September 30, 2011
Loans 90+
Days
Past Due
Still Accruing
Nonaccrual
Loans
Total
Nonperforming
Loans
Nonaccrual
Loans
(In thousands)
Loans 90+
Days
Past Due
Still Accruing
Total
Nonperforming
Loans
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
$
2,775 $
899
-
174
-
66
175
1,548 $
3
-
-
-
98
94
4,323 $
902
-
174
-
164
269
3,758 $
1,133
-
174
340
2
215
603 $
949
-
-
-
99
61
Total
$
4,089 $
1,743 $
5,832 $
5,622 $
1,712 $
4,361
2,082
-
174
340
101
276
7,334
F-29
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(5 – continued)
The following table presents the aging of the recorded investment in past due loans at September 30, 2012:
30-59 Days
60-89 Days
Past Due
Past Due
90+ Days
Past Due
Total
Past Due Current
Total
Loans
(In thousands)
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
$
4,636 $
20
-
-
51
109
286
1,926 $
90
-
-
-
-
98
3,754 $
833
-
-
-
164
174
10,316 $
943
-
-
51
273
558
181,835 $
89,577
23,942
9,308
12,307
36,031
30,190
192,151
90,520
23,942
9,308
12,358
36,304
30,748
Total
$
5,102 $
2,114 $
4,925 $
12,141 $
383,190 $
395,331
The following table presents the aging of the recorded investment in past due loans at September 30, 2011:
30-59 Days
60-89 Days
Past Due
Past Due
90+ Days
Past Due
Total
Past Due Current
Total
Loans
(In thousands)
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
$
4,145 $
216
-
-
47
122
246
842 $
400
-
-
-
932
274
2,213 $
2,003
-
174
341
101
147
7,200 $
2,619
-
174
388
1,155
667
163,754 $
71,195
24,990
7,483
12,612
39,577
29,032
170,954
73,814
24,990
7,657
13,000
40,732
29,699
Total
$
4,776 $
2,448 $
4,979 $
12,203 $
348,643 $
360,846
F-30
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(5 – continued)
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:
current financial information, public information, historical payment experience, credit documentation, and current economic trends, among other
factors. The Company classifies loans based on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings:
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected,
these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future
date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are
characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and
improbable.
Loss: Loans classified as loss are considered uncollectible and of such little value that their continuance on the Company’s books as an asset,
without establishment of a specific valuation allowance or charge-off, is not warranted.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.
The following table presents the recorded investment in loans by risk category as of the date indicated:
September 30, 2012:
Pass
Special Mention
Substandard
Doubtful
Loss
Residential
Real Estate
Commercial
Real Estate Multifamily Construction
Land and Land
Development
Commercial
Business
Consumer
Total
(In thousands)
$
175,694 $
4,919
11,130
408
-
85,439 $
2,642
1,805
634
-
21,268 $
318
2,356
-
-
9,308 $
-
-
-
-
11,942 $
416
-
-
-
32,687 $
2,158
1,459
-
-
29,993 $
142
600
13
-
366,331
10,595
17,350
1,055
-
Total
$
192,151 $
90,520 $
23,942 $
9,308 $
12,358 $
36,304 $
30,748 $
395,331
September 30, 2011:
Pass
Special Mention
Substandard
Doubtful
Loss
$
157,240 $
2,044
10,696
974
-
67,572 $
2,296
3,711
235
-
22,699 $
327
1,964
-
-
7,483 $
-
174
-
-
12,223 $
402
375
-
-
37,639 $
1,819
1,272
2
-
28,869 $
74
650
106
-
333,725
6,962
18,842
1,317
-
Total
$
170,954 $
73,814 $
24,990 $
7,657 $
13,000 $
40,732 $
29,699 $
360,846
F-31
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(5 – continued)
Troubled Debt Restructurings
The following table summarizes the Company’s TDRs by accrual status at September 30, 2012 and 2011. There was no specific reserve included in
the allowance for loan losses related to TDRs at September 30, 2012 and 2011.
September 30, 2012:
Residential real estate
Commercial real estate
Multifamily
Commercial business
Consumer
Total
September 30, 2011:
Residential real estate
Commercial business
Total
Accruing
Nonaccrual
Total
(In thousands)
$
$
$
$
2,993 $
1,290
2,356
14
158
6,811 $
1,499 $
812
2,311 $
- $
-
-
-
-
- $
- $
-
- $
2,993
1,290
2,356
14
158
6,811
1,499
812
2,311
The following table summarizes information in regard to TDRs that were restructured during the year ended September 30, 2012:
Residential real estate
Commercial real estate
Multifamily
Commercial business
Consumer
Total
Number of
Loans
Pre-
Modification
Principal
Balance
Post-
Modification
Principal
Balance
(In thousands)
15 $
1
1
1
1
19 $
1,872 $
772
1,797
14
159
4,614 $
1,874
506
2,313
14
160
4,867
For the TDRs listed above, the terms of modification included temporary interest-only payment periods, reduction of the state interest rate,
reduction of principal balance, extension of the maturity date, and the renewal of matured loans where the debtor was unable to access funds
elsewhere at a market interest rate for debt with similar risk characteristics.
The Company has not committed to lend any additional amounts as of September 30, 2012 and 2011 to customers with outstanding loans that are
classified as TDRs.
During the year ended September 30, 2012, the Company had one TDR with a balance of $262,000 that was modified within the previous twelve
months for which there was a payment default (defined as more than 90 days past due). The Company recognized a net charge-off of $42,000 for this
TDR during the year ended September 30, 2012.
F-32
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(5 – continued)
At September 30, 2012, the recorded investment in residential mortgage loans secured by one-to-four family residential properties with loan-to-value
ratios exceeding 90% amounted to $9.2 million, of which some do not have private mortgage insurance or government guaranty.
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 collectability or present other unfavorable features.
The following is a summary of activity for related party loans for the years ended September 30, 2012 and 2011:
(In thousands)
Beginning balance
New loans and advances
Repayments
Reclassifications
Increase due to acquisition of First Federal branches
Ending balance
F-33
2012
2011
$
6,351 $
1,477
(1,097)
(365)
816
6,434
1,763
(1,099)
(747)
-
$
7,182 $
6,351
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(6)
REAL ESTATE DEVELOPMENT AND CONSTRUCTION
On March 22, 2011, the Company acquired a parcel of land in New Albany, Indiana for $2.97 million. On April 5, 2012, the Bank received
approval from the Office of the Comptroller of the Currency (“OCC”) to develop the land for retail purposes through its subsidiary, FFCC.
The retail development may include a future branch location. The total cost of the development is expected to be approximately $6.9
million, including the $4.5 million paid as of September 30, 2012. The development costs will be partially funded by a $5.0 million loan
commitment from another financial institution (see Note 14). The development is expected to be completed by May 31, 2013.
Development and construction period interest of $8,000 was capitalized as part of the real estate carrying value during the year ended
September 30, 2012.
(7)
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
2012
2011
$
2,996 $
9,757
3,331
16,084
1,993
9,449
3,163
14,605
4,577
4,161
$
11,507 $
10,444
Depreciation expense of $689,000 and $610,000 was recognized for the years ended September 30, 2012 and 2011, respectively.
(8)
FORECLOSED REAL ESTATE
At September 30, 2012 and 2011, the Bank had foreclosed real estate held for sale of $1.5 million and $1.0 million, respectively. During the
years ended September 30, 2012 and 2011, foreclosure losses in the amount of $755,000 and $572,000, respectively, were charged-off to the
allowance for loan losses. The losses on subsequent write downs of foreclosed real estate amounted to $94,000 and $229,000 for the years
ended September 30, 2012 and 2011, respectively, and were aggregated with realized gains and losses from the sale of foreclosed real
estate, and real estate taxes and other expenses of holding foreclosed real estate. Net realized gains from the sale of foreclosed real estate
amounted to $41,000 for the year ended September 30, 2012 and net realized losses from the sale of foreclosed real estate amounted to
$20,000 for the year ended September 30, 2011. 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 $147,000 and $157,000 for the years ended September 30, 2012
and 2011, respectively. The net loss is reported in noninterest expense. Realized gains from the sale of foreclosed real estate totaling
$36,000 and $51,000, respectively, for the years ended September 30, 2012 and 2011 were deferred because the sales were financed by the
Bank and did not qualify for recognition under generally accepted accounting principles. At September 30, 2012 and 2011, aggregate
deferred gains on the sale of foreclosed real estate financed by the Bank amounted to $132,000 and $119,000, respectively.
F-34
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(9)
GOODWILL AND OTHER INTANGIBLES
Goodwill and the core deposit intangibles acquired in the acquisitions of Community First Bank (“Community First”) on September 30, 2009
and the First Federal branches on July 6, 2012 are 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 or the core deposit
intangibles was recognized during 2012 or 2011.
The changes in the carrying amount of goodwill for the years ended September 30, 2012 and 2011 are summarized as follows:
(In thousands)
Beginning balance
Acquisition of First Federal branches
Ending balance
The following is a summary of other intangible assets subject to amortization:
(In thousands)
Core deposit intangible acquired in Community First acquisition
Core deposit intangible acquired in First Federal branch acquisition
Less accumulated amortization
Ending balance
2012
2011
$
5,940 $
1,996
5,940
-
$
7,936 $
5,940
2012
2011
$
2,447 $
566
(600)
2,447
-
(293)
$
2,413 $
2,154
Amortization expense of intangibles amounted to $307,000 and $293,000 for the years ended September 30, 2012 and 2011, respectively.
Estimated amortization expense for the core deposit intangibles for each of the ensuing five years and in the aggregate is as follows:
Years ending September 30:
(In thousands)
2013
2014
2015
2016
2017
2018 and thereafter
Total
$
344
344
344
344
344
693
$
2,413
F-35
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(10)
DEPOSITS
The aggregate amount of time deposit accounts (certificates of deposit) with balances of $100,000 or more was $71.8 million and $53.1
million at September 30, 2012 and 2011, respectively.
At September 30, 2012, scheduled maturities of certificates of deposit were as follows:
Years ending September 30:
2013
2014
2015
2016
2017 and thereafter
Total
(In thousands)
$
110,678
34,706
26,525
16,658
27,931
$
216,498
The Bank held deposits of $5.3 million and $3.4 million for related parties at September 30, 2012 and 2011, respectively.
(11)
FEDERAL FUNDS PURCHASED
On June 30, 2012, 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, 2013 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, 2012, the Bank had no outstanding federal funds purchased under
the facility.
(12)
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:
(Dollars in thousands)
Retail repurchase agreements
Broker-dealer repurchase agreements:
Long-term agreements:
Maturing November 2011
Maturing December 2011
2012
2011
Weighted
Average
Rate
Amount
Weighted
Average
Rate
Amount
0.50% $
1,329
0.63% $
1,321
-
-
1.60%
1.65%
10,049
5,033
Total repurchase agreements
$
1,329
$
16,403
The debt securities` underlying the retail repurchase agreements were under the control of the Bank at September 30, 2012 and 2011.
The securities underlying the broker-dealer repurchase agreements were delivered to the broker-dealer who arranged the transactions.
F-36
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(12 – continued)
Information concerning borrowings under retail repurchase agreements as of and for the years ended September 30, 2012 and 2011 is
summarized as follows:
(Dollars in thousands)
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
2012
2011
0.62%
1,324
$
1,329
0.63%
1,316
1,321
$
2,796
2,871
2,565
2,599
$
$
Information concerning borrowings under repurchase agreements with broker-dealers as of and for the years ended September 30, 2012
and 2011 is summarized as follows:
(Dollars in thousands)
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
2012
2011
2.09%
2,785
$
15,047
2.07%
15,312
15,473
$
-
-
16,184
16,678
$
$
Interest expense on repurchase agreements for the years ended September 30, 2012 and 2011 is summarized as follows:
(In thousands)
Broker-dealer repurchase agreements
Retail repurchase agreements
Total
F-37
2012
2011
$
$
59 $
8
67 $
317
8
325
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(13)
BORROWINGS FROM FEDERAL HOME LOAN BANK
At September 30, 2012 and 2011 borrowings from the FHLB were as follows:
(Dollars in thousands)
Advances maturing in:
2012
2013
2015
2017
Total advances
Line of credit balance
2012
2011
Weighted
Average
Rate
Amount
Weighted
Average
Rate
Amount
-% $
2.34%
2.66%
1.10%
-
18,062
20,000
15,000
53,062
0.32% $
2.34%
2.66%
-%
15,000
18,137
20,000
-
53,137
-%
-
-%
-
Total borrowings from Federal Home Loan Bank
$
53,062
$
53,137
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,
2012, the eligible blanket collateral included residential mortgage loans and investment securities with carrying values of $178.7 million and
$32.9 million, respectively.
On August 6, 2012, 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 6, 2013. At September 30, 2012,
there were no borrowings outstanding under this agreement.
(14)
OTHER LONG-TERM DEBT
On July 27, 2012, FFCC entered into a loan agreement with another financial institution to finance the retail development and construction
project discussed in Note 6. The loan has a maximum commitment of $5 million and FFCC had borrowed $2.1 million under the loan at
September 30, 2012. The loan is for a 10 year term with a fixed interest rate of 4.0% for the first six years of the loan term, then adjusting
annually thereafter to the one-year LIBOR rate plus 250 basis points. The loan provides for 12 interest only monthly payments, followed by
107 monthly payments sufficient to fully amortize the loan over a 20 year period and a balloon payment of all outstanding principal and
interest at maturity on July 27, 2022. The loan is secured by a mortgage and assignment of leases and rents on the retail development
property, which had a carrying amount of $4.5 million at September 30, 2012.
Future maturities of other longer term debt, based on the amount outstanding under the loan agreement at September 30, 2012, are as
follows for the years ending September 30, 2013, 2014, 2015, 2016, 2017 and later years: $71,000, $74,000, $77,000, $80,000, $83,000, and $1.7
million, respectively.
F-38
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(15)
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 $21,000 and $23,000 for the years
ended September 30, 2012 and 2011, respectively.
The Company has a directors’ deferred compensation plan whereby a director, at his or her 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 $120,000 and $104,000 for the years ended September 30, 2012 and 2011, respectively.
(16)
BENEFIT PLANS
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 $304,000 and $285,000 for the years ended September 30, 2012 and 2011, 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, 2012 and 2011
amounted to $252,000 and $240,000, respectively. The fair value of unearned ESOP shares was $2.3 million at September 30, 2012. Company
common stock held by the ESOP trust at September 30, 2012 was as follows:
Allocated shares
Unearned shares
Total ESOP shares
83,522
119,841
203,363
F-39
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(17)
STOCK BASED COMPENSATION PLANS
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 both years ended September 30, 2012 and 2011 amounted to $260,000. A summary of the Company’s nonvested restricted
shares for the year ended September 30, 2012 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
78,470 $
-
(19,620)
-
13.25
-
13.25
-
58,850 $
13.25
The total fair value of restricted shares that vested during the year ended September 30, 2012 was $346,000. At September 30, 2012, there
was $682,000 of total unrecognized compensation expense related to nonvested restricted shares. The compensation expense is expected
to be recognized over the remaining vesting period of 2.6 years.
F-40
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(17 - continued)
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
$
A summary of stock option activity under the plan as of September 30, 2012, and changes during the year then ended is presented
below.
Outstanding at beginning of year
Granted
Exercise
Forfeited or expired
Outstanding at end of year
Exercisable at end of year
Weighted
Weighted Average
Average Remaining Aggregate
Intrinsic
Exercise Contractual
Value
Term
Price
Number
of
Shares
245,232 $
-
-
-
13.25
-
-
-
245,232 $
13.25
7.6 $
1,533,000
98,095 $
13.25
7.6 $
613,000
The Company recognized compensation expense related to stock options of $152,000 and $177,000 for the years ended September 30, 2012
and 2011, respectively. At September 30, 2012, there was $398,000 of unrecognized compensation expense related to nonvested stock
options, which will be recognized over the remaining vesting period of 2.6 years.
F-41
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(18)
INCOME TAXES
The Company and its subsidiaries file consolidated income tax returns. The components of the consolidated income tax expense were as
follows for the years ended September 30, 2012 and 2011:
(In thousands)
Current
Tax benefit allocated to additional paid-in capital related to equity incentive plan
Deferred
Income tax expense
2012
2011
$
1,265 $
33
160
1,092
22
565
$
1,458 $
1,679
The reconciliation of income tax expense with the amount which would have been provided at the federal statutory rate of 34 percent
follows for the years ended September 30, 2012 and 2011:
(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
2012
2011
$
1,953 $
90
(486)
(97)
(2)
1,935
138
(381)
(106)
93
$
1,458 $
1,679
Significant components of the Company’s deferred tax assets and liabilities as of September 30, 2012 and 2011 are as follows:
(In thousands)
Deferred tax assets:
Allowance for loan losses
Acquisition purchase accounting adjustments
Deferred compensation plans
Charitable contributions carryover
Equity incentive plans
Other-than-temporary impairment loss on available for sale securities
Valuation allowance on foreclosed real estate and repossessed assets
Deferred interest income on nonaccrual loans
Other
Deferred tax assets
Deferred tax liabilities:
Unrealized gain on securities available for sale
Accumulated depreciation
Deferred loan fees and costs, net
Federal Home Loan Bank stock dividends
Section 481 adjustment for bad debt recapture
Unrealized gain on trading account securities
Deferred tax liabilities
$
2012
2011
1,983 $
252
273
124
76
23
27
51
225
3,034
(3,184)
(775)
(148)
(134)
(109)
(20)
(4,370)
1,884
551
237
231
60
24
62
-
145
3,194
(1,846)
(697)
(215)
(133)
(140)
-
(3,031)
Net deferred tax asset (liability)
$
(1,336) $
163
The Company has charitable contributions carryovers of $366,000 available to reduce federal taxable income in subsequent years. The
charitable contribution carryovers expire during the year ending September 30, 2014.
F-42
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(18 - continued)
At September 30, 2012 and 2011, 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 and Indiana state income tax returns. Returns filed in these jurisdictions for tax years
ended on or after September 30, 2009 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, 2012 and 2011 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, 2012 and 2011.
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 for tax years through
September 30, 2010. Under this method, the Bank computed its federal tax bad debt deduction based on actual loss experience over a
period of years. Beginning with its tax year ended September 30, 2011, the Bank is required to use the specific charge-off method to
compute its federal tax bad debt deduction. The 1996 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.
(19)
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 $559,000 at September 30, 2012.
The following is a summary of the commitments to extend credit at September 30, 2012 and 2011:
(In thousands)
Loan commitments:
Fixed rate
Adjustable rate
Undisbursed portion of home equity lines of credit
Undisbursed portion of commercial and personal lines of credit
Undisbursed portion of construction loans in process
Total commitments to extend credit
F-43
2012
2011
$
6,886 $
726
20,038
21,000
6,602
2,274
776
18,029
16,797
4,501
$
55,252 $
42,377
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(20)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
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 19). The Bank
uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount and type of collateral obtained,
if deemed necessary by the Bank upon extension of credit, varies and is based on management’s credit evaluation of the counterparty.
Standby letters of credit are conditional lending commitments issued by the Bank to guarantee the performance of a customer to a third
party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The
credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s
policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend
credit.
The Bank has not been obligated to perform on any financial guarantees and has incurred no losses on its commitments in 2012 or 2011.
F-44
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(21)
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying value and estimated fair value of financial instruments at September 30, 2012 and 2011.
(In thousands)
Financial assets:
Cash and due from banks
Interest-bearing deposits in banks
Trading account securities
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
Short-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
2012
2011
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$
27,569 $
11,222
3,562
152,543
7,848
27,569 $
11,222
3,562
152,543
8,314
18,099 $
9,104
-
108,577
9,506
18,099
9,104
-
108,577
9,690
389,067
388,790
354,432
366,803
643
5,400
2,412
643
5,400
2,412
-
4,400
2,198
-
4,400
2,198
494,234
1,329
53,062
236
622
492,161
1,329
53,752
236
622
387,626
16,403
53,137
399
330
394,303
16,457
54,534
399
330
11
11
50
50
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 16, and the fair value of these
instruments is considered immaterial.
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.
F-45
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(21 - continued)
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 FHLB 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 borrowings from the FHLB and repurchase agreements. Fair value for FHLB advances and long-term repurchase
agreements is estimated by discounting the future cash flows at current interest rates for FHLB advances of similar maturities. For 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.
F-46
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(22)
FAIR VALUE MEASUREMENTS
FASB ASC Topic 820, Fair Value Measurements, provides the framework for measuring fair value. That framework provides a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC Topic 820 are described as follows:
Level 1:
Level 2:
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.
Level 3:
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.
F-47
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(22 – continued)
The table below presents the balances of financial assets measured at fair value on a recurring and nonrecurring basis as of September 30,
2012. The Company had no liabilities measured at fair value as of September 30, 2012.
September 30, 2012:
Assets Measured – Recurring Basis
Trading account securities
Securities available for sale:
Agency bonds and notes
Agency mortgage-backed
Agency CMO
Privately-issued CMO
Privately-issued ABS
Municipal
Equity securities
Total securities available for sale
Interest rate cap
Assets Measured – Nonrecurring Basis
Impaired loans:
Residential real estate
Commercial real estate
Construction
Commercial business
Consumer
Total impaired loans
Loans held for sale
Foreclosed real estate:
Residential real estate
Commercial real estate
Multifamily
Land and land development
Total foreclosed real estate
$
$
$
$
$
$
$
$
$
F-48
Level 1
Level 2
Level 3
Total
Carrying Value
(In thousands)
- $
3,562 $
- $
3,562
16,064
43,420
17,541
5,289
7,227
62,933
69
152,543
11
2,775
839
174
66
161
4,015
- $
-
-
-
-
69
69 $
16,064 $
43,420
17,541
5,289
7,227
62,933
-
152,474 $
- $
11 $
- $
-
-
-
-
-
- $
- $
- $
-
-
-
-
- $
- $
- $
-
-
-
- $
- $
-
-
-
-
- $
2,775 $
839
174
66
161
4,015 $
643 $
- $
643
- $
-
-
-
- $
487 $
231
357
406
1,481 $
487
231
357
406
1,481
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(22 – continued)
The table below presents the balances of financial assets measured at fair value on a recurring and nonrecurring basis as of September 30,
2011. The Company had no liabilities measured at fair value as of September 30, 2011.
September 30, 2011:
Assets Measured - Recurring Basis
Securities available for sale:
Agency bonds and notes
Agency mortgage-backed
Agency CMO
Privately-issued CMO
Privately-issued ABS
Municipal
Equity securities
Total securities available for sale
Interest rate cap
Assets Measured - Nonrecurring Basis
Impaired loans:
Residential real estate
Commercial real estate
Construction
Land and land development
Commercial business
Consumer
Total impaired loans
Foreclosed real estate:
Residential real estate
Commercial real estate
Construction
Land and land development
Total foreclosed real estate
Carrying Value
Level 1
Level 2
Level 3
Total
(In thousands)
$
$
$
$
$
$
$
- $
-
-
-
-
-
56
56 $
12,866 $
18,309
25,691
4,704
6,692
40,259
-
108,521 $
- $
50 $
- $
-
-
-
-
-
-
- $
- $
12,866
18,309
25,691
4,704
6,692
40,259
56
108,577
50
- $
-
-
-
-
-
- $
- $
-
-
-
- $
- $
-
-
-
-
-
- $
- $
-
-
-
- $
3,674 $
1,063
174
340
2
184
5,437 $
786 $
105
72
65
1,028 $
3,674
1,063
174
340
2
184
5,437
786
105
72
65
1,028
Fair value is based upon quoted market prices, where available. If quoted market prices are not available, fair value is based on information
obtained from third parties that primarily use, as inputs, observable market-based parameters or a matrix pricing model that employs the
Bond Market Association’s standard calculations for cash flow and price/yield analysis and observable market-based parameters.
Valuation adjustments may be made to ensure that financial instruments are recorded at fair value, or the lower of cost or fair value. These
adjustments may include unobservable parameters. Any such valuation adjustments have been applied consistently over time. The
Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of
future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market
participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a
different estimate of fair value at the reporting date.
F-49
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(22 - continued)
Trading Account Securities and Securities Available for Sale. Securities classified as trading and 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 trading account securities are reported in noninterest income. 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 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. 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. The
appraisals are then discounted to reflect management’s estimate of the fair value of the collateral given the current market conditions and
the condition of the collateral. 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. Fair value of impaired loans is classified as Level 3 in the fair value
hierarchy.
Loans Held for Sale. Loans held for sale are carried at the lower of cost or market value. The portfolio is 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 held for sale is reported at fair value less estimated costs to dispose of the property. The
fair values are determined by real estate appraisals which are then discounted to reflect management’s estimate of the fair value of the
property given current market conditions. Fair value of foreclosed real estate held for sale is classified as Level 3 in the fair value hierarchy.
There have been no changes in the valuation techniques and related inputs used for assets measured at fair value on a recurring and
nonrecurring basis during the years ended September 30, 2012 and 2011. There were no transfers into or out of Level 3 financial assets or
liabilities for the years ended September 30, 2012 or 2011. 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, 2012 or 2011.
F-50
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(23)
DERIVATIVE INSTRUMENTS
The Company has an interest rate cap contract 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, 2012:
Strike
Rate
Remaining
Term
Notional
Amount
(Dollars in thousands)
Purchase
Premium
Unrealized
Loss
Fair
Value
7.50%
4.8 years
$
10,000 $
150 $
139 $
11
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 Notes 21 and 22)
(24)
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 is 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 is 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-51
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(25)
PREFERRED STOCK
On August 11, 2011, the Company entered into a Securities Purchase Agreement (“Purchase Agreement”) with the United States
Department of the Treasury, pursuant to which the Company issued 17,120 shares of the its Senior Non-Cumulative Perpetual Preferred
Stock, Series A (“Series A Preferred Stock”), having a liquidation amount per share equal to $1,000, for a total purchase price of
$17,120,000. The Purchase Agreement was entered into, and the Series A Preferred Stock was issued, pursuant to the Small Business
Lending Fund (“SBLF”) program, a $30 billion fund established under the Small Business Jobs Act of 2010, that encourages lending to
small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion.
Holders of the Series A Preferred Stock are entitled to receive non-cumulative dividends, payable quarterly, on each January 1, April 1, July
1 and October 1, beginning October 1, 2011. The dividend rate, as a percentage of the liquidation amount, can fluctuate on a quarterly basis
during the first ten quarters during which the Series A Preferred Stock is outstanding and may be adjusted between 1.0% and 5.0% per
annum, to reflect the amount of change in the Bank’s level of Qualified Small Business Lending (“QSBL”) (as defined in the Purchase
Agreement) over the baseline level calculated under the terms of the Purchase Agreement (“Baseline”). In addition to the dividend, in the
event the Bank’s level of QSBL has not increased relative to the Baseline, at the beginning of the tenth calendar quarter, the Company will
be subject to an additional lending incentive fee equal to 2.0% per annum. For the eleventh dividend period through the eighteenth
dividend period, inclusive, and that portion of the nineteenth dividend period before, but not including, the four and one half (4½) year
anniversary of the date of issuance, the dividend rate will be fixed at between 1.0% and 7.0% per annum based upon the increase in QSBL
as compared to the Baseline. After four and one half (4½) years from issuance, the dividend rate will increase to nine 9.0%. Based upon the
Bank’s level of QSBL over the Baseline for purposes of calculating the dividend rate for the initial dividend period, the dividend rate for the
initial dividend period ended September 30, 2011 was 4.84%. The dividend rate for the fifth dividend period ended September 30, 2012 was
1.0% and the weighted average dividend rate for the year ended September 30, 2012 was 1.0%.
The Series A Preferred Stock is non-voting, except in limited circumstances. In the event that the Company fails to timely make five
dividend payments, whether or not consecutive, the holder of the Series A Preferred Stock will have the right, but not the obligation, to
appoint a representative as an observer on the Company’s board of directors.
The Series A Preferred Stock may be redeemed at any time at the Company’s option, at a redemption price of one hundred percent (100%)
of the liquidation amount plus accrued but unpaid dividends to the date of redemption for the current period, subject to the approval of its
federal banking regulator.
The Series A Preferred Stock was issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended. The Company has agreed to register the Series A Preferred Stock under certain circumstances set forth in the Purchase
Agreement. The Series A Preferred Stock is not subject to any contractual restrictions on transfer.
F-52
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(26)
DIVIDEND RESTRICTION
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 OCC. 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 OCC or below the amount of the liquidation account established upon completion of the conversion.
(27)
REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the OCC. 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, 2012,
that the Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 2012, the most recent notification from the OCC 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-53
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(27 - 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)
Amount
Ratio
Actual
As of September 30, 2012:
Total capital (to risk weighted
Minimum
For Capital
Adequacy Purposes:
Ratio
Amount
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions:
Ratio
Amount
assets)
$
67,566
17.07% $
31,666
8.00% $
39,583
10.00%
Tier I capital (to risk weighted
assets)
$
62,629
15.82%
N/A
$
23,750
6.00%
Tier I capital (to adjusted total
assets)
$
62,629
10.12% $
24,762
4.00% $
30,953
5.00%
Tangible capital (to adjusted total
assets)
$
62,629
10.12% $
9,286
1.50%
N/A
As of September 30, 2011:
Total capital (to risk weighted
assets)
$
63,838
17.52% $
29,148
8.00% $
36,435
10.00%
Tier I capital (to risk weighted
assets)
$
59,352
16.29%
N/A
$
21,861
6.00%
Tier I capital (to adjusted total
assets)
$
59,352
11.34% $
20,926
4.00% $
26,158
5.00%
Tangible capital (to adjusted total
assets)
$
59,352
11.34% $
7,847
1.50%
N/A
F-54
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(28)
SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number
of shares of common stock outstanding during the periods presented. Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under stock options, restricted stock and other potentially dilutive securities outstanding.
Earnings and dividends per share are restated for stock splits and dividends through the date of issuance of the financial statements.
Earnings per share information is presented below for the years ended September 30, 2012 and 2011.
(In thousands, except share and per share data)
Years Ended September 30,
Basic:
Earnings:
Net income
Less: Preferred stock dividends declared
Net income available to common shareholders
Shares:
Weighted average common shares outstanding
Net income per common share, basic
Diluted:
Earnings:
Net income
Less: Preferred stock dividends declared
Net income available to common shareholders
Shares:
Weighted average common shares outstanding
Add: Dilutive effect of outstanding options
Add: Dilutive effect of restricted stock
Weighted average common shares outstanding, as adjusted
$
$
$
$
$
2012
2011
4,287 $
(171)
4,014
(115)
4,116 $
3,899
2,163,552
2,144,141
1.90 $
1.82
4,287 $
(171)
4,014
(115)
4,116 $
3,899
2,163,552
51,853
14,783
2,144,141
32,273
13,058
2,230,188
2,189,472
Net income per common share, diluted
$
1.85 $
1.78
Unearned ESOP and nonvested restricted stock shares are not considered as outstanding for purposes of computing weighted average
common shares outstanding.
F-55
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(29)
PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial information for First Savings Financial Group, Inc. (parent company only) follows:
Balance Sheets
(In thousands)
Assets:
Cash and interest bearing deposits
Other assets
Investment in subsidiaries
Liabilities and Equity:
Accrued expenses
Stockholders' equity
Statements of Income
(In thousands)
As of September 30,
2011
2012
1,895 $
698
80,506
83,099 $
5,194
817
70,800
76,811
173 $
82,926
83,099 $
210
76,601
76,811
$
$
$
$
Years Ended September 30,
2012
2011
Other operating expenses
$
(959) $
Loss before income taxes and equity in undistributed net income of subsidiaries
Income tax benefit
Loss before equity in undistributed net income of subsidiaries
Equity in undistributed net income of subsidiaries
Net income
F-56
(983)
(983)
277
(706)
(959)
289
(670)
4,957
4,720
$
4,287 $
4,014
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(29 - continued)
Statements of Cash Flows
(In thousands)
Operating Activities:
Net income
Adjustments to reconcile net income to cash provided by operating activities:
Equity in undistributed net income of subsidiaries
ESOP and stock compensation expense
Net change in other assets and liabilities
Net cash provided by operating activities
Investing Activities:
Investment in Bank
Net cash used in investing activities
Financing Activities:
Proceeds from issuance of preferred stock
Exercise of stock options
Purchase of treasury stock
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
Years Ended September 30,
2012
2011
$
4,287 $
4,014
(4,957)
664
188
182
(4,720)
677
497
468
(2,494)
(2,494)
(15,408)
(15,408)
-
-
(743)
(244)
(987)
17,120
46
(725)
-
16,441
(3,299)
1,501
5,194
3,693
Cash and interest bearing deposits at end of year
$
1,895 $
5,194
F-57
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(30)
CONCENTRATION OF CREDIT RISK
At September 30, 2012 and 2011, the Bank had a concentration of credit risk with a correspondent bank in excess of the federal deposit
insurance limit of $1.2 million.
(31)
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
Transfer of securities from available for sale to held to maturity
(32)
SUBSEQUENT EVENTS
2012
2011
$
5,367 $
848
6,448
1,288
2,436
1,453
-
-
1,903
774
145
7,388
On November 16, 2012, the Board of Directors authorized a new stock repurchase program to acquire up to 230,217 shares, or approximately
10%, of the Company’s outstanding common stock that will be outstanding upon completion of the current stock repurchase program. The
Company’s current repurchase program has 21,350 shares remaining to be purchased. The new repurchases will commence upon
completion of the current repurchase program. Repurchases, which will be conducted through open market purchases or privately
negotiated transactions, will be made from time to time depending on market conditions and other factors. Repurchased shares will be held
in treasury.
Also on November 16, 2012, the Board of Directors declared a special cash dividend of $0.40 per share on its outstanding common stock,
payable on or about December 31, 2012 to stockholders of record as of the close of business on November 30, 2012. The amount of the
dividend paid to shareholders will be approximately $930,000.
F-58
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2012 AND 2011
(33)
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In thousands, except per share data)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
September 30, 2012:
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
Less: Preferred stock dividends declared
Net income available to common shareholders
Net income per common share, basic
Net income per common share, diluted
September 30, 2011:
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
Less: Preferred stock dividends declared
Net income available to common shareholders
Net income per common share, basic
Net income per common share, diluted
$
$
$
$
$
$
$
$
6,360 $
1,242
5,118
319
4,799
672
4,235
1,236
326
6,199 $
1,123
5,076
270
4,806
654
4,132
1,328
364
6,559 $
1,124
5,435
308
5,127
1,045
4,569
1,603
331
6,876
1,186
5,690
635
5,055
1,051
4,528
1,578
437
910
964
1,272
1,141
43
43
43
42
867 $
921 $
1,229 $
1,099
0.40 $
0.43 $
0.57 $
0.39 $
0.41 $
0.55 $
6,500 $
1,423
5,077
352
4,725
854
4,038
1,541
457
6,405 $
1,336
5,069
287
4,782
630
4,033
1,379
409
6,592 $
1,327
5,265
435
4,830
792
4,056
1,566
443
1,084
970
1,123
-
-
-
1,084 $
970 $
1,123 $
0.50 $
0.46 $
0.53 $
0.50 $
0.44 $
0.51 $
0.50
0.49
6,486
1,299
5,187
531
4,656
732
4,181
1,207
370
837
115
722
0.34
0.33
(Back To Top)
Section 2: EX-21 (EXHIBIT 21.0)
59
Exhibit 21.0
Subsidiaries
Percentage
Ownership
Jurisdiction or
State of Incorporation
Indiana
United States
Indiana
Indiana
Nevada
100%
100%
100%
100%
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 (EXHIBIT 23.0)
Exhibit 23.0
CONSENT OF MONROE SHINE & CO., INC.
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 December 28, 2012 contained in the annual report for the year ended September 30, 2012 appearing in this Form
10-K.
New Albany, Indiana
December 31, 2012
(Back To Top)
Section 4: EX-31.1 (EXHIBIT 31.1)
CERTIFICATION
EXHIBIT 31.1
I, Larry W. Myers, certify that:
1.
2.
3.
4.
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
5.
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 31, 2012
/s/ Larry W. Myers
Larry W. Myers
President and Chief Executive Officer
(principal executive officer)
(Back To Top)
Section 5: EX-31.2 (EXHIBIT 31.2)
I, Anthony A. Schoen, certify that:
CERTIFICATION
1.
2.
3.
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
EXHIBIT 31.2
this annual report;
4.
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
5.
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 31, 2012
/s/ Anthony A. Schoen
Anthony A. Schoen
Chief Financial Officer
(principal financial and accounting officer)
(Back To Top)
Section 6: EX-32 (EXHIBIT 32.0)
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, 2012 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
President and Chief Executive Officer
(principal executive officer)
/s/ Anthony A. Schoen
Anthony A. Schoen
Chief Financial Officer
(principal financial and accounting officer)
December 31, 2012
(Back To Top)