FSFG 10-K 9/30/2013
Section 1: 10-K (FORM 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
⌧⌧⌧⌧
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2013
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 ⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ⌧
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes ⌧ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes ⌧ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ¨
Non-accelerated Filer ¨
Accelerated Filer ¨
Smaller Reporting Company ⌧
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No ⌧
The aggregate market value of the voting and non-voting common equity held by nonaffiliates was $44.8 million, based upon the closing
price of $21.71 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, 2013.
The number of shares outstanding of the registrant’s common stock as of December 13, 2013 was 2,262,305.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2014 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
INDEX
Part I
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
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
Part IV
Item 15.
Exhibits and Financial Statement Schedules
SIGNATURES
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This annual report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and
expectations of First Savings Financial Group, Inc. These forward-looking statements are generally identified by use of the words “believe,”
“expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. First Savings Financial Group’s ability to predict results or the
actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of First
Savings Financial Group and its subsidiary include, but are not limited to, changes in interest rates, national and regional economic
conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and
the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in First Savings Financial Group’s market area, changes in real estate market values in First Savings
Financial Group’s market area, changes in relevant accounting principles and guidelines and inability of third party service providers to
perform. Additional factors that may affect our results are discussed in Item 1A to this Annual Report on Form 10-K titled “Risk Factors” below.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed
on such statements. Except as required by applicable law or regulation, First Savings Financial Group does not undertake, and specifically
disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or
circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
Unless the context indicates otherwise, all references in this annual report to “First Savings Financial Group,” “Company,” “we,”
“us” and “our” refer to First Savings Financial Group and its subsidiaries.
Item 1. BUSINESS
General
PART I
First Savings Financial Group, Inc., an Indiana corporation, was incorporated in May 2008 to serve as the holding company for First
Savings Bank, F.S.B. (the “Bank” or “First Savings Bank”), a federally-chartered savings bank. On October 6, 2008, in accordance with a Plan of
Conversion adopted by its board of directors and approved by its members, the Bank converted from a mutual savings bank to a stock savings
bank and became the wholly-owned subsidiary of First Savings Financial Group. In connection with the conversion, the Company issued an
aggregate of 2,542,042 shares of common stock at an offering price of $10.00 per share. In addition, in connection with the conversion, First Savings
Charitable Foundation was formed, to which the Company contributed 110,000 shares of common stock and $100,000 in cash. The Company’s
common stock began trading on the NASDAQ Capital Market on October 7, 2008 under the symbol “FSFG”.
First Savings Financial Group’s principal business activity is the ownership of the outstanding common stock of First Savings Bank. First
Savings Financial Group does not own or lease any property but instead uses the premises, equipment and other property of First Savings Bank
with the payment of appropriate rental fees, as required by applicable law and regulations, under the terms of an expense allocation agreement.
Accordingly, the information set forth in this annual report including the consolidated financial statements and related financial data contained
herein, relates primarily to the Bank.
First Savings Bank operates as a community-oriented financial institution offering traditional financial services to consumers and
businesses in its primary market area. We attract deposits from the general public and use those funds to originate primarily residential mortgage
loans and, to a lesser but growing extent, commercial mortgage loans and commercial business loans. We also originate residential and commercial
construction loans, multi-family loans, land and land development loans, and consumer loans. We conduct our lending and deposit activities
primarily with individuals and small businesses in our primary market area.
On September 30, 2009, First Savings Bank acquired Community First Bank (“Community First”), an Indiana-chartered commercial bank.
The acquisition expanded First Savings Bank’s presence into Harrison, Crawford and Washington Counties in Indiana.
2
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, 2013, which is the most recent date for which data is available from
the Federal Deposit Insurance Corporation, we held approximately 12.95%, 2.82%, 29.40%, 80.12% and 10.00% 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.
3
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.
4
At September 30, 2013, 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, 2013.
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.
During 2013, we began a commercial real estate lending program that is focused on loans to high net worth individuals that are secured by
low loan-to-value, single-tenant commercial properties that are leased to investment grade national-brand retailers. This program is designed to
diversify the Company’s geographic and credit risk profile given the geographic dispersion of the loans and collateral, and the investment grade
credit of the national-brand lessees. The terms of the loans are generally consistent with the aforementioned terms of in-market commercial real
estate loans; however, these cannot exceed 70% loan-to-value and loan maturities cannot exceed the expiration of the underlying leases. In
addition, the Company has established guidelines with respect to concentrations by state, by lessee, as a percent of the overall loan portfolio and
as a percent of capital. The average size of these loans originated during 2013 was $1.0 million and the portfolio balance was $17.4 million at
September 30, 2013. Our largest such loan, which was originated in May 2013 and secured by a single-tenant commercial retail building, had an
outstanding balance of $2.3 million at September 30, 2013 and was performing in accordance with its original terms at September 30, 2013.
At September 30, 2013, our largest commercial real estate loan had an outstanding balance of $4.2 million. This loan, which was originated
in December 2012 and is secured by an office building, was performing in accordance with its original terms at September 30, 2013.
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, 2013, we had approved commitments for speculative construction loans of $11.2 million, of which $9.3 million was
outstanding. We require a maximum loan-to-value ratio of 80% for speculative construction loans. At September 30, 2013, our largest construction
loan relationship was for a commitment of $2.7 million, of which $1.8 million was outstanding. This relationship was performing according to its
original terms at September 30, 2013.
5
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, 2013, our largest land development loan had an outstanding balance of $1.1 million. This loan was
performing in accordance with its original terms at September 30, 2013.
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, 2013, 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, 2013.
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, 2013, our largest consumer loan was a home equity line of credit with a commitment of $500,000, of which
$193,000 was outstanding. This loan, which was originated in November 2004 and is secured by a first mortgage on a personal residence, was
performing in accordance with its original terms at September 30, 2013.
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, 2013, our largest commercial business loan was for a commitment of $4.5 million, of which $4.0 million was
outstanding. This loan, which was originated in July 2008 and most recently renewed in February 2013 and is secured by contract assignments and
accounts receivable, was performing in accordance with its original terms at September 30, 2013.
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.
6
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.
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.
7
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.
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, 2013,
$21.3 million of loans included sold participation interests of $9.5 million, for a net position of $11.8 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, 2013, the outstanding principal balance of these loans was $4.4 million
and the Bank’s carrying amount was $4.4 million. These loans were purchased in April 2012 and were performing in accordance with their original
terms at September 30, 2013.
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, 2013, we had participation interests of loans
totaling $5.5 million and our largest participation interest with a single borrower was $2.3 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, 2013.
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, 2013, our regulatory limit on loans to one borrower was $10.8
million. At that date, our largest lending relationship was for a commitment of $5.3 million, of which $5.3 million was outstanding, and was
performing according to its original terms at that date. This loan relationship is secured by various commercial real estate properties and land
intended for future development.
8
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.
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, 2013, 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, SBA certificates 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 $3.2
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.
9
.Personnel
As of September 30, 2013, we had 160 full-time employees and 27 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.
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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.
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, 2013, First Savings Bank met each of its capital requirements.
Basel III
On July 9, 2013, the federal bank regulatory agencies issued a final rule that will revise their risk-based capital requirements and the method
for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision
(“Basel III”) and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions, top-tier bank holding companies
with total consolidated assets of $500 million or more and top-tier savings and loan holding companies.
The rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1
capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are
more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or
construction of real property.
The rule also includes changes in what constitutes regulatory capital, some of which are subject to a two-year transition period. These
changes include the phasing-out of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1
capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over
designated percentages of common stock will be required to be deducted from capital, subject to a two-year transition period. Finally, Tier 1 capital
will include accumulated other comprehensive income (which includes all unrealized gains and losses on available for sale debt and equity
securities), subject to a two-year transition period.
The new capital requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures. These
include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and
non-residential mortgage loans that are 90 days past due or otherwise on nonaccrual status; a 20% (up from 0%) credit conversion factor for the
unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250% risk weight (up from
100%) for mortgage servicing rights and deferred tax assets that are not deducted from capital; and increased risk-weights (from 0% to up to 600%)
for equity exposures.
Finally, the rule limits capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital
conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its
minimum risk-based capital requirements.
The final rule becomes effective on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1,
2016, at 0.625% of risk-weighted assets, increasing each year until fully implemented at 2.5% on January 1, 2019.
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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, 2013, First Savings Financial Group and First Savings Bank would have met all capital
adequacy requirements under Basel III on a fully phased-in basis if such requirements were currently effective.
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.
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 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.
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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.
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, 2013, First Savings Bank maintained 84.48% 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.
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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.
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, 2013 totaled $166,545.
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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, 2013 of $5.5
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 for 2013: a 3% reserve ratio is assessed on net
transaction accounts up to and including $79.5 million; a 10% reserve ratio is applied above $79.5 million. The first $12.4 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 2014, will require a 3% ratio for up to $89.0 million and an exemption of $13.3 million. First Savings Bank complies with the
foregoing requirements. In October 2008, the Federal Reserve Board began paying interest on certain reserve balances.
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.
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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.
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.
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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 2013 fiscal year, First Savings Bank’s maximum federal income tax rate was 34%.
First Savings Financial Group and First Savings Bank have entered into a tax allocation agreement. Because First Savings Financial Group
owns 100% of the issued and outstanding capital stock of First Savings Bank, First Savings Financial Group and First Savings Bank are members of
an affiliated group within the meaning of Section 1504(a) of the Internal Revenue Code, of which group First Savings Financial Group is the common
parent corporation. As a result of this affiliation, First Savings Bank may be included in the filing of a consolidated federal income tax return with
First Savings Financial Group and, if a decision to file a consolidated tax return is made, the parties agree to compensate each other for their
individual share of the consolidated tax liability and/or any tax benefits provided by them in the filing of the consolidated federal income tax return.
Our Federal income tax returns have not been audited during the last five years.
Bad Debt Reserves. For fiscal years beginning before June 30, 1996, thrift institutions that qualified under certain definitional tests and
other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income
for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by
interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for
nonqualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of accounting for
bad debts and the percentage of taxable income method for tax years beginning after 1995 and 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.
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State Taxation
Indiana. Indiana imposes an 8.5% franchise tax based on a financial institution’s adjusted gross income as defined by statute. The
Indiana franchise tax rate will be reduced to 8.0%, 7.5%, 7.0% and 6.5% for the Company’s tax years ending September 30, 2015, 2016, 2017 and 2018,
respectively, and will remain at 6.5% for tax years ending after September 30, 2018. 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, 2013, $38.2 million, or 20.7% of our residential mortgage loan portfolio and 9.1% 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, 2013, we had 11 non-owner occupied residential loan relationships, each having an outstanding balance over $500,000, with aggregate
outstanding balances of $11.2 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, 2013, non-
performing non-owner occupied residential loans amounted to $2.1 million. Non-owner occupied residential properties held as real estate owned
amounted to $300,000 at September 30, 2013. For more information about the credit risk we face, see “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Risk Management.”
Our recent emphasis on commercial real estate lending and commercial business lending may expose us to increased lending risks.
At September 30, 2013, $149.4 million, or 35.7%, 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, 2013, non-performing commercial business
loans and non-performing commercial real estate loans totaled $218,000 and $4.8 million, respectively. For more information about the credit risk we
face, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management.”
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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, 2013, $30.7 million, or 7.3% of our loan portfolio consisted of construction loans, and land and land development loans,
and $11.2 million, or 56.3% 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.”
We may suffer losses in our loan portfolio despite our underwriting practices.
Our results of operations are significantly affected by the ability of borrowers to repay their loans. Lending money is an essential part of
the banking business. However, borrowers do not always repay their loans. The risk of non-payment is historically small, but if nonpayment levels
are greater than anticipated, our earnings and overall financial condition, as well as the value of our common stock, could be adversely affected. No
assurance can be given that our underwriting practices or monitoring procedures and policies will reduce certain lending risks. Loan losses can
cause insolvency and failure of a financial institution and, in such an event, our stockholders could lose their entire investment. In addition, future
provisions for loan losses could materially and adversely affect profitability. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. 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 allowance for loan losses may not be adequate to cover actual losses.
Like all financial institutions, we maintain an allowance for loan losses to provide for probable incurred losses due to loan defaults, non-
performance, and other qualitative factors. Our allowance for loan losses is based on our historical loss experience as well as an evaluation of the
risks associated with our loan portfolio, including the size and composition of the loan portfolio, loan portfolio performance, fair value of collateral
securing the loans, current economic conditions and geographic concentrations within the portfolio. Our allowance for loan losses may not be
adequate to cover actual loan losses, and future provisions for loan losses could materially and adversely affect its financial results. For more
information about our analysis and determination of allowance for loan losses, see “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Risk Management.”
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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.
A return of recessionary conditions could result in increases in our level of non-performing loans and/or reduce demand for our products and
services, which would lead to lower revenue, higher loan losses and lower earnings.
A return of recessionary conditions and/or continued negative developments in the domestic and international credit markets may
significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and
profitability. Declines in real estate values and sales volumes and increased unemployment levels may result in higher than expected loan
delinquencies, increases in our levels of non-performing and classified assets and a decline in demand for our products and services. These
negative events may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition.
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, 2013, approximately $230.9 million, or 55.2% 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.”
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Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could
have a material adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by
factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity
sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us. Our ability to
acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or
negative views and expectations about the prospects for the financial services industry as a whole.
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, 2013, 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.
Regulation of the financial services industry is undergoing major changes and future legislation could increase our cost of doing business or
harm our competitive position.
In 2010 and 2011, in response to the financial crisis and recession that began in 2008, significant regulatory and legislative changes
resulted in broad reform and increased regulation impacting financial institutions. The Dodd-Frank Act has created a significant shift in the way
financial institutions operate. The Dodd-Frank Act also creates a new federal agency to administer consumer protection and fair lending laws, a
function that was formerly performed by the depository institution regulators. The Dodd-Frank Act contains various other provisions designed to
enhance the regulation of depository institutions. 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. Any future legislative changes could have a material impact on our
profitability, the value of assets held for investment or collateral for loans. Future legislative changes could require changes to business practices or
force us to discontinue businesses and potentially expose us to additional costs, liabilities, enforcement action and reputational risk.
In addition to the enactment of the Dodd-Frank Act, the federal regulatory agencies have taken stronger supervisory actions against
financial institutions that have experienced increased loan losses and other weaknesses as a result of the recent economic crisis. The actions
include entering into written agreements and cease and desist orders that place certain limitations on operations. Federal bank regulators have also
been using with more frequency their ability to impose individual minimum capital requirements on banks, which requirements may be higher than
those required under the Dodd-Frank Act or that would otherwise qualify a bank as being “well capitalized” under applicable prompt corrective
action regulations. If we were to become subject to a regulatory agreement or higher individual minimum capital requirements, such action may have
a negative impact on our ability to execute our business plan, as well as our ability to grow, pay dividends or engage in mergers and acquisitions
and may result in restrictions in our operations.
Additionally, in early July 2013, the Federal Reserve approved revisions to their capital adequacy guidelines and prompt corrective action
rules that implement the revised standards of Basel III and address relevant provisions of the Dodd-Frank Act. Basel III and the regulations of the
federal banking agencies require bank holding companies and banks to undertake significant activities to demonstrate compliance with the new and
higher capital standards. Compliance with these rules will impose additional costs on the Company and the Bank.
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Increased and/or special FDIC assessments will hurt our earnings.
The recent economic recession has caused a high level of bank failures, which has dramatically increased FDIC resolution costs and led to
a significant reduction in the balance of the Deposit Insurance Fund. As a result, the FDIC has significantly increased the initial base assessment
rates paid by financial institutions for deposit insurance. Increases in the base assessment rate have increased our deposit insurance costs and
negatively impacted our earnings. In addition, in May 2009, the FDIC imposed a special assessment on all insured institutions. Our special
assessment, which was reflected in earnings for the quarter ended June 30, 2009, was $217,000. In lieu of imposing an additional special assessment,
the FDIC required all institutions to prepay their assessments for all of 2010, 2011 and 2012, which for us totaled $2.1 million. Additional increases in
the base assessment rate or additional special assessments would negatively impact our earnings.
Strong competition within our primary market area could hurt our profits and slow growth.
We face intense competition both in making loans and attracting deposits. This competition has made it more difficult for us to make new
loans and attract deposits. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits,
which would reduce net interest income. Competition also makes it more difficult to grow loans and deposits. At June 30, 2013, which is the most
recent date for which data is available from the Federal Deposit Insurance Corporation, we held approximately 12.95%, 2.82%, 29.40%, 80.12% and
10.00% 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.
Because the nature of the financial services business involves a high volume of transactions, we face significant operational risks.
Operational risk is the risk of loss resulting from our operations, including, but not limited to, the risk of fraud by employees or persons
outside of the Company and Bank, the execution of unauthorized transactions by employees, errors relating to transaction processing and
technology, breaches of the internal control system and compliance requirements and business continuation and disaster recovery. This risk of
loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable
regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. In the event of
a breakdown in the internal control system, improper operation of systems or improper employee actions, we could suffer financial loss, face
regulatory action and suffer damage to our reputation.
Our business may be adversely affected by internet fraud.
We are inherently exposed to many types of operational risk, including those caused by the use of computer, internet and
telecommunications systems. These risks may manifest themselves in the form of fraud by employees, by customers, other outside entities
targeting us and/or our customers that use our internet banking, electronic banking or some other form of our telecommunications systems. Given
the growing level of use of electronic, internet-based, and networked systems to conduct business directly or indirectly with our clients, certain
fraud losses may not be avoidable regardless of the preventative and detection systems in place.
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We may experience interruptions or breaches in our information system security.
We rely heavily on communications and information systems to conduct our business. Any failure or interruption of these systems could
result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies
and procedures designed to prevent or limit the effect of the failure or interruption of these information systems, there can be no assurance that any
such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures or
interruptions of these information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory
scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition
and results of operations.
A failure in or breach, including cyber attacks, of our operational or security systems, or those of our third party vendors and other service
providers, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation,
increase our costs and cause losses.
As a financial institution, we are susceptible to fraudulent activity that may be committed against us or our clients and that may result in
financial losses to us or our clients, privacy breaches against our clients, or damage to our reputation. Such fraudulent activity may take many
forms, including check fraud, electronic fraud, wire fraud, phishing, and other dishonest acts. In recent periods, there has been a rise in electronic
fraudulent activity within the financial services industry, especially in the commercial banking sector, due to cyber criminals targeting commercial
bank accounts. Consistent with industry trends, we have also experienced an increase in attempted electronic fraudulent activity in recent periods.
In addition, our operations rely on the secure processing, storage and transmission of confidential and other information on our computer
systems and networks. Although we take numerous protective measures to maintain the confidentiality, integrity and availability of our and our
clients’ information across all geographic and product lines, and endeavor to modify these protective measures as circumstances warrant, the
nature of the threats continues to evolve. As a result, our computer systems, software and networks and those of our customers may be vulnerable
to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer
viruses or other malicious code, cyber attacks and other events that could have an adverse security impact and result in significant losses by us
and/or our customers. Despite the defensive measures we take to manage our internal technological and operational infrastructure, these threats
may originate externally from third parties, such as foreign governments, organized crime and other hackers, and outsource or infrastructure-support
providers and application developers, or the threats may originate from within our organization. Given the increasingly high volume of our
transactions, certain errors may be repeated or compounded before they can be discovered and rectified.
We also face the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate our
business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of
an attack on, or breach of, our operational systems, data or infrastructure. In addition, as interconnectivity with our clients grows, we increasingly
face the risk of operational failure with respect to our clients’ systems.
Although to date we have not experienced any material losses relating to cyber attacks or other information security breaches, there can be
no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened because of, among other
things, the evolving nature of these threats, the outsourcing of some of our business operations, and the continued uncertain global economic
environment. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance
our protective measures or to investigate and remediate any information security vulnerabilities.
We maintain an insurance policy which we believe provides sufficient coverage at a manageable expense for an institution of our size and
scope with similar technological systems. However, we cannot assure that this policy will afford coverage for all possible losses or would be
sufficient to cover all financial losses, damages, penalties, including lost revenues, should we experience any one or more of our or a third party’s
systems failing or experiencing attack.
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We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.
The Bank is subject to extensive regulation, supervision and examination by the Office of the Comptroller of the Currency, its chartering
authority, and by the Federal Deposit Insurance Corporation, as insurer of its deposits. The Company 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 the Bank rather than for
holders of the Company’s 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.”
Our ability to pay dividends is subject to certain limitations and restrictions, and there is no guarantee that we will be able to continue paying the
same level of dividends in the future that we paid in 2013 or that we will be able to pay future dividends at all.
Our ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient consolidated capital. The ability of the
Bank to pay dividends to the Company is limited by its obligations to maintain sufficient capital and liquidity, and by other regulatory restrictions.
The Office of the Comptroller of the Currency and other banking regulators have proposed guidelines seeking greater liquidity and have issued
regulations requiring greater capital requirements. If these regulatory requirements are not met, the Bank will not be able to pay dividends to the
Company, and consequently we may be unable to pay dividends on our common stock. In addition, as a savings and loan holding company, our
ability to declare and pay dividends is subject to the guidelines of the Federal Reserve Bank of St. Louis regarding capital adequacy and dividends.
On August 11, 2011, we issued shares of Senior Non-Cumulative Perpetual Preferred Stock, Series A to the United States Department of
the Treasury as a result of participation in its Small Business Lending Fund program. We are prohibited from continuing to pay dividends on our
common stock unless we have fully paid all required dividends on the senior preferred stock. Although we expect to be able to pay all required
dividends on the senior preferred stock, there is no guarantee that we will be able to do so.
If we are unable to redeem the Senior Non-cumulative Perpetual Preferred Stock, Series A after an initial four-and-one-half year period, the cost
of this capital will increase substantially.
If we are unable to redeem the Senior Non-cumulative Preferred Stock, Series A prior to February 11, 2016, the cost of this capital to us will
increase from approximately $171,000 annually (based on the average dividend rate for 2013, or 1.0% per annum of the Series A preferred stock
liquidation value) to $1.5 million annually (9.0% per annum of the Series A preferred stock liquidation value). This increase in the annual dividend
rate on the Senior Non-cumulative Preferred Stock, Series A would have a material negative effect on the earnings we can retain for growth and to
pay dividends on our common stock.
There is a limited trading market for our stock and you may not be able to resell your shares at or above the price you paid for them.
The price of the common stock purchased may decrease significantly. Although our common stock is quoted on the NASDAQ Capital
Market under the symbol "FSFG", trading activity in the stock historically has been sporadic. A public trading market having the desired
characteristics of liquidity and order depends on the presence in the market of willing buyers and sellers at any given time. The presence of willing
buyers and sellers depends on the individual decisions of investors and general economic conditions, all of which are beyond our control.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
24
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, 2013.
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
New Albany Office
Year
Opened
Owned/
Leased
1968
Owned
1975
Owned
1993
Owned
1999
Owned
2003
Owned
1986
Owned
1995
Owned
1996
Owned
1995
Owned
1925
Owned
1984
Owned
1969
Owned
1948
Owned
1975
Owned
2013
Owned
2218 State Street
New Albany, Indiana
25
The Bank owns one former branch office location that has been closed and consolidated into existing branch office operations. This is
located in Milltown, Indiana, valued at the amount of $250,000, held for sale and included in other real estate owned, held for sale at September 30,
2013 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 has developed for retail purposes through a subsidiary of
the Bank, FFCC, Inc. The retail development includes over 36,000 square feet of leasable class-A retail space and includes the Bank’s New Albany
branch office location. See Note 8 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.
The Company purchased an 8.097 acre parcel of land in Jeffersonville, Indiana, in July 2013 upon which it may locate a new main office and
also develop for retail purposes in future years. However, there were no formal plans as of September 30, 2013 to proceed with a new main office
location or development of the additional acreage. This land, with a carrying value of approximately $1.73 million, was included in premises and
equipment at September 30, 20103 on the balance sheet of the Consolidated Financial Statements beginning on page F-1 of this annual report.
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.
26
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
13, 2013, the Company had approximately 277 holders of record and 2,262,305 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,
2013 and 2012 as reported by NASDAQ.
2013:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2012:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Sale
Low
Sale
Dividends
Market price
end of period
$
$
28.20 $
23.67
24.25
20.00
19.55 $
18.49
17.61
19.04
21.10 $
21.35
18.93
17.96
17.51 $
16.80
16.25
15.23
0.10 $
0.10
0.10
0.40
0.00 $
0.00
0.00
0.00
22.50
23.34
21.71
19.49
19.50
17.65
17.10
16.92
On November 21, 2013, the Company declared a quarterly cash dividend of $0.10 per share on its outstanding common stock, payable on or
about December 31, 2013 to stockholders of record as of the close of business on December 1, 2013. The Company currently intends to maintain a
policy of paying regular quarterly cash dividends; however, the Company cannot guarantee that it will pay dividends or that if paid, it will not
reduce or eliminate dividends in the future.
27
Purchases of Equity Securities
The following table presents information regarding the Company’s stock repurchase activity during the quarter ended September 30, 2013:
(a)
Total number
of shares
purchased
(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
—
—
—
July 1, 2013 through July 31, 2013
Period
August 1, 2013 through August 31, 2013
2,500 $
22.26
2,500
September 1, 2013 through September 30, 2013
11,083 $
22.88
11,083
Total
_______________
13,583 $
22.76
13,583
240,289
237,789
226,706
226,706
(1) On November 16, 2012, the Company announced that its Board of Directors authorized a stock repurchase program to acquire up
to 230,217 shares, or 10.0% of the Company’s outstanding common stock. Under the program, repurchases are to be conducted
through open market purchases or privately negotiated transactions, and are to 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.
28
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
Other borrowings
Stockholders’ equity
(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
Less: Preferred stock dividends declared
Net income available to common shareholders
Per Share Data:
Net income per common share, basic
Net income per common share, diluted
Dividends per common share
2013
2012
At September 30,
2011
2010
2009
660,455 $
20,815
164,167
6,417
408,375
477,726
89,348
6,308
82,253
638,913 $
38,791
152,543
7,848
389,067
494,234
53,062
3,461
82,926
537,086 $
27,203
108,577
9,506
354,432
387,626
53,137
16,403
76,601
508,442 $
11,278
109,976
3,929
343,615
366,161
67,159
16,821
55,151
480,811
10,404
72,580
6,782
353,823
350,816
55,773
18,419
52,877
2013
For the Year Ended September 30,
2010
2011
2012
2009
27,175 $
3,936
23,239
1,858
21,381
4,258
19,132
6,507
1,811
4,696
171
4,525 $
25,994 $
4,675
21,319
1,532
19,787
3,422
17,464
5,745
1,458
4,287
171
4,116 $
25,983 $
5,385
20,598
1,605
18,993
3,008
16,308
5,693
1,679
4,014
115
3,899 $
26,262 $
6,117
20,145
1,604
18,541
2,916
18,020
3,437
808
2,629
-
2,629 $
13,008
4,440
8,568
819
7,749
1,263
9,231
(219)
(252)
33
-
33
2013
For the Year Ended September 30,
2010
2011
2012
2009
2.09 $
1.99
0.70
1.90 $
1.85
0.00
1.82 $
1.78
0.00
1.17 $
1.17
0.08
0.01
0.01
0.00
$
$
$
$
29
At or For the Year Ended September 30,
2011
2012
2010
2013
2009
Performance Ratios:
Return on average assets
Return on average equity
Interest rate spread (1)
Net interest margin (2)
0.72 %
0.75 %
0.78 %
0.53 %
0.01 %
5.63
5.42
6.85
4.93
0.06
3.98
4.07
4.30
4.44
3.41
4.09
4.22
4.44
4.57
3.93
Other expenses to average assets
2.94
3.05
3.15
3.66
3.90
Efficiency ratio (3)
69.58
70.59
69.08
78.14
93.90
Average interest-earning assets to average interest-
bearing liabilities
115.27
116.16
111.98
109.89
125.66
Dividend payout ratio
33.48
–
–
7.34
–
Average equity to average assets
12.81
13.81
11.33
10.85
21.84
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
10.36 %
10.12 %
11.34 %
7.84 %
7.55 %
10.36
10.12
11.34
7.84
7.55
17.04
17.07
17.52
12.77
12.32
1.32 %
1.23 %
1.29 %
1.09 %
1.03 %
61.15
84.12
63.70
63.88
70.06
0.30
0.35
0.21
0.42
0.38
Non-performing loans as a percent of total loans
2.17
1.46
2.02
1.71
1.47
Non-performing assets as a percent of total assets
2.39
2.21
2.01
1.47
1.44
Other Data:
Number of offices
Number of deposit accounts (5)
Number of loans (6)
15
34,788
5,663
14
36,259
6,072
12
29,777
5,777
12
31,100
6,410
14
32,689
6,552
(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 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 2011 to 2012 is due primarily to 768 loans acquired in the acquisition of the First Federal branches.
30
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, 2013 when compared to 2012 primarily as a
result of nonrecurring expenses in 2013 relating to the opening of the new State Street branch in New Albany, Indiana. These 2013 additional
expenses consisted primarily of compensation and benefits and occupancy and equipment.
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 decreased in the year ended September 30, 2013 when compared to 2012 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 decreased in the year ended September 30, 2013 when compared to 2012 primarily as a result of nonrecurring
expenses in 2012 relating to the acquisition and integration of the First Federal branches. 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.
31
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, 2013, 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 2013 or
2012. See Note 4 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report for additional information regarding
OTTI.
32
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, interchange income as a result of promoting increased debit card usage, 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 dividends.
33
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, 2013, 44.1% of our total loans were residential mortgage loans and 20.7% 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, 2013, commercial real estate loans and
commercial business loans represented 28.17% and 7.56%, 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.
During 2013, we began a commercial real estate lending program that is focused on loans to high net worth individuals that are secured by
low loan-to-value, single-tenant commercial properties that are leased to investment grade national-brand retailers. This program is designed to
diversify the Company’s geographic and credit risk profile given the geographic dispersion of the loans and collateral, and the investment grade
credit of the national-brand lessees. The Company originated $17.5 million of these loans during 2013 and the portfolio balance was $17.4 million at
September 30, 2013.
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 and 2013 we integrated 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.
34
Continuing to monitor asset quality and credit risk.
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. During 2013 and 2012, we have placed special emphasis on the improvement of asset quality and
reductions in the levels of classified and criticized assets, which has resulted in significant improvements. For more information about our
monitoring of credit risk and improvement in levels of classified and criticized assets, see “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Risk Management.”
Recognizing improvements in noninterest income.
The Company has recognized significant improvement in its levels of noninterest income for 2013 and 2012 as compared to prior fiscal
years due primarily to net gains on sales of loans, net gains on trading securities, increases in cash surrender value of life insurance, real estate
lease income, and surcharge and interchange income. However, the Company still underperforms compared to its peers, particularly with respect to
service charges on deposit fee income. Therefore, the Company engaged a consulting firm in September 2013 for the purposes of enhancing
noninterest income and reducing noninterest expense, the results from which are expected to begin being realized during 2014.
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.
Increasing shareholder value through stock repurchase programs and dividends.
The Company has been active in the repurchase of its common shares and has purchased and committed 242,388 shares to treasury as of
September 30, 2013, which represents 9.54% of the 2,542,042 common shares issued in its public offering in October 2008. In addition, the Company
has 226,706 common shares remaining for repurchase under the stock repurchase program approved by its Board of Directors on November 16,
2012. Under the program, repurchases are to be conducted through open market purchases or privately negotiated transactions, and are to 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. For more information about our stock repurchases, see “Item 5. Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.”
The Company paid a special cash dividend of $0.40 per common share during the quarter ended December 31, 2012 and implemented
quarterly a cash dividend plan of $0.10 per common share beginning with the quarter ended March 31, 2013, under which it paid $0.10 per common
share for the quarters ended March 31, June 30 and September 30, 2013, for a total of $0.70 per common share paid during the fiscal year ended
September 30, 2013. The Company currently intends to maintain a policy of paying regular quarterly cash dividends; however, the Company cannot
guarantee that it will pay dividends or that if paid, it will not reduce or eliminate dividends in the future. For more information about our dividends,
see “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”
35
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, 2013 and 2012, cash and cash equivalents totaled $20.8 million and $38.8 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, 2013 was approximately $6.3 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, 2013, these loans totaled $184.4 million, or
44.1% of total loans, compared to $191.0 million, or 47.7% of total loans at September 30, 2012. Total residential mortgage loan balances decreased
in 2013 primarily due to repayments and refinancings that were sold in the secondary market. 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 $117.8 million, or 28.2% of total loans at September 30, 2013, compared to $90.3 million, or 22.6% of
total loans at September 30, 2012. The balance of commercial real estate loans has increased primarily due to greater opportunity to originate these
loans during 2013 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 $26.9 million, or 6.4% of total loans, at September 30, 2013 compared to $30.6 million, or 7.7% of total loans, at
September 30, 2012. 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 decreased $1.2 million, or 6.4%, while automobile loans decreased $1.7 million, or
20.7%, from September 30, 2012 to September 30, 2013.
Commercial business loans totaled $31.6 million, or 7.6% of total loans, at September 30, 2013 compared to $36.2 million, or 9.0% of total
loans, at September 30, 2012. 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.
Multi-family real estate loans totaled $26.8 million, or 6.4% of total loans at September 30, 2013, compared to $23.9 million, or 6.0% of total
loans at September 30, 2012. The balance of multi-family real estate loans increased primarily due to greater opportunity to originate these loans
during 2013.
36
Residential construction loans totaled $12.5 million, or 3.0% of total loans, at September 30, 2013 of which $7.7 million were speculative
construction loans. At September 30, 2012, residential construction loans totaled $10.7 million, or 2.7% of total loans, of which $6.4 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 $6.7 million, or 1.6% of total loans, at September 30, 2013 compared to $5.2 million, or 1.3% of total
loans at September 30, 2012. 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 $11.4 million, or 2.7% of total loans at September 30, 2013, compared to $12.3 million, or 3.1% of
total loans at September 30, 2012. 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.
37
The following table sets forth the composition of our loan portfolio at the dates indicated.
(Dollars in thousands)
Real estate mortgage:
Residential
Commercial
Multi-family
Residential construction
Commercial construction
Land and land development
Total
At September 30,
2011
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
2010
2013
2012
2009
$ 184,390 44.10 % $ 190,958 47.72 % $ 169,353 46.65 % $ 172,007 49.33 % $ 185,800 51.61 %
117,782 28.17 90,290 22.56 73,513 20.25 53,869 15.45 48,090 13.36
3.50
26,759
4.04
12,537
2.12
6,730
11,396
3.11
359,594 86.01 333,377 83.31 292,868 80.67 281,030 80.60 279,866 77.74
6.86 20,360
2.20 15,867
9,851
1.14
9,076
3.57
6.40 23,879
3.00 10,748
5,182
1.61
2.73 12,320
5.97 24,909
2.69
8,002
4,144
1.29
3.08 12,947
5.84 12,584
4.55 14,555
7,648
2.83
2.60 11,189
Commercial business
31,627
7.56 36,189
9.04 40,628 11.19 30,905
8.86 36,901 10.25
Consumer:
Home equity lines of credit
Auto loans
Other
Total
Total loans
17,133
6,519
3,266
26,918
4.10 18,294
8,219
1.56
4,114
0.77
6.43 30,627
4.57 15,210
9,827
2.05
4,514
1.03
7.65 29,551
4.82
4.19 16,335
5.08
2.71 13,405
2.11
7,030
1.24
8.14 36,770 10.54 43,211 12.01
4.68 17,365
3.84 18,279
7,567
2.02
418,139 100.00 % 400,193 100.00 % 363,047 100.00 % 348,705 100.00 % 359,978 100.00 %
Deferred loan origination fees and costs, net
Undisbursed portion of loans in process
Allowance for loan losses
Loans, net
(163)
4,389
5,538
$ 408,375
(382)
6,602
4,906
$ 389,067
(558)
4,501
4,672
$ 354,432
(778)
2,057
3,811
$ 343,615
(846)
3,306
3,695
$ 353,823
38
Loan Maturity
The following table sets forth certain information at September 30, 2013 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.
At September 30, 2013
(Dollars in thousands)
Amounts due in:
One year or less
More than one year to two years
More than two years to three years
More than three years to five years
More than five years to ten years
More than ten years to fifteen years
More than fifteen years
Total
Residential
Real Estate
(1)
Commercial
Real Estate
(2)
Construction
(3)
Commercial
Business
Consumer
Total
Loans
$
$
26,104 $
15,181
14,084
22,618
42,466
31,590
59,106
211,149 $
34,933 $
20,402
16,694
20,190
27,266
5,890
3,803
129,178 $
19,267 $
-
-
-
-
-
-
19,267 $
15,863 $
4,172
3,072
3,075
3,138
1,440
867
31,627 $
7,501 $
4,774
3,439
4,316
5,129
1,759
-
26,918 $
103,668
44,529
37,289
50,199
77,999
40,679
63,776
418,139
(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, 2013 that are due after September 30, 2014, 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.
39
Fixed Rates Adjustable Rates
$
Total
108,451 $
45,290
-
9,719
5,678
169,138 $
$
76,594 $ 185,045
94,245
48,955
-
-
15,764
6,045
13,739
19,417
145,333 $ 314,471
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
(1) Includes multi-family loans.
(2) Includes farmland and land and land development loans.
Year Ended September 30,
2011
2012
2013
$ 400,193 $ 363,047 $ 348,705
9,122
8,296
7,182
36,573 28,403 33,968
60,503 29,622 26,313
8,239
4,440
8,936 17,327
6,260
8,379
121,676 83,579 88,308
–
–
–
5,923
– 32,408
(97,373)
(6,357)
(82,020) (73,966)
–
(2,744)
17,946 37,146 14,342
$ 418,139 $ 400,193 $ 363,047
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, 2013, trading account securities recorded at fair value totaled $3.2 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 $11.6 million from September 30, 2012 to September 30, 2013 primarily due to purchases of $51.0 million, which more than offset
unrealized losses of $6.3 million, maturities and calls of $12.2 million, sales of $801,000 and principal repayments of $19.3 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 $1.4 million from September 30, 2012 to
September 30, 2013 primarily due to maturities and principal repayments of $1.4 million.
40
The following table sets forth the amortized costs and fair values of our investment securities at the dates indicated.
(In thousands)
Securities available for sale:
Agency bonds and notes
Agency mortgage-backed securities
Agency CMO
Privately-issued CMO
Privately-issued asset-backed
SBA certificates
Municipal
Equity securities
Total
Securities held to maturity:
Agency mortgage-backed securities
Municipal
Total
2013
At September 30,
2012
2011
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
15,877 $ 15,197 $
41,720 41,714
24,200 24,074
4,616
3,881
7,799
5,829
2,081
2,093
68,072 68,581
93
12,762 $ 12,866
17,719 18,309
25,368 25,691
4,704
4,414
6,692
5,623
–
–
37,344 40,259
56
–
$ 161,660 $ 164,167 $ 143,596 $ 152,543 $ 103,230 $ 108,577
15,940 $ 16,064 $
42,255 43,420
17,186 17,541
5,289
4,283
7,227
5,797
–
–
58,135 62,933
69
–
–
$
$
721 $
5,696
6,417 $
773 $
5,741
6,514 $
1,342 $
6,506
7,848 $
1,460 $
6,854
8,314 $
2,337 $
7,169
9,506 $
2,521
7,169
9,690
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 (decrease) in net unrealized gain
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 accretion of premiums and discounts
on securities
Other than temporary impairment loss
Gains on sales
Increase (decrease) in net unrealized gain
Net increase in investment securities
Investment securities, end of period (1)
(1) At fair value.
41
At or For the Year Ended
September 30,
2012
2013
2011
$
$
$
$
44,880 $
11,361
–
–
(11,629)
(887)
–
(1,238)
20,830 $
33,762
–
–
(9,596)
(625)
–
509
17,977
9,157
(154)
–
(6,177)
(348)
9
366
(2,393)
42,487 $
24,050
44,880 $
2,853
20,830
115,977 $
39,591
(801)
(12,990)
(8,281)
273
–
1
(5,576)
12,217
128,194 $
97,437 $
43,014
(2,265)
(13,318)
(12,529)
242
–
30
3,366
18,540
115,977 $
96,143
39,813
(6,941)
(26,273)
(5,931)
474
–
95
57
1,294
97,437
The following table sets forth the stated maturities and weighted average yields of debt securities at September 30, 2013. Weighted
average yields on tax-exempt securities are presented on a tax equivalent basis using a federal marginal tax rate of 34%. Certain mortgage-backed
securities and collateralized mortgage obligations have adjustable interest rates and will reprice annually within the various maturity ranges. These
repricing schedules are not reflected in the table below. Weighted average yield calculations on investments available for sale do not give effect to
changes in fair value that are reflected as a component of equity.
One Year
or Less
More than
One Year to
Five Years
More than
Five Years to
Ten Years
More than
Ten Years
Total
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
(Dollars in thousands)
Securities available for sale:
Agency bonds and notes
$
Agency mortgage-backed securities
Agency CMO
Privately-issued CMO
Privately-issued ABS
SBA Certificates
Municipal
Total
$
–
–
–
–
–
–
2,139
2,139
– % $
–
–
–
–
–
3.09
3.09 % $
–
130
1,168
–
–
–
4,015
5,313
– % $
4.01
1.41
–
–
–
3.37
2.96 % $
8,319
583
845
–
–
–
11,437
21,184
1.34 % $
2.56
2.06
–
–
–
4.85
3.30 % $
6,878
41,001
22,061
4,616
7,799
2,093
50,990
135,438
2.00 % $
2.45
1.61
9.37
24.47
0.92
5.38
4.87 % $
15,197
41,714
24,074
4,616
7,799
2,093
68,581
164,074
1.64 %
2.45
1.62
9.37
24.47
0.92
5.10
4.59 %
Securities held to maturity:
Agency mortgage-backed securities $
Municipal
Total
$
–
634
634
– % $
5.75
5.75 % $
–
2,162
2,162
– % $
6.17
6.17 % $
–
1,680
1,680
– % $
6.95 %
6.95 % $
721
1,220
1,941
4.73 % $
6.78
6.02 % $
721
5,696
6,417
4.73 %
6.48
6.29 %
As of September 30, 2013, 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 decreased $16.5 million from September 30, 2012 to September 30, 2013.
In the aggregate, the Bank recognized decreases in noninterest-bearing checking accounts of $409,000 and certificates of deposit of $41.8 million,
partially offset by increases in interest-bearing checking accounts of $13.2 million, money market deposit accounts of $7.6 million and interest-
bearing savings accounts of $4.9 million when comparing the two years. Brokered certificates of deposit totaled $3.0 million at both September 30,
2013 and 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 2013 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.
42
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
2013
At September 30,
2012
2011
$
$
50,093 $
113,670
71,794
67,463
174,706
477,726 $
50,502 $
100,438
64,186
62,610
216,498
494,234 $
33,426
67,801
39,511
42,191
204,697
387,626
The following table indicates the amount of jumbo certificates of deposit by time remaining until maturity as of September 30, 2013. 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
5,160
6,826
13,416
27,533
52,935
$
$
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
2013
At September 30,
2012
2011
84,442 $
46,692
30,382
8,113
3,177
1,900
–
–
174,706 $
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
$
$
The following table sets forth the amount and maturities of time deposits at September 30, 2013.
Amount Due
(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
Less Than
One Year
More Than
One Year to
Two Years
More Than
Two Years to
Three Years
More Than
Three Years
Percent of Total
Time Deposit
Accounts
Total
$
$
61,367 $
17,025
2,914
2,905
1,214
19
–
85,444 $
14,433 $
11,270
9,974
881
216
–
–
36,774 $
4,311 $
5,451
7,644
109
781
1,221
–
19,517 $
4,331 $
12,946
9,850
4,218
966
660
–
32,971 $
84,442
46,692
30,382
8,113
3,177
1,900
–
174,706
48.33 %
26.73
17.39
4.64
1.82
1.09
–
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,
2012
2011
2013
494,234 $
–
(19,527)
3,019
(16,508)
477,726 $
387,626 $
116,541
(14,215)
4,282
106,608
494,234 $
366,161
–
17,846
3,619
21,465
387,626
43
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,
2012
2013
2011
$
89,348
$
98,381
$
78,162
$
69,198
1.53 %
89,348 $
1.15 %
67,346
1.68 %
53,062 $
2.11 %
63,990
1.71 %
53,137
1.89 %
The outstanding balance of borrowings from the FHLBI increased $36.2 million from $53.1 million at September 30, 2012 to $89.3 million at
September 30, 2013. 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,
2012
2013
2011
$
1,335
$
1,329
$
1,321
$
1,332
0.45 %
1,335 $
0.25 %
1,324
0.62 %
1,329 $
0.50 %
1,316
0.63 %
1,321
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,
2012
2011
2013
$
-
$
15,047
$
15,473
-
-
-
-
2,785
2.09 %
- $
-
15,312
2.07 %
15,082
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 $5.0 million under the loan at September 30, 2013. 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.
44
Results of Operations for the Years Ended September 30, 2013 and 2012
Overview. The Company reported net income of $4.7 million and net income available to common shareholders of $4.5 million ($1.99 per
common share diluted; weighted average common shares outstanding of 2,269,063, as adjusted) for the year ended September 30, 2013, compared to
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.
As discussed in “Noninterest Expense” below, the Company recognized nonrecurring pretax charges totaling $597,000 during the year
ended September 30, 2012 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.
Net Interest Income. Net interest income increased $1.9 million, or 9.0%, from $21.3 million for the year ended September 30, 2012 to $23.2
million for the year ended September 30, 2013 primarily as the result of an increase in the average balance of interest earning assets from 2012 to
2013, which more than offset a decrease in the interest rate spread from 2012 to 2013. 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 4.07% for 2012 to 3.98% for 2013
due primarily to a decrease in the average tax-equivalent yield on interest-earning assets from 5.11% for 2012 to 4.75% for 2013, which more than
offset a decrease in the average cost of interest-bearing liabilities from 1.04% for 2012 to 0.77% for 2013.
Total interest income increased $1.2 million, or 4.5% from $26.0 million for the year ended September 30, 2012 to $27.2 million for the year
ended September 30, 2013. The increase in total interest income is due primarily to an increase in the average balance of interest earning assets of
$68.3 million from $522.7 million for 2012 to $591.0 million for 2013, 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 5.11% for 2012 to 4.75% for 2013. The increase in the average balance of interest-
earning assets primarily relates to increases in the average balance of loans of $31.4 million, investment securities of $34.5 million and interest-
bearing deposits with banks of $1.9 million.
Interest income on loans increased $515,000, or 2.5%, from $20.6 million for 2012 to $21.1 million for 2013 despite a decrease in the average
tax-equivalent yield on loans from 5.58% for 2012 to 5.27% for 2013, due to an increase in the average balance of loans outstanding of $31.3 million
from $371.1 million for 2012 to $402.4 million for 2013. The increase in the average balance of loans outstanding is due primarily to 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 residential real estate,
commercial business and consumer loan portfolios.
Interest income on investment securities increased $599,000, or 11.5%, from $5.2 million for 2012 to $5.8 million for 2013. The increase in
interest income on investment securities is due primarily to an increase in the average balance of investment securities of $34.5 million, or 25.1%,
from $137.4 million for 2012 to $171.9 million for 2013, 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 4.26% for 2012 to 3.86% for 2013. During 2013, in an effort to maximize
earnings and diversify the asset portfolio, the Bank increased its investments in CMOs issued by U.S. government agencies and sponsored
enterprises, and municipal bonds.
45
Total interest expense decreased $739,000, or 15.7%, due primarily to a decrease in the average cost of funds from 1.04% for 2012 to 0.77%
for 2013, which more than offset the change in total interest expense due to a $62.7 million increase in the average balance of interest-bearing
liabilities from $450.0 million for 2012 to $512.7 million for 2013. The average balance of interest-bearing deposits increased $59.9 million, or 15.9%,
from $378.3 million for 2012 to $438.2 million for 2013 and the average cost of funds for deposits was 0.92% for 2012 compared to 0.64% for 2013.
The increase in the average balance of deposits is due primarily to the acquisition of the First Federal branches in July 2012. The average balance of
borrowings increased $2.8 million, or 3.8%, from $71.7 million for 2012 to $74.5 million for 2013 and the average cost of funds for borrowings was
1.67% for 2012 compared to 1.53% for 2013. The average cost of interest-bearing liabilities decreased for 2013 primarily as a result of a reduction in
the rates offered on deposit accounts during 2013, the repricing of time deposits at lower market rates during 2013, and the use of a certain level of
lower-cost borrowings.
46
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%.
(Dollars in thousands)
Assets:
2013
Interest
and
Dividends
Yield/
Cost
Average
Balance
Year Ended September 30,
2012
Interest
and
Dividends
Yield/
Cost
Average
Balance
2011
Interest
and
Dividends
Yield/
Cost
Average
Balance
Interest-bearing deposits with banks
Loans
Investment securities
Mortgage-backed securities
Federal Home Loan Bank stock
Total interest-earning assets
$ 11,295 $
402,430
128,363
43,502
5,415
591,005
29
21,227
5,781
845
200
28,082
0.26 % $
9,346 $
5.27 371,066
4.50 104,715
32,635
1.94
4,965
3.69
4.75 522,727
11
20,709
5,066
785
151
26,722
4,609 $
0.12 % $
18
5.58 348,522 20,766
5,100
4.84 101,760
504
16,381
2.41
112
4,194
3.04
5.11 475,466 26,500
0.39 %
5.96
5.01
3.08
2.67
5.57
Non-interest-earning assets
Total assets
59,944
$ 650,949
49,979
$ 572,706
42,068
$ 517,534
Liabilities and equity:
NOW accounts
Money market deposit accounts
Passbook accounts
Certificates of deposit
Total interest-bearing deposits
$ 108,668 $
69,736
65,950
193,884
438,238
314
276
60
2,149
2,799
0.29 $ 78,530 $
48,878
0.40
0.09
48,055
1.11 202,797
0.64 378,260
424
347
125
2,580
3,476
0.54 $ 64,967 $
37,150
0.71
0.26
40,398
1.27 201,483
0.92 343,998
342
276
103
3,247
3,968
Borrowings (1)
Total interest-bearing liabilities
74,478
512,716
1,137
3,936
1.53
71,743
0.77 450,003
1,199
4,675
1.67
80,618
1.04 424,616
1,417
5,385
0.53
0.74
0.25
1.61
1.15
1.76
1.27
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
49,886
4,971
567,573
83,376
$ 650,949
40,304
3,325
493,632
79,074
$ 572,706
31,485
2,793
458,894
58,640
$ 517,534
$ 24,146
$ 22,047
$ 21,115
3.98 %
4.09 %
115.27 %
4.07 %
4.22 %
116.16 %
4.30 %
4.44 %
111.98 %
(1) Includes Federal Home Loan Bank borrowings, repurchase agreements and other long-term debt.
47
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
Investment securities
Mortgage-backed securities
Other interest-earning assets
Total interest-earning assets
Interest expense:
Deposits
Federal Home Loan Bank advances
Total interest-bearing liabilities
Year Ended September 30, 2013
Compared to
Year Ended September 30, 2012
Year Ended September 30, 2012
Compared to
Year Ended September 30, 2011
Increase (Decrease)
Due to
Increase (Decrease)
Due to
Volume
Rate
Net
Volume
Rate
Net
$
2 $
1,511
1,038
144
15
2,710
737
53
790
1,920 $
16 $
(993)
(323)
(84)
34
(1,350)
(1,414)
(115)
(1,529)
179 $
18 $
518
715
60
49
1,360
(677)
(62)
(739)
2,099 $
(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
Net increase (decrease) in net interest income
$
Provision for Loan Losses. The provision for loan losses increased $326,000, or 21.3%, from $1.5 million for the year ended September 30,
2012 to $1.9 million for the year ended September 30, 2013. During 2013, the Bank had net charge-offs of $1.2 million compared to $1.3 million for
2012. The gross loan portfolio increased $17.9 million from $400.2 million at September 30, 2012 to $418.1 million at September 30, 2013, primarily in
the commercial real estate mortgage portfolio. Nonperforming loans increased $3.3 million from $5.8 million at September 30, 2012 to $9.1 million at
September 30, 2013, due primarily to a single commercial real estate loan with an outstanding balance of $4.0 million that was placed on nonaccrual
status as of September 30, 2013 based on regulatory guidance. This loan is classified as a troubled debt restructuring, but the loan was current and
performing according to the terms of the note as of September 30, 2013. 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 growth in the commercial real estate mortgage
loan portfolio and the increase in nonperforming loans during 2013. See “Analysis of Nonperforming and Classified Assets” included herein. It is
management’s assessment that the allowance for loan losses at September 30, 2013 was adequate and appropriately reflected the inherent risk of
loss in the Bank’s loan portfolio at that date.
Noninterest Income. Noninterest income increased $836,000, or 24.4%, from $3.4 million for the year ended September 30, 2012 to $4.3
million for the year ended September 30, 2013. The increase is due primarily to an increase in net gain on sale of loans of $313,000 from $197,000 in
2012 to $510,000 in 2013, and an increase in real estate lease income of $317,000, which was new in 2013 and relates to the real estate development
discussed in Note 6 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report, and an increase in net gain on
trading securities of $247,000 from $217,000 in 2012 to $464,000 in 2013. These increases and additional gains were partially offset by a gain on a life
insurance policy of $324,000 that was recognized in 2012.
48
Noninterest Expense. Noninterest expenses increased $1.7 million, or 9.5%, from $17.5 million for the year ended September 30, 2012 to
$19.1 million for the year ended September 30, 2013. The increase was due primarily to increases in compensation and benefits expense of $1.4
million and occupancy and equipment expense of $385,000, which more than offset decreases in advertising of $160,000 and data processing of
$157,000. 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 and increased ESOP compensation expense of approximately $399,000
primarily due to the accelerated repayment of the ESOP loan during the December 2012 quarter. The increase in occupancy and equipment expense
is due primarily to the operation of the acquired First Federal branches and the Bank’s new branch location in New Albany, Indiana, which opened
in August 2013. The decrease in advertising expense was due primarily to a rebranding and advertising campaign for the Bank’s new ‘look’ and
logo in 2012. The decreases in data processing are due primarily to expenditures associated with the acquisition and integration of the First Federal
branches in 2012.
Income Tax Expense. The Company recognized income tax expense of $1.8 million for the year ended September 30, 2013, for an effective
tax rate of 27.8%, compared to income tax expense of $1.5 million, for an effective tax rate of 25.4%, for the year ended September 30, 2012. The
higher effective tax rate for the year ended September 30, 2013 was due primarily to a lower level of tax exempt income for 2013. 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 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.
49
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-three troubled debt restructurings totaling $5.9 million, which were performing according to their terms and on accrual status, as of
September 30, 2013. 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
Total troubled debt restructurings classified
as performing loans
$
2013
2012
At September 30,
2011
2010
2009
3,519 $
4,817
–
29
–
218
310
8,893
143
–
–
–
–
–
21
164
9,057
2,775 $
899
–
174
–
66
175
4,089
1,548
3
–
–
–
98
94
1,743
5,832
3,758 $
1,133
–
174
340
2
215
5,622
603
949
–
–
–
99
61
1,712
7,334
2,187
1,274
2,306
17
146
2,993
1,290
2,356
14
158
1,499
812
–
–
–
5,930
6,811
2,311
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
–
–
–
–
–
–
Real estate owned
Other non-performing assets
Total non-performing assets
$
799
2
15,788 $
1,481
–
14,124 $
1,028
126
10,799 $
1,331
171
7,498 $
1,589
64
6,927
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 %
(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. Total nonaccrual loans at September 30, 2013 includes seven trouble debt restructurings totaling $4.8 million that
were on non-accrual as of that date.
2.02 %
1.37 %
2.01 %
2.17 %
1.37 %
2.39 %
1.71 %
1.17 %
1.47 %
1.47 %
1.10 %
1.44 %
50
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 and criticized assets at the dates indicated.
(In thousands)
Special mention assets
Substandard assets (1)
Doubtful assets
Loss assets
Total classified assets
Total criticized assets
At September 30,
2012
2013
2011
$
7,256 $
10,595 $
6,962
18,965
1,087
–
20,052
22,734
1,055
–
23,789
26,989
1,317
–
28,306
$
27,308 $
34,384 $
35,268
(1) Includes substandard loans and investment securities, other real estate owned and repossessed assets.
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, 2013, the Company held twenty privately-issued CMO and ABS securities with an aggregate amortized cost of $2.9
million and fair value of $4.2 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, 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 had been downgraded to a substandard regulatory classification due to a downgrade of the security’s
credit quality rating by various rating agencies.
51
Delinquencies. The following table provides information about delinquencies in our loan portfolio at the dates indicated.
At September 30,
2013
At September 30,
2012
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
68 $
3
1
–
1
1
26
100 $
4,188
504
35
–
9
–
237
4,973
37 $
4
–
–
–
2
11
54 $
2,731
696
–
–
–
217
218
3,862
88 $
4
–
–
2
5
39
138 $
6,400
120
–
–
50
107
380
7,057
42 $
4
–
–
–
3
11
60 $
4,055
842
–
–
–
163
176
5,237
(Dollars in thousands)
Residential real estate
Commercial real estate
Multi-family
Construction
Land and land development.
Commercial business
Consumer
Total
At September 30,
2011
30-89 Days
90 Days or More
Number
of
Loans
Principal
Balance
of Loans
Number
of
Loans
Principal
Balance
of Loans
66 $
4
–
–
1
7
39
117 $
4,911
613
–
–
45
1,040
515
7,124
28 $
6
–
2
1
3
14
54 $
2,191
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
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 substandard and 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
as impaired in order to recognize the inherent losses associated with lending activities. The general allowance covers unimpaired 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.
52
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, 2013, 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
780
2,826
249
229
299
907
248
5,538
2013
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
14.08 %
51.03
4.50
4.14
5.40
16.38
4.47
100.00 %
44.10 % $
28.17
6.40
4.61
2.73
7.56
6.43
100.00 % $
At September 30,
2012
Amount
908
2,204
389
52
2
1,084
267
4,906
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
18.51 %
44.92
7.93
1.06
0.04
22.10
5.44
100.00 %
47.72 % $
22.56
5.97
3.98
3.08
9.04
7.65
100.00 % $
At September 30,
2011
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
17.83 %
28.13
12.93
1.20
1.13
32.64
6.14
100.00 %
46.65 %
20.25
6.86
3.34
3.57
11.19
8.14
100.00 %
Amount
833
1,314
604
56
53
1,525
287
4,672
2009
Amount
$
2010
% of
Allowance
to Total
Allowance
32.59 %
15.74
9.68
5.72
1.63
23.38
11.26
100.00 %
1,242
600
369
218
62
891
429
3,811
% of
Loans in
Category
to Total
Loans
Amount
49.33 % $
15.45
5.84
7.38
2.60
8.86
10.54
100.00 % $
1,493
271
–
302
258
444
927
3,695
% of
Allowance
to Total
Allowance
40.40 %
7.33
–
8.17
6.98
12.02
25.10
100.00 %
% of
Loans in
Category
to Total
Loans
51.61 %
13.36
3.50
6.17
3.11
10.25
12.00
100.00 %
(Dollars in thousands)
Residential real estate
Commercial real estate
Multi-family
Construction
Land and land development
Commercial business
Consumer
Total allowance for loan losses
$
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.
53
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
Allowance for loan losses at end of period
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
$
2013
Year Ended September 30,
2011
2010
2012
2009
$
4,906 $
1,858
4,672 $
1,532
3,811 $
1,605
3,695 $
1,604
1,729
819
284
11
–
–
–
1,013
111
1,419
65
25
–
–
–
41
62
193
1,226
–
5,538 $
61.15 %
510
543
85
–
–
33
304
1,475
109
–
–
–
–
2
66
177
1,298
–
4,906 $
84.12 %
651
68
–
8
–
86
287
1,100
79
–
–
–
–
214
63
356
744
–
4,672 $
63.70 %
334
–
–
–
5
964
340
1,643
68
–
–
–
–
–
87
155
1,488
–
3,811 $
63.88 %
580
–
–
–
–
39
209
828
57
–
–
–
–
–
82
139
689
1,836
3,695
70.06 %
1.32 %
1.23 %
1.29 %
1.09 %
1.03 %
0.30 %
0.35 %
0.21 %
0.42 %
0.38 %
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, fixed rate 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.
54
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, 2013
and 2012 financial information.
Immediate Change
in the Level
of Interest Rates
300bp
200bp
100bp
Static
(100)bp
At September 30, 2013
One Year Horizon
Dollar
Change
Percent
Change
At September 30, 2012
One Year Horizon
Dollar
Change
Percent
Change
(Dollars in thousands)
$
(99)
(111)
(69)
-
260
(0.45) % $
(0.50)
(0.31)
-
1.17
411
274
107
-
6
1.80 %
1.20
0.47
-
0.03
At September 30, 2013, our simulated exposure to an increase in interest rates shows that an immediate and sustained increase in rates of
1.00% will decrease our net interest income by $69,000 or 0.31% over a one year horizon compared to a flat interest rate scenario. Furthermore, rate
increases of 2.00% and 3.00% would cause net interest income to decrease by 0.50% and 0.45%, respectively.
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.
55
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, 2013 and 2012 financial information.
At September 30, 2013
Dollar
Amount
Economic Value of Equity
Dollar
Change
Immediate Change
in the Level
of Interest Rates
300bp
200bp
100bp
Static
(100)bp
Immediate Change
in the Level
of Interest Rates
300bp
200bp
100bp
Static
(100)bp
$
$
77,012 $
85,452
95,583
102,366
95,248
69,309 $
76,110
82,119
84,299
82,060
Economic Value of Equity as a
Percent of Present Value of Assets
Percent
Change
(Dollars in thousands)
(24.77) %
(16.52)
(6.63)
-
(6.95)
(25,354)
(16,914)
(6,783)
-
(7,118)
At September 30, 2012
Percent
Change
(Dollars in thousands)
(17.78) %
(9.71)
(2.59)
-
(2.66)
(14,990)
(8,189)
(2,180)
-
(2,239)
EVE Ratio
Change
13.07 %
13.97
15.02
15.53
14.26
(246) bp
(156) bp
(51) bp
- bp
(127) bp
Economic Value of Equity as a
EVE Ratio
Change
11.99 %
12.70
13.23
13.19
12.67
(120) bp
(49) bp
4 bp
- bp
(52) bp
Percent of Present Value of Assets
Dollar
Amount
Economic Value of Equity
Dollar
Change
The previous table indicates that at September 30, 2013, the Company would expect a decrease in its EVE in the event of a sudden and
sustained 100 to 300 basis point increase and/or 100 basis point decrease in prevailing interest rates. The expected decrease in the Company’s EVE
given a larger increase in rates is primarily attributable to the relatively high percentage of fixed-rate loans in the Company’s loan portfolio, which at
September 30, 2013 comprised approximately 55.2% of the loan portfolio.
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.
56
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, 2013, cash and cash equivalents totaled $20.8
million. Securities classified as trading and available-for-sale, amounting to $3.2 million and $164.2 million, respectively, at September 30, 2013,
provide additional sources of liquidity. At September 30, 2013, we had the ability to borrow a total of approximately $110.0 million from the FHLBI,
of which $89.3 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, 2013. The Bank had no outstanding federal funds purchased under the facility at September 30, 2013. 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.
At September 30, 2013, the Bank had $64.5 million in commitments to extend credit outstanding. Certificates of deposit due within one year of
September 30, 2013 totaled $85.4 million, or 48.9% 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, 2014. 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, 2013, the Company had liquid assets of $1.7
million.
57
The following tables present certain of our contractual obligations as of September 30, 2013.
(In thousands)
Deferred director fee agreements
Deferred compensation agreements (1)
Operating lease obligations
Repurchase agreements
FHLBI borrowings
Other long-term debt
Total
Total
729 $
147
5
1,335
89,348
4,973
96,537 $
$
$
Less than
One Year
Payments due by period
One to
Three Years
Three to
Five Years
More Than
Five Years
5 $
39
5
1,335
44,348
168
45,900 $
9 $
90
–
–
20,000
356
20,455 $
9 $
18
–
–
25,000
386
25,413 $
706
–
–
–
–
4,063
4,769
(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.
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 securities
Proceeds from maturities and principal repayments of
mortgage-backed securities
Proceeds from sales of investment securities available-
for-sale
Proceeds from sales of mortgage-backed securities
available-for-sale
Purchases of investment securities
Purchases of mortgage-backed securities
Financing activities:
Increase (decrease) in deposits
Decrease in federal funds purchased
Increase (decrease) in repurchase agreements
Increase (decrease) in FHLBI borrowings
Increase other long-term debt
58
Year Ended September 30,
2012
2013
2011
$
– $
(138,111)
96,619
23,546
(38,331) $
(93,666)
82,466
12,385
–
(98,147)
71,898
13,229
21,271
11,629
801
–
(39,591)
(11,361)
(16,508)
–
6
36,286
2,841
25,847
32,204
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)
–
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, 2013, 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.
On July 9, 2013, the federal bank regulatory agencies issued a final rule that will revise their risk-based capital requirements and the method
for calculating risk-weighted assets to make them consistent with Basel III and certain provisions of the Dodd-Frank Act. The final rule applies to
all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more and top-tier savings and loan
holding companies. The rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the
minimum Tier 1 capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets) and assigns a higher risk weight (150%) to
exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the
acquisition, development or construction of real property. See “Item 1. Business- Regulation and Supervision -Basel III.”
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, 2013, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect
on our financial condition, results of operations or cash flows.
Impact of Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see Note 1 of the Notes to Consolidated Financial Statements
beginning on page F-1 of this annual report.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented in this annual report have been prepared according to
accounting principles generally accepted 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.
59
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,
2013, 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, 2013 is effective.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately
and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are
recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United
States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and
(3) unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements
are prevented or timely detected.
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.
60
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 2014 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.
61
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, 2013 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
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)
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
245,232
N/A
245,232
$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.
62
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(1)
(2)
The financial statements required in response to this item are incorporated by reference from Item 8 of this Annual Report on
Form 10-K.
All financial statement schedules are omitted because they are not required or applicable, or the required information is shown in
the consolidated financial statements or the notes thereto.
(3)
Exhibits
No.
3.1
3.2
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
Description
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
*
(1)
Management contract or compensatory plan, contract or arrangement
Incorporated herein by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-
151636), as amended, initially filed with the Securities and Exchange Commission on June 13, 2008.
(2)
Incorporated 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.
(3)
Incorporated herein by reference to the exhibits to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on October 8, 2009.
(4)
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.
63
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 30, 2013
FIRST SAVINGS FINANCIAL GROUP, INC.
By:
/s/ Larry W. Myers
Larry W. Myers
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/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
/s/ John E. Colin
John E. Colin
President, Chief Executive Officer
and Director
(principal executive officer)
December 30, 2013
Chief Financial Officer
(principal accounting and financial officer)
December 30, 2013
Chief Operating Officer and Director
December 30, 2013
Executive Vice President and Director
December 30, 2013
Director
Director
Director
Director
Director
Director
Director
Director
December 30, 2013
December 30, 2013
December 30, 2013
December 30, 2013
December 30, 2013
December 30, 2013
December 30, 2013
December 30, 2013
FIRST SAVINGS FINANCIAL GROUP, INC.
AND SUBSIDIARIES -
CLARKSVILLE, INDIANA
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED
SEPTEMBER 30, 2013 AND 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, 2013
and 2012, 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, 2013 and 2012, 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 30, 2013
MONROE SHINE & CO., INC. ♦ CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
F-2
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2013 AND 2012
(In thousands, except share and per share data)
ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Total cash and cash equivalents
Interest-bearing time deposits
Trading account securities, at fair value
Securities available for sale, at fair value
Securities held to maturity (fair value of $6,514 in 2013 and $8,314 in 2012)
Loans held for sale
Loans, net of allowance for loan losses of $5,538 in 2013 and $4,906 in 2012
Federal Home Loan Bank stock, at cost
Real estate development and construction
Premises and equipment
Other real estate owned, held for sale
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 and outstanding
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; outstanding
2,299,654 and 2,329,681 shares in 2013 and 2012, respectively
Additional paid-in capital - preferred
Additional paid-in capital - common
Retained earnings - substantially restricted
Accumulated other comprehensive income
Unearned ESOP shares
Unearned stock compensation
Less treasury stock, at cost - 242,388 shares
(212,361 shares at September 30, 2012)
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
See notes to consolidated financial statements.
F-3
$
$
$
2013
2012
9,607 $
11,208
20,815
1,500
3,210
164,167
6,417
399
408,375
5,500
7,178
14,842
799
1,208
1,183
12,933
7,936
2,069
1,924
27,569
11,222
38,791
-
3,562
152,543
7,848
643
389,067
5,400
4,538
10,907
2,081
1,358
1,054
8,548
7,936
2,413
2,224
660,455 $
638,913
50,093 $
427,633
477,726
1,335
89,348
4,973
184
707
3,929
578,202
-
-
25
17,120
25,464
42,870
1,468
(865)
(422)
(3,407)
82,253
50,502
443,732
494,234
1,329
53,062
2,132
236
622
4,372
555,987
-
-
25
17,120
24,901
39,917
5,609
(1,198)
(682)
(2,766)
82,926
$
660,455 $
638,913
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2013 AND 2012
(In thousands, except share and per share data)
2013
2012
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
Loans payable
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
Real estate lease 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 other real estate owned
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
Dividends per common share
See notes to consolidated financial statements.
F-4
$
21,126 $
20,611
4,255
1,565
200
29
27,175
2,799
6
1,059
72
3,936
23,239
1,858
21,381
1,251
1
464
-
510
387
-
293
317
1,035
4,258
10,510
2,260
1,186
449
914
473
181
3,159
19,132
6,507
1,811
4,696 $
171
4,525 $
2.09 $
1.99 $
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
2,168,770
2,269,063
0.70 $
2,163,552
2,230,188
-
$
$
$
$
$
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 2013 AND 2012
(In thousands)
Net Income
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period
Income tax (expense) benefit
Net of tax amount
Less: reclassification adjustment for realized gains included in net income
Income tax expense
Net of tax amount
Other Comprehensive Income (Loss)
Comprehensive Income
See notes to consolidated financial statements.
F-5
2013
2012
$
4,696 $
4,287
(6,274)
2,133
(4,141)
(1)
1
-
(4,141)
555 $
3,446
(1,172)
2,274
(30)
11
(19)
2,255
6,542
$
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2013 AND 2012
Accumulated
Unearned
Other
Stock
(In thousands, except share and per share data)
Preferred
Stock
Common
Additional
Stock
Paid-in Capital
Retained
Earnings
Comprehensive Compensation Treasury
Income
and ESOP
Stock
Total
Balances at October 1, 2011
$
Net income
Other comprehensive income
Preferred stock dividends
Stock compensation expense
Shares released by ESOP trust
Purchase of 40,028 treasury shares
Balances at September 30, 2012
$
Net income
Other comprehensive loss
Preferred stock dividends
Common stock dividends ($0.70 per share)
Stock compensation expense
Shares released by ESOP trust
Purchase of 30,027 treasury shares
- $
-
-
-
-
-
-
- $
-
-
-
-
-
-
-
25 $
-
-
-
-
-
-
25 $
-
-
-
-
-
-
-
41,729 $
-
-
-
185
107
-
42,021 $
-
-
-
-
222
341
-
35,801 $
4,287
-
(171)
-
-
-
39,917 $
4,696
-
(171)
(1,572)
-
-
-
3,354 $
-
2,255
-
-
-
-
5,609 $
-
(4,141)
-
-
-
-
-
(2,285) $
-
-
-
261
144
-
(1,880) $
-
-
-
-
261
332
-
(2,023) $
-
-
-
-
-
(743)
(2,766) $
-
-
-
-
-
-
(641)
76,601
4,287
2,255
(171)
446
251
(743)
82,926
4,696
(4,141)
(171)
(1,572)
483
673
(641)
Balances at September 30, 2013
$
- $
25 $
42,584 $
42,870 $
1,468 $
(1,287) $
(3,407) $
82,253
See notes to consolidated financial statements.
F-6
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2013 AND 2012
(In thousands)
2013
2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
4,696 $
4,287
Provision for loan losses
Depreciation and amortization
Amortization of premiums and accretion of discounts on securities, net
(Increase) decrease in trading account securities
Loans originated for sale
Proceeds on sales of loans
Net gain on sales of loans
Net realized and unrealized (gain) loss on other real estate owned
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
Investment in interest-bearing time deposits
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 securities
Net increase in loans
Purchase of Federal Home Loan Bank stock
Investment in cash surrender value of life insurance
Proceeds from life insurance
Proceeds from sale of foreclosed real estate
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 decrease in deposits
Net increase (decrease) in repurchase agreements
Increase in Federal Home Loan Bank line of credit
Proceeds from Federal Home Loan Bank advances
Repayment of Federal Home Loan Bank advances
Proceeds from other long-term debt
Repayment of other long-term debt
Net increase in advance payments by borrowers for taxes and insurance
Purchase of treasury stock
Dividends paid on preferred stock
Dividends paid on common stock
Net Cash Provided By (Used In) Financing Activities
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and cash equivalents at beginning of period
Cash and Cash Equivalents at End of Period
See notes to consolidated financial statements.
1,858
1,241
615
352
(16,435)
17,189
(510)
(42)
(1)
-
-
(387)
513
1,063
21
(52)
1,801
11,922
(1,500)
(50,951)
801
12,223
767
19,910
(21,670)
(100)
(4,000)
606
1,146
(2,727)
(4,745)
-
(50,240)
(16,508)
6
9,348
130,000
(103,062)
2,868
(27)
85
(625)
(171)
(1,572)
20,342
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)
(17,976)
11,588
38,791
27,203
$
20,815 $
38,791
F-7
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND 2012
(1)
SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
First Savings Financial Group, Inc. (the “Company”) is the savings and loan 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 on hand, amounts due from
banks (including cash items in process of clearing) and interest-bearing deposits with other banks having an original maturity of 90 days or
less.
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 other real estate owned, 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
other real estate owned 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, 2013 AND 2012
(1 - continued)
Use of Estimates - continued
While management uses available information to recognize losses on loans and other real estate owned, further reductions in the carrying
amounts of loans and other real estate owned 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 other real estate owned.
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 other real estate owned
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. The Company also holds a pass-through asset-backed security
guaranteed by the Small Business Administration (“SBA”) representing participating interests in pools of long-term debentures issued by
state and local development companies certified by the SBA. 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.
F-9
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(1 - continued)
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 (“FHLB”) 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.
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, 2013, the Bank had commitments to originate $1.3 million 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.
F-10
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(1 - continued)
Loans and Allowance for Loan Losses - continued
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.
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.
During the years ended September 30, 2013 and 2012, the Company recognized partial charge-offs on loans totaling $306,000 and $219,000,
respectively. At September 30, 2013 and 2012, the Company had three outstanding loans with an aggregate recorded investment of
$920,000 on which partial charge-offs totaling $525,000 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 when the carrying value of the loan exceeds the property’s fair value less the estimated costs to sell.
F-11
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(1 - continued)
Loans and Allowance for Loan Losses - continued
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 Company uses a disciplined process and methodology to evaluate the allowance for loan losses on at least a quarterly basis that 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-classified loans and classified loans that are found, upon individual evaluation, to not be impaired.
Such loans are pooled by segment and losses are modeled using annualized 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 that are reviewed on a quarterly basis
based on the risks present for each portfolio segment. Management considers changes and trends in the following qualitative loss
factors: 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. Each
qualitative factor is evaluated and a qualitative factor adjustment is applied to the actual historical loss factors in determining the adjusted
loss factors used in management’s allowance for loan losses adequacy calculation.
Management exercises significant judgment in evaluating the relevant historical loss experience and the qualitative factors. Management
also monitors the differences between estimated and actual incurred loan losses for loans considered impaired in order to evaluate the
effectiveness of the estimation process and make any changes in the methodology as necessary.
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.
F-12
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(1 - continued)
Loans and Allowance for Loan Losses - continued
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, 2013 and 2012.
F-13
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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 a collateral property securing an impaired loan. 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 of at least six consecutive months according to the restructured terms.
F-14
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(1 - continued)
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.
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.
Other Real Estate Owned
Other real estate owned includes formally foreclosed property, in-substance foreclosed property and former banking facilities held for sale.
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 or the decision to classify property as held for sale, 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 other real estate owned 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.
Goodwill and Other Intangibles
Goodwill recognized in a business combination represents the excess of the cost of the acquired entity over the net of the amounts
assigned to assets acquired and liabilities assumed. Goodwill is carried at its implied fair value and is evaluated for possible impairment at
least annually or more frequently upon the occurrence of an event or change in circumstances that would more likely than not reduce the
fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: (1) a significant
adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator.
If the carrying amount of the goodwill exceeds its implied fair value, an impairment loss is recognized in earnings equal to that excess
amount. The loss recognized cannot exceed the carrying amount of goodwill. After a goodwill impairment loss is recognized, the adjusted
carrying amount of goodwill is its new accounting basis.
F-15
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(1 - continued)
Goodwill and Other Intangibles – continued
Other intangible assets consist of acquired core deposit intangibles. Core deposit intangibles are amortized over the estimated economic
lives of the acquired core deposits. The carrying amount of core deposit intangibles and the remaining estimated economic life are
evaluated annually or whenever events or circumstances indicate the carrying amount may not be recoverable or the remaining period of
amortization requires revision. After an impairment loss is recognized, the adjusted carrying amount of the intangible asset is its new
accounting basis.
Securities Lending and Financing Arrangements
Securities purchased under agreements to resell (reverse repurchase agreements) and securities sold under agreements to repurchase
(repurchase agreements) are treated as collateralized lending and borrowing transactions, respectively, and are carried at the amounts at
which the securities were initially acquired or sold.
Benefit Plans
The Bank provides a contributory defined contribution plan available to all eligible employees. The Company established a leveraged
employee stock ownership plan (“ESOP”) 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 or used for additional debt service
on the ESOP loan. Dividends declared on unallocated shares are not considered dividends for financial reporting purposes and are used
for additional debt service on the ESOP loan. 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 sheets, 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 consolidated statements of income.
F-16
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(1 - continued)
Income Taxes – continued
Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus
deferred income taxes. Income tax reporting and financial statement reporting rules differ in many respects. As a result, there will often be
a difference between the carrying amount of an asset or liability as presented in the accompanying consolidated balance sheets and the
amount that would be recognized as the tax basis of the same asset or liability computed based on the effects of tax positions recognized,
as described in the preceding paragraph. These differences are referred to as temporary differences because they are expected to reverse
in future years. Deferred income tax assets are recognized for temporary differences where their future reversal will result in future tax
benefits. Deferred income tax assets are also recognized for the future tax benefits expected to be realized from net operating loss or tax
credit carryforwards. Deferred income tax liabilities are recognized for temporary differences where their future reversal will result in the
payment of future income taxes. Deferred income tax assets are reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred income tax assets will not be realized. Deferred tax assets and liabilities are
reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Advertising Costs
Advertising costs are charged to operations when incurred.
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 December 2011, the FASB issued Accounting Standards Update (“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. ASU No. 2013-01 was issued in
January 2013 to address implementation issues and clarify the scope of ASU No. 2011-11. The amendments in the updates 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 these updates is not expected to have
a material 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, 2013 AND 2012
(1 - continued)
Recent Accounting Pronouncements – continued
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 a material impact on the Company’s consolidated financial
position or results of operations.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income. The update does not change the current requirements for reporting net income or other
comprehensive income in financial statements. The amendments require an entity to provide information about the amounts reclassified
out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the
statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income
by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income
in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to
net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about
those amounts. For public entities, the amendments in the update are effective prospectively for reporting periods beginning after
December 15, 2012. Early adoption is permitted. The adoption of this update is not expected to have a material impact on the Company’s
consolidated financial position or results of operations.
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward,
a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in ASU No. 2013-11 to Topic 740, Income Taxes, provide
guidance on the financial statement presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or
a tax credit carryforward exists. The amendments are effective for fiscal years, and interim periods within those years, beginning after
December 15, 2013. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial
position or results of operations.
F-18
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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-19
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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 $6.3 million and $2.8 million for the years ended
September 30, 2013 and 2012, respectively.
(4)
INVESTMENTSECURITIES
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.
Trading account securities recorded at fair value totaled $3.2 million and $3.6 million as of September 30, 2013 and 2012, respectively,
comprised of investment grade municipal bonds. During the year ended September 30, 2013, the Company reported net gains on trading
account securities of $464,000, including net realized gains on the sale of securities of $472,000, partially offset by net unrealized losses on
securities still held as of the balance sheet date of $8,000. 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 approximate fair values are as follows:
(In thousands)
September 30, 2013:
Securities available for sale:
Agency bonds and notes
Agency mortgage-backed
Agency CMO
Privately-issued CMO
Privately-issued ABS
SBA certificates
Municipal obligations
Subtotal – debt securities
Equity securities
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
$
15,877 $
41,720
24,200
3,881
5,829
2,081
68,072
161,660
10 $
285
199
735
1,972
12
2,057
5,270
690 $
291
325
-
2
-
1,548
2,856
15,197
41,714
24,074
4,616
7,799
2,093
68,581
164,074
-
93
-
93
Total securities available for sale
$
161,660 $
5,363 $
2,856 $
164,167
Securities held to maturity:
Agency mortgage-backed
Municipal
Total securities held to maturity
721 $
5,696
6,417 $
52 $
45
97 $
- $
-
- $
773
5,741
6,514
$
$
F-20
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(4 – continued)
(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 obligations
Subtotal – debt securities
Equity securities
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
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
-
69
- $
-
3
-
51
40
94
-
16,064
43,420
17,541
5,289
7,227
62,933
152,474
69
Total securities available for sale
$
143,596 $
9,041 $
94 $
152,543
Securities held to maturity:
Agency mortgage-backed
Municipal obligations
Total securities held to maturity
$
$
1,342 $
6,506
7,848 $
118 $
348
466 $
- $
-
- $
1,460
6,854
8,314
The amortized cost and fair value of available for sale and held to maturity debt securities as of September 30, 2013 by contractual maturity
are shown below. Expected maturities of mortgage and other asset-backed securities may differ from contractual maturities because the
mortgages and other assets 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
CMO
ABS
SBA certificates
Mortgage-backed securities
Available for Sale
Held to Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
2,138 $
3,959
19,820
58,032
83,949
-
28,081
5,829
2,081
41,720
2,139 $
4,015
19,756
57,868
83,778
93
28,690
7,799
2,093
41,714
634 $
2,162
1,680
1,220
5,696
-
-
-
-
721
639
2,179
1,696
1,227
5,741
-
-
-
-
773
$
161,660 $
164,167 $
6,417 $
6,514
F-21
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(4 – continued)
Information pertaining to securities with gross unrealized losses at September 30, 2013, aggregated by investment category and the length
of time that individual securities have been in a continuous loss position, follows:
(Dollars in thousands)
Securities available for sale:
Continuous loss position less than twelve months:
Agency bonds and notes
Agency mortgage-backed
Agency CMO
Privately-issued ABS
Municipal
Number
of Investment
Positions
Fair
Value
Gross
Unrealized
Losses
7 $
16
6
2
40
13,477 $
22,312
13,796
143
24,181
690
291
325
2
1,515
Total less than twelve months
71
73,909
2,823
Continuous loss position more than twelve months:
Municipal obligations
Total more than twelve months
Total securities available for sale
1
1
217
217
33
33
72 $
74,126 $
2,856
At September 30, 2013, 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.
The total available for sale debt securities in loss positions at September 30, 2013 had depreciated approximately 3.71% from the
Company’s amortized cost basis and are fixed and variable rate securities with a weighted-average yield of 2.28% and a weighted-average
coupon rate of 3.41% at September 30, 2013.
U.S. government agency notes, mortgage-backed securities and CMOs, and municipal bonds in loss positions at September 30, 2013 had
depreciated approximately 3.71% from the Company’s amortized cost basis as of September 30, 2013. 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 reserves.
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, 2013, the Company held twenty privately-
issued CMO and ABS securities acquired in a 2009 bank acquisition with an aggregate carrying value of $2.9 million and fair value of $4.2
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.
F-22
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(4 – continued)
At September 30, 2013, the two privately-issued CMOs in loss positions had depreciated approximately 1.38% from the Company’s
carrying value and include securities collateralized by residential mortgage loans and residential home equity lines of credit. These two
securities had an aggregate fair value of $143,000 and an aggregate unrealized loss of $2,000 at September 30, 2013 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, 2013, 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 U.S. government agency notes, mortgage-backed securities and CMOs, 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, 2013, the Company realized gross gains on sales of available for sale U.S. government agency notes
of $1,000. 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 for the year ended September 30, 2012.
Certain available for sale debt securities were pledged under repurchase agreements during the years ended September 30, 2013 and 2012,
and may be pledged to secure federal funds borrowings and FHLB borrowings (see Notes 11, 12 and 13).
F-23
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(5)
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at September 30, 2013 and 2012 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
Consumer:
Home equity
Auto
Other consumer
Gross loans
Undisbursed portion of construction loans
Principal loan balance
Deferred loan origination fees and costs, net
Allowance for loan losses
$
2013
2012
184,390 $
117,782
26,759
12,537
6,730
11,396
31,627
17,133
6,519
3,266
418,139
(4,389)
413,750
163
(5,538)
190,958
90,290
23,879
10,748
5,182
12,320
36,189
18,294
8,219
4,114
400,193
(6,602)
393,591
382
(4,906)
Loans, net
$
408,375 $
389,067
Mortgage loans serviced for the benefit of others amounted to $138,000 and $189,000 at September 30, 2013 and 2012, respectively. No
mortgage servicing rights have been capitalized since the year ended September 30, 1999.
At September 30, 2013, the recorded investment in residential mortgage loans secured by one-to-four family residential properties with
loan-to-value ratios exceeding 90% amounted to $10.3 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, 2013 and 2012:
(In thousands)
Beginning balance
New loans and advances
Repayments
Reclassifications
Increase due to acquisition of First Federal branches
Ending balance
F-24
2013
2012
$
7,182 $
1,363
(1,665)
(934)
-
6,351
1,477
(1,097)
(365)
816
$
5,946 $
7,182
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(5 – continued)
The following table provides the components of the recorded investment in loans as of September 30, 2013:
Residential
Real Estate
Commercial
Real Estate Multifamily Construction
Land & Land
Development
Commercial
Business
Consumer Total
Recorded Investment in Loans:
Principal loan balance
$ 184,390 $
117,782 $
26,759 $
14,878 $
11,396 $
31,627 $ 26,918 $ 413,750
Accrued interest receivable
600
316
57
31
40
86
78
1,208
Net deferred loan origination fees and costs
415
(169)
(38)
(46)
(7)
(5)
13
163
Recorded investment in loans
$ 185,405 $
117,929 $
26,778 $
14,863 $
11,429 $
31,708 $ 27,009 $ 415,121
(In thousands)
Recorded Investment in Loans as Evaluated for
Impairment:
Individually evaluated for impairment
$
5,429 $
6,091 $
2,306 $
29 $
- $
235 $
456 $ 14,546
Collectively evaluated for impairment
179,372
111,838
24,472
14,834
11,429
31,473
26,519 399,937
Acquired with deteriorated credit quality
604
-
-
-
-
-
34
638
Recorded investment in loans
$ 185,405 $
117,929 $
26,778 $
14,863 $
11,429 $
31,708 $ 27,009 $ 415,121
F-25
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(5 – continued)
The following table provides the components of the recorded investment in loans 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
$ 190,958 $
90,290 $
23,879 $
9,328 $
12,320 $
36,189 $
30,627 $ 393,591
Accrued interest receivable
691
305
69
21
43
128
101
1,358
Net deferred loan origination fees and costs
502
(75)
(6)
(41)
(5)
(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
$
5,210 $
1,993 $
2,356 $
174 $
- $
80 $
333 $
10,146
Collectively evaluated for impairment
186,236
88,331
21,586
9,134
12,358
36,224
30,379 384,248
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-26
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(5 – continued)
An analysis of the allowance for loan losses as of and for the year ended September 30, 2013 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
908 $
91
(284)
65
2,204 $
608
(11)
25
389 $
(140)
-
-
52 $
177
-
-
2 $
297
-
-
1,084 $
795
(1,013)
41
267 $
30
(111)
62
4,906
1,858
(1,419)
193
Ending balance
$
780 $
2,826 $
249 $
229 $
299 $
907 $
248 $
5,538
Ending Allowance Balance Attributable
to Loans:
Individually evaluated for impairment $
30 $
- $
- $
- $
- $
- $
6 $
36
Collectively evaluated for impairment
750
2,826
249
229
299
907
242
5,502
Acquired with deteriorated credit
quality
-
-
-
-
-
-
-
-
Ending balance
$
780 $
2,826 $
249 $
229 $
299 $
907 $
248 $
5,538
F-27
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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 $
56 $
(4)
-
-
52 $
53 $
(51)
-
-
1,525 $
(410)
(33)
2
287 $
218
(304)
66
4,672
1,532
(1,475)
177
2 $
1,084 $
267 $
4,906
Ending Allowance Balance Attributable
to Loans:
Individually evaluated for impairment $
- $
60 $
- $
- $
- $
- $
14 $
74
Collectively evaluated for impairment
908
2,144
389
52
2
1,084
253
4,832
Acquired with deteriorated credit
quality
-
-
-
-
-
-
-
-
Ending balance
$
908 $
2,204 $
389 $
52 $
2 $
1,084 $
267 $
4,906
F-28
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(5 – continued)
The following table presents impaired loans individually evaluated for impairment as of and for the year ended September 30, 2013. The
Company did not recognize any interest income on impaired loans using the cash receipts method of accounting for the year ended
September 30, 2013.
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
(In thousands)
Average
Recorded
Investment
Interest
Income
Recognized
$
5,647 $
6,091
2,306
29
-
235
361
5,975 $
6,099
2,246
13
-
235
357
- $
-
-
-
-
-
-
6,561 $
2,368
2,265
147
-
443
336
$
14,669 $
14,925 $
- $
12,120 $
$
59 $
-
-
-
-
-
95
55 $
-
-
-
-
-
95
30 $
-
-
-
-
-
6
157 $
106
-
-
-
165
78
$
154 $
150 $
36 $
506 $
$
5,706 $
6,091
2,306
29
-
235
456
6,030 $
6,099
2,246
13
-
235
452
30 $
-
-
-
-
-
6
6,718 $
2,474
2,265
147
-
608
414
$
14,823 $
15,075 $
36 $
12,626 $
F-29
119
77
113
-
-
1
7
317
-
-
-
-
-
-
-
-
119
77
113
-
-
1
7
317
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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 using the cash receipts method of accounting 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
(In thousands)
Average
Recorded
Investment
Interest
Income
Recognized
$
5,768 $
2,035
2,356
174
-
80
255
6,126 $
2,059
2,295
174
-
79
257
- $
-
-
-
-
-
-
4,946 $
2,118
1,421
174
272
49
166
$
10,668 $
10,990 $
- $
9,146 $
$
- $
154
-
-
-
-
78
- $
146
-
-
-
-
78
- $
60
-
-
-
-
14
125 $
214
-
-
-
-
118
$
232 $
224 $
74 $
457 $
$
5,768 $
2,189
2,356
174
-
80
333
6,126 $
2,205
2,295
174
-
79
335
- $
60
-
-
-
-
14
5,071 $
2,332
1,421
174
272
49
284
$
10,900 $
11,214 $
74 $
9,603 $
F-30
103
65
71
-
-
-
3
242
-
-
-
-
-
-
-
-
103
65
71
-
-
-
3
242
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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, 2013 and 2012:
At September 30, 2013
Loans 90+
Days
Past Due
Still Accruing
Total
Nonperforming
Loans
Nonaccrual
Loans
At September 30, 2012
Loans 90+
Days
Past Due
Still Accruing
Total
Nonperforming
Loans
Nonaccrual
Loans
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
$
3,519 $
4,817
-
29
-
218
310
143 $
-
-
-
-
-
21
(In thousands)
3,662 $
4,817
-
29
-
218
331
2,775 $
899
-
174
-
66
175
1,548 $
3
-
-
-
98
94
4,323
902
-
174
-
164
269
Total
$
8,893 $
164 $
9,057 $
4,089 $
1,743 $
5,832
F-31
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(5 – continued)
The following table presents the aging of the recorded investment in past due loans at September 30, 2013:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
30-59 Days
Past Due
60-89 Days
Past Due
90+ Days
Past Due
Total
Past Due Current
Total
Loans
(In thousands)
$
2,981 $
295
35
-
9
-
186
1,333 $
211
-
-
-
14
53
2,466 $
667
-
-
-
234
223
6,780 $ 178,625 $ 185,405
117,929
116,756
1,173
26,778
26,743
35
14,863
14,863
-
11,429
11,420
9
31,708
31,460
248
27,009
26,547
462
Total
$
3,506 $
1,611 $
3,590 $
8,707 $ 406,414 $ 415,121
The following table presents the aging of the recorded investment in past due loans at September 30, 2012:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
30-59 Days
Past Due
60-89 Days
Past Due
90+ Days
Past Due
Total
Past Due Current
Total
Loans
(In thousands)
$
4,636 $
20
-
-
51
109
286
1,926 $
90
-
-
-
-
98
3,754 $
833
-
-
-
164
174
10,316 $ 181,835 $ 192,151
90,520
89,577
23,942
23,942
9,308
9,308
12,358
12,307
36,304
36,031
30,748
30,190
943
-
-
51
273
558
Total
$
5,102 $
2,114 $
4,925 $
12,141 $ 383,190 $ 395,331
F-32
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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:
Residential
Real Estate
Commercial
Real Estate Multifamily Construction
Land and Land
Development
Commercial
Business
Consumer Total
September 30, 2013:
Pass
Special Mention
Substandard
Doubtful
Loss
$ 173,350 $
4,519
7,190
346
-
109,311 $
2,104
6,033
481
-
26,778 $
-
-
-
-
14,863 $
-
-
-
-
11,283 $
146
-
-
-
(In thousands)
30,920 $ 26,272 $ 392,777
114
7,256
568 14,001
1,087
-
373
210
205
-
55
-
Total
$ 185,405 $
117,929 $
26,778 $
14,863 $
11,429 $
31,708 $ 27,009 $ 415,121
September 30, 2012:
Pass
Special Mention
Substandard
Doubtful
Loss
$ 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 $ 29,993 $ 366,331
142 10,595
600 17,350
1,055
-
2,158
1,459
-
-
13
-
Total
$ 192,151 $
90,520 $
23,942 $
9,308 $
12,358 $
36,304 $ 30,748 $ 395,331
F-33
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(5 – continued)
Troubled Debt Restructurings
The following table summarizes the Company’s TDRs by accrual status at September 30, 2013 and 2012. There was no specific reserve
included in the allowance for loan losses related to TDRs at September 30, 2013 and 2012.
September 30, 2013:
Residential real estate
Commercial real estate
Multifamily
Commercial business
Consumer
Total
September 30, 2012:
Residential real estate
Commercial real estate
Multifamily
Commercial business
Consumer
Total
Accruing
Nonaccrual
(In thousands)
Total
$
2,187 $
1,274
2,306
17
146
777 $
4,029
-
13
-
2,964
5,303
2,306
30
146
$
5,930 $
4,819 $
10,749
$
2,993 $
1,290
2,356
14
158
$
6,811 $
- $
-
-
-
-
- $
2,993
1,290
2,356
14
158
6,811
The following table summarizes information in regard to TDRs that were restructured during the years ended September 30, 2013 and 2012.
Number of
Loans
Pre-
Modification
Principal
Balance
(Dollars in thousands)
Post-
Modification
Principal
Balance
September 30, 2013:
Residential real estate
Commercial real estate
Commercial business
Consumer
Total
September 30, 2012:
Residential real estate
Commercial real estate
Multifamily
Commercial business
Consumer
Total
2 $
1
1
1
5 $
15 $
1
1
1
1
19 $
143 $
4,061
18
5
143
4,066
20
5
4,227 $
4,234
1,872 $
772
1,797
14
159
1,874
506
2,313
14
160
4,614 $
4,867
F-34
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(5 – continued)
The Company has not committed to lend any additional amounts as of September 30, 2013 and 2012 to customers with outstanding loans
that are classified as TDRs.
For the TDRs listed above, the terms of modification included temporary interest-only payment periods, reduction of the stated 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.
There were no principal charge-offs recorded as a result of TDRs during the years ended September 30, 2013 and 2012. There was no
specific allowance for loan losses related to TDRs modified during the years ended September 30, 2013 and 2012. In the event that a TDR
subsequently defaults, the Company evaluates the restructuring for possible impairment. As a result, the related allowance for loan losses
may be increased or charge-offs may be taken to reduce the carrying amount of the loan.
During the year ended September 30, 2013, the Company had four TDRs totaling $220,000 that were modified within the previous twelve
months for which there was a payment default (defined as more than 90 days past due or in the process of foreclosure). The total
consisted of two residential real estate loans with a balance of $204,000, one commercial business loan with a balance of $14,000 and one
consumer loan with a balance of $2,000 at the date of default. As of September 30, 2013, two of the defaulted TDRs totaling $143,000 were
on nonaccrual status and one defaulted TDR with a balance of $75,000 was accruing and performing in agreement with the modified terms
after curing the default. The Company recognized a net charge-off of $2,000 on the remaining defaulted TDR during the year ended
September 30, 2013.
During the year ended September 30, 2012, the Company had one residential real estate TDR loan 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 or in the
process of foreclosure). The Company recognized a net charge-off of $42,000 for this TDR during the year ended September 30, 2012.
F-35
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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,
Inc. and on July 27, 2012 the Company transferred ownership of the property to FFCC, Inc. The total cost of the development is expected
to be approximately $7.5 million, including the $7.3 million paid as of September 30, 2013. The development costs were partially funded by a
loan from another financial institution (see Note 14). The development is substantially completed, with only certain tenant improvements
in a multi-tenant retail building to be completed for current and future lessees, and seven tenants have commenced occupancy as of
September 30, 2013.
Development and construction period interest of $87,000 and $8,000 was capitalized as part of the real estate carrying value during the
years ended September 30, 2013 and 2012, respectively.
Real estate development and construction consisted of the following at September 30, 2013 and 2012:
(In thousands)
Land and land improvements
Office buildings
Furniture, fixtures and equipment
Less accumulated depreciation
Totals
$
2013
2012
4,159 $
3,032
74
7,265
3,621
917
-
4,538
87
-
$
7,178 $
4,538
Depreciation expense of $87,000 was recognized for real estate development and construction for the year ended September 30, 2013. No
depreciation expense was recognized for real estate development and construction for the year ended September 30, 2012.
The Bank and FFCC lease commercial retail space to tenants under noncancelable operating leases with terms of five to twenty years. The
following is a schedule by years of future minimum lease payments under the leases as of September 30, 2013:
Years ending September 30:
2014
2015
2016
2017
2018
2019 and thereafter
Total
(In thousands)
593
$
626
626
626
637
4,174
7,282
$
F-36
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 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
2013
2012
$
5,242 $
10,400
4,264
19,906
2,860
9,284
3,331
15,475
5,064
4,568
$
14,842 $
10,907
Depreciation expense of $810,000 and $689,000 was recognized for premises and equipment for the years ended September 30, 2013 and
2012, respectively.
(8)
OTHER REAL ESTATE OWNED
At September 30, 2013 and 2012, the Bank had other real estate owned held for sale of $799,000 and $2.1 million, respectively, including
$250,000 and $600,000 in former banking facilities held for sale, respectively. During the years ended September 30, 2013 and 2012,
foreclosure losses in the amount of $191,000 and $755,000, respectively, were charged-off to the allowance for loan losses. The losses on
subsequent write downs of other real estate owned amounted to $165,000 and $94,000 for the years ended September 30, 2013 and 2012,
respectively, and were aggregated with realized gains and losses from the sale of other real estate owned, and real estate taxes and other
expenses of holding other real estate owned. Net realized gains from the sale of other real estate owned amounted to $125,000 and $41,000
for the years ended September 30, 2013 and 2012, respectively. Real estate taxes, other expenses of holding other real estate owned and
net of income received from the operation of other real estate owned held for sale amounted to $140,000 and $147,000 for the years ended
September 30, 2013 and 2012, respectively. The net loss is reported in noninterest expense. Realized gains from the sale of other real estate
owned totaling $93,000 and $36,000 for the years ended September 30, 2013 and 2012, respectively, were deferred because the sales were
financed by the Bank and did not qualify for recognition under generally accepted accounting principles. At September 30, 2013 and 2012,
aggregate deferred gains on the sale of other real estate owned financed by the Bank amounted to $214,000 and $132,000, respectively.
(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 2013 or 2012.
The changes in the carrying amount of goodwill for the years ended September 30, 2013 and 2012 are summarized as follows:
(In thousands)
Beginning balance
Acquisition of First Federal branches
Ending balance
F-37
2013
2012
$
$
7,936 $
-
5,940
1,996
7,936 $
7,936
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(9 – continued)
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
2013
2012
$
2,741 $
566
(1,238)
2,741
566
(894)
$
2,069 $
2,413
Amortization expense of intangibles amounted to $344,000 and $307,000 for the years ended September 30, 2013 and 2012, 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)
2014
2015
2016
2017
2018
2019 and thereafter
Total
(10)
DEPOSITS
$
344
344
344
344
344
349
$
2,069
The aggregate amount of time deposit accounts (certificates of deposit) with balances of $100,000 or more was $52.9 million and $71.8
million at September 30, 2013 and 2012, respectively.
At September 30, 2013, scheduled maturities of certificates of deposit were as follows:
Years ending September 30:
2014
2015
2016
2017
2018 and thereafter
Total
(In thousands)
$
85,444
36,774
19,517
12,035
20,936
$
174,706
The Bank held deposits of $5.3 million for related parties at both September 30, 2013 and 2012.
(11)
FEDERAL FUNDS PURCHASED
The Bank has 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, 2014 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, 2013 and 2012, the Bank had no outstanding federal funds purchased under the
facility.
F-38
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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 at September 30, 2013 and 2012 are summarized as follows:
(Dollars in thousands)
Weighted
Average
Rate
2013
2012
Weighted
Average
Amount
Rate
Amount
Retail repurchase agreements
0.25 % $
1,335
0.50 % $
1,329
The debt securities underlying the retail repurchase agreements were under the control of the Bank at September 30, 2013 and 2012. The
securities underlying broker-dealer repurchase agreements are delivered to the broker-dealer who arranged the transactions.
Information concerning borrowings under retail repurchase agreements as of and for the years ended September 30, 2013 and 2012 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
2013
2012
0.45 %
1,332 $
1,335
0.62 %
1,324
1,329
1,889 $
1,913
2,796
2,871
$
$
Information concerning borrowings under repurchase agreements with broker-dealers as of and for the year ended September 30, 2012 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
$
$
Interest expense on repurchase agreements for the years ended September 30, 2013 and 2012 is summarized as follows:
(In thousands)
Broker-dealer repurchase agreements
Retail repurchase agreements
Total
F-39
2013
2012
$
$
- $
6
6 $
2012
2.09 %
2,785
15,047
-
-
59
8
67
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(13)
BORROWINGS FROM FEDERAL HOME LOAN BANK
At September 30, 2013 and 2012 borrowings from the FHLB were as follows:
(Dollars in thousands)
Advances maturing in:
2013
2014
2015
2017
2018
Total advances
Weighted
Average
Rate
2013
2012
Weighted
Average
Amount
Rate
Amount
- % $
0.34 %
2.66 %
1.10 %
1.04 %
-
35,000
20,000
15,000
10,000
2.34 % $
- %
2.66 %
1.10 %
- %
80,000
18,062
-
20,000
15,000
-
53,062
Line of credit balance
0.45 %
9,348
- %
-
Total borrowings from Federal Home Loan Bank
$
89,348
$
53,062
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,
2013, the eligible blanket collateral included residential mortgage loans with a carrying value of $178.2 million.
On August 12, 2013, the Bank entered into an Overdraft Line of Credit Agreement with the FHLBI which established a line of credit not to
exceed $25.0 million secured under the blanket collateral agreement. This agreement expires on February 12, 2014. At September 30, 2013,
$9.3 million was outstanding under this agreement.
(14)
OTHER LONG-TERM DEBT
On July 27, 2012, FFCC, Inc. entered into a loan agreement with another financial institution to finance the retail development and
construction project discussed in Note 6. The loan had a maximum commitment of $5.0 million and is for a ten-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 provided for 12 interest only monthly payments through July 27, 2013, 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
$7.2 million at September 30, 2013. The outstanding principal balance of the loan was $5.0 million and $2.1 million at September 30, 2013 and
2012, respectively.
Interest expense of $72,000 was recognized on other long-term debt for the year ended September 30, 2013. No interest expense was
recognized for the year ended September 30, 2012.
Future maturities of other long-term debt, based on the amount outstanding under the loan agreement at September 30, 2013, are as follows
for the years ending September 30, 2014, 2015, 2016, 2017, 2018 and later years: $168,000, $175,000, $182,000, $189,000, $197,000 and $4.1
million, respectively.
F-40
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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 $18,000 and $21,000 for the years
ended September 30, 2013 and 2012, respectively.
2>The Company has a directors’ deferred compensation plan whereby a director, at his or her election on an annual basis, may defer all or
a portion of the 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 until separation from service by the director. The benefits under the plan are payable in a lump sum or in monthly
installments over a period of up to ten years following the separation from service; 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
$160,000 and $120,000 for the years ended September 30, 2013 and 2012, 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 $336,000 and $304,000 for the years ended September 30, 2013 and 2012, 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 or by utilizing the dividends as additional debt service on the ESOP loan. 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, 2013 and 2012 amounted to $652,000 and $252,000, respectively. Company common
stock held by the ESOP trust at September 30, 2013 and 2012 was as follows:
Allocated shares
Unearned shares
Total ESOP shares
Fair value of unearned shares
F-41
2013
2012
103,116
86,495
189,611
83,522
119,841
203,363
$
1,946,000 $
2,337,000
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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, 2013 and 2012 amounted to $260,000. A summary of the Company’s nonvested restricted
shares for the year ended September 30, 2013 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
58,850 $
-
(19,620)
-
39,230 $
13.25
-
13.25
-
13.25
There were no restricted shares granted during the years ended September 30, 2013 and 2012. The total fair value of restricted shares that
vested during the years ended September 30, 2013 and 2012 was $441,000 and $346,000, respectively. At September 30, 2013, there was
$422,000 of total unrecognized compensation expense related to nonvested restricted shares. The compensation expense is expected to be
recognized over the remaining vesting period of 1.63 years.
F-42
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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, 2013, and changes during the year then ended is presented
below.
Number
of
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
1,533,000
7.6 $
Outstanding at beginning of year
Granted
Exercise
Forfeited or expired
Outstanding at end of year
Exercisable at end of year
245,232 $
-
-
-
245,232 $
147,141 $
13.25
-
-
-
13.25
13.25
6.6 $
6.6 $
2,268,000
1,361,000
There were no stock options granted or exercised during the years ended September 30, 2013 and 2012. The Company recognized
compensation expense related to stock options of $152,000 for both years ended September 30, 2013 and 2012. At September 30, 2013,
there was $246,000 of unrecognized compensation expense related to nonvested stock options, which will be recognized over the
remaining vesting period of 1.63 years.
F-43
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(18) INCOME TAXES
The Company and its subsidiaries file consolidated income tax returns. The components of consolidated income tax expense were as
follows for the years ended September 30, 2013 and 2012:
(In thousands)
Current
Tax benefit allocated to additional paid-in capital related to equity incentive
plan
Deferred
Income tax expense
2013
2012
$
1,228 $
1,265
70
513
33
160
$
1,811 $
1,458
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, 2013 and 2012:
(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
2013
2012
$
2,212 $
159
(608)
(130)
178
1,953
90
(486)
(97)
(2)
$
1,811 $
1,458
Significant components of the Company’s deferred tax assets and liabilities as of September 30, 2013 and 2012 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 other real estate owned 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
FHLB stock dividends
Section 481 adjustment for bad debt recapture
Unrealized gain on trading account securities
Deferred tax liabilities
$
2013
2012
2,212 $
9
315
-
92
16
48
78
239
3,009
(882)
(1,399)
(63)
(133)
(62)
(17)
(2,556)
1,983
252
273
124
76
23
27
51
225
3,034
(3,184)
(775)
(148)
(134)
(109)
(20)
(4,370)
Net deferred tax asset (liability)
$
453 $
(1,336)
F-44
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(18 - continued)
At September 30, 2013 and 2012, 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, 2010 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, 2013 and 2012 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, 2013
and 2012.
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 $556,000 at September 30, 2013.
The following is a summary of the commitments to extend credit at September 30, 2013 and 2012:
(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-45
2013
2012
$
13,353 $
3,978
19,043
23,722
4,388
6,886
726
20,038
21,000
6,602
$
64,484 $
55,252
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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 2013 or 2012.
F-46
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(21)
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying value and estimated fair value of financial instruments and the level within the fair value
hierarchy in which the fair value measurements fall at September 30, 2013 and 2012.
September 30, 2013:
Financial assets:
Cash and due from banks
Interest-bearing deposits with banks
Interest-bearing time deposits
Trading account securities
Securities available for sale
Securities held to maturity
Loans, net
Loans held for sale
FHLB stock
Accrued interest receivable
Interest rate cap (included in other assets)
Financial liabilities:
Deposits
Short-term repurchase agreements
Borrowings from FHLB
Other long-term debt
Accrued interest payable
Advance payments by borrowers
for taxes and insurance
September 30, 2012:
Financial assets:
Cash and due from banks
Interest-bearing deposits with banks
Trading account securities
Securities available for sale
Securities held to maturity
Loans, net
Loans held for sale
FHLB stock
Accrued interest receivable
Interest rate cap (included in other assets)
Financial liabilities:
Deposits
Short-term repurchase agreements
Borrowings from FHLB
Other long-term debt
Accrued interest payable
Advance payments by borrowers
for taxes and insurance
Carrying
Amount
9,607 $
11,208
1,500
3,210
164,167
6,417
408,375
399
5,500
2,391
11
477,726
1,335
89,348
4,973
184
707
27,569 $
11,222
3,562
152,543
7,848
389,067
643
5,400
2,412
11
494,234
1,329
53,062
2,132
236
622
$
$
F-47
Fair Value Measurements Using:
Level 2
Level 3
Level 1
(In thousands)
9,607 $
11,208
-
-
93
-
- $
-
1,475
3,210
164,074
6,514
-
-
-
-
-
-
-
413,629
-
-
-
-
-
-
-
-
-
-
-
399
5,500
2,391
11
-
1,335
87,932
4,973
184
707
27,569 $
11,222
-
69
-
- $
-
3,562
152,474
8,314
-
-
-
-
477,094
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
388,790
643
5,400
2,412
11
-
1,329
53,752
2,132
236
-
-
-
-
497,028
-
-
-
-
622
-
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(21 - continued)
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 19, 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 and Interest-Bearing Time Deposits
For cash and short-term instruments, including cash and due from banks and interest-bearing deposits with banks, and interest-bearing
time deposits with other financial institutions, the carrying amount is a reasonable estimate of fair value.
Debt and Equity Securities
For marketable equity securities, the fair values are based on quoted market prices. For debt securities, the Company obtains fair value
measurements from an independent pricing service and the fair value measurements consider observable data that may include dealer
quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus
prepayment speeds, credit information, and the security’s terms and conditions, among other factors. For 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, excluding loans held for sale, 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. Impaired loans are valued at the lower of their carrying
value or fair value. The carrying amount of accrued interest receivable approximates its fair value.
The fair value of loans held for sale is estimated based on specific prices of underlying contracts for sales to investors.
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, repurchase agreements and other long-term debt. 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, FHLB line of credit borrowings and other debt, 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-48
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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:
Level 3:
Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active
markets. A quoted market price in an active market provides the most reliable evidence of fair value and shall be
used to measure fair value whenever available.
Inputs to the valuation methodology include quoted market prices for similar assets or liabilities in active
markets; quoted market prices for identical or similar assets or liabilities in markets that are not active; or inputs
that are derived principally from or can be corroborated by observable market data by correlation or other
means.
Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3
assets and liabilities include financial instruments whose value is determined using discounted cash flow
methodologies, as well as instruments for which the determination of fair value requires significant
management judgment or estimation.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such
instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s
financial assets carried at fair value or the lower of cost or fair value.
F-49
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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,
2013. The Company had no liabilities measured at fair value as of September 30, 2013.
September 30, 2013:
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
SBA certificates
Municipal obligations
Equity securities
Total securities available for sale
Interest rate cap
Assets Measured – Nonrecurring Basis
Impaired loans:
Residential real estate
Commercial real estate
Multifamily
Construction
Commercial business
Consumer
Total impaired loans
Loans held for sale
Other real estate owned, held for sale:
Residential real estate
Commercial real estate
Land and land development
Total other real estate owned
Carrying Value
Level 1
Level 2
Level 3
Total
(In thousands)
$
$
$
$
$
$
$
$
$
- $
3,210 $
- $
3,210
- $
-
-
-
-
-
-
93
93 $
15,197 $
41,714
24,074
4,616
7,799
2,093
68,581
-
164,074 $
- $
11 $
- $
-
-
-
-
-
-
-
- $
- $
15,197
41,714
24,074
4,616
7,799
2,093
68,581
93
164,167
11
- $
-
-
-
-
-
- $
- $
-
-
-
-
-
- $
5,676 $
6,091
2,306
29
235
450
14,787 $
5,676
6,091
2,306
29
235
450
14,787
- $
399 $
- $
399
- $
-
-
- $
- $
-
-
- $
397 $
375
27
799 $
397
375
27
799
F-50
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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 obligations
Equity securities
Total securities available for sale
Interest rate cap
Assets Measured – Nonrecurring Basis
Impaired loans:
Residential real estate
Commercial real estate
Multifamily
Construction
Commercial business
Consumer
Total impaired loans
Loans held for sale
Other real estate owned, held for sale:
Residential real estate
Commercial real estate
Multifamily
Land and land development
Total other real estate owned
Level 1
Level 2
Level 3
Total
Carrying Value
(In thousands)
$
$
$
$
$
$
$
$
$
- $
3,562 $
- $
3,562
- $
-
-
-
-
69
69 $
16,064 $
43,420
17,541
5,289
7,227
62,933
-
152,474 $
- $
11 $
- $
-
-
-
-
-
- $
- $
16,064
43,420
17,541
5,289
7,227
62,933
69
152,543
11
- $
-
-
-
-
-
- $
- $
- $
-
-
-
- $
- $
-
-
-
-
-
- $
5,768 $
2,129
2,356
174
80
319
10,826 $
5,768
2,129
2,356
174
80
319
10,826
643 $
- $
643
- $
-
-
-
- $
487 $
231
357
406
1,481 $
487
231
357
406
1,481
F-51
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(22 - continued)
Fair value is based upon quoted market prices, where available. If quoted market prices are not available, fair value is based on internally-
developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters or a matrix pricing model
that employs the Bond Market Association’s standard calculations for cash flow and price/yield analysis and observable market-based
parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value, or the lower of cost or fair
value. These adjustments may include unobservable parameters. Any such valuation adjustments have been applied consistently over
time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or
reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with
other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments
could result in a different estimate of fair value at the reporting date.
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. For securities where quoted market prices, market prices of similar securities or prices from an independent third
party pricing service are not available, fair values are calculated using discounted cash flows or other market indicators and are classified
within Level 3 of the fair value hierarchy. 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 reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted
accordingly. The fair value of impaired loans is classified as Level 3 in the fair value hierarchy.
Impaired loans are measured at the present value of estimated future cash flows using the loan's effective interest rate or the fair value of
the collateral if the loan is a collateral-dependent loan. 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. At September 30, 2013, the significant unobservable
inputs used in the fair value measurement of impaired loans included a discount from appraised value ranging from 0.0% to 15.0% and
estimated costs to sell the collateral ranging from 0.0% to 6.0%. During the year ended September 30, 2013, the Company recognized
provisions for loan losses of $416,000 for impaired loans.
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.
F-52
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(22 - continued)
Other Real Estate Owned. Other real estate owned held for sale is reviewed and evaluated on at least a quarterly basis for additional
impairment and adjusted accordingly. Fair value of other real estate owned is classified as Level 3 in the fair value hierarchy.
Other real estate owned 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 and the condition of the collateral. At September 30, 2013, the significant unobservable inputs used in the fair value
measurement of other real estate owned included a discount from appraised value ranging from 0.0% to 15.0% and estimated costs to sell
the property ranging from 0.0% to 6.0%. The Company recognized charges of $165,000 and $94,000 to write down other real estate owned
to fair value for the years ended September 30, 2013 and 2012, respectively.
Transfers Between Categories. 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, 2013 and 2012. There were no transfers into or out
of Level 3 financial assets or liabilities for the years ended September 30, 2013 or 2012. 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, 2013 or 2012.
F-53
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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, 2013:
Strike
Rate
Remaining
Term
Notional
Amount
Purchase
Premium
Unrealized
Loss
Fair
Value
7.50 %
3.84 years $
10,000 $
150 $
139 $
11
(Dollars in thousands)
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-54
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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 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 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 ninth dividend period ended September 30, 2013 was
1.0% and the weighted average dividend rate for the years ended September 30, 2013 and 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-55
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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 must also file prior notice with the Federal Reserve
Board before the Bank may declare and pay dividends to the Company. The amount of dividends that the Bank may declare and pay to the
Company in any calendar year cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two
calendar years. 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,
2013, that the Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 2013, 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-56
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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.
Actual
Amount
Ratio
Adequacy Purposes:
Ratio
Amount
Minimum
For Capital
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions:
Amount
Ratio
(Dollars in thousands)
As of September 30, 2013:
Total capital (to risk weighted assets)
$
71,828
17.04 % $
33,713
8.00 % $
42,141
10.00 %
Tier I capital (to risk weighted assets)
$
66,515
15.78 %
N/A $
25,285
6.00 %
Tier I capital (to adjusted total assets)
$
66,515
10.36 % $
25,682
4.00 % $
32,103
5.00 %
Tangible capital (to adjusted total assets)
$
66,515
10.36 % $
9,631
1.50 %
N/A
As of September 30, 2012:
Total capital (to risk weighted 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
F-57
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(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, 2013 and 2012.
(In thousands, except share and per share data)
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
$
$
$
$
$
Years Ended September 30,
2012
2013
4,696 $
(171)
4,525 $
4,287
(171)
4,116
2,168,770
2,163,552
2.09 $
1.90
4,696 $
(171)
4,525 $
4,287
(171)
4,116
2,168,770
84,565
15,728
2,163,552
51,853
14,783
2,269,063
2,230,188
Net income per common share, diluted
$
1.99 $
1.85
Unearned ESOP and nonvested restricted stock shares are not considered as outstanding for purposes of computing weighted average
common shares outstanding.
F-58
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(29) PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial information for First Savings Financial Group, Inc. (parent company only) follows:
Assets:
Cash and interest bearing deposits
Other assets
Investment in subsidiaries
Liabilities and Equity:
Accrued expenses
Stockholders' equity
Balance Sheets
(In thousands)
Statements of Income
(In thousands)
As of September 30,
2013
2012
$
$
$
$
1,691 $
745
80,057
82,493 $
240 $
82,253
82,493 $
1,895
698
80,506
83,099
173
82,926
83,099
Years Ended September 30,
2012
2013
Dividend income from subsidiary
Other operating expenses
$
2,000 $
(1,351)
Income (loss) before income taxes and equity in undistributed net income of
subsidiaries
Income tax benefit
Income (loss) before equity in undistributed net income of subsidiaries
Equity in undistributed net income of subsidiaries
649
355
1,004
3,692
Net income
$
4,696 $
-
(959)
(959)
289
(670)
4,957
4,287
F-59
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(29 - continued)
Statements of Cash Flows
(In thousands)
Years Ended September 30,
2012
2013
Operating Activities:
Net income
Adjustments to reconcile net income to cash provided by operating activities:
$
4,696 $
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:
Purchase of treasury stock
Dividends paid
Net cash used in financing activities
Net decrease in cash and interest bearing deposits
Cash and interest bearing deposits at beginning of year
Cash and interest bearing deposits at end of year
$
(30) CONCENTRATION OF CREDIT RISK
(3,692)
1,063
97
2,164
-
-
(625)
(1,743)
(2,368)
4,287
(4,957)
664
188
182
(2,494)
(2,494)
(743)
(244)
(987)
(204)
(3,299)
1,895
1,691 $
5,194
1,895
At September 30, 2013 and 2012, the Bank had a concentration of credit risk with correspondent banks in excess of the federal deposit
insurance limit of $7.9 million and $1.2 million, respectively.
(31) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(In thousands)
Cash payments for:
Interest
Taxes
Non-cash investing activities:
2013
2012
$
4,496 $
1,354
5,367
848
Transfers from loans to other real estate owned
Proceeds from sales of other real estate owned financed through loans
1,212
1,093
2,436
1,453
F-60
FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2013 AND 2012
(32) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In thousands, except per share data)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
September 30, 2013:
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
$
6,760 $
1,095
5,665
452
5,213
1,000
4,819
1,394
378
7,001 $
1,010
5,991
550
5,441
925
4,777
1,589
419
6,689 $
909
5,780
560
5,220
1,035
4,673
1,582
441
6,725
922
5,803
296
5,507
1,298
4,863
1,942
573
1,016
1,170
1,141
1,369
Less: Preferred stock dividends declared
43
43
43
42
Net income available to common shareholders
Net income per common share, basic
Net income per common share, diluted
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
$
$
$
$
973 $
1,127 $
1,098 $
1,327
0.45 $
0.52 $
0.51 $
0.61
0.43 $
0.50 $
0.48 $
0.58
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
Less: Preferred stock dividends declared
43
43
43
42
Net income available to common shareholders
Net income per common share, basic
Net income per common share, diluted
$
$
$
867 $
921 $
1,229 $
1,099
0.40 $
0.43 $
0.57 $
0.50
0.39 $
0.41 $
0.55 $
0.49
F-61
(Back To Top)
Section 2: EX-21.0 (EXHIBIT 21.0)
EXHIBIT 21.0
Registrant
First Savings Financial Group, Inc.
Subsidiaries
First Savings Bank, F.S.B.
Southern Indiana Financial Corporation (1)
FFCC, Inc. (1)
First Savings Investments, Inc. (1)
_____________
(1) Wholly owned subsidiary of First Savings Bank, F.S.B.
(Back To Top)
Section 3: EX-23.0 (EXHIBIT 23.0)
SUBSIDIARIES
Percentage
Ownership
Jurisdiction or
State of Incorporation
Indiana
United
States
Indiana
Indiana
Nevada
100 %
100 %
100 %
100 %
EXHIBIT 23.0
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 30, 2013 contained in the annual report for the year ended September 30, 2013 appearing in this Form
10-K.
New Albany, Indiana
December 30, 2013
(Back To Top)
Section 4: EX-31.1 (EXHIBIT 31.1)
I, Larry W. Myers, certify that:
1.
I have reviewed this Annual Report on Form 10-K of First Savings Financial Group, Inc.:
CERTIFICATION
EXHIBIT 31.1
2.
3.
4.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this annual report;
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual
report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this annual report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our
conclusions about the effectiveness of the disclosure controls and procedures, as the end of the period covered by this annual
report based on such evaluation;
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over financial reporting; and
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)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: December 30, 2013
/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)
EXHIBIT 31.2
I, Anthony A. Schoen, certify that:
CERTIFICATION
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)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this annual report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our
conclusions about the effectiveness of the disclosure controls and procedures, as the end of the period covered by this annual
report based on such evaluation;
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over financial reporting; and
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)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: December 30, 2013
/s/ Anthony A. Schoen
Anthony A. Schoen
Chief Financial Officer
(principal financial and accounting officer)
(Back To Top)
Section 6: EX-32 (EXHIBIT 32)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADDED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.0
In connection with the Annual Report of First Savings Financial Group, Inc. (the “Company”) on Form 10-K for the year ended September
30, 2013 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)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
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 30, 2013
(Back To Top)