XNAS:FSFG First Savings Financial Group Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from   to  

 

Commission File No. 1-34155

 

First Savings Financial Group, Inc.

(Exact name of registrant as specified in its charter)

 

Indiana   37-1567871
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification Number)

 

501 East Lewis & Clark Parkway, Indiana 47129
(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code 1-812-283-0724

 

  Not applicable  
  (Former name, former address and former fiscal year, if changed since last report)  

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

(Check one): Large Accelerated Filer ¨ Accelerated Filer ¨
     
  Non-accelerated Filer ¨ Smaller Reporting Company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

The number of shares outstanding of the registrant’s common stock as of July 31, 2012 was 2,359,581.

 

 
 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

 

INDEX

 

    Page
     
Part I  Financial Information   
     
  Item 1.  Financial Statements  
     
  Consolidated Balance Sheets as of June 30, 2012 and September 30, 2011 (unaudited) 3
     
  Consolidated Statements of Income for the three months and nine months ended June 30, 2012 and 2011 (unaudited) 4
     
  Consolidated Statements of Comprehensive Income for the three months and nine months ended June 30, 2012 and 2011 (unaudited) 5
     
  Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended June 30, 2012 (unaudited) 6
     
  Consolidated Statements of Cash Flows for the nine months ended June 30, 2012 and 2011 (unaudited) 7
     
  Notes to Consolidated Financial Statements (unaudited) 8-38
     
  Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 39-50
     
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk 51-53
     
  Item 4.  Controls and Procedures 54
     
Part II Other Information  
     
  Item 1.  Legal Proceedings 55
     
  Item 1A.  Risk Factors 55
     
  Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 56
     
  Item 3.  Defaults Upon Senior Securities 56
     
  Item 4.  Mine Safety Disclosures 56
     
  Item 5.  Other Information 56
     
  Item 6.  Exhibits 57
     
Signatures   58

 

-2-
 

 

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   June 30,   September 30, 
(In thousands, except share and per share data)  2012   2011 
         
ASSETS          
Cash and due from banks  $7,694   $18,099 
Interest-bearing deposits with banks   7,588    9,104 
Total cash and cash equivalents   15,282    27,203 
           
Trading account securities   2,130    - 
Securities available for sale, at fair value   153,729    108,577 
Securities held to maturity   8,406    9,506 
           
Loans held for sale   92    - 
Loans, net   365,157    354,432 
           
Federal Home Loan Bank stock, at cost   5,400    4,400 
Real estate development and construction   4,112    - 
Premises and equipment   10,246    10,444 
Foreclosed real estate   1,415    1,028 
Accrued interest receivable:          
Loans   1,354    1,382 
Securities   1,280    816 
Cash surrender value of life insurance   8,483    8,548 
Goodwill   5,940    5,940 
Core deposit intangible   1,933    2,154 
Other assets   2,079    2,656 
           
Total Assets  $587,038   $537,086 
           
LIABILITIES          
Deposits:          
Noninterest-bearing  $39,095   $33,426 
Interest-bearing   363,904    354,200 
Total deposits   402,999    387,626 
           
Repurchase agreements   1,327    16,403 
Borrowings from Federal Home Loan Bank   98,044    53,137 
Accrued interest payable   248    399 
Advance payments by borrowers for taxes and insurance   406    330 
Accrued expenses and other liabilities   2,997    2,590 
Total Liabilities   506,021    460,485 
           
STOCKHOLDERS’ EQUITY          
Preferred stock of $.01 par value per share Authorized 982,880 shares; none issued   -    - 
Senior Non-Cumulative Perpetual Preferred Stock, Series A, $.01 par value; Authorized 17,120 shares; issued 17,120 shares; aggregate liquidation preference of $17,120   -    - 
Common stock of $.01 par value per share Authorized 20,000,000 shares; issued 2,542,042 shares   25    25 
Additional paid-in capital   41,953    41,729 
Retained earnings - substantially restricted   38,819    35,801 
Accumulated other comprehensive income   4,397    3,354 
Unearned ESOP shares   (1,235)   (1,343)
Unearned stock compensation   (747)   (942)
Less treasury stock, at cost - 182,461 shares (172,333 shares at September 30, 2011)   (2,195)   (2,023)
Total Stockholders’ Equity   81,017    76,601 
           
Total Liabilities and Stockholders’ Equity  $587,038   $537,086 

 

See notes to consolidated financial statements.

 

-3-
 

 

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   June 30,   June 30, 
(In thousands, except per share data)  2012   2011   2012   2011 
                 
INTEREST INCOME                    
Loans, including fees  $5,083   $5,155   $15,217   $15,488 
Securities:                    
Taxable   1,117    1,159    2,919    3,312 
Tax-exempt   317    244    862    598 
Dividend income   38    26    110    84 
Interest-bearing deposits with banks   4    8    10    15 
Total interest income   6,559    6,592    19,118    19,497 
                     
INTEREST EXPENSE                    
Deposits   817    970    2,584    3,017 
Repurchase agreements   2    84    64    241 
Borrowings from Federal Home Loan Bank   305    273    841    828 
Total interest expense   1,124    1,327    3,489    4,086 
                     
Net interest income   5,435    5,265    15,629    15,411 
Provision for loan losses   308    435    897    1,074 
                     
Net interest income after provision for loan losses   5,127    4,830    14,732    14,337 
                     
NONINTEREST INCOME                    
Service charges on deposit accounts   289    348    864    1,022 
Net gain on sales of available for sale securities   18    -    18    68 
Net gain on trading account securities   31    -    31    - 
Unrealized gain (loss) on derivative contract   (13)   (31)   (33)   2 
Net gain on sales of loans   41    124    114    263 
Increase in cash surrender value of life insurance   72    81    221    230 
Gain on life insurance   321    -    321    - 
Commission income   67    74    202    160 
Other income   219    196    633    531 
Total noninterest income   1,045    792    2,371    2,276 
                     
NONINTEREST EXPENSE                    
Compensation and benefits   2,326    2,130    6,593    6,387 
Occupancy and equipment   468    445    1,403    1,343 
Data processing   452    273    1,074    828 
Advertising   122    76    481    238 
Professional fees   301    141    711    414 
FDIC insurance premiums   83    149    266    432 
Net loss on foreclosed real estate   96    108    206    340 
Other operating expenses   721    734    2,202    2,145 
Total noninterest expense   4,569    4,056    12,936    12,127 
Income before income taxes   1,603    1,566    4,167    4,486 
Income tax expense   331    443    1,021    1,309 
Net Income  $1,272   $1,123   $3,146   $3,177 
                     
Preferred stock dividends declared   43    -    128    - 
Net Income Available to Common Shareholders  $1,229   $1,123   $3,018   $3,177 
                     
Net income per common share:                    
Basic  $0.57   $0.53   $1.40   $1.48 
Diluted  $0.55   $0.51   $1.36   $1.45 
                     
Weighted average common shares outstanding:                    
Basic   2,167,488    2,134,841    2,159,515    2,141,023 
Diluted   2,237,130    2,188,782    2,223,922    2,186,021 

 

See notes to consolidated financial statements.

 

-4-
 

 

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   June 30,   June 30, 
(In thousands)  2012   2011   2012   2011 
                 
Net Income  $1,272   $1,123   $3,146   $3,177 
                     
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX                    
Unrealized gains (losses) on securities available for sale:                    
Unrealized holding gains (losses) arising during the period   1,109    1,174    1,598    (152)
Income tax (expense) benefit   (377)   (465)   (543)   52 
Net of tax amount   732    709    1,055    (100)
                     
Less: reclassification adjustment for realized gains included in net income   (18)   -    (18)   (68)
Income tax expense   6    -    6    23 
Net of tax amount   (12)   -    (12)   (45)
                     
Other Comprehensive Income (Loss)   720    709    1,043    (145)
                     
Comprehensive Income  $1,992   $1,832   $4,189   $3,032 

 

See notes to consolidated financial statements.

 

-5-
 

 

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

                   Accumulated   Unearned         
                   Other   Stock         
   Preferred   Common   Additional   Retained   Comprehensive   Compensation   Treasury     
(In thousands, except share and per share data)  Stock   Stock   Paid-in Capital   Earnings   Income   and ESOP   Stock   Total 
                                 
Balances at September 30, 2010  $-   $25   $24,310   $31,889   $2,959   $(2,703)   (1,329)   55,151 
                                         
Net income   -    -    -    3,177    -    -    -    3,177 
                                         
Change in unrealized gain on securities available for sale, net of reclassification adjustments and tax effect   -    -    -    -    (145)   -    -    (145)
                                         
Stock compensation expense   -    -    139    -    -    195    -    334 
                                         
Shares released by ESOP trust   -    -    64    14    -    121    -    199 
                                         
Purchase of 49,731 treasury shares   -    -    -    -    -    -    (726)   (726)
                                         
Balances at June 30, 2011  $-   $25   $24,513   $35,080   $2,814   $(2,387)  $(2,055)  $57,990 
                                         
Balances at September 30, 2011  $-   $25   $41,729   $35,801   $3,354   $(2,285)  $(2,023)  $76,601 
                                         
Net income   -    -    -    3,146    -    -    -    3,146 
                                         
Change in unrealized gain on securities available for sale, net of reclassification adjustments and tax effect   -    -    -    -    1,043    -    -    1,043 
                                         
Preferred stock dividends declared   -    -    -    (128)   -    -    -    (128)
                                         
Stock compensation expense   -    -    147    -    -    195    -    342 
                                         
Shares released by ESOP trust   -    -    77    -    -    108    -    185 
                                         
Purchase of 10,128 treasury shares   -    -    -    -    -    -    (172)   (172)
                                         
Balances at June 30, 2012  $-   $25   $41,953   $38,819   $4,397   $(1,982)  $(2,195)  $81,017 

 

See notes to consolidated financial statements.

 

-6-
 

 

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Nine Months Ended 
   June 30, 
(In thousands)  2012   2011 
         
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $3,146   $3,177 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   897    1,074 
Depreciation and amortization   740    678 
Amortization of premiums and accretion of discounts on securities, net   256    (151)
Net purchases of trading account securities   (2,100)   - 
Net gain on trading account securities   (31)   - 
Loans originated for sale   (5,231)   (8,721)
Proceeds on sales of loans   5,253    10,764 
Net gain on sales of loans   (114)   (263)
Net realized and unrealized loss on foreclosed real estate   83    204 
Net gain on sales of available for sale securities   (18)   (68)
Unrealized (gain) loss on derivative contract   33    (2)
Gain on life insurance   (321)   - 
Increase in cash surrender value of life insurance   (221)   (230)
Deferred income taxes   17    287 
ESOP and stock compensation expense   494    517 
Increase in accrued interest receivable   (436)   (184)
Decrease in accrued interest payable   (151)   (14)
Change in other assets and liabilities, net   1,072    79 
Net Cash Provided By Operating Activities   3,368    7,147 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchase of securities available for sale   (69,555)   (39,657)
Proceeds from sales of securities available for sale   518    3,914 
Proceeds from maturities of securities available for sale   9,118    15,853 
Proceeds from maturities of securities held to maturity   360    303 
Principal collected on mortgage-backed securities   16,912    9,065 
Net increase in loans   (12,276)   (10,851)
Purchase of Federal Home Loan Bank stock   (1,000)   (351)
Proceeds from redemption of Federal Home Loan Bank stock   -    121 
Proceeds from sale of foreclosed real estate   160    951 
Investment in real estate development and construction   (4,112)   - 
Purchase of premises and equipment   (321)   (1,146)
Net Cash Used In Investing Activities   (60,196)   (21,798)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Net increase in deposits   15,373    11,148 
Net decrease in repurchase agreements   (15,076)   (314)
Increase (decrease) in Federal Home Loan Bank line of credit   4,963    (667)
Proceeds from Federal Home Loan Bank advances   100,000    105,000 
Repayment of Federal Home Loan Bank advances   (60,056)   (102,081)
Net increase (decrease) in advance payments by borrowers for taxes and insurance   76    (51)
Purchase of treasury stock   (172)   (726)
Dividends paid on preferred stock   (201)   - 
Net Cash Provided By Financing Activities   44,907    12,309 
           
Net Decrease in Cash and Cash Equivalents   (11,921)   (2,342)
           
Cash and cash equivalents at beginning of period   27,203    11,278 
           
Cash and Cash Equivalents at End of Period  $15,282   $8,936 

 

See notes to consolidated financial statements.

 

-7-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.Presentation of Interim Information

 

First Savings Financial Group, Inc. (the “Company”) is the thrift holding company of First Savings Bank, F.S.B. (the “Bank”), a wholly-owned subsidiary. The Bank is a federally-chartered savings bank which provides a variety of banking services to individuals and business customers through twelve locations in southern Indiana. The Bank 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.

 

In the opinion of management, the unaudited consolidated financial statements include all adjustments considered necessary to present fairly the financial position as of June 30, 2012, the results of operations for the three- and nine-month periods ended June 30, 2012 and 2011, and the cash flows for the nine-month periods ended June 30, 2012 and 2011. All of these adjustments are of a normal, recurring nature. Such adjustments are the only adjustments included in the unaudited consolidated financial statements. Interim results are not necessarily indicative of results for a full year.

 

The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements, conform to general practices within the banking industry and are presented as permitted by the instructions to Form 10-Q. Accordingly, they do not contain certain information included in the Company’s audited consolidated financial statements and related notes for the year ended September 30, 2011 included in the Form 10-K.

 

The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

 

-8-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2.Investment Securities

 

Agency bonds and notes, agency mortgage-backed securities and agency collateralized mortgage obligations (“CMO”) include securities issued by the Government National Mortgage Association (“GNMA”), a U.S. government agency, and the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal Home Loan Bank (“FHLB”), which are U.S. government-sponsored enterprises. Privately-issued CMO and asset-backed securities (“ABS”) are complex securities issued by non-government special-purpose entities that are collateralized by residential mortgage loans and residential home equity loans.

 

Investment securities have been classified according to management’s intent. The amortized cost of securities and their fair values are as follows:

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (In thousands) 
June 30, 2012:                
Securities available for sale:                    
                     
Agency bonds and notes  $20,657   $154   $-   $20,811 
Agency mortgage-backed   43,219    719    34    43,904 
Agency CMO   18,978    324    3    19,299 
Privately-issued CMO   4,316    521    51    4,786 
Privately-issued ABS   5,768    1,138    61    6,845 
Municipal   53,795    4,282    54    58,023 
Subtotal – debt securities   146,733    7,138    203    153,668 
                     
Equity securities   -    61    -    61 
                     
Total securities available for sale  $146,733   $7,199   $203   $153,729 
                     
Securities held to maturity:                    
                     
Agency mortgage-backed  $1,629   $127   $-   $1,756 
Municipal   6,777    237    -    7,014 
                     
Total securities held to maturity  $8,406   $364   $-   $8,770 

 

-9-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (In thousands) 
September 30, 2011:                
Securities available for sale:                    
                     
Agency bonds and notes  $12,762   $104   $-   $12,866 
Agency mortgage-backed   17,719    590    -    18,309 
Agency CMO   25,368    330    7    25,691 
Privately-issued CMO   10,037    1,535    176    11,396 
Municipal   37,344    2,915    -    40,259 
Subtotal – debt securities   103,230    5,474    183    108,521 
                     
Equity securities   -    56    -    56 
                     
Total securities available for sale  $103,230   $5,530   $183   $108,577 
                     
Securities held to maturity:                    
                     
Agency mortgage-backed  $2,337   $184   $-   $2,521 
Municipal   7,169    -    -    7,169 
                     
Total securities held to maturity  $9,506   $184   $-   $9,690 

 

The amortized cost and fair value of investment securities as of June 30, 2012 by contractual maturity are shown below. Expected maturities of mortgage-backed securities, CMO and ABS may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty.

 

   Available for Sale   Held to Maturity 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
   (In thousands) 
                 
Due within one year  $750   $753   $517   $529 
Due after one year through five years   2,600    2,677    2,524    2,583 
Due after five years through ten years   6,365    6,904    2,182    2,255 
Due after ten years   64,737    68,500    1,554    1,647 
    74,452    78,834    6,777    7,014 
                     
Equity securities   -    61    -    - 
CMO   23,294    24,085    -    - 
ABS   5,768    6,845    -    - 
Mortgage-backed securities   43,219    43,904    1,629    1,756 
                     
   $146,733   $153,729   $8,406   $8,770 

 

-10-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Information pertaining to available for sale securities with gross unrealized losses at June 30, 2012, aggregated by investment category and the length of time that individual securities have been in a continuous loss position, follows:

 

   Number       Gross 
   of Investment   Fair   Unrealized 
   Positions   Value   Losses 
   (Dollars in thousands) 
Securities available for sale:               
                
Continuous loss position less than twelve months:               
Agency mortgage-backed   4   $11,310   $34 
Agency CMO   1    911    3 
Privately-issued ABS   2    144    9 
Municipal bonds   6    3,690    54 
                
Total less than twelve months   13    16,055    100 
                
Continuous loss position more than twelve months:               
Privately-issued CMO   2    637    51 
Privately-issued ABS   1    55    52 
                
Total more than twelve months   3    692    103 
                
Total securities available for sale   16   $16,747   $203 

 

At June 30, 2012, the Company did not have any securities held to maturity with an unrealized loss.

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

The total available for sale debt securities in loss positions at June 30, 2012 have depreciated approximately 1.20% from the Company’s amortized cost basis and are fixed and variable rate securities with a weighted-average yield of 4.13% and a weighted-average coupon rate of 4.45% at June 30, 2012.

 

U.S. government agency mortgage-backed securities and CMOs, and municipal bonds in loss positions at June 30, 2012 had depreciated approximately 0.57% from the Company’s amortized cost basis as of June 30, 2012. All of the agency and municipal securities are issued by U.S. government agencies, U.S. government-sponsored enterprises and municipal governments, and are generally secured by first mortgage loans and municipal project revenues.

 

-11-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The unrealized losses on agency securities and municipal bonds relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government, its agencies, or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As management has the ability to hold debt securities to maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other-than-temporary.

 

At June 30, 2012, the five privately-issued CMO and ABS securities in loss positions had depreciated approximately 11.82% from the Company’s carrying value and include securities collateralized by residential mortgage loans and residential home equity loans. Four of these securities with fair values totaling $737,000 and unrealized losses of $97,000 at June 30, 2012 were rated below investment grade by a nationally recognized statistical rating organization (“NRSRO”).

 

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 June 30, 2012, the Company held nineteen privately-issued CMO and ABS securities acquired in a 2009 bank acquisition with an aggregate carrying value of $3.3 million and fair value of $3.9 million that have been downgraded to a substandard regulatory classification due to a downgrade of the security’s credit quality rating by various rating agencies. Based on 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 June 30, 2012, additional deterioration in market, economic or other conditions that affect the value of the underlying collateral may have an adverse impact on the credit quality in the future and therefore, require a credit-related impairment charge.

 

On May 31, 2012 the Company invested $5.0 million in a managed brokerage account that invests in small and medium lot, investment grade municipal bonds. The brokerage account is managed by an investment advisory firm registered with the U.S. Securities and Exchange Commission. At June 30, 2012, trading account securities recorded at fair value totaled $2.1 million, comprised of investment grade municipal bonds. The remaining $2.9 million of the managed brokerage account was invested in Federal Deposit Insurance Corporation (“FDIC”) insured deposits at June 30, 2012. During the three and nine months ended June 30, 2012, the Company reported net gains on trading account securities of $31,000, including realized gains on the sale of securities and unrealized gains on securities held as of the balance sheet date.

 

During the three and nine months ended June 30, 2012, the Company realized gross gains on sales of available for sale agency securities of $18,000. During the nine months ended June 30, 2011, the Company realized gross gains on sales of available for sale municipal securities of $68,000.

 

-12-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.Loans and Allowance for Loan Losses

 

Loans at June 30, 2012 and September 30, 2011 consisted of the following:

 

   June 30,   September 30, 
   2012   2011 
   (In thousands) 
Real estate mortgage:          
1-4 family residential  $164,167   $169,353 
Multi-family residential   27,499    24,909 
Commercial   90,877    73,513 
Residential construction   12,945    8,002 
Commercial construction   3,368    4,144 
Land and land development   13,092    12,947 
Commercial business loans   36,676    40,628 
Consumer:          
Home equity loans   14,878    15,210 
Auto loans   8,185    9,827 
Other consumer loans   3,985    4,514 
Gross loans   375,672    363,047 
           
Deferred loan origination fees and costs, net   426    558 
Undisbursed portion of loans in process   (6,046)   (4,501)
Allowance for loan losses   (4,895)   (4,672)
           
Loans, net  $365,157   $354,432 

 

During the nine-month period ended June 30, 2012, there was no significant change in the Company’s lending activities or methodology used to estimate the allowance for loan losses as disclosed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011.

 

-13-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides the components of the recorded investment in loans for each portfolio class as of June 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  $164,167   $90,877   $27,499   $10,267   $13,092   $36,676   $27,048   $369,626 
                                         
Accrued interest receivable   625    320    85    27    52    160    85    1,354 
                                         
Net deferred loan origination fees and costs   527    (88)   (3)   (9)   (8)   (16)   23    426 
                                         
Recorded investment in loans  $165,319   $91,109   $27,581   $10,285   $13,136   $36,820   $27,156   $371,406 
                                         
Recorded Investment in Loans as Evaluated for Impairment:                                        
Individually evaluated for impairment  $2,864   $1,391   $-   $174   $340   $66   $356   $5,191 
                                         
Collectively evaluated for impairment   161,735    89,522    27,581    10,111    12,796    36,754    26,762    365,261 
                                         
Acquired with deteriorated credit quality   720    196    -    -    -    -    38    954 
                                         
Ending balance  $165,319   $91,109   $27,581   $10,285   $13,136   $36,820   $27,156   $371,406 

 

-14-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides the components of the recorded investment in loans for each portfolio class as of September 30, 2011:

 

   Residential
Real Estate
   Commercial
Real Estate
   Multifamily   Construction   Land & Land
Development
   Commercial
Business
   Consumer   Total 
   (In thousands) 
                                 
Recorded Investment in Loans:                                        
Principal loan balance  $169,353   $73,513   $24,909   $7,645   $12,947   $40,628   $29,551   $358,546 
                                         
Accrued interest receivable   622    335    84    18    59    148    116    1,382 
                                         
Net deferred loan origination fees and costs   619    (34)   (3)   (6)   (6)   (44)   32    558 
                                         
Recorded investment in loans  $170,594   $73,814   $24,990   $7,657   $13,000   $40,732   $29,699   $360,486 
                                         
Recorded Investment in Loans as Evaluated for Impairment:                                        
Individually evaluated for impairment  $3,758   $1,133   $-   $174   $340   $2   $215   $5,622 
                                         
Collectively evaluated for impairment   166,427    72,100    24,990    7,483    12,660    40,730    29,444    353,834 
                                         
Acquired with deteriorated credit quality   769    581    -    -    -    -    40    1,390 
                                         
Ending balance  $170,954   $73,814   $24,990   $7,657   $13,000   $40,732   $29,699   $360,846 

 

-15-
 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

An analysis of the allowance for loan losses as of June 30, 2012 is as follows:

 

   Residential
Real Estate
   Commercial
Real Estate
   Multifamily   Construction   Land & Land
Development
   Commercial
Business
   Consumer   Total 
   (In thousands) 
Ending Allowance Balance Attributable to Loans:                                
Individually evaluated for impairment  $60   $70   $-   $-   $-   $-   $12   $142 
                                         
Collectively evaluated for impairment   865    1,911    465    79    24    1,181    228    4,753 
                                         
Acquired with deteriorated credit quality   -    -    -    -    -    -    -    - 
                                         
Ending balance  $925   $1,981   $465   $79   $24   $1,181   $240   $4,895 

 

An analysis of the allowance for loan losses as of September 30, 2011 is as follows:

 

   Residential
Real Estate
   Commercial
Real Estate
   Multifamily   Construction   Land & Land
Development
   Commercial
Business
   Consumer   Total 
   (In thousands) 
Ending Allowance Balance Attributable to Loans:                                        
Individually evaluated for impairment  $84   $70   $-   $-   $-   $-   $31   $185 
                                         
Collectively evaluated for impairment   749    1,244    604    56    53    1,525    256    4,487 
                                         
Acquired with deteriorated credit quality   -    -    -    -    -    -    -    - 
                                         
Ending balance  $833   $1,314   $604   $56   $53   $1,525   $287   $4,672 

 

-16-
 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

An analysis of the changes in the allowance for loan losses for the three months ended June 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  $979   $1,612   $647   $64   $33   $1,379   $209   $4,923 
                                         
Provisions   29    547    (182)   15    (9)   (165)   73    308 
Charge-offs   (85)   (178)   -    -    -    (33)   (61)   (357)
Recoveries   2    -    -    -    -    -    19    21 
                                         
Ending balance  $925   $1,981   $465   $79   $24   $1,181   $240   $4,895 

 

An analysis of the changes in the allowance for loan losses for the nine months ended June 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  $833   $1,314   $604   $56   $53   $1,525   $287   $4,672 
                                         
Provisions   359    859    (139)   23    (29)   (312)   136    897 
Charge-offs   (375)   (192)   -    -    -    (33)   (228)   (828)
Recoveries   108    -    -    -    -    1    45    154 
                                         
Ending balance  $925   $1,981   $465   $79   $24   $1,181   $240   $4,895 

 

-17-
 

  

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

An analysis of the changes in the allowance for loan losses for the three months ended June 30, 2011 is as follows:

 

   Residential
Real Estate
   Commercial
Real Estate
   Multifamily   Construction   Land & Land
Development
   Commercial
Business
   Consumer   Total 
   (In thousands)     
Changes in Allowance for Loan Losses:                                        
Beginning balance  $1,236   $880   $554   $145   $37   $961   $344   $4,157 
                                         
Provisions   (203)   210    135    (91)   57    193    134    435 
Charge-offs   (177)   -    -    -    -    (19)   (117)   (313)
Recoveries   -    -    -    -    -    153    15    168 
                                         
Ending balance  $856   $1,090   $689   $54   $94   $1,288   $376   $4,447 

 

An analysis of the changes in the allowance for loan losses for the nine months ended June 30, 2011 is as follows:

 

   Residential
Real Estate
   Commercial
Real Estate
   Multifamily   Construction   Land & Land
Development
   Commercial
Business
   Consumer   Total 
   (In thousands)     
Changes in Allowance for Loan Losses:                                        
Beginning balance  $1,242   $600   $369   $218   $62   $891   $429   $3,811 
                                         
Provisions   15    495    320    (156)   32    255    113    1,074 
Charge-offs   (414)   (5)   -    (8)   -    (72)   (211)   (710)
Recoveries   13    -    -    -    -    214    45    272 
                                         
Ending balance  $856   $1,090   $689   $54   $94   $1,288   $376   $4,447 

 

-18-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents impaired loans individually evaluated for impairment as of June 30, 2012 and for the three and nine months ended June 30, 2012 and 2011. The Company did not recognize any interest income on impaired loans for the three and nine months ended June 30, 2012 and 2011.

 

   At June 30, 2012   Three Months Ended June 30,   Nine Months Ended June 30, 
   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   2012
Average
Recorded
Investment
   2011
Average
Recorded
Investment
   2012
Average
Recorded
Investment
   2011
Average
Recorded
Investment
 
   (In thousands) 
Loans with no related allowance recorded:                                   
Residential real estate  $2,712   $3,079   $-   $2,303   $3,835   $2,927   $3,092 
Commercial real estate   1,187    1,206    -    1,316    1,422    1,082    1,250 
Multifamily   -    -    -    -    16    -    8 
Construction   174    174    -    174    447    174    467 
Land and land development   340    346    -    340    369    340    284 
Commercial business   66    65    -    82    74    41    163 
Consumer   104    106    -    110    177    103    209 
                                    
   $4,583   $4,976   $-   $4,325   $6,340   $4,667   $5,473 
                                    
Loans with an allowance recorded:                                   
Residential real estate  $152   $151   $60   $150   $284   $156   $468 
Commercial real estate   204    211    70    221    513    229    380 
Multifamily   -    -    -    -    -    -    - 
Construction   -    -    -    -    10    -    105 
Land and land development   -    -    -    -    -    -    - 
Commercial business   -    -    -    -    7    -    4 
Consumer   252    252    12    176    109    128    104 
                                    
   $608   $614   $142   $547   $923   $513   $1,061 
                                    
Total:                                   
Residential real estate  $2,864   $3,230   $60   $2,453   $4,119   $3,083   $3,560 
Commercial real estate   1,391    1,417    70    1,537    1,935    1,311    1,630 
Multifamily   -    -    -    -    16    -    8 
Construction   174    174    -    174    457    174    572 
Land and land development   340    346    -    340    369    340    284 
Commercial business   66    65    -    82    81    41    167 
Consumer   356    358    12    286    286    231    313 
                                    
   $5,191   $5,590   $142   $4,872   $7,263   $5,180   $6,534 

 

-19-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents impaired loans individually evaluated for impairment as of September 30, 2011.

 

   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
 
   (In thousands) 
Loans with no related allowance recorded:               
Residential real estate  $3,584   $3,953   $- 
Commercial real estate   898    899    - 
Multifamily   -    -    - 
Construction   174    174    - 
Land and land development   340    346    - 
Commercial business   2    2    - 
Consumer   134    136    - 
                
   $5,132   $5,510   $- 
                
Loans with an allowance recorded:               
Residential real estate  $174   $175   $84 
Commercial real estate   235    235    70 
Multifamily   -    -    - 
Construction   -    -    - 
Land and land development   -    -    - 
Commercial business   -    -    - 
Consumer   81    81    31 
                
   $490   $491   $185 
                
Total:               
Residential real estate  $3,758   $4,128   $84 
Commercial real estate   1,133    1,134    70 
Multifamily   -    -    - 
Construction   174    174    - 
Land and land development   340    346    - 
Commercial business   2    2    - 
Consumer   215    217    31 
                
   $5,622   $6,001   $185 

 

-20-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 by class of loans at June 30, 2012:

 

   Nonaccrual
Loans
   Loans 90+
Days
Past Due
Still Accruing
   Total
Nonperforming
Loans
 
   (In thousands) 
             
Residential real estate  $2,864   $641   $3,505 
Commercial real estate   1,391    -    1,391 
Multifamily   -    46    46 
Construction   174    -    174 
Land and land development   340    -    340 
Commercial business   66    176    242 
Consumer   356    11    367 
                
Total  $5,191   $874   $6,065 

 

The following table presents the recorded investment in nonperforming loans by class of loans at September 30, 2011:

 

   Nonaccrual
Loans
   Loans 90+
Days
Past Due
Still Accruing
   Total
Nonperforming
Loans
 
   (In thousands) 
             
Residential real estate  $3,758   $603   $4,361 
Commercial real estate   1,133    949    2,082 
Multifamily   -    -    - 
Construction   174    -    174 
Land and land development   340    -    340 
Commercial business   2    99    101 
Consumer   215    61    276 
                
Total  $5,622   $1,712   $7,334 

 

-21-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the aging of the recorded investment in past due loans at June 30, 2012 by class of loans:

 

   30-59
Days
Past Due
   60-89
Days
Past Due
   90 +
Days
Past Due
   Total
Past Due
   Current   Total
Loans
 
   (In thousands) 
                         
Residential real estate  $6,017   $2,914   $3,067   $11,998   $153,321   $165,319 
Commercial real estate   282    76    1,266    1,624    89,485    91,109 
Multifamily   -    -    46    46    27,535    27,581 
Construction   -    -    174    174    10,111    10,285 
Land and land development   -    -    340    340    12,796    13,136 
Commercial business   142    -    242    384    36,436    36,820 
Consumer   278    185    11    474    26,682    27,156 
                               
Total  $6,719   $3,175   $5,146   $15,040   $356,366   $371,406 

 

The following table presents the aging of the recorded investment in past due loans at September 30, 2011 by class of loans:

 

   30-59
Days
Past Due
   60-89
Days
Past Due
   90 +
Days
Past Due
   Total
Past Due
   Current   Total
Loans
 
   (In thousands) 
                         
Residential real estate  $4,145   $842   $2,213   $7,200   $163,754   $170,954 
Commercial real estate   216    400    2,003    2,619    71,195    73,814 
Multifamily   -    -    -    -    24,990    24,990 
Construction   -    -    174    174    7,483    7,657 
Land and land development   47    -    341    388    12,612    13,000 
Commercial business   122    932    101    1,155    39,577    40,732 
Consumer   246    274    147    667    29,032    29,699 
                               
Total  $4,776   $2,448   $4,979   $12,203   $348,643   $360,846 

 

-22-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

-23-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of June 30, 2012, and based on the most recent analysis performed, the recorded investment in loans by risk category was as follows:

 

   Residential
Real Estate
   Commercial
Real Estate
   Multifamily   Construction   Land and Land
Development
   Commercial
Business
   Consumer   Total 
   (In thousands) 
                                 
Pass  $150,963   $85,669   $24,456   $10,111   $12,152   $34,849   $26,221   $344,421 
Special Mention   2,718    1,990    320    -    644    412    163    6,247 
Substandard   11,067    3,246    2,805    174    340    1,559    759    19,950 
Doubtful   571    204    -    -    -    -    13    788 
Loss   -    -    -    -    -    -    -    - 
                                         
Total  $165,319   $91,109   $27,581   $10,285   $13,136   $36,820   $27,156   $371,406 

 

As of September 30, 2011, and based on the most recent analysis performed, the recorded investment in loans by risk category was as follows:

 

   Residential
Real Estate
   Commercial
Real Estate
   Multifamily   Construction   Land and Land
Development
   Commercial
Business
   Consumer   Total 
   (In thousands) 
                                 
Pass  $157,240   $67,572   $22,699   $7,483   $12,223   $37,639   $28,869   $333,725 
Special Mention   2,044    2,296    327    -    402    1,819    74    6,962 
Substandard   10,696    3,711    1,964    174    375    1,272    650    18,842 
Doubtful   974    235    -    -    -    2    106    1,317 
Loss   -    -    -    -    -    -    -    - 
                                         
Total  $170,954   $73,814   $24,990   $7,657   $13,000   $40,732   $29,699   $360,846 

 

-24-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 or maturity 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.

 

Loans modified in a TDR may be retained in accrual status if the borrower has maintained a period of performance in which the borrower’s lending relationship was not greater than ninety days delinquent at the time of restructuring and the Company determines the future collection of principal and interest is reasonably assured. Loans modified in a TDR that are placed on nonaccrual status at the time of restructuring will continue in nonaccrual status until the Company determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms of at least six consecutive months.

 

The following table summarizes the Company’s recorded investment in TDRs by class of loan and accrual status at June 30, 2012 and September 30, 2011. There was no specific reserve included in the allowance for loan losses related to TDRs at June 30, 2012 or September 30, 2011.

 

   Accruing   Nonaccrual   Total 
   (In thousands) 
June 30, 2012:               
Residential real estate  $2,794   $-   $2,794 
Commercial real estate   1,300    -    1,300 
Multifamily   2,367    -    2,367 
Consumer   161    -    161 
                
Total  $6,622   $-   $6,622 
                
September 30, 2011:               
Residential real estate  $1,499   $-   $1,499 
Commercial real estate   812    -    812 
                
Total  $2,311   $-   $2,311 

 

-25-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes information in regard to TDRs that were restructured during the three- and nine-month periods ended June 30, 2012:

 

   Number of
Loans
   Pre-
Modification
Principal
Balance
   Post-
Modification
Principal
Balance
 
   (In thousands) 
             
Three Months Ended June 30, 2012:               
Residential real estate   6   $830   $883 
Consumer   1    159    160 
                
Total   7   $989   $1,043 
                
Nine Months Ended June 30, 2012:               
Residential real estate   13   $1,620   $1,672 
Commercial real estate   1    772    506 
Multifamily   1    1,797    2,313 
Consumer   1    159    160 
                
Total   16   $4,348   $4,651 

 

For the TDRs listed above, the terms of modification included temporary interest-only payment periods, reduction of the state interest rate, capitalization of accrued interest, extension of the maturity date, and the renewal of matured loans where the debtor was unable to access funds elsewhere at a market interest rate for debt with similar risk characteristics.

 

The Company had not committed to lend any additional amounts as of June 30, 2012 and September 30, 2011 to customers with outstanding loans classified as TDRs.

 

During the nine-month period ended June 30, 2012, the Company had one TDR with a balance of $262,000 that was modified within the previous twelve months for which there was a payment default (defined as more than 90 days past due). The Company recognized a net charge-off of $42,000 for this TDR during the nine-month period ended June 30, 2012.

 

4.Real Estate Development and Construction

 

On March 22, 2011 the Company acquired a 4.077 acre parcel of land in New Albany, Indiana for $2.97 million. On April 5, 2012, the Bank received approval from the Office of the Comptroller of the Currency (“OCC”) to develop the land for retail purposes through its subsidiary, FFCC. The retail development may include a future branch location, but the Bank has not yet filed an application with the OCC seeking approval to locate a branch on the site. The total cost of the development is expected to be approximately $6.9 million, including the $4.1 million paid as of June 30, 2012. The development costs will be partially funded by a $5.0 million loan commitment from another financial institution. The loan commitment is for a 10 year term with a fixed interest rate of 4.0% for the first six years of the loan term, then adjusting annually thereafter to the one-year LIBOR rate plus 250 basis points. The development is expected to be completed by December 31, 2013.

 

-26-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5.Supplemental Disclosure for Earnings Per Share

 

When presented, basic earnings per share are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Earnings per share information is presented below for the three-month and nine-month periods ended June 30, 2012 and 2011.

 

   Three Months Ended   Nine Months Ended 
   June 30,   June 30, 
   2012    2011   2012   2011 
   (Dollars in thousands, except per share data) 
     
Basic:                    
Earnings:                    
Net income  $1,272   $1,123   $3,146   $3,177 
Less: Preferred stock dividends declared   (43)   -    (128)   - 
                     
Net income available to common shareholders  $1,229   $1,123   $3,018   $3,177 
                     
Shares:                    
Weighted average common shares outstanding   2,167,488    2,134,841    2,159,515    2,141,023 
                     
Net income per common share, basic  $0.57   $0.53   $1.40   $1.48 
                     
Diluted:                    
Earnings:                    
Net income  $1,272   $1,123   $3,146   $3,177 
Less: Preferred stock dividends declared   (43)   -    (128)   - 
                     
Net income available to common shareholders  $1,229   $1,123   $3,018   $3,177 
                     
Shares:                    
Weighted average common shares outstanding   2,167,488    2,134,841    2,159,515    2,141,023 
Add: Dilutive effect of outstanding options   54,523    37,062    48,783    31,005 
Add: Dilutive effect of restricted stock   15,119    16,879    15,624    13,993 
Weighted average common shares outstanding as adjusted   2,237,130    2,188,782    2,223,922    2,186,021 
                     
Net income per common share, diluted  $0.55   $0.51   $1.36   $1.45 

 

Unearned ESOP and nonvested restricted stock shares are not considered as outstanding for purposes of computing weighted average common shares outstanding.

 

-27-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6.Supplemental Disclosures of Cash Flow Information

 

   Nine Months Ended 
   June 30, 
   2012   2011 
   (In thousands) 
Cash payments for:          
Interest  $3,966   $4,904 
Taxes   578    972 
           
Transfers from loans to foreclosed real estate   1,306    1,274 
           
Proceeds from sales of foreclosed real estate financed through loans   655    492 

 

7.Fair Value Measurements and Disclosures about Fair Value of Financial Instruments

 

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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: 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.
     
  Level 2: Inputs to the valuation methodology include quoted market prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted market prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.
     
  Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.  Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets carried at fair value or the lower of cost or fair value. The table below presents the balances of financial assets measured at fair value on a recurring and nonrecurring basis as of June 30, 2012 and September 30, 2011. The Company had no liabilities measured at fair value as of June 30, 2012 or September 30, 2011.

 

-28-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

   Carrying Value 
   Level 1   Level 2   Level 3   Total 
   (In thousands) 
June 30, 2012:                    
Assets Measured - Recurring Basis:                    
Trading account securities  $-   $2,130   $-   $2,130 
                     
Securities available for sale:                    
Agency bonds and notes  $-   $20,811   $-   $20,811 
Agency mortgage-backed   -    43,904    -    43,904 
Agency CMO   -    19,299    -    19,299 
Privately-issued CMO   -    4,786    -    4,786 
Privately-issued ABS   -    6,845    -    6,845 
Municipal   -    58,023    -    58,023 
Equity securities   61    -    -    61 
Total securities available for sale  $61   $153,668   $-   $153,729 
                     
Interest rate cap contract  $-   $17   $-   $17 
                     
Assets Measured - Nonrecurring Basis:                    
Impaired loans  $-   $-   $5,049   $5,049 
Loans held for sale   -    92    -    92 
Foreclosed real estate   -    -    1,415    1,415 
                     
September 30, 2011:                    
Assets Measured - Recurring Basis:                    
Securities available for sale:                    
Agency bonds and notes  $-   $12,866   $-   $12,866 
Agency mortgage-backed   -    18,309    -    18,309 
Agency CMO   -    25,691    -    25,691 
Privately-issued CMO   -    11,396    -    11,396 
Municipal   -    40,259    -    40,259 
Equity securities   56    -    -    56 
Total securities available for sale  $56   $108,521   $-   $108,577 
                     
Interest rate cap contract  $-   $50   $-   $50 
                     
Assets Measured - Nonrecurring Basis:                    
Impaired loans  $-   $-   $5,437   $5,437 
Foreclosed real estate   -    -    1,028    1,028 

 

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.

 

-29-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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. Changes in fair value of trading account securities are reported in noninterest income. Changes in fair value of securities available for sale are recorded in other comprehensive income, net of income tax effect.

 

Derivative Financial Instruments. Derivative financial instruments consist of an interest rate cap contract. As such, significant fair value inputs can generally be verified by counterparties and do not involve significant management judgments (Level 2 inputs).

 

Impaired Loans. Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate or the fair value of collateral if the loan is collateral dependent. Impaired loans are evaluated and valued at the time the loan is identified as impaired at the lower of cost or market value. For collateral dependent impaired loans, market value is measured based on the value of the collateral securing these loans and is classified as Level 2 in the fair value hierarchy. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and its fair value is generally determined based on real estate appraisals or other independent evaluations by qualified professionals. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

 

Loans Held for Sale. Loans held for sale are carried at the lower of cost or market value. The portfolio comprised of residential real estate loans and fair value is based on specific prices of underlying contracts for sales to investors. These measurements are carried at Level 2.

 

Foreclosed Real Estate. Foreclosed real estate held for sale is reported at fair value less estimated costs to dispose of the property using Level 2 inputs. The fair values are determined by real estate appraisals using valuation techniques consistent with the market approach using recent sales of comparable properties. In cases where such inputs are unobservable, the balance is reflected within the Level 3 hierarchy.

 

Transfers Between Categories. There were no transfers into or out of the Company’s Level 3 financial assets for the nine-month periods ended June 30, 2012 and 2011. In addition, there were no transfers into or out of Levels 1 and 2 of the fair value hierarchy during the nine-month periods ended June 30, 2012 and 2011.

 

-30-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

GAAP requires disclosure of fair value information about financial instruments for interim reporting periods, whether or not recognized in the consolidated balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The estimated fair values of the Company’s financial instruments are as follows:

 

   June 30, 2012   September 30, 2011 
   Carrying   Fair   Carrying   Fair 
   Amount   Value   Amount   Value 
   (In thousands) 
Financial assets:                    
Cash and due from banks  $7,694   $7,694   $18,099   $18,099 
Interest-bearing deposits with banks   7,588    7,588    9,104    9,104 
Trading account securities   2,130    2,130    -    - 
Securities available for sale   153,729    153,729    108,577    108,577 
Securities held to maturity   8,406    8,770    9,506    9,690 
                     
Loans, net   365,157    365,941    354,432    366,803 
                     
Loans held for sale   92    92    -    - 
Federal Home Loan Bank stock   5,400    5,400    4,400    4,400 
Accrued interest receivable   2,634    2,634    2,198    2,198 
                     
Financial liabilities:                    
Deposits   402,999    405,051    387,626    394,303 
Short-term repurchase agreements   1,327    1,327    16,403    16,457 
Borrowings from Federal Home Loan Bank   98,044    98,759    53,137    54,534 
Accrued interest payable   248    248    399    399 
Advance payments by borrowers for taxes and insurance   406    406    330    330 
                     
Derivative financial instruments included in other assets:                    
Interest rate cap   17    17    50    50 

 

The carrying amounts in the preceding table are included in the consolidated balance sheets under the applicable captions. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:

 

-31-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Cash and Cash Equivalents

 

For cash and short-term instruments, including cash and due from banks and interest-bearing deposits with banks, the carrying amount is a reasonable estimate of fair value.

 

Debt and Equity Securities

 

For marketable equity securities, the fair values are based on quoted market prices. For debt securities, the Company obtains fair value measurements from an independent pricing service and the fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. For FHLB stock, a restricted equity security, the carrying amount is a reasonable estimate of fair value because it is not marketable.

 

Loans

 

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and terms. The carrying amount of accrued interest receivable approximates its fair value.

 

Deposits

 

The fair value of demand and savings deposits and other transaction accounts is the amount payable on demand at the balance sheet date. The fair value of fixed-maturity time deposits is estimated by discounting the future cash flows using the rates currently offered for deposits with similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.

 

Borrowed Funds

 

Borrowed funds include borrowings from the FHLB and repurchase agreements. Fair value for FHLB advances and long-term repurchase agreements is estimated by discounting the future cash flows at current interest rates for FHLB advances of similar maturities. For short-term repurchase agreements and FHLB line of credit borrowings, the carrying value is a reasonable estimate of fair value.

 

Derivative Financial Instruments

 

For derivative financial instruments, the fair values generally represent an estimate of the amount the Company would receive or pay upon termination of the agreement at the reporting date, taking into account the current interest rates, and exclusive of any accrued interest.

 

-32-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

8.Employee Stock Ownership Plan

 

On October 6, 2008, the Company established a leveraged employee stock ownership plan (“ESOP”) covering substantially all employees. The ESOP trust acquired 203,363 shares of Company common stock at a cost of $10.00 per share financed by a term loan with the Company. The employer loan and the related interest income are not recognized in the consolidated financial statements as the debt is serviced from Company contributions. Dividends payable on allocated shares are charged to retained earnings and are satisfied by the allocation of cash dividends to participant accounts. Dividends payable on unallocated shares are not considered dividends for financial reporting purposes. Shares held by the ESOP trust are allocated to participant accounts based on the ratio of the current year principal and interest payments to the total of the current year and future years’ principal and interest to be paid on the employer loan. Compensation expense is recognized based on the average fair value of shares released for allocation to participant accounts during the year with a corresponding credit to stockholders’ equity. Compensation expense recognized for the three- and nine-month periods ended June 30, 2012 amounted to $64,000 and $186,000, respectively. Compensation expense recognized for the three- and nine-month periods ended June 30, 2011 amounted to $58,000 and $183,000, respectively. Company common stock held by the ESOP trust at June 30, 2012 was as follows:

 

Allocated shares   79,895 
Unearned shares   123,468 
Total ESOP shares   203,363 
      
Fair value of unearned shares  $2,179,000 

 

9.Stock Based Compensation Plans

 

The Company’s 2010 Equity Incentive Plan (“Plan”), which the Company’s shareholders approved in February 2010, 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.

 

-33-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 later 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 restricted stock vests ratably over a five-year period from the grant date. 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 the three-month periods ended June 30, 2012 and 2011 amounted to $65,000. Compensation expense related to restricted stock recognized for both the nine-month periods ended June 30, 2012 and 2011 amounted to $195,000. A summary of the Company’s nonvested restricted shares activity under the Plan as of June 30, 2012 and changes during the nine-month period then ended is presented below.

 

       Weighted 
   Number   Average 
   of   Grant Date 
   Shares   Fair Value 
         
Nonvested at October 1, 2011   78,470   $13.25 
Granted   -    - 
Vested   (19,620)   13.25 
Forfeited   -    - 
           
Nonvested at June 30, 2012   58,850   $13.25 

 

At June 30, 2012, there was $747,000 of total unrecognized compensation expense related to nonvested restricted shares. The compensation expense is expected to be recognized over the remaining vesting period of 2.9 years.

 

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 weighted average fair value at the grant date for options granted in 2010 was $3.09, as determined at the date of grant using the Binomial option pricing model.

 

-34-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

A summary of stock option activity under the Plan as of June 30, 2012, and changes during the nine-month period then ended is presented below.

 

           Weighted     
       Weighted   Average     
   Number   Average   Remaining   Aggregate 
   of   Exercise   Contractual   Intrinsic 
   Shares   Price   Term   Value 
   (Dollars in thousands, except per share data) 
                 
Outstanding at October 1, 2011   245,232   $13.25           
Granted   -    -           
Exercised   -    -           
Forfeited or expired   -    -           
                     
Outstanding at June 30, 2012   245,232   $13.25    7.9   $1,079 
                     
Exercisable at June 30, 2012   98,095   $13.25    7.9   $432 

 

The Company recognized compensation expense related to stock options of $38,000 for both the three-month periods ended June 30, 2012 and 2011. The Company recognized compensation expense related to stock options of $114,000 and $139,000 for the nine-month periods ended June 30, 2012 and 2011, respectively. At June 30, 2012, there was $436,000 of unrecognized compensation expense related to nonvested stock options, which will be recognized over the remaining vesting period of 2.9 years.

 

10.Preferred Stock

 

On August 11, 2011, the Company entered into a Securities Purchase Agreement (“Purchase Agreement”) with the United States Department of the Treasury, pursuant to which the Company issued 17,120 shares of the its Senior Non-Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”), having a liquidation amount per share equal to $1,000, for a total purchase price of $17,120,000. The Purchase Agreement was entered into, and the Series A Preferred Stock was issued, pursuant to the Small Business Lending Fund (“SBLF”) program, a $30 billion fund established under the Small Business Jobs Act of 2010, that encourages lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion.

 

-35-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Holders of the Series A Preferred Stock are entitled to receive non-cumulative dividends, payable quarterly, on each January 1, April 1, July 1 and October 1, beginning October 1, 2011. The dividend rate, as a percentage of the liquidation amount, can fluctuate on a quarterly basis during the first ten quarters during which the Series A Preferred Stock is outstanding and may be adjusted between 1.0% and 5.0% per annum, to reflect the amount of change in the Bank’s level of Qualified Small Business Lending (“QSBL”) (as defined in the Purchase Agreement) over the baseline level calculated under the terms of the Purchase Agreement (“Baseline”).  In addition to the dividend, in the event the Bank’s level of QSBL has not increased relative to the Baseline, at the beginning of the tenth calendar quarter, the Company will be subject to an additional lending incentive fee equal to 2.0% per annum. For the eleventh dividend period through the eighteenth dividend period, inclusive, and that portion of the nineteenth dividend period before, but not including, the four and one half (4½) year anniversary of the date of issuance, the dividend rate will be fixed at between 1.0% and 7.0% per annum based upon the increase in QSBL as compared to the Baseline. After four and one half (4½) years from issuance, the dividend rate will increase to nine 9.0%. Based upon the Bank’s level of QSBL over the Baseline for purposes of calculating the dividend rate for the initial dividend period, the dividend rate for the initial dividend period ended September 30, 2011 was 4.84%. The dividend rate for the fourth dividend period ended June 30, 2012 was 1.0% and the weighted average dividend rate for the nine-month period ended June 30, 2012 was 1.0%.

 

The Series A Preferred Stock is non-voting, except in limited circumstances. In the event that the Company fails to timely make five dividend payments, whether or not consecutive, the holder of the Series A Preferred Stock will have the right, but not the obligation, to appoint a representative as an observer on the Company’s board of directors.

 

The Series A Preferred Stock may be redeemed at any time at the Company’s option, at a redemption price of one hundred percent (100%) of the liquidation amount plus accrued but unpaid dividends to the date of redemption for the current period, subject to the approval of its federal banking regulator.

 

The Series A Preferred Stock was issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The Company has agreed to register the Series A Preferred Stock under certain circumstances set forth in the Purchase Agreement. The Series A Preferred Stock is not subject to any contractual restrictions on transfer.

 

-36-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

11.Recent Accounting Pronouncements

 

The following are summaries of recently issued accounting pronouncements that impact the accounting and reporting practices of the Company:

 

In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements by U.S. GAAP and IFRSs. The amendments in this ASU generally represent clarifications of FASB ASC Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. Adoption of this ASU did not have any impact on the Company’s consolidated financial position or results of operations.

 

In June 2011, the FASB issued ASU No. 2011-05, Amendments to Topic 220, Comprehensive Income. Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. The adoption of this ASU did not have any impact on the Company’s consolidated financial position or results of operations. ASU No. 2011-12 issued in December 2011 deferred the effective date of ASU No. 2011-05 related to the presentation of reclassifications of items out of accumulated other comprehensive income. All other requirements of ASU No. 2011-05 were not affected by ASU No. 2011-12.

 

-37-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210). The update requires an entity to disclose information about offsetting and related arrangements to enable users of the financial statements to understand the effect of netting arrangements on the entity’s financial position. The scope includes derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The amendments in the update are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods, with disclosures required by the amendments provided retrospectively for all comparative periods presented. The adoption of this update is not expected to have any impact on the Company’s consolidated financial position or results of operations.

 

12.Subsequent Event

 

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 office with its existing Corydon office and the operations of the acquired Georgetown office with its existing Georgetown office because of their close proximities. The acquisition expanded the Company’s presence in Harrison and Floyd Counties, Indiana.

 

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 will be accounted for using the purchase method of accounting. Under the purchase method of accounting, the purchase price is assigned to the assets acquired and liabilities assumed based on their estimated fair values, net of applicable income tax effects. The excess of cost over the fair value of the acquired net assets will be recorded as goodwill. As of the filing date of this report, the Company was still in the process of determining the fair value of the acquired assets and assumed liabilities, and the related goodwill resulting from the transaction.

 

-38-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

Safe Harbor Statement for Forward-Looking Statements

 

This report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts; rather they are statements based on the Company’s current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

 

Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the Company’s actual results, performance and achievements being materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; the quality and composition of the loan and investment securities portfolio; loan demand; deposit flows; competition; the ability to successfully integrate the operations of Community First; and changes in accounting principles and guidelines. Additional factors that may affect our results are discussed herein and in our Annual Report on Form 10-K for the year ended September 30, 2011 under “Part II, Item 1A. Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.

 

Critical Accounting Policies

 

During the nine-month period ended June 30, 2012, there was no significant change in the Company’s critical accounting policies or the application of critical accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011.

 

Comparison of Financial Condition at June 30, 2012 and September 30, 2011

 

Cash and Cash Equivalents. Cash and cash equivalents decreased from $27.2 million at September 30, 2011 to $15.3 million at June 30, 2012, due to decreases in cash and due from banks of $10.4 million and interest-bearing deposits with banks of $1.5 million. The decrease in cash and cash equivalents was primarily used to fund the loan portfolio growth and purchases of securities available for sale.

 

Loans. Net loans receivable increased $10.8 million, from $354.4 million at September 30, 2011 to $365.2 million at June 30, 2012, primarily due to increases in nonresidential permanent and construction loans of $16.6 million, multi-family residential mortgage loans of $2.6 million and land and land development loans of $145,000, which more than offset decreases in commercial business loans of $4.0 million, consumer loans of $2.5 million and residential permanent and construction loans of $243,000. The decreases in commercial business loans, consumer loans and residential mortgage loans are primarily due to loan payoffs that have not been replaced by new originations for the Bank’s in-house loan portfolio. The net increase in net loans receivable was primarily funded by the decrease in cash and cash equivalents, and increases in deposits and borrowings.

 

-39-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

Trading Account Securities. Trading account securities increased by $2.1 million due to an investment on May 31, 2012 in a managed brokerage account for the purpose of participating in the short-term trading of small and medium lot, investment grade municipal bonds. At June 30, 2012, trading account securities recorded at fair value totaled $2.1 million, comprised of investment grade municipal bonds. The Company had no trading account securities at September 30, 2011.

 

Securities Available for Sale. Securities available for sale increased $45.1 million from $108.6 million at September 30, 2011 to $153.7 million at June 30, 2012 due primarily to purchases of $69.6 million, partially offset by maturities and calls of $9.1 million, principal repayments of $16.2 million and sales of $518,000. The increase in securities available for sale, primarily in U.S. government agency and sponsored enterprises securities, including mortgage-backed securities, and municipal bonds was primarily funded by the decrease in cash and cash equivalents, and increases in deposits and borrowings.

 

Securities Held to Maturity. Investment securities held-to-maturity decreased $1.1 million from $9.5 million at September 30, 2011 to $8.4 million at June 30, 2012 due primarily to principal repayments on mortgage-backed securities.

 

Deposits. Total deposits increased $15.4 million from $387.6 million at September 30, 2011 to $403.0 million at June 30, 2012 primarily due to increases in noninterest-bearing demand deposit accounts of $5.7 million, interest-bearing demand deposit accounts of $10.4 million, savings accounts of $4.2 million, and money market deposit accounts of $13.7 million, which more than offset a decrease in certificates of deposit of $18.5 million during the period. The decrease in certificates of deposit occurred in various maturity classes and in brokered certificates of deposit, which decreased $1.2 million. The decrease in certificates of deposit is primarily attributed to maturities that customers are investing in more liquid accounts given the low interest rate environment.

 

Borrowings. Borrowings from FHLB increased $44.9 million from $53.1 million at September 30, 2011 to $98.0 million at June 30, 2012 while repurchase agreements decreased $15.1 million from $16.4 million at September 30, 2011 to $1.3 million at June 30, 2012. Management has increased the level of FHLB advances in order repay matured brokered certificates of deposit and repurchase agreements, to take advantage of historically low interest rates, provide short-term liquidity and provide funding for the loan portfolio growth and purchases of available for sale securities.

 

Stockholders’ Equity. Stockholders’ equity increased $4.4 million from $76.6 million at September 30, 2011 to $81.0 million at June 30, 2012. The increase was due primarily to $3.0 million of retained net earnings and a $1.0 million increase in net unrealized gains on securities available for sale.

 

-40-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

Results of Operations for the Nine Months Ended June 30, 2012 and 2011

 

Overview. The Company reported net income of $3.1 million and net income available to common shareholders of $3.0 million, or $1.36 per diluted share, for the nine-month period ended June 30, 2012 compared to net income of $3.2 million, or $1.45 per diluted share, for the nine-month period ended June 30, 2011.

 

Net Interest Income. Net interest income increased $218,000, or 4.1%, for the nine-month period ended June 30, 2012 compared to the same period in 2011. Average interest-earnings assets increased $32.4 million and average interest-bearing liabilities increased $7.7 million when comparing the two periods. The tax-equivalent interest rate spread was 4.12% for 2012 as compared to 4.34% for 2011.

 

Total interest income decreased $379,000, or 5.7%, when comparing the two periods due primarily to a decrease in the average tax-equivalent yield on interest-earning assets from 5.62% for 2011 to 5.20% for 2012, which more than offset the change in interest income due to an increase in the average balance of interest-earning assets of $32.4 million from $470.8 million for 2011 to $503.2 million for 2012. The average balance of loans and investment securities increased $17.8 million and $12.7 million, respectively, when comparing the two periods.

 

Total interest expense decreased $597,000, or 45.9%, due primarily to a decrease in the average cost of interest-bearing liabilities from 1.28% for 2011 to 1.08% for 2012, which more than offset the change in interest expense due to an increase in the average balance of interest-bearing liabilities of $7.7 million from $424.4 million for 2011 to $432.1 million for 2012. The average cost of interest-bearing liabilities decreased for 2012 primarily as a result of lower market interest rates as compared to 2011, the repricing of certificates of deposit at lower market interest rates as they matured and the utilization of lower-cost brokered certificates of deposit and FHLB borrowings as alternative sources of funding. The average balance of deposits increased $13.6 million while the average balance of borrowings decreased $5.9 million when comparing the two periods.

 

-41-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

Average Balance Sheets. The following table presents 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 for the nine-month periods ended June 30, 2012 and 2011. 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%.

 

   Nine Months Ended June 30, 
   2012   2011 
   Average
Balance
   Interest
and
Dividends
   Yield/
Cost
   Average
Balance
   Interest
and
Dividends
   Yield/
Cost
 
   (Dollars in thousands) 
Assets:                              
Interest-bearing deposits with banks  $5,241   $10    0.25%  $4,077   $15    0.49%
Loans   362,288    15,293    5.63    344,504    15,535    6.01 
Investment securities   102,401    3,675    4.78    102,590    3,863    5.02 
Agency mortgage-backed securities   28,430    550    2.58    15,554    355    3.04 
Federal Home Loan Bank stock   4,819    110    3.04    4,124    84    2.72 
Total interest-earning assets   503,179    19,638    5.20    470,849    19,852    5.62 
                               
Non-interest-earning assets   46,103              42,459           
Total assets  $549,282             $513,308           
                               
Liabilities and equity:                              
NOW accounts  $73,455   $307    0.56%  $65,206   $259    0.53 
Money market deposit accounts   44,966    246    0.73    36,688    202    0.73 
Savings accounts   43,460    85    0.26    39,922    77    0.26 
Time deposits   193,828    1,946    1.34    200,335    2,479    1.65 
Total interest-bearing deposits   355,709    2,584    0.97    342,151    3,017    1.18 
                               
Borrowings (1)   76,368    905    1.58    82,233    1,069    1.73 
Total interest-bearing liabilities   432,077    3,489    1.08    424,384    4,086    1.28 
                               
Non-interest-bearing deposits   36,289              30,611           
Other non-interest-bearing liabilities   2,827              2,772           
Total liabilities   471,193              457,767           
                               
Total equity   78,089              55,541           
Total liabilities and equity  $549,282             $513,308           
Net interest income       $16,149             $15,766      
Interest rate spread             4.12%             4.34%
Net interest margin             4.28%             4.46%
Average interest-earning assets to average interest-bearing liabilities             116.46%             110.95%

 

 

 

(1)Includes Federal Home Loan Bank borrowings and repurchase agreements.

 

-42-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income for the nine-month periods ended June 30, 2012 and 2011. 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.

 

   Nine Months Ended June 30, 2012
Compared to
Nine Months Ended June 30, 2011
 
   Increase (Decrease)
Due to
     
   Rate   Volume   Net 
       (In thousands)     
Interest income:               
Interest-bearing deposits with banks  $(12)  $7   $(5)
Loans   (1,320)   1,078    (242)
Investment securities   (181)   (7)   (188)
Agency mortgage-backed securities   (44)   239    195 
Other interest-earning assets   11    15    26 
Total interest-earning assets   (1,546)   1,332    (214)
                
Interest expense:               
Deposits   (557)   124    (433)
Borrowings (1)   (90)   (74)   (164)
Total interest-bearing liabilities   (647)   50    (597)
Net increase (decrease) in net interest income  $(899)  $1,282   $383 

 

 

 

(1) Includes Federal Home Loan Bank borrowings and repurchase agreements.

 

Provision for Loan Losses. The provision for loan losses was $897,000 for the nine months ended June 30, 2012 compared to $1.1 million for the same period in 2011.

 

Net charge-offs were $674,000 for the nine months ended June 30, 2012 compared to net charge-offs of $438,000 for the same period in 2011.

 

The recorded investment in nonperforming loans was $6.1 million at June 30, 2012 compared to $7.3 million at September 30, 2011 and $7.9 million at June 30, 2011. Nonperforming loans at June 30, 2012 include nonaccrual loans of $5.2 million and loans totaling $874,000 that are over 90 days past due, but still accruing interest. These loans are still accruing interest because the estimated value of the collateral and collection efforts are deemed sufficient to ensure their full recovery. The decrease in nonperforming loans from September 30, 2011 to June 30, 2012 is due primarily to a single borrower relationship that was transferred from nonaccrual to accrual status during the nine months ended June 30, 2012. This lending relationship had a total recorded investment of approximately $2.0 million at June 30, 2012 and is secured by 23 non-owner occupied, one-to-four family investment properties, which were predominately constructed in the past ten years and sold on contract to their occupants. All of these loans were current at June 30, 2012 and the borrower had made all contractual principal and interest payments for a period of at least six consecutive months.

 

-43-
 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

Gross loans receivable increased $16.2 million from $359.5 million at June 30, 2011 to $375.7 million at June 30, 2012, primarily due to increases in nonresidential permanent and construction loans of $22.7 million, multi-family residential mortgage loans of $2.6 million, and land and land development loans of $264,000, which more that offset decreases in residential permanent and construction loans of $3.0 million, commercial business loans of $2.2 million and consumer loans of $4.2 million when comparing the two periods. The decreases in residential mortgage loans, commercial business loans and consumer loans are primarily due to loan payoffs that have not been replaced by new originations.

 

The allowance for loan losses was $4.9 million at June 30, 2012 compared to $4.7 million at September 30, 2011 and $4.4 million at June 30, 2011. Management has deemed these amounts as adequate on those dates based on its best estimate of probable known and inherent loan losses. 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 changes in the loan portfolio and overall economic conditions.

 

Noninterest Income. Noninterest income increased $95,000 for the nine-month period ended June 30, 2012 as compared to the same period in 2011. The increase was due primarily to a gain on life insurance of $321,000 and an increase in other noninterest income of $102,000 for 2012, which more than offset decreases in service charges on deposit accounts of $158,000 and net gains on the sale of loans of $149,000. The decrease in service charges on deposits was due primarily to a decrease in overdraft fee income. The increase in other income is due primarily to increases in surcharge, interchange and other fee income sources.

 

Noninterest Expense. Noninterest expenses increased $809,000 for the nine-month period ended June 30, 2012 as compared to the same period in 2011. The increase was due primarily to increases in advertising expense, professional fees, and data processing expense of $243,000, $297,000 and $246,000, respectively, which more than offset decreases in FDIC insurance premiums and net losses on foreclosed real estate of $166,000 and $134,000, respectively. The increase in advertising expense was due primarily to a rebranding and advertising campaign for the Bank’s new look and logo that was launched in September 2011. The increases in data processing and professional fees expenses are due primarily to expenditures associated with the acquisition and planned integration of the four Indiana branch locations acquired from First Federal on July 6, 2012.

 

Income Tax Expense. The Company recognized income tax expense of $1.0 million for the nine-month period ended June 30, 2012, for an effective tax rate of 24.5%, compared to income tax expense of $1.3 million, for an effective tax rate of 29.2%, for the same period in 2011. The lower effective tax rate for the nine months ended June 30, 2012 was due primarily to a higher level of tax exempt income for 2012.

 

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

Results of Operations for the Three Months Ended June 30, 2012 and 2011

 

Overview. The Company reported net income of $1.3 million and net income available to common shareholders of $1.2 million, or $0.55 per diluted share, for the quarter ended June 30, 2012 compared to net income of $1.1 million, or $0.51 per diluted share, for the quarter ended June 30, 2011.

 

Net Interest Income. Net interest income increased $170,000, or 1.1%, for the three months ended June 30, 2012 compared to the same period in 2011. Average interest-earnings assets increased $45.3 million and average interest-bearing liabilities increased $19.2 million when comparing the two periods. The tax-equivalent interest rate spread was 4.12% for 2012 as compared to 4.37% for 2011.

 

Total interest income decreased $33,000, or 0.2%, when comparing the two periods due primarily to a decrease in the average tax-equivalent yield on interest-earning assets from 5.60% for 2011 to 5.12% for 2012, which more than offset the change in interest income due to an increase in the average balance of interest-earning assets of $45.3 million from $481.3 million for 2011 to $526.6 million for 2012. The average balance of loans and investment securities increased $19.8 million and $22.3 million, respectively, when comparing the two periods.