Overview

Income. Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Other significant sources of pre-tax income are service charges (mostly from service charges on deposit accounts and loan servicing fees), increases in the cash surrender value of life insurance, fees from sale of mortgage loans originated for sale in the secondary market, commissions on sales of securities and insurance products, and net realized and unrealized gains on trading account securities. We also recognize income from the sale of investment securities.

Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.

Expenses. The noninterest expenses we incur in operating our business consist of salaries and employee benefits expenses, occupancy expenses, data processing expenses, professional service fees, federal deposit insurance premiums, advertising, net losses on foreclosed real estate and other miscellaneous expenses. Our noninterest expenses increased for the year ended September 30, 2012 when compared to 2011 primarily as a result of nonrecurring expenses in 2012 relating to the acquisition and integration of the First Federal branches and advertising costs associated with the rebranding of the Company with a new 'look' and logo during 2012. These 2012 additional expenses consisted primarily of professional fees, data processing expense and advertising expense.

Salaries and employee benefits consist primarily of: salaries and wages paid to our employees; payroll taxes; and expenses for health insurance, retirement plans and other employee benefits. We also recognize annual employee compensation expenses related to the equity incentive plan as the equity incentive awards vest. See Note 17 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report for additional information regarding the stock based compensation plans.

Occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities. Depreciation of premises and equipment is computed using the straight-line method based on the useful lives of the related assets, which range from three to 50 years.

Data processing expenses are the fees we pay to third parties for processing customer information, deposits and loans. Our data processing expenses increased in the year ended September 30, 2012 when compared to 2011 primarily as a result of nonrecurring expenses in 2012 relating to the integration of the First Federal branches with the Bank's core operating system. These nonrecurring charges associated with the integration of the First Federal branches with the Bank's core operating system amounted to $327,000 during 2012.

Professional fees expense represents the fees we pay to third parties for legal, accounting, investment advisory and other consulting services. Our professional fees expense increased in the year ended September 30, 2012 when compared to 2011 primarily as a result of nonrecurring expenses in 2012 relating to the acquisition and integration of the First Federal branches and investment management fees for the managed trading account. The 2012 nonrecurring charges associated with the acquisition and integration of the First Federal branches amounted to $194,000.

Federal deposit insurance premiums are payments we make to the Federal Deposit Insurance Corporation for insurance of our deposit accounts.

Other expenses include expenses for office supplies, postage, telephone, insurance, regulatory assessments and other miscellaneous operating expenses.

Critical Accounting Policies

The accounting and reporting policies of the Company comply with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding reported results. Critical accounting policies are those policies that require management to make assumptions about matters that are highly uncertain at the time an accounting estimate is made; and different estimates that the Company reasonably could have used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the Company's financial condition, changes in financial condition or results of operations. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements. These factors include, among other things, whether the estimates are significant to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including third parties or available prices, and sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be utilized under generally accepted accounting principles. Significant accounting policies, including the impact of recent accounting pronouncements, are discussed in Note 1 of the Notes to Consolidated Financial Statements. The policies considered to be the critical accounting policies are described below.

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance at least quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loan losses and may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings. Note 1 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report describes the methodology used to determine the allowance for loan losses. The Company has not made any substantive changes to its methodology for determining the allowance for loan losses during the fiscal year ended September 30, 2012, and there have been no material changes in the assumptions or estimation techniques compared to prior years.

Other-Than-Temporary Impairment of Securities. The Company reviews all investment securities with significant declines in fair value for potential other-than-temporary impairment ("OTTI") on a periodic basis. In evaluating the investment portfolio for OTTI, management considers the issuer's credit rating, credit outlook, payment status and financial condition, the length of time the investment has been in a loss position, the size of the loss position and other meaningful information. Generally changes in market interest rates that result in a decline in value of an investment security are considered to be temporary, since the value of such investment can recover in the foreseeable future as market interest rates return to their original levels. However, such declines in value that are due to the underlying credit quality of the issuer or other adverse conditions that cannot be expected to improve in the foreseeable future, may be considered to be other-than-temporary. The Company recognizes credit-related OTTI on debt securities in earnings, while noncredit-related OTTI on debt securities not expected to be sold is recognized in accumulated other comprehensive income. Management believes this is a critical accounting policy because this evaluation of the underlying credit or analysis of other conditions contributing to the decline in value involves a high degree of complexity and requires us to make subjective judgments that often require assumptions or estimates about various matters. No other-than-temporary write-down charges to earnings were recognized during 2012 or 2011. See Note 4 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report for additional information regarding OTTI.

Valuation Methodologies. In the ordinary course of business, management applies various valuation methodologies to assets and liabilities that often involve a significant degree of judgment, particularly when active markets do not exist for the items being valued. Generally, in evaluating various assets for potential impairment, management compares the fair value to the carrying value. Quoted market prices are referred to when estimating fair values for certain assets, such as investment securities. However, for those items for which market-based prices do not exist, management utilizes significant estimates and assumptions to value such items. Examples of these items include goodwill and other intangible assets, foreclosed and other repossessed assets, estimated present value of impaired loans, value ascribed to stock-based compensation and certain other financial investments. The use of different assumptions could produce significantly different results, which could have material positive or negative effects on the Company's results of operations.

Operating Strategy

Our mission is to operate and grow a profitable community-oriented financial institution. We plan to achieve this by executing our strategy of:

· continuing our historical focus on residential mortgage lending but de-emphasizing residential mortgage lending secured by non-owner occupied properties;

· pursuing opportunities to increase commercial real estate lending and commercial business lending;

· improving customer service and product offerings by leveraging the Bank's investment in new technology including the core operating system;

· providing exceptional customer service to attract and retain customers;

· promoting our presence, brand image and product offerings in our primarily market area using our newly designed logo and marketing promotions that were launched in September 2011;

· continuing to monitor asset quality and credit risk in the loan and investment portfolios;

· recognizing improvements in noninterest income with respect to service charges on deposits as a result of restructuring deposit account types and fees, commission income related to non-deposit investment products and gains on sales of mortgage loans sold in the secondary market;

· expanding our market share and market area by opening new branch offices and pursuing opportunities to acquire other financial institutions or branches; and

· increasing shareholder value through stock repurchase programs and potential future dividend plans.

Continuing our historical focus on residential mortgage lending but de-emphasizing residential mortgage lending secured by non-owner occupied properties.

Our predominant lending activity has been residential mortgage lending in our primary market area. A significant portion of the residential mortgage loans that we had originated before 2005 are secured by non-owner occupied properties. Loans secured by non-owner occupied properties generally carry a greater risk of loss than loans secured by owner-occupied properties, and our non-performing loan balances have increased in recent periods primarily because of delinquencies in our non-owner occupied residential loan portfolio. Since 2005, when we hired a new President and Chief Executive Officer, we have de-emphasized non-owner occupied residential mortgage lending and have focused, and intend to continue to focus, our residential mortgage lending primarily on originating residential mortgage loans secured by owner-occupied properties. At September 30, 2012, 47.7% of our total loans were residential mortgage loans and 20.4% of our residential mortgage loans were secured by non-owner occupied properties. We intend to expand our emphasis on residential mortgage lending because this type of lending generally carries lower credit risk and has contributed to our historically favorable asset quality.

Pursuing opportunities to increase commercial real estate lending and commercial business lending.

In recent periods, we have begun to focus on commercial real estate and commercial business lending and intend to continue this focus. Commercial real estate loans and commercial business loans give us the opportunity to earn more income because these loans have higher interest rates than residential mortgage loans in order to compensate for the increased credit risk. At September 30, 2012, commercial real estate loans and commercial business loans represented 22.6% and 9.0%, respectively, of our total loans. We intend to continue to pursue these lending opportunities in our primary market area. In addition, the Company's participation in the United States Department of the Treasury's Small Business Lending Fund program, as discussed further in Note 25 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report, also provides an incentive and capital to increase commercial lending.

Continuing to integrate the Community First and First Federal offices, customers and product lines.

During 2010, we began to integrate the Community First offices and customers by integrating the core operating systems of the Bank and Community First onto a single core operating system, which was successfully completed in August 2010. This single system permits Bank customers to utilize all office locations, permits Bank officers and staff to extract and monitor a standard set of information available from all office locations and allows the Bank to offer a uniform set of product offerings focus. In addition, during 2011 and 2012 we successfully rebranded all office locations, including those operating under the Community First name, with a new 'look' and logo for First Savings Bank in order to provide uniformity to our existing and prospective customer base. In 2012 we began to integrate the First Federal offices and customers into the existing First Savings franchise.

Providing exceptional customer service to attract and retain customers.

As a community-oriented financial institution, we emphasize providing exceptional customer service as a means to attract and retain customers. We deliver personalized service and respond with flexibility to customer needs. We believe that our community orientation is attractive to our customers and distinguishes us from the larger banks that operate in our primary market area.

Expanding our market share and market area.

The 2009 acquisition of Community First expanded our market area into Harrison, Crawford and Washington Counties, Indiana, while the 2012 acquisition of the First Federal branches enhanced our presence in Harrison and Floyd Counties, Indiana. As previously discussed, we successfully rebranded the twelve office locations during 2011 and 2012 with a new look and logo for First Savings Bank and have also expanded our marketing efforts as a result of such. In addition, we intend to continue to pursue opportunities to expand our market share and market area by seeking to open additional branch offices and pursuing opportunities to acquire other financial institutions or branches of other financial institutions in our primary market area and surrounding areas.

Issuance of Preferred Stock under the U.S. Department of the Treasury's Small Business Lending Fund

On August 11, 2011, First Savings Financial Group entered into and consummated a Securities Purchase Agreement (the "Purchase Agreement") with the Secretary of the Treasury, pursuant to which First Savings Financial Group issued 17,120 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series A (the "Series A Preferred Stock"), having a liquidation amount per share equal to $1,000, for a total purchase price of $17.1 million. The Purchase Agreement was entered into, and the Series A Preferred Stock was issued, pursuant to the Small Business Lending Fund program, a $30 billion fund established under the Small Business Jobs Act of 2010, that encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion. See Note 25 of the Notes to Consolidated Financial Statements beginning of page F-1 of this annual report for additional information regarding the terms of the Series A Preferred Stock.

Balance Sheet Analysis

Cash and Cash Equivalents. At September 30, 2012 and 2011, cash and cash equivalents totaled $38.8 million and $27.2 million, respectively. The Bank is required to maintain reserve balances on hand and with the Federal Reserve Bank which are unavailable for investment but interest-bearing and the average amount of those reserve balances for the year ended September 30, 2012 was approximately $2.8 million.

Loans. Our primary lending activity is the origination of loans secured by real estate. We originate one-to four-family mortgage loans, multifamily loans, commercial real estate loans, commercial business loans and construction loans. To a lesser extent, we originate various consumer loans including home equity lines of credit.

Residential mortgage loans comprise the largest segment of our loan portfolio. At September 30, 2012, these loans totaled $191.0 million, or 47.7% of total loans, compared to $169.4 million, or 46.7% of total loans at September 30, 2011. Total residential mortgage loan balances increased in 2012 primarily due to the loans acquired in the First Federal branch acquisition. We generally originate loans for investment purposes, although, depending on the interest rate environment, we typically sell 25-year and 30-year fixed-rate residential mortgage loans that we originate into the secondary market in order to limit exposure to interest rate risk and to earn noninterest income. Management intends to continue offering short-term adjustable rate residential mortgage loans and sell long-term fixed rate mortgage loans in the secondary market with servicing released.

Commercial real estate loans totaled $90.3 million, or 22.6% of total loans at September 30, 2012, compared to $73.5 million, or 20.3% of total loans at September 30, 2011. The balance of commercial real estate loans has increased primarily due to greater opportunity to originate these loans during 2012 as a result of our increased commercial lending personnel. Management continues to focus on pursuing nonresidential loan opportunities in order to further diversify the loan portfolio.

Consumer loans totaled $30.6 million, or 7.7% of total loans, at September 30, 2012 compared to $29.6 million, or 8.1% of total loans, at September 30, 2011. Total consumer loan balances increased in 2012 primarily due to the loans acquired in the First Federal branch acquisition. However, in general, organic consumer loans including automobile loans, home equity lines of credit, unsecured loans and loans secured by deposits, have declined due to pay-downs, payoffs, charge-offs and management's decision to focus on other lending opportunities with less inherent credit risk. In the aggregate, home equity lines of credit increased $3.1 million, or 20.3%, while automobile loans decreased $1.6 million, or 16.4%, from September 30, 2011 to September 30, 2012. The Bank sold its $1.2 million credit card portfolio in May 2011, resulting in a net gain of $104,000 on the sale.

Commercial business loans totaled $36.2 million, or 9.0% of total loans, at September 30, 2012 compared to $40.6 million, or 11.2% of total loans, at September 30, 2011. The balance of commercial business loans has decreased primarily due to repayments, payoffs, charge-offs and increased competition in the marketplace. Management continues to focus on pursuing commercial business loan opportunities in order to further diversify the loan portfolio.

Multi-family real estate loans totaled $23.9 million, or 6.0% of total loans at September 30, 2012, compared to $24.9 million, or 6.9% of total loans at September 30, 2011. The balance of multi-family real estate loans decreased primarily due to repayments.

Residential construction loans totaled $10.7 million, or 2.7% of total loans, at September 30, 2012 of which $6.4 million were speculative construction loans. At September 30, 2011, residential construction loans totaled $8.0 million, or 2.2% of total loans, of which $6.3 million were speculative loans. The general slowdown in the housing market in our primary market area and, to a lesser extent, increased competition in the market for these loans has somewhat decreased the opportunity to originate these loans and significantly grow this segment of the portfolio. We intend to continue pursuing quality construction lending opportunities as the housing market continues to recover.

Commercial construction loans totaled $5.2 million, or 1.3% of total loans, at September 30, 2012 compared to $4.1 million, or 1.1% of total loans at September 30, 2011. The general slowdown of commercial construction in our primary market area and increased competition in the marketplace has decreased the opportunity to originate these loans and grow this segment of the portfolio.

Land and land development loans totaled $12.3 million, or 3.1% of total loans at September 30, 2012, compared to $12.9 million, or 3.6% of total loans at September 30, 2011. These loans are primarily secured by vacant lots to be improved for residential and nonresidential development and farmland. The general slowdown of residential and commercial construction in our primary market area and increased competition in the marketplace has decreased the opportunity to originate these loans and grow this segment of the portfolio.

The following table sets forth the composition of our loan portfolio at the dates indicated.

                                                                                  At September 30,
                                  2012                       2011                       2010                       2009                       2008
(Dollars in thousands)    Amount       Percent       Amount       Percent       Amount       Percent       Amount       Percent       Amount       Percent
Real estate mortgage:
Residential              $ 190,958        47.72 %   $ 169,353        46.65 %   $ 172,007        49.33 %   $ 185,800        51.61 %   $ 113,518        64.20 %
Commercial                  90,290        22.56        73,513        20.25        53,869        15.45        48,090        13.36        15,459         8.74
Multi-family                23,879         5.97        24,909         6.86        20,360         5.84        12,584         3.50         3,282         1.86
Residential
construction                10,748         2.69         8,002         2.20        15,867         4.55        14,555         4.04         6,189         3.50
Commercial
construction                 5,182         1.29         4,144         1.14         9,851         2.83         7,648         2.12         1,991         1.13
Land and land
development                 12,320         3.08        12,947         3.57         9,076         2.60        11,189         3.11         4,748         2.69
Total                      333,377        83.31       292,868        80.67       281,030        80.60       279,866        77.74       145,187        82.12

Commercial business         36,189         9.04        40,628        11.19        30,905         8.86        36,901        10.25        14,411         8.15

Consumer:
Home equity lines of
credit                      18,294         4.57        15,210         4.19        16,335         4.68        17,365         4.82         9,970         5.64
Auto loans                   8,219         2.05         9,827         2.71        13,405         3.84        18,279         5.08         1,950         1.10
Other                        4,114         1.03         4,514         1.24         7,030         2.02         7,567         2.11         5,290         2.99
Total                       30,627         7.65        29,551         8.14        36,770        10.54        43,211        12.01        17,210         9.73

Total loans                400,193       100.00 %     363,047       100.00 %     348,705       100.00 %     359,978       100.00 %     176,808       100.00 %

Deferred loan
origination  fees and
costs, net                    (382 )                     (558 )                     (778 )                     (846 )                     (795 )
Undisbursed portion of
loans in process             6,602                      4,501                      2,057                      3,306                      1,067
Allowance for loan
losses                       4,906                      4,672                      3,811                      3,695                      1,729
Loans, net               $ 389,067                  $ 354,432                  $ 343,615                  $ 353,823                  $ 174,807

Loan Maturity

The following table sets forth certain information at September 30, 2012 regarding the dollar amount of loan principal repayments becoming due during the period indicated. The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity, are reported as due in one year or less.

                                                                    At September 30, 2012
                               Residential       Commercial
                               Real Estate       Real Estate       Construction       Commercial                        Total
(Dollars in thousands)             (1)               (2)               (3)             Business        Consumer         Loans
Amounts due in:
One year or less              $      26,684     $      41,989     $       15,930     $     19,889     $     8,850     $  113,342
More than one year to two
years                                16,048            18,388                  -            4,612           5,711         44,759
More than two years to
three years                          12,210            11,987                  -            3,209           4,001         31,407
More than three years to
five years                           22,375            13,099                  -            4,086           4,997         44,557
More than five years to ten
years                                43,730            12,670                  -            2,888           5,462         64,750
More than ten years to
fifteen years                        30,835             2,388                  -              831           1,604         35,658
More than fifteen years              62,955             2,089                  -              674               2         65,720
Total                         $     214,837     $     102,610     $       15,930     $     36,189     $    30,627     $  400,193
. . .