FINANCIAL GROUP INC.
20 17 A N N UA L R E P O R T
Dear Shareholders,
For the eighth consecutive year since our initial public offering in fiscal 2009, First Savings Financial Group, Inc.
(“FSFG”) has delivered higher net income, increased earnings per share, growth in total assets and loans, and enhanced
shareholder value. In 2017, net income available to common shareholders reached $9.3 million, an 18.7% increase from
2016. This resulted in earnings per share, diluted (“EPS”) of $3.97 for 2017 as compared to $3.41 for 2016, a 16.4%
increase. What is remarkable about this year’s performance as compared to the prior year’s is that 2016 net income and EPS
included a pretax gain of $2.0 million from the sale of a commercial real estate development. Excluding nonrecurring items
discussed in FSFG’s earning release on November 15, 2017, EPS would have been approximately $4.04 for 2017 and
approximately $2.80 for 2016, a 44.3% increase. FSFG’s common stock price closed at $53.40 on September 30, 2017,
which was a significant twelve-month increase of $17.24 per share, or 47.7%. In addition, there has continued to be positive
movement in our common stock price during the last calendar quarter of 2017.
During 2016 and 2017, First Savings Bank (the “Bank”) devoted significant resources to developing and enhancing
its U.S. Small Business Administration (“SBA”) Program 7(a) lending, which is now offered through its Q2 Business
Capital, LLC (“Q2”) subsidiary. In 2017, Q2 was profitable and erased substantially all of the organization costs and
operating losses incurred by the Bank related to SBA lending for the 18 months prior to the formation of Q2. With a solid
pipeline of new transactions and increased efficiencies, we expect Q2 to continue to be profitable, be accretive to earnings in
2018, and further diversify our revenue streams without us assuming undue risk and/or compromising our asset quality
principles.
On July 21, 2017, FSFG announced its intention to acquire The First National Bank of Odon (“FNBO”), in Odon,
Indiana, in an all-cash transaction valued at $10.6 million, subject to possible adjustment. The transaction is expected to
close on February 9, 2018, pending receipt of FNBO shareholder and regulatory approvals. FNBO has two offices located in
Odon and Montgomery, Indiana, and had total assets of approximately $102.7 million at September 30, 2017. During 2017,
FSFG incurred approximately $165,000 of pretax costs related to the acquisition. We expect the acquisition to be
immediately accretive to earnings.
The annual shareholders meeting of First Savings Financial Group, Inc. will be held on February 20, 2018 at 2:00
p.m. at the Sheraton Riverside Hotel in Jeffersonville, Indiana. I personally invite you to attend this meeting, which is a great
opportunity to learn more about our organization, meet our directors and staff, and celebrate our record year. I look forward
to seeing you there.
Sincerely,
Larry W. Myers
President & Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2017
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 1-34155
FIRST SAVINGS FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Indiana
(State or other jurisdiction of
incorporation or organization)
37-1567871
(I.R.S. Employer Identification No.)
501 East Lewis & Clark Parkway, Clarksville, Indiana
(Address of principal executive offices)
47129
(Zip Code)
Registrant’s telephone number, including area code: (812) 283-0724
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Name of each exchange on which registered
NASDAQ Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ___ No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes ___ No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web
site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, small reporting company, or an emerging growth company. See the definitions of “large
accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2
of the Exchange Act.
Large Accelerated Filer [ ]
Non-accelerated Filer [ ]
Emerging Growth Company [ ]
Accelerated Filer [ X ]
Smaller Reporting Company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to Section
13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act). Yes ___ No X
The aggregate market value of the voting and non-voting common equity held by nonaffiliates was $85.8
million, based upon the closing price of $48.72 per share as quoted on the NASDAQ Stock Market as of the last
business day of the registrant’s most recently completed second fiscal quarter ended March 31, 2017.
The number of shares outstanding of the registrant’s common stock as of December 1, 2017 was 2,243,139.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2018 Annual Meeting of Stockholders are incorporated by reference
in Part III of this Form 10-K.
INDEX
Part I
Page
Item 1.
Business .............................................................................................................................................. 2
Item 1A.
Risk Factors ......................................................................................................................................... 18
Item 1B.
Unresolved Staff Comments ............................................................................................................... 26
Item 2.
Properties ............................................................................................................................................ 26
Item 3.
Legal Proceedings ............................................................................................................................... 27
Item 4.
Mine Safety Disclosures...................................................................................................................... 27
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ......................................................................................................... 28
Item 6.
Selected Financial Data ....................................................................................................................... 30
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations .............. 33
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk ............................................................ 53
Item 8.
Financial Statements and Supplementary Data ................................................................................... 53
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ............ 53
Item 9A.
Controls and Procedures ..................................................................................................................... 54
Item 9B.
Other Information ................................................................................................................................ 54
Part III
Item 10.
Directors, Executive Officers and Corporate Governance .................................................................. 55
Item 11.
Executive Compensation ..................................................................................................................... 55
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ......................................................................................................................... 55
Item 13.
Certain Relationships and Related Transactions, and Director Independence .................................... 55
Item 14.
Principal Accounting Fees and Services ............................................................................................. 55
Item 15.
Exhibits and Financial Statement Schedules ....................................................................................... 56
Item 16.
Form 10-K Summary .......................................................................................................................... 56
Part IV
SIGNATURES
1
This annual report contains forward-looking statements that are based on assumptions and may describe
future plans, strategies and expectations of First Savings Financial Group, Inc. These forward-looking statements
are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or
similar expressions. First Savings Financial Group’s ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of First
Savings Financial Group and its subsidiary include, but are not limited to, changes in interest rates, national and
regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S.
government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of
the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial
services in First Savings Financial Group’s market area, changes in real estate market values in First Savings
Financial Group’s market area, changes in relevant accounting principles and guidelines and inability of third
party service providers to perform. Additional factors that may affect our results are discussed in Item 1A to this
Annual Report on Form 10-K titled “Risk Factors” below.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue
reliance should not be placed on such statements. Except as required by applicable law or regulation, First Savings
Financial Group does not undertake, and specifically disclaims any obligation, to release publicly the result of any
revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the
statements or to reflect the occurrence of anticipated or unanticipated events.
Unless the context indicates otherwise, all references in this annual report to “First Savings Financial
Group,” “Company,” “we,” “us” and “our” refer to First Savings Financial Group and its subsidiaries.
PART I
Item 1.
BUSINESS
General
First Savings Financial Group, Inc., an Indiana corporation, was incorporated in May 2008 and serves as
the holding company for First Savings Bank (the “Bank” or “First Savings Bank”). First Savings Financial Group’s
principal business activity is the ownership of the outstanding common stock of First Savings Bank. First Savings
Financial Group does not own or lease any property but instead uses the premises, equipment and other property of
First Savings Bank with the payment of appropriate rental fees, as required by applicable law and regulations, under
the terms of an expense allocation agreement. Accordingly, the information set forth in this annual report including
the consolidated financial statements and related financial data contained herein, relates primarily to the Bank.
First Savings Bank converted from a federally-chartered savings bank to an Indiana-chartered
commercial bank and became a member the Federal Reserve System effective December 19, 2014. As a result
of the Bank’s charter conversion, First Savings Financial Group converted to a bank holding company and
simultaneously elected financial holding company status effective December 19, 2014.
First Savings Bank operates as a community-oriented financial institution offering traditional financial
services to consumers and businesses in its primary market area. We attract deposits from the general public and
use those funds to originate primarily residential and commercial mortgage loans. We also originate commercial
business loans, residential and commercial construction loans, multi-family loans, land and land development loans,
and consumer loans. We conduct our lending and deposit activities primarily with individuals and small businesses
in our primary market area, except as otherwise discussed herein.
Our website address is www.fsbbank.net. Information on our website should not be considered a part of
this annual report.
2
Market Area
We are located in South Central Indiana along the axis of Interstate 65 and Interstate 64, directly across the
Ohio River from Louisville, Kentucky. We consider Clark, Floyd, Harrison, Crawford and Washington counties,
Indiana, in which all of our offices are located, and the surrounding areas to be our primary market area. The
current top employment sectors in these counties are the private retail, service and manufacturing industries, which
are likely to continue to be supported by the projected growth in population and median household income. These
counties are well-served by barge transportation, rail service, and commercial and general aviation services,
including the United Parcel Service’s major hub, which are located in our primary market area.
Competition
We face significant competition for the attraction of deposits and origination of loans. Our most direct
competition for deposits has historically come from the several financial institutions operating in our primary market
area and from other financial service companies such as securities and mortgage brokerage firms, credit unions and
insurance companies. We also face competition for investors’ funds from money market funds, mutual funds and
other corporate and government securities. At June 30, 2017, which is the most recent date for which data is
available from the Federal Deposit Insurance Corporation (“FDIC”), we held approximately 14.59%, 2.70%,
36.55%, 80.50% and 16.16% of the FDIC-insured deposits in Clark, Floyd, Harrison, Crawford and Washington
Counties, Indiana, respectively. This data does not reflect deposits held by credit unions with which we also
compete. In addition, banks owned by large national and regional holding companies and other community-based
banks also operate in our primary market area. Some of these institutions are larger than us and, therefore, may have
greater resources.
Our competition for loans comes primarily from financial institutions in our primary market area and from
other financial service providers, such as mortgage companies, mortgage brokers and credit unions. Competition for
loans also comes from non-depository financial service companies entering the mortgage market, such as insurance
companies, securities companies, and specialty and captive finance companies.
We expect competition to increase in the future as a result of legislative, regulatory and technological
changes and the continuing trend of consolidation in the financial services industry. Technological advances, for
example, have lowered barriers to entry, allowing banks to expand their geographic reach by providing services over
the Internet, and made it possible for non-depository institutions to offer products and services that traditionally have
been provided by banks. Changes in federal law now permit affiliation among banks, securities firms and insurance
companies, which promotes a competitive environment in the financial services industry. Competition for deposits
and the origination of loans could limit our growth in the future.
Lending Activities
Consistent with the Bank’s conversion to an Indiana-chartered commercial bank in December 2014, the
Bank is continuing the process of transforming the composition of its balance sheet from that of a traditional thrift
institution to that of a commercial bank. We intend to continue to emphasize residential lending, primarily secured
by owner-occupied properties, but also to continue concentrating on ways to expand our consumer/retail banking
capabilities and our commercial banking services with a focus on serving small businesses and emphasizing
relationship banking in our primary market area.
The largest segments of our loan portfolio are commercial real estate loans and residential real estate
mortgage loans, which are primarily one- to four-family residential loans, and, to a lesser extent, multi-family real
estate and commercial business loans. We also originate residential and commercial construction loans, land and
land development loans, and consumer loans. We generally originate loans for investment purposes, although,
depending on the interest rate environment and our asset/liability management goals, we may sell into the secondary
market the 25-year and 30-year fixed-rate residential mortgage loans that we originate, as well as the portion of
loans guaranteed by the U.S. Small Business Administration (“SBA”) that we originate under its 7(a) program. We
do not offer, have not offered and have not purchased or acquired Alt-A, sub-prime or no-documentation loans.
3
One- to Four-Family Residential Loans. Our origination of residential mortgage loans enables borrowers
to purchase or refinance existing homes located in Clark, Floyd, Harrison, Crawford and Washington Counties,
Indiana, and the surrounding areas. A significant portion of the residential mortgage loans that we had originated
before 2005 are secured by non-owner occupied properties. Loans secured by non-owner occupied properties
generally carry a greater risk of loss than loans secured by owner-occupied properties. See “Item 1A. Risk Factors –
Risks Related to Our Business – Our concentration in non-owner occupied real estate loans may expose us to
increased credit risk” and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Risk Management – Analysis of Nonperforming and Classified Assets.” Since 2005, we have de-
emphasized non-owner occupied residential mortgage lending and have focused, and intend to continue to focus, our
residential mortgage lending primarily on originating residential mortgage loans secured by owner-occupied
properties.
Our residential lending policies and procedures conform to the secondary market guidelines. We generally
offer a mix of adjustable-rate mortgage loans and fixed-rate mortgage loans with terms of 10 to 30 years. Borrower
demand for adjustable-rate loans compared to fixed-rate loans is a function of the level of interest rates, the
expectations of changes in the level of interest rates, and the difference between the interest rates and loan fees
offered for fixed-rate mortgage loans as compared to an initially discounted interest rate and loan fees for multi-year
adjustable-rate mortgages. The relative amount of fixed-rate mortgage loans and adjustable-rate mortgage loans that
can be originated at any time is largely determined by the demand for each in a competitive environment. The loan
fees, interest rates and other provisions of mortgage loans are determined by us based on our own pricing criteria
and competitive market conditions.
Interest rates and payments on our adjustable-rate mortgage loans generally adjust annually after an initial
fixed period that typically ranges from one to five years. Interest rates and payments on our adjustable-rate loans
generally are adjusted to a rate typically equal to a margin above the one year U.S. Treasury index. The maximum
amount by which the interest rate may be increased or decreased is generally one percentage point per adjustment
period and the lifetime interest rate cap is generally six percentage points over the initial interest rate of the loan.
However, a portion of the adjustable-rate mortgage loan portfolio has a maximum amount by which the interest rate
may be increased or decreased of two percentage points per adjustment period and a lifetime interest rate cap
generally of six percentage points over the initial interest rate of the loan.
While one to four family residential real estate loans are normally originated with up to 30-year terms, such
loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in
full either upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average
loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market,
prevailing interest rates and the interest rates payable on outstanding loans on a regular basis. We do not offer loans
with negative amortization and generally do not offer interest-only loans.
We generally do not make conventional loans with loan-to-value ratios exceeding 80%, including that for
non-owner occupied residential real estate loans whose loan-to-value ratios generally may not exceed 75%, or 65%
where the borrower has more than five non-owner occupied loans outstanding. Non-owner occupied loans
originated before 2005, however, were generally originated with loan-to-value ratios up to 80%. Loans with loan-
to-value ratios in excess of 80% generally require private mortgage insurance. However, the total balance of
residential mortgage loans secured by one-to-four family residential properties with loan-to-value ratios
exceeding 90% amounted to $16.2 million, of which some do not have private mortgage insurance or
government guaranty. We generally require all properties securing mortgage loans to be appraised by a board-
approved independent appraiser. We also generally require title insurance on all first mortgage loans with principal
balances of $250,000 or more. Borrowers must obtain hazard insurance, and flood insurance is required for all loans
located in flood hazard areas.
At September 30, 2017, our largest one to four family residential loan had an outstanding balance of $1.5
million. This loan, which was originated in September 2016 and is secured by 12 duplexes containing 24 living
units, was performing in accordance with its original terms at September 30, 2017.
4
Commercial Real Estate Loans. We offer fixed and adjustable-rate mortgage loans secured by commercial
real estate. Our commercial real estate loans are generally secured by small to moderately-sized office, retail and
industrial properties located in our primary market area and are typically made to small business owners and
professionals such as attorneys and accountants.
We originate fixed-rate commercial real estate loans, generally with terms up to five years and payments
based on an amortization schedule of 15 to 20 years, resulting in “balloon” balances at maturity. We also offer
adjustable-rate commercial real estate loans, generally with terms up to five years and with interest rates typically
equal to a margin above the prime lending rate or the London Interbank Offered Rate (LIBOR). Loans are secured
by first mortgages, generally are originated with a maximum loan-to-value ratio of 80% and often require specified
debt service coverage ratios depending on the characteristics of the project. Rates and other terms on such loans
generally depend on our assessment of credit risk after considering such factors as the borrower’s financial condition
and credit history, loan-to-value ratio, debt service coverage ratio and other factors.
During 2013, we began a commercial real estate lending program that is focused on loans to high net worth
individuals that are secured by low loan-to-value, single-tenant commercial properties that are generally leased to
investment grade national-brand retailers, the borrowers and collateral properties for which are outside of our
primary market area. This program is designed to diversify the Company’s geographic and credit risk profile given
the geographic dispersion of the loans and collateral, and the investment grade credit of the national-brand lessees.
The terms of the loans are generally consistent with the aforementioned terms of in-market commercial real estate
loans; however, these cannot exceed 70% loan-to-value and loan maturities cannot exceed the expiration of the
underlying leases. In addition, the Company has established guidelines with respect to concentrations by state,
lessee and industry of lessees as a percent of the overall loan portfolio, and as a percent of capital. The average size
of these loans originated was $1.1 million and the portfolio balance was $134.4 million at September 30, 2017. Our
largest such loan, which was originated in February 2017 and secured by a single-tenant commercial retail building,
had an outstanding balance of $3.9 million at September 30, 2017 and was performing in accordance with its
original terms at September 30, 2017.
At September 30, 2017, our largest commercial real estate loan had an outstanding balance of $9.1 million.
This loan, which was originated in September 2016, is secured by a commercial real estate development formerly
owned by the Company that includes one multi-tenant, two single-tenant, and two two-tenant retail buildings. It was
performing in accordance with its original terms at September 30, 2017.
Construction Loans. We originate construction loans for one to four family homes and commercial
properties such as small industrial buildings, warehouses, retail shops and office units. Construction loans are
typically for a term of 12 months with monthly interest only payments. Except for speculative loans, discussed
below, repayment of construction loans typically comes from the proceeds of a permanent mortgage loan for which
a commitment is typically in place when the construction loan is originated. We originate construction loans to a
limited group of well-established builders in our primary market area and we limit the number of projects with each
builder. Interest rates on these loans are generally tied to the prime lending rate. Construction loans, other than land
development loans, generally will not exceed the lesser of 80% of the appraised value or 90% of the direct costs,
excluding items such as developer fees, operating deficits or other items that do not relate to the direct development
of the project. Generally, commercial construction loans require the personal guarantee of the owners of the
business. We also offer construction loans for the financing of pre-sold homes, which convert into permanent loans
at the end of the construction period. Such loans generally have a six month construction period with interest only
payments due monthly, followed by an automatic conversion to a 15 year to 30 year permanent loan with monthly
payments of principal and interest. Occasionally, a construction loan to a builder of a speculative home will be
converted to a permanent loan if the builder has not secured a buyer within a limited period of time after the
completion of the home. We generally disburse funds on a percentage-of-completion basis following an inspection
by a third party inspector.
5
We also originate speculative construction loans to builders who have not identified a buyer or lessee for
the completed property at the time of origination. At September 30, 2017, we had approved commitments for
speculative construction loans of $10.4 million, of which $4.1 million was outstanding. We require a maximum
loan-to-value ratio of 80% for speculative construction loans. At September 30, 2017, our largest construction loan
relationship was for a commitment of $11.3 million, of which $7.5 million was outstanding but 80% of this loan is
participated to other financial institutions. This loan, which was originated in June 2016 and is secured by a national
brand hotel, was performing in accordance with its original terms at September 30, 2017.
Land and Land Development Loans. On a limited basis, we originate loans to developers for the purpose
of developing vacant land in our primary market area, typically for residential subdivisions. Land development
loans are generally interest-only loans for a term of 18 to 24 months. We generally require a maximum loan-to-
value ratio of 75% of the appraisal market value upon completion of the project. We generally do not require any
cash equity from the borrower if there is sufficient indicated equity in the collateral property. Development plats
and cost verification documents are required from borrowers before approving and closing the loan. Our loan
officers are required to personally visit the proposed development site and the sites of competing developments. We
also originate loans to individuals secured by undeveloped land held for investment purposes. At September 30,
2017, our largest land development loan had an outstanding balance of $2.9 million. This loan, which was
originated in April 2017, was performing in accordance with its original terms at September 30, 2017.
Multi-Family Real Estate Loans. We offer multi-family mortgage loans that are generally secured by
properties in our primary market area. Multi-family loans are secured by first mortgages and generally are
originated with a maximum loan-to-value ratio of 80% and generally require specified debt service coverage ratios
depending on the characteristics of the project. Rates and other terms on such loans generally depend on our
assessment of the credit risk after considering such factors as the borrower’s financial condition and credit history,
loan-to-value ratio, debt service coverage ratio and other factors. At September 30, 2017, our largest multi-family
mortgage loan had an outstanding balance of $3.7 million. This loan, which was originated in March 2017, was
performing in accordance with its original terms at September 30, 2017.
Consumer Loans. Although we offer a variety of consumer loans, our consumer loan portfolio consists
primarily of home equity loans, both fixed rate amortizing term loans with terms up to 15 years and adjustable rate
lines of credit with interest rates equal to a margin above the prime lending rate. We also offer auto and truck loans,
personal loans and small boat loans. Consumer loans typically have shorter maturities and higher interest rates than
traditional one-to four-family lending. We typically do not make home equity loans with loan-to-value ratios
exceeding 90%, including any first mortgage loan balance. The procedures for underwriting consumer loans include
an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and
payments on the proposed loan. Although the applicant’s creditworthiness is a primary consideration, the
underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount.
At September 30, 2017, our largest consumer loan was a home equity line of credit with a commitment of $300,000,
of which $300,000 was outstanding. This loan, which was originated in July 2017 and is secured by a first mortgage
on a personal residence, was performing in accordance with its original terms at September 30, 2017.
Commercial Business Loans. We typically offer commercial business loans to small businesses located in
our primary market area. Commercial business loans are generally secured by equipment and general business
assets. Key loan terms and covenants vary depending on the collateral, the borrower’s financial condition, credit
history and other relevant factors, and personal guarantees are typically required as part of the loan commitment. At
September 30, 2017, our largest commercial business loan was for a commitment of $7.5 million, of which $6.8
million was outstanding but $2.5 million had been participated to other financial institutions. This loan, which was
originated in September 2016 is made to a local hospital, was performing in accordance with its original terms at
September 30, 2017.
6
Loan Underwriting Risks
Adjustable Rate Loans. While we anticipate that adjustable rate loans will better offset the adverse effects
of an increase in interest rates as compared to fixed rate mortgages, an increased monthly mortgage payment
required of adjustable rate loan borrowers in a rising interest rate environment could cause an increase in
delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high
interest rate environment. In addition, although adjustable-rate mortgage loans make our asset base more responsive
to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate
adjustment limits.
Non-Owner Occupied Residential Real Estate Loans. Loans secured by rental properties represent a
unique credit risk to us and, as a result, we adhere to special underwriting guidelines. Of primary concern in non-
owner occupied real estate lending is the consistency of rental income of the property. Payments on loans secured
by rental properties often depend on the maintenance of the property and the payment of rent by its tenants.
Payments on loans secured by rental properties often depend on successful operation and management of the
properties. As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the
economy. To monitor cash flows on rental properties, we require borrowers and loan guarantors, if any, to provide
annual financial statements and we consider and review a rental income cash flow analysis of the borrower and
consider the net operating income of the property, the borrower’s expertise, credit history and profitability, and the
value of the underlying property. We generally require collateral on these loans to be a first mortgage along with an
assignment of rents and leases. If the borrower holds loans on more than four rental properties, a loan officer or
collection officer is generally required to inspect these properties annually to determine if they are being properly
maintained and rented. We have generally limited these loan relationships to an aggregate total of $500,000.
Multi-Family and Commercial Real Estate Loans. Loans secured by multi-family and commercial real
estate generally have larger balances and involve a greater degree of risk than one to four family residential
mortgage loans. Of primary concern in multi-family and commercial real estate lending is the borrower’s
creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income
properties often depend on successful operation and management of the properties. As a result, repayment of such
loans may be subject to adverse conditions in the real estate market or the economy. To monitor cash flows on
income properties, we require borrowers and loan guarantors, if any, to provide annual financial statements on
multi-family and commercial real estate loans. In addition, some loans may contain covenants regarding ongoing
cash flow coverage requirements. In reaching a decision on whether to make a multi-family or commercial real
estate loan, we consider and review a global cash flow analysis of the borrower and consider the net operating
income of the property, the borrower’s expertise, credit history and profitability, and the value of the underlying
property. An environmental survey or environmental risk insurance is obtained when the possibility exists that
hazardous materials may have existed on the site, or the site may have been impacted by adjoining properties that
handled hazardous materials.
Construction and Land and Land Development Loans. Construction financing is generally considered to
involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a
construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of
construction and the estimated cost of construction. During the construction phase, a number of factors could result
in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to
advance funds beyond the amount originally committed to permit completion of the building. If the estimate of
value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a building having a
value which is insufficient to assure full repayment if liquidation is required. If we are forced to foreclose on a
building before or at completion due to a default, we may be unable to recover all of the unpaid balance of, and
accrued interest on, the loan as well as related foreclosure and holding costs. In addition, speculative construction
loans, which are loans made to home builders who, at the time of loan origination, have not yet secured an end buyer
for the home under construction, typically carry higher risks than those associated with traditional construction
loans. These increased risks arise because of the risk that there will be inadequate demand to ensure the sale of the
property within an acceptable time. As a result, in addition to the risks associated with traditional construction
loans, speculative construction loans carry the added risk that the builder will have to pay the property taxes and
other carrying costs of the property until an end buyer is found. Land and land development loans have substantially
similar risks to speculative construction loans.
7
Consumer Loans. Consumer loans may entail greater risk than do residential mortgage loans, particularly
in the case of consumer loans that are secured by assets that depreciate rapidly, such as motor vehicles and boats. In
such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment
for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In the case of home equity loans, real estate values may be reduced to a level that is
insufficient to cover the outstanding loan balance after accounting for the first mortgage loan balance. Consumer
loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely
affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application
of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount
that can be recovered on such loans.
Commercial Business Loans. Unlike residential mortgage loans, which generally are made on the basis of
the borrower’s ability to make repayment from his or her employment income or other income, and which are
secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher
risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the
borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may
depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate
over time, may be difficult to appraise and may fluctuate in value.
Loan Originations, Sales and Purchases. Loan originations come from a number of sources. The primary
sources of loan originations are existing customers, walk-in traffic, advertising, and referrals from customers and
centers of influence, such as real estate agents, attorneys, accountants and other professionals.
We have not historically sold whole loans, other than long term fixed rate residential mortgage loans that
we originate, which we generally sell in the secondary market. We have not historically purchased whole loans;
however, we acquired four brokered whole loans during the year ended September 30, 2012. The loans were
purchased at an average of 90% of their principal balance and are secured by multi-family and retail shopping
centers located in Indiana. At September 30, 2017, three of these loans remained outstanding with a total principal
balance of $4.0 million and were performing in accordance with their original terms.
While we generally do not sell participation interests in loans originated by us or purchase participation
interests in loans originated by other financial institutions in order to supplement our lending portfolio, we may sell
or purchase participation interests in loans from time to time depending on various factors. At September 30, 2017,
$38.0 million of loans included sold participation interests of $19.8 million, for a net position of $18.2 million
outstanding in our portfolio. At September 30, 2017, acquired participation interests of loans from one lending
relationship totaled $771,000 and this was our largest purchased participation interest with a single borrower. This
loan, which was originated in January 2014 and is secured by a first mortgage on an industrial building, was
performing in accordance with its original terms at September 30, 2017.
Beginning in April 2015, the Bank hired a management team, business development officers (loan
officers), underwriters and supporting staff that are seasoned and experienced in SBA lending in order to enhance
the Company’s proficiency in SBA 7(a) program loan originations and sales. The Bank intends to continue hiring
additional business development officers and appropriate supporting staff in order to grow this program, the
borrowers and collateral for which are outside of our primary market area. The primary purpose of the program is to
originate SBA 7(a) program loans and sell the amounts guaranteed by the SBA in the secondary market. The
program is also designed to diversify the Company’s geographic and interest rate risk profile with respect to the
retained unguaranteed amounts given the geographic dispersion of the loans and collateral, and their floating rate
structure. The Company originated SBA loans with a total commitment of $91.3 million during the year end
September 30, 2017. At September 30, 2017, $110.6 million of SBA loans included sold guaranteed portions of
$61.2 million, for a net position of $49.4 million outstanding in our portfolio. The amount outstanding in the Bank’s
portfolio at September 30, 2017 included $24.9 million in SBA loans held for sale, $7.6 million in the unguaranteed
portion of SBA loans not yet sold and $17.8 million in the unguaranteed portion of SBA loans sold. All SBA loans
held for sale were carried at the lower of cost or market value at September 30, 2017 and 2016.
Our decision to sell or purchase loans is based on prevailing market interest rate conditions, interest rate
management, regulatory lending restrictions and liquidity needs.
8
Loan Approval Procedures and Authority. Our conventional lending activities follow written, non-
discriminatory underwriting standards and loan origination procedures established by our Board of Directors and
management. Certain of our employees have been granted individual lending limits, which vary depending on the
individual, the type of loan and whether the loan is secured or unsecured. Generally, all loan requests for non-SBA
7(a) program lending relationships that exceed the individual officer lending limits, which is generally $250,000
secured or $50,000 unsecured, require committee or Board of Directors approval. Loans resulting in aggregated
lending relationships in excess of individual office lending limits but less than $1.5 million require approval by the
Officer Loan Committee and loans resulting in aggregated lending relationships in excess of $1.5 million but less
than $3.0 million require approval of the Executive Loan Committee. The Executive Loan Committee consists of
the President, Area President, Chief Lending Officer, Chief of Credit Administration and two senior commercial
lending officers, and the Officer Loan Committee consists of the same but also includes certain other officers
designated by the Board of Directors. Loans resulting in aggregated lending relationships in excess of $3.0 million
require approval by both the Executive Loan Committee and the Board of Directors.
Our SBA 7(a) program lending activities also follow underwriting standards and loan origination
procedures established by our Board of Directors and management. Certain of our employees have been granted
individual lending limits, which is $2.0 million for the aggregate loan balance, of which 75% or greater is
guaranteed by the SBA. Generally, all SBA 7(a) program loan requests for lending relationships that exceed the
individual officer lending limits require approval by the SBA Officer Loan Committee. The SBA Officer Loan
Committee consists of the President, Chief Lending Officer, Chief of Credit Administration, Chief of SBA Lending,
Senior SBA Lending Officer and a senior commercial lending officer. The aggregated lending relationships for the
SBA 7(a) program may not exceed $5.0 million according to SBA guidelines and therefore no loan requests require
approval by the Board of Directors given that the portion of SBA 7(a) program loans that are not guaranteed by the
SBA may not exceed $1.25 million.
Loans to One Borrower. The maximum amount that we may lend to one borrower and the borrower’s
related entities is limited, by regulation, to generally 15% of our stated capital and reserves. At September 30, 2017,
our regulatory limit on loans to one borrower was $12.7 million. At that date, our largest lending relationship was
for a commitment of $9.1 million, of which $9.1 million was outstanding, and was performing according to its
original terms at that date.
Loan Commitments. We issue commitments for residential and commercial mortgage loans conditioned
upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to
lend to our customers. Generally, our loan commitments expire after 30 days.
Investment Activities
We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations,
securities of various U.S. government agencies and sponsored enterprises, securities of various state and municipal
governments, mortgage-backed securities, collateralized mortgage obligations and certificates of deposit of federally
insured institutions. Within certain regulatory limits, we also may invest a portion of our assets in other permissible
securities. As a member of the Federal Reserve System and Federal Home Loan Bank System, in particular a
member of the Federal Home Loan Bank of Indianapolis (“FHLB”), First Savings Bank is also required to acquire
and hold shares of capital stock in the Federal Reserve Bank and FHLB.
At September 30, 2017, our investment portfolio consisted primarily of U.S. government agency and
sponsored enterprises securities, mortgage backed securities and collateralized mortgage obligations issued by U.S.
government agencies and sponsored enterprises, municipal bonds, privately-issued collateralized mortgage
obligations and asset-backed securities, and a pass-through asset-backed security guaranteed by the SBA. We
also have a managed brokerage account that invests in small and medium lot, investment grade municipal
bonds and these securities are classified as trading account securities. The brokerage account is managed by
an investment advisory firm registered with the U.S. Securities and Exchange Commission. At September 30,
2017, trading account securities recorded at fair value totaled $7.2 million.
9
Our investment objectives are to provide and maintain liquidity, to establish an acceptable level of interest
rate and credit risk, and to provide an alternate source of low-risk investments at a favorable return when loan
demand is weak. Our Board of Directors has the overall responsibility for the investment portfolio, including
approval of the investment policy. Messrs. Myers, our President and Chief Executive Officer, and Schoen, our
Chief Financial Officer, are responsible for implementation of the investment policy and monitoring our investment
performance. Our Board of Directors reviews the status of our investment portfolio on a quarterly basis, or more
frequently if warranted.
Deposit Activities and Other Sources of Funds
General. Deposits, borrowings, and loan and investment security repayments are the major sources of our
funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds,
while deposit inflows and outflows, loan prepayments and investment security calls are significantly influenced by
general interest rates and money market conditions.
Deposit Accounts. Deposits are attracted from within our primary market area through the offering of a
broad selection of deposit instruments, including non-interest-bearing demand deposits (such as checking accounts),
interest-bearing demand accounts (such as NOW and money market accounts), regular savings accounts and time
deposits. Deposit account terms vary according to the minimum balance required, the time periods the funds must
remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we
consider the rates offered by our competition, our liquidity needs, profitability to us, matching deposit and loan
products and customer preferences and concerns. We generally review our deposit mix and pricing weekly. Our
deposit pricing strategy has typically been to offer competitive rates on all types of deposit products, and to
periodically offer special rates in order to attract deposits of a specific type or term.
Borrowings. We use advances from the FHLB to supplement our investable funds. First Savings Bank is a
member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The
Federal Home Loan Bank System functions as a central reserve bank providing credit for member financial
institutions. First Savings Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in
the FHLB and is authorized to apply for advances on the security of such stock and certain of our mortgage loans
and other assets (principally securities which are obligations of the U.S., U.S. government agencies or U.S.
government-sponsored enterprises), provided certain standards related to creditworthiness have been met. Advances
are made under several different programs, each having its own interest rate and range of maturities. Depending on
the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net
worth or on the FHLB’s assessment of the institution’s creditworthiness. We have two federal funds purchased line
of credit facilities with other financial institutions that are subject to continued borrower eligibility and are intended
to support short-term liquidity needs. We also utilize brokered certificates of deposit and retail repurchase
agreements as sources of borrowings and may use broker repurchase agreements and internet certificates of deposit
from time to time, depending on our liquidity needs and pricing of these facilities versus other funding alternatives.
Personnel
As of September 30, 2017, we had 176 full-time employees and 25 part-time employees, none of whom is
represented by a collective bargaining unit.
Subsidiaries
The Company has two wholly-owned subsidiaries, First Savings Bank and First Savings Insurance Risk
Management, Inc. (the “Captive”). The Bank has three subsidiaries, Southern Indiana Financial Corporation, Q2
Business Capital, LLC, and First Savings Investments, Inc. The Captive, an insurance subsidiary of the Company
formed during the fourth fiscal quarter of 2014, is a Nevada corporation that provides property and casualty
insurance to the Company, the Bank and the Bank’s active subsidiaries. In addition, the Captive provides
reinsurance to eight other third-party insurance captives for which insurance may not be currently available or
economically feasible in the insurance marketplace. Southern Indiana Financial Corporation is an independent
insurance agency, offering various types of annuities and life insurance policies, but is currently inactive.
10
On April 25, 2017, the Bank formed Q2 Business Capital, LLC (“Q2”), which is an Indiana limited
liability company that specializes in the origination and servicing of SBA loans. The Bank owns 51% of Q2
with the option to purchase the minority interest between July 1, 2020 and September 30, 2020. In
accordance with Q2’s operating agreement, the Bank will be allocated the first $1.7 million of cumulative net
income of Q2 with any additional profits and losses allocated 51% to the Bank and 49% to Q2’s minority
members.
General
REGULATION AND SUPERVISION
First Savings Bank, as an Indiana commercial bank, is subject to extensive regulation, examination and
supervision by the Indiana Department of Financial Institutions (“INDFI”). As a member bank of the Federal
Reserve System, First Savings Bank’s primary federal regulator is the Federal Reserve Board (“FRB”). First
Savings Bank is also a member of the Federal Home Loan Bank System and its deposit accounts are insured up to
applicable limits by the Deposit Insurance Fund of the FDIC. First Savings Bank must file reports with its
regulatory agencies concerning its activities and financial condition in addition to obtaining regulatory approvals
before entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There
are periodic examinations by the INDFI and FRB to evaluate First Savings Bank’s safety and soundness and
compliance with various regulatory requirements. This regulatory structure is intended primarily for the protection
of the Deposit Insurance Fund and depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the establishment of an adequate allowance for loan
losses for regulatory purposes. Any change in such policies, whether by the INDFI, FRB, or Congress, could have a
material adverse impact on First Savings Financial Group and First Savings Bank and their operations.
Certain of the regulatory requirements that are or will be applicable to First Savings Bank and First Savings
Financial Group are described below. This description of statutes and regulations is not intended to be a complete
explanation of such statutes and regulations and their effects on First Savings Bank and First Savings Financial
Group.
Regulation of First Savings Bank
Business Activities. The activities of Indiana banks, such as First Savings Bank, are governed by Indiana
and federal laws and regulations. Those laws and regulations delineate the nature and extent of the business
activities in which banks may engage
Federal law generally limits the activities as principal and equity investments of FDIC insured state banks
to those permitted for national banks. Activities as principal of state bank subsidiaries are also limited to those
permitted for subsidiaries of national banks, absent regulatory approval for a particular subsidiary activity. In
addition, federal law limits the authority of Federal Reserve System member banks, such as First Savings Bank, to
purchase investment securities. Generally, such authority is limited to investment securities permissible for national
banks, which includes investment grade, marketable debt obligations. Certain activities, such as the establishment
of new branches and mergers and acquisitions, require the prior approval of both the INDFI and the FRB.
Loans to One Borrower. Indiana law establishes limits on a bank’s loans to one borrower. Generally,
subject to certain exceptions, an Indiana bank may not make a loan or extend credit to a single or related group of
borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10%
of unimpaired capital and surplus, if secured by specified readily-marketable collateral. These limits are similar to
those applicable to First Savings Bank under its previous federal savings bank charter.
Capital Requirements. Federal regulations require FDIC insured depository institutions, including state
chartered Federal Reserve System member banks, to meet several minimum capital standards: a common equity
Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to
risk-based assets of 8% and a 4% Tier 1 capital to total assets leverage ratio. The existing capital requirements were
effective January 1, 2015.
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As noted, the capital standards require the maintenance of common equity Tier 1 capital, Tier 1 capital and
total capital to risk-weighted assets of at least 4.5%, 6% and 8%, respectively, and a leverage ratio of at least 4%
Tier 1 capital. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained
earnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier
1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1
capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and
related surplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual
preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included
in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets
and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other
Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with
readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI
incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-
securities). Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the
regulations.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios,
assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual
interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in
the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For
example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally
assigned to prudently underwritten first lien one to four- family residential mortgages, a risk weight of 100% is
assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk
weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital
distributions by the institution and certain discretionary bonus payments to management if an institution does not
hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets
above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer
requirement was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and is increasing each year
until fully implemented at 2.5% on January 1, 2019.
The FRB has authority to establish individual minimum capital requirements in appropriate cases upon a
determination that an institution’s capital level is or may become inadequate in light of the particular risks or
circumstances.
As of September 30, 2017, First Savings Bank met all applicable capital adequacy requirements.
Prompt Corrective Regulatory Action. Federal law establishes a system of prompt corrective action to
resolve the problems of undercapitalized institutions. The law requires that certain supervisory actions be taken
against undercapitalized institutions, the severity of which depends on the degree of undercapitalization. The FRB
has adopted regulations to implement the prompt corrective action legislation as to state member banks. The
regulations were amended to incorporate the previously mentioned increased regulatory capital standards that were
effective January 1, 2015. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of
10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a
common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based
capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or
greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total
risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less
than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly
undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less
than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is
considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total
assets that is equal to or less than 2.0%.
12
Subject to a narrow exception, a receiver or conservator is required to be appointed for an institution that is
“critically undercapitalized” within specified time frames. The regulations also provide that a capital restoration
plan must be filed with the FRB within 45 days of the date an institution is deemed to have received notice that it is
“undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must
be guaranteed by any parent holding company up to the lesser of 5% of the institution’s total assets when it was
deemed to be undercapitalized or the amount necessary to achieve compliance with applicable capital requirements.
In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized
institution including, but not limited to, increased monitoring by regulators and restrictions on growth, capital
distributions and expansion. The FRB could also take any one of a number of discretionary supervisory actions,
including the issuance of a capital directive and the replacement of senior executive officers and directors.
Significantly and critically undercapitalized institutions are subject to additional mandatory and discretionary
measures.
Insurance of Deposit Accounts. First Savings Bank’s deposits are insured up to applicable limits by the
Deposit Insurance Fund of the FDIC. Currently, deposit insurance per account owner is $250,000. Under the
FDIC’s existing risk-based assessment system, insured institutions are assigned to one of four risk categories based
on supervisory evaluations, regulatory capital levels and certain other factors, with less risky institutions paying
lower assessments. An institution’s assessment rate depends upon the category to which it is assigned and certain
specified adjustments. The assessment rates (inclusive of adjustments) currently range from two and one half to 45
basis points of total capital less tangible assets, depending upon the particular institution’s risk category. The rate
schedules will automatically adjust in the future when the Deposit Insurance Fund reaches certain milestones. No
institution may pay a dividend if in default of the federal deposit insurance assessment.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated
insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by
September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The
Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC. The
FDIC has exercised that discretion by establishing a target fund ratio of 2%, which it has established as a long term
goal.
The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums
would likely have an adverse effect on the operating expenses and results of operations of First Savings Bank.
Management cannot predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FRB or FDIC. The management of First Savings
Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.
Limitation on Dividends. Indiana law authorizes a bank’s board of directors to declare dividends out of
profits as deemed expedient. However, application to and the prior approval of the INDFI and FRB is required
before payment of a dividend if total dividends for the calendar year exceed net income for the year to date plus the
amount of retained net income for the preceding two years. Federal law specifies that a bank may not pay a
dividend if it fails to satisfy any applicable federal capital requirement after the dividend.
If First Savings Bank’s capital ever fell below its regulatory requirements or the FRB notified it that it was
in need of increased supervision, its ability to pay dividends or otherwise make capital distributions could be
restricted. In addition, the INDFI and/or FRB could prohibit a proposed capital distribution, which would otherwise
be permitted by the regulation, if the regulator determined that such distribution would constitute an unsafe or
unsound practice.
13
Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines
prescribing Standards for Safety and Soundness in various areas such as internal controls and information systems,
internal audit, loan documentation and credit underwriting, interest rate exposure, asset growth and quality, earnings
and compensation, fees and benefits. The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository institutions before capital becomes
impaired. If the FRB determines that a state member bank fails to meet any standard prescribed by the guidelines,
the FRB may require the institution to submit an acceptable plan to achieve compliance with the standard.
Community Reinvestment Act. All federally-insured banks have a responsibility under the Community
Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and
moderate-income neighborhoods. An institution’s failure to satisfactorily comply with the provisions of the
Community Reinvestment Act could result in denials of regulatory applications. First Savings Bank received a
“satisfactory” Community Reinvestment Act rating in its most recently completed examination.
Transactions with Related Parties. Federal law limits First Savings Bank’s authority to engage in
transactions with “affiliates” (e.g., any entity that controls or is under common control with First Savings Bank,
including First Savings Financial Group and its other subsidiaries). The aggregate amount of covered transactions
with any individual affiliate is limited to 10% of the capital and surplus of a bank. The aggregate amount of covered
transactions with all affiliates is limited to 20% of a bank’s capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type specified by federal law. The purchase of low
quality assets from affiliates is generally prohibited. Transactions with affiliates must generally be on terms and
under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies.
The Sarbanes-Oxley Act of 2002 generally prohibits loans by First Savings Financial Group to its executive
officers and directors. However, the law contains a specific exception for loans by a depository institution to its
executive officers and directors in compliance with federal banking laws. Under such laws, First Savings Bank’s
authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such
persons control, is limited. The laws limit both the individual and aggregate amount of loans that First Savings
Bank may make to insiders based, in part, on First Savings Bank’s capital level and requires that certain board
approval procedures be followed. Such loans are required to be made on terms substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception
for loans made pursuant to a benefit or compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other employees. Loans to executive officers are subject to
additional limitations based on the type of loan involved.
Enforcement. The INDFI maintains enforcement authority over First Savings Bank, including the power
to issue cease and desist orders and civil money penalties and remove directors, officers or employees. The INDFI
also has the power to appoint a conservator or receiver for a bank upon insolvency, imminent insolvency, unsafe or
unsound condition or certain other situations. The FRB has primary federal enforcement responsibility over Federal
Reserve System member state banks and has authority to bring actions against the institution and all institution-
affiliated parties, including shareholders, and any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful actions likely to have an adverse effect on the bank. Formal enforcement action may range
from the issuance of a capital directive or cease and desist order to removal of officers and/or directors. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in
especially egregious cases. The FDIC, as deposit insurer, has the authority to recommend to the FRB that
enforcement action be taken with respect to a member bank. If action is not taken by the FRB, the FDIC has
authority to take such action under certain circumstances. In general, regulatory enforcement actions occur with
respect to situations involving unsafe or unsound practices or conditions, violations of law or regulation or breaches
of fiduciary duty. Federal and Indiana law also establish criminal penalties for certain violations.
Assessments. Indiana banks are required to pay assessments to the INDFI to fund the agency’s operations.
The assessments paid to the INDFI by First Savings Bank for the fiscal year ended September 30, 2017 totaled
$54,000.
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Federal Home Loan Bank System. First Savings Bank is a member of the Federal Home Loan Bank
System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a
central credit facility primarily for member institutions. First Savings Bank, as a member of the FHLB, is required
to acquire and hold shares of capital stock in the FHLB. First Savings Bank was in compliance with this
requirement with an investment in FHLB capital stock at September 30, 2017 of $6.0 million.
Federal Reserve Board System. The FRB regulations require banks to maintain reserves against their
transaction accounts (primarily Negotiable Order of Withdrawal (NOW) and regular checking accounts). As of
September 30, 2017 and through the date of filing, First Savings Bank was in compliance with this requirement.
Other Regulations
First Savings Bank’s operations are also subject to federal laws applicable to credit transactions, including the:
•
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
•
• Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to
enable the public and public officials to determine whether a financial institution is fulfilling its
obligation to help meet the housing needs of the community it serves;
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit;
Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting
agencies;
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection
agencies; and
•
•
• Rules and regulations of the various federal agencies charged with the responsibility of implementing
such federal laws.
The operations of First Savings Bank also are subject to laws such as the:
• Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial
records and prescribes procedures for complying with administrative subpoenas of financial records;
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic
deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the
use of automated teller machines and other electronic banking services; and
•
• Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,”
such as digital check images and copies made from that image, the same legal standing as the original
paper check.
Holding Company Regulation
General. As a bank holding company, First Savings Financial Group is subject to FRB regulation,
examination, supervision and reporting requirements. In addition, the FRB has enforcement authority over First
Savings Financial Group and its non-savings institution subsidiaries. Among other things, this authority permits the
FRB to restrict or prohibit activities that are determined to be a serious risk to First Savings Bank. The INDFI also
has examination and enforcement authority since First Savings Financial Group controls an Indiana bank.
As a bank holding company, First Savings Financial Group is required to obtain the prior approval of the
FRB to acquire all, or substantially all, of the assets of any other bank or bank holding company. Prior FRB approval
is required for any bank holding company to acquire direct or indirect ownership or control of any voting securities
of any bank or bank holding company if, after such acquisition, the acquiring bank holding company would, directly
or indirectly, own or control more than 5% of any class of voting shares of the bank or bank holding company. In
addition to the approval of the FRB, prior approval may for such acquisitions also be necessary from other agencies
including the INDFI and agencies that regulate the target.
15
A bank holding company is generally prohibited from engaging in nonbanking activities, or acquiring
direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities.
One of the principal exceptions to this prohibition is for activities found by the FRB to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the
FRB has determined by regulation to be so closely related to banking are: (i) making or servicing loans;
(ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary,
investment or financial advisor; (v) leasing personal or real property; (vi) making investments in corporations or
projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan association whose
direct and indirect activities are limited to those permitted for bank holding companies.
The Gramm-Leach-Bliley Act of 1999 authorized a bank holding company that meets specified conditions,
including being “well capitalized” and “well managed,” to opt to become a “financial holding company” and thereby
engage in a broader array of financial activities than previously permitted. First Savings Financial Group has
elected to become a financial holding company because of the activities of the Captive.
Bank holding companies are generally subject to consolidated capital requirements established by the FRB.
The Dodd-Frank Act required the FRB to amend its consolidated minimum capital requirements for bank holding
companies to make them no less stringent than those applicable to insured depository institutions themselves. Bank
holding companies of under $1 billion in consolidated assets, such as First Savings Financial Group, are exempt
from consolidated regulatory capital requirements, unless the FRB determines otherwise in particular cases.
The FRB’s policies also require that a bank holding company serve as a source of financial strength to its
subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks
during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity
to obtain additional resources for assisting its subsidiary banks where necessary. The Dodd-Frank Act codified the
source of strength doctrine.
A bank holding company is generally required to give the FRB prior written notice of any purchase or
redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is
equal to 10% or more of the company’s consolidated net worth. The FRB may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe and unsound practice, or violate any law,
regulation, FRB order or directive, or any condition imposed by, or written agreement with, the FRB. There is an
exception to this approval requirement for well-capitalized bank holding companies that meet certain other
conditions.
The FRB has issued a policy statement regarding the payment of dividends and the repurchase of shares of
common stock by bank holding companies. In general, the policy provides that dividends should be paid only out of
current earnings and only if the prospective rate of earnings retention by the holding company appears consistent
with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for
prior regulatory consultation with respect to dividends in certain circumstances such as where the company’s net
income for the past four quarters, net of dividends’ previously paid over that period, is insufficient to fully fund the
dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and
overall financial condition. The ability of a holding company to pay dividends may be limited if a subsidiary bank
becomes undercapitalized. The guidance also provides for regulatory consultation prior to a bank holding company
redeeming or repurchasing regulatory capital instruments when the holding company is experiencing financial
weaknesses or where the redemption or repurchase of common or preferred stock cause a net reduction in the
amount of such equity instruments outstanding at the end of a quarter compared to the beginning of the quarter in
which the redemption or repurchase occurs. These regulatory policies could affect the ability of First Savings
Financial Group to pay dividends, repurchase shares of its stock or otherwise engage in capital distributions.
The status of First Savings Financial Group as a registered bank holding company under the Bank Holding
Company Act does not exempt it from certain federal and state laws and regulations applicable to corporations
generally including, without limitation, certain provisions of the federal securities laws.
16
Acquisition of Control. Under the federal Change in Bank Control Act, no person may acquire control of a
bank holding company such as First Savings Financial Group unless the FRB has been given 60 days’ prior written
notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors,
including the financial and managerial resources of the acquirer and the competitive effects of the
acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies
representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the
company’s directors, or a determination by the regulator that the acquirer has the power to direct, or directly or
indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of
more than 10% of any class of a bank holding company’s voting stock constitutes a rebuttable presumption of
control under the regulations under certain circumstances including where, is the case with First Savings Financial
Group, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934. Indiana law
requires INDFI approval for changes in control of companies controlling Indiana banks, with “control” defined to
mean power to direct the management or policies of the holding company or power to vote at least 25% of the
company’s voting securities.
Federal Securities Laws
First Savings Financial Group’s common stock is registered with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended. First Savings Financial Group is subject to the
information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act
of 1934, as amended.
Federal Taxation
INCOME TAXATION
General. We report our income on a fiscal year basis using the accrual method of accounting. The federal
income tax laws apply to us in the same manner as to other corporations with some exceptions, including
particularly our reserve for bad debts discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules applicable to us. For its 2016
fiscal year, the Company’s maximum federal income tax rate was 34%.
First Savings Financial Group and First Savings Bank have entered into a tax allocation agreement.
Because First Savings Financial Group owns 100% of the issued and outstanding capital stock of First Savings
Bank, First Savings Financial Group and First Savings Bank are members of an affiliated group within the meaning
of Section 1504(a) of the Internal Revenue Code, of which group First Savings Financial Group is the common
parent corporation. As a result of this affiliation, First Savings Bank may be included in the filing of a consolidated
federal income tax return with First Savings Financial Group and, if a decision to file a consolidated tax return is
made, the parties agree to compensate each other for their individual share of the consolidated tax liability and/or
any tax benefits provided by them in the filing of the consolidated federal income tax return.
Our Federal income tax returns have not been audited during the last five years.
Bad Debt Reserves. For fiscal years beginning before June 30, 1996, thrift institutions that qualified under
certain definitional tests and other conditions of the Internal Revenue Code, as the Bank did prior to its conversion
to a commercial bank in December 2014, were permitted to use certain favorable provisions to calculate their
deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for
bad debts on qualifying real property loans, generally secured by interests in real property improved or to be
improved, under the percentage of taxable income method or the experience method. The reserve for nonqualifying
loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method
of accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995 and
required savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves.
Approximately $4.6 million of our accumulated bad debt reserves would not be recaptured into taxable income
unless First Savings Bank makes a “non-dividend distribution” to First Savings Financial Group as described below.
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Distributions. If First Savings Bank makes “non-dividend distributions” to First Savings Financial Group,
the distributions will be considered to have been made from First Savings Bank’s unrecaptured tax bad debt
reserves, including the balance of its reserves as of September 30, 1988, to the extent of the “non-dividend
distributions,” and then from First Savings Bank’s supplemental reserve for losses on loans, to the extent of those
reserves, and an amount based on the amount distributed, but not more than the amount of those reserves, will be
included in First Savings Bank’s taxable income. Non-dividend distributions include distributions in excess of First
Savings Bank’s current and accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of First
Savings Bank’s current or accumulated earnings and profits will not be so included in First Savings Bank’s taxable
income.
The amount of additional taxable income triggered by a non-dividend distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if First Savings
Bank makes a non-dividend distribution to First Savings Financial Group, approximately one and one-half times the
amount of the distribution not in excess of the amount of the reserves would be includable in income for federal
income tax purposes, assuming a 34% federal corporate income tax rate. First Savings Bank does not intend to pay
dividends that would result in a recapture of any portion of its bad debt reserves.
State Taxation
Indiana. Effective July 1, 2013, Indiana amended its tax code to provide for reductions in the franchise tax
rate. For the Company’s tax year ended September 30, 2017, Indiana imposed a 7.0% franchise tax based on a
financial institution’s adjusted gross income as defined by statute. The Indiana franchise tax rate will be reduced to
6.5%, 6.5%, 6.25%, 6.0%, 5.5%, 5.0% and 4.9% for the Company’s tax years ending September 30, 2018, 2019,
2020, 2021, 2022, 2023, and 2024 and years thereafter, respectively. In computing adjusted gross income,
deductions for municipal interest, U.S. Government interest, the bad debt deduction computed using the reserve
method and pre-1990 net operating losses are disallowed.
Our state income tax returns have not been audited during the last five years.
Item 1A. RISK FACTORS
Our concentration in non-owner occupied residential real estate loans may expose us to increased
credit risk.
At September 30, 2017, $28.8 million, or 16.8% of our residential mortgage loan portfolio and 4.7% of our
total loan portfolio, consisted of loans secured by non-owner occupied residential properties. Loans secured by non-
owner occupied properties generally expose a lender to greater risk of non-payment and loss than loans secured by
owner occupied properties because repayment of such loans depend primarily on the tenant’s continuing ability to
pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property
owner’s ability to repay the loan without the benefit of a rental income stream. In addition, the physical condition of
non-owner occupied properties is often below that of owner occupied properties due to lax property maintenance
standards, which has a negative impact on the value of the collateral properties. Furthermore, some of our non-
owner occupied residential loan borrowers have more than one loan outstanding with us. At September 30, 2017,
we had nine non-owner occupied residential loan relationships, each having an outstanding balance over $500,000,
with aggregate outstanding balances of $8.5 million. Consequently, an adverse development with respect to one
credit relationship may expose us to a greater risk of loss compared to an adverse development with respect to an
owner occupied residential mortgage loan. At September 30, 2017, nonperforming non-owner occupied residential
loans amounted to $63,000. Non-owner occupied residential properties held as real estate owned amounted to
$189,000 at September 30, 2017. For more information about the credit risk we face, see “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Risk Management.”
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Our emphasis on commercial real estate lending and commercial business lending may expose us to
increased lending risks.
At September 30, 2017, $325.8 million, or 52.6%, of our loan portfolio consisted of commercial real estate
loans and commercial business loans. Subject to market conditions, we intend to increase our origination of these
loans. Commercial real estate loans generally expose a lender to greater risk of non-payment and loss than one- to
four-family residential mortgage loans because repayment of the loans often depends on the successful operation of
the property and the income stream of the borrowers. Commercial real estate loans also typically involve larger loan
balances to single borrowers or groups of related borrowers both at origination and at maturity because many of our
commercial real estate loans are not fully-amortizing, but result in “balloon” balances at maturity. Commercial
business loans expose us to additional risks since they typically are made on the basis of the borrower’s ability to
make repayments from the cash flow of the borrower’s business and are secured by non-real estate collateral that
may depreciate over time. In addition, some of our commercial borrowers have more than one loan outstanding
with us. Consequently, an adverse development with respect to one loan or one credit relationship may expose us to
a greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage
loan. At September 30, 2017, nonperforming commercial business loans and nonperforming commercial real estate
loans totaled $81,000 and $1.3 million, respectively. For more information about the credit risk we face, see “Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management.”
Our construction loan and land and land development loan portfolios may expose us to increased
credit risk.
At September 30, 2017, $68.7 million, or 11.1% of our loan portfolio consisted of construction loans, and
land and land development loans, and $10.4 million, or 12.3% of the construction loan portfolio (excluding portions
participated to other financial institutions), consisted of speculative construction loans at that date. Speculative
construction loans are loans made to builders who have not identified a buyer for the completed property at the time
of loan origination. Subject to market conditions, we intend to continue to emphasize the origination of construction
loans and land and land development loans. These loan types generally expose a lender to greater risk of
nonpayment and loss than residential mortgage loans because the repayment of such loans often depends on the
successful operation or sale of the property and the income stream of the borrowers and such loans typically involve
larger balances to a single borrower or groups of related borrowers. In addition, many borrowers of these types of
loans have more than one loan outstanding with us so an adverse development with respect to one loan or credit
relationship can expose us to significantly greater risk of non-payment and loss. Furthermore, we may need to
increase our allowance for loan losses through future charges to income as the portfolio of these types of loans
grows, which would adversely affect our earnings. For more information about the credit risk we face, see “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management.”
We may suffer losses in our loan portfolio despite our underwriting practices.
Our results of operations are significantly affected by the ability of borrowers to repay their loans. Lending
money is an essential part of the banking business. However, borrowers do not always repay their loans. The risk of
non-payment is historically small, but if nonpayment levels are greater than anticipated, our earnings and overall
financial condition, as well as the value of our common stock, could be adversely affected. No assurance can be
given that our underwriting practices or monitoring procedures and policies will reduce certain lending risks. Loan
losses can cause insolvency and failure of a financial institution and, in such an event, our stockholders could lose
their entire investment. In addition, future provisions for loan losses could materially and adversely affect our
earnings and financial condition. Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. For more information
about the credit risk we face, see “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Risk Management.”
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Our allowance for loan losses may not be adequate to cover actual losses.
Like all financial institutions, we maintain an allowance for loan losses to provide for probable incurred
losses due to loan defaults, non-performance, and other qualitative factors. Our allowance for loan losses is based on
our historical loss experience as well as an evaluation of the risks associated with our loan portfolio, including the
size and composition of the loan portfolio, loan portfolio performance, fair value of collateral securing the loans,
current economic conditions and geographic concentrations within the portfolio. Our allowance for loan losses may
not be adequate to cover actual loan losses, and future provisions for loan losses could materially and adversely
affect our earnings and financial condition. For more information about our analysis and determination of allowance
for loan losses, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Risk Management.”
Our SBA lending program is dependent upon the federal government and we face specific risks
associated with originating SBA loans.
Our SBA lending program is dependent upon the federal government. As an SBA Preferred Lender, we
enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process
necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of
participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When
weaknesses are identified, the SBA may request corrective actions or impose enforcement actions, including
revocation of the lender’s Preferred Lender status. If we lose our status as a Preferred Lender, we may lose some or
all of our customers to lenders who are SBA Preferred Lenders. Also, any changes to the SBA program, including
changes to the level of guarantee provided by the federal government on SBA loans, could adversely affect our
business and earnings.
We generally sell the guaranteed portion of our SBA 7(a) program loans in the secondary market. These
sales have resulted in premium income for us at the time of sale and created a stream of future servicing income.
We may not be able to continue originating these loans or selling them in the secondary market. Furthermore, even
if we are able to continue originating and selling SBA 7(a) program loans in the secondary market, we might not
continue to realize premiums upon the sale of the guaranteed portion of these loans. When we sell the guaranteed
portion of our SBA 7(a) program loans, we incur credit risk on the non-guaranteed portion of the loans, and if a
customer defaults on the non-guaranteed portion of a loan, we share any loss and recovery related to the loan pro-
rata with the SBA. If the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant
technical deficiencies in the manner in which the loan was originated, funded or serviced by us, the SBA may seek
recovery of the principal loss related to the deficiency from us, which could adversely affect our business and
earnings.
The laws, regulations and standard operating procedures that are applicable to SBA loan products may
change in the future. We cannot predict the effects of these changes on our business and profitability. Because
government regulation greatly affects the business and financial results of all commercial banks and bank holding
companies, changes in the laws, regulations and procedures applicable to SBA loans could adversely affect our
business and earnings.
If an other-than-temporary-impairment is recorded in connection with our investment portfolio it
could have a significant negative impact on our profitability.
Our investment portfolio consists primarily of U.S. government agency and sponsored enterprises
securities, mortgage backed securities and collateralized mortgage obligations issued by U.S. government agencies
and sponsored enterprises, municipal bonds, and privately-issued collateralized mortgage obligations and asset-
backed securities. We must evaluate these securities for other-than-temporary impairment loss (“OTTI”) on a
periodic basis. The privately-issued collateralized mortgage obligations and asset-backed securities exhibit signs of
weakness, which may necessitate an OTTI charge in the future should the financial condition of the pools deteriorate
further. Any future OTTI charges could have a significant adverse effect our earnings.
20
Recessionary conditions could result in increases in our level of nonperforming loans and/or reduce
demand for our products and services, which would lead to lower revenue, higher loan losses and lower
earnings.
Recessionary conditions and/or continued negative developments in the domestic and international credit
markets may significantly affect the markets in which we do business, the value of our loans and investments, and
our ongoing operations, costs and profitability. Declines in real estate values and sales volumes and increased
unemployment levels may result in higher than expected loan delinquencies, increases in our levels of
nonperforming and classified assets and a decline in demand for our products and services. These negative events
may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition.
Changing interest rates may hurt our earnings and asset value.
Our net interest income is the interest we earn on loans and investments less the interest we pay on our
deposits and borrowings. Our net interest margin is the difference between the yield we earn on our assets and the
interest rate we pay for deposits and our other sources of funding. Changes in interest rates—up or down—could
adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our
assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise
or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in
duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest
rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to
contract until the yield catches up. Changes in the slope of the “yield curve”—or the spread between short-term and
long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping,
meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than
our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as
our cost of funds increases relative to the yield we can earn on our assets. Also, interest rate decreases can lead to
increased prepayments of loans and mortgage-backed securities as borrowers refinance their loans to reduce
borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such
repayment proceeds into lower yielding investments, which would likely hurt our income. At September 30, 2017,
approximately $247.3 million, or 39.9% of the total loan portfolio, consisted of fixed rate mortgage loans. This
investment in fixed-rate mortgage loans exposes the Company to increased levels of interest rate risk.
Changes in interest rates also affect the value of our interest-earning assets, and in particular our securities
portfolio. Generally, the value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized
gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Decreases
in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect
on stockholders’ equity. For further discussion of how changes in interest rates could impact us, see “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations —Risk Management —
Interest Rate Risk Management.”
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of
loans and other sources could have a material adverse effect on our liquidity. Our access to funding sources in
amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial
services industry in general. Factors that could detrimentally impact our access to liquidity sources include a
decrease in the level of our business activity due to a market downturn or adverse regulatory action against us. Our
ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe
disruption of the financial markets or negative views and expectations about the prospects for the financial services
industry as a whole.
21
If the goodwill that we recorded in connection with a business acquisition becomes impaired, it could
have a significant negative impact on our profitability.
Goodwill represents the amount of consideration exchanged over the fair value of net assets we acquired in
the purchase of another financial institution. We review goodwill for impairment at least annually, or more
frequently if events or changes in circumstances indicate the carrying value of the asset might be impaired. At
September 30, 2017, our goodwill totaled $7.9 million. While we have recorded no such impairment charges since
we initially recorded the goodwill, there can be no assurance that our future evaluations of goodwill will not result in
findings of impairment and related write-downs, which may have a material adverse effect on our financial
condition and results of operations.
Strong competition within our primary market area could hurt our profits and slow growth.
We face intense competition both in making loans and attracting deposits. This competition has made it
more difficult for us to make new loans and attract deposits. Price competition for loans and deposits might result in
us earning less on our loans and paying more on our deposits, which would reduce net interest income. Competition
also makes it more difficult to grow loans and deposits. At June 30, 2017, which is the most recent date for which
data is available from the FDIC, we held approximately 14.59%, 2.70%, 36.55%, 80.50% and 16.16% of the FDIC-
insured deposits in Clark, Floyd, Harrison, Crawford and Washington Counties, Indiana, respectively. Some of the
institutions with which we compete have substantially greater resources and lending limits than we have and may
offer services that we do not provide. We expect competition to increase in the future as a result of legislative,
regulatory and technological changes and the continuing trend of consolidation in the financial services industry.
Our profitability depends upon our continued ability to compete successfully in our primary market area. See “Item
1. Business — Market Area” and “Item 1. Business — Competition” for more information about our primary market
area and the competition we face.
Because the nature of the financial services business involves a high volume of transactions, we face
significant operational risks.
Operational risk is the risk of loss resulting from our operations, including, but not limited to, the risk of
fraud by employees or persons outside of the Company and Bank, the execution of unauthorized transactions by
employees, errors relating to transaction processing and technology, breaches of the internal control system and
compliance requirements and business continuation and disaster recovery. This risk of loss also includes the
potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with
applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to
potential negative publicity. In the event of a breakdown in the internal control system, improper operation of
systems or improper employee actions, we could suffer financial loss, face regulatory action and suffer damage to
our reputation.
A disruption, failure in or breach, including cyber-attacks, of our operational, communications,
information or security systems, or those of our third party vendors and other service providers, could
disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage
our reputation, increase our costs and cause losses.
We rely heavily on communications and information systems to conduct our business and face the risk of
operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate our
business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Any
failure or interruption of these systems could result in failures or disruptions in our customer relationship
management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to
prevent or limit the effect of the failure or interruption of these information systems, there can be no assurance that
any such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed. The
occurrence of any failures or interruptions of these information systems could damage our reputation, result in a loss
of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible
financial liability, any of which could have a material adverse effect on our financial condition and results of
operations.
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We rely on the secure processing, storage and transmission of confidential and other information on our
computer systems and networks. Although we take numerous protective measures to maintain the confidentiality,
integrity and availability of our and our clients’ information across all geographic and product lines, and endeavor to
modify these protective measures as circumstances warrant, the nature of the threats continues to evolve. As a
result, our computer systems, software and networks and those of our customers may be vulnerable to unauthorized
access, loss or destruction of data (including confidential client information), account takeovers, unavailability of
service, computer viruses or other malicious code, cyber-attacks and other events that could have an adverse security
impact and result in significant losses by us and/or our customers. Despite the defensive measures we take to
manage our internal technological and operational infrastructure, these threats may originate externally from third
parties, such as foreign governments, organized crime and other hackers, and outsource or infrastructure-support
providers and application developers, or the threats may originate from within our organization. Given the
increasingly high volume of our transactions, certain errors may be repeated or compounded before they can be
discovered and rectified.
We are inherently exposed to risks caused by the use of computer, internet and telecommunications
systems, and susceptible to fraudulent activity that may be committed against us or our clients, which may result in
financial losses to us or our clients, privacy breaches against our clients or damage to our reputation. These risks
include fraud by employees, customers and other outside entities targeting us and/or our customers, and such
fraudulent activity may take many forms, including internet fraud, check fraud, electronic fraud, wire fraud,
phishing, and other dishonest acts. In recent periods, there has been a rise in electronic fraudulent activity within the
financial services industry, especially in the commercial banking sector, due to cyber criminals targeting commercial
bank accounts. Consistent with industry trends, we have also experienced an increase in attempted electronic
fraudulent activity in recent periods. Given such increase in electronic fraudulent activity and the growing level of
use of electronic, internet-based and networked systems to conduct business directly or indirectly with our clients,
certain fraud losses may not be avoidable regardless of the preventative and detection systems in place.
Although, to date, we have not experienced any material losses relating to cyber-attacks or other
information security breaches, there can be no assurance that we will not suffer such losses in the future. Our risk
and exposure to these matters remains heightened because of, among other things, the evolving nature of these
threats, the outsourcing of some of our business operations and the continued uncertain global economic
environment. As cyber threats continue to evolve, we may be required to expend significant additional resources to
continue to modify or enhance our protective measures or to investigate and remediate any information security
vulnerabilities.
We maintain an insurance policy which we believe provides sufficient coverage at a manageable expense
for an institution of our size and scope with similar technological systems. However, we cannot assure that this
policy will afford coverage for all possible losses or would be sufficient to cover all financial losses, damages,
penalties, including lost revenues, should we experience any one or more of our or a third party’s systems failing or
experiencing attack.
We operate in a highly regulated environment and we may be adversely affected by changes in laws
and regulations.
The Bank is subject to extensive regulation, supervision and examination by the INDFI, its chartering
authority, the FRB, its primary federal regulator, and the FDIC, as insurer of its deposits. The Company is also
subject to regulation and supervision by the Federal Reserve Bank of St. Louis. Such regulation and supervision
governs the activities in which an institution and its holding company may engage, and are intended primarily for
the protection of the insurance fund and the depositors and borrowers of the Bank rather than for holders of the
Company’s common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement
activities, including the imposition of restrictions on our operations, the classification of our assets and
determination of the level of our allowance for loan losses. If our regulators require us to charge-off loans or
increase our allowance for loan losses, our earnings would suffer. Any change in such regulation and oversight,
whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact
on our operations.
23
The Dodd-Frank Act has created a new federal agency to administer consumer protection and fair lending
laws, a function that was formerly performed by the depository institution regulators. The Dodd-Frank Act contains
various other provisions designed to enhance the regulation of depository institutions including the implementation
of more stringent capital adequacy rules. The full impact of the Dodd-Frank Act on our business and operations will
not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act
may have a material impact on our operations, particularly through increased regulatory burden and compliance
costs. Any future legislative changes could have a material impact on our profitability, the value of assets held for
investment or collateral for loans. Future legislative changes could require changes to business practices or force us
to discontinue businesses and potentially expose us to additional costs, liabilities, enforcement action and
reputational risk.
In addition to the enactment of the Dodd-Frank Act, the federal regulatory agencies have taken stronger
supervisory actions against financial institutions that have experienced increased loan losses and other weaknesses
as a result of the recent economic crisis. The actions include entering into written agreements and cease and desist
orders that place certain limitations on operations. Federal bank regulators have also been using with more
frequency their ability to impose individual minimum capital requirements on banks, which requirements may be
higher than those required under the Dodd-Frank Act or that would otherwise qualify a bank as being “well
capitalized” under applicable prompt corrective action regulations. If we were to become subject to a regulatory
agreement or higher individual minimum capital requirements, such action may have a negative impact on our
ability to execute our business plan, as well as our ability to grow, pay dividends or engage in mergers and
acquisitions and may result in restrictions in our operations. For a further discussion, see “Item 1. Business –
Regulation and Supervision.”
We rely heavily on our management team and the unexpected loss of any of those personnel could
adversely affect our operations, and we depend on our ability to attract and retain key personnel.
We are a customer-focused and relationship-driven organization. We expect our future growth to be driven
in a large part by the relationships maintained with our customers by our executive and other senior officers.
Although we are party to non-compete and non-solicitation agreements with certain executive, senior and other
officers, the unexpected loss of any of our key employees could have an adverse effect on our business, results of
operations and financial condition.
The implementation of our business strategy will also require us to continue to attract, hire, motivate and
retain skilled personnel to develop new customer relationships as well as new financial products and services. The
market for qualified employees in the businesses in which we operate is competitive and we may not be successful
in attracting, hiring or retaining key personnel. Our inability to attract, hire or retain key personnel could have a
material adverse effect on our business, results of operations and financial condition.
Our ability to pay dividends is subject to certain limitations and restrictions, and there is no
guarantee that we will be able to continue paying the same level of dividends in the future that we paid in
2017 or that we will be able to pay future dividends at all.
Our ability to declare and pay dividends is subject to the guidelines of the FRB regarding capital adequacy
and dividends, other regulatory restrictions, and the need to maintain sufficient consolidated capital. The ability of
the Bank to pay dividends to the Company is subject to regulation by the INDFI, applicable Indiana law and the
FRB, and is limited by the Bank’s obligations to maintain sufficient capital and liquidity. In addition, banking
regulators may propose guidelines seeking greater liquidity and regulations requiring greater capital requirements.
If such new regulatory requirements were not met, the Bank would not be able to pay dividends to the Company,
and consequently we may be unable to pay dividends on our common stock.
24
There is a limited trading market for our stock and you may not be able to resell your shares at or
above the price you paid for them.
The price of the common stock purchased may decrease significantly. Although our common stock is
quoted on the NASDAQ Capital Market under the symbol "FSFG", trading activity in the stock historically has been
sporadic. A public trading market having the desired characteristics of liquidity and order depends on the presence
in the market of willing buyers and sellers at any given time. The presence of willing buyers and sellers depends on
the individual decisions of investors and general economic conditions, all of which are beyond our control.
Insiders have substantial control over us, and this control may limit our shareholders’ ability to
influence corporate matters and may delay or prevent a third party from acquiring control over us.
As of December 1, 2017, our directors, executive officers, and their related entities and persons currently
beneficially own, in the aggregate, approximately 13.3% of our outstanding common stock. The significant
concentration of stock ownership may adversely affect the trading price of our common stock due to investors’
perception that conflicts of interest may exist or arise. In addition, these shareholders will be able to exercise
influence over all matters requiring shareholder approval, including the election of directors and approval of
corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership
could limit your ability to influence corporate matters and may have the effect of delaying or preventing a change in
control, including a merger, consolidation or other business combination involving us, or discouraging a potential
acquirer from making a tender offer or otherwise attempting to obtain control, even if that change in control would
benefit our other shareholders. For information regarding the ownership of our outstanding stock by our directors,
executive officers, and their related entities and persons, see “Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters” in this Report.
25
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
We conduct our business through our main office and branch offices. The following table sets forth certain
information relating to these facilities as of September 30, 2017.
Location
Main Office:
Clarksville Main Office
501 East Lewis & Clark Parkway
Clarksville, Indiana
Branch Offices:
Jeffersonville - Allison Lane Office
2213 Allison Lane
Jeffersonville, Indiana
Charlestown Office
1100 Market Street
Charlestown, Indiana
Georgetown Office
1000 Copperfield Drive
Georgetown, Indiana
Jeffersonville - Court Avenue Office
202 East Court Avenue
Jeffersonville, Indiana
Sellersburg Office
125 Hunter Station Way
Sellersburg, Indiana
Corydon Office
900 Hwy 62 NW
Corydon, Indiana
Salem Office
1336 S Jackson Street
Salem, Indiana
English Office
200 Indiana Avenue
English, Indiana
Marengo Office
125 W Old Short Street
Marengo, Indiana
Leavenworth Office
510 Hwy 62
Leavenworth, Indiana
Lanesville Office
7340 Main Street NE
Lanesville, Indiana
Elizabeth Office
8160 Beech Street SE
Elizabeth, Indiana
New Albany Office
2218 State Street
New Albany, Indiana
Year
Opened
Owned/
Leased
1968
Owned
1975
Owned
1993
Owned
2003
Owned
1986
Owned
1995
Owned
1996
Owned
1995
Owned
1925
Owned
1984
Owned
1969
Owned
1948
Owned
1975
Owned
2013
Leased
26
The Bank owns two former branch office locations that have been closed and the operations of which were
consolidated into existing branch office operations. The property located in Floyds Knobs, Indiana is utilized by the
Bank as an operation center. The property located in Milltown, Indiana, is valued at $70,000 and is included in
“other real estate owned, held for sale” at September 30, 2017 on the balance sheet of the Consolidated Financial
Statements beginning on page F-1 of this annual report.
The Company owned a 4.077 acre parcel of land in New Albany, Indiana, which was developed by
FFCC. The retail development included over 36,000 square feet of leasable class-A retail space and included
the Bank’s New Albany branch office location. The retail development was sold September 29, 2016, at
which time a 10-year lease with several renewal options for the branch office location was executed between
the Bank and the buyer.
The Company purchased an 8.097 acre parcel of land in Jeffersonville, Indiana, in July 2013 upon which it
may locate a new main office and subsequently divest of additional unused acreage in future years. However, there
were no formal plans as of September 30, 2017 to proceed with a new main office location or divestiture of the
additional acreage. This land, with a carrying value of approximately $1.7 million, was included in “premises and
equipment” at September 30, 2017 on the balance sheet of the Consolidated Financial Statements beginning on page
F-1 of this annual report.
The Company also rents additional office space and equipment under operating lease agreements that
expire at different dates through May 2021. See Note 19 of the Notes to Consolidated Financial Statements
beginning on page F-1 of this annual report for additional information regarding the Company’s operating leases.
Item 3. LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens,
condemnation proceedings on properties in which we hold security interests, claims involving the making and
servicing of real property loans and other issues incident to our business. We are not a party to any pending legal
proceedings that we believe would have a material adverse effect on our financial condition, results of operations or
cash flows.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
27
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Common Equity and Related Stockholder Matters
The Company’s common stock is listed on the NASDAQ Capital Market (“NASDAQ”) under the trading
symbol “FSFG.” As of December 1, 2017, the Company had approximately 240 holders of record and 2,243,139
shares of common stock outstanding. The figure of shareholders of record does not reflect the number of persons
whose shares are in nominee or “street” name accounts through brokers. See Item 1, “Business—Regulation and
Supervision—Limitation on Capital Distributions” and Note 23 of the Notes to Consolidated Financial Statements
beginning on page F-1 of this annual report for information regarding dividend restrictions applicable to the
Company.
The following table provides quarterly market price and dividend information per common share for the
fiscal years ended September 30, 2017 and 2016 as reported by NASDAQ.
2017:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2016:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Sale
Low
Sale
Market price
Dividends end of period
$ 55.50
58.97
50.73
48.49
$ 51.27
48.16
44.10
35.16
$ 36.20
36.30
36.00
36.98
$ 34.54
32.80
32.50
33.89
$ 0.14
0.14
0.14
0.13
$ 0.13
0.13
0.13
0.12
$ 53.40
52.78
48.72
47.00
$ 36.16
34.54
33.98
36.43
The Company currently intends to maintain a policy of paying regular quarterly cash dividends; however, the
Company cannot guarantee that it will pay dividends or that if paid, it will not reduce or eliminate dividends in the
future.
28
Purchases of Equity Securities
The following table presents information regarding the Company’s stock repurchase activity during
the quarter ended September 30, 2017:
(a)
Total number of
shares purchased
(b)
Average price
paid per share
(c)
Total number of
shares purchased as
part of publicly
announced plans or
programs (1)
(d)
Maximum number of
shares that may yet be
purchased under the plans
or programs
—
—
—
—
—
—
—
—
—
—
—
—
67,201
67,201
67,201
67,201
Period
July 1, 2017 through
July 31, 2017
August 1, 2017 through
August 31, 2017
September 1, 2017 through
September 30, 2017
Total
(1) On November 16, 2012, the Company announced that its Board of Directors authorized a stock repurchase
program to acquire up to 230,217 shares, or 10.0% of the Company’s outstanding common stock. Under
the program, which has no expiration date, repurchases are to be conducted through open market purchases
or privately negotiated transactions, and are to be made from time to time depending on market conditions
and other factors. There is no guarantee as to the exact number of shares to be repurchased by the
Company. Repurchased shares will be held in treasury.
Equity Compensation Plan Information
The following table sets forth information as of September 30, 2017 about Company common stock that
may be issued under the Company’s equity compensation plans. All plans were approved by the Company’s
stockholders.
Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a))
(c)
197,529
$20.15
19,940
N/A
197,529
N/A
$20.15
N/A
19,940
Plan category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
In December 2015 the Company adopted the 2016 Equity Incentive Plan (“2016 Plan”), which the
Company’s shareholders approved in February 2016. The 2016 Plan provides for the award of stock options
and restricted stock. The aggregate number of shares of the Company’s common stock available for issuance
under the Plan may not exceed 88,000 shares, consisting of 66,000 stock options and 22,000 shares of
restricted stock. As of September 30, 2017, grants outstanding under the 2016 plan included 17,265 restricted
shares, 42,895 incentive stock options and 7,900 non-statutory stock options to directors, officers and key
employees. The restricted shares and stock options granted will vest ratably over five years and, once vested,
the stock options are exercisable in whole or in part for a period up to ten years from the date of the award.
29
Item 6. SELECTED FINANCIAL DATA
The following tables contain certain information concerning our consolidated financial position and results
of operations, which is derived in part from our audited consolidated financial statements. The following is only a
summary and should be read in conjunction with the audited consolidated financial statements and notes thereto
beginning on page F-1 of this annual report.
2017
(In thousands)
Financial Condition Data:
Total assets .................................................... $ 891,133
34,259
Cash and cash equivalents .............................
Trading account securities .............................
7,175
Securities available-for-sale ...........................
178,099
Securities held-to-maturity.............................
2,878
Loans, net ......................................................
586,456
Deposits .........................................................
669,382
118,065
Borrowings from FHLB .................................
Other borrowings ...........................................
1,348
Stockholders’ equity ......................................
93,115
At September 30,
2015
2016
2014
2013
$ 796,516
29,342
9,255
174,493
3,166
518,611
579,467
121,633
1,345
86,580
$ 749,946
24,994
9,044
178,328
4,620
457,112
533,297
104,867
5,974
94,357
$ 713,129
20,330
5,319
184,697
5,419
433,876
533,194
79,548
6,150
87,080
$ 660,455
20,815
3,210
164,167
6,417
408,375
477,726
89,348
6,308
82,253
2017
(In thousands)
Operating Data:
Interest income .............................................. $ 33,917
Interest expense .............................................
4,457
29,460
Net interest income ........................................
Provision for loan losses ................................
1,301
Net interest income after provision for loan
losses..............................................................
Noninterest income ........................................
Noninterest expense .......................................
Income before income taxes ..........................
Income tax expense (benefit) .........................
Net income .....................................................
Less: Preferred stock dividends declared .......
Net income available to common
shareholders ................................................... $ 9,313
28,159
8,625
24,951
11,833
2,520
9,313
-
Per Share Data:
Net income per common share, basic ............
Net income per common share, diluted ..........
Dividends per common share .........................
2017
$ 4.20
3.97
0.55
For the Year Ended September 30,
2015
2014
2016
2013
$ 29,456
4,167
25,289
637
$ 27,987
3,778
24,209
859
$ 27,494
3,555
23,939
1,246
$ 27,175
3,936
23,239
1,858
24,652
3,372
22,435
5,589
(2,322)
7,911
62
23,350
5,976
20,999
8,327
1,576
6,751
171
22,693
5,046
20,272
7,467
2,077
5,390
171
21,381
4,258
19,132
6,507
1,811
4,696
171
$ 7,849
$ 6,580
$ 5,219
$ 4,525
2013
$ 2.09
1.99
0.70
For the Year Ended September 30,
2015
2014
2016
$ 3.57
3.41
0.51
$ 3.07
2.93
0.47
$ 2.46
2.34
0.43
30
At or For the Year Ended September 30,
2015
2014
2016
2017
2013
Performance Ratios:
Return on average assets ...............................................
1.10%
1.03%
0.93%
0.78%
0.72%
Return on average equity ..............................................
10.56
Return on average common stockholders’ equity .........
10.56
Interest rate spread (1) ..................................................
Net interest margin (2) ..................................................
Other expenses to average assets ..................................
3.84
3.95
2.96
9.04
9.73
3.71
3.81
2.93
7.43
9.16
3.74
3.84
2.88
6.38
8.01
3.86
3.93
2.92
5.63
7.09
3.98
4.09
2.94
Efficiency ratio (3)........................................................
65.13
68.20
69.57
69.94
69.58
Average interest-earning assets to
average interest-bearing liabilities ............................. 120.21
117.86
116.90
114.66
115.27
Dividend payout ratio ...................................................
13.20
14.03
14.74
16.96
33.48
Average equity to average assets ..................................
10.45
11.45
12.47
12.17
12.81
Capital Ratios (4):
Total capital (to risk-weighted assets):
Consolidated ...........................................................
Bank .......................................................................
Tier 1 capital (to risk-weighted assets):
Consolidated ...........................................................
Bank .......................................................................
Common equity Tier 1 capital (to risk-weighted
assets):
Consolidated ...........................................................
Bank .......................................................................
Tier 1 capital (to average adjusted total assets):
Consolidated ...........................................................
Bank .......................................................................
12.69% 11.82% 16.21%
11.33
12.22
13.13
N/A
14.87% 17.04%
N/A
11.53
11.05
10.66
10.16
14.96
11.88
N/A
13.62
N/A
15.78
11.53
11.05
10.66
10.16
14.96
11.88
N/A
N/A
N/A
N/A
9.14
8.79
8.43
8.09
11.01
8.67
N/A
9.14
N/A
10.36
(1) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average
cost on average interest-bearing liabilities. Tax exempt income is reported on a tax equivalent basis using a federal marginal
tax rate of 34%.
(2) Represents net interest income as a percent of average interest-earning assets. Tax exempt income is reported on a tax
equivalent basis using a federal marginal tax rate of 34%.
(3) Represents other expenses divided by the sum of net interest income and other income. The efficiency ratios for 2017 and
2016 exclude the loss on tax credit investment of $226,000 and $4.2 million, respectively. This is a non-GAAP financial
measure that management believes is useful to investors in understanding the Company’s performance.
(4) First Savings Financial Group was not subject to the regulatory capital requirements until its conversion from a
savings and loan holding company to a bank holding company in December 2014. Therefore, the capital amounts
and ratios presented for the years ended September 30, 2014 and 2013 are for the Bank only.
31
At or For the Year Ended September 30,
2015
2016
2014
2017
2013
Asset Quality Ratios:
Allowance for loan losses as a percent of
total loans ..................................................................
1.36%
1.35%
1.43%
1.42%
1.34%
Allowance for loan losses as a percent of
nonperforming loans .................................................. 206.64
182.76
150.37
145.96
61.15
Net charge-offs to average outstanding
loans during the period ..............................................
Nonperforming loans as a percent
of total loans ..............................................................
Nonperforming assets as a percent
of total assets .............................................................
Other Data:
Number of full service branch offices ..........................
Number of deposit accounts ........................................
Number of loans .........................................................
0.06
0.03
0.11
0.12
0.30
0.66
0.74
0.95
0.97
2.19
1.33
1.49
1.75
1.79
2.39
14
33,594
5,679
14
33,407
5,409
14
33,430
5,373
15
34,049
5,482
15
34,788
5,663
32
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Overview
Income. Our primary source of pre-tax income is net interest income. Net interest income is the difference
between interest income, which is the income that we earn on our loans and investments, and interest expense,
which is the interest that we pay on our deposits and borrowings. Other significant sources of pre-tax income are
service charges (mostly from service charges on deposit accounts and loan servicing fees), increases in the cash
surrender value of life insurance, fees from sale of residential mortgage and SBA loans originated for sale in the
secondary market, commissions on sales of securities and insurance products, rents from real estate leasing, 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 incurred
losses 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. 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. 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 40
years. Data processing expenses are the fees we pay to third parties for processing customer information, deposits
and loans. Professional fees expense represents the fees we pay to third parties for legal, accounting, investment
advisory and other consulting services. Federal deposit insurance premiums are payments we make to the FDIC to
insure 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 (“U.S. GAAP”) and conform to general practices within the banking
industry. The preparation of financial statements in conformity with U.S. GAAP 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.
33
Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as
necessary to cover probable incurred losses 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 banking regulators, as an integral part of their
examination process, periodically review our allowance for loan losses and may require us to recognize adjustments
to the allowance based on their judgments about information available to them at the time of their examination. A
large loss could deplete the allowance and require increased provisions to replenish the allowance, which would
adversely affect earnings. During the year ended September 30, 2017, the Company changed from using a 36-
month historical loss period as the basis for the general component of its allowance for loan losses to a 60-month
historical loss period due to the Company’s loss history and changes in the composition of the loan portfolio. Other
than the change from a 36-month loss period to a 60-month loss period, there were no substantive changes to the
Company’s methodology or assumptions used to estimate the allowance for loan losses during the year ended
September 30, 2017 compared to prior years.
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 loans held for sale, loan servicing rights, 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.
Deferred Tax Assets. Income tax expense involves estimates related to the valuation allowance on
deferred tax assets. A valuation allowance reduces deferred tax assets to the amount management believes is more
likely than not to be realized. In evaluating the realization of deferred tax assets, management considers the
likelihood that sufficient taxable income of appropriate character will be generated within carryback and
carryforward periods, including consideration of available tax planning strategies.
Balance Sheet Analysis
Cash and Cash Equivalents. At September 30, 2017 and 2016, cash and cash equivalents totaled
$34.3 million and $29.3 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.
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.
34
At September 30, 2017, residential mortgage loans totaled $171.9 million, or 27.7% of total loans,
compared to $178.4 million, or 32.2% of total loans at September 30, 2016. Total residential mortgage loan
balances decreased in 2017 primarily due to repayments and refinancings that were sold in the secondary
market. We generally originate loans for investment purposes, although, depending on the interest rate
environment, we typically sell 25-year and 30-year fixed rate residential mortgage loans that we originate into the
secondary market in order to limit exposure to interest rate risk and to earn noninterest income. Management
intends to continue offering short-term adjustable rate residential mortgage loans and generally sell long-term
fixed rate mortgage loans in the secondary market with servicing released.
Commercial real estate loans totaled $273.1 million, or 44.1% of total loans at September 30, 2017,
compared to $217.4 million, or 39.3% of total loans at September 30, 2016. The balance of commercial real
estate loans has increased primarily due to the previously discussed lending program that is focused on loans
secured by low loan-to-value, single-tenant commercial properties that are generally leased to investment grade
national brand retailers, the borrowers and collateral properties for which are outside of our primary market area.
Management continues to focus on pursuing nonresidential loan opportunities in order to further diversify the
loan portfolio.
Multi-family real estate loans totaled $21.1 million, or 3.4% of total loans at September 30, 2017,
compared to $18.4 million, or 3.3% of total loans at September 30, 2016. These loans are primarily secured by
apartment buildings and other multi-tenant developments in our primary market area.
Residential construction loans totaled $29.1 million, or 4.7% of total loans at September 30, 2017, of which
$10.4 million were speculative construction loans. At September 30, 2016, residential construction loans totaled
$24.3 million, or 4.4% of total loans, of which $10.6 million were speculative loans. The increase in residential
construction loans is due primarily to the continuing recovery of the housing market.
Commercial construction loans totaled $29.9 million, or 4.8% of total loans, at September 30, 2017
compared to $33.7 million, or 6.1% of total loans at September 30, 2016. The decrease is due primarily to a
decrease in originations of commercial construction during the year.
Land and land development loans totaled $9.7 million, or 1.6% of total loans at September 30, 2017,
compared to $11.1 million, or 2.0% of total loans at September 30, 2016. These loans are primarily secured
by vacant lots to be improved for residential and nonresidential development, and farmland.
Commercial business loans totaled $52.7 million, or 8.5% of total loans, at September 30, 2017 compared
to $42.0 million, or 7.6% of total loans, at September 30, 2016. The increase is due primarily to the increase of
commercial business lending opportunities in our primary market area. Management continues to focus on
pursuing commercial business loan opportunities in order to further diversify the loan portfolio.
Consumer loans totaled $32.3 million, or 5.2% of total loans, at September 30, 2017 compared to $28.3
million, or 5.1% of total loans, at September 30, 2016. In general, organic consumer loans including automobile
loans, home equity lines of credit, unsecured loans and loans secured by deposits, has only slightly increased
due to pay-downs, payoffs, charge-offs and management’s decision to focus on other lending opportunities
with less inherent credit risk. Home equity lines of credit increased $1.6 million, or 7.3%, automobile loans
increased $2.2 million, or 45.3%, and other consumer loans increased $221,000, or 10.5%, from September
30, 2016 to September 30, 2017.
35
The following table sets forth the composition of our loan portfolio at the dates indicated.
2017
2016
At September 30,
2015
2014
2013
Amount
(Dollars in thousands)
Real estate mortgage:
Residential .................................. $ 171,863
273,106
Commercial ................................
21,121
Multi-family ...............................
29,074
Residential construction ..............
29,882
Commercial construction ............
9,733
Land and land development ........
534,779
Total .......................................
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
27.73%
44.06
3.41
4.69
4.82
1.57
86.28
$ 178,364
217,378
18,431
24,275
33,685
11,137
483,270
32.22%
39.27
3.32
4.39
6.09
2.01
87.30
$ 181,873
172,995
21,647
19,723
15,548
11,061
422,847
37.70%
35.86
4.49
4.08
3.22
2.29
87.64
$ 182,743
153,896
21,286
14,528
8,354
11,290
392,097
40.94%
34.48
4.77
3.25
1.87
2.53
87.84
$ 184,390
117,782
26,759
12,537
6,730
11,396
359,594
44.10%
28.17
6.40
3.00
1.61
2.73
86.01
Commercial business ......................
52,724
8.51
41,967
7.58
32,574
6.75
28,448
6.37
31,627
7.56
22,939
7,057
2,323
32,319
3.70
1.14
0.37
5.21
21,370
4,858
2,102
28,330
3.86
0.88
0.38
5.12
19,423
5,452
2,159
27,034
4.03
1.13
0.45
5.61
17,903
5,619
2,320
25,842
4.01
1.26
0.52
5.79
17,133
6,519
3,266
26,918
4.10
1.56
0.77
6.43
619,822
100.00%
553,567
100.00%
482,455 100.00%
446,387
100.00%
418,139 100.00%
Consumer:
Home equity lines of credit .........
Auto loans ...................................
Other ...........................................
Total .......................................
Gross loans .....................................
Undisbursed portion of
construction loans .......................
Principal loan balance ....................
(25,483)
594,339
Deferred loan origination
209
fees and costs, net .......................
Allowance for loan losses ...............
(8,092)
Loans, net ....................................... $ 586,456
(27,623)
525,944
(211)
(7,122)
$ 518,611
(18,599)
463,856
(120)
(6,624)
$ 457,112
(6,271)
440,116
10
(6,250)
$ 433,876
(4,389)
413,750
163
(5,538)
$ 408,375
36
Loan Maturity
The following table sets forth certain information at September 30, 2017 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.
(In thousands)
Amounts due in:
One year or less ...................................
More than one year to five years .........
More than five years ............................
Total .................................................
At September 30, 2017
Residential
Real Estate
(1)
Commercial
Real Estate
(2)
Construction
(3)
Commercial
Business
Consumer
Total
Loans
$ 13,429
35,299
144,256
$ 192,984
$ 40,653
103,522
138,664
$ 282,839
$ 58,956
-
-
$ 58,956
$ 21,358
19,767
11,599
$ 52,724
$ 6,112
14,145
12,062
$ 32,319
$ 140,508
172,733
306,581
$ 619,822
(1) Includes multi-family loans.
(2) Includes farmland and land and land development loans.
(3) Includes construction loans for which the Bank has committed to provide permanent financing.
Fixed vs. Adjustable Rate Loans
The following table sets forth the dollar amount of all loans at September 30, 2017 that are due after
September 30, 2018, and have either fixed interest rates or adjustable interest rates. The amounts shown below
exclude unearned loan origination fees.
(In thousands)
Residential real estate (1) ..................................................
Commercial real estate (2) .................................................
Commercial business .........................................................
Consumer ..........................................................................
Total ...............................................................................
Fixed Rates
$ 77,020
96,188
18,998
6,583
$ 198,789
Adjustable Rates
$ 102,535
145,998
12,368
19,624
$ 280,525
Total
$ 179,555
242,186
31,366
26,207
$ 479,314
(1) Includes multi-family loans.
(2) Includes farmland and land and land development loans.
37
Trading Account Securities. Our trading account securities represent an investment in a managed
brokerage account that invests in small and medium lot, investment grade municipal bonds. The brokerage
account is managed by an investment advisory firm registered with the U.S. Securities and Exchange
Commission. At September 30, 2017 and 2016, trading account securities recorded at fair value totaled $7.2
million and $9.3 million, respectively.
Securities Available for Sale. Our available for sale securities portfolio consists primarily of U.S.
government agency and sponsored enterprises securities, mortgage backed securities and collateralized mortgage
obligations issued by U.S. government agencies and sponsored enterprises, municipal bonds, privately-issued
collateralized mortgage obligations and asset-backed securities, and a pass-through asset-backed security
guaranteed by the SBA. Available for sale securities increased by $3.6 million, from $174.5 million at September
30, 2016 to $178.1 million at September 30, 2017, due primarily to purchases of $32.0 million, which more than
offset maturities and calls of $3.7 million, sales of $4.3 million and principal repayments of $17.0 million and a
decrease in unrealized gains of $2.8 million.
Securities Held to Maturity. Our held to maturity securities portfolio consists of mortgage-backed
securities issued by government sponsored enterprises and municipal bonds. Held to maturity securities decreased
by $288,000 from September 30, 2016 to September 30, 2017, due primarily to maturities and principal repayments.
The following table sets forth the amortized costs and fair values of our investment securities at the dates
indicated.
2017
At September 30,
2016
2015
Amortized
Cost
(In thousands)
Securities available for sale:
Agency bonds and notes ................ $ -
Agency mortgage-backed
36,439
securities ....................................
14,605
Agency CMO.................................
1,825
Privately-issued CMO...................
2,691
Privately-issued asset-backed ........
913
SBA certificates .............................
Municipal .......................................
115,193
Total ........................................ $ 171,666
Securities held to maturity:
Agency mortgage-backed
securities .................................... $ 179
Municipal .......................................
2,699
Total ........................................ $ 2,878
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$ -
36,736
$ 1,024
46,376
$ 1,032
47,405
$ 5,564
47,418
$ 5,582
48,278
14,576
2,001
3,448
912
120,426
$ 178,099
16,053
2,359
3,675
1,220
94,567
$ 165,274
16,095
2,652
4,532
1,227
101,550
$ 174,493
18,943
3,005
4,820
1,472
90,380
$ 171,602
19,014
3,470
6,109
1,480
94,395
$ 178,328
$ 195
3,111
$ 3,306
$ 260
2,906
$ 3,166
$ 283
3,371
$ 3,654
$ 345
4,275
$ 4,620
$ 376
4,815
$ 5,191
38
The following table sets forth the stated maturities and weighted average yields of debt securities at
September 30, 2017. Weighted average yields on tax-exempt securities are presented on a tax equivalent basis using
a federal marginal tax rate of 34%. Certain mortgage-backed securities and collateralized mortgage obligations have
adjustable interest rates and will reprice annually within the various maturity ranges. These repricing schedules are
not reflected in the table below. Weighted average yield calculations on investments available for sale do not give
effect to changes in fair value that are reflected as a component of equity.
One Year
or Less
More than
One Year to
Five Years
More than
Five Years to
Ten Years
More than
Ten Years
Total
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
(Dollars in thousands)
Securities available for sale:
Agency mortgage-backed securities ..... $ –
Agency CMO ....................................... 109
–
Privately-issued CMO ..........................
Privately-issued ABS ...........................
–
–
SBA certificates ...................................
Municipal .............................................
1,096
Total .............................................. $ 1,205
– % $ 7,760
1.66
2,554
–
–
–
–
–
–
6.25
13,976
5.84% $24,290
1.87% $10,284
2,306
1.85
–
–
–
–
912
–
4.11
27,634
3.16% $41,136
2.02% $ 18,692
9,607
2.23
2,001
–
3,448
–
–
2.35
4.98
77,720
4.02% $111,468
2.99% $ 36,736
14,576
2.07
2,001
8.40
3,448
15.22
912
–
4.71
120,426
4.59% $178,099
2.49%
2.05
8.40
15.22
2.35
4.72
4.27%
Securities held to maturity:
Agency mortgage-backed securities ..... $ –
Municipal .............................................
227
Total .............................................. $ 227
– % $ –
6.82
995
6.82% $ 995
– % $ –
6.87
1,028
6.87% $ 1,028
– % $ 179
6.88
449
6.88% $ 628
4.66% $ 179
6.63
2,699
6.06% $ 2,878
4.66%
6.83
6.69%
As of September 30, 2017, we did not own any investment securities of a single issuer that had an
aggregate book value in excess of 10% of the Company’s stockholders’ equity at that date, other than securities and
obligations issued by U.S. government agencies and sponsored enterprises.
Deposits. Deposit accounts, generally obtained from individuals and businesses throughout our
primary market area, are our primary source of funds for lending and investments. Our deposit accounts are
comprised of noninterest-bearing accounts, interest-bearing savings, checking and money market accounts
and time deposits. Deposits increased $89.9 million from $579.5 million at September 30, 2016 to $669.4
million at September 30, 2017. The Bank recognized increases in time deposits of $20.7 million, interest-
bearing checking accounts of $36.3 million, noninterest-bearing checking accounts of $16.4 million, money
market deposit accounts of $10.1 million and savings accounts of $6.4 million when comparing the two years.
Brokered certificates of deposit totaled $106.9 million at September 30, 2017 compared to $81.5 million at
September 30, 2016. We have continued to promote relationship oriented deposit accounts but at times also
utilize brokered certificates of deposit as a lower cost alternative to retail time deposits. In addition, we have
continued to develop and promote cash management services including sweep accounts and remote deposit
capture in order to increase the level of commercial deposit accounts. We believe that the development and
promotion of these products has made us more competitive in attracting commercial deposits during recent
periods.
39
The following table sets forth the balances of our deposit accounts at the dates indicated.
(In thousands)
Non-interest-bearing demand deposits ............................................... $ 96,283 $ 79,859 $ 71,184
136,670
NOW accounts ................................................................................... 182,068
57,008
70,775
Money market accounts .....................................................................
74,539
Savings accounts ................................................................................
90,360
Time deposits ..................................................................................... 229,896
193,896
Total ............................................................................................. $ 669,382 $ 579,467 $ 533,297
145,816
60,702
83,911
209,179
2015
2017
At September 30,
2016
The following table indicates the amount of jumbo certificates of deposit by time remaining until maturity
as of September 30, 2017. Jumbo certificates of deposit require minimum deposits of $100,000.
(In thousands)
Three months or less ..........................................................................
Over three through six months ............................................................
Over six through twelve months .........................................................
Over twelve months ............................................................................
Total ...............................................................................................
Amount
$ 5,512
4,677
10,462
21,571
$ 42,222
Borrowings. We use borrowings from the FHLB consisting of advances and borrowings under a line of
credit arrangement to supplement our supply of funds for loans and investments. We also utilize retail repurchase
agreements as a source of borrowings.
The following table sets forth certain information regarding the Bank’s use of FHLB borrowings.
(Dollars in thousands)
Maximum amount of FHLB borrowings outstanding at any month-
end during period ............................................................................... $ 122,089 $ 121,633 $ 119,085
Average FHLB borrowings outstanding during period ...................... 110,952
94,413
Weighted average interest rate during period .....................................
Balance outstanding at end of period ................................................. $ 118,065 $ 121,633 $ 104,867
Weighted average interest rate at end of period .................................
100,894
1.50%
1.50%
1.54%
1.50%
1.24%
1.48%
Year Ended September 30,
2015
2016
2017
The outstanding balance of borrowings from the FHLB decreased $3.5 million, from $121.6 million at
September 30, 2016 to $118.1 million at September 30, 2017. FHLB borrowings are primarily used to fund loan
demand and to purchase available for sale securities.
The following table sets forth certain information regarding the Bank’s use of borrowings under retail
repurchase agreements.
(Dollars in thousands)
Maximum amount of retail repurchase agreements outstanding at
any month-end during period ............................................................. $ 1,348
1,346
Average retail repurchase agreements outstanding during period ......
Weighted average interest rate during period .....................................
Balance outstanding at end of period ................................................. $ 1,348
Weighted average interest rate at end of period .................................
0.25%
0.25%
$ 1,345
1,343
$ 1,342
1,340
0.25%
0.25%
$ 1,345
$ 1,342
0.25%
0.25%
Year Ended September 30,
2015
2016
2017
Stockholders’ Equity. Stockholders’ equity increased $6.5 million, from $86.6 million at September 30,
2016 to $93.1 million at September 30, 2017. The increase is due to an increase in retained net income of $8.1
million during the year ended September 30, 2017.
40
Results of Operations for the Years Ended September 30, 2017, 2016 and 2015
Overview. The Company reported net income and net income available to common shareholders of
$9.3 million ($3.97 per common share diluted) for the year ended September 30, 2017, compared to net
income of $7.9 million and net income available to common shareholders of $7.8 million ($3.41 per common
share diluted) for the year ended September 30, 2016. The increase in net income and net income available to
common shareholders was due to increases in net interest income of $4.2 million and noninterest income of
$5.3 million offset by increases in provision for loan losses of $664,000, noninterest expense of $2.5 million,
and income tax expense of $4.8 million.
Net income and net income available to common shareholders increased to $7.9 million and $7.8
million ($3.41 per common share diluted) for the year ended September 30, 2016, respectively, compared to
net income of $6.8 million and net income available to common shareholders of $6.6 million ($2.93 per
common share diluted) for the year ended September 30, 2015. During the year ended September 30, 2016, the
Company recognized a $4.7 million historic structure rehabilitation tax credit related to its equity investment in a
community-based economic development (“CBED”) project, which resulted in a net tax benefit of $2.3 million for
the year. As a result of the recognition of the tax credit, the Company also recognized a $4.2 million impairment loss
in noninterest income during the year ended September 30, 2016 related to the equity investment in the CBED
project. The net impact of the tax benefit and the impairment loss was a $332,000 increase in net income for the year
ended September 30, 2016. During the year ended September 30, 2016, the Company also recognized $2.0 million
in other income related to the gain on sale of its commercial real estate development in New Albany, Indiana
(“Wesley Commons”).
Net Interest Income. For the year ended September 30, 2017, net interest income increased $4.2
million or 16.5%, as compared to 2016, primarily as the result of an increase in the average balance of
interest earning assets and an increase in the interest rate spread from 2016 to 2017. The interest rate spread,
the difference between the average tax-equivalent yield on interest-earning assets and the average cost of
interest-bearing liabilities, increased from 3.71% for 2016 to 3.84% for 2017 due primarily to an increase in
the average balance of interest-bearing assets from $696.6 million for 2016 to $786.7 million for 2017 and a
decrease in the average cost of interest-bearing liabilities from 0.70% for 2016 to 0.68% for 2017. For the year
ended September 30, 2016, net interest income increased $1.1 million or 4.5% as compared 2015, primarily
as the result of an increase in the average balance of interest earning assets from 2015 to 2016, which more
than offset a decrease in the interest rate spread from 2015 to 2016. The interest rate spread decreased from
3.74% for 2015 to 3.71% for 2016 due primarily to an increase in the average balance of interest-bearing
liabilities from $565.9 million for 2015 to $591.1 million for 2016, and an increase in the average cost of interest-
bearing liabilities from 0.67% for 2015 to 0.70% for 2016.
For the year ended September 30, 2017, total interest income increased $4.5 million, or 15.1%, as
compared to 2016. The increase in total interest income is due primarily to an increase in the average balance of
interest earning assets of $90.0 million, from $696.6 million for 2016 to $786.6 million for 2017, and the average
tax-equivalent yield on interest-earning assets increased from 4.41% for 2016 to 4.52% for 2017. The increase in
the average balance of interest-earning assets primarily relates to increases in the average balance of loans of $86.3
million and interest-bearing deposits with banks of $4.4 million. For the year ended September 30, 2016, total
interest income increased $1.5 million, or 5.2%, from $28.0 million for the year ended September 30, 2015 to
$29.5 million for the year ended September 30, 2016. The increase in total interest income is due primarily to
an increase in the average balance of interest earning assets of $35.0 million, from $661.6 million for 2015 to $696.6
million for 2016, with the average tax-equivalent yield on interest-earning assets of 4.41% for both 2015 and 2016.
The increase in the average balance of interest-earning assets primarily relates to increases in the average balance of
loans of $36.3 million and interest-bearing deposits with banks of $4.5 million.
41
Interest income on loans increased $4.2 million, or 18.4%, from $22.9 million for 2016 to $27.1
million for 2017, due primarily to an increase in the average balance of loans outstanding of $86.3 million,
from $488.7 million for 2016 to $575.0 million, and an increase in the average tax-equivalent yield on loans
from 4.70% for 2016 to 4.73% for 2017. In 2016, interest income on loans increased $1.5 million, or 6.7%,
from $21.4 million for 2015 to $22.9 million for 2016, due primarily to an increase in the average balance of
loans outstanding of $36.3 million, from $452.4 million for 2015 to $488.7 million for 2016, which more than
offset the change in loan interest income due to a decrease in the average tax-equivalent yield on loans from
4.76% for 2015 to 4.70% for 2016. The increase in the average balance of loans outstanding for both 2017 and
2016 is due primarily to an increase in commercial real estate mortgage loans, as a result of the previously discussed
lending program that is focused on loans secured by low loan-to-value, single-tenant commercial properties that are
generally leased to investment grade national-brand retailers, the borrowers and collateral properties for which are
outside of our primary market area.
Interest income on investment securities increased $166,000, or 2.7%, from $6.2 million for 2016 to
$6.3 million for 2017, despite a decrease in the average balance of investment securities of $682,000, from
$179.6 million for 2016 to $178.9 million for 2017, due to an increase in the average tax-equivalent yield on
investment securities. In 2016, interest income on investment securities decreased $36,000, or 0.6%, totaling
$6.2 million for both 2015 and 2016, due primarily to a decrease in the average balance of investment
securities of $5.6 million, from $185.2 million for 2015 to $179.6 million for 2016, which more than offset the
increase in the average tax-equivalent yield on investment securities. The increase in the average tax-equivalent
yield on investment securities for both 2017 and 2016 was due primarily to an increased investment in
municipal bonds, which generally provide a higher rate of interest than securities issued by U.S. government
agencies and sponsored enterprises.
Total interest expense increased $290,000, or 6.9%, due primarily to an increase in the average
balance of interest-bearing liabilities of $63.3 million, from $591.1 million for 2016 to $654.4 million for
2017, which more than offset a decrease in the average cost of funds from 0.70% for 2016 to 0.68% for 2017.
The average balance of interest-bearing deposits increased $55.7 million, or 11.5%, from $484.2 million for
2016 to $539.9 million for 2017, and the average cost of funds for deposits was 0.51% for both 2016 and
2017. The average balance of borrowings increased $7.5 million, or 7.1%, from $106.9 million for 2016 to
$114.4 million for 2017, and the average cost of funds for borrowings was 1.57% for 2016 compared to
1.48% for 2017. In 2016, total interest expense increased $389,000, or 10.3%, due primarily to an increase in
the average balance of interest-bearing liabilities of $25.2 million, from $565.9 million for 2015 to $591.1
million for 2016, and an increase in the average cost of funds from 0.67% for 2015 to 0.70% for 2016. The
average balance of interest-bearing deposits increased $18.8 million, or 4.0%, from $465.4 million for 2015
to $484.2 million for 2016, and the average cost of funds for deposits was 0.52% for 2015 compared to 0.51%
for 2016. The average balance of borrowings increased $6.4 million, or 6.4%, from $100.5 million for 2015
to $106.9 million for 2016, and the average cost of funds for borrowings was 1.34% for 2015 compared to
1.57% for 2016.
42
Average Balances and Yields.
The following tables present information regarding average balances of assets and liabilities, the total dollar
amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest
expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and
costs for the periods indicated are derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented. Nonaccrual loans are included in average balances only. Loan
fees are included in interest income on loans and are not material. Tax exempt income on loans and investment
securities has been calculated on a tax equivalent basis using a federal marginal tax rate of 34%.
2017
Interest
and
Dividends
Average
Balance
(Dollars in thousands)
Assets:
Interest-bearing deposits with banks .....$ 25,835 $ 184
Loans ..................................................... 574,957
27,188
6,993
Investment securities ............................. 137,756
Mortgage-backed securities...................
886
41,167
313
FRB and FHLB stock ............................
6,936
35,564
Total interest-earning assets ............ 786,651
Year Ended September 30,
Yield/
Cost
Average
Balance
2016
Interest
and
Dividends
Yield/
Cost
Average
Balance
2015
Interest
and
Dividends
0.71% $ 21,481 $ 109
22,955
4.73
6,346
5.08
1,018
2.15
310
4.51
30,738
4.52
488,702
130,947
48,658
6,859
696,647
0.51% $ 16,971 $ 48
21,526
452,426
4.70
6,235
135,819
4.85
1,038
49,381
2.09
6,976
4.52
303
29,150
661,573
4.41
Non-interest-earning assets ......................
56,520
Total assets ......................................$843,171
67,843
$764,490
66,898
$728,471
Liabilities and equity:
NOW accounts ......................................$171,831 $ 404
199
65,016
Money market deposit accounts ............
Savings accounts ...................................
63
88,418
2,096
Time deposits ........................................ 214,673
2,762
Total interest-bearing deposits ........... 539,938
0.24 $147,851 $ 306
148
57,857
0.31
57
80,001
0.07
1,979
198,522
0.98
2,490
484,231
0.51
0.21 $127,265 $ 242
206
66,153
0.26
47
72,320
0.07
1,932
199,694
1.00
2,427
465,432
0.51
Borrowings (1) ...................................... 114,436
Total interest-bearing liabilities .......... 654,374
1,695
4,457
1.48
0.68
93,083
Non-interest-bearing deposits ...............
Other non-interest-bearing liabilities .....
7,563
Total liabilities ................................ 755,020
88,151
Total equity ...........................................
Total liabilities and equity ..................$843,171
106,852
591,083
75,368
10,491
676,942
87,548
$764,490
1,677
4,167
1.57
0.70
100,480
565,912
1,351
3,778
62,008
9,699
637,619
90,852
$728,471
Yield/
Cost
0.28%
4.76
4.59
2.10
4.34
4.41
0.19
0.31
0.06
0.97
0.52
1.34
0.67
Net interest income (taxable equivalent
basis ...............................................
Less: taxable equivalent adjustment .....
Net interest income ...............................
Interest rate spread ................................
Net interest margin ................................
Average interest-earning assets to
average interest-bearing liabilities ......
31,107
(1,647)
$ 29,460
26,571
(1,282)
$ 25,289
25,372
(1,163)
$ 24,209
3.84%
3.95
120.21
3.71%
3.81
117.86
3.74%
3.84
116.90
(1) Includes FHLB borrowings, repurchase agreements and other long-term debt.
43
Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net
interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by
prior volume). The volume column shows the effects attributable to changes in volume (changes in volume
multiplied by prior rate). The net column represents the sum of the prior columns. Changes attributable to changes
in both rate and volume have been allocated proportionally based on the absolute dollar amounts of change in each.
Year Ended September 30, 2017
Compared to
Year Ended September 30, 2016
Increase (Decrease)
Due to
Year Ended September 30, 2016
Compared to
Year Ended September 30, 2015
Increase (Decrease)
Due to
Volume
(In thousands)
Interest income:
Interest-bearing deposits with banks .................. $ 25
Loans .................................................................
4,086
338
Investment securities ..........................................
Mortgage-backed securities ................................
(162)
5
Other interest-earning assets ..............................
4,292
Total interest-earning assets .........................
Interest expense:
Deposits ..............................................................
Borrowings (1) ...................................................
Total interest-bearing liabilities ....................
Net increase (decrease) in net interest income
272
89
361
Rate
Net
Volume
Rate
Net
$ 50
147
309
30
(2)
534
-
(71)
(71)
$ 75
4,233
647
(132)
3
4,826
$ 15
1,695
(193)
(15)
(4)
1,498
$ 46
(266)
304
(5)
11
90
$ 61
1,429
111
(20)
7
1,588
272
18
290
121
88
209
(58)
238
180
63
326
389
(taxable equivalent basis) ............................. $ 3,931
$ 605
$ 4,536
$ 1,289
$ (90)
$ 1,199
(1) Includes FHLB borrowings, repurchase agreements and other long-term debt.
Provision for Loan Losses. The provision for loan losses increased $664,000, or 104.2%, from $637,000
for the year ended September 30, 2016 to $1.3 million for the year ended September 30, 2017 due primarily to an
increase in the gross loan portfolio of $66.2 million. Net charge-offs in 2017 were $331,000 compared to
$139,000 for 2016 and nonperforming loans increased $19,000 to $3.9 million at September 30, 2017. In
2016, the provision for loan losses decreased $222,000, or 25.8%, from $859,000 for the year ended September 30,
2015 to $637,000 for the year ended September 30, 2016 as the gross loan portfolio increased $71.1 million,
from $482.5 million at September 30, 2015 to $553.6 million at September 30, 2016. Net charge-offs in 2016
were $139,000 compared to $485,000 for 2015 and nonperforming loans decreased $508,000 from $4.4
million at September 30, 2015 to $3.9 million at September 30, 2016. The consistent application of
management’s allowance for loan losses methodology resulted in an increase in the level of the allowance for
loan losses for 2017 consistent with the growth in the commercial real estate mortgage loan portfolio. See
“Analysis of Nonperforming and Classified Assets” included herein. It is management’s assessment that the
allowance for loan losses at September 30, 2017 was adequate and appropriately reflected the probable
incurred losses in the Bank’s loan portfolio at that date.
44
Noninterest Income. Noninterest income increased $5.4 million, or 155.8%, from $3.4 million for the year
ended September 30, 2016 to $8.6 million for the year ended September 30, 2017. The increase was due primarily
to a $4.2 million impairment loss on a historic tax credit investment during the year ended September 30, 2016
compared to a $226,000 loss in 2017, as well as an increase in net gain on sales of loans guaranteed by the SBA of
$3.5 million. The total net gain on sales of loans guaranteed by the SBA was $4.2 million for the year ended
September 30, 2017 as compared to $715,000 for the year ended September 30, 2016. The aforementioned
increases in noninterest income were offset by decreases in the net gain on sale of real estate development and net
gain on trading account securities of $1.9 million and $548,000, respectively. The decrease in the net gain on sale of
real estate development is due to the sale of the Company’s commercial real estate development in September 2016.
The net gain on trading account securities was $200,000 for the year ended September 30, 2017 as compared to
$748,000 for the year ended September 30, 2016. In 2016, noninterest income decreased $2.6 million, or 43.6%,
from $6.0 million for the year ended September 30, 2015 to $3.4 million for the year ended September 30, 2016.
The decrease was due primarily to the aforementioned $4.2 million impairment loss on the CBED project
investment in 2016, a $105,000 decrease in service charges on deposit accounts, a $139,000 decrease in real estate
lease income and an $831,000 gain on life insurance policies in 2015, which more than offset increases in net gain
on sale of premises and equipment, net gain on sale of real estate development, net gain on sale of loans, and net
gain on trading account securities of $168,000, $1.9 million, $321,000 and $308,000, respectively. The increases in
net gain on sale of premises and equipment and net gain on sale of real estate development are due primarily to the
aforementioned $2.0 million gain on sale of Wesley Commons in September 2016. The increase in net gain on sale
of loans is due primarily to the sale of loans guaranteed by the SBA.
Noninterest Expense. Noninterest expenses increased $2.6 million, or 11.2%, from $22.4 million for the
year ended September 30, 2016 to $25.0 million for the year ended September 30, 2017. The increase was due
primarily to an increase in compensation and benefits of $2.2 million, which more than offset a decrease in data
processing of $230,000. The increase in compensation and benefits was attributable to the addition of new
employees to support the Company’s SBA lending activities as well as normal salary and benefits increases. The
decrease in data processing was primarily due to new contracts signed in 2017, which resulted in a decrease in
monthly processing fees. In 2016, noninterest expenses increased $1.4 million, or 6.8%, from $21.0 million for the
year ended September 30, 2015 to $22.4 million for the year ended September 30, 2016. The increase was due
primarily to increases in compensation and benefits and data processing expenses of $1.0 million and $197,000,
respectively. The increase in compensation and benefits expense is due primarily to increased staffing as a result of
the Company’s enhanced focus on its SBA lending activities, and normal salary, wage and benefits increases, which
more than offset a decrease in ESOP compensation expense. The ESOP loan was repaid in full during the quarter
ended December 31, 2015 and, as a result, no ESOP compensation expense was recognized during the remainder of
the 2016 fiscal year. The increase in data processing expense is due primarily to the replacement of customer
magnetic strip debit cards with EMV chip debit cards and data processing expense related to SBA lending activities.
Income Tax Expense. The Company recognized an income tax expense of $2.5 million for the year
ended September 30, 2017, compared to income tax benefit of $2.3 million for the year ended September 30,
2016 and income tax expense of $1.6 million for the year ended September 30, 2015. The effective tax rate
was 21.3% and 18.9%, for the years ended September 30, 2017 and 2015, respectively. The tax benefit for
2016 was due to the aforementioned recognition of the $4.7 million tax credit as a result of the CBED project
investment.
45
Risk Management
Overview. Managing risk is essential to successfully managing a financial institution. Our most prominent
risk exposures are credit risk, interest rate risk and market risk. Credit risk is the risk of not collecting the interest
and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of
interest income as a result of changes in interest rates. Market risk arises from fluctuations in interest rates that may
result in changes in the values of financial instruments, such as available-for-sale securities that are accounted for on
a mark-to-market basis. Other risks that we face are operational risks, liquidity risks and reputation risk.
Operational risks include risks related to fraud, regulatory compliance, processing errors, technology and disaster
recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers. Reputation
risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or
revenue or in the value of our common stock. The Company has implemented an enterprise risk management
structure in order to better manage and mitigate these identified and perceived risks.
Credit Risk Management. Our strategy for credit risk management focuses on having well-defined credit
policies and uniform underwriting criteria and providing prompt attention to potential problem loans.
When a borrower fails to make a required loan payment, we take a number of steps to have the borrower
cure the delinquency and restore the loan to current status. When the loan becomes 15 days past due, a late notice is
sent to the borrower and a late fee is assessed. When the loan becomes 30 days past due, a more formal letter is
sent. Between 15 and 30 days past due, telephone calls are also made to the borrower. After 30 days, we regard the
borrower as in default. The borrower may be sent a letter from our attorney and we may commence collection
proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before
the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Generally, when a consumer
loan becomes 60 days past due, we institute collection proceedings and attempt to repossess any personal property
that secures the loan. Generally, we institute foreclosure proceedings when a loan is 60 days past due. Management
obtains the approval of the Board of Directors to proceed with foreclosure of property. Management informs the
Board of Directors monthly of all loans in nonaccrual status, all loans in foreclosure and all repossessed property
and assets that we own.
Analysis of Nonperforming and Classified Assets. We consider nonaccrual loans, troubled debt
restructurings (“TDRs”), repossessed assets and loans that are 90 days or more past due to be nonperforming assets.
Loans are generally placed on nonaccrual status when they become 90 days delinquent at which time the accrual of
interest ceases and the allowance for any uncollectible accrued interest is established and charged against operations.
Typically, payments received on a nonaccrual loan are first applied to the outstanding principal balance.
Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other
real estate owned until it is sold. When property is acquired it is recorded at its fair market value less estimated
costs to sell at the date of foreclosure. Holding costs and declines in fair value after acquisition of the property
result in charges against income.
46
The following table provides information with respect to our nonperforming assets at the dates indicated. Included in
nonperforming loans are loans for which the Bank has modified the repayment terms, and therefore are considered
to be TDRs. The Bank had 35 TDRs totaling $7.0 million, which were performing according to their terms and on
accrual status, as of September 30, 2017.
2017
(Dollars in thousands)
Nonaccrual loans ........................................... $ 3,823
93
Accruing loans past due 90 days or more
3,916
Total nonperforming loans ....................
7,041
Performing TDRs ..........................................
852
Real estate owned ..........................................
Other nonperforming assets ...........................
–
Total nonperforming assets ................... $ 11,809
At September 30,
2015
2016
2014
2013
$ 3,875 $ 4,153 $ 3,804 $ 8,893
164
9,057
5,930
799
2
$ 11,902 $ 13,113 $ 12,784 $ 15,788
478
4,282
7,537
953
12
252
4,405
8,090
618
–
22
3,897
7,486
519
–
Total nonperforming loans to total loans .......
Total nonperforming loans to total assets ......
Total nonperforming assets to total assets .....
0.66%
0.44
1.33
0.74%
0.49
1.49
0.95%
0.59
1.75
0.97%
0.60
1.79
2.19%
1.37
2.39
Federal regulations require us to review and classify our assets on a regular basis. In addition, the Bank’s
regulators have the authority to identify problem assets and, if appropriate, require them to be classified. There are
three classifications for problem assets: substandard, doubtful and loss. “Substandard assets” must have one or more
defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies
are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic
that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and
values questionable, and there is a high possibility of loss. An asset classified “loss” is considered uncollectible and
of such little value that continuance as an asset of the institution, without establishment of a specific allowance or
charge-off, is not warranted. The regulations also provide for a “special mention” category, described as assets
which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving our close attention. When we classify an asset as doubtful we may
establish a specific allowance for loan losses. If we classify an asset as loss, we charge off an amount equal to 100%
of the portion of the asset classified loss.
Classified assets includes loans that are classified due to factors other than payment delinquencies, such as
lack of current financial statements and other required documentation, insufficient cash flows or other deficiencies,
and, therefore, are not included as nonperforming assets. Other than as disclosed in the above tables, there are no
other loans where management has serious doubts about the ability of the borrowers to comply with the present loan
repayment terms. Classified assets also include investment securities that have experienced a downgrade of the
security’s credit quality rating by various rating agencies.
At September 30, 2017, the Company held fifteen privately-issued CMO and ABS securities with an
aggregate carrying value of $1.8 million and fair value of $2.4 million that have been downgraded to a substandard
regulatory classification due to a downgrade of the security’s credit quality rating by various rating agencies. Based
on an independent third party analysis, the Bank expects to collect the contractual principal and interest cash flows
for these securities and, as a result, no other-than-temporary impairment has been recognized on the privately-issued
CMO or ABS portfolios. At September 30, 2016, the Company held seventeen privately-issued CMO and ABS
securities with an aggregate carrying value of $2.0 million and fair value of $2.8 million that had been downgraded
to a substandard regulatory classification due to a downgrade of the security’s credit quality rating by various rating
agencies.
47
Analysis and Determination of the Allowance for Loan Losses.
The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio.
We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional
allowances are necessary, a provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of a specific
allowance for impaired loans and a general allowance on the remainder of the loan portfolio. Although we
determine the amount of each element of the allowance separately, the entire allowance for loan losses is available
to absorb losses in the loan portfolio.
Specific Allowance for Impaired Loans. We consider loans classified as substandard or doubtful and
TDRs to be impaired and establish a specific allowance when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than the carrying value of the loan.
General Allowance on the Remainder of the Loan Portfolio. We establish a general allowance for loans
that are not currently classified as impaired in order to recognize the inherent losses associated with lending
activities. The general allowance covers unimpaired loans and is based on historical loss experience adjusted for
qualitative factors such as changes in economic conditions, changes in the volume of past due and nonaccrual loans
and classified assets, changes in the nature and volume of the portfolio, changes in the value of underlying collateral
for collateral dependent loans, concentrations of credit, and other factors.
The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates
indicated.
2017
% of
Allowance
to Total
Allowance
3.11%
70.92
1.31
10.01
2.76
10.37
1.52
100.00%
% of
Loans in
Category
to Total
Loans
27.73%
44.06
3.41
9.51
1.57
8.51
5.21
100.00%
At September 30,
2016
% of
Allowance
to Total
Allowance
4.70%
72.46
1.53
11.86
4.14
3.99
1.32
100.00%
% of
Loans in
Category
to Total
Loans
32.22%
39.27
3.32
10.48
2.01
7.58
5.12
100.00%
Amount
$ 444
4,327
156
551
369
678
99
$ 6,624
Amount
$ 335
5,160
109
845
295
284
94
$ 7,122
2015
% of
Allowance
to Total
Allowance
6.70%
65.32
2.36
8.32
5.57
10.24
1.49
100.00%
% of
Loans in
Category
to Total
Loans
37.70%
35.86
4.49
7.30
2.29
6.75
5.61
100.00%
(Dollars in thousands)
Amount
$ 252
Residential real estate ......................
5,739
Commercial real estate ....................
106
Multi-family ....................................
810
Construction ....................................
223
Land and land development.............
839
Commercial business ......................
Consumer ........................................
123
Total allowance for loan losses ... $ 8,092
At September 30,
2014
% of
Allowance
to Total
Allowance
9.23%
60.93
2.34
7.09
4.83
12.72
2.86
100.00%
% of
Loans in
Category
to Total
Loans
40.94%
34.48
4.77
5.12
2.53
6.37
5.79
100.00%
Amount
$ 780
2,826
249
229
299
907
248
$ 5,538
2013
% of
Allowance
to Total
Allowance
14.08%
51.03
4.50
4.14
5.40
16.38
4.47
100.00%
% of
Loans in
Category
to Total
Loans
44.10%
28.17
6.40
4.61
2.73
7.56
6.43
100.00%
(Dollars in thousands)
Amount
$ 577
Residential real estate ......................
3,808
Commercial real estate .....................
146
Multi-family .....................................
Construction .....................................
443
302
Land and land development.............
795
Commercial business .......................
Consumer .........................................
179
Total allowance for loan losses .. $ 6,250
48
Although we believe that we use the best information available to establish the allowance for loan losses,
future adjustments to the allowance for loan losses may be necessary and our results of operations could be
adversely affected if circumstances differ substantially from the assumptions used in making the determinations.
Furthermore, while we believe we have established our allowance for loan losses in conformity with generally
accepted accounting principles, there can be no assurance that the banking regulators, in reviewing our loan
portfolio, will not require us to increase our allowance for loan losses. The banking regulators may require us to
increase our allowance for loan losses based on judgments different from ours. In addition, because future events
affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing
allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may
adversely affect our financial condition and results of operations.
Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan
losses for the periods indicated.
(Dollars in thousands)
2017
Allowance for loan losses at beginning of period ... $ 7,122
1,301
Provision for loan losses .........................................
Charge offs:
Residential real estate ..........................................
Commercial real estate.........................................
Multi-family.........................................................
Construction.........................................................
Land and land development .................................
Commercial business ...........................................
Consumer .............................................................
Total charge-offs ............................................
169
–
–
–
–
200
116
485
Recoveries:
Residential real estate ..........................................
Commercial real estate.........................................
Multi-family.........................................................
Land and land development .................................
Construction.........................................................
Commercial business ...........................................
Consumer .............................................................
Total recoveries .............................................
Net charge-offs .......................................................
71
10
–
–
–
17
56
154
331
Year Ended September 30,
2014
2015
2016
$ 5,538
$ 6,250
$ 6,624
1,246
859
637
2013
$ 4,906
1,858
207
–
–
–
–
10
108
325
115
–
–
–
–
1
70
186
139
283
40
–
–
–
126
144
593
41
–
–
–
–
1
66
108
485
278
224
–
–
–
234
136
872
28
219
–
–
–
–
91
338
534
284
11
–
–
–
1,013
111
1,419
65
25
–
–
–
41
62
193
1,226
Allowance for loan losses at end of period ............. $8,092
$ 7,122
$ 6,624
$ 6,250
$ 5,538
Allowance for loan losses to nonperforming
loans ..................................................................... 206.64% 182.76% 150.37% 145.96%
Allowance for loan losses to total loans
outstanding at the end of the period .....................
Net charge-offs to average loans outstanding
during the period ..................................................
0.03
0.06
0.11
0.12
1.36
1.35
1.43
1.42
61.15%
1.34
0.30
Interest Rate Risk Management. We manage the interest rate sensitivity of our interest-bearing liabilities
and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment.
Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the
shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while
decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we
have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable
interest rate spread. Our strategy for managing interest rate risk emphasizes: adjusting the maturities of borrowings;
adjusting the investment portfolio mix and duration and generally selling in the secondary market substantially all
newly originated, fixed rate one-to four-family residential real estate loans. We currently do not participate in
hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments.
49
We have an Asset/Liability Management Committee, which includes members of management approved by
the Board of Directors, to communicate, coordinate and control all aspects involving asset/liability management.
The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with
the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth,
risk limits and profitability goals.
Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net
interest income and net income.
Market Risk Analysis. An element in our ongoing interest rate risk management process is to measure and
monitor interest rate risk using a Net Interest Income at Risk simulation to model the interest rate sensitivity of the
balance sheet and to quantify the impact of changing interest rates on the Company. The model quantifies the
effects of various possible interest rate scenarios on projected net interest income over a one-year horizon. The
model assumes a semi-static balance sheet and measures the impact on net interest income relative to a base case
scenario of hypothetical changes in interest rates over twelve months and provides no effect given to any steps that
management might take to counter the effect of the interest rate movements. The scenarios include prepayment
assumptions, changes in the level of interest rates, the shape of the yield curve, and spreads between market interest
rates in order to capture the impact from re-pricing, yield curve, option, and basis risks.
Results of our simulation modeling, which assumes an immediate and sustained parallel shift in market
interest rates, project that the Company’s net interest income could change as follows over a one-year horizon,
relative to our base case scenario, based on September 30, 2017 and 2016 financial information.
At September 30, 2017
At September 30, 2016
Immediate Change
One Year Horizon
One Year Horizon
in the Level
of Interest Rates
Dollar
Change
Percent
Dollar
Change
Change
(Dollars in thousands)
Percent
Change
300bp
200bp
100bp
Static
(100)bp
$ 319
332
155
-
1.04%
1.08
0.51
-
(463)
(1.51)
$ 274
219
165
-
(668)
1.07%
0.85
0.65
-
(2.61)
At September 30, 2017, our simulated exposure to an increase in interest rates shows that an immediate and
sustained increase in rates of 1.00% will increase our net interest income by $155,000 or 0.51% over a one year
horizon compared to a flat interest rate scenario. Furthermore, rate increases of 2.00% and 3.00% would cause net
interest income to increase by 1.08% and 1.04%, respectively. Conversely, an immediate and sustained decrease in
rates of 1.00% will decrease our net interest income by $463,000, or 1.51%, over a one year horizon compared to a
flat interest rate scenario.
The Company also has longer term interest rate risk exposure, which may not be appropriately measured by
Net Interest Income at Risk modeling, and therefore uses an Economic Value of Equity (“EVE”) interest rate
sensitivity analysis in order to evaluate the impact of its interest rate risk on earnings and capital. This is measured
by computing the changes in net EVE for its cash flows from assets, liabilities and off-balance sheet items in the
event of a range of assumed changes in market interest rates. EVE modeling involves discounting present values of
all cash flows for on and off balance sheet items under different interest rate scenarios and provides no effect given
to any steps that management might take to counter the effect of the interest rate movements. The discounted
present value of all cash flows represents the Company’s EVE and is equal to the market value of assets minus the
market value of liabilities, with adjustments made for off-balance sheet items. The amount of base case EVE and its
sensitivity to shifts in interest rates provide a measure of the longer term re-pricing and option risk in the balance
sheet.
50
Results of our simulation modeling, which assumes an immediate and sustained parallel shift in market
interest rates, project that the Company’s EVE could change as follows, relative to our base case scenario, based on
September 30, 2017 and 2016 financial information.
Immediate Change
Economic Value of Equity
Economic Value of Equity as a
in the Level
of Interest Rates
Dollar
Amount
Dollar
Change
Percent
Change
Percent of Present Value of Assets
EVE Ratio
Change
At September 30, 2017
300bp
200bp
100bp
Static
(100)bp
(Dollars in thousands)
$ 128,282
$ (11,951)
135,642
140,196
140,233
132,724
(4,591)
(37)
-
(7,509)
(8.52)%
(3.27)
(0.03)
-
(5.35)
16.20%
16.48
16.41
15.87
14.66
33 bp
61 bp
54 bp
- bp
(121)bp
Immediate Change
Economic Value of Equity
Economic Value of Equity as a
in the Level
of Interest Rates
Dollar
Amount
Dollar
Change
Percent
Change
Percent of Present Value of Assets
EVE Ratio
Change
At September 30, 2016
300bp
200bp
100bp
Static
(100)bp
$ 122,285
$ (1,520)
(Dollars in thousands)
(1.23)%
3.31
4.27
-
4,095
5,289
-
(15,582)
(12.59)
16.86%
16.94
16.50
15.38
13.29
148 bp
156 bp
112 bp
- bp
(209)bp
127,900
129,094
123,805
108,223
The previous table indicates that at September 30, 2017, the Company would expect a decrease in its EVE
in the event of a sudden and sustained 100, 200 and 300 basis point increase and/or 100 basis point decrease in
prevailing interest rates. The expected decrease in the Company’s EVE given a larger increase in rates is primarily
attributable to the relatively high percentage of fixed-rate loans in the Company’s loan portfolio, which at September
30, 2017 comprised approximately 39.9% of the loan portfolio.
The models are driven by expected behavior in various interest rate scenarios and many factors besides
market interest rates affect the Company’s net interest income and EVE. For this reason, we model many different
combinations of interest rates and balance sheet assumptions to understand its overall sensitivity to market interest
rate changes. Therefore, as with any method of measuring interest rate risk, certain shortcomings are inherent in the
method of analysis presented in the foregoing tables and it is recognized that the model outputs are not guarantees of
actual results. For example, although certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on
other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further,
in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from time
deposits could deviate significantly from those assumed in calculating the table.
Liquidity Management. Liquidity is the ability to meet current and future short-term financial obligations.
Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment
securities and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest
rates, economic conditions and competition.
51
The Bank regularly adjusts its investments in liquid assets based upon our assessment of (1) expected loan
demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the
objectives of our asset/liability management policy.
The Bank’s most liquid assets are cash and cash equivalents and interest-bearing deposits. The levels of
these assets depend on our operating, financing, lending and investing activities during any given period. At
September 30, 2017, cash and cash equivalents totaled $34.3 million. Securities classified as trading and available-
for-sale, amounting to $7.2 million and $178.1 million, respectively, at September 30, 2017, provide additional
sources of liquidity. At September 30, 2017, we had the ability to borrow a total of approximately $133.1 million
from the FHLB, of which $118.1 million was borrowed and outstanding. In addition, we had the ability to borrow
the lesser of $20 million or 25% of the Bank’s equity capital, excluding reserves, using a federal funds purchased
line of credit facility with another financial institution at September 30, 2017. We also had a second federal funds
line of credit facility with another financial institution from which we had the ability to borrow an additional $15
million. The Bank had no outstanding federal funds purchased under either facility at September 30, 2017.
At September 30, 2017, the Bank had $124.1 million in commitments to extend credit outstanding. Time
deposits due within one year of September 30, 2017 totaled $134.9 million, or 58.7% of time deposits. We believe
the large percentage of time deposits that mature within one year reflects customers’ hesitancy to invest their funds
for long periods due to the recent low interest rate environment and local competitive pressure. If these maturing
time deposits do not remain with us, we will be required to seek other sources of funds, including other certificates
of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such
deposits or other borrowings than we currently pay on the time deposits due on or before September 30, 2018. We
believe, however, based on past experience that a significant portion of our time deposits will remain with us. We
have the ability to attract and retain deposits by adjusting the interest rates offered.
The Company is a separate legal entity from the Bank and must provide for its own liquidity to pay its
operating expenses and other financial obligations, to pay any dividends and to repurchase any of its outstanding
common stock. The Company’s primary source of income is dividends received from the Bank. The amount of
dividends that the Bank may declare and pay to the Company in any calendar year, without the receipt of prior
approval from banking regulators, cannot exceed net income for that year to date plus retained net income (as
defined) for the preceding two calendar years. At September 30, 2017, the Company had liquid assets of $1.3
million on a stand-alone, unconsolidated basis.
The following tables present certain of our contractual obligations as of September 30, 2017.
(In thousands)
Total
Deferred director fee agreements .......................... $ 1,330
80
Deferred compensation agreements ......................
1,205
Operating lease obligations ...................................
1,348
Repurchase agreements.........................................
FHLB borrowings .................................................
118,065
Total ..................................................................... $ 122,028
Less than
One Year
$ 122
–
227
1,348
28,065
$ 29,762
Payments due by period
Three to
Five Years
$ 135
–
226
–
20,000
$ 20,361
One to
Three Years
$ 182
–
324
–
40,000
$ 40,506
More Than
Five Years
$ 891
80
428
–
30,000
$ 31,399
Our primary investing activities are the origination of loans and the purchase of securities. Our primary
financing activities consist of activity in deposit accounts and FHLB borrowings. Deposit flows are affected by the
overall level of interest rates, the interest rates and products offered by us and our local competitors and other
factors. We generally manage the pricing of our deposits to be competitive. Occasionally, we offer promotional
rates on certain deposit products to attract deposits.
Capital Management. The Bank is subject to various regulatory capital requirements administered by the
federal banking agencies, including a risk-based capital measure. The risk-based capital guidelines include both a
definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-
balance sheet items to broad risk categories. At September 30, 2017, the Bank exceeded all of its regulatory capital
requirements. The Bank is considered “well capitalized” under regulatory guidelines. See “Item 1. Business —
Regulation and Supervision — Regulation of Federal Savings Associations — Capital Requirement.”
52
Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial
transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial
statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such
transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments
and lines of credit.
For the year ended September 30, 2017, we did not engage in any off-balance sheet transactions reasonably
likely to have a material effect on our financial condition, results of operations or cash flows.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented in this annual report have been
prepared according to accounting principles generally accepted in the United States, which require the measurement
of financial position and operating results in terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The primary impact of inflation on our operations is
reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a
financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by reference to Part II, “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operation.”
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is included herein beginning on page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
53
Item 9A. CONTROLS AND PROCEDURES
(a)
Disclosure Controls and Procedures
The Company’s management, including the Company’s principal executive officer and principal financial
officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is
defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange
Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as
of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for
the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits
under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and
communicated to the Company’s management, including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure.
(b)
Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting. The internal control process has been designed under our supervision to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements
for external reporting purposes in accordance with accounting principles generally accepted in the United States of
America.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial
reporting as of September 30, 2017, utilizing the framework established in 2013 Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on
this assessment, management has determined that the Company’s internal control over financial reporting as of
September 30, 2017 is effective.
Our internal control over financial reporting includes policies and procedures that pertain to the
maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets;
and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the United States; (2) receipts and
expenditures are being made only in accordance with authorizations of management and the directors of the
Company; and (3) unauthorized acquisition, use, or disposition of the Company’s assets that could have a material
effect on the Company’s financial statements are prevented or timely detected.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
This annual report does not include an attestation report of the Company’s registered public accounting
firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only
management’s report in this annual report.
(c)
Changes to Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the three months
ended September 30, 2017 that have materially affected, or are reasonable likely to materially affect, the Company’s
internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
54
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information relating to the directors and officers of the Company, information regarding compliance
with Section 16(a) of the Exchange Act and information regarding the audit committee and audit committee
financial expert is incorporated herein by reference to the sections captioned “Item 1 – Election of Directors,”
“Section 16(a) Beneficial Ownership Reporting Compliance,” and “Audit Committee” in the Company’s Proxy
Statement for the 2018 Annual Meeting of Stockholders (the “Proxy Statement”).
The Company has adopted a code of ethics and business conduct which applies to all of the Company’s and
the Bank’s directors, officers and employees. A copy of the code of ethics and business conduct is available to
stockholders on the Investor Relations portion of the Bank’s website at www.fsbbank.net.
Item 11. EXECUTIVE COMPENSATION
The information regarding executive compensation is incorporated herein by reference to the sections
captioned “Director Compensation” and “Executive Compensation” in the Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
(a)
Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the section captioned
“Stock Ownership” in the Proxy Statement.
(b)
Security Ownership of Management
Information required by this item is incorporated herein by reference to the section captioned
“Stock Ownership” in the Proxy Statement.
(c)
Changes in Control
Management of the Company knows of no arrangements, including any pledge by any person of
securities of the Company, the operation of which may at a subsequent date result in a change in
control of the registrant.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information relating to certain relationships and related transactions and director independence is
incorporated herein by reference to the sections captioned “Transactions with Related Persons” and “Director
Independence” in the Proxy Statement.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information relating to the principal accountant fees and expenses is incorporated herein by
reference to the section captioned “Ratification of the Independent Registered Public Accounting Firm” in the Proxy
Statement.
55
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(1)
(2)
The financial statements required in response to this item are incorporated by reference from Item
8 of this Annual Report on Form 10-K.
All financial statement schedules are omitted because they are not required or applicable, or the
required information is shown in the consolidated financial statements or the notes thereto.
(3)
Exhibits
No.
Description
10.4
10.3
10.2
3.1
3.2
3.3
4.0
10.1
Articles of Incorporation of First Savings Financial Group, Inc. (1)
Articles of Amendment to the Articles of Incorporation for the Series A
Preferred Stock (2)
Bylaws of First Savings Financial Group, Inc. (1)
Specimen Stock Certificate of First Savings Financial Group, Inc. (1)
Amended and Restated Employment Agreement by and among First Savings
Financial Group, Inc., First Savings Bank and Larry W. Myers,
dated October 7, 2009* (3)
Amended and Restated Employment Agreement by and among First Savings
Financial Group, Inc., First Savings Bank and John P. Lawson, Jr.,
dated October 7, 2009* (3)
Amended and Restated Employment Agreement by and among First Savings
Financial Group, Inc., First Savings Bank and Anthony A. Schoen,
dated October 7, 2009* (3)
Amended and Restated Employment Agreement by and among First Savings
Financial Group, Inc., First Savings Bank and Samuel E. Eckart,
dated October 7, 2009* (3)
First Savings Bank, F.S.B. Employee Severance Compensation Plan* (4)
10.5
First Savings Bank, F.S.B. Supplemental Executive Retirement Plan* (4)
10.6
Agreement and plan of Reorganization dated July 21, 2017 (2)
10.7
Amended and Restated Director Deferred Compensation Agreement* (1)
10.8
Subsidiaries of the Registrant
21.0
Consent of Monroe Shine & Co., Inc.
23.0
Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer
31.1
Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer
31.2
Section 1350 Certificate of Chief Executive Officer and Chief Financial Officer
32.0
101.0 The following materials from the Company’s Annual Report on Form 10-K for the year
ended September 30, 2017, formatted in XBRL (Extensible Business Reporting
Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of
Income, (iii) the Consolidated Statement of Changes in Stockholders’ Equity, (iv) the
Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial
Statements.
_________________________________________________________________________
* Management contract or compensatory plan, contract or arrangement
(1) Incorporated herein by reference to the exhibits to the Company’s Registration Statement on
Form S-1 (File No. 333-151636), as amended, initially filed with the Securities and Exchange
Commission on June 13, 2008.
(2) Incorporated by reference to the exhibits to the Company’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on July 26, 2017.
(3) Incorporated herein by reference to the exhibits to the Company’s Current Report on Form 8-
K filed with the Securities and Exchange Commission on October 8, 2009.
(4) Incorporated herein by reference to the exhibits to the Company’s Current Report on Form 8-
K filed with the Securities and Exchange Commission on October 10, 2008.
Item 16. FORM 10-K SUMMARY
Not applicable.
FIRST SAVINGS FINANCIAL GROUP, INC.
CONTENTS
Management’s Report on Internal Control Over Financial Reporting .............................................
Report of Independent Registered Public Accounting Firm ............................................................
Consolidated Balance Sheets .........................................................................................................
Consolidated Statements of Income ................................................................................................
Consolidated Statements of Comprehensive Income .......................................................................
Consolidated Statements of Changes in Stockholders' Equity .........................................................
Consolidated Statements of Cash Flows ........................................................................................
Notes to Consolidated Financial Statements ..................................................................................
Page
2
3
4
5
6
7
8
9
F-1
Management’s Report on Internal Control Over Financial Reporting
The management of First Savings Financial Group, Inc. (“the Company”) is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. The Company’s internal control
over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the financial statements.
The system of internal control over financial reporting as it relates to the consolidated financial statements is
evaluated for effectiveness by management. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed First Savings Financial Group, Inc.’s system of internal control over financial reporting as of
September 30, 2017, in relation to criteria for effective internal control over financial reporting as described in the
2013 “Internal Control Integrated Framework,” issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on this assessment, management concluded that, as of September 30, 2017,
its system of internal control over financial reporting is effective and meets the criteria of the “Internal Control
Integrated Framework.”
Monroe Shine & Co., Inc., independent registered public accounting firm, has issued an audit report
dated December 14, 2017 on the Company’s internal control over financial reporting.
/s/ Larry W. Myers
Larry W. Myers
President and
Chief Executive Officer
December 14, 2017
/s/ Anthony A. Schoen
Anthony A. Schoen
Chief Financial Officer
F-2
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
First Savings Financial Group, Inc.
Clarksville, Indiana
We have audited the accompanying consolidated balance sheets of First Savings Financial Group, Inc. (the
“Company”) as of September 30, 2017 and 2016, and the related consolidated statements of income,
comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 2017. We also have audited First Savings Financial Group, Inc.’s internal control
over financial reporting as of September 30, 2017, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
The Company's management is responsible for these consolidated financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion
on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the consolidated financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of First Savings Financial Group, Inc. as of September 30, 2017 and 2016, and the results of
its operations and its cash flows for each of the years in the three-year period ended September 30, 2017, in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion,
First Savings Financial Group, Inc. maintained, in all material respects, effective internal control over financial
reporting as of September 30, 2017, based on criteria established in Internal Control – Integrated Framework
(2013) issued by COSO.
New Albany, Indiana
December 14, 2017
MONROE SHINE & CO., INC. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
F-3
FIRST SAVINGS FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2017 AND 2016
(In thousands, except share and per share data)
2017
2016
ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Total cash and cash equivalents
Interest-bearing time deposits
Trading account securities, at fair value
Securities available for sale, at fair value
Securities held to maturity
Loans held for sale, residential mortgage
Loans held for sale, Small Business Administration
Loans, net of allowance for loan losses of $8,092 and $7,122
Federal Reserve Bank and Federal Home Loan Bank stock, at cost
Premises and equipment
Other real estate owned, held for sale
Accrued interest receivable:
Loans
Securities
Cash surrender value of life insurance
Goodwill
Core deposit intangibles
Other assets
Total Assets
LIABILITIES
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Repurchase agreements
Borrowings from Federal Home Loan Bank
Accrued interest payable
Advance payments by borrowers for taxes and insurance
Accrued expenses and other liabilities
Total Liabilities
STOCKHOLDERS' EQUITY
Preferred stock of $.01 par value per share;
authorized 1,000,000 shares; none issued
Common stock of $.01 par value per share;
authorized 20,000,000 shares; issued 2,559,307 shares (2,542,042 at
September 30, 2016); outstanding 2,242,454 shares (2,204,787 shares
at September 30, 2016)
Additional paid-in capital
Retained earnings - substantially restricted
Accumulated other comprehensive income
Unearned stock compensation
Less treasury stock, at cost - 316,853 shares
(337,255 shares at September 30, 2016)
Total Stockholders' Equity
$
11,017
23,242
34,259
$
11,449
17,893
29,342
2,435
7,175
178,099
2,878
727
24,908
586,456
6,936
11,270
852
1,907
1,491
18,297
7,936
693
4,814
3,100
9,255
174,493
3,166
384
5,087
518,611
6,936
11,674
519
1,451
1,355
18,214
7,936
1,037
3,956
$
891,133
$
796,516
$
96,283
573,099
669,382
$
79,859
499,608
579,467
1,348
118,065
283
1,212
7,728
798,018
1,345
121,633
195
1,014
6,282
709,936
-
-
25
27,798
67,583
4,158
(571)
(5,878)
93,115
25
27,182
59,499
5,944
-
(6,070)
86,580
Total Liabilities and Stockholders' Equity
$
891,133
$
796,516
See notes to consolidated financial statements.
F-4
FIRST SAVINGS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2017, 2016 AND 2015
(In thousands, except share and per share data)
2017
2016
2015
INTEREST INCOME
Loans, including fees
Securities:
Taxable
Tax-exempt
Dividend income
Interest-bearing deposits with banks
Total interest income
INTEREST EXPENSE
Deposits
Federal funds purchased
Repurchase agreements
Borrowings from Federal Home Loan Bank
Loans payable
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
NONINTEREST INCOME
Service charges on deposit accounts
Net gain on sales of available for sale securities
Net gain on trading account securities
Net gain on sales of loans, residential mortgage
Net gain on sales of loans, Small Business Administration
Increase in cash surrender value of life insurance
Gain on life insurance
Commission income
Real estate lease income
Net gain on sale of premises and equipment
Net gain on sale of real estate development
Loss on tax credit investment
Other income
Total noninterest income
NONINTEREST EXPENSE
Compensation and benefits
Occupancy and equipment
Data processing
Advertising
Professional fees
FDIC insurance premiums
Net (gain) loss on other real estate owned
Other operating expenses
Total noninterest expense
Income before income taxes
Income tax (benefit) expense
Net Income
$
27,093
$
22,876
$
21,439
3,315
3,012
313
184
33,917
2,762
23
3
1,669
-
4,457
29,460
1,301
28,159
1,355
30
200
530
4,204
433
189
379
-
38
-
(226)
1,493
8,625
3,691
2,470
310
109
29,456
2,490
1
3
1,512
161
4,167
25,289
637
24,652
1,221
-
748
430
715
448
-
369
489
168
1,862
(4,236)
1,158
3,372
3,971
2,226
303
48
27,987
2,427
-
3
1,172
176
3,778
24,209
859
23,350
1,326
-
440
411
413
479
831
373
628
-
-
-
1,075
5,976
15,089
2,788
1,357
538
1,527
490
(113)
3,275
24,951
11,833
2,520
9,313
$
12,858
2,698
1,587
545
1,259
502
28
2,958
22,435
5,589
(2,322)
7,911
$
11,809
2,622
1,390
530
1,172
460
1
3,015
20,999
8,327
1,576
6,751
$
Preferred stock dividends declared
Net Income Available to Common Shareholders
$
-
9,313
$
62
7,849
$
171
6,580
Net income per common share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
$
$
4.20
3.97
$
$
3.57
3.41
$
$
3.07
2.93
2,219,088
2,346,008
2,200,258
2,303,628
2,140,632
2,247,966
Dividends per common share
$
0.55
$
0.51
$
0.47
See notes to consolidated financial statements.
F-5
FIRST SAVINGS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 2017, 2016 AND 2015
(In thousands)
Net Income
2017
2016
2015
$
9,313
$
7,911
$
6,751
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period
Income tax benefit (expense)
Net of tax amount
Less: reclassification adjustment for realized
gains included in net income
Income tax expense
Net of tax amount
(2,743)
977
(1,766)
(30)
10
(20)
2,631
(897)
1,734
-
-
-
Other Comprehensive Income (Loss)
(1,786)
1,734
549
(192)
357
-
-
-
357
Comprehensive Income
$
7,527
$
9,645
$
7,108
See notes to consolidated financial statements.
F-6
FIRST SAVINGS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2017, 2016 AND 2015
(In thousands, except share and per share data)
Common
Stock
Additional
Paid-in Capital
Retained
Earnings
Comprehensive Compensation
Income
and ESOP
Treasury
Stock
Total
Balances at October 1, 2014
$
25
$
43,199
$
47,175
$
3,853
$
(699)
$
(6,473)
$
87,080
Accumulated
Other
Unearned
Stock
Net income
Other comprehensive income
Preferred stock dividends
Common stock dividends ($0.47 per share)
Stock compensation expense
Shares released by ESOP trust
Stock options exercises - 20,972 shares
Purchase of 9,274 treasury shares
-
-
-
-
-
-
-
-
-
-
-
-
243
563
(89)
-
6,751
-
(171)
(995)
-
-
-
-
-
357
-
-
-
-
-
-
-
-
-
-
162
340
-
-
-
-
-
-
-
-
367
(251)
6,751
357
(171)
(995)
405
903
278
(251)
Balances at September 30, 2015
$
25
$
43,916
$
52,760
$
4,210
$
(197)
$
(6,357)
$
94,357
Net income
Other comprehensive income
Preferred stock dividends
Common stock dividends ($0.51 per share)
Shares released by ESOP trust
Stock options exercises - 26,210 shares
Redemption of preferred stock - 17,120 shares
Purchase of 4,933 treasury shares
-
-
-
-
-
-
-
-
-
-
-
-
504
(118)
(17,120)
-
7,911
-
(62)
(1,110)
-
-
-
-
-
1,734
-
-
-
-
-
-
-
-
-
-
197
-
-
-
-
-
-
-
-
466
-
(179)
7,911
1,734
(62)
(1,110)
701
348
(17,120)
(179)
Balances at September 30, 2016
$
25
$
27,182
$
59,499
$
5,944
$
-
$
(6,070)
$
86,580
Net income
Other comprehensive loss
Common stock dividends ($0.55 per share)
Restricted stock grants - 17,265 shares
Stock compensation expense
Stock option exercises - 26,858 shares
Purchase of 6,456 treasury shares
-
-
-
-
-
-
-
-
-
-
692
55
(131)
-
9,313
-
(1,229)
-
-
-
-
-
(1,786)
-
-
-
-
-
-
-
-
(692)
121
-
-
-
-
-
-
-
486
(294)
9,313
(1,786)
(1,229)
-
176
355
(294)
Balances at September 30, 2017
$
25
$
27,798
$
67,583
$
4,158
$
(571)
$
(5,878)
$
93,115
See notes to consolidated financial statements.
F-7
FIRST SAVINGS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2017, 2016 AND 2015
(In thousands)
2017
2016
2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses
Depreciation and amortization
Amortization of premiums and accretion of discounts on securities, net
Decrease (increase) in trading account securities
Loans originated for sale
Proceeds on sales of loans
Net gain on sales of loans
Net realized and unrealized gain on other real estate owned
Net gain on sales of available for sale securities
Gain on life insurance
Increase in cash surrender value of life insurance
Net gain on sale of premises, equipment and real estate development
Loss on tax credit investment
Deferred income taxes
ESOP and stock compensation expense
Increase in accrued interest receivable
Increase in accrued interest payable
Change in other assets and liabilities, net
Net Cash Provided By (Used In) Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in interest-bearing time deposits
Proceeds from maturities of interest-bearing time deposit maturities
Purchase of securities available for sale
Proceeds from sales of securities available for sale
Proceeds from maturities of securities available for sale
Proceeds from maturities of securities held to maturity
Principal collected on securities
Net increase in loans
Purchase of Federal Reserve Bank stock
Purchase of Federal Home Loan Bank stock
Proceeds from redemption of Federal Home Loan Bank stock
Proceeds from life insurance
Investment in historic tax credit entity
Proceeds from sale of other real estate owned
Investment in real estate development and construction
Purchase of premises and equipment
Proceeds from sale of premises, equipment and real estate development
Net Cash Used In Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
Net increase in repurchase agreements
Increase (decrease) in Federal Home Loan Bank line of credit
Proceeds from Federal Home Loan Bank advances
Repayment of Federal Home Loan Bank advances
Repayment of other long-term debt
Net increase in advance payments by
borrowers for taxes and insurance
Redemption of preferred stock
Proceeds from exercise of stock options
Purchase of treasury stock
Dividends paid on preferred stock
Dividends paid on common stock
Net Cash Provided By Financing Activities
Net Increase in Cash and Cash Equivalents
Cash and cash equivalents at beginning of year
$
9,313
$
7,911
$
6,751
1,301
1,164
702
2,080
(89,738)
75,638
(4,734)
(170)
(30)
(189)
(433)
(38)
226
1,836
176
(592)
88
1,181
(2,219)
(455)
1,120
(32,005)
4,255
3,665
208
17,103
(71,593)
-
-
-
-
(344)
208
-
(426)
19
(78,245)
89,915
3
(3,568)
15,000
(15,000)
-
198
-
62
-
-
(1,229)
85,381
4,917
29,342
637
1,461
553
(211)
(27,572)
28,797
(1,145)
(49)
-
-
(448)
(2,030)
4,236
(2,431)
628
(151)
9
(1,001)
9,194
(245)
245
(15,659)
-
6,725
1,381
14,894
(52,550)
-
(216)
-
1,564
(3,285)
472
(35)
(318)
1,866
(45,161)
46,170
3
6,766
35,000
(25,000)
(4,632)
131
(17,120)
169
-
(62)
(1,110)
40,315
4,348
24,994
859
1,452
679
(3,725)
(16,980)
11,324
(824)
(1)
-
(831)
(479)
-
-
(36)
1,108
(144)
11
273
(563)
(1,600)
-
(23,669)
-
11,227
666
18,814
(24,519)
(945)
(533)
1,275
425
(417)
809
(73)
(475)
-
(19,015)
103
4
5,319
300,000
(280,000)
(180)
135
-
159
(132)
(171)
(995)
24,242
4,664
20,330
Cash and Cash Equivalents at End of Year
$
34,259
$
29,342
$
24,994
See notes to consolidated financial statements.
F-8
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
First Savings Financial Group, Inc. (the “Company”) is a financial holding company and the parent
of First Savings Bank (the “Bank”) and First Savings Insurance Risk Management, Inc. (the
“Captive”).
The Bank, which is a wholly-owned Indiana-chartered commercial bank subsidiary of the Company,
provides a variety of banking services to individuals and business customers through fourteen
locations in southern Indiana. The Bank attracts deposits primarily from the general public and uses
those funds, along with other borrowings, primarily to originate residential mortgage, commercial
mortgage, construction, commercial business and consumer loans, and to a lesser extent, to invest in
mortgage-backed securities and other securities. The Bank has two wholly owned subsidiaries: First
Savings Investments, Inc., a Nevada corporation that manages a securities portfolio and Southern
Indiana Financial Corporation, which is currently inactive.
At September 30, 2016, the Bank had a third wholly owned subsidiary, FFCC, Inc. (“FFCC”), which
was an Indiana corporation that participated in commercial real estate development and leasing. In
accordance with the Plan of Complete Liquidation adopted by FFCC’s board of directors and
approval by the Bank as its sole shareholder on December 21, 2016, FFCC voluntarily dissolved and
completely liquidated effective December 31, 2016. As a result of the liquidation, FFCC distributed
its net assets to the Bank on December 31, 2016.
On April 25, 2017, the Bank formed Q2 Business Capital, LLC (“Q2”), which is an Indiana limited
liability company that specializes in the origination and servicing of U.S. Small Business
Administration (“SBA”) loans. The Bank owns 51% of Q2 with the option to purchase the minority
interest between July 1, 2020 and September 30, 2020. In accordance with Q2’s operating
agreement, the Bank will be allocated the first $1.7 million of cumulative net income of Q2 with any
additional profits and losses allocated 51% to the Bank and 49% to Q2’s minority members.
The Captive, which is a wholly-owned insurance subsidiary of the Company formed during the
fourth fiscal quarter of 2014, is a Nevada corporation that provides property and casualty insurance
to the Company, the Bank and the Bank’s active subsidiaries. In addition, the Captive provides
reinsurance to eight other third-party insurance captives for which insurance may not be currently
available or economically feasible in the insurance marketplace.
Basis of Consolidation and Reclassifications
The consolidated financial statements include the accounts of the Company and its subsidiaries and
have been prepared in accordance with accounting principles generally accepted in the United States
of America and conform to general practices within the banking industry. Intercompany balances
and transactions have been eliminated. Certain prior year amounts have been reclassified to conform
to the current year presentation. The reclassifications had no effect on net income or stockholders’
equity.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company has defined cash and cash equivalents as
cash on hand, amounts due from banks (including cash items in process of clearing), interest-bearing
deposits with other banks having an original maturity of 90 days or less and money market funds.
F-9
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(1 - continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of
the allowance for loan losses and the valuation of real estate and other assets acquired in connection
with foreclosures or in satisfaction of loans. In connection with the determination of the allowances
for loan losses and other real estate owned, management obtains independent appraisals for
significant properties.
A majority of the Bank’s loan portfolio consists of single-family residential and commercial real
estate loans to customers in the southern Indiana and Louisville, Kentucky metropolitan area.
Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio and the
recovery of the carrying amount of other real estate owned are susceptible to changes in local market
conditions.
While management uses available information to recognize losses on loans and other real estate
owned, further reductions in the carrying amounts of loans and other real estate owned may be
necessary based on changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated losses on loans and other
real estate owned. Such agencies may require the Bank to recognize additional losses based on their
judgments about information available to them at the time of their examination. Because of these
factors, it is reasonably possible the estimated losses on loans and other real estate owned may
change materially in the near term. However, the amount of the change that is reasonably possible
cannot be estimated.
Investment Securities
Trading Account Securities: Securities purchased with the intention of recognizing short-term
profits or which are actively bought and sold are classified as trading account securities and reported
at fair value. The net realized and unrealized gains and losses on trading account securities are
reported in noninterest income. Realized gains and losses on trading account securities are
determined using the specific identification method.
Securities Available for Sale: Securities available for sale consist primarily of municipal obligations,
mortgage-backed securities and collateralized mortgage obligations (“CMOs”), and are stated at fair
value. The Company holds municipal bonds issued by municipal governments within the U.S.;
mortgage-backed securities and CMOs issued by the Government National Mortgage Association
(“GNMA”), a U.S. government agency, and the Federal National Mortgage Association (“FNMA”)
and the Federal Home Loan Mortgage Corporation (“FHLMC”), government-sponsored enterprises;
debt securities issued by government-sponsored enterprises; and privately-issued CMOs and asset-
backed securities (“ABSs”). The Company also holds a pass-through asset-backed security
guaranteed by the SBA representing participating interests in pools of long-term debentures issued
by state and local development companies certified by the SBA. Mortgage-backed securities
represent participating interests in pools of long-term first mortgage loans originated and serviced by
issuers of the securities. CMOs and ABSs are complex mortgage-backed securities that restructure
the cash flows and risks of the underlying mortgage collateral.
F-10
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(1 - continued)
Investment Securities - continued
Amortization of premiums and accretion of discounts are recognized in interest income using
methods approximating the interest method over the period to maturity, adjusted for anticipated
prepayments. Unrealized gains and losses, net of tax, on securities available for sale are included in
other comprehensive income and the accumulated unrealized holding gains and losses are reported as
a separate component of equity until realized. Realized gains and losses on the sale of securities
available for sale are determined using the specific identification method and are included in other
noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in
other comprehensive income.
Securities Held to Maturity: Debt securities for which the Company has the positive intent and
ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion
of discounts that are recognized in interest income using methods approximating the interest method
over the period to maturity, adjusted for anticipated prepayments. The Company classifies certain
mortgage-backed securities and municipal obligations as held to maturity.
Declines in the fair value of individual available for sale and held to maturity securities below their
amortized cost that are other than temporary result in write-downs of the individual securities to their
fair value. The related write-downs are included in earnings as realized losses. In estimating other-
than-temporary impairment losses, management considers (1) the length of time and the extent to
which the fair value has been less than amortized cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to retain its investment for a
period of time sufficient to allow for any anticipated recovery in fair value.
Investments in non-marketable equity securities such as Federal Reserve Bank (“FRB”) stock and
Federal Home Loan Bank of Indianapolis (“FHLB”) stock are carried at cost and are classified as
restricted securities. Impairment testing on these investments is based on applicable accounting
guidance and the cost basis is reduced when impairment is deemed to be other-than-temporary.
Loans Held for Sale
Residential mortgage loans originated and intended for sale in the secondary market are carried at the
lower of aggregate cost or market value. Aggregate market value is determined based on the quoted
prices under a “best efforts” sales agreement with a third party. Net unrealized losses are recognized
through a valuation allowance by charges to income. Realized gains on sales of residential mortgage
loans are determined using the specific identification method and are included in noninterest income.
Residential mortgage loans are sold with servicing released.
Commitments to originate residential mortgage loans held for sale are considered derivative financial
instruments to be accounted for at fair value. The Bank’s residential mortgage loan commitments
subject to derivative accounting are fixed rate mortgage loan commitments at market rates when
initiated. At September 30, 2017, the Bank had commitments to originate $228,000 of fixed-rate
mortgage loans intended for sale in the secondary market after the loans are closed. Fair value is
estimated based on fees that would be charged on commitments with similar terms.
F-11
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(1 - continued)
Loans Held for Sale - continued
The Bank originates loans to customers under the SBA 7(a) and other programs that generally
provide for SBA guarantees of 75% to 90% of each loan. The Bank intends to sell the guaranteed
portion of the SBA loans. The guaranteed portion of the SBA loans was classified as loans held for
sale at September 30, 2017 and 2016. At September 30, 2017 and 2016, SBA loans held for sale
totaling $24.9 million and $5.1 million, respectively, were carried at the lower of aggregate cost or
fair value. Realized gains and losses on sales of SBA loans held for sale are determined using the
allocation of participating interests sold and retained and are included in noninterest income. Direct
loan origination costs and fees related to SBA loans held for sale are deferred upon origination and
are recognized as an adjustment to the gain or loss on the date of sale. SBA loans held for sale are
sold on a servicing retained basis.
Transfers of Financial Assets
The Company accounts for transfers and servicing of financial assets in accordance with Financial
Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 860, Transfers and
Servicing. Transfers of financial assets are accounted for as sales only when control over the assets
has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the
assets have been isolated from the Company, (2) the transferee obtains the right (free from conditions
that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and
(3) the Company does not maintain effective control over the transferred assets through an agreement
to repurchase them before their maturity.
Transfers of a portion of a loan must meet the criteria of a participating interest. If it does not meet
the criteria of a participating interest, the transfer must be accounted for as a secured borrowing. In
order to meet the criteria for a participating interest, all cash flows from the loan must be divided
proportionately, the rights of each loan holder must have the same priority, and the loan holders must
have no recourse to the transferor other than standard representations and warranties and no loan
holder has the right to pledge or exchange the entire loan.
The Company sells financial assets in the normal course of business, the majority of which are
related to the SBA-guaranteed portion of loans, as well as residential mortgage loan sales through
established programs, commercial loan sales through participation agreements, and other individual
or portfolio loan and securities sales. In accordance with accounting guidance for asset transfers, the
Company considers any ongoing involvement with transferred assets in determining whether the
assets can be derecognized from the balance sheet. With the exception of servicing and certain
performance-based guarantees, the Company's continuing involvement with financial assets sold is
minimal and generally limited to market customary representation and warranty clauses.
When the Company sells financial assets, it may retain servicing rights and/or other interests in the
financial assets. The gain or loss on sale depends on the previous carrying amount of the transferred
financial assets, the servicing right recognized, and the consideration received and any liabilities
incurred in exchange for the transferred assets. Upon transfer, any servicing assets and other
interests held by the Company are carried at the lower of cost or fair value.
F-12
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(1 - continued)
Loans and Allowance for Loan Losses
Loans Held for Investment
Loans are stated at unpaid principal balances, less net deferred loan fees and the allowance for loan
losses. The Company grants real estate mortgage, commercial business and consumer loans. A
substantial portion of the loan portfolio is represented by residential and commercial mortgage loans
to customers in the southern Indiana and Louisville, Kentucky metropolitan area. The ability of the
Company’s customers to honor their contracts is dependent upon the real estate and general
economic conditions in this area.
Loan origination and commitment fees, as well as certain direct costs of underwriting and closing
loans, are deferred and amortized as a yield adjustment to interest income over the lives of the related
loans using the interest method. Amortization of deferred loan fees is discontinued when a loan is
placed on nonaccrual status.
Nonaccrual Loans
The recognition of income on a loan is discontinued and previously accrued interest is reversed when
interest or principal payments become 90 days past due unless, in the opinion of management, the
outstanding interest remains collectible. Past due status is determined based on contractual terms.
Generally, by applying the cash receipts method, interest income on nonaccrual loans is subsequently
recognized only as received until the loan is returned to accrual status. The cash receipts method is
used when the likelihood of further loss on the loan is remote. Otherwise, the Company applies the
cost recovery method and applies all payments as a reduction of the unpaid principal balance until
the loan qualifies for return to accrual status. Interest income on impaired loans is recognized using
the cost recovery method, unless the likelihood of further loss is considered remote.
A loan is restored to accrual status when all principal and interest payments are brought current and
the borrower has demonstrated the ability to make future payments of principal and interest as
scheduled, which generally requires that the borrower demonstrate a period of performance of at
least six consecutive months.
Loan Charge-Offs
For portfolio segments other than consumer loans, the Company’s practice is to charge-off any loan
or portion of a loan when the loan is determined by management to be uncollectible due to the
borrower’s failure to meet repayment terms, the borrower’s deteriorating or deteriorated financial
condition, depreciation of the underlying collateral, the loan’s classification as a loss by regulatory
examiners, or for other reasons. A partial charge-off is recorded on a loan when the uncollectibility
of a portion of the loan has been confirmed, such as when a loan is discharged in bankruptcy, the
collateral is liquidated, a loan is restructured at a reduced principal balance, or other identifiable
events that lead management to determine the full principal balance of the loan will not be repaid. A
specific reserve is recognized as a component of the allowance for estimated losses on loans
individually evaluated for impairment. Partial charge-offs of loans are included in the Company’s
historical loss experience used to estimate the general component of the allowance for loan losses as
discussed below.
Consumer loans not secured by real estate are typically charged off at 90 days past due, or earlier if
deemed uncollectible, unless the loans are in the process of collection. Overdrafts are charged off
after 45 days past due. Charge-offs are typically recorded on loans secured by real estate when the
property is foreclosed upon when the carrying value of the loan exceeds the property’s fair value less
the estimated costs to sell.
F-13
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(1 - continued)
Loans and Allowance for Loan Losses - continued
Allowance for Loan Losses
The allowance for loan losses reflects management’s judgment of probable incurred loan losses at the
balance sheet date. Additions to the allowance for loan losses are made by the provision for loan losses
charged to earnings. Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance.
The Company evaluates the allowance for loan losses on a quarterly basis based upon management’s
periodic review of the collectability of the loans in light of historical experience, the nature and
volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay,
estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to significant revision as more
information becomes available.
The allowance consists of specific and general components. The specific component relates to loans
that are individually evaluated for impairment. A specific reserve is established when the underlying
discounted collateral value (or present value of estimated future cash flows) of the impaired loan is
lower than the carrying value of that loan.
The general component covers loans not considered to be impaired. Such loans are pooled by
segment and losses are modeled using annualized historical loss experience adjusted for qualitative
factors. The historical loss experience is determined by portfolio segment and is based on the actual
loss history experienced by the Company over the most recent 60 month period. Prior to 2017,
management used a 36-month historical loss period as the basis for its allowance for loan losses
methodology. However, based on the Company’s loss history and changes in the loan portfolio,
management determined that a 60-month historical loss history was appropriate and updated its
methodology in 2017.
This actual loss experience is then adjusted for qualitative factors that are reviewed on a quarterly
basis based on the risks present for each portfolio segment. Management considers changes and
trends in the following qualitative loss factors: levels of and trends in delinquencies and impaired
loans; levels of and trends in charge-offs and recoveries; trends in the volume and term of new loan
originations; national and local economic trends and conditions; changes in lending policies,
procedures and practices; changes in the experience and ability of lending management and other
staff; changes in the quality and depth of the internal loan review process; trends in collateral
valuation in the Company’s lending area; and other factors as determined by management. Each
qualitative factor is evaluated and a qualitative factor adjustment is applied to the actual historical
loss factors in determining the adjusted loss factors used in management’s allowance for loan losses
adequacy calculation.
Management exercises significant judgment in evaluating the relevant historical loss experience and
the qualitative factors. Management also monitors the differences between estimated and actual
incurred loan losses for loans considered impaired in order to evaluate the effectiveness of the
estimation process and make any changes in the methodology as necessary.
The following portfolio segments are considered in the allowance for loan loss analysis: residential
real estate, commercial real estate, multi-family residential real estate, construction, land and land
development, commercial business and consumer.
F-14
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(1 - continued)
Loans and Allowance for Loan Losses - continued
Residential real estate loans primarily consist of loans to individuals for the purchase or refinance of
their primary residence, with a small portion of the segment secured by non-owner-occupied
residential investment properties. The risks associated with residential real estate loans are closely
correlated to the local housing market and general economic conditions, as repayment of the loans is
primarily dependent on the borrower’s or tenant’s personal cash flow and employment status.
Commercial real estate loans are comprised of loans secured by various types of collateral including
office buildings, warehouses, retail space and mixed use buildings located in the Company’s primary
lending area and in other states. Risks related to commercial real estate lending are related to the
market value of the property taken as collateral, the underlying cash flows and general economic
conditions. Repayment of these loans is generally dependent on the ability of the borrower to attract
tenants at lease rates that provide for adequate debt service and can be impacted by general economic
conditions, which impact vacancy rates. The Company generally obtains loan guarantees from
financially capable parties for commercial real estate loans.
Multi-family residential real estate loans primarily consist of loans secured by apartment buildings
and other multi-tenant developments generally located in the Company’s primary lending area.
Repayment of these loans is primarily dependent on the borrower’s ability to attract tenants and
collect rents that provide for adequate debt service. The risks associated with these loans are closely
correlated to the local housing market and general economic conditions.
Construction loans consist of single-family residential properties, multi-family properties and
commercial projects, and include both owner-occupied and speculative investment properties. Risks
inherent in construction lending are related to the market value of the property held as collateral, the
cost and timing of constructing or improving a property, the borrower’s ability to use funds
generated by a project to service a loan until a project is completed, movements in interest rates and
the real estate market during the construction phase, and the ability of the borrower to obtain
permanent financing.
Land and land development loans primarily consist of loans secured by farmland and vacant land
held for long-term investment or development. The risks associated with land and land development
loans are related to the market value of the property taken as collateral and the underlying cash flows
for loans secured by farmland, and general economic conditions.
Commercial business loans include lines of credit to businesses, term loans and letters of credit
secured by business assets such as equipment, accounts receivable, inventory, or other assets
excluding real estate and are generally made to finance capital expenditures or fund operations.
Commercial loans contain risks related to the value of the collateral securing the loan and the
repayment is primarily dependent upon the financial success and viability of the borrower. As with
commercial real estate loans, the Company generally obtains loan guarantees from financially
capable parties for commercial business loans.
Consumer loans consist primarily of home equity lines of credit and other loans secured by junior
liens on the borrower’s personal residence, home improvement loans, automobile and truck loans,
boat loans, mobile home loans, loans secured by savings deposits and other personal loans. The risks
associated with these loans are related to the local housing market and local economic conditions
including the unemployment level.
Other than the change from a 36-month historical loss period to a 60-month historical loss period in
2017 discussed above, there were no significant changes to the Company’s accounting policies or
methodology used to estimate the allowance for loan losses during the years ended September 30,
2017, 2016, and 2015.
F-15
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(1 - continued)
Loans and Allowance for Loan Losses – continued
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that the
Company will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan
basis by either the present value of expected future cash flows discounted at the loan’s effective
interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
Values for collateral dependent loans are generally based on appraisals obtained from independent
licensed real estate appraisers, with adjustments applied for estimated costs to sell the property, costs
to complete unfinished or repair damaged property and other known defects. New appraisals are
generally obtained for all significant properties when a loan is identified as impaired. Generally, a
property is considered significant if the value of the property is estimated to exceed $250,000.
Subsequent appraisals are obtained as needed or if management believes there has been a significant
change in the market value of a collateral property securing an impaired loan. In instances where it
is not deemed necessary to obtain a new appraisal, management would base its impairment and
allowance for loan loss analysis on the original appraisal with adjustments for current conditions
based on management’s assessment of market factors and management’s inspection of the property.
Troubled Debt Restructurings
The modification of a loan is considered to be a troubled debt restructuring (“TDR”) if the debtor is
experiencing financial difficulties and the Company grants a concession to the debtor that it would
not otherwise consider. By granting the concession, the Company expects to obtain more cash or
other value from the debtor, or to increase the probability of receipt, than would be expected by not
granting the concession. The concession may include, but is not limited to, reduction of the stated
interest rate of the loan, reduction of accrued interest, extension of the maturity date or reduction of
the face amount of the debt. A concession will be granted when, as a result of the restructuring, the
Company does not expect to collect all amounts due, including interest at the original stated rate. A
concession may also be granted if the debtor is not able to access funds elsewhere at a market rate for
debt with similar risk characteristics as the restructured debt. The Company’s determination of
whether a loan modification is a TDR considers the individual facts and circumstances surrounding
each modification.
A TDR can involve loans remaining on nonaccrual, moving to nonaccrual or continuing on accrual
status, depending on the individual facts and circumstances of the borrower. Generally, a nonaccrual
loan that is restructured in a TDR remains on nonaccrual status for a period of at least six months
following the restructuring in order to ensure that the borrower performs in accordance with the
restructured terms, including consistent and timely payments of at least six consecutive months
according to the restructured terms.
F-16
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(1 - continued)
Real Estate Development and Construction
Real estate that is developed and on which buildings are constructed for the purpose of leasing or
sale to third parties by the Company is stated at cost, including interest capitalized during the
construction period, less accumulated depreciation. The Company uses the straight line method of
computing depreciation at rates adequate to amortize the cost of the applicable assets over their
estimated useful lives. Maintenance and repairs are expensed as incurred. The cost and related
accumulated depreciation of assets sold, or otherwise disposed of, are removed from the related
accounts and any gain or loss is included in earnings.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. The Company uses the
straight line method of computing depreciation at rates adequate to amortize the cost of the
applicable assets over their estimated useful lives. Maintenance and repairs are expensed as
incurred. The cost and related accumulated depreciation of assets sold, or otherwise disposed of, are
removed from the related accounts and any gain or loss is included in earnings.
Other Real Estate Owned
Other real estate owned includes formally foreclosed property and former banking facilities held for
sale. At the time of foreclosure, foreclosed real estate is recorded at its fair value less estimated
costs to sell, which becomes the property’s new cost basis. Any write-downs based on the property’s
fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure or
the decision to classify property as held for sale, valuations are periodically performed by
management and property held for sale is carried at the lower of the new cost basis or fair value, less
estimated costs to sell. Costs incurred in maintaining other real estate owned and subsequent
impairment adjustments to the carrying amount of a property, if any, are included in noninterest
expense.
Cash Surrender Value of Life Insurance
The Bank has purchased life insurance policies on certain directors, officers and key employees to
help offset costs associated with the Bank’s compensation and benefit programs. The Bank is the
owner and is a joint or sole beneficiary of the policies. Bank-owned life insurance is recorded at the
amount that can be realized under the insurance contract at the balance sheet date, which is the cash
surrender value adjusted for other charges or other amounts due that are probable at settlement.
Income from the increase in cash surrender value of the policies and income from the recognition of
death benefits is reported in noninterest income.
Goodwill and Other Intangibles
Goodwill recognized in a business combination represents the excess of the fair value of
consideration transferred over the fair value of assets acquired and liabilities assumed. Goodwill is
evaluated for possible impairment at least annually or more frequently upon the occurrence of an
event or change in circumstances that would more likely than not reduce the fair value of the
reporting unit below its carrying amount. Such circumstances could include, but are not limited to:
(1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition,
or (3) an adverse action or assessment by a regulator.
Other intangible assets consist of acquired core deposit intangibles. Core deposit intangibles are
amortized over the estimated economic lives of the acquired core deposits. The carrying amount of
core deposit intangibles and the remaining estimated economic life are evaluated annually or
whenever events or circumstances indicate the carrying amount may not be recoverable or the
remaining period of amortization requires revision.
F-17
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(1 - continued)
Securities Lending and Financing Arrangements
Securities purchased under agreements to resell (reverse repurchase agreements) and securities sold
under agreements to repurchase (repurchase agreements) are treated as collateralized lending and
borrowing transactions, respectively, and are carried at the amounts at which the securities were
initially acquired or sold.
Benefit Plans
The Bank provides a contributory defined contribution plan available to all eligible employees. The
Company also established a leveraged employee stock ownership plan (“ESOP”) on October 6, 2008
that includes substantially all employees. The Company accounts for the ESOP in accordance with
FASB ASC 718-40, Employee Stock Ownership Plans. Dividends declared on allocated shares are
recorded as a reduction of retained earnings and paid to the participants’ accounts or used for
additional debt service on the ESOP loan. Dividends declared on unallocated shares are not
considered dividends for financial reporting purposes and are used for additional debt service on the
ESOP loan. As shares are committed to be released for allocation to participants’ accounts,
compensation expense is recognized based on the average fair value of the shares and the shares
become available for earnings per share calculations.
Stock Based Compensation
The Company has adopted the fair value based method of accounting for stock-based compensation
prescribed in FASB ASC 718-20, Compensation – Stock Compensation, for its stock plans.
Income Taxes
When income tax returns are filed, it is highly certain that some positions taken would be sustained
upon examination by the taxing authorities, while other positions are subject to some degree of
uncertainty regarding the merits of the position taken or the amount of the position that would be
sustained. The Company recognizes the benefits of a tax position in the consolidated financial
statements of the period during which, based on all available evidence, management believes it is
more-likely-than-not (more than 50 percent probable) that the tax position would be sustained upon
examination. Income tax positions that meet the more-likely-than-not threshold are measured as the
largest amount of income tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits associated with the
income tax positions claimed on income tax returns that exceeds the amount measured as described
above is reflected as a liability for unrecognized income tax benefits in the consolidated balance
sheets, along with any associated interest and penalties that would be payable to the taxing
authorities, if there were an examination. Interest and penalties associated with unrecognized income
tax benefits are classified as additional income taxes in the consolidated statements of income.
F-18
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(1 - continued)
Income Taxes – continued
Income taxes are provided for the tax effects of the transactions reported in the financial statements
and consist of taxes currently due plus deferred income taxes. Income tax reporting and financial
statement reporting rules differ in many respects. As a result, there will often be a difference
between the carrying amount of an asset or liability as presented in the accompanying consolidated
balance sheets and the amount that would be recognized as the tax basis of the same asset or liability
computed based on the effects of tax positions recognized, as described in the preceding paragraph.
These differences are referred to as temporary differences because they are expected to reverse in
future years. Deferred income tax assets are recognized for temporary differences where their future
reversal will result in future tax benefits. Deferred income tax assets are also recognized for the
future tax benefits expected to be realized from net operating loss or tax credit carryforwards.
Deferred income tax liabilities are recognized for temporary differences where their future reversal
will result in the payment of future income taxes. Deferred income tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than not that some portion
or all of the deferred income tax assets will not be realized. Deferred tax assets and liabilities are
reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are
expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets
and liabilities are adjusted through the provision for income taxes.
Advertising Costs
Advertising costs are charged to operations when incurred.
Comprehensive Income
Comprehensive income consists of reported net income and other comprehensive income. Other
comprehensive income, recognized as a separate component of equity, includes the change in
unrealized gains and losses on securities available for sale. Amounts reclassified out of unrealized
gains or losses on securities available for sale included in accumulated other comprehensive income
are included in the net gain on sales of available for sale securities line item in the consolidated
statements of income.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are
recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated.
F-19
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(1 - continued)
Recent Accounting Pronouncements
The following are summaries of recently issued or adopted accounting pronouncements that impact
the accounting and reporting practices of the Company:
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance supersedes
existing guidance on accounting for leases with the main difference being that operating leases are to
be recorded in the statement of financial position as right-of-use assets and lease liabilities, initially
measured at the present value of the lease payments. For operating leases with a term of 12 months
or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and
liabilities. For public business entities, the guidance is effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. Early application of the
guidance is permitted. In transition, entities are required to recognize and measure leases at the
beginning of the earliest period presented using a modified retrospective approach. Management is
evaluating the new guidance, but does not expect the adoption of this guidance to have a material
impact on the Company’s consolidated financial position or results of operations.
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial
Instruments – Credit Losses (Topic 326). The update replaces the incurred loss methodology for
recognizing credit losses under current GAAP with a methodology that reflects expected credit losses
and requires consideration of a broader range of reasonable and supportable information to inform
credit loss estimates. Under the new guidance, an entity will measure all expected credit losses for
financial instruments held at the reporting date based on historical experience, current conditions and
reasonable and supportable forecasts. The expected loss model will apply to loans and leases,
unfunded lending commitments, held-to-maturity debt securities and other debt instruments measured
at amortized cost. The impairment model for available-for-sale debt securities will require the
recognition of credit losses through a valuation allowance when fair value is less than amortized cost,
regardless of whether the impairment is considered to be other-than-temporary. For the Company,
the amendments in the update are effective for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years. Early adoption is permitted as of fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. The
Company is currently assessing the impact the guidance will have upon adoption, but management
expects to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of
the beginning of the first reporting period in which the new standard is effective.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350)
– Simplifying the Test for Goodwill Impairment. The update simplifies the measurement of goodwill
impairment by eliminating Step 2 from the goodwill impairment test. Instead, an entity should
perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting
unit with its carrying amount and recognize an impairment charge for the amount by which the
carrying amount exceeds the reporting unit’s fair value. However, the loss should not exceed the
total amount of goodwill allocated to the reporting unit. The amendments in the update are effective
for the Company for its annual or any interim goodwill impairment tests in fiscal years beginning
after December 15, 2019. Early adoption is permitted for interim and annual goodwill impairment
tests performed on testing dates after January 1, 2017. The adoption of this update is not expected to
have a material impact on the Company’s consolidated financial position or results of operations.
F-20
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(1 - continued)
Recent Accounting Pronouncements - continued
In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other
Costs (Subtopic 310-20) – Premium Amortization on Purchased Callable Debt Securities. The
update shortens the amortization period for certain callable debt securities held at a premium.
Specifically, the update requires the premium to be amortized to the earliest call date. The update
does not require an accounting change for securities held at a discount; the discount continues to be
amortized to maturity. The amendments in the update are effective for public business entities for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early
adoption is permitted, including adoption in an interim period. If an entity early adopts the
amendments in an interim period, any adjustments should be reflected as of the beginning of the
fiscal year that includes that interim period. An entity should apply the amendments in this update
on a modified retrospective basis through a cumulative-effect adjustment directly to retained
earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an
entity should provide disclosures about a change in accounting principle. The Company is currently
assessing the impact the guidance will have upon adoption, but the adoption of this update is not
expected to have a material impact on the Company’s consolidated financial position or results of
operations.
(2)
RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve balances on hand and with the Federal Reserve Bank, which
are unavailable for investment but are interest-bearing. The average amount of those reserve
balances was approximately $12.9 million, $10.3 million, and $8.4 million for the years ended
September 30, 2017, 2016, and 2015, respectively.
F-21
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(3)
INVESTMENT SECURITIES
Investment securities have been classified according to management’s intent.
Trading Account Securities
The Company invests in small and medium lot, investment grade municipal bonds through a
managed brokerage account. The brokerage account is managed by an investment advisory firm
registered with the U.S. Securities and Exchange Commission. Trading account securities recorded
at fair value totaled $7.2 million and $9.3 million as of September 30, 2017 and 2016, respectively.
The following is a summary of the reported net gains on trading account securities for the years ended
September 30, 2017, 2016 and 2015:
(In thousands)
2017
2016
2015
Net realized gain on sales
Net unrealized gain/(loss) on securities held as of
the balance sheet date
Net gain on trading account securities
$
Securities Available for Sale and Held to Maturity
$
229
$
795 $
(29)
200 $
(47)
748 $
394
46
440
The amortized cost of securities available for sale and held to maturity and their approximate fair
values are as follows:
(In thousands)
September 30, 2017:
Securities available for sale:
Agency mortgage-backed
Agency CMO
Privately-issued CMO
Privately-issued ABS
SBA certificates
Municipal bonds
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Losses
Fair
Value
$ 36,439
14,605
1,825
2,691
913
115,193
$ 382
37
204
757
-
5,409
$ 85
66
28
-
1
176
$ 36,736
14,576
2,001
3,448
912
120,426
Total securities available for sale
$ 171,666
$ 6,789
$ 356
$ 178,099
Securities held to maturity:
Agency mortgage-backed
Municipal bonds
$ 179
2,699
$ 16
412
$ -
-
$ 195
3,111
Total securities held to maturity
$ 2,878
$ 428
$ -
$ 3,306
F-22
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(3 – continued)
(In thousands)
September 30, 2016:
Securities available for sale:
Agency bonds and notes
Agency mortgage-backed
Agency CMO
Privately-issued CMO
Privately-issued ABS
SBA certificates
Municipal bonds
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Losses
Fair
Value
$ 1,024
46,376
16,053
2,359
3,675
1,220
94,567
$ 8
1,029
108
293
864
7
7,002
$ -
-
66
-
7
-
19
$ 1,032
47,405
16,095
2,652
4,532
1,227
101,550
Total securities available for sale
$ 165,274
$ 9,311
$ 92
$ 174,493
Securities held to maturity:
Agency mortgage-backed
Municipal bonds
$ 260
2,906
$ 23
465
$ -
-
$ 283
3,371
Total securities held to maturity
$ 3,166
$ 488
$ -
$ 3,654
The amortized cost and fair value of available for sale and held to maturity debt securities as of
September 30, 2017 by contractual maturity are shown below. Expected maturities of mortgage and
other asset-backed securities may differ from contractual maturities because the mortgages and other
assets underlying the obligations may be prepaid without penalty.
(In thousands)
Available for Sale
Fair
Value
Amortized
Cost
Held to Maturity
Amortized
Cost
Fair
Value
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
CMO
ABS
SBA certificates
Mortgage-backed securities
$ 1,085
13,366
25,923
74,819
16,430
2,691
913
36,439
$ 1,096
13,976
27,634
77,720
16,577
3,448
912
36,736
$ 227
995
1,028
449
-
-
-
179
$ 259
1,137
1,194
521
-
-
-
195
$ 171,666
$ 178,099
$ 2,878
$ 3,306
F-23
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(3 – continued)
Information pertaining to securities with gross unrealized losses at September 30, 2017 and 2016,
aggregated by investment category and the length of time that individual securities have been in a
continuous loss position, follows:
(Dollars in thousands)
September 30, 2017:
Securities available for sale:
Continuous loss position less than twelve months:
Agency mortgage-backed
Agency CMO
Privately-issued CMO
Municipal bonds
Total less than twelve months
Continuous loss position more than twelve months:
Agency CMO
SBA certificates
Municipal bonds
Total more than twelve months
Total securities available for sale
September 30, 2016:
Securities available for sale:
Continuous loss position less than twelve months:
Agency CMO
Privately-issued ABS
Municipal bonds
Total less than twelve months
Continuous loss position more than twelve months:
Agency CMO
Total more than twelve months
Number of
Investment
Positions
Fair
Value
Gross
Unrealized
Losses
12
9
2
9
32
3
1
1
5
37
3
2
4
9
2
2
$ 13,332
9,062
113
6,522
$ 85
52
28
157
29,029
322
2,605
912
513
4,030
14
1
19
34
$ 33,059
$ 356
$ 3,946
66
2,147
$ 12
7
19
6,159
38
4,683
4,683
54
54
Total securities available for sale
11
$ 10,842
$ 92
At September 30, 2017 and 2016, the Company did not have any securities held to maturity with an
unrealized loss.
F-24
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(3 – continued)
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis,
and more frequently when economic or market concerns warrant such evaluation. Consideration is
given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.
The total available for sale debt securities in loss positions at September 30, 2017, which consisted
of U.S. government agency mortgaged-backed, agency CMOs, privately-issued CMOs, SBA
certificates, and municipal bonds, had depreciated approximately 1.07% from the Company’s
amortized cost basis and are fixed and variable rate securities with a weighted-average yield of
2.16% and a weighted-average coupon rate of 2.71% at September 30, 2017. All of the agency and
municipal securities are
issued by U.S. government-sponsored enterprises and municipal
governments, and are generally secured by first mortgage loans and municipal project revenues.
The Company evaluates the existence of a potential credit loss component related to the decline in
fair value of the privately-issued CMO and ABS portfolios each quarter using an independent third
party analysis. At September 30, 2017, the Company held fifteen privately-issued CMO and ABS
securities acquired in a 2009 bank acquisition with an aggregate carrying value of $1.8 million and
fair value of $2.4 million that have been downgraded to a substandard regulatory classification due to
a downgrade of the security’s credit quality rating by various rating agencies.
F-25
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(3 – continued)
At September 30, 2017, the two privately-issued CMOs in loss positions had depreciated
approximately 19.86% from the Company’s carrying value and include securities collateralized by
residential mortgage loans and residential home equity lines of credit. These two securities had an
aggregate fair value of $113,000 and an aggregate unrealized loss of $28,000 at September 30, 2017
and were rated below investment grade by a nationally recognized statistical rating organization
(“NRSRO”). Based on the independent third party analysis of the expected cash flows, management
has determined that the declines in value for these securities are temporary and, as a result, no other-
than-temporary impairment has been recognized on the privately-issued CMO and ABS portfolios.
While the Company did not recognize a credit-related impairment loss at September 30, 2017,
additional deterioration in market and economic conditions may have an adverse impact on the credit
quality in the future and therefore, require a credit-related impairment charge.
The unrealized losses on U.S. government agency CMOs and municipal bonds relate principally to
current interest rates for similar types of securities. In analyzing an issuer’s financial condition,
management considers whether the securities are issued by the federal government, its agencies, or other
governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the
issuer’s financial condition. As management has the ability to hold debt securities to maturity, or for the
foreseeable future if classified as available for sale, no declines are deemed to be other-than-temporary.
The following is a summary of the reported gross gains and losses on sales of available for sale
securities for the years ended September 30, 2017, 2016 and 2015:
(In thousands)
2017
2016
2015
Gross realized gains on sales
Gross realized losses on sales
Net realized gain on sales of available for sale securities
$
$
$
96
(66)
30 $
-
-
-
$
$
-
-
-
Certain available for sale debt securities were pledged under repurchase agreements and to secure
FHLB borrowings at September 30, 2017 and 2016, and may be pledged to secure federal funds
borrowings (see Notes 11, 12 and 13).
At September 30, 2017 and 2016, there were no holdings of securities of any one issuer, other than
the U.S government and its agencies, with an aggregate book value greater than 10% of stockholders’
equity.
F-26
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(4)
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at September 30, 2017 and 2016 consisted of the following:
(In thousands)
Real estate mortgage:
1-4 family residential
Commercial
Multifamily residential
Residential construction
Commercial construction
Land and land development
Commercial business
Consumer:
Home equity
Auto
Other consumer
Gross loans
Undisbursed portion of construction loans
Principal loan balance
Deferred loan origination fees and costs, net
Allowance for loan losses
Loans, net
2017
2016
$ 171,863
273,106
21,121
29,074
29,882
9,733
52,724
$ 178,364
217,378
18,431
24,275
33,685
11,137
41,967
22,939
7,057
2,323
619,822
(25,483)
594,339
209
(8,092)
21,370
4,858
2,102
553,567
(27,623)
525,944
(211)
(7,122)
$ 586,456
$ 518,611
At September 30, 2017, there were no residential mortgage loans serviced for the benefit of others.
At September 30, 2016, residential mortgage loans serviced for the benefit of others amounted to
$32,000.
The Bank has entered into loan transactions with certain directors, officers and their affiliates
(related parties). In the opinion of management, such indebtedness was incurred in the ordinary
course of business on substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than normal risk of collectability or
present other unfavorable features.
The following is a summary of activity for related party loans for the years ended September 30,
2017 and 2016:
(In thousands)
Beginning balance
New loans and advances
Repayments
Reclassifications due to officer and director changes
Ending balance
2017
2016
$ 10,646
2,049
(2,204)
(192)
$ 11,076
1,945
(2,307)
(68)
$ 10,299
$ 10,646
F-27
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(4 – continued)
The following table provides the components of the recorded investment in loans as of September 30, 2017:
Residential
Real Estate
Commercial
Real Estate
Multifamily
Construction
Land & Land
Development
Commercial
Business
Consumer
Total
(In thousands)
Recorded Investment in Loans:
Principal loan balance
$ 171,863
$ 273,106
$ 21,121
$ 33,473
$ 9,733
$ 52,724
$ 32,319
$ 594,339
Accrued interest
receivable
Net deferred loan
origination fees and costs
Recorded investment in
loans
493
929
37
137
50
26
(15)
(17)
31
2
221
59
1,907
184
(21)
209
$ 172,406
$ 274,061
$ 21,143
$ 33,593
$ 9,766
$ 53,129
$ 32,357
$ 596,455
Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for
impairment
$ 4,969
$ 5,477
$ -
$ -
$ 30
$ 192
$ 196
$ 10,864
Collectively evaluated for
impairment
Recorded investment in
loans
167,437
268,584
21,143
33,593
9,736
52,937
32,161
585,591
$ 172,406
$ 274,061
$ 21,143
$ 33,593
$ 9,766
$ 53,129
$ 32,357
$ 596,455
F-28
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(4 – continued)
The following table provides the components of the recorded investment in loans as of September 30, 2016:
Residential
Real Estate
Commercial
Real Estate
Multifamily
Construction
Land & Land
Development
Commercial
Business
Consumer
Total
(In thousands)
Recorded Investment in Loans:
Principal loan balance
$ 178,364
$ 217,378
$ 18,431
$ 30,337
$ 11,137
$ 41,967
$ 28,330
$ 525,944
Accrued interest
receivable
Net deferred loan
origination fees and costs
Recorded investment in
loans
505
592
38
95
158
(254)
(17)
(126)
23
4
143
55
1,451
37
(13)
(211)
$ 179,027
$ 217,716
$ 18,452
$ 30,306
$ 11,164
$ 42,147
$ 28,372
$ 527,184
Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for
impairment
$ 4,342
$ 6,298
$ -
$ -
$ 241
$ 231
$ 249
$ 11,361
Collectively evaluated for
impairment
Recorded investment in
loans
174,685
211,418
18,452
30,306
10,923
41,916
28,123
515,823
$ 179,027
$ 217,716
$ 18,452
$ 30,306
$ 11,164
$ 42,147
$ 28,372
$ 527,184
F-29
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(4 – continued)
The following table presents the balance in the allowance for loan losses by portfolio segment and based on impairment method as of September 30, 2017 and 2016:
2017:
Individually evaluated
for impairment
Collectively evaluated
for impairment
Residential
Real Estate
Commercial
Real Estate
Multifamily
Construction
Land & Land
Development
Commercial
Business
Consumer
Total
(In thousands)
$ 2
$ -
$ -
$ -
$ -
$ -
$ 21
$ 23
250
5,739
106
810
223
839
102
8,069
Ending balance
$ 252
$ 5,739
$ 106
$ 810
$ 223
$ 839
$ 123
$ 8,092
2016:
Individually evaluated
for impairment
Collectively evaluated
for impairment
$ 43
$ -
$ -
$ -
$ -
$ -
$ 5
$ 48
292
5,160
109
845
295
284
89
7,074
Ending balance
$ 335
$ 5,160
$ 109
$ 845
$ 295
$ 284
$ 94
$ 7,122
F-30
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(4 – continued)
The following table presents the activity in the allowance for loan losses by portfolio segment for the years ended September 30, 2017, 2016, and 2015:
2017:
Beginning balance
Provisions
Charge-offs
Recoveries
Ending balance
2016:
Beginning balance
Provisions
Charge-offs
Recoveries
Ending balance
2015:
Beginning balance
Provisions
Charge-offs
Recoveries
Ending balance
Residential
Real Estate
Commercial
Real Estate
Multifamily
Construction
Land & Land
Development
Commercial
Business
Consumer
Total
(In thousands)
$ 335
15
(169)
71
$ 252
$ 444
(17)
(207)
115
$ 335
$ 577
109
(283)
41
$ 444
$ 5,160
569
-
10
$ 5,739
$ 4,327
833
-
-
$ 5,160
$ 3,808
559
(40)
-
$ 4,327
$ 109
(3)
-
-
$ 106
$ 156
(47)
-
-
$ 109
$ 146
10
-
-
$ 156
$ 845
(35)
-
-
$ 810
$ 551
294
-
-
$ 845
$ 443
108
-
-
$ 551
$ 295
(72)
-
-
$ 223
$ 369
(74)
-
-
$ 295
$ 302
67
-
-
$ 369
$ 284
738
(200)
17
$ 839
$ 678
(385)
(10)
1
$ 284
$ 795
8
(126)
1
$ 678
$ 94
89
(116)
56
$ 123
$ 99
33
(108)
70
$ 94
$ 179
(2)
(144)
66
$ 99
$ 7,122
1,301
(485)
154
$ 8,092
$ 6,624
637
(325)
186
$ 7,122
$ 6,250
859
(593)
108
$ 6,624
F-31
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(4 – continued)
The following table presents impaired loans individually evaluated for impairment as of and for the
year ended September 30, 2017. The Company did not recognize any interest income on impaired
loans using the cash receipts method of accounting for the year ended September 30, 2017.
Recorded
Investment
Unpaid
Principal
Balance
Average
Recorded
Investment
Related
Allowance
(In thousands)
Interest
Income
Recognized
Loans with no related allowance recorded:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
$ 4,745
5,477
-
-
30
192
95
$ 4,980
5,645
-
-
30
199
95
$ -
-
-
-
-
-
-
$ 4,377
5,997
-
-
221
209
141
$ 10,539
$ 10,949
$ -
$ 10,945
Loans with an allowance recorded:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
$ 224
-
-
-
-
-
101
$ 268
-
-
-
-
-
101
$ 2
-
-
-
-
-
21
$ 294
-
-
-
-
130
94
Total:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
$ 325
$ 369
$ 23
$ 518
$ 4,969
5,477
-
-
30
192
196
$ 5,248
5,645
-
-
30
199
196
$ 2
-
-
-
-
-
21
$ 4,671
5,997
-
-
221
339
235
$ 10,864
$ 11,318
$ 23
$ 11,463
$ 144
204
-
-
1
6
4
$ 359
$ -
-
-
-
-
-
-
$ -
$ 144
204
-
-
1
6
4
$ 359
F-32
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(4 – continued)
The following table presents impaired loans individually evaluated for impairment as of and for the
year ended September 30, 2016. The Company did not recognize any interest income on impaired
loans using the cash receipts method of accounting for the year ended September 30, 2016.
Recorded
Investment
Unpaid
Principal
Balance
Average
Recorded
Investment
Related
Allowance
(In thousands)
Interest
Income
Recognized
Loans with no related allowance recorded:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
$ 3,891
6,298
-
-
241
231
175
$ 4,171
6,394
-
-
238
224
175
$ -
-
-
-
-
-
-
$ 5,044
6,595
-
-
18
281
198
$ 10,836
$ 11,202
$ -
$ 12,136
Loans with an allowance recorded:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
$ 451
-
-
-
-
-
74
$ 450
-
-
-
-
-
74
$ 43
-
-
-
-
-
5
$ 86
-
-
-
-
-
79
Total:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
$ 525
$ 524
$ 48
$ 165
$ 4,342
6,298
-
-
241
231
249
$ 4,621
6,394
-
-
238
224
249
$ 43
-
-
-
-
-
5
$ 5,130
6,595
-
-
18
281
277
$ 11,361
$ 11,726
$ 48
$ 12,301
$ 144
197
-
-
-
5
5
$ 351
$ -
-
-
-
-
-
-
$ -
$ 144
197
-
-
-
5
5
$ 351
F-33
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(4 – continued)
The following table presents information related to impaired loans individually evaluated for
impairment for the year ended September 30, 2015. The Company recognized $5,000 of interest
income on impaired commercial real estate loans using the cash receipts method of accounting for
the year ended September 30, 2015.
Average
Recorded
Investment
Interest
Income
Recognized
(In thousands)
$ 143
223
-
-
-
1
6
$ 373
$ -
-
-
-
-
-
-
$ -
$ 143
223
-
-
-
1
6
$ 373
Loans with no related allowance recorded:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
$ 5,590
6,136
-
-
-
255
238
Loans with an allowance recorded:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
Total:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
$ 12,219
$ 115
9
-
-
-
4
90
$ 218
$ 5,705
6,145
-
-
-
259
328
$ 12,437
F-34
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(4 – continued)
Nonperforming loans consist of nonaccrual loans and loans over 90 days past due and still accruing interest. The following table presents the recorded
investment in nonperforming loans at September 30, 2017 and 2016:
At September 30, 2017
Loans 90+
Days
Past Due
Still Accruing
Total
Nonperforming
Loans
Nonaccrual
Loans
At September 30, 2016
Loans 90+
Days
Past Due
Still Accruing
Total
Nonperforming
Loans
Nonaccrual
Loans
(In thousands)
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
Total
$ 2,358
1,253
-
-
30
81
101
$ 3,823
$ 83
-
-
-
-
-
10
$ 93
$ 2,441
1,253
-
-
30
81
111
$ 3,916
$ 1,752
1,606
-
-
241
136
140
$ 3,875
$ 22
-
-
-
-
-
-
$ 22
$ 1,774
1,606
-
-
241
136
140
$ 3,897
F-35
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(4 – continued)
The following table presents the aging of the recorded investment in past due loans at September 30, 2017:
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
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
$ 2,288
-
176
-
48
201
29
$ 1,255
-
-
-
-
-
11
$ 1,540
-
-
-
30
-
10
$ 5,083
-
176
-
78
201
50
$ 167,323
274,061
20,967
33,593
9,688
52,928
32,307
$ 172,406
274,061
21,143
33,593
9,766
53,129
32,357
Total
$ 2,742
$ 1,266
$ 1,580
$ 5,588
$ 590,867
$ 596,455
The following table presents the aging of the recorded investment in past due loans at September 30, 2016:
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
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
$ 2,019
367
-
-
-
40
76
$ 860
-
-
-
-
-
1
$ 1,070
94
-
-
241
42
40
$ 3,949
461
-
-
241
82
117
$ 175,078
217,255
18,452
30,306
10,923
42,065
28,255
$ 179,027
217,716
18,452
30,306
11,164
42,147
28,372
Total
$ 2,502
$ 861
$ 1,487
$ 4,850
$ 522,334
$ 527,184
F-36
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(4 – continued)
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial
information, public information, historical payment experience, credit documentation, and current economic trends, among other factors. The Company
classifies loans based on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings:
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential
weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged,
if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct
possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss: Loans classified as loss are considered uncollectible and of such little value that their continuance on the Company’s books as an asset is not warranted.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. The following
table presents the recorded investment in loans by risk category as of the date indicated:
Residential
Real Estate
Commercial
Real Estate
Multifamily
Construction
Land and Land
Development
Commercial
Business
Consumer
Total
(In thousands)
September 30, 2017:
Pass
Special Mention
Substandard
Doubtful
Loss
$ 165,192
895
6,152
167
-
$ 268,481
1,982
3,598
-
-
$ 20,299
844
-
-
-
$ 33,500
93
-
-
-
$ 9,736
-
30
-
-
$ 52,398
641
90
-
-
$ 32,172
53
111
21
-
$ 581,778
4,508
9,981
188
-
Total
$ 172,406
$ 274,061
$ 21,143
$ 33,593
$ 9,766
$ 53,129
$ 32,357
$ 596,455
September 30, 2016:
Pass
Special Mention
Substandard
Doubtful
Loss
$ 173,477
459
5,002
89
-
$ 211,247
-
6,469
-
-
$ 18,452
-
-
-
-
$ 30,206
100
-
-
-
$ 10,924
-
240
-
-
$ 41,986
25
136
-
-
$ 28,197
-
160
15
-
$ 514,489
584
12,007
104
-
Total
$ 179,027
$ 217,716
$ 18,452
$ 30,306
$ 11,164
$ 42,147
$ 28,372
$ 527,184
F-37
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(4 – continued)
Troubled Debt Restructurings
The following table summarizes TDRs by accrual status at September 30, 2017 and 2016. There was
no specific reserve included in the allowance for loan losses related to TDRs at September 30, 2017
and 2016.
September 30, 2017:
Residential real estate
Commercial real estate
Commercial business
Consumer
Accruing
Nonaccrual
(In thousands)
Total
$ 2,610
4,225
111
95
$ 25
1,253
82
-
$ 2,635
5,478
193
95
Total
$ 7,041
$ 1,360
$ 8,401
September 30, 2016:
Residential real estate
Commercial real estate
Commercial business
Consumer
$ 2,590
4,692
95
109
$ -
1,512
120
-
$ 2,590
6,204
215
109
Total
$ 7,486
$ 1,632
$ 9,118
The following table summarizes information in regard to TDRs that were restructured during the
years ended September 30, 2017, 2016, and 2015.
September 30, 2017:
Residential real estate
Commercial real estate
Land and land development
Commercial business
Total
September 30, 2016:
Residential real estate
Commercial real estate
Commercial business
Total
September 30, 2015:
Residential real estate
Commercial real estate
Consumer
Total
Number of
Loans
Pre-
Modification
Principal
Balance
Post-
Modification
Principal
Balance
(Dollars in thousands)
$ 473
233
31
103
$ 474
233
32
103
$ 840
$ 842
$ 181
94
186
$ 247
131
216
$ 461
$ 594
$ 165
1,523
3
$ 172
1,523
3
$ 1,691
$ 1,698
2
1
1
1
5
5
1
3
9
2
1
1
4
F-38
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(4 – continued)
At September 30, 2017 and 2016, the Company had committed to lend $17,000 and $0, respectively,
to customers with outstanding loans classified as TDRs.
For the TDRs listed above, the terms of modification included temporary interest-only payment
periods, reduction of the stated interest rate, extension of the maturity date, deferral of the
contractual principal and interest payments, and the renewal of matured loans where the debtor was
unable to access funds elsewhere at a market interest rate for debt with similar risk characteristics.
There was no specific allowance for loan losses related to TDRs modified during the years ended
September 30, 2017 and 2016. In the event that a TDR subsequently defaults, the Company
evaluates the restructuring for possible impairment. As a result, the related allowance for loan losses
may be increased or charge-offs may be taken to reduce the carrying amount of the loan.
During the years ended September 30, 2017, 2016, and 2015, the Company did not have any TDRs
that were modified within the previous twelve months for which there was a payment default
(defined as more than 90 days past due or in the process of foreclosure).
Loan Servicing Rights
The Company originates loans to commercial customers under the SBA 7(a) and other programs.
During the year ended September 30, 2016, the Company began selling the guaranteed portion of the
SBA loans with servicing retained. Loan servicing rights on originated SBA loans that have been
sold are initially recorded at fair value. Capitalized servicing rights are then amortized in proportion
to and over the period of estimated net servicing income. Impairment of servicing rights is assessed
using the present value of estimated future cash flows.
The aggregate fair value of loan servicing rights at September 30, 2017 and 2016 approximated its
carrying value. A valuation model employed by an independent third party calculates the present
value of future cash flows and is used to estimate fair value at the date of sale and on a quarterly
basis for impairment analysis purposes. Management periodically compares the valuation model
inputs and results to published industry data in order to validate the model results and assumptions.
Key assumptions used to estimate the fair value of the loan servicing rights at September 30, 2017
and 2016 were as follows:
Assumption
Range of Assumption (Weighted Average)
2017
2016
Discount rate
Prepayment rate
9.12% to 13.90% (11.66%)
2.94% to 8.87% (6.63%)
8.54% to 14.46% (12.27%)
4.25% to 8.71% (6.75%)
For purposes of impairment, risk characteristics such as interest rate, loan type, term and investor
type are used to stratify the loan servicing rights. Impairment is recognized through a valuation
allowance to the extent that fair value is less than the carrying amount. Changes in the valuation
allowance are reported in net gain on sales of loans in the consolidated statements of income.
F-39
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(4 – continued)
The unpaid principal balance of SBA loans serviced for others was $61.2 million and $13.6 million
at September 30, 2017 and 2016, respectively. An analysis of loan servicing fees on SBA loans for
the years ended September 30, 2017, 2016 and 2015 is as follows:
(In thousands)
2017
2016
2015
Late fees and ancillary fees earned
Net servicing costs
SBA net servicing fees
$
$
47
(9)
38
$
$
37
(59)
(22)
$
$
-
-
-
Contractually specified late fees and ancillary fees earned on SBA loans are included in interest
income on loans in the consolidated statements of income. Net servicing costs (contractually
specified servicing fees offset by direct servicing expenses) related to SBA loans are included in
other noninterest income in the consolidated statements of income.
An analysis of loan servicing rights for the years ended September 30, 2017, 2016 and 2015 is as
follows:
(In thousands)
2017
2016
2015
Balance as of October 1
Servicing rights capitalized
Amortization
Change in valuation allowance
Balance as of September 30
$
$
310
1,188
(109)
-
1,389
$
$
-
345
(35)
-
310
$
$
-
-
-
-
-
Residential mortgage loans originated for sale in the secondary market continue to be sold with
servicing released.
F-40
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(5)
REAL ESTATE DEVELOPMENT AND CONSTRUCTION
The Company developed a parcel of land in New Albany, Indiana for retail purposes through the
Bank’s subsidiary, FFCC. The total cost of the development was $7.6 million, and the development
costs were partially funded by a loan from another financial institution (see Note 14). On August 12,
2016, the Bank and FFCC executed a purchase and sale agreement for the sale of the development
and property owned by the Bank to an unaffiliated third party. The sale closed on September 29,
2016. The net sales proceeds were $10.8 million, $8.8 million of which was allocated to the
development owned by FFCC and $2.0 million of which was allocated to property owned by the
Bank. The sale of the development resulted in a gain of $1.9 million recognized in noninterest
income in the accompanying consolidated statements of income.
Depreciation expense recognized for real estate development and construction for the years ended
September 30, 2017, 2016 and 2015 is as follows:
(In thousands)
Depreciation expense
2017
2016
2015
$
-
$
198 $
196
(6)
INVESTMENT IN HISTORIC TAX CREDIT ENTITY
On October 15, 2014, the Bank entered into an agreement to participate in the rehabilitation of a
certified historic structure located in Louisville, Kentucky with a regional commercial developer. As
part of the agreement, the Bank committed to invest $4.2 million into a limited liability company
organized in the state of Kentucky by the commercial developer, for which it received a 99% equity
interest in the entity and will receive an allocation of 99% of the operating profit and losses and any
historic tax credits generated by the entity. The tax credits initially expected to be allocated to the
Bank include federal rehabilitation investment credits totaling $4.7 million available under Internal
Revenue Code Section 47. Subsequently, during the quarter ended March 31, 2017, the estimate of
tax credits increased to $5.0 million and the Bank’s investment in equity increased to $4.5 million, or
90% of the anticipated credits to be received.
The Bank’s investment in the historic tax credit entity is accounted for using the equity method of
accounting. In conjunction with receipts of certificates of occupancy for the project, the Company
recognized losses in noninterest income of $226,000, $4.2 million, and $0 for the years ended
September 30, 2017, 2016, and 2015, respectively. The Company recorded historic tax credits in
income tax (benefit) expense of $249,000, $4.7 million, and $0 for the years ended September 30,
2017, 2016, and 2015, respectively.
At September 30, 2017, there were no unfunded capital contribution commitments. At September 30,
2016, the Bank’s remaining unfunded capital contribution commitment of $118,000 was included in
other liabilities in the accompanying consolidated balance sheet.
F-41
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(7)
PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
(In thousands)
Land and land improvements
Office buildings
Leasehold improvements
Furniture, fixtures and equipment
Less: accumulated depreciation
Totals
2017
2016
$ 4,413
9,381
61
4,948
18,803
(7,533)
$ 4,411
9,316
61
4,681
18,469
(6,795)
$ 11,270
$ 11,674
Depreciation expense recognized for premises and equipment for the years ended September 30,
2017, 2016 and 2015 is as follows:
(In thousands)
Depreciation expense
2017
2016
2015
$
820
$
919 $
912
As discussed further in Note 5, the Bank sold property in conjunction with the sale of a real estate
development owned by FFCC in September 2016. The Bank’s property sold in the transaction
consisted of a retail branch operated by the Bank and other retail space leased to a third-party tenant.
In accordance with the purchase and sale agreement, the Bank executed a lease agreement with the
buyer to lease back the portion of the property consisting of the retail branch. The lease has an initial
term of 10 years and may be extended for up to six consecutive five-year periods. The Bank is
accounting for the leaseback as an operating lease. The total gain realized on the sale of the property
was $471,000, with $307,000 attributable to the retail branch property operated by the Bank and
$164,000 attributable to the other retail space. The gain on the other retail space has been recognized
in noninterest income in the accompanying consolidated statements of income. The gain attributable
to the retail branch property has been deferred and will be recognized in income in proportion to the
rent charged over the term of the lease. At September 30, 2017 and 2016, the remaining deferred
gain of $278,000 and $307,000, respectively, is included in other liabilities in the accompanying
consolidated balance sheets. See Note 19 for additional information regarding the Company’s
operating leases.
F-42
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(8)
OTHER REAL ESTATE OWNED
Other real estate owned asset activity was as follows for the years ended September 30, 2017, 2016
and 2015:
(In thousands)
2017
2016
2015
Balance as of October 1
Transfers from loans to other real estate owned
Direct write-downs
Sales
Other adjustments
Balance as of September 30
$
$
$
519
703
(28)
(337)
(5)
852 $
618 $
648
(100)
(621)
(26)
519 $
952
814
(73)
(1,075)
-
618
The Bank was in process of foreclosure of residential real estate loans with outstanding balances of
$1.6 million and $837,000 as of September 30, 2017 and 2016, respectively.
Net (gain) loss on other real estate owned for the years ended September 30, 2017, 2016 and 2015
was as follows:
(In thousands)
2017
2016
2015
Net (gain) loss on sales
Direct write-downs
Operating expenses, net of rental income
$
$
$
(198)
28
57
(113) $
(150) $
100
78
28 $
(123)
73
51
1
F-43
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(9)
GOODWILL AND OTHER INTANGIBLES
Goodwill and the core deposit intangibles acquired in the acquisitions of Community First Bank
(“Community First”) on September 30, 2009 and the First Federal Savings Bank of Elizabethtown,
Inc. (“First Federal”) branches on July 6, 2012 are evaluated for impairment at least annually or more
frequently upon the occurrence of an event or when circumstances indicate that the carrying amount
is greater than its fair value. No impairment of goodwill or the core deposit intangibles was
recognized during 2017, 2016, and 2015.
The changes in the carrying amount of goodwill for the years ended September 30, 2017, 2016 and
2015 are summarized as follows:
(In thousands)
Beginning balance
Changes in goodwill
Ending balance
2017
2016
2015
$
$
$
7,936
- -
7,936 $
7,936 $
-
7,936 $
7,936
-
7,936
The following is a summary of other intangible assets subject to amortization:
(In thousands)
2017
2016
Core deposit intangible acquired in Community First acquisition
Core deposit intangible acquired in First Federal branch acquisition
Less accumulated amortization
Ending balance
$
$
2,741
566
(2,614)
$
693 $
2,741
566
(2,270)
1,037
Amortization expense on intangibles for the years ended September 30, 2017, 2016 and 2015 is
summarized as follows:
(In thousands)
Amortization expense
2017
2016
2015
$
344
$
344 $
344
Estimated amortization expense for the core deposit intangibles for each of the ensuing five years
and in the aggregate is as follows:
Years ending September 30:
(In thousands)
2018
2019
2020
2021
2022
2023 and thereafter
Total
$
$
344
148
50
50
50
51
693
F-44
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(10)
DEPOSITS
The aggregate amount of time deposit accounts with balances that met or exceeded the Federal
Deposit Insurance Corporation (“FDIC”) insurance limit of $250,000 was $11.3 million and $13.8
million at September 30, 2017 and 2016, respectively.
At September 30, 2017, scheduled maturities of time deposits were as follows:
Years ending September 30:
2018
2019
2020
2021
2022
Total
(In thousands)
$
$
134,916
44,445
21,540
16,612
12,383
229,896
The Bank held deposits for related parties of $5.6 million and $5.7 million at September 30, 2017
and 2016, respectively.
(11)
FEDERAL FUNDS PURCHASED
The Bank has entered into a federal funds purchased line of credit facility with another financial
institution that established a line of credit not to exceed the lesser of $20 million or 25% of the
Bank’s equity capital, excluding reserves. Availability under the line of credit is subject to continued
borrower eligibility and expires on June 30, 2018 unless it is extended. The line of credit is intended
to support short-term liquidity needs, and the agreement states that the Bank may borrow under the
facility for up to seven consecutive days without pledging collateral to secure the borrowing. At
September 30, 2017 and 2016, the Bank had no outstanding federal funds purchased under the
facility.
The Bank has also entered into a separate federal funds purchased line of credit facility with another
financial institution that established a discretionary line of credit not to exceed $15 million. The line
of credit is intended to support short-term liquidity needs. At September 30, 2017 and 2016, the
Bank had no outstanding federal funds purchased under the facility.
F-45
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(12)
REPURCHASE AGREEMENTS
Repurchase agreements include retail repurchase agreements representing overnight borrowings from
deposit customers.
Repurchase agreements at September 30, 2017, 2016 and 2015 are summarized as follows:
(Dollars in thousands)
2017
2016
2015
Weighted
Average
Rate
Amount
Weighted
Average
Rate
Amount
Weighted
Average
Rate
Amount
Retail repurchase agreements
0.25% $ 1,348
0.25% $ 1,345
0.25% $ 1,342
Information concerning borrowings under retail repurchase agreements as of and for the years ended
September 30, 2017, 2016 and 2015 is summarized as follows:
(Dollars in thousands)
Weighted average interest rate during the year
Average balance during the year
Maximum month-end balance during the year
2017
2016
2015
0.25%
0.25%
0.25%
$ 1,346
1,348
$ 1,343
1,345
$ 1,340
1,342
Available for sale securities underlying the repurchase agreements had a fair value of $2.2 million
and $1.4 million at September 30, 2017 and 2016, respectively.
F-46
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(13)
BORROWINGS FROM FEDERAL HOME LOAN BANK
At September 30, 2017 and 2016 borrowings from the FHLB were as follows:
(Dollars in thousands)
Advances maturing in:
2017
2018
2019
2020
2021
2022 and beyond
Total advances
2017
2016
Weighted
Average
Rate
Amount
Weighted
Average
Rate
Amount
- %
1.04
1.57
1.86
1.87
1.45
1.10 %
1.04
-
1.86
1.87
1.45
$ -
10,000
15,000
25,000
10,000
40,000
100,000
$ 15,000
10,000
-
25,000
10,000
40,000
100,000
Line of credit balance
1.38
18,065
0.67
21,633
Total borrowings from FHLB
$ 118,065
$ 121,633
The Bank entered into an Advances, Pledge and Security Agreement with the FHLB, allowing the
Bank to initiate advances from the FHLB. The advances are secured under a blanket collateral
agreement. At September 30, 2017, the eligible blanket collateral included residential mortgage
loans with a carrying value of $162.9 million, commercial real estate loans with a carrying value of
$201.4 million and available for sale securities with a fair value of $19.6 million.
On August 12, 2016, the Bank entered into an Overdraft Line of Credit Agreement with the FHLB
which established a line of credit not to exceed $25.0 million secured under the blanket collateral
agreement. This agreement expires on August 12, 2018. At September 30, 2017, $18.1 million was
outstanding under this agreement.
On June 19, 2014, the Bank entered into a Letter of Credit Agreement with the FHLB which
established a letter of credit not to exceed $3.3 million secured under the blanket collateral
agreement. This agreement was extended in June 2017, lowering the amount to $2.7 million, and
now expires on June 30, 2018. At September 30, 2017, there was no outstanding balance under this
agreement.
On May 24, 2017, the Bank entered into an advance agreement with the FHLB which established a
commitment to advance $2.2 million through November 22, 2017 at a term not to exceed 20 years at
the FHLB’s current Community Investment Program Advance Rate. At September 30, 2017, there
was no outstanding balance under this agreement.
F-47
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(14)
OTHER LONG-TERM DEBT
On July 27, 2012, FFCC entered into a loan agreement with another financial institution to finance
the retail development and construction project discussed in Note 5. The loan had a maximum
commitment of $5.0 million and was for a ten-year term with a fixed interest rate of 4.0% for the
first six years of the loan term, then adjusting annually thereafter to the one-year LIBOR rate plus
250 basis points. The loan provided for 12 interest only monthly payments through July 27, 2013,
followed by 107 monthly payments sufficient to fully amortize the loan over a 20 year period and a
balloon payment of all outstanding principal and interest at maturity on July 27, 2022. The loan was
secured by a mortgage and assignment of leases and rents on the retail development property. The
real estate development was sold on September 29, 2016, at which time the loan was repaid in full.
Interest expense recognized on other long-term debt for the years ended September 30, 2017, 2016
and 2015 is as follows:
(In thousands)
Interest expense
2017
2016
2015
$
-
$
161 $
176
(15)
DEFERRED COMPENSATION PLANS
The Bank has deferred compensation agreements with former and current officers. The agreements
provide for the payment of specific benefits following retirement. The balance of the accrued benefit
for these agreements was $80,000 and $3,000 at September 30, 2017 and 2016, respectively.
Deferred compensation expense for the years ended September 30, 2017, 2016 and 2015 is as
follows:
(In thousands)
2017
2016
2015
Deferred compensation expense
$
80
$
2 $
5
The Company has a directors’ deferred compensation plan whereby a director, at his or her election
on an annual basis, may defer all or a portion of the director fees into an account with the Company.
The Company accrues interest on the deferred obligation at an annual rate equal to the prime rate for
the immediately preceding calendar quarter plus 2%, but in no event at a rate in excess of 8%. The
deferral period extends until separation from service by the director. The benefits under the plan are
payable in a lump sum or in monthly installments over a period of up to ten years following the
separation from service; however, the agreements provide for payment of benefits in the event of
disability, early retirement, termination of service or death. The balance of the accrued benefit for
the director plan was $1.3 million and $1.2 million at September 30, 2017 and 2016, respectively.
Deferred directors fees expense for the years ended September 30, 2017, 2016 and 2015 is as
follows:
(In thousands)
2017
2016
2015
Deferred directors fee expense
$
194
$
195 $
164
F-48
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(16)
BENEFIT PLANS
Defined Contribution Plan:
The Bank has a qualified contributory defined contribution plan available to all eligible employees.
The plan allows participating employees to make tax-deferred contributions under Internal Revenue
Code Section 401(k).
Company contributions to the plan for the years ended September 30, 2017, 2016 and 2015 is as
follows:
(In thousands)
2017
2016
2015
Company contributions to the plan
$
493
$
387 $
378
Employee Stock Ownership Plan:
On October 6, 2008, the Company established a leveraged ESOP covering substantially all
employees. The ESOP trust acquired 203,363 shares of Company common stock at a cost of $10.00
per share financed by a term loan with the Company. The employer loan and the related interest
income are not recognized in the consolidated financial statements as the debt is serviced from
Company contributions. Dividends payable on allocated shares are charged to retained earnings and
are satisfied by the allocation of cash dividends to participant accounts or by utilizing the dividends
as additional debt service on the ESOP loan. Dividends payable on unallocated shares are not
considered dividends for financial reporting purposes. Shares held by the ESOP trust are allocated to
participant accounts based on the ratio of the current year principal and interest payments to the total
of the current year and future years’ principal and interest to be paid on the employer loan.
Compensation expense is recognized based on the average fair value of shares released for allocation
to participant accounts during the year with a corresponding credit to stockholders’ equity.
Compensation expense recognized for the years ended September 30, 2017, 2016 and 2015 is as
follows:
(In thousands)
2017
2016
2015
Compensation expense
$
-
$
628 $
851
The employer loan was fully repaid in December 2015 and all shares of Company stock were
allocated to participant accounts as of September 30, 2016. The ESOP trust held 161,115 and
172,870 shares of Company common stock allocated to participant accounts at September 30, 2017
and 2016, respectively.
F-49
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(17)
STOCK-BASED COMPENSATION PLANS
The Company maintains two equity incentive plans under which stock options and restricted stock
have or can be granted, the 2010 Equity Incentive Plan (“2010 Plan”) approved by the Company’s
shareholders in February 2010 and the 2016 Equity Incentive Plan (“2016 Plan”) approved by the
Company’s shareholders in February 2016. At September 30, 2017, all available awards had been
granted under the 2010 Plan. The aggregate number of shares of the Company’s common stock
available for issuance under the 2016 Plan may not exceed 88,000 shares, consisting of 66,000 stock
options and 22,000 shares of restricted stock. At September 30, 2017, 19,440 shares of the
Company’s common stock were available for issuance under the 2016 Plan, consisting of 14,705
stock options and 4,735 shares of restricted stock.
Stock based compensation expense related to stock options and restricted stock for the years ended
September 30, 2017, 2016 and 2015 is as follows:
(In thousands)
Stock option expense
Restricted stock expense
Stock Options:
2017
2016
2015
$
$
55
121
$
-
-
95
162
Under the plans, the Company may grant both non-statutory and incentive stock options that may not
have a term exceeding ten years. In the case of incentive stock options, the aggregate fair value
(determined at the time the incentive stock options are granted) which are first exercisable during any
calendar year shall not exceed $100,000. Exercise prices generally may not be less than the fair
market value of the underlying stock at the date of the grant. The terms of the plans also include
provisions whereby all unearned options and restricted shares become immediately exercisable and
fully vested upon a change in control.
Stock options granted generally vest ratably over five years and are exercisable in whole or in part
for a period up to ten years from the date of the grant. Compensation expense is measured based on
the fair market value of the options at the grant date and is recognized ratably over the period during
which the shares are earned (the vesting period). The fair market value of stock options granted is
estimated at the date of grant using a binomial option pricing model. Expected volatilities are based
on historical volatility of the Company’s stock. The expected term of options granted represents the
period of time that options are expected to be outstanding. The risk free rate for the expected life of
the options is based on the U.S. Treasury yield curve in effect at the grant date.
The fair value of options granted during the year ended September 30, 2017 was determined using
the following assumptions:
Expected dividend yield
Risk-free interest rate
Expected volatility
Expected life of options
Weighted average fair value at grant date
1.75%
2.13%
14.6%
7.5 years
$ 6.13
F-50
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(17 - continued)
A summary of stock option activity as of September 30, 2017, and changes during the year then ended is
presented below.
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
Number of
Shares
Outstanding at beginning of year
Granted
Exercised
Forfeited or expired
Outstanding at end of year
Vested and expected to vest
Exercisable at end of year
187,050
51,295
(26,858)
(13,958)
197,529
197,529
146,734
$ 13.25
40.09
13.25
14.21
$ 20.15
$ 20.15
$ 13.25
4.3
4.3
2.6
$ 6,567,000
$ 6,567,000
$ 5,891,000
The intrinsic value of stock options exercised during the year ended September 30, 2017 was
$860,000. At September 30, 2017, there was $259,000 of unrecognized compensation expense
related to nonvested stock options. The compensation expense is expected to be recognized over the
remaining vesting period of 4.14 years.
Restricted Stock:
The vesting period of restricted stock granted under the plans is generally five years beginning one
year after the date of grant of the awards. Compensation expense is measured based on the fair
market value of the restricted stock at the grant date and is recognized ratably over the vesting
period.
A summary of the Company’s nonvested restricted shares activity as of September 30, 2017 and
changes during the year then ended is presented below.
Nonvested at October 1, 2016
Granted
Vested
Forfeited
Nonvested at September 30, 2017
Number
of
Shares
-
17,265
-
-
17,265
Weighted
Average
Grant Date
Fair Value
-
$ 40.09
-
-
$ 40.09
There were no restricted shares vested during the years ended September 30, 2017 and 2016. The
total fair value of restricted shares that vested during the year ended September 30, 2015 was
$575,000. At September 30, 2017 there was $571,000 of unrecognized compensation expense related
to nonvested restricted shares. The compensation expense is expected to be recognized over the
remaining vesting period of 4.14 years.
F-51
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(18)
INCOME TAXES
The components of consolidated income tax expense (benefit) were as follows for the years ended
September 30, 2017, 2016 and 2015:
(In thousands)
2017
2016
2015
Provision at federal statutory rate
State income tax-net of federal tax benefit
Other
Income tax expense (benefit)
$
$
683
76
1,761
2,520
$
$
109
1,597
(4,028)
(2,322)
$
$
1,463
-
113
1,576
The reconciliation of income tax expense (benefit) with the amount which would have been provided
at the federal statutory rate of 34 percent follows for the years ended September 30, 2017, 2016 and
2015:
(In thousands)
2017
2016
2015
Provision at federal statutory rate
State income tax-net of federal tax benefit
Tax-exempt interest income
Bank owned life insurance
Captive insurance net premiums
Increase in deferred tax valuation allowance
Historic tax credit
Other
Income tax expense (benefit)
$
$
4,023
234
(1,082)
(210)
(275)
76
(249)
3
2,520
$
$
1,900
27
(877)
(151)
(297)
1,597
(4,660)
139
(2,322)
$
$
2,831
93
(772)
(444)
(313)
-
-
181
1,576
F-52
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(18 - continued)
Significant components of deferred tax assets and liabilities at September 30, 2017 and 2016 are as
follows:
(In thousands)
2017
2016
Deferred tax assets:
Allowance for loan losses
Deferred compensation plans
Equity incentive plans
Other-than-temporary impairment loss on available for sale
securities
Valuation allowance on other real estate owned
Interest on nonaccrual loans
Discount on unguaranteed portion of SBA loans
Loss on tax credit investment
Historic tax credit carryforward
Deferred loan fees and costs, net
Investment in subsidiary
Other
Gross deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Unrealized gain on securities available for sale
Accumulated depreciation
Installment sale
Loan servicing rights
Acquisition purchase accounting adjustments
FHLB stock dividends
Unrealized gain on trading account securities
Prepaid expenses
Other
Deferred tax liabilities
$ 2,846
529
117
7
$ 2,745
461
69
14
101
186
-
1,673
171
205
69
311
6,215
(1,673)
4,542
(2,234)
(811)
(481)
-
(574)
(129)
(2)
(589)
(141)
(4,961)
96
193
121
1,597
2,306
80
-
207
7,889
(1,597)
6,292
(3,232)
(825)
(520)
(118)
(507)
(130)
(13)
(413)
(114)
(5,872)
Net deferred tax asset (liability)
$ (419)
$ 420
F-53
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(18 - continued)
Tax laws enacted in 2013 and 2014 decrease the Indiana financial institutions tax rate beginning in 2014
and ending in 2023. Deferred taxes have been adjusted to reflect the newly enacted rates and the period in
which temporary differences are expected to reverse.
In assessing the ability of the Company to realize the benefit of the deferred tax assets, management
considers whether it is more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management considers
the scheduled reversal of deferred tax liabilities, availability of operating loss carrybacks, projected future
taxable income, and tax planning strategies in making this assessment. Based upon the level of historical
taxable income and projections for future taxable income over the periods which deferred tax assets are
deductible, management believes it is more likely than not the Company will generate sufficient taxable
income to realize the benefits of these deductible differences at September 30, 2017, except for a valuation
allowance of $1.7 million on the net deferred tax asset related to losses on a historic tax credit investment
totaling $4.5 million. In assessing the need for a valuation allowance for the deferred tax assets for the
historic tax credit investment, the Company considered all positive and negative evidence in assessing
whether the weight of available evidence supports the recognition of some or all of the deferred tax assets
related to the investment. Because of the tax nature of the loss to be recognized when the investment is
ultimately sold (which for tax purposes will give rise to a capital loss for the historic tax credit investment),
the Company may not be able to generate capital gains in the future to be able to utilize the capital losses
from the investment. Therefore, the Company’s assessment of the deferred tax asset warrants the need for a
valuation allowance.
At September 30, 2017 and 2016, the Company had a federal historic tax credit of $171,000 and $2.3
million respectively, available to reduce federal income taxes in subsequent years. The carryover expires
during the year ending September 30, 2036.
At September 30, 2017 and 2016, the Company had no liability for unrecognized income tax benefits and
does not anticipate any increase in the liability for unrecognized tax benefits during the next twelve months.
The Company believes that its income tax positions would be sustained upon examination and does not
anticipate any adjustments that would result in a material change to its financial position or results of
operations. The Company files consolidated U.S. federal and Indiana state income tax returns. Returns filed
in these jurisdictions for tax years ending on or after September 30, 2013 are subject to examination by the
relevant taxing authorities. Each entity included in the consolidated federal and state income tax returns
filed by the Company are charged or given credit for the applicable tax as though separate returns were
filed.
Retained earnings of the Bank at September 30, 2017 and 2016 include approximately $4.6 million for
which no deferred federal income tax liability has been recognized. This amount represents an allocation of
income to bad debt deductions as of September 30, 1988 for tax purposes only. Reduction of such allocated
amounts for purposes other than tax bad debt losses, including redemption of bank stock, excess dividends
or loss of “bank” status, would create income for tax purposes only, subject to the then-current corporate
income tax rate. The unrecorded deferred income tax liability on these amounts was approximately $1.5
million at September 30, 2017 and 2016.
F-54
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(19) OPERATING LEASES
The Bank and Q2 rent office space and equipment under operating lease agreements that expire at
different dates through September 2026. The following is a schedule by years of future minimum
lease payments required under operating leases that have initial or remaining noncancelable lease
terms in excess of one year as of September 30, 2017:
Years ending September 30:
(In thousands)
2018
2019
2020
2021
2022
2023 and thereafter
Total
$
$
227
189
135
119
107
428
1,205
Rent expense under operating leases for the years ended September 30, 2017, 2016 and 2015 is as
follows:
(In thousands)
Rent expense
2017
2016
2015
$
278 $
95 $
56
F-55
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(20)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance
sheet.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial
instruments for commitments to extend credit and standby letters of credit is represented by the
contractual notional amount of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-
by-case basis. The amount and type of collateral obtained, if deemed necessary by the Bank upon
extension of credit, varies and is based on management’s credit evaluation of the counterparty.
Commitments under outstanding standby letters of credit totaled $5.7 million and $3.7 million at
September 30, 2017 and 2016, respectively.
Standby letters of credit are conditional lending commitments issued by the Bank to guarantee the
performance of a customer to a third party. Standby letters of credit generally have fixed expiration
dates or other termination clauses and may require payment of a fee. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending loan facilities to
customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially
the same as that involved in making commitments to extend credit.
The Bank has not been obligated to perform on any financial guarantees and has incurred no losses
on its commitments in 2017 or 2016.
The following is a summary of the commitments to extend credit at September 30, 2017 and 2016:
(In thousands)
Loan commitments:
Fixed rate
Adjustable rate
Guarantees of third-party revolving credit
Undisbursed portion of home equity lines of credit
Undisbursed portion of commercial and personal lines of credit
Undisbursed portion of construction loans in process
Total commitments to extend credit
2017
2016
$ 7,069
29,933
$ 7,189
45,526
153
28,422
23,066
25,483
$ 124,126
86
24,418
26,759
27,623
$ 131,601
F-56
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(21)
FAIR VALUE MEASUREMENTS
FASB ASC Topic 820, Fair Value Measurements, provides the framework for measuring fair value.
That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under
FASB ASC Topic 820 are described as follows:
Level 1:
Level 2:
Level 3:
Inputs to the valuation methodology are quoted prices, unadjusted, for identical
assets or liabilities in active markets. A quoted market price in an active market
provides the most reliable evidence of fair value and shall be used to measure
fair value whenever available.
Inputs to the valuation methodology include quoted market prices for similar
assets or liabilities in active markets; quoted market prices for identical or
similar assets or liabilities in markets that are not active; or inputs that are
derived principally from or can be corroborated by observable market data by
correlation or other means.
Inputs to the valuation methodology are unobservable and significant to the fair
value measurement. Level 3 assets and liabilities include financial instruments
whose value is determined using discounted cash flow methodologies, as well as
instruments for which the determination of fair value requires significant
management judgment or estimation.
A description of the valuation methodologies used for instruments measured at fair value, as well as
the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
These valuation methodologies were applied to all of the Company’s financial assets carried at fair
value or the lower of cost or fair value.
F-57
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(21 – continued)
The table below presents the balances of financial assets measured at fair value on a recurring and
nonrecurring basis as of September 30, 2017. The Company had no liabilities measured at fair value
as of September 30, 2017.
(In thousands)
Level 1
Level 2
Level 3
Total
Carrying Value
September 30, 2017:
Assets Measured – Recurring Basis
Trading account securities
Securities available for sale:
Agency mortgage-backed
Agency CMO
Privately-issued CMO
Privately-issued ABS
SBA certificates
Municipal bonds
Total securities available for sale
Assets Measured – Nonrecurring Basis
Impaired loans:
Residential real estate
Commercial real estate
Land and land development
Commercial business
Consumer
Total impaired loans
$ -
$ 7,175
$ -
$ 7,175
$ -
-
-
-
-
-
$ -
$ 36,736
14,576
2,001
3,448
912
120,426
$ 178,099
$ -
-
-
-
-
-
$ -
$ 36,736
14,576
2,001
3,448
912
120,426
$ 178,099
$ -
-
-
-
-
$ -
$ -
-
-
-
-
$ -
$ 4,967
5,477
30
192
175
$ 10,841
$ 4,967
5,477
30
192
175
$ 10,841
Loans held for sale:
Residential mortgage loans held for sale
SBA loans held for sale
Total loans held for sale
$ -
-
$ -
$ 727
24,908
$ 25,635
$ -
-
$ -
$ 727
24,908
$ 25,635
Loans servicing rights
$ -
$ -
$ 1,389
$ 1,389
Other real estate owned, held for sale:
Residential real estate
Commercial real estate
Land and land development
Total other real estate owned
$ -
-
-
$ -
$ -
-
-
$ -
$ 310
260
282
$ 852
$ 310
260
282
$ 852
F-58
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(21 – continued)
The table below presents the balances of financial assets measured at fair value on a recurring and
nonrecurring basis as of September 30, 2016. The Company had no liabilities measured at fair value
as of September 30, 2016.
(In thousands)
Level 1
Level 2
Level 3
Total
Carrying Value
September 30, 2016:
Assets Measured – Recurring Basis
Trading account securities
Securities available for sale:
Agency bonds and notes
Agency mortgage-backed
Agency CMO
Privately-issued CMO
Privately-issued ABS
SBA certificates
Municipal bonds
Total securities available for sale
Assets Measured – Nonrecurring Basis
Impaired loans:
Residential real estate
Commercial real estate
Land and land development
Commercial business
Consumer
Total impaired loans
$ -
$ 9,255
$ -
$ 9,255
$ -
-
-
-
-
-
-
$ -
$ 1,032
47,405
16,095
2,652
4,532
1,227
101,550
$ 174,493
$ -
-
-
-
-
-
-
$ -
$ 1,032
47,405
16,095
2,652
4,532
1,227
101,550
$ 174,493
$ -
-
-
-
-
$ -
$ -
-
-
-
-
$ -
$ 4,299
6,298
241
231
244
$ 11,313
$ 4,299
6,298
241
231
244
$ 11,313
Loans held for sale:
Residential mortgage loans held for sale
SBA loans held for sale
Total loans held for sale
$ -
-
$ -
$ 384
5,087
$ 5,471
$ -
-
$ -
$ 384
5,087
$ 5,471
Loans servicing rights
$ -
$ -
$ 310
$ 310
Other real estate owned, held for sale:
Residential real estate
Commercial real estate
Total other real estate owned
$ -
-
$ -
$ -
-
$ -
$ 397
122
$ 519
$ 397
122
$ 519
F-59
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(21 - continued)
Fair value is based upon quoted market prices, where available. If quoted market prices are not
available, fair value is based on internally-developed models or obtained from third parties that
primarily use, as inputs, observable market-based parameters or a matrix pricing model that employs
the Bond Market Association’s standard calculations for cash flow and price/yield analysis and
observable market-based parameters. Valuation adjustments may be made to ensure that financial
instruments are recorded at fair value, or the lower of cost or fair value. These adjustments may
include unobservable parameters. Any such valuation adjustments have been applied consistently
over time. The Company’s valuation methodologies may produce a fair value calculation that may
not be indicative of net realizable value or reflective of future fair values. While management
believes the Company’s valuation methodologies are appropriate and consistent with other market
participants, the use of different methodologies or assumptions to determine the fair value of certain
financial instruments could result in a different estimate of fair value at the reporting date.
Trading Account Securities and Securities Available for Sale. Securities classified as trading and
available for sale are reported at fair value on a recurring basis. These securities are classified as
Level 1 of the valuation hierarchy where quoted market prices from reputable third-party brokers are
available in an active market. If quoted market prices are not available, the Company obtains fair
value measurements from an independent pricing service. These securities are reported using Level
2 inputs and the fair value measurements consider observable data that may include dealer quotes,
market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade
execution data, market consensus prepayment speeds, credit information, and the security’s terms
and conditions, among other factors. For securities where quoted market prices, market prices of
similar securities or prices from an independent third party pricing service are not available, fair
values are calculated using discounted cash flows or other market indicators and are classified within
Level 3 of the fair value hierarchy. Changes in fair value of trading account securities are reported in
noninterest income. Changes in fair value of securities available for sale are recorded in other
comprehensive income, net of income tax effect.
Impaired Loans. Impaired loans are reviewed and evaluated on at least a quarterly basis for
additional impairment and adjusted accordingly. The fair value of impaired loans is classified as
Level 3 in the fair value hierarchy.
Impaired loans are measured at the present value of estimated future cash flows using the loan's
effective interest rate or the fair value of the collateral if the loan is a collateral-dependent loan. At
September 30, 2017 and 2016, all impaired loans were considered to be collateral-dependent for the
purpose of determining fair value. Collateral may be real estate and/or business assets, including
equipment, inventory and/or accounts receivable, and its fair value is generally determined based on
real estate appraisals or other independent evaluations by qualified professionals. The appraisals are
then discounted to reflect management’s estimate of the fair value of the collateral given the current
market conditions and the condition of the collateral. At September 30, 2017 and 2016, the
significant unobservable inputs used in the fair value measurement of impaired loans included a
discount from appraised value ranging from 0.0% to 15.0% and estimated costs to sell the collateral
ranging from 0.0% to 6.0%.
Provisions for loan losses recognized for impaired loans for the years ended September 30, 2017,
2016 and 2015 is as follows:
(In thousands)
2017
2016
2015
Provision for loan losses recognized
$
182
$
43
$
58
F-60
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(21 - continued)
Loans Held for Sale. Loans held for sale is comprised of residential mortgage loans and SBA loans
held for sale, both of which are carried at the lower of cost or market value. The fair value of loans
held for sale is based on specific prices of the underlying contracts for sale to investors, and is
classified as level 2 in the fair value hierarchy.
Loan Servicing Rights. Loan servicing rights represent the value associated with servicing SBA
loans that have been sold. The fair value of loan servicing rights is determined on a quarterly basis
by an independent third party valuation model using market-based discount rate and prepayment
assumptions, and is classified as Level 3 in the fair value hierarchy. At September 30, 2017, the
significant unobservable inputs used in the fair value measurement of loan servicing rights included
discount rates ranging from 9.12% to 13.90% with a weighted average of 11.66% and prepayment
speed assumptions ranging from 2.94% to 8.87% with a weighted average rate of 6.63%. At
September 30, 2016, the significant unobservable inputs used in the fair value measurement of loan
servicing rights included discount rates ranging from 8.54% to 14.46% with a weighted average of
12.27% and prepayment speed assumptions ranging from 4.25% to 8.71% with a weighted average
rate of 6.75%. Impairment of the loan servicing rights is recognized on a quarterly basis through a
valuation allowance to the extent that fair value is less than the carrying amount. The Company did
not recognize any impairment charges on loan servicing rights for the years ended September 30,
2017 and 2016.
Other Real Estate Owned. Other real estate owned held for sale is reviewed and evaluated on at
least a quarterly basis for additional impairment and adjusted accordingly. Fair value of other real
estate owned is classified as Level 3 in the fair value hierarchy.
Other real estate owned is reported at fair value less estimated costs to dispose of the property. The
fair values are determined by real estate appraisals which are then discounted to reflect
management’s estimate of the fair value of the property given current market conditions and the
condition of the collateral. At September 30, 2017, the significant unobservable inputs used in the
fair value measurement of other real estate owned included a discount from appraised value
(including estimated costs to sell the property) ranging from 16.1% to 58.8% with a weighted
average of 46.6%. At September 30, 2016, the significant unobservable inputs used in the fair value
measurement of other real estate owned included a discount from appraised value (including
estimated costs to sell the property) ranging from 15.0% to 34.2% with a weighted average of 24.6%.
Charges to write down real estate owned to fair value for the years ended September 30, 2017, 2016
and 2015 is as follows:
(In thousands)
2017
2016
2015
Charges to write down real estate owned
$
28
$
100
$
73
Transfers Between Categories. There have been no changes in the valuation techniques and related
inputs used for assets measured at fair value on a recurring and nonrecurring basis during the years
ended September 30, 2017 and 2016. There were no transfers into or out of Level 3 financial assets
or liabilities for the years ended September 30, 2017 and 2016. In addition, there were no transfers
into or out of Levels 1 and 2 of the fair value hierarchy during the years ended September 30, 2017
and 2016.
F-61
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(21 - continued)
Fair Value of Financial Instruments
The following tables summarize the carrying value and estimated fair value of financial instruments
and the level within the fair value hierarchy in which the fair value measurements fall at September
30, 2017 and 2016.
(In thousands)
September 30, 2017:
Financial assets:
Cash and due from banks
Interest-bearing deposits with banks
Interest-bearing time deposits
Trading account securities
Securities available for sale
Securities held to maturity
Loans, net
Residential mortgage loans held for sale
SBA loans held for sale
FRB and FHLB stock
Accrued interest receivable
Loan servicing rights (included in other
assets)
Financial liabilities:
Deposits
Short-term repurchase agreements
Borrowings from FHLB
Accrued interest payable
Advance payments by borrowers for taxes
and insurance
Carrying
Amount
Fair Value Measurements Using:
Level 3
Level 2
Level 1
$ 11,017
23,242
2,435
7,175
178,099
2,878
586,456
727
24,908
6,936
3,398
1,389
669,382
1,348
118,065
283
1,212
$ 11,017
23,242
-
-
-
-
$ -
-
2,435
7,175
178,099
3,306
$ -
-
-
-
-
-
-
-
-
N/A
-
-
-
-
-
-
-
-
579,074
727
27,980
N/A
3,398
-
-
N/A
-
-
1,456
-
1,348
117,920
283
670,050
-
-
-
1,212
-
F-62
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(21 - continued)
(In thousands)
Carrying
Amount
Fair Value Measurements Using:
Level 3
Level 2
Level 1
September 30, 2016:
Financial assets:
Cash and due from banks
Interest-bearing deposits with banks
Interest-bearing time deposits
Trading account securities
Securities available for sale
Securities held to maturity
Loans, net
Residential mortgage loans held for sale
SBA loans held for sale
FRB and FHLB stock
Accrued interest receivable
Loan servicing rights (included in other
assets)
Financial liabilities:
Deposits
Short-term repurchase agreements
Borrowings from FHLB
Accrued interest payable
Advance payments by borrowers for taxes
and insurance
$ 11,449
17,893
3,100
9,255
174,493
3,166
518,611
384
5,087
6,936
2,806
310
579,467
1,345
121,633
195
1,014
$ 11,449
17,893
-
-
-
-
$ -
-
3,114
9,255
174,493
3,654
$ -
-
-
-
-
-
-
-
-
N/A
-
-
-
-
-
-
-
-
522,560
384
5,722
N/A
2,806
-
-
-
N/A
-
312
-
1,345
123,794
195
581,844
-
-
-
1,014
-
The carrying amounts in the preceding tables are included in the consolidated balances sheets under
the applicable captions. The contract or notional amounts of the Bank’s financial instruments with
off-balance-sheet risk are disclosed in Note 20, and the fair value of these instruments is considered
immaterial.
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument for which it is practicable to estimate:
Cash and Cash Equivalents
For cash and short-term instruments, including cash and due from banks, interest-bearing deposits
with banks with original maturities of 90 days or less and money market funds, the carrying amount
is a reasonable estimate of fair value.
Investments and Interest-Bearing Time Deposits
For debt securities and interest-bearing time deposits, 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.
F-63
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(21 - continued)
Loans
The fair value of loans, excluding loans held for sale, is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers with similar credit
ratings and terms. Impaired loans are valued at the lower of their carrying value or fair value, as
previously described. The carrying amount of accrued interest receivable approximates its fair value.
The fair value of loans held for sale is estimated based on specific prices of underlying contracts for
sales to investors, as previously discussed.
FRB and FHLB stock
It is not practical to determine the fair value of FRB and FHLB stock due to restrictions placed on
transferability.
Loan Servicing Rights
The fair value of loan serving rights is determined by a valuation model employed by an independent
third party using market-based discount rate and prepayment assumptions, as previously described.
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.
(22)
PREFERRED STOCK
On August 11, 2011, the Company entered into a Securities Purchase Agreement (“Purchase
Agreement”) with the United States Department of the Treasury, pursuant to which the Company
issued 17,120 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series A (“Series A
Preferred Stock”), having a liquidation amount per share equal to $1,000, for a total purchase price of
$17,120,000. The Purchase Agreement was entered into, and the Series A Preferred Stock was
issued, pursuant to the Small Business Lending Fund (“SBLF”) program, a $30 billion fund
established under the Small Business Jobs Act of 2010, that encourages lending to small businesses
by providing Tier 1 capital to qualified community banks with assets of less than $10 billion.
The Series A Preferred Stock could 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 redeemed by the Company for the full
liquidation amount of $17,120,000 on February 11, 2016.
F-64
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(23)
CAPITAL REQUIREMENTS AND RESTRICTION ON DIVIDENDS
The Company and Bank are subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Company’s consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Company and Bank must
meet specific capital guidelines that involve quantitative measures of the Company’s and Bank’s
assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company’s and Bank’s capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and
Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 and
common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and
Tier 1 capital (as defined) to average assets (as defined). The final rules implementing the Basel
Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III rules”) became
effective for the Company and the Bank on January 1, 2015, with full compliance with all of the
requirements being phased in over a multi-year schedule through 2019. Under the Basel III rules, the
Bank must hold a conservation buffer above the adequately capitalized risk-based capital ratios
disclosed in the table below. The capital conservation buffer is being phased in from 0.0% for 2015
to 2.5% by 2019. The capital conservation buffer is 1.25% for 2017 and 0.625% for 2016.
Management believes that the Company and Bank met all capital adequacy requirements to which
they are subject as of September 30, 2017 and 2016.
As of September 30, 2017, the most recent notification from the FRB categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, common equity Tier
1 risk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or
events since that notification that management believes have changed the Bank’s category.
F-65
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(23 - continued)
The Company’s and Bank’s actual capital amounts and ratios are also presented in the table. No
amount was deducted from capital for interest-rate risk in either year.
(Dollars in thousands)
As of September 30, 2017:
Total capital (to risk-weighted assets):
Consolidated
Bank
Tier I capital (to risk-weighted assets):
Consolidated
Bank
Actual
Amount
Ratio
Minimum for Capital
Adequacy Purposes
Ratio
Amount
Minimum To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
$ 88,179
84,720
12.69%
12.22%
$ 55,587
55,476
8.00%
8.00%
N/A
$ 69,345
N/A
10.00%
$ 80,087
76,628
11.53%
11.05%
$ 41,690
41,607
6.00%
6.00%
N/A
$ 55,476
N/A
8.00%
Common equity tier I capital (to risk-weighted assets):
Consolidated
Bank
$ 80,087
76,628
Tier I capital (to average adjusted total assets):
Consolidated
Bank
$ 80,087
76,628
11.53%
11.05%
$ 31,267
31,205
4.50%
4.50%
N/A
$ 45,074
N/A
6.50%
9.14%
8.79%
$ 35,031
34,887
4.00%
4.00%
N/A
$ 43,608
N/A
5.00%
As of September 30, 2016:
Total capital (to risk-weighted assets):
Consolidated
Bank
Tier I capital (to risk-weighted assets):
Consolidated
Bank
$ 72,227
69,056
11.82%
11.33%
$ 48,874
48,748
8.00%
8.00%
N/A
$ 60,934
N/A
10.00%
$ 65,105
61,934
10.66%
10.16%
$ 36,655
36,561
6.00%
6.00%
N/A
$ 48,748
N/A
8.00%
Common equity tier I capital (to risk-weighted assets):
Consolidated
Bank
$ 65,105
61,934
Tier I capital (to average adjusted total assets):
Consolidated
Bank
$ 65,105
61,934
10.66%
10.16%
$ 27,491
27,420
4.50%
4.50%
N/A
$ 39,607
N/A
6.50%
8.43%
8.09%
$ 30,881
30,621
4.00%
4.00%
N/A
$ 38,277
N/A
5.00%
F-66
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(23 - continued)
Dividend Restriction
As an Indiana corporation, the Company is subject to Indiana law with respect to the payment of
dividends. Under Indiana law, the Company may pay dividends so long as it is able to pay its debts
as they become due in the usual course of business and its assets exceed the sum of its total
liabilities, plus the amount that would be needed, if the Company were to be dissolved at the time of
the dividend, to satisfy any rights that are preferential to the rights of the persons receiving the
dividend. The ability of the Company to pay dividends depends primarily on the ability of the Bank
to pay dividends to the Company.
The payment of dividends by the Bank is subject to banking regulations and applicable Indiana state
law. The amount of dividends that the Bank may pay to the Company in any calendar year without prior
approval from banking regulators cannot exceed net income for that year to date plus retained net income
(as defined) for the preceding two calendar years. The Bank may not declare or pay a cash dividend or
repurchase any of its capital stock if the effect thereof would cause the regulatory capital of the Bank
to be reduced below regulatory capital requirements imposed by banking regulators or the FDIC, or
below the amount of the liquidation account established upon completion of the conversion.
Liquidation Account
Upon completion of its conversion from mutual to stock form on October 6, 2008, the Bank
established a liquidation account in an amount equal to its retained earnings at March 31, 2008,
totaling $29.3 million. The liquidation account is maintained for the benefit of depositors as of the
March 31, 2007 eligibility record date (or the June 30, 2008 supplemental eligibility record date)
who maintain their deposits in the Bank after conversion.
In the event of complete liquidation, and only in such an event, each eligible depositor is entitled to
receive a liquidation distribution from the liquidation account in the proportionate amount of the then
current adjusted balance for deposits held, before any liquidation distribution may be made with
respect to the stockholders. Except for the repurchase of stock and payment of dividends by the
Bank, the existence of the liquidation account does not restrict the use or application of retained
earnings of the Bank.
F-67
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(24)
PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial information for First Savings Financial Group, Inc. (parent company only)
follows:
Balance Sheets
(In thousands)
Assets:
Cash and due from banks
Time deposits
Other assets
Investment in subsidiaries
Liabilities and Equity:
Accrued expenses
Stockholders' equity
(In thousands)
Dividend income from subsidiaries
Other income
Other operating expenses
As of September 30,
2016
2017
$ 1,290 $ 849
-
662
85,464
$ 93,547 $ 86,975
10
566
91,681
$ 432 $ 395
86,580
$ 93,547 $ 86,975
93,115
Statements of Income
Years Ended September 30,
2016
2015
2017
$ 1,850 $ 4,000 $ 8,500
-
(1,650)
-
(1,027)
-
(778)
Income before income taxes and equity in
undistributed net income of subsidiaries
1,072
2,973
6,852
Income tax benefit
239
282
414
Income before equity in undistributed net
income of subsidiaries
Equity in undistributed net income of subsidiaries
1,311
8,002
3,255
4,656
7,266
(515)
Net income
$ 9,313 $ 7,911 $ 6,751
F-68
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(24 - continued)
Statements of Cash Flows
(In thousands)
Operating Activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of
subsidiaries
ESOP and stock compensation expense
Net change in other assets and liabilities
Net cash provided by operating activities
Investing Activities:
Investment in interest-bearing time deposits
Net cash used by investing activities
Financing Activities:
Redemption of preferred stock
Exercise of stock options
Purchase of treasury stock
Dividends paid
Net cash used in financing activities
Years Ended September 30,
2016
2015
2017
$ 9,313 $ 7,911 $ 6,751
(8,002)
176
131
1,618
(4,656)
628
368
4,251
(10)
(10)
-
-
-
62
-
(1,229)
(1,167)
(17,120)
169
-
(1,172)
(18,123)
515
1,108
67
8,441
-
-
-
159
(132)
(1,166)
(1,139)
Net increase (decrease) in cash and due from
banks
441
(13,872)
7,302
Cash and due from banks at beginning of year
849
14,721
7,419
Cash and due from banks at end of year
$ 1,290 $ 849 $ 14,721
(25)
CONCENTRATION OF CREDIT RISK
At September 30, 2017 and 2016, the Bank had a concentration of credit risk with correspondent
banks in excess of the federal deposit insurance limit of $7.2 million and $7.5 million, respectively.
F-69
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(26)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(In thousands)
Cash payments for:
Interest
Income taxes (net of refunds received)
Non-cash activities:
Transfers from (to) loans held for sale (from) to
loans
Transfers from loans to other real estate owned
Proceeds from sales of other real estate owned
financed through loans
Proceeds from sales of premises,
equipment and real estate development
financed through loans
Cashless exercise of stock options
Years Ended September 30,
2016
2017
2015
$ 4,400 $ 4,218 $ 3,890
914
(598)
743
(854)
1,319
703
189
-
294
648
299
8,950
179
-
814
340
-
119
(27)
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In thousands, except per share data)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
September 30, 2017:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan
losses
Noninterest income
Noninterest expenses
Income before income taxes
Income tax expense
$ 8,011
1,022
6,989
306
$ 8,219
1,032
7,187
375
$ 8,664
1,132
7,532
321
$ 9,023
1,271
7,752
299
6,683
1,875
5,540
3,018
681
6,812
1,861
6,066
2,607
413
7,211
2,123
6,305
3,029
586
7,453
2,766
7,040
3,179
840
Net income
2,337
2,194
2,443
2,339
Less: Preferred stock dividends declared
-
-
-
-
Net income available to common
shareholders
$ 2,337
$ 2,194
$ 2,443
$ 2,339
Net income per common share, basic
$ 1.06
$ 0.99
$ 1.10
$ 1.05
Net income per common share, diluted
$ 1.00
$ 0.94
$ 1.04
$ 0.99
F-70
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(27 - continued)
(In thousands, except per share data)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
September 30, 2016:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan
losses
Noninterest income
Noninterest expenses
Income (loss) before income taxes
Income tax expense (benefit)
$ 7,126
968
6,158
-
$ 7,147
1,028
6,119
125
$ 7,422
1,115
6,307
303
$ 7,761
1,056
6,705
209
6,158
1,444
5,892
1,710
467
5,994
1,262
5,232
2,024
389
6,004
(2,576)
5,590
(2,162)
(4,389)
6,496
3,242
5,721
4,017
1,211
Net income
1,243
1,635
2,227
2,806
Less: Preferred stock dividends declared
43
19
-
-
Net income available to common
shareholders
$ 1,200
$ 1,616
$ 2,227
$ 2,806
Net income per common share, basic
$ 0.55
$ 0.73
$ 1.01
$ 1.27
Net income per common share, diluted
$ 0.52
$ 0.70
$ 0.97
$ 1.22
F-71
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(27 - continued)
(In thousands, except per share data)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
September 30, 2015:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan
losses
Noninterest income
Noninterest expenses
Income before income taxes
Income tax expense
$ 7,009
931
6,078
207
$ 6,924
952
5,972
212
$ 6,915
933
5,982
208
$ 7,139
962
6,177
232
5,871
1,111
5,374
1,608
408
5,760
1,078
4,876
1,962
435
5,774
1,937
5,197
2,514
318
5,945
1,850
5,552
2,243
415
Net income
1,200
1,527
2,196
1,828
Less: Preferred stock dividends declared
43
43
43
42
Net income available to common
shareholders
$ 1,157
$ 1,484
$ 2,153
$ 1,786
Net income per common share, basic
$ 0.55
$ 0.69
$ 1.00
$ 0.83
Net income per common share, diluted
$ 0.52
$ 0.66
$ 0.95
$ 0.80
(28)
SEGMENT REPORTING
The Company’s operations include two primary segments: core banking and SBA lending. The core
banking segment originates residential, commercial and consumer loans and attracts deposits from its
customer base. Net interest income from loans and investments funded by deposits and borrowings is the
primary revenue for the core banking segment. The SBA lending segment originates loans guaranteed by
the SBA, subsequently selling the guaranteed portion to outside investors. Net gains on sales of loans and
net interest income are the primary sources of revenue for the SBA lending segment.
The core banking segment is comprised primarily by the Bank and First Savings Investments, Inc.,
while the SBA lending segment’s revenues are comprised primarily of net interest income and gains
on the sales of SBA loans generated by Q2 beginning January 1, 2017 and SBA loan related income
of the Bank prior to the formation of Q2.
The following segment financial information has been derived from the internal financial statements of the
Company which are used by management to monitor and manage financial performance. The accounting
policies of the two segments are the same as those of the Company. Holding company amounts are the
primary differences between segment amounts and consolidated totals, and are reflected in the column
labeled “Other” below, along with amounts to eliminate transactions between segments.
F-72
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(28 - continued)
Year Ended September 30, 2017:
Net interest income
Net gains on sales of loans, SBA
Noncash items:
Provision for loan losses
Depreciation and amortization
Income tax expense (benefit)
Segment profit
Segment assets at September 30, 2017
Year Ended September 30, 2016:
Net interest income
Net gains on sales of loans, SBA
Noncash items:
Provision for loan losses
Depreciation and amortization
Income tax benefit
Segment profit (loss)
Segment assets at September 30, 2016
Year Ended September 30, 2015:
Net interest income
Net gains on sales of loans, SBA
Noncash items:
Provision for loan losses
Depreciation and amortization
Income tax expense (benefit)
Segment profit (loss)
Segment assets at September 30, 2015
(29)
PENDING ACQUISITION
Core
Banking
SBA
Lending
Other
Consolidated
Totals
(In thousands)
$ 27,637
-
$ 1,802
4,204
$ 21
-
$ 29,460
4,204
868
1,120
2,754
7,109
885,669
433
44
-
1,924
51,821
-
-
(234)
280
(46,357)
1,301
1,164
2,520
9,313
891,133
Core
Banking
SBA
Lending
Other
Consolidated
Totals
(In thousands)
$ 24,880
-
$ 390
715
$ 19
-
$ 25,289
715
501
1,426
(2,045)
9,604
785,287
136
35
-
(1,830)
11,954
-
-
(277)
137
(725)
637
1,461
(2,322)
7,911
796,516
Core
Banking
SBA
Lending
Other
Consolidated
Totals
(In thousands)
$ 24,056
-
$ 145
413
$ 8
-
$ 24,209
413
859
1,442
1,989
7,201
741,952
-
10
-
(139)
6,073
-
-
(413)
(311)
1,921
859
1,452
1,576
6,751
749,946
On July 21, 2017, the Company entered into a definitive agreement to acquire Dearmin Bancorp, Inc.
(“Dearmin”) and its majority owned subsidiary, The First National Bank of Odon (“FNBO”) pursuant
to which FNBO will be merged into the Bank. The all-cash transaction is valued at $10.6 million,
subject to possible adjustment. The closing of the transaction is subject to certain customary
conditions, including shareholder and regulatory approval. Closing is expected to occur in the first
calendar quarter of 2018.
F-73
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017, 2016 AND 2015
(30)
SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income available to common
shareholders by the weighted average number of shares of common stock outstanding during the
periods presented. Diluted earnings per common share include the dilutive effect of additional
potential common shares issuable under stock options, restricted stock and other potentially dilutive
securities outstanding. Earnings and dividends per share are restated for stock splits and dividends
through the date of issuance of the financial statements. Earnings per share information is presented
below for the years ended September 30, 2017, 2016 and 2015.
(In thousands, except share and per share data)
Basic:
Earnings:
Net income
Less: Preferred stock dividends declared
Net income available to common shareholders
Shares:
Weighted average common shares outstanding
Net income per common share, basic
Diluted:
Earnings:
Net income
Less: Preferred stock dividends declared
Net income available to common shareholders
Shares:
Weighted average common shares outstanding
Add: Dilutive effect of outstanding options
Add: Dilutive effect of restricted stock
Weighted average common shares outstanding,
as adjusted
Net income per common share, diluted
Years Ended September 30,
2016
2015
2017
9,313 $
-
9,313 $
7,911 $
(62)
7,849 $
6,751
(171)
6,580
2,219,088
2,200,258
4.20 $
3.57 $
2,140,632
3.07
9,313 $
-
9,313 $
7,911 $
(62)
7,849 $
6,751
(171)
6,580
$
$
$
$
$
2,219,088
123,557
3,363
2,200,258
103,370
-
2,346,008
2,303,628
$
3.97 $
3.41 $
2,140,632
101,862
5,472
2,247,966
2.93
Unearned ESOP and nonvested restricted stock shares are not considered as outstanding for purposes
of computing weighted average common shares outstanding.
F-74
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: December 14, 2017
FIRST SAVINGS FINANCIAL GROUP, INC.
By:
/s/ Larry W. Myers
Larry W. Myers
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Larry W. Myers
Larry W. Myers
President, Chief Executive Officer
and Director
(principal executive officer)
December 14, 2017
/s/ Anthony A. Schoen
Anthony A. Schoen
Chief Financial Officer
(principal accounting and financial officer)
December 14, 2017
/s/ John P. Lawson, Jr.
John P. Lawson, Jr.
/s/ Samuel E. Eckart
Samuel E. Eckart
/s/ Cecile A. Blau
Cecile A. Blau
/s/ Martin A. Padgett
Martin A. Padgett
/s/ Michael F. Ludden
Michael F. Ludden
/s/ Douglas A. York
Douglas A. York
/s/ L. Chris Fordyce
L. Chris Fordyce
Chief Operating Officer and Director
December 14, 2017
Director
Director
Director
Director
Director
Director
December 14, 2017
December 14, 2017
December 14, 2017
December 14, 2017
December 14, 2017
December 14, 2017
/s/ Frank N. Czeschin
Frank N. Czeschin
/s/ John E. Colin
John E. Colin
/s/ Pamela Bennett-Martin
Pamela Bennett-Martin
Director
Director
Director
December 14, 2017
December 14, 2017
December 14, 2017
SUBSIDIARIES
EXHIBIT 21.0
Registrant
Percentage
Ownership
Jurisdiction or
State of Incorporation
First Savings Financial Group, Inc. N/A
Indiana
Subsidiaries
First Savings Insurance Risk Management, Inc. (1) 100%
First Savings Bank
(1)
Southern Indiana Financial Corporation (2)
First Savings Investments, Inc. (2)
Q2 Business Capital, LLC. (2)
________________
(1) Subsidiary of First Savings Financial Group, Inc.
(2) Subsidiary of First Savings Bank
100%
100%
100%
51%
Nevada
Indiana
Indiana
Nevada
Indiana
EXHIBIT 31.1
I, Larry W. Myers, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of First Savings Financial Group, Inc.:
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this annual
report;
Based on my knowledge, the financial statements, and other financial information included in this
annual report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this annual report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this annual report our conclusions about the effectiveness of the disclosure controls and
procedures, as the end of the period covered by this annual report based on such evaluation;
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: December 14, 2017
/s/ Larry W. Myers
Larry W. Myers
President and Chief Executive Officer
(principal executive officer)
EXHIBIT 31.2
I, Anthony A. Schoen, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of First Savings Financial Group, Inc.:
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this annual
report;
Based on my knowledge, the financial statements, and other financial information included in this
annual report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this annual report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this annual report our conclusions about the effectiveness of the disclosure controls and
procedures, as the end of the period covered by this annual report based on such evaluation;
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: December 14, 2017
/s/ Anthony A. Schoen
Anthony A. Schoen
Chief Financial Officer
(principal financial and accounting officer)
EXHIBIT 32.0
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADDED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of First Savings Financial Group, Inc. (the “Company”) on Form 10-
K for the year ended September 30, 2017 as filed with the Securities and Exchange Commission (the “Report”), the
undersigned hereby certify, pursuant to 18 U.S.C. §1350, as added by § 906 of the Sarbanes-Oxley Act of 2002,
that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company as of and for the period covered by the Report.
/s/ Larry W. Myers
President and Chief Executive Officer
(principal executive officer)
/s/ Anthony A. Schoen
Anthony A. Schoen
Chief Financial Officer
(principal financial and accounting officer)
December 14, 2017
FI N AN CI A L G R O U P I N C.
501 East Lewis & Clark Parkway
Clarksville , IN 47129