Section 1: 10-K (FORM 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
xxxx ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2019
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:
Common Stock, par value $0.01 per share
(Title of each class)
FSFG
(Trading symbol(s))
NASDAQ Stock Market, LLC
(Name of each exchange on which registered)
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 every Interactive Data File required to be submitted 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 such files). Yes x No ¨
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 x
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 $98.9 million, based upon the closing price of
$54.05 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, 2019.
The number of shares outstanding of the registrant’s common stock as of December 10, 2019 was 2,350,869.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2020 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
INDEX
Part I
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Part III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
SIGNATURES
Part IV
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This annual report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and
expectations of First Savings Financial Group, Inc. These forward-looking statements are generally identified by use of the words “believe,” “expect,”
“intend,” “anticipate,” “estimate,” “project” or similar expressions. First Savings Financial Group’s ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of First Savings Financial Group
and its subsidiary include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory
changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and
composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in First Savings
Financial Group’s market area, changes in real estate market values in First Savings Financial Group’s market area, changes in relevant accounting
principles and guidelines and inability of third party service providers to perform. Additional factors that may affect our results are discussed in Item 1A
to this Annual Report on Form 10-K titled “Risk Factors” below.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such
statements. Except as required by applicable law or regulation, First Savings Financial Group does not undertake, and specifically disclaims any
obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the
date of the statements or to reflect the occurrence of anticipated or unanticipated events, except as may be required by applicable law or regulation.
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.
On February 9, 2018, the Company acquired Dearmin Bancorp, Inc. (“Dearmin”) and its majority owned subsidiary, The First National Bank of Odon
(“FNBO”), a full service community bank located in Odon, Indiana. The acquisition expanded the Company’s presence into Daviess County, Indiana. See
Note 2 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report.
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 is not, and should not be considered a part of, this annual report.
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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, Washington and Daviess 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, 2019, which is the most recent date for which data is available from the FDIC, we held approximately
16.06%, 16.82%, 3.25%, 38.86%, 100.00% and 19.80% of the FDIC-insured deposits in Clark, Daviess, 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.
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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, Washington and Daviess Counties, Indiana, and the surrounding areas.
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. 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 $17.6 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.
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.
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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 (“NNN Finance Program”). 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 regulatory capital. The average size of these loans originated was $1.2 million and the portfolio balance
was $223.4 million at September 30, 2019.
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, including speculative construction loans to builders who have not identified a buyer or lessee
for the completed property at the time of origination, are made to a limited group of well-established builders in our primary market area and we limit the
number of projects with each builder. Construction loans are typically for a term of 12 months with monthly interest only payments and interest rates on
these loans are generally tied to the prime lending rate. Except for speculative construction loans, 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. Occasionally, a speculative
construction loan may 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 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. 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. We require a maximum loan-to-value ratio of 80% for speculative construction loans. Generally, commercial construction
loans require the personal guarantee of the owners of the business. We generally disburse funds on a percentage-of-completion basis following an
inspection by a third party inspector.
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.
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.
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.
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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.
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.
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Construction and Land and Land Development Loans. Construction financing is generally considered to involve a higher degree of risk of loss
than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of
the property’s value at completion of construction and the estimated cost of construction. During the construction phase, a number of factors could result
in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount
originally committed to permit completion of the building. If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of
the loan, with a building having a value which is insufficient to assure full repayment if liquidation is required. If we are forced to foreclose on a building
before or at completion due to a default, we may be unable to recover all of the unpaid balance of, and accrued interest on, the loan as well as related
foreclosure and holding costs. In addition, speculative construction loans, which are loans made to home builders who, at the time of loan origination, have
not yet secured an end buyer for the home under construction, typically carry higher risks than those associated with traditional construction loans. These
increased risks arise because of the risk that there will be inadequate demand to ensure the sale of the property within an acceptable time. As a result, in
addition to the risks associated with traditional construction loans, speculative construction loans carry the added risk that the builder will have to pay the
property taxes and other carrying costs of the property until an end buyer is found. Land and land development loans have substantially similar risks to
speculative construction loans.
Consumer Loans. Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are
secured by assets that depreciate rapidly, such as motor vehicles and boats. In such cases, repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In the case of home equity loans, real estate values may be reduced to a level that is insufficient to cover the outstanding loan
balance after accounting for the first mortgage loan balance. Consumer loan collections depend on the borrower’s continuing financial stability, and
therefore are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.
Commercial Business Loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment
from his or her employment income or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial
business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s
business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business
itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.
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 generally do not sell whole loans, other than long-term fixed rate residential mortgage loans that we originate, or participation interests in loans
originated by us. We also generally do not purchase whole loans or participation interests in loans originated by other financial institutions. However, in
order to manage certain risk factors or supplement our lending portfolio, we may sell or purchase whole loans or participation interests in loans from time to
time depending on various factors. At September 30, 2019, $54.5 million of loans included sold participation interests of $27.0 million, for a net position of
$27.5 million outstanding in our portfolio. At September 30, 2019, acquired participation interests of loans from one lending relationship totaled $631,000.
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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
continues to hire additional business development officers and appropriate supporting staff in order to grow this lending platform. The primary purpose of
this lending platform is to originate SBA 7(a) program loans, the borrowers and collateral for which are outside of our primary market area, and sell the
amounts guaranteed by the SBA in the secondary market. This lending platform 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 $86.5 million during the year ended September 30, 2019. At September 30, 2019, $252.2 million
of SBA loans included sold guaranteed portions of $167.0 million, for a net position of $85.2 million outstanding in our portfolio. The amount outstanding in
the Bank’s portfolio at September 30, 2019 included $15.6 million in SBA loans held for sale, $19.1 million in the unguaranteed portion of SBA loans not yet
sold and $50.5 million in the unguaranteed portion of SBA loans sold. All SBA loans held for sale were carried at the lower of cost or fair market value at
September 30, 2019 and 2018.
Beginning in April 2018, the Bank hired a management team, business development officers (loan officers), underwriters and supporting staff that
are seasoned and experienced in the originations and sales of one- to four-family residential real estate loans on a nationwide basis. The Bank continues to
hire additional business development officers and appropriate supporting staff in order to grow this lending platform. The primary purpose of this lending
platform is to originate one- to four-family residential real estate loans, the borrowers and collateral for which are outside of our primary market area, and sell
the whole loans in the secondary market. The Company originated $883.5 million and sold $805.1 million of one- to four-family residential real estate loans
within this lending platform during the year ended September 30, 2019. The amount outstanding in the Bank’s portfolio at September 30, 2019 included $77.8
million in loans held for sale. All residential real estate loans held for sale were carried at market value at September 30, 2019 and 2018.
Our decision to sell or purchase loans is based on prevailing market interest rate conditions, interest rate risk management considerations,
regulatory lending restrictions and liquidity needs.
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 $300,000 secured or $25,000 unsecured, require committee or Board
of Directors approval. Loans resulting in aggregated lending relationships in excess of individual office lending limits but less than $4.0 million require
approval by the Officer Loan Committee and loans resulting in aggregated lending relationships in excess of $4.0 million but less than $8.0 million require
approval of the Board Credit Committee. The Board Credit Committee consists of the President, Chief Lending Officer, Chief of Credit Administration and
four independent board members, and the Officer Loan Committee consists of members of senior management and certain other officers designated by the
Board of Directors. Loans resulting in aggregated lending relationships in excess of $8.0 million require approval by 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 Financial Officer, 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.
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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, 2019, our regulatory limit on loans to one borrower was $18.2 million. At that date, our
largest lending relationship was for a commitment of $12.0 million, of which $11.6 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, 2019, 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 pass-through asset-backed securities guaranteed by the SBA.
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.
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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, 2019, we had 437 full-time employees and 36 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, 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 eleven 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.
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 was allocated the first $1.7 million of cumulative net income of Q2 and subsequent profits and losses
are 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.
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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.
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.
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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 increased 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, 2019, First Savings Bank met all applicable capital adequacy requirements in effect at that date.
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%.
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.
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The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated
insured deposits. The 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.
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.
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The Sarbanes-Oxley Act of 2002 generally prohibits loans by First Savings Financial Group to its executive officers and directors. However, the law
contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such
laws, First Savings Bank’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons
control, is limited. The laws limit both the individual and aggregate amount of loans that First Savings Bank may make to insiders based, in part, on First
Savings Bank’s capital level and requires that certain board approval procedures be followed. Such loans are required to be made on terms substantially the
same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a
benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees.
Loans to executive officers are subject to additional limitations based on the type of loan involved.
Enforcement. The 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 year ended September 30, 2019 totaled $73,000.
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, 2019 of $11.5 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, 2019, 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.
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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 that has elected financial holding company status within the meaning of the Bank Holding Company Act of
1956, as amended, 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.
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.
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.
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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.
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.
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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.
On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act (the “Tax Act”), was signed into law. Among other things, the Act
reduced the Company’s corporate federal tax rate from 34% to 21% effective January 1, 2018. The Company files federal income tax returns on a September 30
fiscal year basis, so in accordance with Internal Revenue Code regulations, the Company’s federal income tax rate for the year ended September 30, 2018 was
based on a blended rate of 24.5%. As a result of the Tax Act, the Company was required to re-measure, through income tax expense, deferred tax assets and
liabilities using the enacted rate at which the Company expects them to be recovered or settled. The re-measurement of the net deferred tax asset resulted in
an income tax benefit of approximately $145,000 for the year ended September 30, 2018.
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.
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.
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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-quarter 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 21% 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, 2019, Indiana imposed a 6.50% franchise tax based on a financial institution’s adjusted gross income as defined by statute. The Indiana
franchise tax rate will be reduced to 6.25%, 6.00%, 5.50%, 5.00%, and 4.90% for the Company’s tax years ending September 30, 2020, 2021, 2022, 2023, and
2024 and years thereafter, respectively. In computing Indiana taxable income, deductions for municipal interest, state and local income taxes and certain
accelerated depreciation permitted for federal tax purposes are disallowed.
The Company and its subsidiaries also file income and franchise tax returns in various other states where they are deemed to have tax nexus.
Our state income tax returns have not been audited during the last five years.
Item 1A.
RISK FACTORS
Our emphasis on commercial real estate lending and commercial business lending may expose us to increased lending risks.
At September 30, 2019, $509.1 million, or 62.1%, 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, 2019, nonperforming commercial real estate loans totaled $2.4 million. At September 30, 2019 the Bank did not have any nonperforming
commercial business 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 construction loan and land and land development loan portfolios may expose us to increased credit risk.
At September 30, 2019, $30.1 million, or 3.7% of our loan portfolio consisted of construction loans, and land and land development loans, and $4.5
million, or 20.0% of the construction loan portfolio (excluding undisbursed commitments and 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.”
Our concentration in non-owner occupied residential real estate loans may expose us to increased credit risk.
At September 30, 2019, $27.8 million, or 14.0% of our residential mortgage loan portfolio and 3.4% 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, 2019, we had seven non-owner occupied
residential loan relationships, each having an outstanding balance over $500,000, with aggregate outstanding balances of $6.8 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, 2019, the Bank had one nonperforming non-owner occupied residential loan totaling $65,000. At
September 30, 2019, the Bank did not have any non-owner occupied residential properties held as real estate owned. 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.
Decreased residential mortgage origination volume and pricing decisions of competitors may adversely affect our profitability.
Our mortgage banking operation originates and sells residential mortgage loans. Changes in interest rates, housing prices, applicable government
regulations and pricing decisions by our loan competitors may adversely affect demand for our residential mortgage loan products and the revenue realized
on the sale of loans and, ultimately, reduce our net income. New regulations, increased regulatory reviews, and/or changes in the structure of the secondary
mortgage markets which we utilize to sell mortgage loans may increase costs and make it more difficult to operate a residential mortgage origination
business. Our revenue from the mortgage banking business was $33.0 million in the year ended September 30, 2019. This revenue could significantly decline
in future periods if interest rates were to rise and the other risks highlighted in this paragraph were realized, which may adversely affect our profitability.
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We may be required to repurchase mortgage loans or indemnify buyers against losses in some circumstances.
When residential mortgage loans are sold, whether as whole loans or pursuant to a securitization, we are required to make customary
representations and warranties to purchasers, guarantors and insurers about the mortgage loans and the manner in which they were originated. We may be
required to repurchase or substitute mortgage loans, or indemnify buyers against losses, in the event we breach certain representations or warranties in
connection with the sale of such loans. If repurchase and indemnity demands increase, are valid claims and are in excess of our provision for potential
losses, our liquidity, results of operations or financial condition may be materially and adversely affected.
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, 2019, which is the most recent date for which data is
available from the FDIC, we held approximately 16.06%, 16.82%, 3.25%, 38.86%, 100.00% and 19.80% of the FDIC-insured deposits in Clark, Daviess, 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.
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, 2019,
approximately $371.5 million, or 45.3% of the total loan portfolio, consisted of fixed-rate mortgage loans. This investment in fixed-rate mortgage loans
exposes the Company to increased levels of interest rate risk.
Changes in interest rates also affect the value of our interest-earning assets, and in particular our securities portfolio. Generally, the value of fixed-
rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as a separate
component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse
effect on stockholders’ equity. For further discussion of how changes in interest rates could impact us, see “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations —Risk Management — Interest Rate Risk Management.”
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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.
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.
Market expansion and acquisitions may not produce revenue enhancements or cost savings at levels or within timeframes originally anticipated
and may result in unforeseen integration difficulties and dilution to existing shareholder value.
We have acquired, and expect to continue to acquire, other financial institutions or parts of those institutions in the future, and we may engage in
de novo branch expansion. We may also consider and enter into new lines of business or offer new products or services. We may incur substantial costs to
expand, and we can give no assurance such expansion will result in the levels of profits we seek. There can be no assurance that integration efforts for any
mergers or acquisitions will be successful. Also, we may issue equity securities in connection with acquisitions, which could cause ownership and economic
dilution to our current shareholders. There is no assurance that, following any mergers or acquisitions, our integration efforts will be successful or that, after
giving effect to the acquisition, we will achieve profits comparable to, or better than, our historical experience.
Market expansion and acquisitions involve a number of expenses and risks, including:
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the time and costs of associated with identifying and evaluating potential new markets, hiring experienced local management and opening new
offices, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;
the time and costs associated with identifying potential acquisition and merger targets;
the accuracy of the estimates and judgments used to evaluate credit, operations, management and market risks with respect to a target
institution;
the diversion of our management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the
combined businesses;
our ability to finance an acquisition and possible dilution to our existing shareholders;
closing delays and expenses related to the resolution of lawsuits filed by shareholders of targets;
entry into new markets where we lack experience;
introduction of new products and services into our business;
the risk of loss of key employees and customers; and
incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of
operations.
Future acquisitions could be material to the Company and it may issue additional shares of stock to pay for those acquisitions, which would dilute
current shareholder’s ownership interests.
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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, 2019, our goodwill totaled $9.8 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.
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.
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.
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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 2019 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.
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There has been a sporadic 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 10, 2018, our directors, executive officers, and their related entities and persons currently beneficially own, in the aggregate,
approximately 15.26% 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”.
We identified material weaknesses in our internal control over financial reporting at September 30, 2019 and determined that our disclosure
controls and procedures were not effective. Failure to remediate the identified material weaknesses and maintain effective internal control over financial
reporting and disclosure controls and procedures in future periods could have a material adverse effect on our financial statements.
Management maintains and regularly monitors, reviews and updates the Company’s internal control over financial reporting and disclosure
controls and procedures as required by The Sarbanes-Oxley Act and related rules and regulations. Any system of controls, however well designed and
operated, is based in part on certain assumptions and can provide only reasonable assurances that the controls will be effective. Any failure or
circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect
on our business, results of operations and financial condition.
The Company’s management, with the supervision of the Chief Financial Officer and the Chief Executive Officer, conducted an evaluation of the
Company’s internal control over financial reporting and disclosure controls and procedures as of September 30, 2019. Based on that assessment,
management determined that, as of September 30, 2019, the Company’s internal control over financial reporting was not effective as a result of identified
material weaknesses, and that its disclosure controls and procedures were not effective as of such date as a result of the identified control deficiencies. The
specific control deficiencies are described in Part II - Item 9A. “Controls and Procedures” of this Form 10-K and in “Management’s Report on Internal
Control over Financial Reporting” contained herein. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements would not be
prevented or detected on a timely basis.
We are in the process of implementing remedial measures intended to address the control deficiencies that led to the material weaknesses.
However, if the remedial measures are insufficient, or if additional material weaknesses or significant deficiencies in our internal control over financial
reporting or in our disclosure controls and procedures occur in the future, we may not be able to report our financial results in an accurate and timely
manner, prevent or detect fraud, or provide reliable financial information pursuant to our reporting obligations, which could have a material adverse effect on
our business, financial condition, and results of operations.
26
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, 2019.
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
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
New Albany, Indiana
Odon Office
501 West Main Street
Odon, Indiana
Montgomery Office
478 West Meyers Street
Montgomery, Indiana
1982
Owned
1992
Owned
27
The Bank owns three former branch office locations. These locations 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
Leavenworth, Indiana has a carrying value of $55,000 at September 30, 2019 on the balance sheet of the Consolidated Financial Statements. The property
located in Marengo, Indiana has a carrying value of $111,000 at September 30, 2019 on the balance sheet of the Consolidated Financial Statements.
The Company owned a 4.077 acre parcel of land in New Albany, Indiana, which was developed by FFCC, Inc., a former wholly-owned subsidiary of
the Bank. The retail development, named “Wesley Commons”, 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, and FFCC was voluntarily dissolved and completely liquidated effective December 31, 2016.
The Company purchased an 8.097 acre parcel of land in Jeffersonville, Indiana, in July 2013 upon which it intended to construct an office building,
relocate its corporate headquarters, and subsequently divest of additional unused acreage in future years. However, in October 2018, the Company acquired
an office building for $7.5 million, in Jeffersonville, Indiana, to which it intends to relocate its corporate headquarters. As of September 30, 2019, the 8.097
acre parcel of land, which has a carrying value of approximately $1.7 million, is listed for sale and is included in “other real estate owned, held for sale” at
September 30, 2019 on the balance sheet of the Consolidated Financial Statements.
The Company also rents additional office space and equipment under operating lease agreements that expire at different dates through August
2028. 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.
28
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 10, 2019,
the Company had approximately 255 holders of record and 2,350,869 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 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.
Purchases of Equity Securities
The following table presents information regarding the Company’s stock repurchase activity during the quarter ended September 30, 2019:
(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
—
—
—
—
—
—
—
—
—
—
—
—
49,504
49,504
49,504
49,504
Period
July 1, 2019 through July 31,
2019
August 1, 2019 through
August 31, 2019
September 1, 2019 through
September 30, 2019
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.
29
Equity Compensation Plan Information
The following table sets forth information as of September 30, 2019 about Company common stock that may be issued under the Company’s equity
compensation plans. All plans were approved by the Company’s stockholders.
Plan category
Equity compensation plans approved by
security holders
Equity compensation plans not approved by
security holders
Total
Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a))
(c)
84,806 $
N/A
84,806 $
34.13
N/A
34.13
20,649
N/A
20,649
In December 2009 the Company adopted the 2010 Equity Incentive Plan (“2010 Plan”), which the Company’s shareholders approved in February
2010. The 2010 Plan provided 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 355,885 shares, consisting of 254,204 stock options and 101,681 shares of restricted stock. As of September 30,
2019, grants outstanding under the 2010 Plan included 101,681 restricted shares, 182,349 incentive stock options and 63,197 non-statutory stock options to
directors, officers and key employees. The restricted shares and stock options granted 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.
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, 2019,
grants outstanding under the 2016 Plan included 20,564 restricted shares, 47,545 incentive stock options and 7,900 non-statutory stock options to directors,
officers and key employees. The restricted shares and stock options granted 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.
30
Item 6.
SELECTED FINANCIAL DATA
The following tables contain certain information concerning our consolidated financial position and results of operations, which is derived in part
from our audited consolidated financial statements. The following is only a summary and should be read in conjunction with the audited consolidated
financial statements and notes thereto beginning on page F-1 of this annual report.
$
$
(In thousands)
Financial Condition Data:
Total assets
Cash and cash equivalents
Trading account securities
Securities available-for-sale
Securities held-to-maturity
Loans held for sale
Loans, net
Deposits
Borrowings from FHLB
Other borrowings
Stockholders’ equity
(In thousands)
Operating Data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan
losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense (benefit)
Net income
Less: net income attributable to noncontrolling
interests
Net income attributable to First Savings
Financial Group
Less: Preferred stock dividends declared
Net income available to common shareholders
$
Per Share Data:
Net income per common share, basic
Net income per common share, diluted
Dividends per common share
2019
$
2019
2018
At September 30,
2017
2016
2015
1,222,579 $
41,432
-
177,302
2,336
96,070
810,658
834,384
222,544
23,729
121,053
1,034,406 $
42,274
-
184,373
2,607
32,125
704,271
811,112
90,000
21,013
98,813
891,133 $
34,259
7,175
178,099
2,878
25,635
586,456
669,382
118,065
1,348
93,115
796,516 $
29,342
9,255
174,493
3,166
5,471
518,611
579,467
121,633
1,345
86,580
2019
50,995 $
10,906
40,089
1,463
38,626
43,854
62,390
20,090
3,095
16,995
For the Year Ended September 30,
2017
2018
2016
42,159 $
6,337
35,822
1,353
34,469
13,295
33,006
14,758
2,422
12,336
33,917 $
4,457
29,460
1,301
28,159
8,625
24,951
11,833
2,520
9,313
29,456 $
4,167
25,289
637
24,652
3,372
22,435
5,589
(2,322)
7,911
818
1,434
-
-
16,177
-
16,177 $
10,902
-
10,902 $
9,313
-
9,313 $
7,911
62
7,849 $
For the Year Ended September 30,
2017
2018
2016
749,946
24,994
9,044
178,328
4,620
6,803
457,112
533,297
104,867
5,974
94,357
2015
27,987
3,778
24,209
859
23,350
5,976
20,999
8,327
1,576
6,751
-
6,751
171
6,580
2015
6.99 $
6.82
0.63
4.83 $
4.60
0.59
4.20 $
3.97
0.55
3.57 $
3.41
0.51
3.07
2.93
0.47
31
Performance Ratios:
Return on average assets
2019
At or For the Year Ended September 30,
2016
2017
2018
2015
1.42%
1.11%
1.10%
1.03%
Return on average equity
15.65
12.80
10.56
Return on average common stockholders’
equity
Interest rate spread (1)
Net interest margin (2)
Other expenses to average assets
15.00
11.37
10.56
3.63
3.88
5.48
3.82
3.99
3.35
3.84
3.95
2.96
9.04
9.73
3.71
3.81
2.93
0.93%
7.43
9.16
3.74
3.84
2.88
Efficiency ratio (3)
74.32
67.20
65.51
78.28
69.57
Efficiency ratio (excluding nonrecurring items)
(4)
Average interest-earning assets to average
interest-bearing liabilities
Dividend payout ratio
Average equity to average assets
Capital Ratios (5):
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
74.51
63.96
64.69
68.20
69.57
124.96
125.02
120.21
117.86
116.90
9.10
9.54
12.32
9.77
13.20
10.45
14.03
11.45
14.74
12.47
13.85%
12.88
14.50%
12.92
12.69%
12.22
11.82%
11.33
16.21%
13.13
10.70
11.81
10.70
11.81
8.39
9.34
10.84
11.75
10.84
11.75
8.39
9.10
11.53
11.05
11.53
11.05
9.14
8.79
10.66
10.16
10.66
10.16
8.43
8.09
14.96
11.88
14.96
11.88
11.01
8.67
(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 21% for 2019, a blended federal marginal tax
rate of 24.5% for 2018 and 34% for years 2015 through 2017.
(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 21% for 2019, a blended federal tax rate of 24.5% for 2018 and 34% for years 2015 through 2017.
(3) Represents other expenses divided by the sum of net interest income and other income.
(4) Represents other expenses, excluding nonrecurring items as discussed below, divided by the sum of net interest income and other income, excluding
income (loss) on tax credit investment discussed below. The efficiency ratio for 2019 excludes the income on tax credit investment of $210,000. The
efficiency ratio for 2018 excludes the income on tax credit investment of $585,000, expenses of $1.3 million associated with the acquisition of and merger
with Dearmin and FNBO, and expenses of $661,000 associated with the initial operations of the secondary-market residential mortgage lending division.
The efficiency ratio for 2017 excludes the loss on tax credit investment of $226,000 and expenses of $166,000 associated with the acquisition of and
merger with Dearmin and FNBO. The efficiency ratio for 2016 excludes the loss on tax credit investment of $4.2 million. This is a non-GAAP financial
measure that management believes is useful to investors in understanding the Company’s performance.
32
Asset Quality Ratios:
Allowance for loan losses as a percent of total
loans
Allowance for loan losses as a percent of
nonperforming loans
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
2019
At or For the Year Ended September 30,
2016
2017
2018
2015
1.22%
1.31%
1.36%
1.35%
1.43%
193.82
218.18
206.64
182.76
150.37
0.02
0.60
1.31
16
43,368
7,228
0.09
0.63
1.02
15
44,343
7,759
33
0.06
0.66
1.33
14
33,594
5,679
0.03
0.74
1.49
14
33,407
5,409
0.11
0.95
1.75
14
33,430
5,373
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), ATM and interchange fees on
debit and credit cards, increases in the cash surrender value of life insurance, income from sales of residential mortgage and SBA loans originated for sale in
the secondary market, commissions on sales of securities and insurance products, and real estate lease income. 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 our equity incentive
plans 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, office lease expense 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.
34
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.
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, 2019. See Note 1 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report for additional information
regarding the methodology used to determine the allowance for loan losses.
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, derivative financial instruments,
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. See Note 22 of the Notes to Consolidated Financial Statements beginning on
page F-1 of this annual report for additional information.
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. See Note 18 of the Notes to Consolidated Financial Statements beginning on page F-1 of this
annual report for additional information.
Balance Sheet Analysis
Cash and Cash Equivalents. At September 30, 2019 and 2018, cash and cash equivalents totaled $41.4 million and $42.3 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. Net loans increased $106.4 million, from $704.3 million at September 30, 2018 to $810.7 million at September 30, 2019.
35
At September 30, 2019, residential mortgage loans totaled $198.1 million, or 24.2% of total loans, compared to $195.3 million, or 27.4% of total loans
at September 30, 2018. 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 $436.0 million, or 53.2% of total loans at September 30, 2019, compared to $343.5 million, or 48.2% of total loans
at September 30, 2018. The balance of commercial real estate loans has increased primarily due to increased SBA commercial real estate loan originations and
NNN Finance Program originations. Management continues to focus on pursuing nonresidential real estate loan opportunities in order to further diversify
the loan portfolio.
Multi-family real estate loans totaled $38.2 million, or 4.7% of total loans at September 30, 2019, compared to $28.8 million, or 4.0% of total loans at
September 30, 2018. These loans are primarily secured by apartment buildings and other multi-tenant developments in our primary market area.
Residential construction loans totaled $12.5 million, or 1.5% of total loans at September 30, 2019, of which $4.5 million were speculative construction
loans. At September 30, 2018, residential construction loans totaled $19.5 million, or 2.7% of total loans, of which $5.9 million were speculative loans.
Commercial construction loans totaled $7.0 million, or 0.9% of total loans, at September 30, 2019 compared to $8.7 million, or 1.2% of total loans at
September 30, 2018. The decrease is due primarily to a decrease in originations of commercial construction loans during the year.
Land and land development loans totaled $10.5 million, or 1.3% of total loans at September 30, 2019, compared to $10.5 million, or 1.5% of total loans
at September 30, 2018. These loans are primarily secured by vacant lots to be improved for residential and nonresidential development, and farmland.
Commercial business loans totaled $73.0 million, or 8.9% of total loans, at September 30, 2019 compared to $67.8 million, or 9.5% of total loans, at
September 30, 2018. The increase is due primarily to the increase of commercial business lending opportunities in our primary market area and increased SBA
commercial business loan originations. Management continues to focus on pursuing commercial business loan opportunities in order to further diversify the
loan portfolio.
Consumer loans totaled $44.7 million, or 5.4% of total loans, at September 30, 2019 compared to $39.3 million, or 5.5% of total loans, at September 30,
2018. 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 $4.0 million, or 16.3%, automobile loans increased $1.6 million, or 13.9%, and other consumer loans decreased $255,000,
or 8.7%, from September 30, 2018 to September 30, 2019.
36
The following table sets forth the composition of our loan portfolio at the dates indicated.
2019
2018
At September 30,
2017
2016
2015
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
$
(Dollars in thousands)
Real estate mortgage:
Residential
Commercial
Multi-family
Residential
construction
Commercial
construction
Land and land
development
Total
198,067
436,020
38,226
12,545
6,995
10,536
702,389
24.16% $
53.17
4.66
1.53
0.85
1.28
85.65
195,274
343,498
28,814
19,527
8,669
10,504
606,286
27.37% $
48.15
4.04
2.74
1.22
1.47
84.99
171,863
273,106
21,121
15,088
18,385
9,733
509,296
28.92% $
45.95
3.55
2.54
3.09
1.64
85.69
178,364
217,378
18,431
11,124
19,212
11,137
455,646
33.91% $
41.33
3.50
181,873
172,995
21,647
2.12
3.65
2.12
86.63
9,195
7,477
11,061
404,248
Commercial business
73,034
8.91
67,786
9.50
52,724
8.87
41,967
7.98
32,574
Consumer:
Home equity lines of
credit
Auto loans
Other
Total
28,651
13,347
2,663
44,661
3.49
1.63
0.32
5.44
24,635
11,720
2,918
39,273
3.46
1.64
0.41
5.51
22,939
7,057
2,323
32,319
3.86
1.19
0.39
5.44
21,372
4,880
2,078
28,330
4.06
0.93
0.40
5.39
19,499
5,487
2,048
27,034
39.22%
37.29
4.67
1.98
1.61
2.38
87.15
7.02
4.21
1.18
0.44
5.83
Principal loans
820,084
100.00%
713,345
100.00%
594,339
100.00%
525,943
100.00%
463,856
100.00%
Deferred loan origination
fees and costs, net
Allowance for loan
614
losses
Loans, net
(10,040)
810,658
$
$
249
(9,323)
704,271
209
(8,092)
586,456
$
(211)
(7,122)
518,611
$
(120)
(6,624)
457,112
$
37
Loan Maturity
The following table sets forth certain information at September 30, 2019 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
Residential
Real Estate
(1)
Commercial
Real Estate
(2)
Construction
(3)
Commercial
Business
Consumer
Total
Loans
At September 30, 2019
$
$
19,069 $
43,495
173,729
236,293 $
65,309 $
161,304
219,943
446,556 $
19,540 $
-
-
19,540 $
32,131 $
24,062
16,841
73,034 $
7,489 $
17,239
19,933
44,661 $
143,538
246,100
430,446
820,084
(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, 2019 that are due after September 30, 2020, 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
(1) Includes multi-family loans.
(2) Includes farmland and land and land development loans.
38
Fixed Rates
$
Adjustable
Rates
123,124 $
218,490
24,489
30,788
396,891 $
Total
217,224
381,247
40,903
37,172
676,546
94,100 $
162,757
16,414
6,384
279,655 $
$
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. The Bank ceased its trading account securities activity and liquidated this portfolio as of June 30, 2018.
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 pass-through asset-backed securities guaranteed by the SBA.
Available for sale securities decreased by $7.1 million, from $184.4 million at September 30, 2018 to $177.3 million at September 30, 2019, due primarily to
principal repayments of $18.l million, sales of $13.9 million and maturities and calls of $7.7 million, partially offset by purchases of $24.4 million and an
increase in unrealized gains of $8.8 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 $271,000 from September 30, 2018 to September 30, 2019, 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.
(In thousands)
Securities available for sale:
Agency bonds and notes
Agency mortgage-backed securities
Agency CMO
Privately-issued CMO
Privately-issued asset-backed
SBA certificates
Municipal
Total
Securities held to maturity:
Agency mortgage-backed securities
Municipal
Total
2019
At September 30,
2018
2017
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
- $
13,743
8,834
1,242
1,022
1,119
141,995
167,955 $
- $
14,097
9,048
1,382
1,178
1,154
150,443
177,302 $
- $
31,686
10,754
1,434
1,538
1,305
137,144
183,861 $
- $
31,130
10,441
1,579
1,884
1,351
137,988
184,373 $
- $
36,439
14,605
1,825
2,691
913
115,193
171,666 $
-
36,736
14,576
2,001
3,448
912
120,426
178,099
102 $
2,234
2,336 $
109 $
2,561
2,670 $
134 $
2,473
2,607 $
142 $
2,754
2,896 $
179 $
2,699
2,878 $
195
3,111
3,306
$
$
$
$
39
The following table sets forth the stated maturities and weighted average yields of debt securities at September 30, 2019. Weighted average yields
on tax-exempt securities are presented on a tax equivalent basis using a federal marginal tax rate of 21.0%. 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
Privately-issued CMO
Privately-issued ABS
SBA certificates
Municipal
Total
Securities held to maturity:
Agency mortgage-backed securities
Municipal
Total
$
$
$
$
–
–
–
–
–
2,713
2,713
–
248
248
–% $
–
–
–
–
5.01
5.01% $
788
–
–
–
–
23,846
24,634
1.85% $
–
–
–
–
3.82
3.76% $
3,439
3,849
–
–
1,154
29,955
38,397
2.51% $
2.85
–
–
4.27
4.17
3.89% $
9,870
5,199
1,382
1,178
–
93,929
111,558
3.27% $
3.06
7.17
25.97
–
4.05
4.20% $
14,097
9,048
1,382
1,178
1,154
150,443
177,302
–% $
6.32
6.32% $
–
1,006
1,006
–% $
6.43
6.43% $
77
779
856
5.30% $
5.93
5.88% $
24
201
225
3.78% $
5.56
5.37% $
102
2,234
2,336
3.01%
2.97
7.17
25.97
4.27
4.05
4.09%
4.94%
6.16
6.11%
As of September 30, 2019, 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 consolidated 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 $23.3 million from $811.1 million at September 30, 2018 to $834.4 million at September 30, 2019. The
Bank recognized increases in money market deposit accounts of $14.2 million, noninterest-bearing checking accounts of $5.4 million, time deposits of $4.1
million and interest-bearing checking accounts of $203,000 and decreases in savings accounts of $602,000, when comparing the two years. Brokered
certificates of deposit totaled $99.7 million at September 30, 2019 compared to $118.7 million at September 30, 2018. 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.
The following table sets forth the balances of our deposit accounts at the dates indicated.
(In thousands)
Non-interest-bearing demand deposits
NOW accounts
Money market accounts
Savings accounts
Time deposits
Total
2019
At September 30,
2018
2017
$
$
173,072 $
173,746
121,281
120,393
245,892
834,384 $
167,705 $
173,543
107,124
120,995
241,745
811,112 $
96,283
182,068
70,775
90,360
229,896
669,382
40
The following table indicates the amount of jumbo certificates of deposit by time remaining until maturity as of September 30, 2019. Jumbo
certificates of deposit require minimum deposits of $100,000.
(In thousands)
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Total
Amount
$
9,818
6,383
16,439
30,113
62,753
$
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
Average FHLB borrowings outstanding during period
Weighted average interest rate during period
Balance outstanding at end of period
Weighted average interest rate at end of period
Year Ended September 30,
2018
2017
2019
$
$
222,544
143,480
$
222,544
1.87%
$
1.64%
159,863
121,691
$
90,000
1.66%
$
1.63%
122,089
110,952
1.50%
118,065
1.54%
The outstanding balance of borrowings from the FHLB increased $132.5 million, from $90.0 million at September 30, 2018 to $222.5 million at
September 30, 2019. 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
Year Ended September 30,
2018
2017
2019
during period
Average retail repurchase agreements outstanding during period
Weighted average interest rate during period
Balance outstanding at end of period
Weighted average interest rate at end of period
$
$
$
1,354
1,075
0.25%
-
$
0.00%
$
1,352
1,350
0.25%
1,352
$
0.25%
1,348
1,346
0.25%
1,348
0.25%
On September 20, 2018, the Company entered into a subordinated note purchase agreement in the principal amount of $20 million. The subordinated
note initially bears a fixed interest rate of 6.02% per year through September 30, 2023, and thereafter a floating rate, reset quarterly, equal to the three-month
LIBOR rate plus 310 basis points. All interest is payable quarterly and the subordinated note is scheduled to mature on September 30, 2028. The
subordinated note is an unsecured subordinated obligation of the Company and may be repaid in whole or in part, without penalty, on or after September 30,
2023. The subordinated note is intended to qualify as Tier 2 capital for the Company under regulatory guidelines. The subordinated note had a carrying
value of $19.7 million, net of unamortized debt issuance costs of 271,000, at September 30, 2019 on the balance sheet of the Consolidated Financial
Statements.
The Bank has entered into federal funds purchased line of credit facilities with two other financial institutions that established lines of credit not to
exceed the lesser of $20 million or 25% of the Bank’s equity capital, excluding reserves, and $15 million, respectively. At September 30, 2019, the Bank had
$4.0 million outstanding in federal funds purchased under one of the lines of credit.
Stockholders’ Equity. Stockholders’ equity increased $22.3 million, from $98.8 million at September 30, 2018 to $121.1 million at September 30, 2019.
The increase is due to retained net income of $14.7 million during the year ended September 30, 2019 and a $6.9 million increase in accumulated other
comprehensive income due to an increase in the market value of available-for-sale securities.
41
Results of Operations for the Years Ended September 30, 2019, 2018 and 2017
Overview. The Company reported net income of $16.2 million ($6.82 per common share diluted) for the year ended September 30, 2019, compared to
net income of $10.9 million ($4.60 per common share diluted) for the year ended September 30, 2018. The increase in net income was due to increases in net
interest income of $4.3 million and noninterest income of $30.6 million, partially offset by an increase in noninterest expense of $29.4 million.
Net income was $10.9 million ($4.60 per common share diluted) for the year ended September 30, 2018 compared to net income of $9.3 million ($3.97
per common share diluted) for the year ended September 30, 2017. The increase in net income for 2018 compared to 2017 was due to increases in net interest
income and noninterest income of $6.4 million and $4.7 million, respectively, partially offset by an increase in noninterest expense of $8.1 million.
Net Interest Income. For the year ended September 30, 2019, net interest income increased $4.3 million or 11.9%, as compared to 2018, primarily as
the result of an increase in the average balance of interest earning assets. The interest rate spread, the difference between the average tax-equivalent yield
on interest-earning assets and the average cost of interest-bearing liabilities, decreased from 3.82% for 2018 to 3.63% for 2019 due primarily to an increase in
the average cost of interest-bearing liabilities from 0.85% for 2018 to 1.28% for 2019 and an increase in average interest-bearing liabilities from $743.3 million
for 2018 to $849.6 million for 2019, which more than offset the effect of an increase in the average yield on interest-bearing assets from 4.67% for 2018 to
4.91% for 2019 and an increase in the average balance of interest-bearing assets from $929.2 million for 2018 to $1.06 billion for 2019. For the year ended
September 30, 2018, net interest income increased $6.4 million or 21.6% as compared 2017, primarily as the result of an increase in the average balance of
interest earning assets. The interest rate spread decreased slightly from 3.84% for 2017 to 3.82% for 2018 due primarily to an increase in the average cost of
interest-bearing liabilities from 0.68% for 2017 to 0.85% for 2018 and an increase in average interest-bearing liabilities from $654.4 million for 2017 to $743.3
million for 2018, which more than offset the effect of an increase in the average yield on interest-bearing assets from 4.52% for 2017 to 4.67% for 2018 and an
increase in the average balance of interest-bearing assets from $786.6 million for 2017 to $929.2 million for 2018.
For the year ended September 30, 2019, total interest income increased $8.8 million, or 21.0%, as compared to 2018. The increase in total interest
income is due primarily to increases in the average balance of interest earning assets of $132.4 million, from $929.2 million for 2018 to $1.06 billion for 2019,
and the average tax-equivalent yield on interest-earning assets, from 4.67% for 2018 to 4.91% for 2019. The increase in the average balance of interest-
earning assets primarily relates to increases in the average balance of loans of $130.2 million. For the year ended September 30, 2018, total interest income
increased $8.2 million, or 24.3%, from $33.9 million for the year ended September 30, 2017 to $42.2 million for the year ended September 30, 2018. The increase
in total interest income is due primarily to increases in the average balance of interest earning assets of $142.6 million, from $786.6 million for 2017 to $929.2
million for 2018, and the average tax-equivalent yield on interest-earning assets, from 4.52% for 2017 to 4.67% for 2018. The increase in the average balance
of interest-earning assets primarily relates to increases in the average balance of loans of $123.6 million and securities of $13.6 million.
Interest income on loans increased $8.6 million, or 25.3%, from $34.1 million for 2018 to $42.7 million for 2019, due primarily to an increase in the
average balance of loans outstanding of $130.2 million, from $698.6 million for 2018 to $828.8 million, and an increase in the average tax-equivalent yield on
loans from 4.89% for 2018 to 5.16% for 2019. In 2018, interest income on loans increased $7.0 million, or 25.7%, from $27.1 million for 2017 to $34.1 million for
2018, due primarily to an increase in the average balance of loans outstanding of $123.6 million, from $575.0 million for 2017 to $698.6 million for 2018, and an
increase in the average tax-equivalent yield on loans from 4.73% for 2017 to 4.89% for 2018. The increase in the average balance of loans outstanding for
both 2019 and 2018 is due primarily to an increase in commercial real estate mortgage loans, as a result of increased SBA loan originations and NNN Finance
Program originations.
42
Interest income on investment securities decreased $402,000, or 5.6%, from $7.2 million for 2018 to $6.8 million for 2019, primarily due to a decrease
in the average balance of investment securities of $10.6 million, from $192.6 million for 2018 to $182.0 million for 2019. The average tax equivalent yield on
investment securities decreased slightly from 4.34% for 2018 to 4.32% for 2019, due primarily to the decrease in the federal marginal income tax rate from a
blended rate of 24.5% for 2018 to a rate of 21.0% for 2019. In 2018, interest income on investment securities increased $874,000, or 13.8%, from $6.3 million for
2017 to $7.2 million for 2018, primarily due to the increase in the average balance of investment securities of $13.6 million, from $178.9 million for 2017 to
$192.5 million for 2018. The average tax equivalent yield on investment securities decreased from 4.40% for 2017 to 4.34% for 2018 due primarily to the
decrease in the federal marginal income tax rate from 34.0% for 2017 to a blended rate of 24.5% for 2018.
Total interest expense increased $4.6 million, or 72.5%, due primarily to an increase in the average balance of interest-bearing liabilities of $106.3
million, from $743.3 million for 2018 to $849.6 million for 2019, and an increase in the average cost of funds from 0.85% for 2018 to 1.28% for 2019. The average
balance of interest-bearing deposits increased $65.7 million, or 10.6%, from $619.7 million for 2018 to $685.4 million for 2019, and the average cost of funds for
deposits was 0.69% for 2018 compared to 1.01% for 2019. The average balance of borrowings from the Federal Home Loan Bank increased $21.8 million, or
17.9%, from $121.7 million for 2018 to $143.5 million for 2019, and the average cost of Federal Home Loan Bank borrowings increased from 1.66% for 2018 to
1.87% for 2019. Average other borrowings, which are comprised of subordinated debt, increased from $593,000 for 2018 to $19.7 million for 2019. The average
cost of other borrowings increased from 5.56% for 2018, net of amortization of debt issuance costs, to 6.48% for 2019, net of amortization of debt issuance
costs. In 2018, total interest expense increased $1.9 million, or 42.2%, due primarily to an increase in the average balance of interest-bearing liabilities of $88.9
million, from $654.4 million for 2017 to $743.3 million for 2018, and an increase in the average cost of funds from 0.68% for 2017 to 0.85% for 2018. The average
balance of interest-bearing deposits increased $79.8 million, or 14.8%, from $539.9 million for 2017 to $619.7 million for 2018, and the average cost of funds for
deposits was 0.51% for 2017 compared to 0.69% for 2018. The average balance of borrowings increased $9.2 million, or 8.0%, from $114.4 million for 2017 to
$123.6 million for 2018, and the average cost of funds for borrowings was 1.48% for 2017 compared to 1.66% for 2018.
43
Average Balances and Yields.
The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and
dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting
annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of
assets or liabilities, respectively, for the periods presented. Nonaccrual loans are included in average balances only. Loan fees are included in interest
income on loans and are not material. Tax exempt income on loans and investment securities for the 2019, 2018 and 2017 periods has been adjusted to a tax
equivalent basis using a federal marginal tax rate of 21.0%, 24.5% and 34.0%, respectively.
(Dollars in thousands)
Assets:
Interest-bearing deposits with banks
Loans
Investment securities
Mortgage-backed securities
FRB and FHLB stock
$
Average
Balance
$
39,434
828,809
159,228
22,738
11,477
Total interest-earning assets
1,061,686
$
$
Non-interest-earning assets
Total assets
Liabilities and equity:
NOW accounts
Money market deposit accounts
Savings accounts
Time deposits
Total interest-bearing deposits
Repurchase agreements
Federal funds purchased
Borrowings from FHLB
Other borrowings
Total interest-bearing liabilities
Non-interest-bearing deposits
Other non-interest-bearing liabilities
Total liabilities
Total stockholders’ equity
Noncontrolling interests in subsidiary
Total equity
76,449
1,138,135
$
177,316
115,648
119,966
272,433
685,363
1,075
33
143,480
19,692
849,643
166,719
13,159
1,029,521
107,865
749
108,614
2019
Interest
and
Dividends
Year Ended September 30,
2018
Interest
and
Dividends
Yield/
Cost
Average
Balance
2017
Interest
and
Dividends
Yield/
Cost
Yield/
Cost
Average
Balance
856
42,765
7,241
629
643
52,134
481
1,472
93
4,898
6,944
3
1
2,681
1,277
10,906
2.17% $
5.16
4.55
2.77
5.60
4.91
$
28,863
698,638
154,764
37,799
9,183
929,247
436
34,130
7,333
1,020
465
43,384
1.51% $
4.89
4.74
2.70
5.06
4.67
$
25,835
574,957
137,756
41,167
6,936
786,651
184
27,188
6,993
886
313
35,564
$
56,921
986,168
$
56,520
843,171
$
0.27
1.27
0.08
1.80
1.01
0.28
3.03
1.87
6.48
1.28
$
185,026
89,256
110,289
235,100
619,671
1,350
-
121,691
593
743,305
137,742
8,760
899,807
95,889
472
96,361
483
624
85
3,087
4,279
3
-
2,022
33
6,337
$
0.26
0.70
0.08
1.31
0.69
0.22
0.00
1.66
5.56
0.85
404
199
63
2,096
2,762
3
23
1,669
-
4,457
$
171,831
65,016
88,418
214,673
539,938
1,346
2,138
110,952
-
654,374
93,083
7,563
755,020
88,151
-
88,151
0.71%
4.73
5.08
2.15
4.51
4.52
0.24
0.31
0.07
0.98
0.51
0.22
1.08
1.50
0.00
0.68
Total liabilities and equity
$
1,138,135
$
986,168
$
843,171
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
41,228
(1,139)
40,089
$
37,047
(1,225)
35,822
$
31,107
(1,647)
29,460
$
3.63%
3.88
124.96
44
3.82%
3.99
125.02
3.84%
3.95
120.21
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, 2019
Compared to
Year Ended September 30, 2018
Increase (Decrease)
Due to
Volume
Rate
Year Ended September 30, 2018
Compared to
Year Ended September 30, 2017
Increase (Decrease)
Due to
Net
Volume
Rate
Net
$
194 $
6,574
206
(412)
122
6,684
577
-
1
381
1,244
2,203
225 $
2,062
(298)
21
56
2,066
2,088
-
-
277
-
2,366
419 $
8,636
(92)
(391)
178
8,750
2,665
-
1
659
1,244
4,569
23 $
5,999
742
(63)
110
6,811
473
-
(11)
168
33
663
229 $
943
(402)
197
42
1,009
1,044
-
(12)
185
-
1,217
252
6,942
340
134
152
7,820
1,517
-
(23)
353
33
1,880
(In thousands)
Interest income:
Interest-bearing deposits with banks
Loans
Investment securities
Mortgage-backed securities
FRB and FHLB stock
Total interest-earning assets
Interest expense:
Deposits
Repurchase agreements
Federal funds purchased
Borrowings from FHLB
Other borrowings (sub debt)
Total interest-bearing liabilities
Net increase (decrease) in net interest income (taxable
equivalent basis)
$
4,481 $
(300) $
4,181 $
6,148 $
(208) $
5,940
Provision for Loan Losses. The provision for loan losses increased $110,000, or 8.1%, from $1.4 million for the year ended September 30, 2018 to
$1.5 million for the year ended September 30, 2019 due primarily to an increase in total loans of $106.7 million. Net charge-offs in 2019 were $746,000 compared
to $122,000 for 2018 and nonperforming loans increased $907,000 to $5.2 million at September 30, 2019. In 2018, the provision for loan losses increased
$52,000, or 4.0%, from $1.3 million for the year ended September 30, 2017 to $1.4 million for the year ended September 30, 2018 due primarily to an increase in
total loans of $84.5 million (excluding loans acquired in the FNBO merger). Net charge-offs in 2018 were $122,000 compared to $331,000 for 2017 and
nonperforming loans increased $357,000 to $4.3 million at September 30, 2018. 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 2019 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, 2019 was adequate and appropriately reflected the probable incurred losses in the Bank’s loan portfolio at that date.
Noninterest Income. Noninterest income increased $30.6 million, or 229.9%, from $13.3 million for the year ended September 30, 2018 to $43.9 million
for the year ended September 30, 2019. The increase was due primarily to increases in mortgage banking income and real estate lease income of $30.7 million
and $589,000, respectively. These increases were partially offset by a decrease in the net gain on sale of loans guaranteed by the SBA of $924,000. The
increase in mortgage banking income is due to production from the secondary-market residential mortgage lending segment that commenced operations in
April 2018. The increase in real estate lease income for 2019 is due to the acquisition in October 2018 of a commercial office building that will serve as the
Company’s new corporate headquarters, a portion of which is leased to other tenants. The net gain on sales of loans guaranteed by the SBA was $4.6
million for the year ended September 30, 2019, compared to $5.5 million for the same period in 2018. In 2018, noninterest income increased $4.7 million, or
54.1%, from $8.6 million for the year ended September 30, 2017 to $13.3 million for the year ended September 30, 2018. The increase was due primarily to
increases in mortgage banking income, net gain on sales of SBA loans, income on tax credit investments, service charges on deposit accounts, and other
income of $1.8 million, $1.3 million, $811,000, $376,000 and $386,000, respectively. The increase in mortgage banking income is due to the production from the
newly hired secondary-market residential mortgage lending staff previously discussed. The net gain on sales of loans guaranteed by the SBA was $5.5
million for the year ended September 30, 2018, compared to $4.2 million for the same period in 2017, and the increase is due to increased production and sales
volume. The Company recognized income on tax credit investment of $585,000 for the year ended September 30, 2018 related to distributions receivable from
the tax credit investment entity, compared to an impairment loss of $226,000 on the investment in the entity for 2017. The increase in service charges on
deposit accounts is due primary to the deposit accounts acquired in the FNBO merger.
45
Noninterest Expense. Noninterest expenses increased $29.4 million, or 89.0%, from $33.0 million for the year ended September 30, 2018 to $62.4
million for the year ended September 30, 2019. The increase was due primarily to increases in compensation and benefits, occupancy and equipment,
advertising and other operating expense of $23.2 million, $2.5 million, $1.9 million and $2.0 million, respectively. The increase in compensation and benefits
expense is attributable to the addition of new employees to support the growth of the Company, including its mortgage banking and SBA lending activities,
and normal salary and benefits adjustments. The increase in occupancy and equipment expense is primarily attributable to increases in lease and rental,
depreciation and equipment, and software licensing expenses that are all primarily related to the mortgage banking segment. The increases in advertising and
other operating expenses are also primarily due to the expansion of the mortgage banking segment. In 2018, noninterest expenses increased $8.0 million, or
32.3%, from $25.0 million for the year ended September 30, 2017 to $33.0 million for the year ended September 30, 2018. The increase was due primarily to
increases in compensation and benefits, data processing, other operating expenses and occupancy and equipment of $4.6 million, $1.1 million, $933,000 and
$841,000, respectively, which included merger-related expenses and initial operating expenses of the secondary-market residential mortgage lending division,
as provided in the table below.
(In thousands)
Increase
Less: Merger-related expenses
Less: Initial secondary-market residential mortgage division
operating expenses
Data
Processing
Other
Operating
Compensation
and Benefits
$
4,641 $
83
$
475
4,083 $
1,068 $
839
-
229 $
Occupancy
and Equipment
841
72
933 $
43
30
860 $
58
711
The increase in compensation and benefits expense for 2018 compared to 2017 is attributable to the addition of new employees to support the
growth of the Company, including its SBA and secondary-market residential mortgage lending activities, compensation for the employees retained in the
FNBO merger, and normal salary and benefits adjustments. The increase in data processing expense is primarily attributable to costs associated with the
FNBO merger. The increase in occupancy and equipment expense is primarily attributable to increases in repairs, maintenance and software licensing
expenses.
Income Tax Expense. The Company recognized income tax expense of $3.1 million for the year ended September 30, 2019, compared to income tax
expense of $2.4 million for the year ended September 30, 2018 and income tax expense of $2.5 million for the year ended September 30, 2017. The effective tax
rate was 15.4%, 16.4% and 21.3%, for the years ended September 30, 2019, 2018 and 2017, respectively. The decrease in the effective tax rate is due primarily
to a reduction in the Company’s statutory federal income tax rate from 34.0% for 2017 to a blended rate of 24.5% for 2018 and a rate of 21.0% for 2019, as a
result of the Tax Act enacted in December 2017, and net income attributable to noncontrolling interests of $818,000 and $1.4 million, for the years ended
September 30, 2019 and 2018, respectively, which is pass-through income not subject to income tax at the entity level.
46
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. Former bank premises held for sale are also included in other real estate owned, but are not
included in the nonperforming asset totals below.
47
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 33 TDRs totaling $7.3 million, which
were performing according to their terms and on accrual status, as of September 30, 2019.
(Dollars in thousands)
Nonaccrual loans
Accruing loans past due 90 days or more
Total nonperforming loans
Performing TDRs
Real estate owned
Other nonperforming assets
Total nonperforming assets
Total nonperforming loans to total loans
Total nonperforming loans to total assets
Total nonperforming assets to total assets
2019
2018
At September 30,
2017
2016
2015
$
$
5,168
12
5,180
7,265
–
–
12,445
$
$
4,182
91
4,273
9,145
103
–
13,521
$
$
3,823
93
3,916
7,041
852
–
11,809
$
$
3,875
22
3,897
7,486
519
–
11,902
$
$
4,153
252
4,405
8,090
618
–
13,113
0.63%
0.42
1.02
0.60%
0.41
1.31
0.66%
0.44
1.33
0.74%
0.49
1.49
0.95%
0.59
1.75
Federal and state banking 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, 2019, the Company held twelve privately-issued CMO and ABS securities with an aggregate amortized cost of $1.1 million and fair
value of $1.2 million that have been downgraded to a substandard regulatory classification due to a downgrade of the security’s credit quality rating by
various rating agencies. Based on an independent third party analysis, the Bank expects to collect the contractual principal and interest cash flows for these
securities and, as a result, no other-than-temporary impairment has been recognized on the privately-issued CMO or ABS portfolios. At September 30, 2018,
the Company held fourteen privately-issued CMO and ABS securities with an aggregate carrying value of $1.3 million and fair value of $1.6 million that had
been downgraded to a substandard regulatory classification due to a downgrade of the security’s credit quality rating by various rating agencies.
48
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 at least 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.
(Dollars in thousands)
Residential real estate
Commercial real estate
Multi-family
Construction
Land and land development
Commercial business
Consumer
Total allowance for loan losses
Amount
338
6,381
478
421
209
1,639
574
10,040
$
$
2019
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
3.37%
63.56
4.76
4.19
2.08
16.32
5.72
100.00%
24.16% $
53.17
4.66
2.38
1.28
8.91
5.44
100.00% $
Amount
274
6,825
195
580
210
1,041
198
9,323
At September 30,
2018
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
2.94%
73.21
2.09
6.22
2.25
11.17
2.12
100.00%
27.37% $
48.15
4.04
3.96
1.47
9.50
5.51
100.00% $
Amount
252
5,739
106
810
223
839
123
8,092
2017
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
3.11%
70.92
1.31
10.01
2.76
10.37
1.52
100.00%
28.92%
45.95
3.55
5.63
1.64
8.87
5.44
100.00%
(Dollars in thousands)
Residential real estate
Commercial real estate
Multi-family
Construction
Land and land development
Commercial business
Consumer
Total allowance for loan losses
2016
% of
Allowance
to Total
Amount
$
Allowance
4.70%
72.46
1.53
11.86
4.14
3.99
1.32
100.00%
335
5,160
109
845
295
284
94
7,122
$
49
At September 30,
% of
Loans in
Category
to Total
Loans
Amount
2015
% of
Allowance
to Total
33.91% $
41.33
3.50
5.77
2.12
7.98
5.39
100.00% $
Allowance
6.70%
65.32
2.36
8.32
5.57
10.24
1.49
100.00%
444
4,327
156
551
369
678
99
6,624
% of
Loans in
Category
to Total
Loans
39.22%
37.29
4.67
3.59
2.38
7.02
5.83
100.00%
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for
loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in
making the determinations. 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)
Allowance for loan losses at beginning of period
Provision for loan losses
Charge offs:
Residential real estate
Commercial real estate
Multi-family
Construction
Land and land development
Commercial business
Consumer
Total charge-offs
Recoveries:
Residential real estate
Commercial real estate
Multi-family
Land and land development
Construction
Commercial business
Consumer
Total recoveries
Net charge-offs
2019
Year Ended September 30,
2017
2018
2016
2015
$
$
9,323
1,463
$
8,092
1,353
$
7,122
1,301
$
6,624
637
6,250
859
21
574
–
–
–
79
174
848
30
2
–
–
–
13
57
102
746
98
–
–
–
–
–
223
321
106
–
–
–
–
12
81
199
122
169
–
–
–
–
200
116
485
71
10
–
–
–
17
56
154
331
207
–
–
–
–
10
108
325
115
–
–
–
–
1
70
186
139
283
40
–
–
–
126
144
593
41
–
–
–
–
1
66
108
485
Allowance for loan losses at end of period
$
10,040
$
9,323
$
8,092
$
7,122
$
6,624
Allowance for loan losses to nonperforming loans
Allowance for loan losses to total loans outstanding at the end of
the period
Net charge-offs to average loans outstanding during the period
193.82%
218.18%
206.64%
182.76%
150.37%
1.22
0.09
1.31
0.02
1.36
0.06
1.35
0.03
1.43
0.11
50
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, other than the use of forward mortgage loan sale contracts in connection with our mortgage
banking activities. See Note 21 of the Notes to Consolidated Financial Statements beginning on page F-1 of this annual report for additional information
regarding derivative financial instruments.
We have an Asset/Liability Management Committee, which includes members of management selected 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, 2019 and 2018 financial
information.
Immediate Change
in the Level
of Interest Rates
300bp
200bp
100bp
Static
(100)bp
At September 30, 2019
At September 30, 2018
One Year Horizon
One Year Horizon
Dollar
Change
Percent
Change
Dollar
Change
Percent
Change
$
(4,945)
(2,197)
(993)
-
750
(Dollars in thousands)
(12.43)% $
(5.52)
(2.50)
-
1.89
(1,821)
764
410
-
(415)
(4.92)%
2.06
1.11
-
(1.12)
At September 30, 2019, our simulated exposure to an increase in interest rates shows that an immediate and sustained increase in rates of 1.00% will
decrease our net interest income by $993,000 or 2.50% over a one year horizon compared to a flat interest rate scenario. Furthermore, rate increases of 2.00%
and 3.00% would cause net interest income to decrease by 5.52% and 12.43%, respectively. An immediate and sustained decrease in rates of 1.00% will
increase our net interest income by $750,000, or 1.89%, over a one year horizon compared to a flat interest rate scenario.
51
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.
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, 2019 and 2018 financial information.
At September 30, 2019
Immediate Change
in the Level
of Interest Rates
300bp
200bp
100bp
Static
(100)bp
Immediate Change
in the Level
of Interest Rates
300bp
200bp
100bp
Static
(100)bp
Dollar
Amount
Economic Value of Equity
Dollar
Change
Percent
Change
Economic Value of Equity as a
Percent of Present Value of Assets
EVE Ratio
Change
(Dollars in thousands)
$
166,249 $
190,042
206,390
221,264
230,357
(55,015)
(31,222)
(14,874)
-
9,093
(24.86)%
(14.11)
(6.72)
-
4.11
14.99%
16.45
17.14
17.63
17.68
(264)bp
(118)bp
(49)bp
- bp
5bp
At September 30, 2018
Dollar
Amount
Economic Value of Equity
Dollar
Change
Percent
Change
Economic Value of Equity as a
Percent of Present Value of Assets
EVE Ratio
Change
(Dollars in thousands)
$
138,241 $
162,949
171,236
176,833
176,695
(38,592)
(13,884)
(5,597)
-
(138)
(21.82)%
(7.85)
(3.17)
-
(0.08)
15.55%
17.68
17.86
17.77
17.18
(222)bp
(9)bp
9bp
- bp
(59)bp
The previous table indicates that at September 30, 2019, the Company would expect a decrease in its EVE in the event of a sudden and sustained
100, 200 and 300 basis point increase in prevailing interest rates, and an increase in its EVE in the event of a sudden and sustained 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, 2019 comprised approximately 41.3% of the loan portfolio.
52
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.
The Bank regularly adjusts its investments in liquid assets based upon its 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, 2019, cash and cash equivalents totaled $41.4 million. Securities
classified as available-for-sale, amounting to $177.3 million, at September 30, 2019, provide additional sources of liquidity. At September 30, 2019, we had the
ability to borrow a total of approximately $254.7 million from the FHLB, of which $222.5 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, 2019. 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 $4.0 million of outstanding federal funds purchased at September 30, 2019.
At September 30, 2019, the Bank had $147.0 million in commitments to extend credit outstanding, excluding interest rate lock commitments for
residential mortgage loans intended for sale in the secondary market that meet the definition of a derivative. Time deposits due within one year of September
30, 2019 totaled $178.4 million, or 72.6% 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, 2020. 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, 2019, the Company had liquid assets of $6.5 million on a stand-alone, unconsolidated basis.
53
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, 2019, 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.”
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, 2019, 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.
54
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, as a result of the material weaknesses described below, 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 not
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.
In the fourth fiscal quarter of 2019, management identified material weaknesses in internal control related to the design effectiveness of the
Company's controls within the mortgage banking segment over the valuation of interest rate lock commitments and loans held for sale, and the accrual of
incentive compensation. The material weakness related to the valuation of interest rate lock commitments and loans held for sale occurred due to a failure to
design appropriate controls for the evaluation of significant assumptions used in the valuation process. The material weakness related to the accrual of
incentive compensation occurred due to a failure to design appropriate controls to ensure that incentive compensation is recognized when earned based on
the terms of the employment agreements. When the material weaknesses were identified, management updated its valuation of interest rate lock
commitments and loans held for sale resulting in a decrease in the value of certain of these instruments, and recorded previously unrecognized incentive
compensation, resulting in a restatement of the financial statements included in the Company's June 30, 2019 Form 10-Q. All necessary adjustments have
been recorded as of September 30, 2019 related to the valuation of interest rate lock commitments and loans held for sale, and the accrual of incentive
compensation.
As of September 30, 2019, based on management's assessment, the Company's internal control over financial reporting was not effective due to
these matters. Management is taking steps to remediate the material weaknesses by evaluating the Company's policies and practices for and resources
allocated to the controls over the valuation of interest rate lock commitments and loans held for sale and the review of incentive compensation agreements.
Management also intends to provide additional training and improved documentation to support the assumptions utilized in the valuation of interest rate
lock commitments and loans held for sale.
(b)
Internal Control over Financial Reporting
The management of 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 and 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, 2019, 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, 2019, its
system of internal control over financial reporting is not effective and does not meet the criteria of the “Internal Control Integrated Framework” due to the
material weaknesses described above.
(c)
Changes to Internal Control over Financial Reporting
Other than the remediation efforts with respect to the material weaknesses described above, there were no changes in the Company’s internal
control over financial reporting during the three months ended September 30, 2019 that have materially affected, or are reasonable likely to materially affect,
the Company’s internal control over financial reporting.
Item 9B.
OTHER INFORMATION
None.
55
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information relating to the directors and officers of the Company, information regarding compliance with Section 16(a) of the Exchange Act and
information regarding the audit committee and audit committee financial expert is incorporated herein by reference to the sections captioned “Item 1 –
Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Audit Committee” in the Company’s Proxy Statement for the 2019
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 Company.
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.
56
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(1)
(2)
The financial statements required in response to this item are incorporated by reference from Item 8 of this Annual Report on Form 10-K.
All financial statement schedules are omitted because they are not required or applicable, or the required information is shown in the
consolidated financial statements or the notes thereto.
(3)
Exhibits
No.
Description
3.1
3.2
3.3
4.0
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
21.0
23.0
31.1
31.2
32.0
101.0
Articles of Incorporation of First Savings Financial Group, Inc. (1)
Articles of Amendment to the Articles of Incorporation for the Series A Preferred Stock (2)
Bylaws of First Savings Financial Group, Inc. (1)
Specimen Stock Certificate of First Savings Financial Group, Inc. (1)
Amended and Restated Employment Agreement by and among First Savings Financial Group, Inc., First Savings Bank 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)
First Savings Bank, F.S.B. Employee Severance Compensation Plan* (4)
First Savings Bank, F.S.B. Supplemental Executive Retirement Plan* (4)
Agreement and Plan of Reorganization dated July 21, 2017 (2)
Amended and Restated Director Deferred Compensation Agreement* (1)
Subordinated Note Purchase Agreement dated September 20, 2018 (5)
Subsidiaries of the Registrant
Consent of Monroe Shine & Co., Inc.
Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer
Section 1350 Certificate of Chief Executive Officer and Chief Financial Officer
The following materials from the Company’s Annual Report on Form 10-K for the year ended September 30, 2019, 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.
Incorporated by reference to the exhibits to the Company’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on August 17, 2011.
Incorporated herein by reference to the exhibits to the Company’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 8, 2009.
Incorporated herein by reference to the exhibits to the Company’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 10, 2008.
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 September 24, 2018.
(2)
(3)
(4)
(5)
Item 16.
FORM 10-K SUMMARY
Not applicable.
57
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 16, 2019
FIRST SAVINGS FINANCIAL GROUP, INC.
By: /s/ Larry W. Myers
Larry W. Myers
President, Chief Executive Officer and Director
58
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Larry W. Myers
Larry W. Myers
/s/ Anthony A. Schoen
Anthony A. Schoen
/s/ John P. Lawson, Jr.
John P. Lawson, Jr.
/s/ Samuel E. Eckart
Samuel E. Eckart
/s/ Steven R. Stemler
Steven R. Stemler
/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
/s/ Frank N. Czeschin
Frank N. Czeschin
/s/ John E. Colin
John E. Colin
/s/ Pamela Bennett-Martin
Pamela Bennett-Martin
President, Chief Executive Officer and Director
(principal executive officer)
December 16, 2019
Chief Financial Officer
(principal accounting and financial officer)
December 16, 2019
Chief Operating Officer and Director
December 16, 2019
Director
Director
Director
Director
Director
Director
Director
Director
Director
December 16, 2019
December 16, 2019
December 16, 2019
December 16, 2019
December 16, 2019
December 16, 2019
December 16, 2019
December 16, 2019
December 16, 2019
FIRST SAVINGS FINANCIAL GROUP, INC.
CLARKSVILLE, INDIANA
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED
SEPTEMBER 30, 2019, 2018 AND 2017
FIRST SAVINGS FINANCIAL GROUP, INC.
CONTENTS
Management’s Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm – Adverse Opinion on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm – Opinion on the Financial Statements
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
F-2
F-4
F-6
F-7
F-8
F-9
F-10
F-11
F-12
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, 2019, 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, 2019, its
system of internal control over financial reporting is not effective under the criteria of the “Internal Control Integrated Framework” because of the following
material weaknesses:
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has
identified material weaknesses in internal control related to the design effectiveness of the Company's controls within the mortgage banking segment over
the valuation of interest rate lock commitments and loans held for sale, and the accrual of incentive compensation. The material weakness related to the
valuation of interest rate lock commitments and loans held for sale occurred due to a failure to design appropriate controls for the evaluation of significant
assumptions used in the valuation process. The material weakness related to the accrual of incentive compensation occurred due to a failure to design
appropriate controls to ensure that incentive compensation is recognized when earned based on the terms of the employment agreements. When the material
weaknesses were identified, management updated its valuation of interest rate lock commitments and loans held for sale resulting in a decrease in the value
of certain of these instruments, and recorded previously unrecognized incentive compensation, resulting in a restatement of the financial statements
included in the Company's June 30, 2019 Form 10-Q. All necessary adjustments have been recorded as of September 30, 2019 related to the valuation of
interest rate lock commitments and loans held for sale, and the accrual of incentive compensation.
F-2
As of September 30, 2019, based on management's assessment, the Company's internal control over financial reporting was not effective due to these
matters. Management is taking steps to remediate the material weaknesses by evaluating the Company's policies and practices for and resources allocated to
the controls over the valuation of interest rate lock commitments and loans held for sale and the review of incentive compensation agreements. Management
also intends to provide additional training and improved documentation to support the assumptions utilized in the valuation of interest rate lock
commitments and loans held for sale.
Monroe Shine & Co., Inc., independent registered public accounting firm, has issued an audit report dated December 16, 2019 expressing an adverse opinion
on the effectiveness of the Company’s internal control over financial reporting as of September 30, 2019.
/s/ Larry W. Myers
Larry W. Myers
President and Chief Executive Officer
December 16, 2019
/s/ Anthony A. Schoen
Anthony A. Schoen
Chief Financial Officer
F-3
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
First Savings Financial Group, Inc.
Clarksville, Indiana
Adverse Opinion on Internal Control over Financial Reporting
We have audited First Savings Financial Group, Inc.’s (the “Company’s”) internal control over financial reporting as of September 30, 2019, based on
criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). In our opinion, because of the effect of the material weaknesses described in the following paragraphs on the achievement of the objectives of
the control criteria, the Company has not maintained effective internal control over financial reporting as of September 30, 2019, based on criteria established
in Internal Control – Integrated Framework (2013) issued by the COSO.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following
material weaknesses have been identified and included in management’s assessment:
Management has identified material weaknesses in internal control related to the design effectiveness of the Company's controls within the mortgage
banking segment over the valuation of interest rate lock commitments and loans held for sale, and the accrual of incentive compensation. The material
weakness related to the valuation of interest rate lock commitments and loans held for sale occurred due to a failure to design appropriate controls for the
evaluation of significant assumptions used in the valuation process. The material weakness related to the accrual of incentive compensation occurred due to
a failure to design appropriate controls to ensure that incentive compensation is recognized when earned based on the terms of the employment agreements.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 consolidated financial
statements, and this report does not affect our report dated December 16, 2019, on those consolidated financial statements.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated
balance sheets and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows of the Company,
and our report dated December 16, 2019, expressed an unqualified opinion.
Basis for Opinion
The Company's management is responsible 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 the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
F-4
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. 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 audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
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.
New Albany, Indiana
December 16, 2019
F-5
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
First Savings Financial Group, Inc.
Clarksville, Indiana
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of First Savings Financial Group, Inc. (the “Company”) as of September 30, 2019 and
2018, 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, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of its
operations and its cash flows for each of the years in the three-year period ended September 30, 2019, in conformity with accounting principles generally
accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s
internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated December 16, 2019 expressed an adverse
opinion.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s, or its predecessors’, auditor consecutively since at least 1968.
New Albany, Indiana
December 16, 2019
F-6
FIRST SAVINGS FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2019 AND 2018
2019
2018
(In thousands, except share and per share data)
ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Total cash and cash equivalents
Interest-bearing time deposits
Securities available for sale, at fair value
Securities held to maturity
Loans held for sale, residential mortgage ($80,457 at fair value in 2019; $9,952 at fair value in 2018)
Loans held for sale, Small Business Administration
Loans, net of allowance for loan losses of $10,040 and $9,323
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
Federal funds purchased
Repurchase agreements
Borrowings from Federal Home Loan Bank
Other borrowings
Accrued interest payable
Advance payments by borrowers for taxes and insurance
Accrued expenses and other liabilities
Total Liabilities
$
$
13,008
28,424
41,432
2,265
177,302
2,336
80,457
15,613
810,658
13,040
19,238
1,893
3,329
1,712
26,546
9,848
1,416
15,494
14,191
28,083
42,274
2,501
184,373
2,607
10,466
21,659
704,271
9,621
13,013
103
2,687
1,600
19,966
9,848
1,727
7,690
$
1,222,579
$
1,034,406
$
$
173,072
661,312
834,384
4,000
-
222,544
19,729
935
1,906
17,824
1,101,322
167,705
643,407
811,112
-
1,352
90,000
19,661
743
1,218
10,075
934,161
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 2,565,606 shares (2,560,907 at
-
-
September 30, 2018); outstanding 2,350,229 shares (2,292,021 shares at September 30, 2018)
26
26
Additional paid-in capital
Retained earnings - substantially restricted
Accumulated other comprehensive income
Unearned stock compensation
Less treasury stock, at cost - 215,377 shares (268,886 shares at September 30, 2018)
Total First Savings Financial Group, Inc. Stockholders' Equity
Noncontrolling interests in subsidiary
Total Equity
Total Liabilities and Equity
See notes to consolidated financial statements
F-7
27,494
91,228
7,296
(446)
(4,545)
121,053
204
121,257
27,630
76,523
382
(479)
(5,269)
98,813
1,432
100,245
$
1,222,579
$
1,034,406
FIRST SAVINGS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2019, 2018 AND 2017
2019
2018
2017
Net interest income after provision for loan losses
38,626
34,469
(In thousands, except share and per share data)
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
Other borrowings
Total interest expense
Net interest income
Provision for loan losses
NONINTEREST INCOME
Service charges on deposit accounts
ATM and interchange fees
Net gain (loss) on sales of available for sale securities and time deposits
Net unrealized gain on equity securities
Other than temporary impairment loss on securities
Net gain on trading account securities
Net gain on sales of loans, Small Business Administration
Mortgage banking income
Increase in cash surrender value of life insurance
Gain on life insurance
Commission income
Real estate lease income
Net gain (loss) on premises and equipment
Income (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 on other real estate owned
Other operating expenses
Total noninterest expense
Income before income taxes
Income tax expense
Net Income
Less: net income attributable to noncontrolling interests
Net Income Attributable to First Savings Financial Group, Inc.
Net income per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
$
42,697 $
34,057 $
2,769
4,030
643
856
50,995
6,944
1
3
2,681
1,277
10,906
40,089
1,463
3,650
3,551
465
436
42,159
4,279
-
3
2,022
33
6,337
35,822
1,353
1,957
1,949
(74)
5
-
-
4,569
33,007
580
-
324
594
(83)
210
816
43,854
42,899
6,094
1,823
2,752
2,342
312
(57)
6,225
62,390
20,090
3,095
16,995
818
16,177 $
1,731
1,580
99
-
(95)
43
5,493
2,318
430
-
550
5
25
585
531
13,295
19,730
3,629
2,425
808
1,786
580
(160)
4,208
33,006
14,758
2,422
12,336
1,434
10,902 $
6.99 $
6.82 $
4.83 $
4.60 $
$
$
$
27,093
3,315
3,012
313
184
33,917
2,762
23
3
1,669
-
4,457
29,460
1,301
28,159
1,355
1,348
30
-
-
200
4,204
530
433
189
379
-
38
(226)
145
8,625
15,089
2,788
1,357
538
1,527
490
(113)
3,275
24,951
11,833
2,520
9,313
-
9,313
4.20
3.97
2,315,697
2,372,084
2,258,020
2,372,554
2,219,088
2,346,008
Dividends per share
$
0.63 $
0.59 $
0.55
See notes to consolidated financial statements
F-8
FIRST SAVINGS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 2019, 2018 AND 2017
(In thousands)
Net Income
2019
2018
2017
$
16,995 $
12,336 $
9,313
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) losses included in net income
Income tax expense (benefit)
Net of tax amount
Less: reclassification adjustment for other-than-temporary impairment loss on securities
included in net income
Income tax benefit
Net of tax amount
8,783
(1,912)
6,871
55
(12)
43
-
-
-
(5,649)
1,257
(4,392)
(99)
26
(73)
95
(25)
70
(2,743)
977
(1,766)
(30)
10
(20)
-
-
-
Other Comprehensive Income (Loss)
6,914
(4,395)
(1,786)
Comprehensive Income
Less: comprehensive income attributable to noncontrolling interests
23,909
818
7,941
1,434
7,527
-
Comprehensive Income Attributable to First Savings Financial Group, Inc.
$
23,091 $
6,507 $
7,527
See notes to consolidated financial statements.
F-9
FIRST SAVINGS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2019, 2018 AND 2017
Accumulated
Other
Unearned
(In thousands, except share and per share data)
Balances at October 1, 2016
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
Noncontrolling
Interests in
Subsidiary
Total
Common Additional
Retained Comprehensive
Stock Paid-in Capital Earnings
Income
Stock
Treasury
Compensation Stock
$
25 $
27,182 $ 59,499 $
5,944 $
- $ (6,070) $
- $ 86,580
-
-
-
-
-
-
-
-
9,313
-
-
-
(1,786)
-
(1,229)
692
55
(131)
-
-
-
-
-
-
-
-
-
-
-
-
-
(692)
121
-
-
-
-
-
-
9,313
-
(1,786)
-
(1,229)
-
-
-
176
-
486
-
355
-
(294)
-
(294)
Balances at September 30, 2017
25
27,798
67,583
4,158
571
5,878
- 93,115
Net income
Other comprehensive loss
Reclassification from AOCI to retained
earnings for change in federal tax rate
Common stock dividends - $0.59 per share
Distributions to noncontrolling interests
Restricted stock grants, net of forfeitures -
1,000 shares
Stock compensation expense
Stock option exercises - 55,296 shares
Purchase 6,729 treasury shares
-
-
-
-
-
1
-
-
-
-
10,902
-
-
-
(4,395)
-
-
-
-
1,434 12,336
-
(4,395)
-
(619)
619
-
-
-
-
-
(1,343)
-
-
56
68
(292)
-
-
-
-
-
-
-
-
-
-
-
-
-
(57)
149
-
-
-
-
-
(1,343)
(2)
(2)
-
-
-
217
-
1,042
-
750
-
(433)
-
(433)
Balances at September 30, 2018
26
27,630
76,523
382
479
5,269
1,432 100,245
Net income
Other comprehensive income
Common stock dividends - $0.63 per share
Distributions to noncontrolling interests
Restricted stock grants, net of forfeitures -
2,299 shares
Stock compensation expense
Stock option exercises - 66,877 shares
Purchase of 10,968 treasury shares
-
-
-
-
-
-
-
-
-
16,177
-
-
-
6,914
-
(1,472)
-
-
141
72
(349)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(141)
174
-
-
-
-
-
-
818 16,995
-
6,914
-
(1,472)
(2,046)
(2,046)
-
-
-
246
-
1,297
-
948
-
(573)
-
(573)
Balances at September 30, 2019
$
26 $
27,494 $ 91,228 $
7,296 $
(446) $ (4,545) $
204 $121,257
See notes to consolidated financial statements.
F-10
FIRST SAVINGS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2019, 2018 AND 2017
(In thousands)
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 in trading account securities
Amortization and accretion of fair value adjustments on loans, net
Loans originated for sale
Proceeds on sales of loans
Net realized and unrealized gain on loans held for sale
Net realized and unrealized gain on other real estate owned
Net (gain) loss on sales of available for sale securities and time deposits
Net gain on equity securities
Other than temporary impairment loss on securities
Gain on life insurance
Increase in cash surrender value of life insurance
Net gain on sale of premises and equipment
(Income) loss on tax credit investment
Deferred income taxes
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 sales and maturities of interest-bearing time deposits
Purchase of securities available for sale
Proceeds from sales of securities available for sale
Proceeds from maturities of securities available for sale
Proceeds from maturities of securities held to maturity
Principal collected on securities
Net increase in loans
Purchase of Federal Reserve Bank stock
Proceeds from redemption of Federal Reserve Bank stock
Purchase of Federal Home Loan Bank stock
Investment in cash surrender value of life insurance
Proceeds from life insurance
Investment in historic tax credit entity
Proceeds from sale of other real estate owned
Purchase of premises and equipment
Proceeds from sales of premises and equipment
Net cash received in the acquisition of Dearmin Bancorp and FNBO
Net Cash Used In Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
Net increase in federal funds purchased
Net increase (decrease) 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
Net proceeds from subordinated note
Net increase in advance payments by borrowers for taxes and insurance
Proceeds from exercise of stock options
Taxes paid on stock award shares for employees
Dividends paid on common stock
Distributions to noncontrolling interests
Net Cash Provided By Financing Activities
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and cash equivalents at beginning of year
2019
2018
2017
$
16,995 $
12,336 $
9,313
1,463
1,684
477
-
(664)
(939,608)
904,692
(29,753)
(78)
74
(5)
-
-
(580)
(31)
(210)
507
246
(754)
192
628
(44,725)
(1,085)
838
(24,448)
13,948
7,710
240
18,180
(108,847)
(634)
-
(2,785)
(6,000)
-
-
178
(9,496)
74
-
(112,127)
23,272
4,000
(1,352)
12,544
310,000
(190,000)
-
688
408
(32)
(1,472)
(2,046)
156,010
1,353
1,373
235
7,175
(517)
(115,065)
115,980
(7,080)
(215)
(99)
-
95
-
(430)
(25)
(585)
235
217
(562)
459
3,085
17,965
(980)
4,734
(50,020)
58,116
2,625
227
16,875
(85,798)
-
21
(2,562)
-
540
-
606
(1,594)
51
6,667
(50,492)
49,965
-
4
(18,065)
224,500
(234,500)
19,661
6
362
(46)
(1,343)
(2)
40,542
(842)
8,015
42,274
34,259
1,301
1,164
702
2,080
(10)
(89,738)
75,638
(4,734)
(170)
(30)
-
-
(189)
(433)
(38)
226
1,836
176
(592)
88
1,181
(2,229)
(455)
1,120
(32,005)
4,255
3,665
208
17,103
(71,583)
-
-
-
-
-
(344)
208
(426)
19
-
(78,235)
89,915
-
3
(3,568)
15,000
(15,000)
-
198
62
-
(1,229)
-
85,381
4,917
29,342
Cash and Cash Equivalents at End of Year
$
41,432 $
42,274 $
34,259
See notes to consolidated financial statements.
F-11
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(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 16 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 was 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, 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 11 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-12
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(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 the valuation of other real estate owned, management obtains independent appraisals for significant
properties.
A substantial portion 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 Company 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 pass-through asset-backed securities 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-13
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(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.
Equity Securities: Equity securities, other than restricted securities such as Federal Reserve Bank (“FRB”) and Federal Home Loan Bank of
Indianapolis (“FHLB”) stock, are carried at fair value, with changes in fair value included in earnings. Equity securities without readily determinable
fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for
the identical or similar investment of the same issuer. Dividends received from equity securities, other than restricted securities such as FRB and
FHLB stock, are included in other noninterest income.
Investments in non-marketable equity securities such as FRB stock and FHLB stock are carried at cost and are classified as restricted securities.
Both cash and stock dividends received from these investments are included in dividend income. 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
Prior to July 1, 2018, residential mortgage loans originated and intended for sale in the secondary market were carried at the lower of aggregate cost
or market value. Aggregate market value was determined based on the quoted prices under a “best efforts” sales agreement with a third party.
Effective July 1, 2018, the Company elected to record residential mortgage loans held for sale at fair value in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 825-10. Net unrealized gains and losses are included in mortgage banking
income in the accompanying consolidated statements of income. Realized gains on sales of residential mortgage loans are determined using the
specific identification method and are included in mortgage banking income.
F-14
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(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, 2019 and 2018. At September 30, 2019 and 2018, SBA loans held for sale totaling $15.6 million and $21.7 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 based on the
allocation of participating interests sold and retained and are included in net gain on sales of SBA loans in the accompanying consolidated
statements of 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 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,
residential mortgage loan sales through established programs, and commercial loan sales through participation agreements. 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, with the exception of mortgage servicing rights related to sales of residential mortgage loans, which are carried at fair
value.
F-15
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(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. 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 estimated costs to sell.
F-16
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(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.
The Company’s historical 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 Company’s loan review system; 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-17
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(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, 2019, 2018, and 2017.
F-18
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(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-19
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(1 – continued)
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. The Company uses the straight line method of computing depreciation at
rates adequate to amortize the cost of the applicable assets over their estimated useful lives. Maintenance and repairs are expensed as incurred. The
cost and related accumulated depreciation of assets sold, or otherwise disposed of, are removed from the related accounts and any gain or loss is
included in earnings.
Other Real Estate Owned
Other real estate owned includes formally foreclosed property, property obtained via a deed in lieu of foreclosure and former banking facilities held
for sale. At the time of acquisition, 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
acquisition 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-20
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(1 – continued)
Derivative Financial Instruments
In connection with the origination of residential mortgage loans to be sold in the secondary market, the Company enters into commitments to
originate loans whereby the interest rate on the loan is determined prior to funding (i.e., rate lock commitment). The period of time between issuance
of a loan commitment and closing and sale of the loan generally ranges from 15 to 60 days. The Company also enters into forward mortgage loan
commitments to sell to various investors to protect itself against exposure to various factors and to reduce sensitivity to interest rate movements.
Both the interest rate lock commitments and the related forward mortgage loan sales contracts are considered derivatives and are recorded on the
balance sheet at fair value in accordance with FASB ASC 815, Derivatives and Hedging, with changes in fair value recorded in mortgage banking
income in the accompanying consolidated statements of income. All such derivatives are considered stand-alone derivatives and have not been
formally designated as hedges by management.
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 compensation plans.
F-21
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(1 – continued)
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.
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 or loss are included in the net gain (loss) on
sales of available for sale securities and other than temporary impairment loss on securities line items 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-22
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(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 balance sheet 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. In
July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides an additional, optional transition
method related to implementing the new leases standard. ASU 2018-11 provides that companies can initially apply the new leases standard at
adoption and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Management is
evaluating the new guidance and expects to report increased assets and liabilities as a result of recording right-of-use assets and lease liabilities.
However, based on current lease obligations, the adoption is expected to increase the Company’s consolidated balance sheets by less than 5% and
not have a material impact on the Company’s and the Bank’s regulatory capital ratios.
In June 2016, the FASB issued 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 were originally effective for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years. The Company is currently assessing the impact the guidance will have upon adoption.
Management expects to recognize a one-time cumulative-effect adjustment to the allowance for loan losses through retained earnings as of the
beginning of the first reporting period in which the new standard is effective; however, the magnitude of the adjustment is unknown. In planning
for the implementation of ASU 2016-13, management is currently evaluating software solutions, data requirements and loss methodologies.
In November 2019, the FASB issued ASU No. 2019-10 which delayed the effective date of ASU 2016-13 for smaller reporting companies (as defined
by the SEC) and other non-SEC reporting entities to fiscal years beginning after December 15, 2022, including interim periods within those fiscal
periods. Early adoption is permitted as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
F-23
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(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 adoption of this update is not expected to have a
material impact on the Company’s consolidated financial position or results of operations.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value
Measurement. The update removes, modifies and adds certain disclosure requirements for fair value measurements. Among other changes, entities
will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for
timing of transfers between levels and the valuation processes for Level 3 fair value measurements, but will be required to disclose the range and
weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in the update are effective
for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon
issuance of the update. 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-24
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(2)
ACQUISITION OF DEARMIN BANCORP AND THE FIRST NATIONAL BANK OF ODON
On February 9, 2018, the Company acquired Dearmin Bancorp, Inc. (“Dearmin”) and its majority owned subsidiary, The First National Bank of Odon
(“FNBO”), a full service community bank located in Odon, Indiana. The acquisition expanded the Company’s presence into Daviess County,
Indiana. The Company expects to benefit from growth in this market area as well as from expansion of the banking services provided to the existing
customers of FNBO. Cost savings are also expected for the combined bank through economies of scale, efficiencies and the consolidation of
business operations.
Pursuant to the terms of the merger agreement, FNBO stockholders received $265.00 in cash for each share of FNBO common stock for total cash
consideration of $10.6 million. Under the acquisition method of accounting, the purchase price is assigned to the assets acquired and liabilities
assumed based on their estimated fair values, net of applicable income tax effects. In accounting for the acquisition, the excess of cost over the fair
value of the acquired net assets of $1.9 million has been recorded as goodwill. Transaction and integration costs related to the acquisition totaling
$1.3 million and $166,000 were expensed as incurred during the years ended September 30, 2018 and 2017, respectively. No transaction and
integration costs were recognized for the year ended September 30, 2019.
Following is a condensed balance sheet providing the estimated fair values of the assets acquired and the liabilities assumed as of the date of
acquisition:
Cash and due from banks
Interest-bearing deposits with banks
Interest-bearing time deposits with banks
Investment securities
Loans, net
Premises and equipment
Goodwill arising in the acquisition
Core deposit intangible
Other assets
Total assets acquired
Deposit accounts
Net deferred tax liabilities
Other liabilities
Total liabilities assumed
Total consideration
(In thousands)
1,310
$
15,957
3,817
39,978
34,467
1,125
1,912
1,487
2,890
102,943
91,765
205
373
92,343
$
10,600
In accounting for the acquisition, $1.5 million was assigned to a core deposit intangible which is amortized over a weighted-average estimated
economic life of 9.1 years. It is not anticipated that the core deposit intangible will have a significant residual value. No amount of the goodwill or
core deposit intangible arising in the acquisition is deductible for income tax purposes.
F-25
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(2 – continued)
FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, applies to a loan with evidence of deterioration of credit
quality since origination, acquired by completion of a transfer for which it is probable, at acquisition, that the investor will be unable to collect all
contractually required payments receivable. On the acquisition date, no loans were identified with evidence of deterioration of credit quality since
origination. Loans acquired not subject to ASC 310-30 included non-impaired loans with a fair value of $34.5 million and gross contractual amounts
receivable of $41.5 million at the date of acquisition.
(3)
RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve balances on hand and with the Federal Reserve Bank, which are unavailable for investment but are
interest-bearing. The average amount of those reserve balances was approximately $20.3 million, $17.4 million, and $12.9 million for the years ended
September 30, 2019, 2018, and 2017, respectively.
F-26
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(4)
INVESTMENT SECURITIES
Investment securities have been classified according to management’s intent.
Trading Account Securities
Prior to June 30, 2018, the Company invested in small and medium lot, investment grade municipal bonds through a managed brokerage account.
The brokerage account was managed by an investment advisory firm registered with the U.S. Securities and Exchange Commission. The trading
account portfolio was liquidated in June 2018.
The following is a summary of the reported net gains on trading account securities for the years ended September 30, 2018 and 2017:
(In thousands)
Net realized gain on sales
Net unrealized loss on securities held as of the balance sheet date
Net gain on trading account securities
Securities Available for Sale and Held to Maturity
2018
2017
43 $
-
43 $
229
(29)
200
$
$
The amortized cost of securities available for sale and held to maturity and their approximate fair values are as follows:
(In thousands)
September 30, 2019:
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
$
13,743 $
8,834
1,242
1,022
1,119
141,995
366 $
221
142
156
41
8,465
12 $
7
2
-
6
17
14,097
9,048
1,382
1,178
1,154
150,443
Total securities available for sale
$
167,955 $
9,391 $
44 $
177,302
Securities held to maturity:
Agency mortgage-backed
Municipal bonds
Total securities held to maturity
102 $
2,234
2,336 $
7 $
327
334 $
- $
-
- $
109
2,561
2,670
$
$
F-27
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(4 – continued)
(In thousands)
September 30, 2018:
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
$
31,686 $
10,754
1,434
1,538
1,305
137,144
90 $
-
148
346
53
2,189
646 $
313
3
-
7
1,345
31,130
10,441
1,579
1,884
1,351
137,988
Total securities available for sale
$
183,861 $
2,826 $
2,314 $
184,373
Securities held to maturity:
Agency mortgage-backed
Municipal bonds
Total securities held to maturity
$
$
134 $
2,473
2,607 $
8 $
281
289 $
- $
-
- $
142
2,754
2,896
The amortized cost and fair value of available for sale and held to maturity debt securities as of September 30, 2019 by contractual maturity are
shown below. Expected maturities of mortgage and other asset-backed securities may differ from contractual maturities because the mortgages and
other assets underlying the obligations may be prepaid without penalty.
(In thousands)
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
CMO
ABS
SBA certificates
Mortgage-backed securities
Available for Sale
Held to Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
2,676 $
23,170
28,248
87,901
10,076
1,022
1,119
13,743
2,713 $
23,846
29,955
93,929
10,430
1,178
1,154
14,097
248 $
1,006
779
201
-
-
-
102
$
167,955 $
177,302 $
2,336 $
278
1,139
907
237
-
-
-
109
2,670
F-28
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(4 – continued)
Information pertaining to securities with gross unrealized losses at September 30, 2019 and 2018, 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, 2019:
Securities available for sale:
Continuous loss position less than twelve months:
Agency mortgage-backed
Agency CMO
Municipal bonds
Total less than twelve months
Continuous loss position more than twelve months:
Agency mortgage-backed
Agency CMO
Privately-issued CMO
SBA certificates
Municipal bonds
Total more than twelve months
Total securities available for sale
September 30, 2018:
Securities available for sale:
Continuous loss position less than twelve months:
Agency mortgage-backed
Agency CMO
Municipal bonds
Total less than twelve months
Continuous loss position more than twelve months:
Agency mortgage-backed
Agency CMO
Privately-issued CMO
SBA certificates
Municipal bonds
Total more than twelve months
Total securities available for sale
Number of
Investment
Positions
Fair
Value
Gross
Unrealized
Losses
3 $
1
3
7
2
2
1
1
1
7
1,248 $
1,962
1,694
4,904
785
956
33
451
140
2,365
14 $
7,269 $
1
1
16
18
11
6
2
6
1
26
44
15 $
4
93
14,814 $
2,560
44,162
313
54
944
112
61,536
1,311
11
9
1
1
8
30
9,283
7,881
37
617
6,106
23,924
142 $
85,460 $
333
259
3
7
401
1,003
2,314
At September 30, 2019 and 2018, the Company did not have any securities held to maturity with an unrealized loss.
F-29
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(4 – 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, 2019, which consisted of U.S. government agency mortgaged-backed,
agency CMOs, privately-issued CMOs, SBA certificates, and municipal bonds, had depreciated approximately 0.60% from the Company’s amortized
cost basis and are fixed and variable rate securities with a weighted-average yield of 2.20% and a weighted-average coupon rate of 2.93% at
September 30, 2019. 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, 2019, the Company held 12 privately-issued CMO and ABS
securities acquired in a 2009 bank acquisition with an aggregate amortized cost of $1.1 million and fair value of $1.2 million that have been
downgraded to a substandard regulatory classification due to a downgrade of the security’s credit quality rating by various rating agencies.
At September 30, 2019, one privately-issued CMO was in a loss position and had depreciated approximately 5.71% from the Company’s carrying
value and was collateralized by residential mortgage loans. This security had a total fair value of $33,000 and a total unrealized loss of $2,000 at
September 30, 2019, and was rated below investment grade by various rating agencies. Based on the independent third party analysis of the
expected cash flows, management has determined that the decline in fair value for this security is temporary and, as a result, no other-than-
temporary impairment is required to be recognized. While the Company does not anticipate additional credit-related impairment losses at September
30, 2019, additional deterioration in market and economic conditions may have an adverse impact on the credit quality in the future and therefore,
require additional credit-related impairment charges.
F-30
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(4 – continued)
There were no other-than-temporary write-downs charged to earnings during the fiscal years ended September 30, 2019 and 2017. During the fiscal
year ended September 30, 2018, the Company recognized an other-than-temporary write-down charge to earnings of $95,000 representing the total
amortized cost of a privately-issued CMO. The security was determined to be other-than-temporarily impaired and the Company does not anticipate
recovering its investment in the security.
The unrealized losses on U.S. government agency mortgage-backed securities and CMOs, SBA certificates 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 and time deposits for the years ended
September 30, 2019, 2018 and 2017:
(In thousands)
Gross realized gains on sales
Gross realized losses on sales
Net realized gain (loss) on sales of available for sale securities and time deposits
2019
2018
2017
$
$
68 $
(142)
(74) $
119 $
(20)
99 $
96
(66)
30
Certain available for sale debt securities were pledged under repurchase agreements and to secure FHLB borrowings at September 30, 2019 and
2018, and may be pledged to secure federal funds borrowings (see Notes 11, 12 and 13).
At September 30, 2019 and 2018, 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 the Company’s consolidated stockholders’ equity.
F-31
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(5)
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at September 30, 2019 and 2018 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
Total loans
Deferred loan origination fees and costs, net
Allowance for loan losses
$
2019
2018
198,067 $
436,020
38,226
12,545
6,995
10,536
73,034
28,651
13,347
2,663
820,084
614
(10,040)
195,274
343,498
28,814
19,527
8,669
10,504
67,786
24,635
11,720
2,918
713,345
249
(9,323)
Loans, net
$
810,658 $
704,271
At September 30, 2019 and 2018, the net unamortized premium on loans acquired from other financial institutions was $339,000 and $413,000,
respectively.
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, 2019 and 2018:
(In thousands)
Beginning balance
New loans and advances
Repayments
Reclassifications due to officer and director changes
Ending balance
$
2019
2018
8.231 $
3.906
(2.875)
(147)
10,299
2,521
(4,515)
(74)
$
9.115 $
8,231
Off-balance-sheet commitments (including commitments to make loans, unused lines of credit and letters of credit) to related parties at September
30, 2019 and 2018 were $2.4 million and $2.6 million, respectively.
F-32
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(5 – continued)
The following table provides the components of the recorded investment in loans as of September 30, 2019:
Residential
Real Estate
Commercial
Real Estate
Multifamily
Construction
Land & Land
Development
Commercial
Business
Consumer
Total
(In thousands)
Recorded Investment in Loans:
Principal loan balance
$
198,067
$
436,020 $
38,226
$
19,540 $
10,536 $
73,034 $
44,661 $
820,084
Accrued interest receivable
627
1,922
99
117
29
448
87
3,329
Net deferred loan origination fees
and costs
(98)
408
(33)
3
(1)
366
(31)
614
Recorded investment in loans
$
198,596
$
438,350 $
38,292
$
19,660 $
10,564 $
73,848 $
44,717 $
824,027
Recorded Investment in Loans as
Evaluated for Impairment:
Individually evaluated for
impairment
$
4,448
$
7,647 $
-
$
- $
- $
105 $
234 $
12,434
Collectively evaluated for
impairment
194,148
430,703
38,292
19,660
10,564
73,743
44,483
811,593
Recorded investment in loans
$
198,596
$
438,350 $
38,292
$
19,660 $
10,564 $
73,848 $
44,717 $
824,027
F-33
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(5 – continued)
The following table provides the components of the recorded investment in loans as of September 30, 2018:
Residential
Real Estate
Commercial
Real Estate
Multifamily
Construction
Land & Land
Development
Commercial
Business
Consumer
Total
(In thousands)
Recorded Investment in Loans:
Principal loan balance
$
195,274
$
343,498 $
28,814
$
28,196 $
10,504 $
67,786 $
39,273 $
713,345
Accrued interest receivable
589
1,403
81
156
24
365
69
2,687
Net deferred loan origination fees
and costs
(62)
104
(30)
(5)
(4)
275
(29)
249
Recorded investment in loans
$
195,801
$
345,005 $
28,865
$
28,347 $
10,524 $
68,426 $
39,313 $
716,281
Recorded Investment in Loans as
Evaluated for Impairment:
Individually evaluated for
impairment
$
5,107
$
7,719 $
-
$
- $
27 $
231 $
243 $
13,327
Collectively evaluated for
impairment
190,694
337,286
28,865
28,347
10,497
68,195
39,070
702,954
Recorded investment in loans
$
195,801
$
345,005 $
28,865
$
28,347 $
10,524 $
68,426 $
39,313 $
716,281
F-34
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(5 – 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, 2019
and 2018:
Residential
Real Estate
Commercial
Real Estate
Multifamily
Construction
Land & Land
Development
Commercial
Business
Consumer
Total
(In thousands)
2019:
Individually evaluated for
impairment
$
10 $
512 $ -
$
-
-
- $
23 $
545
Collectively evaluated for
impairment
328
5,869
478
421
209
1,639
551
9,495
Ending balance
$
338 $
6,381 $
478 $
421 $
209 $
1,639 $
574 $
10,040
2018:
Individually evaluated for
impairment
$
7 $
492 $
- $
- $
- $
- $
12 $
511
Collectively evaluated for
impairment
267
6,333
195
580
210
1,041
186
8,812
Ending balance
$
274 $
6,825 $
195 $
580 $
210 $
1,041 $
198 $
9,323
F-35
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(5 – continued)
The following table presents the activity in the allowance for loan losses by portfolio segment for the years ended September 30, 2019, 2018, and 2017:
Residential
Real Estate
Commercial
Real Estate
Multifamily
Construction
Land & Land
Development
Commercial
Business
Consumer
Total
(In thousands)
2019:
Beginning balance
Provisions
Charge-offs
Recoveries
Ending balance
2018:
Beginning balance
Provisions
Charge-offs
Recoveries
Ending balance
2017:
Beginning balance
Provisions
Charge-offs
Recoveries
Ending balance
$
$
$
$
$
$
274 $
55
(21)
30
338 $
252 $
14
(98)
106
274 $
335 $
15
(169)
71
252 $
6,825 $
128
(574)
2
6,381 $
5,739 $
1,086
-
-
6,825 $
5,160 $
569
-
10
5,739 $
195 $
283
-
-
478 $
106 $
89
-
-
195 $
109 $
(3)
-
-
106 $
F-36
580 $
(159)
-
-
421 $
810 $
(230)
-
-
580 $
845 $
(35)
-
-
810 $
210 $
(1)
-
-
209 $
223 $
(13)
-
-
210 $
295 $
(72)
-
-
223 $
1,041 $
664
(79)
13
1,639 $
839 $
190
-
12
1,041 $
284 $
738
(200)
17
839 $
198 $
493
(174)
57
574 $
123 $
217
(223)
81
198 $
94 $
89
(116)
56
123 $
9,323
1,463
(848)
102
10,040
8,092
1,353
(321)
199
9,323
7,122
1,301
(485)
154
8,092
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(5 – continued)
The following table presents impaired loans individually evaluated for impairment as of and for the year ended September 30, 2019. The Company
did not recognize any interest income on impaired loans using the cash receipts method of accounting for the year ended September 30, 2019.
Loans with no related allowance recorded:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
Loans with an allowance recorded:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
Total:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
(In thousands)
Average
Recorded
Investment
Interest
Income
Recognized
$
$
$
$
$
4,438 $
5,401
-
-
-
105
78
4,967 $
5,408
-
-
-
106
81
- $
-
-
-
-
-
-
5,037 $
6,337
-
-
6
215
107
10,022 $
10,562 $
- $
11,702 $
10 $
2,246
-
-
-
-
156
7 $
2,637
-
-
-
-
155
2,412 $
2,799 $
4,448 $
7,647
-
-
-
105
234
4,974 $
8,045
-
-
-
106
236
10 $
512
-
-
-
-
23
545 $
10 $
512
-
-
-
-
23
122 $
2,126
-
-
-
28
157
2,433 $
5,159 $
8,463
-
-
6
243
264
$
12,434 $
13,361 $
545 $
14,135 $
F-37
115
305
-
-
-
7
4
431
-
-
-
-
-
-
-
-
115
305
-
-
-
7
4
431
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(5 – continued)
The following table presents impaired loans individually evaluated for impairment as of and for the year ended September 30, 2018. The Company
did not recognize any interest income on impaired loans using the cash receipts method of accounting for the year ended September 30, 2018.
Loans with no related allowance recorded:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
Loans with an allowance recorded:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
Total:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
(In thousands)
Average
Recorded
Investment
Interest
Income
Recognized
$
$
$
$
$
4,833 $
6,568
-
-
27
231
122
5,285 $
6,715
-
-
28
241
123
- $
-
-
-
-
-
-
5,082 $
6,694
-
-
29
316
120
11,781 $
12,392 $
- $
12,241 $
274 $
1,151
-
-
-
-
121
282 $
1,293
-
-
-
-
128
1,546 $
1,703 $
5,107 $
7,719
-
-
27
231
243
5,567 $
8,008
-
-
28
241
251
7 $
492
-
-
-
-
12
511 $
7 $
492
-
-
-
-
12
315 $
256
-
-
-
-
137
708 $
5,397 $
6,950
-
-
29
316
257
$
13,327 $
14,095 $
511 $
12,949 $
F-38
142
312
-
-
-
13
4
471
-
-
-
-
-
-
-
-
142
312
-
-
-
13
4
471
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(5 – 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.
Loans with no related allowance recorded:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
Loans with an allowance recorded:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
Total:
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
(In thousands)
Average
Recorded
Investment
Interest
Income
Recognized
$
$
$
$
$
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 $
224 $
-
-
-
-
-
101
325 $
4,969 $
5,477
-
-
30
192
196
268 $
-
-
-
-
-
101
369 $
5,248 $
5,645
-
-
30
199
196
2 $
-
-
-
-
-
21
23 $
2 $
-
-
-
-
-
21
294 $
-
-
-
-
130
94
518 $
4,671 $
5,997
-
-
221
339
235
$
10,864 $
11,318 $
23 $
11,463 $
F-39
144
204
-
-
1
6
4
359
-
-
-
-
-
-
-
-
144
204
-
-
1
6
4
359
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(5 – 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, 2019 and 2018:
At September 30, 2019
Loans 90+
Days
Past Due
Still Accruing
Total
Nonperforming
Loans
Nonaccrual
Loans
At September 30, 2018
Loans 90+
Days
Past Due
Still Accruing
Total
Nonperforming
Loans
Nonaccrual
Loans
$
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
2,580 $
2,425
-
-
-
-
163
Total
$
5,168 $
(In thousands)
2,592 $
2,425
-
-
-
-
163
2,711 $
1,284
-
-
27
-
160
5,180 $
4,182 $
91 $
-
-
-
-
-
-
91 $
2,802
1,284
-
-
27
-
160
4,273
12 $
-
-
-
-
-
-
12 $
F-40
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(5 – continued)
The following table presents the aging of the recorded investment in past due loans at September 30, 2019:
30-59 Days
Past Due
60-89 Days
Past Due
90+ Days
Past Due
Total
Past Due
Current
Total
Loans
$
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
1,619 $
892
-
-
-
182
77
577 $
772
-
-
-
-
17
(In thousands)
1,121 $
1,523
-
-
-
-
19
3,317 $
3,187
-
-
-
182
113
195,279 $
435,163
38,292
19,660
10,564
73,666
44,604
198,596
438,350
38,292
19,660
10,564
73,848
44,717
Total
$
2,770 $
1,366 $
2,663 $
6,799 $
817,228 $
824,027
The following table presents the aging of the recorded investment in past due loans at September 30, 2018:
30-59 Days
Past Due
60-89 Days
Past Due
90+ Days
Past Due
Total
Past Due
Current
Total
Loans
$
Residential real estate
Commercial real estate
Multifamily
Construction
Land and land development
Commercial business
Consumer
2,088 $
696
-
-
-
7
43
649 $
-
-
-
27
-
37
(In thousands)
1,202 $
210
-
-
-
-
32
3,939 $
906
-
-
27
7
112
191,862 $
344,099
28,865
28,347
10,497
68,419
39,201
195,801
345,005
28,865
28,347
10,524
68,426
39,313
Total
$
2,834 $
713 $
1,444 $
4,991 $
711,290 $
716,281
F-41
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(5 – continued)
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current
financial information, public information, historical payment experience, credit documentation, and current economic trends, among other factors. The
Company classifies loans based on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings:
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these
potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the
distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss: Loans classified as loss are considered uncollectible and of such little value that their continuance on the Company’s books as an asset 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)
$
$
194,591
-
3,946
59
-
424,989 $
904
12,457
-
-
$
37,823
-
469
-
-
19,660 $
-
-
-
-
10,564 $
-
-
-
-
71,050 $
-
2,798
-
-
44,618 $
-
97
2
-
803,295
904
19,767
61
-
September 30, 2019:
Pass
Special Mention
Substandard
Doubtful
Loss
Total
$
198,596
$
438,350 $
38,292
$
19,660 $
10,564 $
73,848 $
44,717 $
824,027
September 30, 2018:
Pass
Special Mention
Substandard
Doubtful
Loss
$
$
190,647
19
5,061
74
-
338,256 $
-
6,749
-
-
$
28,365
-
500
-
-
28,347 $
-
-
-
-
10,207 $
290
27
-
-
66,162 $
-
2,264
-
-
39,246 $
-
67
-
-
701,230
309
14,668
74
-
Total
$
195,801
$
345,005 $
28,865
$
28,347 $
10,524 $
68,426 $
39,313 $
716,281
F-42
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(5 – continued)
Troubled Debt Restructurings
The following table summarizes TDRs by accrual status at September 30, 2019 and 2018. There was $5,000 of specific reserve included in the
allowance for loan losses related to TDRs at September 30, 2018. There was no specific reserve included in the allowance for loan losses related to
TDRs at September 30, 2019.
September 30, 2019:
Residential real estate
Commercial real estate
Commercial business
Consumer
Total
September 30, 2018:
Residential real estate
Commercial real estate
Commercial business
Consumer
Total
Accruing Nonaccrual
Total
(In thousands)
$
$
$
1,868 $
5,222
105
70
7,265 $
2,396 $
6,435
231
83
351 $
59
-
-
410 $
21 $
65
-
-
2,219
5,281
105
70
7,675
2,417
6,500
231
83
$
9,145 $
86 $
9,231
The following table summarizes information in regard to TDRs that were restructured during the years ended September 30, 2018 and 2017. There
were no TDRs that were restructured during the year ended September 30, 2019.
September 30, 2018:
Residential real estate
Commercial real estate
Commercial business
Consumer
Total
September 30, 2017:
Residential real estate
Commercial real estate
Land and land development
Commercial business
Total
Number of
Loans
Post-
Pre-
Modification
Modification
Principal
Principal
Balance
Balance
(Dollars in thousands)
1 $
1
1
1
4 $
2 $
1
1
1
5 $
140 $
1,674
170
3
1,987 $
473 $
233
31
103
840 $
120
1,674
170
3
1,967
474
233
32
103
842
F-43
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(5 – continued)
At September 30, 2019 and 2018, the Company had committed to lend $1,000 and $1,000, 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 were no principal charge-offs recorded as a result of TDRs during the years ended September 30, 2019, 2018 and 2017. Provisions for loan
losses related to TDRs totaled $5,000 for the year ended September 30, 2018. There were no provisions for loan losses related to TDRs for the years
ended September 30, 2019 and 2017. In the event that a TDR subsequently defaults, the Company evaluates the restructuring for possible
impairment. As a result, the related allowance for loan losses may be increased or charge-offs may be taken to reduce the carrying amount of the
loan.
During the year ended September 30, 2019, the Company had one TDR that was modified within the previous twelve months for which there was a
payment default (defined as more than 90 days past due or in the process of foreclosure). The outstanding balance of that TDR was $114,000.
During the years ended September 30, 2018, and 2017 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).
SBA Loan Servicing Rights
The Company originates loans to commercial customers under the SBA 7(a) and other programs, and sells 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 SBA
servicing rights are then amortized in proportion to and over the period of estimated net servicing income. Impairment of SBA servicing rights is
assessed using the present value of estimated future cash flows.
The aggregate fair value of SBA loan servicing rights at September 30, 2019 and 2018 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 SBA loan servicing rights at
September 30, 2019 and 2018 were as follows:
Assumption
Discount rate
Prepayment rate
Range of Assumption (Weighted Average)
2019
6.82% to 26.61% (11.11)%
6.80% to 21.17% (14.10)%
2018
10.84% to 23.22% (14.63)%
4.32% to 14.43% (10.08)%
For purposes of impairment, risk characteristics such as interest rate, loan type, term and investor type are used to stratify the SBA 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-44
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(5 – continued)
The unpaid principal balance of SBA loans serviced for others was $165.0 million and $120.6 million at September 30, 2019 and 2018, respectively.
An analysis of loan servicing fees on SBA loans for the years ended September 30, 2019, 2018 and 2017 is as follows:
(In thousands)
Late fees and ancillary fees earned
Net servicing income (costs)
SBA net servicing fees (costs)
2019
2018
2017
$
$
41 $
1,245
1,286 $
17 $
863
880 $
47
(9)
38
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 income (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 SBA loan servicing rights for the years ended September 30, 2019, 2018 and 2017 is as follows:
(In thousands)
Balance as of October 1
Servicing rights capitalized
Amortization
Direct write-offs
Change in valuation allowance
Balance as of September 30
2019
2018
2017
$
$
2,405 $
1,334
(596)
(142)
29
3,030 $
1,389 $
1,565
(372)
-
(177)
2,405 $
310
1,188
(109)
-
-
1,389
An analysis of the valuation allowance related to SBA loan servicing rights for the years ended September 30, 2019, 2018 and 2017 is as follows:
(In thousands)
Balance as of October 1
Additions charged to earnings
Write-downs charged against allowance
Balance as of September 30
Mortgage Servicing Rights (“MSRs”)
2019
2018
2017
177 $
113
(142)
148 $
- $
177
-
177 $
-
-
-
-
$
$
The Company originates residential mortgage loans for sale in the secondary market and began retaining servicing for certain of these loans when
they are sold in August 2019. MSRs retained for originated loans that have been sold are accounted for at fair value. The fair value of MSRs are
determined using the present value of estimated expected net servicing income using assumptions about expected mortgage loan prepayment rates,
discount rate, servicing costs, and other economic factors, which are determined based on current market conditions. Changes in these underlying
assumptions could cause the fair value of MSRs to change significantly in the future. Changes in fair value of MSRs are recorded in mortgage
banking income in the accompanying consolidated statements of income. MSRs are subject to changes in value from, among other things, changes
in interest rates, prepayments of the underlying loans and changes in the credit quality of the underlying portfolio.
F-45
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(5 – continued)
A valuation model employed by an independent third party calculates the present value of future cash flows and is used to value the MSRs on a
monthly basis. 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 MSRs at September 30, 2019 were as follows:
Assumption
Discount rate
Prepayment rate
Range of Assumption (Weighted Average)
9.25%
4.42% to 72.79% (18.75)%
The unpaid principal balance of residential mortgage loans serviced for others was $91.6 million at September 30, 2019. Custodial escrow balances
maintained in connection with the foregoing loan servicing and other liabilities were $427,000 at September 30, 2019. Contractually specified
servicing fees (net of direct servicing expenses), late fees and other ancillary fees of $30,000 are included in other noninterest income in the
consolidated statements of income for the year ended September 30, 2019.
Changes in the carrying value of MSRs accounted for at fair value for the year ended September 30, 2019 were as follows:
(In thousands)
Fair value as of October 1
Servicing rights capitalized
Changes in fair value related to:
Loan repayments
Changes in valuation model inputs or assumptions
Fair value as of September 30
F-46
2019
-
940
(6)
-
934
$
$
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(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. During the years ended September
30, 2019 and 2018, the Bank recognized income related to distributions from the historic tax credit entity of $210,000 and $585,000, respectively.
During the year ended September 30, 2017, the Bank recognized impairment losses in noninterest income of $226,000, and recorded historic tax
credits of $249,000, as an offset to income tax expense.
F-47
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(7) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at September 30, 2019 and 2018:
(In thousands)
Land and land improvements
Office buildings
Leasehold improvements
Furniture, fixtures and equipment
Construction in progress
Less: accumulated depreciation
Totals
$
2019
2018
2,816 $
17,575
61
6,596
1,193
28,241
(9,003)
4,582
10,592
61
6,100
-
21,335
(8,322)
$
19,238 $
13,013
Depreciation expense recognized for premises and equipment for the years ended September 30, 2019, 2018 and 2017 is as follows:
(In thousands)
Depreciation expense
2019
2018
2017
$
1,305 $
920 $
820
In September 2016, the Bank sold property in conjunction with the sale of a real estate development. 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, 2019 and 2018, the remaining deferred gain of $218,000 and
$248,000, 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-48
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(8) OTHER REAL ESTATE OWNED
Other real estate owned asset activity was as follows for the years ended September 30, 2019, 2018 and 2017:
(In thousands)
Balance as of October 1
Acquired from FNBO
Transfers from loans to other real estate owned
Transfers from premises and equipment to REO
Direct write-downs
Sales
Other adjustments
Balance as of September 30
2019
2018
2017
$
$
103 $
-
114
1,893
-
(217)
-
1,893 $
852 $
31
133
-
(63)
(827)
(23)
103 $
519
-
703
-
(28)
(337)
(5)
852
At September 30, 2018, the balance of other real estate owned included $103,000 of residential real estate properties where physical possession has
been obtained. At September 30, 2019 and 2018, the recorded investment in consumer mortgage loans secured by residential real estate properties
where formal foreclosure proceedings are in process was $1.3 million and $1.3 million, respectively.
Net (gain) loss on other real estate owned for the years ended September 30, 2019, 2018 and 2017 was as follows:
(In thousands)
Net gain on sales
Direct write-downs
Operating expenses, net of rental income
2019
2018
2017
(78) $
-
21
(57) $
(278) $
63
55
(160) $
(198)
28
57
(113)
$
$
F-49
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(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, the
First Federal Savings Bank of Elizabethtown, Inc. (“First Federal”) branches on July 6, 2012, and Dearmin/FNBO on February 9, 2018, 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 2019, 2018, and 2017.
The changes in the carrying amount of goodwill for the years ended September 30, 2019, 2018 and 2017 are summarized as follows:
(In thousands)
Beginning balance
Acquisition of Dearmin/FNBO
Ending balance
2019
2018
2017
$
$
9,848 $
-
9,848 $
7,936 $
1,912
9,848 $
7,936
-
7,936
The following is a summary of other intangible assets subject to amortization:
(In thousands)
Core deposit intangible acquired in Community First acquisition
Core deposit intangible acquired in First Federal branch acquisition
Core deposit intangible acquired in Dearmin/FNBO acquisition
Less accumulated amortization
Ending balance
2019
2018
2,741 $
566
1,487
(3,378)
1,416 $
2,741
566
1,487
(3,067)
1,727
$
$
Amortization expense on intangibles for the years ended September 30, 2019, 2018 and 2017 is summarized as follows:
(In thousands)
Amortization expense
2019
2018
2017
$
312 $
453 $
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:
2020
2021
2022
2023
2024
2025 and thereafter
Total
(In thousands)
214
$
214
214
214
163
397
1,416
$
F-50
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(10)
DEPOSITS
Deposits at September 30, 2019 and 2018 consisted of the following:
(In thousands)
Noninterest-bearing demand deposits
NOW accounts
Money market accounts
Savings accounts
Retail time deposits
Brokered time deposits
Total
$
2019
2018
173,072 $
173,746
121,281
120,393
146,227
99,665
167,705
173,543
107,124
120,995
123,007
118,738
$
834,384 $
811,112
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 $22.3 million and $12.9 million at September 30, 2019 and 2018, respectively.
At September 30, 2019, scheduled maturities of time deposits were as follows:
Years ending September 30:
2020
2021
2022
2023
2024
Total
(In thousands)
178,397
$
35,969
13,584
8,467
9,475
245,892
$
The Bank held deposits for related parties of $9.2 million and $6.9 million at September 30, 2019 and 2018, 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, 2020 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, 2019 and 2018, 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, 2019, the
Bank had $4.0 million outstanding federal funds purchased under the facility. At September 30, 2018, the Bank had no outstanding federal funds
purchased under the facility.
F-51
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(12)
REPURCHASE AGREEMENTS
Repurchase agreements include retail repurchase agreements representing overnight borrowings from deposit customers.
There we no repurchase agreements outstanding as of September 30, 2019. Repurchase agreements at September 30, 2018 are summarized as
follows:
(Dollars in thousands)
Retail repurchase agreements
2018
Weighted
Average
Rate
Amount
0.25% $
1,352
Information concerning borrowings under retail repurchase agreements as of and for the years ended September 30, 2019, 2018 and 2017 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
2019
2018
2017
$
0.25%
$
1,075
1,354
0.25%
$
1,350
1,352
0.25%
1,346
1,348
Available for sale securities underlying the repurchase agreements had a fair value of $1.6 million at September 30, 2018. There were no available for
sale securities underlying the repurchase agreements at September 30, 2019.
F-52
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(13)
BORROWINGS FROM FEDERAL HOME LOAN BANK
At September 30, 2019 and 2018 borrowings from the FHLB were as follows:
(Dollars in thousands)
Advances maturing in:
2019
2020
2021
2022
2023
2024 and beyond
Total advances
Line of credit balance
2019
2018
Weighted
Average
Rate
Amount
Weighted
Average
Rate
Amount
-% $
1.88
2.12
2.01
-
1.34
-
40,000
30,000
10,000
-
130,000
210,000
1.57% $
1.86
1.87
2.01
-
1.26
2.33
12,544
2.01
15,000
25,000
10,000
10,000
-
30,000
90,000
-
Total borrowings from FHLB
$
222,544
$
90,000
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, 2019, the eligible blanket collateral included residential mortgage loans
with a carrying value of $194.8 million, commercial real estate loans with a carrying value of $314.0 million and available for sale securities with a fair
value of $10.7 million.
On August 14, 2018, the Bank entered into an Overdraft Line of Credit Agreement with the FHLB which established a line of credit not to exceed
$30.0 million secured under the blanket collateral agreement. This agreement expires on August 14, 2020. At September 30, 2019, there was $12.5
million 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. The agreement had an initial expiration date of July 1, 2015 and is automatically extended for one
additional year for successive one-year periods, not to extend beyond July 1, 2034. This agreement was extended in June 2018, lowering the amount
to $2.3 million, and now expires on June 30, 2020. At September 30, 2019, there was no outstanding balance under this agreement.
On May 31, 2017, the Bank entered into a Letter of Credit Agreement with the FHLB which established a letter of credit not to exceed $2.2 million.
The agreement had an initial expiration date of May 31, 2018 and is automatically extended for one additional year for successive one-year periods,
not to extend beyond June 1, 2037. At September 30, 2019, there was no outstanding balance under this agreement.
F-53
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(14)
OTHER BORROWINGS
On September 20, 2018, the Company entered into a subordinated note purchase agreement in the principal amount of $20 million. The subordinated
note initially bears a fixed interest rate of 6.02% per year through September 30, 2023, and thereafter a floating rate, reset quarterly, equal to the
three-month LIBOR rate plus 310 basis points. All interest is payable quarterly and the subordinated note is scheduled to mature on September 30,
2028. The subordinated note is an unsecured subordinated obligation of the Company and may be repaid in whole or in part, without penalty, on or
after September 30, 2023. The subordinated note is intended to qualify as Tier 2 capital for the Company under regulatory guidelines. The
subordinated note is presented net of unamortized debt issuance costs of $271,000 and $339,000 at September 30, 2019 and 2018, respectively, in the
accompanying consolidated balance sheet. The debt issuance costs are being amortized over five years, which represents the period from issuance
to the first redemption date of September 30, 2023.
Interest expense recognized on other borrowings for the years ended September 30, 2019, 2018 and 2017 is as follows:
(In thousands)
Subordinated note
Interest expense on other borrowings
(15)
DEFERRED COMPENSATION PLANS
2019
2018
2017
$
$
1,277 $
1,277 $
33 $
33 $
-
-
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 $211,000 and $132,000 at September 30, 2019 and 2018,
respectively.
Deferred compensation expense for the years ended September 30, 2019, 2018 and 2017 is as follows:
(In thousands)
Deferred compensation expense
2019
2018
2017
$
80 $
51 $
80
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 $1.4 million at September 30, 2019 and 2018.
F-54
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(15 – continued)
Deferred directors’ fees expense for the years ended September 30, 2019, 2018 and 2017 is as follows:
(In thousands)
Deferred directors’ fee expense
(16)
BENEFIT PLANS
Defined Contribution Plan:
2019
2018
2017
$
263 $
224 $
194
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, 2019, 2018 and 2017 is as follows:
(In thousands)
Company contributions to the plan
Employee Stock Ownership Plan:
2019
2018
2017
$
762 $
576 $
493
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.
There was no compensation expense recognized for the years ended September 30, 2019, 2018 and 2017.
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 136,219 and 151,999 shares of Company common stock allocated to participant accounts at September 30, 2019 and 2018,
respectively.
F-55
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(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. 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, 2019, 8,658
shares of the Company’s common stock were available for issuance under the 2010 Plan as stock options and 11,991 shares of the Company’s
common stock were available for issuance under the 2016 Plan, consisting of 10,555 stock options and 1,436 shares of restricted stock. The
Company accounts for any forfeitures as they occur, and any previously recognized compensation cost for an award is reversed in the period the
award is forfeited.
Stock based compensation expense related to stock options and restricted stock for the years ended September 30, 2019, 2018 and 2017 is as
follows:
(In thousands)
Stock option expense
Restricted stock expense
Stock Options:
2019
2018
2017
$
72 $
173
68 $
148
55
121
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 years ended September 30, 2019, 2018 and 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-56
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(17 – continued)
A summary of stock option activity as of September 30, 2019, and changes during the year then ended is presented below.
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
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
24.88
59.23
14.21
40.09
34.13
34.13
24.97
5.2 $
5.2 $
3.3 $
2,495,000
2,495,000
1,782,000
Number of
Shares
150,033 $
2,400
(66,877)
(750)
84,806 $
84,806 $
46,439 $
The intrinsic value of stock options exercised during the years ended September 30, 2019, 2018 and 2017 was $2.6 million, $2.8 million and $860,000,
respectively. At September 30, 2019, there was $174,000 of unrecognized compensation expense related to nonvested stock options. The
compensation expense is expected to be recognized over a weighted average period of 2.53 years. Cash received from the exercise of stock options
and the tax benefit from the exercise of stock options were $408,000 and $237,000, respectively, for the year ended September 30, 2019.
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, 2019 and changes during the year then ended is presented
below.
Nonvested at October 1, 2018
Granted
Vested
Forfeited
Nonvested at September 30, 2019
Number
of
Shares
Weighted
Average
Grant Date
Fair Value
14,812 $
2,500 $
(3,653) $
(201) $
13,458 $
41.20
59.23
40.99
40.09
44.62
There were 3,653 and 3,453 restricted shares vested during the years ended September 30, 2019 and 2018, respectively. There were no restricted
shares vested during the year ended September 30, 2017. The total fair value of restricted shares that vested during the years ended September 30,
2019 and 2018 was $216,000 and $195,000, respectively. At September 30, 2019, there was $446,000 of unrecognized compensation expense related to
nonvested restricted shares. The compensation expense is expected to be recognized over a weighted average period of 2.77 years.
F-57
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(18)
INCOME TAXES
The Company and its subsidiaries file consolidated income tax returns. The components of consolidated income tax expense were as follows for the
years ended September 30, 2019, 2018 and 2017:
(In thousands)
Current
Valuation allowance
Deferred
Income tax expense
2019
2018
2017
2,493 $
166
436
3,095 $
1,753 $
102
567
2,422 $
683
76
1,761
2,520
$
$
The reconciliation of income tax expense with the amount which would have been provided at the federal statutory rate of 21% for the year ended
September 30, 2019, blended federal statutory rate of 24.5% for the year ended September 30, 2018 and the federal statutory rate of 34% for the year
ended September 30, 2017 follows:
(In thousands)
Provision at federal statutory rate
State income tax-net of federal tax benefit
Federal tax rate change – 2017 Tax Cut and Jobs Act
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
2019
2018
2017
4,219 $
327
-
(890)
(111)
(223)
166
-
(393)
3,095 $
3,616 $
110
(145)
(917)
(104)
(208)
102
-
(32)
2,422 $
4,023
234
-
(1,082)
(210)
(275)
76
(249)
3
2,520
$
$
F-58
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(18 – continued)
Significant components of deferred tax assets and liabilities at September 30, 2019 and 2018 are as follows:
(In thousands)
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
Loss on tax credit investment
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
Acquisition purchase accounting adjustments
Mortgage servicing rights
FHLB stock dividends
Prepaid expenses
Other
Deferred tax liabilities
$
2019
2018
1,681 $
391
48
27
-
111
1,418
138
493
65
4,372
(1,412)
2,960
(2,017)
(690)
(314)
(777)
(223)
(84)
(515)
(107)
(4,727)
1,763
371
55
27
67
105
1,342
158
179
132
4,199
(1,342)
2,857
(92)
(519)
(313)
(735)
-
(84)
(337)
(113)
(2,193)
Net deferred tax asset (liability)
$
(1,767) $
664
F-59
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(18 – continued)
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. Among other things, the Tax Act reduced the Company’s
corporate federal tax rate from 34% to 21% effective January 1, 2018. The Company files federal income tax returns on a September 30 fiscal year
basis, so in accordance with Internal Revenue Code regulations, the Company’s federal income tax rate for the year ended September 30, 2018 is
based on a blended rate of 24.5%. As a result of the Tax Act, the Company was required to re-measure, through income tax expense, deferred tax
assets and liabilities using the enacted rate at which the Company expects them to be recovered or settled. The re-measurement of the net deferred
tax liability resulted in an income tax benefit of approximately $145,000 for the year ended September 30, 2018.
At March 31, 2018, the Company early adopted ASU 2018-02 and reclassified out of retained earnings and into accumulated other comprehensive
income approximately $619,000 of income tax benefit that was recorded through income tax expense at December 31, 2017 due to re-measuring to
21% deferred taxes on available for sale securities.
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, 2019, except for a valuation allowance of $1.4 million on the net deferred tax asset related to losses
on a historic tax credit investment totaling $6.3 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, 2019 and 2018, 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, 2015 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.
F-60
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(18 – continued)
Retained earnings of the Bank at September 30, 2019 and 2018 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 $957,000 at September 30, 2019 and 2018.
(19)
OPERATING LEASES
Lessee
The Bank and Q2 rent office space and equipment under operating lease agreements that expire at different dates through August 2028. 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, 2019:
Years ending September 30:
2020
2021
2022
2023
2024
2025 and thereafter
Total
(In thousands)
994
$
609
426
310
203
590
3,132
$
Rent expense under operating leases for the years ended September 30, 2019, 2018 and 2017 is as follows:
(In thousands)
Rent expense
Lessor
2019
2018
2017
$
1,206 $
462 $
278
The Bank leases commercial office space to tenants under noncancelable operating leases with terms of three to ten years. The following is a
schedule by years of future minimum lease payments with initial or remaining terms in excess of one year as of September 30, 2019:
Years ending September 30:
2020
2021
2022
2023
2024
2025 and thereafter
Total
(In thousands)
499
$
165
87
41
7
-
799
$
F-61
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(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 $5.0 million and $5.4 million at September 30, 2019 and 2018, 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 2019 or 2018.
The following is a summary of the commitments to extend credit at September 30, 2019 and 2018. Interest rate lock commitments that meet the
definition of a derivative are excluded from these totals.
(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
F-62
2019
2018
$
$
28,079 $
22,546
157
32,269
35,718
23,182
141,951 $
14,578
22,811
157
30,629
35,637
22,429
126,241
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(21)
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (i.e., rate lock
commitment). The Company also enters into forward mortgage loan commitments to sell to various investors to protect itself against exposure to
various factors and to reduce sensitivity to interest rate movements. Both the interest rate lock commitments and the related forward mortgage loan
sales contracts are considered derivatives and are recorded on the balance sheet at fair value in accordance with FASB ASC 815, Derivatives and
Hedging, with changes in fair value recorded in mortgage banking income in the accompanying consolidated statements of income. All such
derivatives are considered stand-alone derivatives and have not been formally designated as hedges by management.
Certain financial instruments, including derivatives, may be eligible for offset in the balance sheet when the “right of setoff” exists or when the
instruments are subject to an enforceable master netting agreement, which includes the right of the non-defaulting party or non-affected party to
offset recognized amounts, including collateral posted with the counterparty, to determine a net receivable or net payable upon early termination of
the agreement. Certain of the Company’s derivative instruments are subject to master netting agreements. However, the Company has not elected
to offset such financial instruments in the consolidated balance sheets.
The table below provides information on the Company’s derivative financial instruments as of September 30, 2019 and 2018.
September 30, 2019:
(In thousands)
Interest rate lock commitments
Forward mortgage loan sale contracts
September 30, 2018:
(In thousands)
Interest rate lock commitments
Forward mortgage loan sale contracts
Notional
Amount
Asset
Derivatives
Liability
Derivatives
258,545 $
203,250
3,269 $
130
461,795 $
3,399 $
-
329
329
Notional
Amount
Asset
Derivatives
Liability
Derivatives
16,634 $
13,750
30,384 $
380 $
41
421 $
-
-
-
$
$
$
$
Income (loss) related to derivative financial instruments included in mortgage banking income in the accompanying consolidated statements of
income for the years ended September 30, 2019, 2018 and 2017, is as follows:
(In thousands)
Interest rate lock commitments
Forward mortgage loan sale contracts
2019
2018
2017
$
$
2,889 $
(3,462)
(573) $
380 $
37
417 $
-
-
-
F-63
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(22)
FAIR VALUE MEASUREMENTS
FASB ASC Topic 820, Fair Value Measurements, provides the framework for measuring fair value. That framework provides a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy under FASB ASC Topic 820 are described as follows:
Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted
market price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever
available.
Level 2: Inputs to the valuation methodology include quoted market prices for similar assets or liabilities in active markets; 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.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities
include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for
which the determination of fair value requires significant management judgment or estimation.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments
pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets carried
at fair value or the lower of cost or fair value.
F-64
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(22 – continued)
The table below presents the balances of financial assets and liabilities measured at fair value on a recurring and nonrecurring basis as of
September 30, 2019.
(In thousands)
September 30, 2019:
Assets Measured – Recurring Basis
Securities available for sale:
Agency mortgage-backed
Agency CMO
Privately-issued CMO
Privately-issued ABS
SBA certificates
Municipal bonds
Total securities available for sale
$
$
Residential mortgage loans held for sale – fair value option elected $
Derivative assets (included in other assets)
Equity securities (included in other assets)
Mortgage servicing rights (included in other assets)
Liabilities Measured – Recurring Basis
Derivative liabilities (included in other liabilities)
Assets Measured – Nonrecurring Basis
Impaired loans:
Residential real estate
Commercial real estate
Commercial business
Consumer
Total impaired loans
SBA loans held for sale
SBA loan servicing rights
Other real estate owned, held for sale:
Former bank premises
Total other real estate owned
$
$
$
$
$
$
$
$
$
$
F-65
Level 1
Level 2
Level 3
Total
Carrying Value
- $
-
-
-
-
-
- $
- $
- $
85 $
- $
- $
- $
-
-
-
- $
- $
- $
- $
- $
14,097 $
9,048
1,382
1,178
1,154
150,443
177,302 $
80,457 $
130 $
- $
- $
- $
-
-
-
-
-
- $
- $
3,269 $
- $
934 $
329 $
- $
- $
-
-
-
- $
4,438 $
7,135
105
211
11,889 $
14,097
9,048
1,382
1,178
1,154
150,443
177,302
80,457
3,399
85
934
329
4,438
7,135
105
211
11,889
15,613 $
- $
15,613
- $
3,030 $
3,030
- $
- $
1,893 $
1,893 $
1,893
1,893
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(22 – continued)
The table below presents the balances of financial assets measured at fair value on a recurring and nonrecurring basis as of September 30, 2018.
The Company had no liabilities measured at fair value as of September 30, 2018.
Level 1
Level 2
Level 3
Total
Carrying Value
(In thousands)
September 30, 2018:
Assets Measured – Recurring Basis
Securities available for sale:
Agency mortgage-backed
Agency CMO
Privately-issued CMO
Privately-issued ABS
SBA certificates
Municipal bonds
Total securities available for sale
$
$
- $
-
-
-
-
-
- $
Residential mortgage loans held for sale – fair value option elected $
Derivative assets (included in other assets)
Assets Measured – Nonrecurring Basis
Impaired loans:
Residential real estate
Commercial real estate
Land and land development
Commercial business
Consumer
Total impaired loans
Residential mortgage loans held for sale – fair value option not
elected
SBA loans held for sale
SBA loan servicing rights
Other real estate owned, held for sale:
Residential real estate
Total other real estate owned
$
$
$
$
$
$
$
$
F-66
- $
- $
- $
-
-
-
-
- $
- $
- $
- $
- $
- $
31,130 $
10,441
1,579
1,884
1,351
137,988
184,373 $
9,952 $
- $
-
-
-
-
-
- $
- $
41 $
380 $
- $
-
-
-
-
- $
514 $
21,659 $
5,100 $
7,227
27
231
231
12,816 $
- $
- $
31,130
10,441
1,579
1,884
1,351
137,988
184,373
9,952
421
5,100
7,227
27
231
231
12,816
514
21,659
- $
2,405 $
2,405
- $
- $
103 $
103 $
103
103
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(22 – continued)
Fair value is based upon quoted market prices, where available. If quoted market prices are not available, fair value is based on internally-developed
models or obtained from third parties that primarily use, as inputs, observable market-based parameters or a matrix pricing model that employs the
Bond Market Association’s standard calculations for cash flow and price/yield analysis and observable market-based parameters. Valuation
adjustments may be made to ensure that financial instruments are recorded at fair value, or the lower of cost or fair value. These adjustments may
include unobservable parameters. Any such valuation adjustments have been applied consistently over time. The Company’s valuation
methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While
management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the
reporting date.
Securities Available for Sale and Equity Securities. Securities classified as available for sale and equity securities 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 equity
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.
Residential Mortgage Loans Held for Sale. Prior to June 30, 2018, residential mortgage loans held for sale were carried at the lower of cost or
market value. Effective July 1, 2018, the Company elected to record substantially all of its residential mortgage loans held for sale at fair value in
accordance with FASB ASC 825-10. The fair value of residential mortgage loans held for sale is based on specific prices of the underlying contracts
for sale to investors or current secondary market prices for loans with similar characteristics, and is classified as Level 2 in the fair value hierarchy.
SBA Loans Held for Sale. SBA loans held for sale are carried at the lower of cost or market value. The fair value of SBA loans held for sale is
obtained from an independent third party pricing firm based on specific prices of the underlying contracts for sale to investors or current secondary
market prices for loans with similar characteristics, and is classified as Level 2 in the fair value hierarchy.
Derivative Financial Instruments. Derivative financial instruments consist of mortgage banking interest rate lock commitments and forward
mortgage loan sale commitments. The fair value of forward mortgage loan sale commitments is obtained from an independent third party and is
based on the gain or loss that would occur if the Company were to pair-off the sales transaction with the investor. The fair value of forward
mortgage loan sale commitments is classified as Level 2 in the fair value hierarchy.
The fair value of interest rate lock commitments is also obtained from an independent third party and is based on investor prices for the underlying
loans or current secondary market prices for loans with similar characteristics, less estimated costs to originate the loans and adjusted for the
anticipated funding probability (pull-through rate). The fair value of interest rate lock commitments is classified as Level 3 in the fair value
hierarchy.
F-67
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(22 – continued)
The table below presents a reconciliation of derivative assets measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) for the years ended September 30, 2019, 2018 and 2017:
(In thousands)
Beginning balance
Unrealized gains recognized in earnings, net of settlements
Ending balance
2019
2018
2017
$
$
380 $
2,889
3,269 $
- $
380
380 $
-
-
-
The realized and unrealized gains recognized in earnings in the table above are included in mortgage banking income on the accompanying
consolidated statements of income. Gains recognized in earnings for the years ended September 30, 2019 and 2018 attributable to Level 3 derivative
assets held at the balance sheet date were $3.3 million and $380,000, respectively.
The table below presents information about significant unobservable inputs (Level 3) used in the valuation of derivative financial instruments
measured at fair value on a recurring basis as of September 30, 2019 and 2018.
Financial Instrument
Interest rate lock commitments
Significant
Unobservable Inputs
Pull-through rate
Direct costs to close
2019 Range of
Inputs
55% - 100%
1%
2018 Range of
Inputs
72% - 95%
1% - 3%
Mortgage Servicing Rights. The current market for MSRs is not sufficiently liquid to provide participants with quoted market prices. Therefore, the
Company uses a discounted cash flow valuation model from an independent third party to determine the fair value of MSRs. The discounted cash
flow model approach consists of projecting expected servicing cash flows and calculating the present value. The key assumptions used in the
valuation of MSRs include mortgage prepayment speeds, discount rates and loan servicing costs. Due to the nature of the valuation inputs, MSRs
are classified within Level 3 of the valuation hierarchy.
The table below presents a reconciliation of MSRs measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for
the year ended September 30, 2019:
(In thousands)
Beginning balance
Issuances (loans sold with servicing retained)
Net settlements
Unrealized gains (losses) included in earnings
Ending balance
2019
-
940
(6)
-
934
$
$
Changes in the fair value of MSRs are included in mortgage banking income in the accompanying consolidated statements of income.
F-68
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(22 – continued)
The table below presents information about significant unobservable inputs (Level 3) used in the valuation of MSRs measured at fair value on a
recurring basis as of September 30, 2019.
Financial Instrument
MSRs
Significant
Unobservable Inputs
Discount rate
Prepayment rate
2019
Range of Inputs
9.25%
4.42% - 72.79%
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, 2019 and 2018, 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, 2019 and 2018, the significant unobservable inputs used in the fair value measurement of impaired
loans included a discount from appraised value ranging from 0.0% to 75.0% and estimated costs to sell the collateral ranging from 0.0% to 12.0%.
Provisions for loan losses recognized for impaired loans for the years ended September 30, 2019, 2018 and 2017 is as follows:
(In thousands)
Provision for loan losses recognized
2019
2018
2017
$
860 $
573 $
182
F-69
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(22 – continued)
SBA Loan Servicing Rights. SBA loan servicing rights represent the value associated with servicing SBA loans that have been sold. The fair value
of SBA 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, 2019, the significant unobservable inputs
used in the fair value measurement of SBA loan servicing rights included discount rates ranging from 6.82% to 26.61% with a weighted average of
11.11% and prepayment speed assumptions ranging from 6.80% to 21.17% with a weighted average rate of 14.10%. At September 30, 2018, the
significant unobservable inputs used in the fair value measurement of SBA loan servicing rights included discount rates ranging from 10.84% to
23.22% with a weighted average of 14.63% and prepayment speed assumptions ranging from 4.32% to 14.43% with a weighted average rate of
10.08%. Impairment of the SBA 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.
Impairment charges to write down SBA loan servicing rights to fair value for the years ended September 30, 2019, 2018 and 2017 is as follows:
(In thousands)
Charges to write down SBA loan servicing rights
2019
2018
2017
$
113 $
177 $
-
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, 2019, 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 0.0% to 15.0% with a weighted average of
10.5%. At September 30, 2018, 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 100.0% with a weighted average of 48.9%.
Charges to write down other real estate owned to fair value for the years ended September 30, 2019, 2018 and 2017 is as follows:
(In thousands)
Charges to write down other real estate owned
2019
2018
2017
$
- $
63 $
28
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, 2019 and 2018. There were no transfers into or out of Level 3 financial
assets or liabilities for the years ended September 30, 2019 and 2018. 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, 2019 and 2018.
F-70
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(22 – continued)
Financial Instruments Recorded Using Fair Value Option. Under FASB ASC 825-10, the Company may elect to report most financial instruments
and certain other items at fair value on an instrument-by-instrument basis, with changes in fair value reported in income. The election is made at the
acquisition of an eligible financial asset or financial liability, and may not be revoked once made.
The Company has elected the fair value option for substantially all of its residential mortgage loans held for sale effective July 1, 2018, including all
loans originated by the newly formed wholesale lending division. These loans are intended for sale and the Company believes that the fair value is
the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loans and in accordance with
the Company’s policy on loans held for investment. None of these loans were 90 days or more past due, nor were any on nonaccrual status as of
September 30, 2019 and 2018.
The table below presents the difference between the aggregate fair value and the aggregate remaining principal balance for residential mortgage
loans held for sale for which the fair value option had been elected as of September 30, 2019 and 2018.
September 30, 2019:
(In thousands)
Residential mortgage loans held for sale
(September 30, 2018:
In thousands)
Residential mortgage loans held for sale
$
$
Aggregate
Fair Value
80,457 $
Aggregate
Principal
Balance Difference
2,670
77,787 $
Aggregate
Fair Value
9,952 $
Aggregate
Principal
Balance Difference
257
9,695 $
The table below presents gains and losses and interest included in earnings related to financial assets measured at fair value under the fair value
option for the years ended September 30, 2019, 2018 and 2017:
(In thousands)
Gains – included in mortgage banking income
Interest income
2019
2018
2017
$
$
2,492 $
1,516
4,008 $
257 $
376
633 $
-
-
-
F-71
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(22 – 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, 2019 and 2018.
$
(In thousands)
September 30, 2019:
Financial assets:
Cash and due from banks
Interest-bearing deposits with banks
Interest-bearing time deposits
Securities available for sale
Securities held to maturity
Residential mortgage loans held for sale
SBA loans held for sale
Loans, net
FRB and FHLB stock
Accrued interest receivable
SBA loan servicing rights (included in other assets)
Residential mortgage loan servicing rights (included in other assets)
Derivative assets (included in other assets)
Equity securities (included in other assets)
Financial liabilities:
Deposits
Federal funds purchased
Borrowings from FHLB
Subordinated note
Accrued interest payable
Advance payments by borrowers for taxes and insurance
Derivative liabilities (included in other liabilities)
Carrying
Amount
13,008 $
28,424
2,265
177,302
2,336
80,457
15,613
810,658
13,040
5,041
3,030
934
3,399
85
834,384
4,000
222,544
19,729
935
1,906
329
F-72
Fair Value Measurements Using:
Level 2
Level 3
Level 1
13,008 $
28,424
-
-
-
-
-
-
N/A
-
-
-
-
85
-
-
-
-
-
-
-
- $
-
2,265
177,302
2,670
80,457
17,040
-
N/A
5,041
-
-
130
-
-
4,000
222,432
21,143
935
1,906
329
-
-
-
-
-
-
-
841,646
N/A
-
3,030
934
3,269
-
835,483
-
-
-
-
-
-
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(22 – continued)
(In thousands)
September 30, 2018:
Financial assets:
Cash and due from banks
Interest-bearing deposits with banks
Interest-bearing time deposits
Securities available for sale
Securities held to maturity
Residential mortgage loans held for sale
SBA loans held for sale
Loans, net
FRB and FHLB stock
Accrued interest receivable
Loan servicing rights (included in other assets)
Derivative assets (included in other assets)
Financial liabilities:
Deposits
Short-term repurchase agreements
Borrowings from FHLB
Subordinated note
Accrued interest payable
Advance payments by borrowers for taxes and insurance
$
Carrying
Amount
14,191 $
28,083
2,501
184,373
2,607
10,466
21,659
704,271
9,621
4,287
2,405
421
811,112
1,352
90,000
19,661
743
1,218
Fair Value Measurements Using:
Level 2
Level 3
Level 1
14,191 $
28,083
-
-
-
-
-
-
N/A
-
-
-
-
-
-
-
-
-
- $
-
2,494
184,373
2,896
10,476
23,488
-
N/A
4,287
-
41
-
1,352
84,175
19,661
743
1,218
-
-
-
-
-
-
-
673,652
N/A
-
2,405
380
809,305
-
-
-
-
-
The carrying amounts in the preceding tables are included in the consolidated balance sheets under the applicable captions. The contracted or
notional amounts of financial instruments with off-balance-sheet risk are disclosed in Note 20, and the fair value of these instruments is considered
immaterial.
F-73
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(23)
CAPITAL REQUIREMENTS AND RESTRICTION ON DIVIDENDS
The Bank is 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 Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total, 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 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 was 1.875% for 2018 and is 2.50% for 2019. Management believes that the Bank met all capital adequacy requirements to which
it was subject as of September 30, 2019 and 2018.
As of September 30, 2019, 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 1 risk-based, common equity
Tier 1 risk-based and Tier 1 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-74
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(23 – continued)
The Company is not subject to the FRB’s consolidated capital requirements because it has less than $3 billion in total consolidated assets.
However, management has elected to disclose the Company’s capital amounts and ratios in addition to Bank’s required disclosures in the table
below. No amount was deducted from capital for interest-rate risk in either year.
(Dollars in thousands)
As of September 30, 2019:
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
As of September 30, 2018:
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
$
$
$
$
$
$
$
$
Actual
Amount
Ratio
Minimum for Capital
Adequacy Purposes
Ratio
Amount
Minimum To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
130,700
121,160
13.85% $
12.88%
75,474
75,249
8.00%
8.00% $
N/A
94,061
N/A
10.00%
100,931
111,120
10.70% $
11.81%
56,606
56,437
6.00%
6.00% $
N/A
75,249
N/A
8.00%
100,931
111,120
10.70% $
11.81%
42,454
42,327
4.50%
4.50% $
N/A
61,140
100,931
111,120
8.39% $
9.34%
48,142
47,564
4.00%
4.00% $
N/A
59,455
N/A
6.50%
N/A
5.00%
114,911
102,281
14.50% $
12.92%
63,402
63,312
8.00%
8.00% $
N/A
79,140
N/A
10.00%
85,927
92,958
10.84% $
11.75%
47,551
47,484
6.00%
6.00% $
N/A
63,312
N/A
8.00%
85,927
92,958
10.84% $
11.75%
35,663
35,613
4.50%
4.50% $
N/A
51,441
85,927
92,958
8.39% $
9.10%
40,982
40,840
4.00%
4.00% $
N/A
51,050
N/A
6.50%
N/A
5.00%
F-75
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(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 Bank’s 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-76
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(24)
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, 2019, 2018 and 2017.
(In thousands, except share and per share data)
Basic:
Earnings:
Net income attributable to First Savings Financial Group, Inc. available to common
Years Ended September 30,
2018
2019
2017
shareholders
$
16,177 $
10,902 $
9,313
Shares:
Weighted average common shares outstanding, basic
2,315,697
2,258,020
2,219,088
Net income per common share, basic
$
6.99 $
4.83 $
4.20
Diluted:
Earnings:
Net income attributable to First Savings Financial Group, Inc. available to common
shareholders
$
16,177 $
10,902 $
9,313
Shares:
Weighted average common shares outstanding, basic
Add: Dilutive effect of outstanding options
Add: Dilutive effect of restricted stock
Weighted average common shares outstanding, as adjusted
2,315,697
50,623
5,764
2,372,084
2,258,020
107,274
7,260
2,372,554
2,219,088
123,557
3,363
2,346,008
Net income per common share, diluted
$
6.82 $
4.60 $
3.97
Nonvested restricted stock shares are not considered as outstanding for purposes of computing weighted average common shares outstanding.
There were no antidilutive restricted stock awards excluded from the calculation of diluted net income per share for the years ended September 30,
2019, 2018 and 2017. Stock options for 7,200 and 4,800 shares of common stock were excluded from the calculation of diluted net income per
common share for the years ended September 30, 2019 and 2018, respectively, because their effect was antidilutive. No stock options were excluded
from the calculation of diluted net income per common share for the year ended September 30, 2017.
F-77
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(25)
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
Other assets
Investment in subsidiaries
Liabilities and Equity:
Subordinated note
Accrued interest payable
Accrued expenses
Stockholders' equity
(In thousands)
Dividend income from subsidiaries
Interest expense
Other operating expenses
As of September 30,
2019
2018
$
$
$
$
6,474 $
816
133,760
141,050 $
19,729 $
-
268
121,053
141,050 $
10,170
928
108,007
119,105
19,661
33
598
98,813
119,105
1,850
-
(778)
1,072
239
1,311
8,002
9,313
Statements of Income
Years Ended September 30,
2018
2017
2019
$
750 $
(1,277)
(882)
9,875 $
(33)
(921)
Income (loss) before income taxes and equity in undistributed net income of
subsidiaries
Income tax benefit
(1,409)
8,921
747
408
Income (loss) before equity in undistributed net income of subsidiaries
(662)
9,329
Equity in undistributed net income of subsidiaries
16,839
1,573
Net income
$
16,177 $
10,902 $
F-78
(25 – continued)
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
Statements of Cash Flows
(In thousands)
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating
Years Ended September 30,
2018
2017
2019
$
16,177 $
10,902 $
9,313
activities:
Equity in undistributed net income of subsidiaries
Stock compensation expense
Net change in other assets and liabilities
Net cash provided by (used in) operating activities
Investing Activities:
Acquisition of Dearmin
Investment in bank subsidiary
Investment in interest-bearing time deposits
Proceeds from maturities of interest-bearing time deposits
Net cash used in investing activities
Financing Activities:
Net proceeds from subordinated note
Exercise of stock options
Tax paid on stock award shares for employees
Dividends paid
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and due from banks
Cash and due from banks at beginning of year
(16,839)
246
(184)
(600)
-
(2,000)
-
-
(2,000)
-
408
(32)
(1,472)
(1,096)
(3,696)
10,170
(1,573)
217
(162)
9,384
(9,148)
(10,000)
-
10
(19,138)
19,661
362
(46)
(1,343)
18,634
8,880
1,290
Cash and due from banks at end of year
$
6,474 $
10,170 $
(26)
CONCENTRATION OF CREDIT RISK
(8,002)
176
131
1,618
-
-
(10)
-
(10)
-
62
-
(1,229)
(1,167)
441
849
1,290
At September 30, 2019 and 2018, the Bank had a concentration of credit risk with correspondent banks in excess of the federal deposit insurance
limit of $8.8 million and $9.6 million, respectively.
F-79
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(27)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(In thousands)
Cash payments for:
Interest
Income taxes (net of refunds received)
Non-cash activities:
Transfers to loans held for sale from loans
Transfers from loans to other real estate owned
Proceeds from sales of other real estate owned financed through loans
Cashless exercise of stock options
Transfers from premises and equipment to other real estate owned
(28)
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Years Ended September 30,
2018
2017
2019
$
10,729 $
1,572
5,873 $
1,759
-
114
112
542
1,893
-
133
453
387
-
4,400
(598)
(854)
703
189
294
-
(In thousands, except per share data)
September 30, 2019:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expenses
Income before income taxes
Income tax expense
$
Net income
Net
subsidiary
income (loss) attributable
to noncontrolling
interest
in
Net income attributable to First Savings Financial Group, Inc.
Net income per common share, basic
Net income per common share, diluted
$
$
$
F-80
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
11,801 $
2,225
9,576
315
9,261
5,781
11,416
3,626
522
12,307 $
2,446
9,861
340
9,521
7,089
12,880
3,730
466
13,058 $
3,166
9,892
337
9,555
12,644
16,488
5,711
748
3,104
3,264
4,963
173
(269)
571
2,931 $
3,533 $
4,392 $
1.28 $
1.24 $
1.53 $
1.50 $
1.88 $
1.85 $
13,829
3,069
10,760
471
10,289
18,340
21,606
7,023
1,359
5,664
343
5,321
2.28
2.24
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(28 – continued)
(In thousands, except per share data)
September 30, 2018:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expenses
Income before income taxes
Income tax expense
Net income
Net income attributable to noncontrolling interest in subsidiary
Net income attributable to First Savings Financial Group, Inc.
Net income per common share, basic
Net income per common share, diluted
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 (loss) before income taxes
Income tax expense (benefit)
Net income
Net income attributable to noncontrolling interest in subsidiary
Net income attributable to First Savings Financial Group, Inc.
Net income per common share, basic
Net income per common share, diluted
$
$
$
$
$
$
$
$
F-81
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
9,426 $
1,373
8,053
462
7,591
2,906
6,382
4,115
622
3,493
87
3,406 $
1.53 $
1.44 $
8,011 $
1,022
6,989
306
6,683
1,875
5,540
3,018
681
2,337
-
2,337 $
1.06 $
1.00 $
10,146 $
1,423
8,723
371
8,352
2,567
8,359
2,560
338
2,222
576
1,646 $
0.73 $
0.69 $
8,219 $
1,032
7,187
375
6,812
1,861
6,066
2,607
413
2,194
-
2,194 $
0.99 $
0.94 $
11,206 $
1,699
9,507
266
9,241
3,254
8,122
4,373
696
3,677
571
3,106 $
1.37 $
1.31 $
8,664 $
1,132
7,532
321
7,211
2,123
6,305
3,029
586
2,443
-
2,443 $
1.10 $
1.04 $
11,381
1,842
9,539
254
9,285
4,568
10,143
3,710
766
2,944
200
2,744
1.20
1.15
9,023
1,271
7,752
299
7,453
2,766
7,040
3,179
840
2,339
-
2,339
1.05
0.99
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(29)
SEGMENT REPORTING
The Company’s operations include three primary segments: core banking, SBA lending, and mortgage banking. 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 mortgage banking segment originates residential mortgage loans and sells them in the
secondary market. Net gains on the sales of loans, income from derivative financial instruments and net interest income are the primary sources of
revenue for the mortgage banking segment.
The core banking segment is comprised primarily of 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 mortgage banking segment operates as a separate division of the Bank and began operations
in April 2018 and was not recognized as a separate operating segment until the year ended September 30, 2019.
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 three segments are the same as those of the Company.
The amounts reflected in the “Other” column in the tables below represent combined balances of the Company and the Captive, and are the primary
differences between the sum of the segment amounts and consolidated totals, along with amounts to eliminate transactions between segments.
F-82
(29 – continued)
(In thousands)
Year Ended September 30, 2019:
Net interest income
Net gains on sales of loans, SBA
Mortgage banking income
Noncash items:
Provision for loan losses
Depreciation and amortization
Income tax expense (benefit)
Segment profit (loss)
Segment assets at September 30, 2019
(In thousands)
Year Ended September 30, 2018:
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, 2018
(In thousands)
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 benefit
Segment profit (loss)
Segment assets at September 30, 2017
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
Core
Banking
SBA
Lending
Mortgage
Banking
Other
Consolidated
Totals
$
36,524 $
-
33
(242)
1,467
2,143
11,423
1,124,526
$
4,145
4,569
-
1,705
49
213
1,458
84,661
$
636
-
32,974
-
100
1,475
4,422
88,645
(1,216) $
-
-
-
68
(736)
(308)
(75,253)
40,089
4,569
33,007
1,463
1,684
3,095
16,995
1,222,579
Core
Banking
SBA
Lending
Other
Consolidated
Totals
$
32,812 $
-
$
3,012
5,493
(2) $
-
35,822
5,493
(69)
1,323
2,825
9,050
1,025,135
1,422
50
-
2,968
66,970
-
-
(403)
318
(57,699)
1,353
1,373
2,422
12,336
1,034,406
Core
Banking
SBA
Lending
Other
Consolidated
Totals
$
27,637 $
-
$
1,802
4,204
868
1,120
2,754
7,109
885,669
433
44
-
1,924
51,821
F-83
$
21
-
-
-
(234)
280
(46,357)
29,460
4,204
1,301
1,164
2,520
9,313
891,133
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(30)
REVENUE FROM CONTRACTS WITH CUSTOMERS
As of October 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified
retrospective approach. The adoption of the ASU had no material impact on the measurement or recognition of revenue; however, additional
disclosures have been added in accordance with the ASU.
All of the Company’s revenue from contracts with customers within the scope of FASB ASC 606 is included in the core banking segment and is
recognized within noninterest income. The following table presents the Company’s sources of noninterest income for the years ended September
30, 2019, 2018 and 2017:
Service charges on deposit accounts
ATM and interchange fees
Investment advisory income
Other
Revenue from contracts with customers
Gain (loss) on securities
Gain on sale of SBA loans
Mortgage banking income
Increase in cash value of life insurance
Real estate lease income
Other
Other noninterest income
Total noninterest income
Year Ended
September 30,
2018
2017
2019
$
1,957 $
1,949
324
137
4,367
(74)
4,569
33,007
580
594
811
39,487
1,731 $
1,580
550
139
4,000
99
5,493
2,318
430
5
950
9,295
$
43,854 $
13,295 $
1,355
1,348
379
140
3,222
30
4,204
530
433
-
206
5,403
8,625
A description of the Company’s revenue streams accounted for under FASB ASC 606 follows:
Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and
overdraft services. Transaction-based fees, which include services such as wire fees, stop payment charges, statement rendering, and ACH fees,
are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer's request. Account maintenance
fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company
satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs.
ATM and Interchange Fees: The Company earns ATM usage fees and interchange fees from debit cardholder transactions conducted through a
payment network. ATM fees are recognized when the transaction occurs. Interchange fees from cardholder transactions represent a percentage of
the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.
F-84
FIRST SAVINGS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019, 2018 AND 2017
(30 – continued)
Investment Advisory Income: The Company earns trust, insurance commissions, brokerage commissions and annuities income from its contracts
with customers to manage assets for investment, and/or to transact on their accounts. These fees are primarily earned over time as the Company
provides the contracted services and are generally assessed based on the market value of assets under management. Fees that are transaction
based, including trade execution services, are recognized when the transaction is executed. Other related fees, which are based on a fixed fee
schedule, are recognized when the services are rendered.
Other Income: Other income from contracts with customers includes check cashing and cashier’s check fees, safe deposit box fees and cash
advance fees. This revenue is recognized at the time the transaction is executed or over the period the Company satisfies the performance
obligation.
(Back To Top)
Section 2: EX-21.0 (EXHIBIT 21.0)
F-85
Registrant
First Savings Financial Group, Inc.
Subsidiaries
First Savings Insurance Risk Management, Inc. (1)
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
(Back To Top)
Section 3: EX-23.0 (EXHIBIT 23.0)
SUBSIDIARIES
Percentage
Ownership
Jurisdiction or
State of Incorporation
EXHIBIT 21.0
N/A
100%
100%
100%
100%
51%
Indiana
Nevada
Indiana
Indiana
Nevada
Indiana
EXHIBIT 23.0
We consent to the incorporation by reference in First Savings Financial Group, Inc.’s Registration Statements on Form S-8 (File Nos. 333-154417, 333-166430
and 333-211554) of our report dated December 16, 2019 relating to the consolidated financial statements and effectiveness of internal control over financial
reporting contained in this Annual Report on Form 10-K for the year ended September 30, 2019.
/s/ Monroe Shine & Co., Inc.
New Albany, Indiana
December 16, 2019
(Back To Top)
Section 4: EX-31.1 (EXHIBIT 31.1)
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 16, 2019
/s/ Larry W. Myers
Larry W. Myers
President and Chief Executive Officer
(principal executive officer)
(Back To Top)
Section 5: EX-31.2 (EXHIBIT 31.2)
EXHIBIT 31.2
I, Anthony A. Schoen, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of First Savings Financial Group, Inc.:
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this annual report;
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual
report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) 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 16, 2019
/s/ Anthony A. Schoen
Anthony A. Schoen
Chief Financial Officer
(principal financial and accounting officer)
(Back To Top)
Section 6: EX-32.0 (EXHIBIT 32.0)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADDED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.0
In connection with the Annual Report of First Savings Financial Group, Inc. (the “Company”) on Form 10-K for the year ended September 30, 2019
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 16, 2019
(Back To Top)