UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

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

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

 

For the quarterly period endedDecemberMarch 31, 20172020

 

OR

 

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

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

 

For the transition period from _____________________ to __________________from_____________________to__________________

 

Commission File No.1-34155

 

First Savings Financial Group, Inc.
(Exact name of registrant as specified in its charter)

First Savings Financial Group, Inc.

(Exact name of registrant as specified in its charter)

 

Indiana37-1567871
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification Number)

 

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

702 North Shore Drive, Suite 300, Jeffersonville, Indiana 47130

(Address of principal executive offices) (Zip Code)

 

Registrant's telephone number, including area code1-812-283-0724

 

Not applicable501 East Lewis & Clark Parkway, Clarksville, Indiana 47129
(Former name, former address and former fiscal year, if changed since last report)

Securities Registered pursuant to Section 12(b) of the Act:

 

Common stock, $0.01 par value per shareFSFGThe NASDAQ Stock Market, LLC
(Title of each class)(Trading Symbol)(Name of each exchange on which registered)

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. Yesx No¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesxNo¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller 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.

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨Nox

 

The number of shares outstanding of the registrant’s common stock as of February 5, 2018May 4, 2020 was 2,260,940.2,375,324.

 

 

 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

 

INDEX

 

  Page
Part IFinancial Information 
   
 Item 1. Financial Statements 
   
 Consolidated Balance Sheets as of DecemberMarch 31, 20172020 and September 30, 20172019 (unaudited)3
   
 Consolidated Statements of Income for the three months and six months ended DecemberMarch 31, 20172020 and 20162019 (unaudited)4
   
 Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended DecemberMarch 31, 20172020 and 20162019 (unaudited)5
   
 Consolidated Statements of Changes in Stockholders’ Equity for the threesix months ended DecemberMarch 31, 20172020 and 20162019 (unaudited)6
   
 Consolidated Statements of Cash Flows for the threesix months ended DecemberMarch 31, 20172020 and 20162019 (unaudited)7
   
 Notes to Consolidated Financial Statements (unaudited)8-458-56
   
 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations46-5357-68
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk54-5569-70
   
 Item 4. Controls and Procedures5671
   
Part IIOther Information
   
 Item 1. Legal Proceedings5772
   
 Item 1A. Risk Factors5772
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds5874
   
 Item 3. Defaults Upon Senior Securities5874
   
 Item 4. Mine Safety Disclosures5874
   
 Item 5. Other Information5975
   
 Item 6. Exhibits5975
   
Signatures6076

 

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PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

  December 31,  September 30, 
(In thousands, except share and per share data) 2017  2017 
       
ASSETS        
Cash and due from banks $10,018  $11,017 
Interest-bearing deposits with banks  29,013   23,242 
Total cash and cash equivalents  39,031   34,259 
         
Interest-bearing time deposits  2,680   2,435 
Trading account securities, at fair value  6,639   7,175 
Securities available for sale, at fair value  176,494   178,099 
Securities held to maturity  2,844   2,878 
         
Loans held for sale, residential mortgage  123   727 
Loans held for sale, Small Business Administration  29,186   24,908 
Loans, net of allowance for loan losses of $8,511 and $8,092  616,993   586,456 
         
Federal Reserve Bank and Federal Home Loan Bank stock, at cost  9,499   6,936 
Premises and equipment  11,155   11,270 
Other real estate owned, held for sale  211   852 
Accrued interest receivable:        
Loans  2,166   1,907 
Securities  1,827   1,491 
Cash surrender value of life insurance  18,404   18,297 
Goodwill  7,936   7,936 
Core deposit intangibles  607   693 
Other assets  4,357   4,814 
         
Total Assets $930,152  $891,133 
         
LIABILITIES        
Deposits:        
Noninterest-bearing $101,213  $96,283 
Interest-bearing  574,236   573,099 
Total deposits  675,449   669,382 
         
Repurchase agreements  1,349   1,348 
Borrowings from Federal Home Loan Bank  150,000   118,065 
Accrued interest payable  329   283 
Advance payments by borrowers for taxes and insurance  783   1,212 
Accrued expenses and other liabilities  6,835   7,728 
Total Liabilities  834,745   798,018 
         
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 2,561,207 shares (2,559,307 at September 30, 2017); outstanding 2,251,539 shares (2,242,454 shares September 30, 2017)  26   25 
Additional paid-in capital  27,872   27,798 
Retained earnings - substantially restricted  70,674   67,583 
Accumulated other comprehensive income  3,142   4,158 
Unearned stock compensation  (619)  (571)
Less treasury stock, at cost - 309,668 shares  (316,853 shares at September 30, 2017)  (5,775)  (5,878)
Total First Savings Financial Group, Inc. Stockholders' Equity  95,320   93,115 
         
Noncontrolling interest in subsidiary  87   - 
Total Equity  95,407   93,115 
         
Total Liabilities and Equity $930,152  $891,133 

See notes to consolidated financial statements.

-3-

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

  Three Months Ended 
  December, 31 
(In thousands, except share and per share data) 2017  2016 
       
INTEREST INCOME        
Loans, including fees $7,687  $6,346 
Securities:        
Taxable  777   937 
Tax-exempt  801   627 
Dividend income  90   79 
Interest-bearing deposits with banks  71   22 
Total interest income  9,426   8,011 
         
INTEREST EXPENSE        
Deposits  862   612 
Federal funds purchased  -   3 
Repurchase agreements  1   1 
Borrowings from Federal Home Loan Bank  510   406 
Total interest expense  1,373   1,022 
         
Net interest income  8,053   6,989 
Provision for loan losses  462   306 
         
Net interest income after provision for loan losses  7,591   6,683 
         
NONINTEREST INCOME        
Service charges on deposit accounts  377   336 
Net gain (loss) on trading account securities  150   (282)
Net gain on sales of loans, residential mortgage  115   151 
Net gain on sales of loans, Small Business Administration  1,539   854 
Increase in cash surrender value of life insurance  107   109 
Gain on life insurance  -   189 
Commission income  128   66 
Net gain on sale of premises and equipment  7   7 
Other income  483   445 
Total noninterest income  2,906   1,875 
         
NONINTEREST EXPENSE        
Compensation and benefits  4,011   3,541 
Occupancy and equipment  742   600 
Data processing  347   374 
Advertising  117   107 
Professional fees  373   205 
FDIC insurance premiums  119   110 
Net gain on other real estate owned  (156)  (90)
Other operating expenses  829   693 
Total noninterest expense  6,382   5,540 
Income before income taxes  4,115   3,018 
Income tax expense  622   681 
Net Income  3,493   2,337 
Less: net income attributable to noncontrolling interest  87   - 
Net Income Attributable to First Savings Financial Group, Inc. $3,406  $2,337 
         
Net income per share:        
Basic $1.53  $1.06 
Diluted $1.44  $1.00 
         
Weighted average shares outstanding:        
Basic  2,228,256   2,205,309 
Diluted  2,358,935   2,329,514 
         
Dividends per share $0.14  $0.13 

  March 31,  September 30, 
(In thousands, except share and per share data) 2020  2019 
ASSETS        
Cash and due from banks $11,790  $13,008 
Interest-bearing deposits with banks  10,813   28,424 
Total cash and cash equivalents  22,603   41,432 
         
Interest-bearing time deposits  2,510   2,265 
Securities available for sale, at fair value  184,684   177,302 
Securities held to maturity  2,189   2,336 
         
Loans held for sale, residential mortgage, at fair value  139,084   80,457 
Loans held for sale, Small Business Administration  24,843   15,613 
Loans, net of allowance for loan losses of $11,691 at March 31, 2020 and $10,040 at September 30, 2019  877,276   810,658 
Federal Reserve Bank and Federal Home Loan Bank stock, at cost  16,618   13,040 
Premises and equipment  23,437   19,238 
Other real estate owned, held for sale  1,838   1,893 
Accrued interest receivable:        
Loans  3,320   3,329 
Securities  1,837   1,712 
Cash surrender value of life insurance  31,383   26,546 
Goodwill  9,848   9,848 
Core deposit intangibles  1,309   1,416 
Other assets  25,473   15,494 
Total Assets $1,368,252  $1,222,579 
         
LIABILITIES        
Deposits:        
Noninterest-bearing $178,894  $173,072 
Interest-bearing  758,412   661,312 
Total deposits  937,306   834,384 
         
Federal funds purchased  -   4,000 
Borrowings from Federal Home Loan Bank  270,000   222,544 
Other borrowings  19,763   19,729 
Accrued interest payable  787   935 
Advance payments by borrowers for taxes and insurance  1,985   1,906 
Accrued expenses and other liabilities  22,166   17,824 
Total Liabilities  1,252,007   1,101,322 
         
STOCKHOLDERS' EQUITY        
Preferred stock of $.01 par value per share; authorized 1,000,000 shares; none issued  -   - 
Common stock of $.01 par value per share; authorized 20,000,000 shares; issued 2,567,842 shares (2,565,606 at September 30, 2019); outstanding 2,375,324 shares (2,350,229 shares at September 30, 2019)  26   26 
Additional paid-in capital  27,436   27,494 
Retained earnings - substantially restricted  93,425   91,228 
Accumulated other comprehensive income  472   7,296 
Unearned stock compensation  (446)  (446)
Less treasury stock, at cost - 192,518 shares (215,377 shares at September 30, 2019)  (4,254)  (4,545)
Total First Savings Financial Group, Inc. Stockholders' Equity  116,659   121,053 
Noncontrolling interests in subsidiary  (414)  204 
Total Equity  116,245   121,257 
         
Total Liabilities and Equity $1,368,252 ��$1,222,579 

 

See notes to consolidated financial statements.

 

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PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

  Three Months Ended 
  December, 31 
(In thousands) 2017  2016 
       
Net Income $3,493  $2,337 
         
OTHER COMPREHENSIVE LOSS, NET OF TAX        
Unrealized losses on securities available for sale:        
Unrealized holding losses arising during the period  (1,566)  (5,484)
Income tax benefit  550   1,921 
Net of tax amount  (1,016)  (3,563)
         
Other Comprehensive Loss  (1,016)  (3,563)
         
Comprehensive Income (Loss)  2,477   (1,226)
        ��
Less: comprehensive income attributable to noncontrolling interest  87   - 
         
Comprehensive income (loss) attributable to First Savings Financial Group, Inc. $2,390  $(1,226)

  Three Months Ended  Six Months Ended 
  March 31,  March 31, 
(In thousands, except share and per share data) 2020  2019  2020  2019 
INTEREST INCOME                
Loans, including fees $11,858  $10,211  $23,671  $20,021 
Securities:                
Taxable  504   727   1,089   1,474 
Tax-exempt  1,027   1,006   2,037   1,976 
Dividend income  151   142   305   263 
Interest-bearing deposits with banks  153   221   358   374 
Total interest income  13,693   12,307   27,460   24,108 
                 
INTEREST EXPENSE                
Deposits  1,625   1,607   3,374   3,031 
Federal funds purchased  1   -   1   - 
Repurchase agreements  -   1   -   2 
Borrowings from Federal Home Loan Bank  838   520   1,646   998 
Other borrowings  319   318   637   640 
Total interest expense  2,783   2,446   5,658   4,671 
                 
Net interest income  10,910   9,861   21,802   19,437 
Provision for loan losses  1,705   340   2,210   655 
                 
Net interest income after provision for loan losses  9,205   9,521   19,592   18,782 
                 
NONINTEREST INCOME                
Service charges on deposit accounts  441   449   950   960 
ATM and interchange fees  524   446   1,027   899 
Net gain on sales of available for sale securities and time deposits  7   1   7   1 
Net unrealized loss on equity securities  (29)  -   (27)  - 
Net gain on sales of loans, Small Business Administration  1,229   521   1,990   1,485 
Mortgage banking income  8,272   5,074   24,089   8,363 
Increase in cash surrender value of life insurance  194   147   356   258 
Commission income  83   77   110   134 
Real estate lease income  152   157   303   315 
Net gain (loss) on premises and equipment  (5)  8   (9)  9 
Other income  126   209   324   446 
Total noninterest income  10,994   7,089   29,120   12,870 
                 
NONINTEREST EXPENSE                
Compensation and benefits  14,907   8,240   32,727   15,497 
Occupancy and equipment  1,989   1,420   3,911   2,745 
Data processing  546   479   1,048   906 
Advertising  1,777   567   3,243   963 
Professional fees  522   504   1,149   964 
FDIC insurance premiums  99   112   103   178 
Net (gain) loss on other real estate owned  (7)  7   (2)  (14)
Other operating expenses  2,242   1,551   4,168   3,057 
Total noninterest expense  22,075   12,880   46,347   24,296 
Income (loss) before income taxes  (1,876)  3,730   2,365   7,356 
Income tax expense (benefit)  (774)  466   (136)  988 
Net Income (Loss)  (1,102)  3,264   2,501   6,368 
Less: net loss attributable to noncontrolling interests  (475)  (269)  (311)  (96)
Net Income (Loss) Attributable to First Savings Financial Group, Inc. $(627) $3,533  $2,812  $6,464 
                 
Net income (loss) per share:                
Basic $(0.27) $1.53  $1.20  $2.82 
Diluted $(0.26) $1.50  $1.18  $2.73 
                 
Weighted average shares outstanding:                
Basic  2,355,750   2,307,155   2,348,145   2,295,788 
Diluted  2,379,901   2,360,004   2,381,356   2,366,524 
                 
Dividends per share $0.17  $0.16  $0.33  $0.31 

 

See notes to consolidated financial statements.

 

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-4-

 

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITYCOMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

           Accumulated             
     Additional     Other  Unearned     Noncontrolling    
  Common  Paid-in  Retained  Comprehensive  Stock  Treasury  Interest in    
(In thousands, except share and per share data) Stock  Capital  Earnings  Income  Compensation  Stock  Subsidiary  Total 
                         
Three Months Ended December 31, 2016:                                
Balances at October 1, 2016 $25  $27,182  $59,499  $5,944  $-  $(6,070) $-  $86,580 
                                 
Net income  -   -   2,337   -   -   -   -   2,337 
                                 
Other comprehensive loss  -   -   -   (3,563)  -   -   -   (3,563)
                                 
Common stock dividends ($0.13 per share)  -   -   (288)  -   -   -   -   (288)
                                 
Restricted stock grants - 17,265 shares  -   692   -   -   (692)  -   -   - 
                                 
Stock compensation expense  -   8   -   -   17   -   -   25 
                                 
Stock options exercises - 2,000 shares  -   (10)  -   -   -   36   -   26 
                                 
Balances at December 31, 2016 $25  $27,872  $61,548  $2,381  $(675) $(6,034) $-  $85,117 
                                 
Three Months Ended December 31, 2017:                                
Balances at October 1, 2017 $25  $27,798  $67,583  $4,158  $(571) $(5,878) $-  $93,115 
                                 
Net income  -   -   3,406   -   -   -   87   3,493 
                                 
Other comprehensive loss  -   -   -   (1,016)  -   -   -   (1,016)
                                 
Common stock dividends ($0.14 per share)  -   -   (315)  -   -   -   -   (315)
                                 
Restricted stock grants - 1,500 shares  1   84   -   -   (85)  -   -   - 
                                 
Stock compensation expense  -   17   -   -   37   -   -   54 
                                 
Stock option exercises - 8,400 shares  -   (27)  -   -   -   149   -   122 
                                 
Purchase of 815 treasury shares  -   -   -   -   -   (46)  -   (46)
                                 
Balances at December 31, 2017 $26  $27,872  $70,674  $3,142  $(619) $(5,775) $87  $95,407 

  Three Months Ended  Six Months Ended 
  March 31,  March 31, 
(In thousands) 2020  2019  2020  2019 
Net Income (Loss) $(1,102) $3,264  $2,501  $6,368 
                 
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX                
Unrealized gains (losses) on securities available for sale:                
Unrealized holding gains (losses) arising during the period  (7,929)  2,964   (8,677)  4,744 
Income tax benefit (expense)  1,694   (646)  1,858   (1,036)
Net of tax amount  (6,235)  2,318   (6,819)  3,708 
                 
Less: reclassification adjustment for realized gains included in net income  (7)  (1)  (7)  (1)
Income tax expense  2   -   2   - 
Net of tax amount  (5)  (1)  (5)  (1)
                 
                 
Other Comprehensive Income (Loss)  (6,240)  2,317   (6,824)  3,707 
                 
Comprehensive Income (Loss)  (7,342)  5,581   (4,323)  10,075 
Less: comprehensive loss attributable to noncontrolling interests  (475)  (269)  (311)  (96)
                 
Comprehensive Income (Loss) Attributable to First Savings Financial Group, Inc. $(6,867) $5,850  $(4,012) $10,171 

 

See notes to consolidated financial statements.

 

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-5-

 

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

 

  Three Months Ended 
  December, 31 
(In thousands) 2017  2016 
       
CASH FLOWS FROM OPERATING ACTIVITIES        
Net income $3,493  $2,337 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:        
Provision for loan losses  462   306 
Depreciation and amortization  300   293 
Amortization of premiums and accretion of discounts on securities, net  146   201 
Decrease in trading account securities  536   117 
Loans originated for sale  (48,992)  (32,929)
Proceeds on sales of loans  49,096   22,719 
Net gain on sales of loans  (1,654)  (1,005)
Net realized and unrealized gain on other real estate owned  (180)  (113)
Gain on life insurance  -   (189)
Increase in cash surrender value of life insurance  (107)  (109)
Net gain on sale of premises and equipment  (7)  (7)
Deferred income taxes  177   333 
Stock compensation expense  54   25 
Increase in accrued interest receivable  (595)  (540)
Increase in accrued interest payable  46   6 
Change in other assets and liabilities, net  (2,194)  (1,159)
Net Cash Provided By (Used In) Operating Activities  581   (9,714)
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Investment in interest-bearing time deposits  (490)  - 
Proceeds from maturities of interest-bearing time deposits  245   245 
Purchase of securities available for sale  (4,112)  (11,222)
Proceeds from maturities of securities available for sale  355   560 
Proceeds from maturities of securities held to maturity  25   25 
Principal collected on securities  3,652   6,161 
Net increase in loans  (30,640)  (16,344)
Purchase of Federal Home Loan Bank stock  (2,563)  - 
Proceeds from sale of other real estate owned  484   - 
Purchase of premises and equipment  (100)  (120)
Net Cash Used In Investing Activities  (33,144)  (20,695)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Net increase in deposits  6,067   45,479 
Net increase in repurchase agreements  1   1 
Decrease in Federal Home Loan Bank line of credit  (18,065)  (16,637)
Proceeds from Federal Home Loan Bank advances  94,500   - 
Repayment of Federal Home Loan Bank advances  (44,500)  - 
Net decrease in advance payments by  borrowers for taxes and insurance  (429)  (343)
Proceeds from exercise of stock options  122   26 
Purchase of treasury stock  (46)  - 
Dividends paid on common stock  (315)  (288)
Net Cash Provided By Financing Activities  37,335   28,238 
         
Net Increase (Decrease) in Cash and Cash Equivalents  4,772   (2,171)
         
Cash and cash equivalents at beginning of period  34,259   29,342 
         
Cash and Cash Equivalents at End of Period $39,031  $27,171 

(In thousands, except share and per share data) Common
Stock		  Additional
Paid-in
Capital		  Retained
Earnings		  Accumulated
Other
Comprehensive
Income		  Unearned
Stock
Compensation		  Treasury
Stock		  Noncontrolling
Interests in
Subsidiary		  Total 
Six Months Ended March 31, 2019:                        
 Balances at October 1, 2018 $26  $27,630  $76,523  $382  $(479) $(5,269) $1,432  $100,245 
                                 
Net income (loss)  -   -   6,464   -   -   -   (96)  6,368 
                                 
Other comprehensive income  -   -   -   3,707   -   -   -   3,707 
                                 
Common stock dividends - $0.31 per share  -   -   (721)  -   -   -   -   (721)
                                 
Distributions to noncontrolling interests  -   -   -   -   -   -   (95)  (95)
                                 
Restricted stock grants, net of forfeitures - 2,329 shares  -   141   -   -   (141)  -   -   - 
                                 
Stock compensation expense  -   35   -   -   86   -   -   121 
                                 
Stock option exercises - 61,484 shares  -   (306)  -   -   -   1,183   -   877 
                                 
Purchase of 10,968 treasury shares  -   -   -   -   -   (573)  -   (573)
                                 
 Balances at March 31, 2019 $26  $27,500  $82,266  $4,089  $(534) $(4,659) $1,241  $109,929 
                                 
Six Months Ended March 31, 2020:                                

Balances at October 1, 2019

 $26  $27,494  $91,228  $7,296  $(446) $(4,545) $204  $121,257 
                                 
Cumulative effect adjustment, adoption of ASU 2016-02  -   -   166   -   -   -   -   166 
                                 
Net income (loss)  -   -   2,812   -   -   -   (311)  2,501 
                                 
Other comprehensive loss  -   -   -   (6,824)  -   -   -   (6,824)
                                 
Common stock dividends - $0.33 per share  -   -   (781)  -   -   -   -   (781)
                                 
Distributions to noncontrolling interests  -   -   -   -   -   -   (307)  (307)
                                 
Restricted stock grants - 1,436 shares  -   95   -   -   (95)  -   -   - 
                                 
Stock compensation expense  -   42   -   -   95   -   -   137 
                                 
Stock option exercises - 28,361 shares  -   (195)  -   -   -   593   -   398 
                                 
Purchase of 4,702 treasury shares  -   -   -   -   -   (302)  -   (302)
                                 
 Balances at March 31, 2020 $26  $27,436  $93,425  $472  $(446) $(4,254) $(414) $116,245 

 

See notes to consolidated financial statements.

 

-7-

-6-

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

  Six Months Ended 
  March 31, 
(In thousands) 2020  2019 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net income $2,501  $6,368 
Adjustments to reconcile net income to net cash used in operating activities:        
Provision for loan losses  2,210   655 
Depreciation and amortization  761   860 
Amortization of premiums and accretion of discounts on securities, net  269   240 
Amortization and accretion of fair value adjustments on loans, net  (475)  (318)
Loans originated for sale  (1,111,120)  (200,737)
Proceeds on sales of loans  1,065,708   191,800 
Net realized and unrealized gain on loans held for sale  (25,247)  (7,762)
Net realized and unrealized gain on other real estate owned  (13)  (25)
Net gain on sales of available for sale securities and time deposits  (7)  (1)
Increase in cash surrender value of life insurance  (356)  (258)
Net loss on equity securities  27   - 
Net (gain) loss on sale of premises and equipment  9   (9)
Deferred income taxes  415   279 
Stock compensation expense  139   120 
Increase in accrued interest receivable  (116)  (315)
Increase (decrease) in accrued interest payable  (148)  582 
Change in other assets and liabilities, net  (565)  (1,178)
Net Cash Used In Operating Activities  (66,008)  (9,699)
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Investment in interest-bearing time deposits  (490)  (690)
Proceeds from sales and maturities of interest-bearing time deposits  245   245 
Purchase of securities available for sale  (27,406)  (18,296)
Proceeds from sales of securities available for sale  3,180   226 
Proceeds from maturities of securities available for sale  4,150   3,505 
Proceeds from maturities of securities held to maturity  139   132 
Principal collected on securities  3,753   12,354 
Net increase in loans  (68,638)  (59,358)
Purchase of Federal Home Loan Bank stock  (3,578)  (575)
Investment in cash surrender value of life insurance  (4,481)  (6,000)
Proceeds from sale of other real estate owned  68   123 
Purchase of premises and equipment  (5,345)  (7,992)
Proceeds from sales of premises and equipment  118   51 
Net Cash Used In Investing Activities  (98,285)  (76,275)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Net increase in deposits  102,922   13,658 
Net decrease in federal funds purchased  (4,000)  - 
Net increase in repurchase agreements  -   1 
Increase (decrease) in Federal Home Loan Bank line of credit  (12,544)  5,938 
Proceeds from Federal Home Loan Bank advances  240,000   95,000 
Repayment of Federal Home Loan Bank advances  (180,000)  (30,000)
Net increase in advance payments by borrowers for taxes and insurance  79   56 
Proceeds from exercise of stock options  148   337 
Taxes paid on stock award shares for employees  (53)  (32)
Dividends paid on common stock  (781)  (721)
Distributions to noncontrolling interests  (307)  (95)
Net Cash Provided By Financing Activities  145,464   84,142 
Net Decrease in Cash and Cash Equivalents  (18,829)  (1,832)
         
Cash and cash equivalents at beginning of period  41,432   42,274 
         
Cash and Cash Equivalents at End of Period $22,603  $40,442 

See notes to consolidated financial statements.

-7-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.Presentation of Interim Information

 

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 fourteen16 locations in southern Indiana. The Bank attracts deposits primarily from the general public and uses those funds, along with other borrowings, primarily to originate commercial mortgage, residential mortgage, construction, commercial business and consumer loans, and to a lesser extent, to invest in mortgage-backed securities, municipal bonds and other investment 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.

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.

 

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 Q2’s cumulative net income 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 eight other third-party insurance captives for which insurance may not be currently available or economically feasible in the insurance marketplace.

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments considered necessary to present fairly the financial position as of DecemberMarch 31, 2017,2020, the results of operations for the three monththree- and six-month periods ended DecemberMarch 31, 20172020 and 2016,2019, and the cash flows for the three monthsix-month periods ended DecemberMarch 31, 20172020 and 2016.2019. All of these adjustments are of a normal, recurring nature. Such adjustments are the only adjustments included in the unaudited consolidated financial statements. Interim results are not necessarily indicative of results for a full year.

 

The unaudited consolidated financial statements and notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements, conform to general practices within the banking industry and are presented as permitted by the instructions to Form 10-Q. Accordingly, they do not contain certain information included in the Company’s audited consolidated financial statements and related notes for the year ended September 30, 20172019 included in the Company’s Annual Report on Form 10-K.

-8-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform with the current period presentation. The reclassifications had no effect on net income or stockholders’ equity.

 

-8-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

2.Investment Securities

 

AgencyU.S. agency bonds and notes, agency mortgage-backed securities and agency collateralized mortgage obligations (“CMO”) include treasury notes issued by the U.S. government; securities issued by the Government National Mortgage Association (“GNMA”), a U.S. government agency,agency; and securities issued by the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal Home Loan Bank (“FHLB”), which are U.S. government sponsored enterprises. The Company holds municipal bonds issued by municipal governments within the U.S. The Company also holds a pass throughpass-through asset-backed securitysecurities guaranteed by the SBA representing participating interests in pools of long term debentures issued by state and local development companies certified by the SBA. Privately issued CMO and asset-backed securities (“ABS”) are complex securities issued by non governmentnon-government special purpose entities that are collateralized by residential mortgage loans and residential home equity loans.

 

Investment securities have been classified according to management’s intent.

 

Trading Account Securities

The Company invests in small and medium lot, investment grade municipal bonds through a managed brokerage account. The brokerage account is managed by an investment advisory firm registered with the U.S. Securities and Exchange Commission. At December 31, 2017 and September 30, 2017, trading account securities recorded at fair value totaled $6.6 million and $7.2 million, respectively, and were comprised of investment grade municipal bonds. During the three month period ended December 31, 2017, the Company reported a net gain on trading account securities of $150,000. During the three month period ended December 31, 2016, the Company reported a net loss on trading account securities of $282,000.

-9-

-9-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Securities Available for Sale and Held to Maturity

 

The amortized cost of securities available for sale and held to maturity and their approximate fair values are as follows:

 

(In thousands) Amortized
Cost		 Gross
Unrealized
Gain		 Gross
Unrealized
Losses		 Fair
 Value		 
December 31, 2017:                
 

 

Amortized
Cost

  Gross
Unrealized Gain		 Gross
Unrealized
Losses		  

 

Fair

Value

 
 (In thousands) 
March 31, 2020:         
Securities available for sale:                                
                                
Agency mortgage-backed $34,302  $251  $235  $34,318  $8,855  $479  $-  $9,334 
Agency CMO  13,516   19   171   13,364   8,427   91   80   8,438 
Privately-issued CMO  1,704   188   36   1,856   1,063   6   40   1,029 
Privately-issued ABS  2,427   712   -   3,139   949   43   56   936 
SBA certificates  859   -   2   857   718   30   3   745 
Municipal bonds  118,826   4,438   304   122,960   164,013   2,020   1,831   164,202 
                                
Total securities available for sale $171,634  $5,608  $748  $176,494  $184,025  $2,669  $2,010  $184,684 
                                
Securities held to maturity:                                
                                
Agency mortgage-backed $171  $14  $-  $185  $93  $6  $-  $99 
Municipal bonds  2,673   370   -   3,043   2,096   326   -   2,422 
                                
Total securities held to maturity $2,844  $384  $-  $3,228  $2,189  $332  $-  $2,521 

  

The Company obtains pricing for its available for sale securities portfolio from an independent third party pricing service approximately 10 days prior to each month end. Due to significant market movements at the end of March 2020 in response to the COVID-19 pandemic, the values obtained for the available for sale securities portfolio showed a significant decrease compared to the prior quarter. However, based on changes in the market subsequent to the valuation date management believes the decrease in the valuation of the available for sale securities portfolio would have been partially mitigated at March 31, 2020.

-10-

-10-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

(In thousands) Amortized
Cost		 Gross
Unrealized
Gain		 Gross
Unrealized
Losses		 Fair
 Value		 
September 30, 2017:                
 

 

Amortized
Cost

  Gross
Unrealized
Gain		 Gross
Unrealized
Losses		  

 

Fair

Value

 
 (In thousands) 
September 30, 2019:            
Securities available for sale:                                
                                
Agency mortgage-backed $36,439  $382  $85  $36,736  $13,743  $366  $12  $14,097 
Agency CMO  14,605   37   66   14,576   8,834   221   7   9,048 
Privately-issued CMO  1,825   204   28   2,001   1,242   142   2   1,382 
Privately-issued ABS  2,691   757   -   3,448   1,022   156   -   1,178 
SBA certificates  913   -   1   912   1,119   41   6   1,154 
Municipal bonds  115,193   5,409   176   120,426   141,995   8,465   17   150,443 
                                
Total securities available for sale $171,666  $6,789  $356  $178,099  $167,955  $9,391  $44  $177,302 
                                
Securities held to maturity:                                
                                
Agency mortgage-backed $179  $16  $-  $195  $102  $7  $  -  $109 
Municipal bonds  2,699   412   -   3,111   2,234   327   -   2,561 
                                
Total securities held to maturity $2,878  $428  $-  $3,306  $2,336  $334  $-  $2,670 

 

The amortized cost and fair value of investment securities as of DecemberMarch 31, 20172020 by contractual maturity are shown below. CMO, ABS, SBA certificates, and mortgage-backed securities which do not have a single maturity date are shown separately.

 

 Available for Sale  Held to Maturity  Available for Sale Held to Maturity 
(In thousands) Amortized
Cost		 Fair 
Value		 Amortized
Cost		 Fair 
Value		 
 Amortized
Cost		  

Fair

Value

  Amortized
Cost		  

Fair

Value

 
          (In thousands) 
Due within one year $1,055  $1,064  $232  $262  $4,304  $4,371  $244  $277 
Due after one year through five years  16,980   17,648   1,000   1,132   26,250   26,564   999   1,141 
Due after five years through ten years  22,802   23,920   992   1,137   25,012   25,431   718   844 
Due after ten years  77,989   80,328   449   512   108,447   107,836   135   160 
CMO  15,220   15,220   -   -   9,490   9,467   -   - 
ABS  2,427   3,139   -   -   949   936   -   - 
SBA certificates  859   857   -   -   718   745   -   - 
Mortgage-backed securities  34,302   34,318   171   185   8,855   9,334   93   99 
                                
 $171,634  $176,494  $2,844  $3,228  $184,025  $184,684  $2,189  $2,521 

-11-

-11-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Information pertaining to investment securities with gross unrealized losses at DecemberMarch 31, 20172020 and September 30, 2017,2019, aggregated by investment category and the length of time that individual securities have been in a continuous loss position, follows:

 

(Dollars in thousands) Number of
Investment
Positions		 Fair
Value		 Gross
Unrealized
Losses		 
December 31, 2017:            
 Number of
Investment
Positions		  

 

Fair

Value

  Gross
Unrealized
Losses		 
 (Dollars in thousands) 
March 31, 2020:       
Securities available for sale:                        
            
Continuous loss position less than twelve months:                        
Agency CMO  3  $3,877  $80 
Privately-issued CMO  3   947   28 
Privately-issued ABS  2   489   56 
Municipals  103   58,572   1,831 
                        
Total less than twelve months  111   63,885   1,995 
            
Continuous loss position more than twelve months:            
Privately-issued CMO  1   23  12 
SBA certificates  1   259   3 
            
Total more than twelve months  2   282   15 
            
Total securities available for sale  113  $64,167  $2,010 
   
September 30, 2019:   
Securities available for sale:            
            
Continuous loss position less than twelve months:            
Agency mortgage-backed  3  $1,248  $1 
Agency CMO  1   1,962   1 
Municipal bonds  3   1,694   16 
            
Total less than twelve months  7   4,904   18 
            
Continuous loss position more than twelve months:            
Agency mortgage-backed  15  $16,471  $110   2   785   11 
Agency CMO  7   6,116   51   2   956   6 
Privately-issued CMO  2   102   36   1   33   2 
SBA certificates  1   857   2   1   451   6 
Municipal bonds  21   10,204   103   1   140   1 
                        
Total less than twelve months  46   33,750   302 
            
Continuous loss position more than twelve months:            
            
Agency mortgage-backed  6   5,756   125 
Agency CMO  8   6,978   120 
Municipal bonds  5   4,793   201 
            
Total more than twelve months  19   17,527   446   7   2,365   26 
                        
Total securities available for sale  65  $51,277  $748   14  $7,269  $44 
            
September 30, 2017:       
Securities available for sale:            
Continuous loss position less than twelve months:            
            
Agency mortgage-backed  12  $13,332  $85 
Agency CMO  9   9,062   52 
Privately-issued CMO  2   113   28 
Municipal bonds  9   6,522   157 
            
Total less than twelve months  32   29,029   322 
            
Continuous loss position more than twelve months:            
            
Agency CMO  3   2,605   14 
SBA certificates  1   912   1 
Municipal bonds  1   513   19 
            
Total more than twelve months  5   4,030   34 
            
Total securities available for sale  37  $33,059  $356 

 

At DecemberMarch 31, 20172020 and September 30, 2017,2019, the Company did not have any securities held to maturity with an unrealized loss.

 

-12-

-12-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions 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 DecemberMarch 31, 2017,2020, which consisted of U.S. government agency mortgage backed securities agencyand CMOs, privately issued CMOs, SBA certificates and municipal bonds, had a fair value as a percentage of amortized cost of 98.58%96.96%. 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 DecemberMarch 31, 2017,2020, the Company held fifteentwelve privately-issued CMO and ABS securities, acquired in a 2009 bank merger, with an aggregate amortized cost of $1.7 million$984,000 and fair value of $2.4 million$959,000 that have been downgraded to a substandard regulatory classification due to the security’s credit quality rating by various nationally recognized statistical rating organizations.organizations (“NRSROs”).

 

At DecemberMarch 31, 2017,2020, four privately-issued CMO securities and two privately-issued CMOABS were in a loss positionsposition and had depreciated approximately 26.03%6.16% from the Company’s carrying value and were collateralized by residential mortgage loans. These securities had a total fair value of $102,000$1.5 million and a total unrealized loss of $36,000$96,000 at DecemberMarch 31, 2017,2020. The two privately-issued ABS and one privately-issued CMO were rated below investment grade by NRSROs.NRSROs, and had a total fair value of $948,000 and a total unrealized loss of $28,000. The remaining three privately-issued CMO securities were rated above investment grade by NRSROs, and had a total fair value of $511,000 and a total unrealized loss of $68,000. Based on the independent third party analysis of the expected cash flows, management has determined that no other-than-temporary impairment iswas required to be recognized on the privately issued CMO and ABS portfolios.portfolios at March 31, 2020. While the Company diddoes not recognize a credit relatedanticipate additional credit-related impairment losslosses at DecemberMarch 31, 2017,2020, additional deterioration in market and economic conditions may have an adverse impact on the credit quality inof the futureportfolio, and therefore, require a credit related impairment charge.charge in the future.

 

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.

 

During the three month periods ended December 31, 2017 and 2016, the Company did not realize any gross gains or losses on sales of available for sale securities.

Certain available for sale debt securities were pledged under repurchase agreements and to secure FHLB borrowings at December 31, 2017 and September 30, 2017, and may be pledged to secure federal funds borrowings.

-13-

-13-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

During the three and six-month periods ended March 31, 2020, the Company realized gross gains on sales of available for sale securities of $15,000, and gross losses of $8,000. During the three and six-month periods ended March 31, 2019, the Company realized gross gains on sales of available for sale securities of $1,000, and no gross losses.

Certain available for sale debt securities were pledged under repurchase agreements and to secure FHLB borrowings at March 31, 2020 and September 30, 2019, and may be pledged to secure federal funds borrowings.

3.Loans and Allowance for Loan Losses

 

Loans at DecemberMarch 31, 20172020 and September 30, 20172019 consisted of the following:

 

(In thousands) December 31,
2017		  September 30,
2017		 
 March 31,
 2020		 September 30,
2019		 
      (In thousands) 
Real estate mortgage:                
1-4 family residential $172,982  $171,863  $196,378  $198,067 
Commercial  292,159   273,106   483,368   436,020 
Multifamily residential  20,127   21,121   39,068   38,226 
Residential construction  20,119   15,088   9,542   12,545 
Commercial construction  22,455   18,385   10,414   6,995 
Land and land development  9,522   9,733   10,192   10,536 
Commercial business  54,469   52,724   88,091   73,034 
                
Consumer:                
Home equity  23,260   22,939   35,892   28,651 
Auto  7,786   7,057   13,052   13,347 
Other consumer  2,349   2,323   2,298   2,663 
Total Loans  625,228   594,339   888,295   820,084 
                
Deferred loan origination fees and costs, net  276   209   672   614 
Allowance for loan losses  (8,511)  (8,092)  (11,691)  (10,040)
                
Loans, net $616,993  $586,456  $877,276  $810,658 

 

During the three monthsix-month period ended DecemberMarch 31, 2017,2020, there was no significant change in the Company’s lending activities or the methodology used to estimate the allowance for loan losses as disclosed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2017.2019. Certain qualitative factors used to determine the allowance for loan losses at March 31, 2020 were increased due to economic uncertainties related to the novel coronavirus (“COVID-19”).

 

At DecemberMarch 31, 20172020 and September 30, 2017,2019, the Bank did not own any residential real estate properties where physical possession has been obtained. At March 31, 2020 and September 30, 2019, the recorded investment in consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure was $1.6$1.4 million and $1.6$1.3 million, respectively.

 

-14-

-14-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The following table provides the components of the recorded investment in loans as of DecemberMarch 31, 2017:2020:

 

 Residential
Real Estate		  Commercial
Real Estate		  Multifamily  Construction  Land & Land
Development		  Commercial
Business		  Consumer  Total 
 (In thousands)  

Residential
Real Estate

 

Commercial

Real Estate

 

 

Multifamily

 

 

Construction

 

Land & Land
Development

 

Commercial
Business

 

 

Consumer

 

 

Total

 
                  (In thousands) 
Recorded Investment in Loans:                                                                
Principal loan balance $172,982  $292,159  $20,127  $42,574  $9,522  $54,469  $33,395  $625,228  $196,378  $483,368  $39,068  $19,956  $10,192  $88,091  $51,242  $888,295 
                                                                
Accrued interest receivable  510   1,077   38   201   36   247   57   2,166   550   1,935   88   94   21   508   124   3,320 
                                                                
Net deferred loan origination fees and costs  22   91   (13)  9   2   187   (22)  276   (103)  444   (36)  18   (4)  380   (27)  672 
                                                                
Recorded investment in loans $173,514  $293,327  $20,152  $42,784  $9,560  $54,903  $33,430  $  627,670  $196,825  $485,747  $39,120  $20,068  $10,209  $88,979  $51,339  $892,287 
                                                                
                                
Recorded Investment in Loans as Evaluated for Impairment:Recorded Investment in Loans as Evaluated for Impairment:                                                      
Individually evaluated for impairment $5,001  $6,816  $-  $-  $29  $355  $205  $12,406  $5,501  $11,320  $702  $-  $1  $2,066  $224  $19,814 
                                                                
Collectively evaluated for impairment  168,513   286,511   20,152   42,784   9,531   54,548   33,225   615,264   191,324   474,427   38,418   20,068   10,208   86,913   51,115   872,473 
                                                                
Ending balance $173,514  $293,327  $20,152  $42,784  $9,560  $54,903  $33,430  $627,670  $196,825  $485,747  $39,120  $20,068  $10,209  $88,979  $51,339  $892,287 

 

-15-

-15-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The following table provides the components of the recorded investment in loans as of September 30, 2017:2019:

 

 Residential
Real Estate		  Commercial
Real Estate		  Multifamily  Construction  Land & Land
Development		  Commercial
Business		  Consumer  Total 
 (In thousands)  Residential
Real Estate		 Commercial
Real Estate		  

 

Multifamily

 

 

Construction

  Land & Land
Development		 Commercial
Business		  

 

Consumer

 

 

Total

 
                  (In thousands) 
Recorded Investment in Loans:                                                                
Principal loan balance $171,863  $273,106  $21,121  $33,473  $9,733  $52,724  $32,319  $  594,339  $198,067  $436,020  $38,226  $19,540  $10,536  $73,034  $44,661  $820,084 
                                                                
Accrued interest receivable  493   929   37   137   31   221   59   1,907   627   1,922   99   117   29   448   87   3,329 
                                                                
Net deferred loan origination fees and costs  50   26   (15)  (17)  2   184   (21)  209   (98)  408   (33)  3   (1)  366   (31)  614 
                                                                
Recorded investment in loans $172,406  $274,061  $21,143  $33,593  $9,766  $53,129  $32,357  $596,455  $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 $4,969  $5,477  $-  $-  $30  $192  $196  $10,864  $4,448  $7,647  $-  $-  $-  $105  $234  $12,434 
                                                                
Collectively evaluated for impairment  167,437   268,584   21,143   33,593   9,736   52,937   32,161   585,591   194,148   430,703   38,292   19,660   10,564   73,743   44,483   811,593 
                                                                
Ending balance $172,406  $274,061  $21,143  $33,593  $9,766  $53,129  $32,357  $596,455  $198,596  $438,350  $38,292  $19,660  $10,564  $73,848  $44,717  $824,027 

 

-16-

-16-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

An analysis of the allowance for loan losses as of DecemberMarch 31, 20172020 is as follows:

 

 Residential
Real Estate		  Commercial
Real Estate		  Multifamily  Construction  Land & Land
Development		  Commercial
Business		  Consumer  Total  Residential
Real Estate		 Commercial
Real Estate		  

 

Multifamily

 

 

Construction

  Land & Land
Development		 Commercial
Business		  

 

Consumer

 

 

Total

 
 (In thousands)  (In thousands)    
Ending Allowance Balance Attributable to Loans:                                                 
Individually evaluated for impairment $2  $-  $-  $-  $-  $-  $6  $   8  $-  $1,645  $-  $-  $-  $556  $-  $2,201 
                                                                
Collectively evaluated for impairment  231   6,106   102   903   219   816   126   8,503   400   5,290   499   366   203   2,031   701   9,490 
                                                                
Ending balance $233  $6,106  $102  $903  $219  $816  $132  $8,511  $400  $6,935  $499  $366  $203  $2,587  $701  $11,691 

 

An analysis of the allowance for loan losses as of September 30, 20172019 is as follows:

 

 Residential
Real Estate		  Commercial
Real Estate		  Multifamily  Construction  Land & Land
Development		  Commercial
Business		  Consumer  Total  

Residential
Real Estate

 

Commercial
Real Estate

 

 

Multifamily

 

 

Construction

 

Land & Land
Development

 

Commercial
Business

 

 

Consumer

 

 

Total

 
 (In thousands)  (In thousands)    
Ending Allowance Balance Attributable to Loans:                                  
Individually evaluated for impairment $2  $-  $-  $-  $-  $-  $21  $   23  $10  $512  $-  $-  $-  $-  $23  $545 
                                                                
Collectively evaluated for impairment  250   5,739   106   810   223   839   102   8,069   328   5,869   478   421   209   1,639   551   9,495 
                                                                
Ending balance $252  $5,739  $106  $810  $223  $839  $123  $8,092  $338  $6,381  $478  $421  $209  $1,639  $574  $10,040 

 

-17-

-17-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

An analysis of the changes in the allowance for loan losses for the three months ended DecemberMarch 31, 20172020 is as follows:

 

 

Residential

Real Estate

 

Commercial

Real Estate

 

 

Multifamily

 

 

Construction

 

Land & Land

Development

 

Commercial

Business

 

 

Consumer

 

 

Total

  Residential
Real Estate		 Commercial
Real Estate		  

 

Multifamily

 

 

Construction

  Land & Land
Development		 Commercial
Business		  

 

Consumer

 

 

Total

 
 (In thousands)  (In thousands)    
Changes in Allowance for Loan Losses:                                                                
Beginning balance $252  $5,739  $106  $810  $223  $839  $123  $   8,092  $339  $6,694  $481  $395  $201  $1,753  $667  $10,530 
Provisions  (18)  367   (4)  93   (4)  (23)  51   462   54   348   18   (29)  2   1,229   83   1,705 
Charge-offs  (13)  -   -   -   -   -   (52)  (65)  (4)  (107)  -   -   -   (396)  (62)  (569)
Recoveries  12   -   -   -   -   -   10   22   11   -   -   -   -   1   13   25 
                                                                
Ending balance $233  $6,106  $102  $903  $219  $816  $132  $8,511  $400  $6,935  $499  $366  $203  $2,587  $701  $11,691 

 

An analysis of the changes in the allowance for loan losses for the threesix months ended DecemberMarch 31, 20162020 is as follows:

 

 Residential
Real Estate		  Commercial
Real Estate		  Multifamily  Construction  Land & Land
Development		  Commercial
Business		  Consumer  Total  Residential
Real Estate		 Commercial
Real Estate		  

 

Multifamily

 

 

Construction

  Land & Land
Development		 Commercial
Business		  

 

Consumer

 

 

Total

 
 (In thousands)  (In thousands)    
Changes in Allowance for Loan Losses:                                                                
Beginning balance $335  $5,160  $109  $845  $295  $284  $94  $   7,122  $338  $6,381  $478  $421  $209  $1,639  $574  $10,040 
Provisions  (9)  153   (4)  181   (34)  13   6   306   78   623   21   (55)  (6)  1,338   211   2,210 
Charge-offs  (17)  -   -   -   -   -   (18)  (35)  (36)  (115)  -   -   -   (396)  (126)  (673)
Recoveries  3   -   -   -   -   13   10   26   20   46   -   -   -   6   42   114 
                                                                
Ending balance $312  $5,313  $105  $1,026  $261  $310  $92  $7,419  $400  $6,935  $499  $366  $203  $2,587  $701  $11,691 

 

-18-

-18-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

An analysis of the changes in the allowance for loan losses for the three months ended March 31, 2019 is as follows:

  Residential
Real Estate		  Commercial
Real Estate		  

 

Multifamily

  

 

Construction

  Land & Land
Development		  Commercial
Business		  

 

Consumer

  

 

Total

 
  (In thousands)    
Changes in Allowance for Loan Losses:                                
Beginning balance $249  $6,716  $158  $693  $219  $1,288  $297  $9,620 
Provisions  (28)  (20)  74   (178)  18   246   228   340 
Charge-offs  (9)  -   -   -   -   -   (39)  (48)
Recoveries  8   -   -   -   -   1   13   22 
                                 
Ending balance $220  $6,696  $232  $515  $237  $1,535  $499  $9,934 

An analysis of the changes in the allowance for loan losses for the six months ended March 31, 2019 is as follows:

  

Residential
Real Estate

  

Commercial
Real Estate

  

 

Multifamily

  

 

Construction

  

Land & Land
Development

  

Commercial

Business

  

 

Consumer

  

 

Total

 
  (In thousands)    
Changes in Allowance for Loan Losses:                                
Beginning balance $274  $6,825  $195  $580  $210  $1,041  $198  $9,323 
Provisions  (58)  (129)  37   (65)  27   493   350   655 
Charge-offs  (10)  -   -   -   -   -   (81)  (91)
Recoveries  14   -   -   -   -   1   32   47 
                                 
Ending balance $220  $6,696  $232  $515  $237  $1,535  $499  $9,934 

-19-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The following table presents impaired loans individually evaluated for impairment as of DecemberMarch 31, 20172020 and for the three and six months ended DecemberMarch 31, 20172020 and 2016.2019.

 

 At December 31, 2017 Three Months Ended
December 31,		  At March 31, 2020 Three Months Ended March 31, Six Months Ended March 31, 
       2017 2017 2016 2016           2020  2020  2019  2019  2020  2020  2019  2019 
 Recorded
Investment		 Unpaid
Principal
Balance		 Related
Allowance		 Average
Recorded
Investment		 Interest
Income
Recognized		 Average
Recorded
Investment		 Interest
Income
Recognized		  

 

 

Recorded
Investment

 

 

Unpaid
Principal
Balance

 

 

 

Related
Allowance

  Average
Recorded
Investment		 Interest
Income
Recognized		 Average
Recorded
Investment		  

Interest

Income

Recognized

  Average Recorded Investment  

Interest

Income

Recognized

  Average Recorded Investment  

Interest

Income

Recognized

 
 (In thousands)  (In thousands) 
Loans with no related allowance recorded:                                                                        
Residential real estate $4,756  $5,173  $-  $5,035  $36  $4,094  $33  $5,501  $5,961  $-  $5,338  $34  $5,132  $29  $5,215  $61  $5,203  $63 
Commercial real estate  6,816   6,986   -   6,373   64   6,354   48   4,430   4,594   -   5,399   47   6,616   80   5,402   109   6,675   162 
Multifamily  -   -   -   -   -   -   -   702   703   -   352   -   -   -   234   -   -   - 
Construction  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Land and land development  29   29   -   29   -   238   -   1   1   -   1   -   -   -   -   -   12   - 
Commercial business  355   363   -   239   2   217   2   497   602   -   347   -   277   2   267   1   283   4 
Consumer  104   104   -   97   1   178   1   66   66   -   75   -   118   1   77   2   119   2 
                             $11,197  $11,927  $-  $11,512  $81  $12,143  $112  $11,195  $173  $12,292  $231 
 $12,060  $12,655  $-  $11,773  $103  $11,081  $84                                             
                            
Loans with an allowance recorded:                                                                        
Residential real estate $245  $274  $2  $290  $-  $460  $-  $-  $-  $-  $55  $-  $91  $-  $39  $-  $172  $- 
Commercial real estate  -   -   -   -   -   -   -   6,890   7,048   1,645   4,611   -   2,104   -   3,953   -   1,722   - 
Multifamily  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Construction  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Land and land development  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Commercial business  -   -   -   -   -   -   -   1,569   1,881   556   940   -   20   -   627   -   11   - 
Consumer  101   101   6   112   -   82   -   158   160   -   183   -   153   -   174   -   164   - 
                            
 $346  $375  $8  $402  $-  $542  $-  $8,617  $9,089  $2,201  $5,789  $-  $2,368  $-  $4,793  $-  $2,069  $- 
                                                                        
Total:                                                                        
Residential real estate $5,001  $5,447  $2  $5,325  $36  $4,554  $33  $5,501  $5,961  $-  $5,393  $34  $5,223  $29  $5,254  $61  $5,375  $63 
Commercial real estate  6,816   6,986   -   6,373   64   6,354   48   11,320   11,642   1,645   10,010   47   8,720   80   9,355   109   8,397   162 
Multifamily  -   -   -   -   -   -   -   702   703   -   352   -   -   -   234   -   -   - 
Construction  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Land and land development  29   29   -   29   -   238   -   1   1   -   1   -   -   -   -   -   12   - 
Commercial business  355   363   -   239   2   217   2   2,066   2,483   556   1,287   -   297   2   894   1   294   4 
Consumer  205   205   6   209   1   260   1   224   226   -   258   -   271   1   251   2   283   2 
                             $19,814  $21,016  $2,201  $17,301  $81  $14,511  $112  $15,988  $173  $14,361  $231 
 $12,406  $13,030  $8  $12,175  $103  $11,623  $84 

 

The Company did not recognize any interest income using the cash receipts method during the three-monththree- and six-month periods ended DecemberMarch 31, 20172020 and 2016.2019.

 

-19-

-20-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The following table presents impaired loans individually evaluated for impairment as of September 30, 2017.2019.

 

 Recorded
Investment		 Unpaid
Principal
Balance		 Related
Allowance		 
 (In thousands)  

Recorded

Investment

  Unpaid
Principal
Balance		 

Related
Allowance

 
        (In thousands) 
Loans with no related allowance recorded:            Loans with no related allowance recorded:
Residential real estate $4,745  $4,980  $-  $4,438  $4,967  $- 
Commercial real estate  5,477   5,645   -   5,401   5,408   - 
Multifamily  -   -   -   -   -   - 
Construction  -   -   -   -   -   - 
Land and land development  30   30   -   -   -   - 
Commercial business  192   199   -   105   106   - 
Consumer  95   95   -   78   81   - 
 $10,539  $10,949  $-             
             $10,022  $10,562  $- 
            
Loans with an allowance recorded:            Loans with an allowance recorded:
Residential real estate $224  $268  $2  $10  $7  $10 
Commercial real estate  -   -   -   2,246   2,637   512 
Multifamily  -   -   -   -   -   - 
Construction  -   -   -   -   -   - 
Land and land development  -   -   -   -   -   - 
Commercial business  -   -   -   -   -   - 
Consumer  101   101   21   156   155   23 
            
 $325  $369  $23  $2,412  $2,799  $545 
                        
Total:                        
Residential real estate $4,969  $5,248  $2  $4,448  $4,974  $10 
Commercial real estate  5,477   5,645   -   7,647   8,045   512 
Multifamily  -   -   -   -   -   - 
Construction  -   -   -   -   -   - 
Land and land development  30   30   -   -   -   - 
Commercial business  192   199   -   105   106   - 
Consumer  196   196   21   234   236   23 
 $10,864  $11,318  $23             
 $12,434  $13,361  $545 

 

-20-

-21-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

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 DecemberMarch 31, 2017:2020:

 

 Nonaccrual
Loans		 Loans 90+
Days
Past Due
Still Accruing		 Total
Nonperforming
Loans		 
 (In thousands)  

Nonaccrual

Loans

 

Loans 90+
Days

Past Due

Still Accruing

  Total
Nonperforming
Loans		 
        (In thousands) 
Residential real estate $2,507  $247  $2,754  $2,655  $-  $2,655 
Commercial real estate  78   -   78   8,224   -   8,224 
Multifamily  -   -   -   702   -   702 
Construction  -   -   -   -   -   - 
Land and land development  29   -   29   1   -   1 
Commercial business  -   -   -   2,062   -   2,062 
Consumer  110   -   110   163   -   163 
                        
Total $2,724  $247  $2,971  $13,807  $-  $13,807 

 

The following table presents the recorded investment in nonperforming loans at September 30, 2017:2019:

 

 Nonaccrual
Loans		 Loans 90+
Days
Past Due
Still Accruing		 Total
Nonperforming
Loans		 
 (In thousands)  

Nonaccrual

Loans

 

Loans 90+
Days

Past Due

Still Accruing

  Total
Nonperforming
Loans		 
        (In thousands) 
Residential real estate $2,358  $83  $2,441  $2,580  $12  $2,592 
Commercial real estate  1,253   -   1,253   2,425   -   2,425 
Multifamily  -   -   -   -   -   - 
Construction  -   -   -   -   -   - 
Land and land development  30   -   30   -   -   - 
Commercial business  81   -   81   -   -   - 
Consumer  101   10   111   163   -   163 
                        
Total $3,823  $93  $3,916  $5,168  $12  $5,180 

 

-21-

-22-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The following table presents the aging of the recorded investment in past due loans at DecemberMarch 31, 2017:2020:

 

 30-59
Days
Past Due		 60-89
Days
Past Due		 90 +
Days
Past Due		 Total
Past Due		 Current Total
Loans		 
 (In thousands)  

30-59
Days

Past Due

 

60-89
Days

Past Due

 

90 +

Days

Past Due

 

Total

Past Due

  Current  

Total

Loans

 
              (In thousands) 
Residential real estate $1,937  $1,528  $1,754  $5,219  $168,295  $173,514  $1,832  $364  $1,837  $4,033  $192,792  $196,825 
Commercial real estate  555   410   -   965   292,362   293,327   1,828   1,116   2,409   5,353   480,394   485,747 
Multifamily  -   -   -   -   20,152   20,152   -   -   -   -   39,120   39,120 
Construction  -   -   -   -   42,784   42,784   -   -   -   -   20,068   20,068 
Land and land development  -   -   -   -   9,560   9,560   -   -   1   1   10,208   10,209 
Commercial business  174   -   -   174   54,729   54,903   219   437   -   656   88,323   88,979 
Consumer  102   9   -   111   33,319   33,430   41   1   4   46   51,293   51,339 
                                                
Total $2,768  $1,947  $1,754  $6,469  $621,201  $627,670  $3,920  $1,918  $4,251  $10,089  $882,198  $892,287 

 

The following table presents the aging of the recorded investment in past due loans at September 30, 2017:2019:

 

 30-59
Days
Past Due		 60-89
Days
Past Due		 90 +
Days
Past Due		 Total
Past Due		 Current Total
Loans		 
 (In thousands)  

30-59
Days

Past Due

 

60-89
Days

Past Due

 

90 +

Days

Past Due

 

Total

Past Due

  Current  

Total

Loans

 
              (In thousands) 
Residential real estate $2,288  $1,255  $1,540  $5,083  $167,323  $172,406  $1,619  $577  $1,121  $3,317  $195,279  $198,596 
Commercial real estate  -   -   -   -   274,061   274,061   892   772   1,523   3,187   435,163   438,350 
Multifamily  176   -   -   176   20,967   21,143   -   -   -   -   38,292   38,292 
Construction  -   -   -   -   33,593   33,593   -   -   -   -   19,660   19,660 
Land and land development  48   -   30   78   9,688   9,766   -   -   -   -   10,564   10,564 
Commercial business  201   -   -   201   52,928   53,129   182   -   -   182   73,666   73,848 
Consumer  29   11   10   50   32,307   32,357   77   17   19   113   44,604   44,717 
                                                
Total $2,742  $1,266  $1,580  $5,588  $590,867  $596,455  $2,770  $1,366  $2,663  $6,799  $817,228  $824,027 

 

-22-

-23-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, public information, historical payment experience, credit documentation, and current economic conditions and 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 Company’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 Company 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.

 

-23-

-24-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. As of DecemberMarch 31, 2017,2020, and based on the most recent analysis performed, the recorded investment in loans by risk category was as follows:

 

 Residential
Real Estate		 Commercial
Real Estate		 Multifamily Construction Land and Land
Development		 Commercial
Business		 Consumer Total 
 (In thousands)  

Residential

Real Estate

 

Commercial

Real Estate

  Multifamily Construction  

Land and Land
Development

 

Commercial

Business

  Consumer Total 
                  (In thousands) 
Pass $166,980  $286,472  $19,630  $41,585  $9,531  $52,163  $33,251  $609,612  $193,101  $471,765  $38,418  $20,068  $10,208  $85,585  $51,310  $870,455 
Special Mention  407   2,703   522   1,199   -   2,484   11   7,326   -   141   -   -   -   90   -   231 
Substandard  5,971   4,152   -   -   29   256   163   10,571   3,588   13,841   702   -   1   3,304   29   21,465 
Doubtful  156   -   -   -   -   -   5   161   136   -   -   -   -   -   -   136 
Loss  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
                                                                
Total $173,514  $293,327  $20,152  $42,784  $9,560  $54,903  $33,430  $627,670  $196,825  $485,747  $39,120  $20,068  $10,209  $88,979  $51,339  $892,287 

 

As of September 30, 2017,2019, the recorded investment in loans by risk category was as follows:

 Residential
Real Estate		 Commercial
Real Estate		 Multifamily Construction Land and Land
Development		 Commercial
Business		 Consumer Total 
 (In thousands)  Residential
Real Estate		 Commercial
Real Estate		 Multifamily Construction Land and Land
Development		 Commercial
Business		 Consumer Total 
                  (In thousands) 
Pass $165,192  $268,481  $20,299  $33,500  $9,736  $52,398  $32,172  $581,778  $194,591  $424,989  $37,823  $19,660  $10,564  $71,050  $44,618  $803,295 
Special Mention  895   1,982   844   93   -   641   53   4,508   -   904   -   -   -   -   -   904 
Substandard  6,152   3,598   -   -   30   90   111   9,981   3,946   12,457   469   -   -   2,798   97   19,767 
Doubtful  167   -   -   -   -   -   21   188   59   -   -   -   -   -   2   61 
Loss  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
                                                                
Total $172,406  $274,061  $21,143  $33,593  $9,766  $53,129  $32,357  $596,455  $198,596  $438,350  $38,292  $19,660  $10,564  $73,848  $44,717  $824,027 

 

-24-

-25-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Troubled Debt Restructurings

 

Modification of a loan is considered to be a troubled debt restructuring (“TDR”) if the debtor is experiencing financial difficulties and the Company grants a concession to the debtor that it would not otherwise consider. By granting the concession, the Company expects to obtain more cash or other value from the debtor, or to increase the probability of receipt, than would be expected by not granting the concession. The concession may include, but is not limited to, reduction of the stated interest rate of the loan, reduction of accrued interest, extension of the maturity date or reduction of the face amount or maturity amount of the debt. A concession will be granted when, as a result of the restructuring, the Company does not expect to collect all amounts due, including interest at the original stated rate. A concession may also be granted if the debtor is not able to access funds elsewhere at a market rate for debt with similar risk characteristics as the restructured debt. The Company’s determination of whether a loan modification is a TDR considers the individual facts and circumstances surrounding each modification.

 

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

 

The following table summarizes the Company’s recorded investment in TDRs at DecemberMarch 31, 20172020 and September 30, 2017.2019. There was $622,000 of specific reserves included in the allowance for loan losses related to TDRs at March 31, 2020. There was no specific reserve included in the allowance for loan losses related to commercial real estate TDRs at December 31, 2017 and September 30, 2017.2019.

 

 Accruing  Nonaccrual  Total  Accruing  Nonaccrual  Total 
 (In thousands)  (In thousands) 
December 31, 2017:            
March 31, 2020:       
Residential real estate $2,494  $26  $2,520  $2,846  $184  $3,030 
Commercial real estate  6,738   78   6,816   3,096   4,451   7,547 
Commercial business  355   -   355   3   -   3 
Consumer  95   -   95   61   -   61 
Total $9,682  $104  $9,786  $6,006  $4,635  $10,641 
                        
September 30, 2017:            
September 30, 2019:            
Residential real estate $2,610  $25  $2,635  $1,868  $351  $2,219 
Commercial real estate  4,225   1,253   5,478   5,222   59   5,281 
Commercial business  111   82   193   105   -   105 
Consumer  95   -   95   70   -   70 
Total $7,041  $1,360  $8,401  $7,265  $410  $7,675 

 

-25-

-26-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The following table summarizes information in regard toregarding TDRs that were restructured during the three month periodthree- and six-month periods ended DecemberMarch 31, 2017:
2020:

 

  Number of
Loans		  Pre-
Modification
Principal
Balance		  Post-
Modification
Principal
Balance		 
  (Dollar in thousands) 
Three Months Ended December 31, 2017:            
Commercial real estate  1  $1,674  $1,674 
Commercial business  1   170   170 
Consumer  1   3   3 
Total  3  $1,847  $1,847 

  Number of Loans  Pre-
Modification
Principal
Balance		  Post-
Modification
Principal
Balance		 
  (Dollars in thousands) 
Three Months Ended March 31, 2020:      
Residential real estate  1  $1,099  $1,100 
Commercial real estate  1   3,831   3,832 
Total  2  $4,930  $4,932 
Six Months Ended March 31, 2020:            
Residential real estate  1  $1,099  $1,100 
Commercial business  1   3,831   3,832 
Total  2  $4,930  $4,932 

 

There were no TDRs that were restructured during the three month periodthree- and six-month periods ended DecemberMarch 31, 2016.

For the TDRs listed above, the terms of modification included deferral of contractual principal and interest payments, reduction of the stated interest rate and extension of the maturity date where the debtor was unable to access funds elsewhere at a market interest rate for debt with similar risk characteristics.2019.

 

At DecemberMarch 31, 20172020 and September 30, 2017,2019, the Company had committed to lend $1,000 and $17,000, respectively, to customers with outstanding loans classified as TDRs.

 

There were no principal charge-offs recorded as a result of TDRs during the three monththree- and six-month periods ended DecemberMarch 31, 20172020 and 2016. There2019. At March 31, 2020, there was $622,000 of specific allowance for loan losses related to TDRs modified during the three- and six-month periods ended March 31, 2020. At March 31, 2019, there was no specific allowance for loan losses related to TDRs modified during the three monththree- and six-month periods ended DecemberMarch 31, 2017 and 2016.2019. 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 three monththree- and six-month periods ended DecemberMarch 31, 20172020 and 2016,the three-month period ending March 31, 2019, the Company did not have any TDRs that were modified within the previous twelve months and for which there was a payment default. During the six-month period ended March 31, 2019, the Company had one TDR with an outstanding balance of $114,000 that was modified within the previous twelve months and for which there was a payment default.

 

On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”. This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance indicates that, in consultation with the Financial Accounting Standards Board (“FASB”), the federal banking agencies concluded that short-term modifications (e.g., six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not TDRs. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020. The CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. As of May 8, 2020, the Company had approved payment extensions or loan forbearance agreements using this guidance on approximately $86.1 million of balances in the loan portfolio, of which $77.7 million related to commercial real estate, $5.8 million related to residential real estate and consumer loans, and $2.6 million related to SBA lending relationships. These payment extensions or loan forbearance agreements are generally for periods of three months or less.

-26-

-27-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

SBA Loan Servicing Rights

 

The Company originates loans to commercial customers under the SBA 7(a) program and other programs. During the fiscal year ended September 30, 2016, the Company began sellingprograms, and sells the guaranteed portion of the SBA loans with servicing rights 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 approximates 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 include the discount rate and prepayment speed assumptions. 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 SBA loans in the consolidated statements of income.

 

The unpaid principal balance of SBA loans serviced for others was $77.7$168.4 million, $61.2$165.0 million and $24.3$137.6 million at DecemberMarch 31, 2017,2020, September 30, 20172019 and DecemberMarch 31, 2016,2019, respectively. Contractually specified late fees and ancillary fees earned on SBA loans were $2,000$13,000 and $43,000$30,000 for the three monththree- and six-month periods ended DecemberMarch 31, 20172020, respectively. Contractually specified late fees and 2016,ancillary fees earned on SBA loans were $9,000 and $16,000 for the three- and six-month periods ended March 31, 2019, respectively. Net servicing income (contractually specified servicing fees offset by direct servicing expenses) related to SBA loans of $150,000was $407,000 and $819,000 for the three month periodthree- and six-month periods ended DecemberMarch 31, 20172020, respectively. Net servicing income (contractually specified servicing fees offset by direct servicing expenses) related to SBA loans was $301,000 and net servicing costs of $15,000$573,000 for the three month periodthree- and six-month periods ended DecemberMarch 31, 20162019, respectively. Net servicing income and costs are included in other noninterest income in the consolidated statements of income.

 

-28-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

An analysis of SBA loan servicing rights for the three monththree- and six-month periods ended DecemberMarch 31, 20172020 and 20162019 is as follows:

 

(In thousands) Three Months Ended
December 31, 2017		  Three Months Ended
December 31, 2016		 
 Three Months Ended Six Months Ended 
 March 31, March 31, 
 2020 2019 2020 2019 
    (In thousands) 
Balance, beginning of period $1,389  $310  $3,005  $2,554  $3,030  $2,405 
Servicing rights resulting from transfers of loans  429   261   329   192   551   443 
Amortization  (72)  (12)  (250)  (151)  (467)  (253)
Change in valuation allowance  -   - 
        
Change in valuation, allowance  (193)  -   (223)  - 
Balance, end of period $1,746  $559  $2,891  $2,595  $2,891  $2,595 

 

ResidentialThe valuation allowance related to SBA loan servicing rights at March 31, 2020 and September 30, 2019 was $371,000 and $148,000, respectively.

Mortgage Servicing Rights (“MSRs”)

The Company originates residential mortgage loans originated for sale in the secondary market continueand in August 2019 began retaining servicing for certain of these loans when they are sold. MSRs retained for originated loans that have been sold are accounted for at fair value. The fair value of MSRs is 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 be sold with servicing released.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 loans.

 

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 March 31, 2020 and September 30, 2019 were as follows:

Assumption 

Range of Assumption (Weighted Average)

March 31, 2020

  

Range of Assumption (Weighted Average)

September 30, 2019

 
Discount rate  9.25%  9.25%  
Prepayment rate  4.06% to 89.72% (25.09%)   4.42% to 72.79% (18.75%) 

-29-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The unpaid principal balance of residential mortgage loans serviced for others was $497.5 million and $91.6 million at March 31, 2020 and September 30, 2019, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing and other liabilities were $3.9 million and $427,000 at March 31, 2020 and September 30, 2019, respectively. Contractually specified servicing fees (net of direct servicing expenses), late fees and other ancillary fees related to residential mortgage loans serviced for others were $106,000 and $96,000 for the three and six months ended March 31, 2020, respectively, and are included in other noninterest income in the consolidated statements of income.

Changes in the carrying value of MSRs accounted for at fair value for the three- and six-months ended March 31, 2020 were as follows:

  Three Months
Ended
March 31,
2020		  Six Months
Ended
March 31,
2020		 
  (In thousands) 
Fair value as of beginning of period $3,254  $934 
Servicing rights capitalized  1,908   4,185 
Changes in fair value related to:       
Loan repayments  (145)  (184)
Changes in valuation model inputs or assumptions  (962)   (880)
        
Fair value as of end of period $4,055  $4,055 

-27-4.Deposits

Deposits at March 31, 2020 and September 30, 2019 consisted of the following:

  

March 31,

2020

  September 30,
2019		 
  (In thousands) 
Noninterest-bearing demand deposits $178,894  $173,072 
NOW accounts  183,776   173,746 
Money market accounts  108,494   121,281 
Savings accounts  125,007   120,393 
Retail time deposits  167,890   146,227 
Brokered time deposits  173,245   99,665 
         
Total $937,306  $834,384 

-30-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

4.5.Investment in Historic Tax Credit EntitySupplemental Disclosure for Net Income (Loss) Per Share

 

On October 15, 2014,Net income (loss) per share information is presented below for 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 Kentucky by the commercial developer, for which it received a 99% equity interest in the entitythree- 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 totaled $4.7 million available under Internal Revenue Code Section 47. Subsequently, during the quartersix-month periods ended March 31, 2017, the estimate2020 and 2019.

  Three Months Ended  Six Months Ended 
  March 31,  March 31, 
  2020  2019  2020  2019 
  (Dollars in thousands, except per share data) 
Basic:                
Earnings:                
Net income (loss) attributable to First Savings Financial Group, Inc. $(627) $3,533  $2,812  $6,464 
Shares:                
Weighted average common shares outstanding, basic  2,355,750   2,307,155   2,348,145   2,295,788 
                 
Net income (loss) per common share, basic $(0.27) $1.53  $1.20  $2.82 
                 
Diluted:                
Earnings:                
Net income (loss) attributable to First Savings Financial Group, Inc. $(627) $3,533  $2,812  $6,464 
Shares:                
Weighted average common shares outstanding, basic  2,355,750   2,307,155   2,348,145   2,295,788 
Add: Dilutive effect of outstanding options  21,440   50,205   29,220   65,650 
Add: Dilutive effect of restricted stock  2,711   2,644   3,991   5,086 
Weighted average common shares outstanding, as adjusted  2,379,901   2,360,004   2,381,356   2,366,524 
                 
Net income (loss) per common share, diluted $(0.26) $1.50  $1.18  $2.73 

Nonvested restricted stock shares are not considered as outstanding for purposes of tax credits increased to $5.0 million and the Company’s investment in equity increased to $4.5 million, or 90% of the anticipated credits to be received.computing weighted average common shares outstanding.

 

The Bank’s investment inThere were no antidilutive restricted stock awards excluded from the historic tax credit entity is accountedcalculation of diluted net income per share for using the equity method of accounting. During the three monththree- and six-month periods ended DecemberMarch 31, 20172020 and 2016,2019. Stock options for 22,158 and 19,158 shares of common stock were excluded from the Bank did not recognize a loss on its investment or tax credits. At Decembercalculation of diluted net income per common share for the three- and six-month periods ended March 31, 2017, there2020, respectively, because their effect was antidilutive. Stock options for 10,200 shares of common stock were no unfunded capital contribution commitments.excluded from the calculation of diluted net income per common share for the three- and six-month periods ended March 31, 2019, because their effect was antidilutive.

 

5.Deposits

Deposits at December 31, 2017 and September 30, 2017 consisted of the following:

(In thousands) December 31,
2017		  September 30,
2017		 
    
Noninterest-bearing demand deposits $101,213  $96,283 
NOW accounts  205,758   182,068 
Money market accounts  70,212   70,775 
Savings accounts  92,064   90,360 
Retail time deposits  123,136   123,010 
Brokered time deposits  83,066   106,886 
         
Total $675,449  $669,382 

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

6.Supplemental Disclosure for Earnings Per Share

Earnings per share information is presented below for the three month periods ended December 31, 2017 and 2016.

  Three Months Ended 
  December 31, 
(Dollars in thousands, except per share data) 2017  2016 
       
Basic:        
Earnings:        
Net income attributable to First Savings Financial Group, Inc. $3,406  $2,337 
         
Shares:        
Weighted average shares outstanding  2,228,256   2,205,309 
         
Net income per share, basic $1.53  $1.06 
         
Diluted:        
Earnings:        
Net income attributable to First Savings Financial Group, Inc. $3,406  $2,337 
         
Shares:        
Weighted average shares outstanding  2,228,256   2,205,309 
Add: Dilutive effect of outstanding options  124,466   124,205 
Add: Dilutive effect of nonvested restricted stock  6,213   - 
Weighted average shares outstanding, as adjusted  2,358,935   2,329,514 
         
Net income per share, diluted $1.44  $1.00 

Nonvested restricted stock shares are not considered as outstanding for purposes of computing weighted average common shares outstanding.

There were no antidilutive stock options or restricted stock awards excluded from the calculation of diluted net income per share for the three month period ended December 31, 2017. Stock options for 51,295 shares of stock and restricted stock awards of 17,265 shares were excluded from the calculation of diluted net income per share for the three-month period ended December 31, 2016, because their effect was antidilutive.

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(Unaudited)

7.Supplemental Disclosures of Cash Flow Information

 

 Three Months Ended  Six Months Ended 
 December 31,  March 31, 
 2017 2016  2020 2019 
 (In thousands)   (In thousands) 
Cash payments for:                
Interest $1,333  $1,025  $5,820  $4,095 
Income taxes (net of refunds received)  (723)  -   1,195   337
        
Transfers from loans held for sale to loans  851   - 
        
Transfers from loans to foreclosed real estate  -   34 
        
Proceeds from sales of foreclosed real estate financed through loans  337   - 
Noncash investing and financing activities:        
Transfers from loans to other real estate owned  -   224 
Proceeds from sales of other real estate owned financed through loans  -   47 
Right-of-use assets obtained in exchange for lease obligations  7,506   - 
Noncash exercise of stock options  249   542 
Transfers from premises and equipment toother real estate owned  -    1,838 

 

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

 

Financial Accounting Standards Board (“FASB”)FASB Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements, provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC Topic 820 are described as follows:

 

Level 1:Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted market price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

Level 2:Inputs to the valuation methodology include quoted market prices for similar assets or liabilities in active markets; 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.

 

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(Unaudited)

 

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 and liabilities carried at fair value or the lower of cost or fair value. The tables below present the balances of financial assets and liabilities measured at fair value on a recurring and nonrecurring basis as of DecemberMarch 31, 20172020 and September 30, 2017. The Company had no liabilities measured at fair value as of December 31, 2017 or September 30, 2017.2019.

 

 Carrying Value  Carrying Value 
 Level 1 Level 2 Level 3 Total  Level 1 Level 2 Level 3 Total 
 (In thousands)  (In thousands) 
December 31, 2017:                
March 31, 2020:                
Assets Measured - Recurring Basis:                                
Trading account securities $-  $6,639  $-  $6,639 
                
Securities available for sale:                                
Agency mortgage-backed $-  $34,318  $-  $34,318  $-  $9,334  $-  $9,334 
Agency CMO  -   13,364   -   13,364   -   8,438   -   8,438 
Privately issued CMO  -   1,856   -   1,856 
Privately issued ABS  -   3,139   -   3,139 
Privately-issued CMO  -   1,029   -   1,029 
Privately-issued ABS  -   936   -   936 
SBA certificates  -   857   -   857   -   745   -   745 
Municipal  -   122,960   -   122,960   -   164,202   -   164,202 
Total securities available for sale $-  $176,494  $-  $176,494  $-  $184,684  $-  $184,684 
Residential mortgage loans held for sale – fair value option elected $-  $139,084  $-  $139,084 
Derivative assets (included in other assets) $-  $30  $5,678  $5,708 
Equity securities (included in other assets) $58  $-  $-  $58 
Mortgage servicing rights (included in other assets) $-  $-  $4,055  $4,055 
                
Liabilities Measured - Recurring Basis:                
Derivative liabilities (included in other liabilities) $-  $7,420  $-  $7,420 
                                

Assets Measured - Nonrecurring Basis:

                                
Impaired loans:                                
Residential real estate $-  $-  $4,999  $4,999  $-  $-  $5,501  $5,501 
Commercial real estate  -   -   6,816   6,816   -   -   9,675   9,675 
Multifamily real estate  -   -   702   702 
Commercial business  -   -   1,510   1,510 
Land and land development  -   -   29   29   -   -   1   1 
Commercial business  -   -   355   355 
Consumer  -   -   199   199   -   -   224   224 
Total impaired loans $-  $-  $12,398  $12,398  $-  $-  $17,613  $17,613 
                
Loans held for sale:                
Residential mortgage loans held for sale $-  $123  $-  $123 
SBA loans held for sale  -   29,186   -   29,186  $-  $-  $24,843  $24,843 
Total loans held for sale $-  $

29,309

  $-  $29,309 
                
Loan servicing rights $-  $-  $1,746  $1,746 
                
SBA loan servicing rights $-  $-  $2,891  $2,891 
Other real estate owned, held for sale:                                
Residential real estate $-  $-  $69  $69 
Commercial real estate  -   -   142   142 
Former bank premises $-  $-  $1,838  $1,838 
Total other real estate owned $-  $-  $211  $211  $-  $-  $1,838  $1,838 

 

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(Unaudited)

 Carrying Value 
  Level 1  Level 2  Level 3  Total 
  (In thousands) 
September 30, 2019:                
Assets Measured – Recurring Basis                
Securities available for sale:                
Agency mortgage-backed $-  $14,097  $-  $14,097 
Agency CMO  -   9,048   -   9,048 
Privately-issued CMO  -   1,382   -   1,382 
Privately-issued ABS  -   1,178   -   1,178 
SBA certificates  -   1,154   -   1,154 
Municipal bonds  -   150,443   -   150,443 
Total securities available for sale $-  $177,302  $-  $177,302 
                 
Residential mortgage loans held for sale – fair value option elected $-  $80,457  $-  $80,457 
                 
Derivative assets (included in other assets) $-  $130  $3,269  $3,399 
Equity securities (included in other assets) $85  $-  $-  $85 
Mortgage servicing rights (included in other assets) $-  $-  $934  $934 
                 
Liabilities Measured – Recurring Basis                
Derivative liabilities (included in other liabilities) $-  $329  $-  $329 
                 
Assets Measured – Nonrecurring Basis                
Impaired loans:                
Residential real estate $-  $-  $4,438  $4,438 
Commercial real estate  -   -   7,135   7,135 
Commercial business  -   -   105   105 
Consumer  -   -   211   211 
Total impaired loans $-  $-  $11,889  $11,889 
                 
SBA loans held for sale $-  $15,613  $-  $15,613 
                 
SBA loan servicing rights $-  $-  $3,030  $3,030 
                 
Other real estate owned, held for sale:                
Former bank premises $-  $-  $1,893  $1,893 
Total other real estate owned $-  $-  $1,893  $1,893 

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(Unaudited)

  Carrying Value 
  Level 1  Level 2  Level 3  Total 
  (In thousands) 
September 30, 2017:                
Assets Measured - Recurring Basis:                
Trading account securities $-  $7,175  $-  $7,175 
                 
Securities available for sale:                
Agency mortgage-backed $-  $36,736  $-  $36,736 
Agency CMO  -   14,576   -   14,576 
Privately-issued CMO  -   2,001   -   2,001 
Privately-issued ABS  -   3,448   -   3,448 
SBA certificates  -   912   -   912 
Municipal  -   120,426   -   120,426 
Total securities available for sale $-  $178,099  $-  $178,099 
                 

Assets Measured - Nonrecurring Basis:

                
Impaired loans:                
Residential real estate $-  $-  $4,967  $4,967 
Commercial real estate  -   -   5,477   5,477 
Land and land development  -   -   30   30 
Commercial business  -   -   192   192 
Consumer  -   -   175   175 
Total impaired loans $-  $-  $10,841  $10,841 
                 
Loans held for sale:                
Residential mortgage loans held for sale $-  $727  $-  $727 
SBA loans held for sale  -   24,908   -   24,908 
Total loans held for sale $-  $25,635  $-  $25,635 
                 
Loan servicing rights $-  $-  $1,389  $1,389 
                 
Other real estate owned, held for sale:                
Residential real estate $-  $-  $310  $310 
Commercial real estate  -   -   260   260 
Land and land development  -   -   282   282 
Total other real estate owned $-  $-  $852  $852 

 

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 at the lower of cost or fair value. These adjustments may include unobservable parameters. Any such valuation adjustments have been applied consistently over time.

 

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FIRST SAVINGS FINANCIAL GROUP, INC.

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(Unaudited)

The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. ThereOther than SBA loans held for sale (see discussion below), 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 three monthsix-month period ended DecemberMarch 31, 2017.2020.

 

Trading Account Securities and Securities Available for Sale.Sale and Equity Securities. Securities classified as trading and 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 trading accountequity 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.

The Company obtains pricing for its available for sale securities portfolio from an independent third party pricing service approximately 10 days prior to each month end. Due to significant market movements at the end of March 2020 in response to the COVID-19 pandemic, the values obtained for the available for sale securities portfolio showed a significant decrease compared to the prior quarter. However, based on changes in the market subsequent to the valuation date management believes the decrease in the valuation of the available for sale securities portfolio would have been partially mitigated at March 31, 2020.

 

Residential Mortgage Loans Held for Sale. 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. At September 30, 2019, the fair value of SBA loans held for sale was 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 was classified as Level 2 in the fair value hierarchy. At March 31, 2020, the fair value of SBA loans held for sale reflects management’s estimate based on the weighted average price of SBA loans sold to investors during the prior quarter, and is classified as Level 3 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.

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(Unaudited)

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.

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 three- and six-months ended March 31, 2020 and 2019:

  Three Months Ended  Six Months Ended 
  March 31,  March 31, 
(In thousands) 2020   2019  2020  2019 
Beginning balance $2,921  $658  $3,269  $380 
Unrealized gains recognized in earnings,                
net of settlements  2,757   1,047   2,409   1,325 
                 
Ending balance $5,678  $1,705  $5,678  $1,705 

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 three-month periods ended March 31, 2020 and 2019 attributable to Level 3 derivative assets held at the balance sheet date were $5.7 million and $1.7 million, respectively. Gains recognized in earnings for the six-month periods ended March 31, 2020 and 2019 attributable to Level 3 derivative assets held at the balance sheet date were $5.7 million and $1.7 million, 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 March 31, 2020 and September 30, 2019.

Financial Instrument 

Significant

Unobservable Inputs

 

Range of Inputs

March 31,

2020

  

Range of Inputs
September 30,

2019

 
Interest rate lock commitments Pull-through rate  25% - 100%   55% - 100% 
  Direct costs to close  1%  1% 

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. A reconciliation of MSRs measured at fair value on a recurring basis using significant unobservable inputs (Level 3) and a summary of the significant unobservable inputs used in the MSR valuation is presented in Note 3. Changes in the fair value of MSRs are included in mortgage banking income in the accompanying consolidated statements of income.

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(Unaudited)

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 March 31, 2020 and September 30, 2019, 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 generally then discounted by management in order to reflect management’s estimate of the fair value of the collateral given the current market conditions and the condition of the collateral. At DecemberMarch 31, 20172020 and September 30, 2017,2019, the significant unobservable inputs used in the fair value measurement of impaired loans included discounts from appraised value ranging from 0.0% to 15.0%90% and estimated costs to sell the collateral ranging from 0.0% to 6.0%12.0%. During the three monththree-month periods ended DecemberMarch 31, 20172020 and 2016,2019, the Company recognized provisions for loan losses of $2,000$1.8 million and $50,000,$379,000, respectively, for impaired loans. During the six-month periods ended March 31, 2020 and 2019, the Company recognized provisions for loan losses of $1.9 million and $546,000, respectively, for impaired loans.

 

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(Unaudited)

Loans Held for Sale. Loans held for sale are carried at the lower of cost or market value. The portfolio is comprised of residential mortgage loans and SBA loans. The fair value of loans held for sale is based on specific prices of the underlying contracts for sale to investors, and is classified as Level 2 in the fair value hierarchy.

Loan Servicing Rights. LoanSBA 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 DecemberMarch 31, 2017,2020, the significant unobservable inputs used in the fair value measurement of SBA loan servicing rights included discount rates ranging from 10.25%7.73% to 14.38%16.13% with a weighted average of 12.03%12.49% and prepayment speed assumptions ranging from 3.47%9.02% to 9.93%23.97% with a weighted average rate of 7.54%16.16%. At September 30, 2017,2019, the significant unobservable inputs used in the fair value measurement of SBA loan servicing rights included discount rates ranging from 9.12%6.82% to 13.90%26.61% with a weighted average of 11.66%11.11% and prepayment speed assumptions ranging from 2.94%6.80% to 8.87%21.17% with a weighted average rate of 6.63%14.10%. 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. The Company recognized $193,000 and $223,000 of impairment charges on loan servicing rights for the three- and six-month periods ended March 31, 2020, respectively. The Company did not recognize any impairment charges on loan servicing rights for the three monththree- and six-month periods ended DecemberMarch 31, 2017 and 2016.2019.

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(Unaudited)

 

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. The 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 generally discounted by management in order to reflect management’s estimate of the fair value of the property given current market conditions and the condition of the property. At DecemberMarch 31, 2017,2020, 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 23.3%15.0% to 46.2%30.9% with a weighted average of 38.7%30.1%. At September 30, 2017,2019, 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 16.1%0.0% to 58.8%15.0% with a weighted average of 46.6%10.5%. The Company recognized charges of $10,000 to write-down other real estate owned to fair value for the three month period ended December 31, 2017. The Company did not recognize any charges to write down other real estate owned to fair value for the three month periodthree- and six-month periods ended DecemberMarch 31, 2016.2020 and 2019.

 

Transfers Between Categories.Categories.ThereAs previously described, management used different valuation methodologies related to SBA loans held for sale at March 31, 2020 and September 30, 2019, resulting in a change in classification from Level 2 to Level 3 for those types of instruments. Other than that change, there were no transfers into or out of Levels 1, 2, or 3 of the fair value hierarchy for the three monththree- and six-month periods ended December 30, 2017March 31, 2020 and 2016.2019.

 

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 date of an eligible financial asset or financial liability, and may not be revoked once made.

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(Unaudited)

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 Company’s 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 March 31, 2020 and September 30, 2019.

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 March 31, 2020 and September 30, 2019.

(In thousands)  

Aggregate

Fair Value March 31, 2020

  Aggregate Principal Balance March 31, 2020  Difference 
Residential mortgage loans held for sale $139,084  $134,280  $4,804 

(In thousands)  

Aggregate

Fair Value September 30, 2019

  Aggregate Principal Balance September 30, 2019  Difference 
Residential mortgage loans held for sale $80,457  $77,787  $2,670 

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 three- and six-month periods ended March 31, 2020 and 2019:

  Three Months Ended  Six Months Ended 
  March 31,  March 31, 
(In thousands) 2020  2019  2020  2019 
Gains – included in mortgage banking income $980  $437  $3,356  $1,026 
Interest income  950   187   1,841   341 
                 
  $1,930  $624  $5,197  $1,367 

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(Unaudited)

 

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

  

  Carrying  Fair Value Measurements Using: 
(In thousands) Amount  Level 1  Level 2  Level 3 
             
December 31, 2017:                
Financial assets:                
Cash and due from banks $10,018  $10,018  $-  $- 
Interest-bearing deposits with banks  29,013   29,013   -   - 
Interest-bearing time deposits  2,680   -   2,669   - 
Trading account securities  6,639   -   6,639   - 
Securities available for sale  176,494   -   176,494   - 
Securities held to maturity  2,844   -   3,228   - 
                 
Loans, net  616,993   -   -   608,866 
                 
Residential mortgage loans held for sale  123   -   123   - 
SBA loans held for sale  29,186   -   32,396   - 
FRB and FHLB stock  9,499   N/A   N/A   N/A 
Accrued interest receivable  3,993   -   3,993   - 
Loan servicing rights (included in other assets)  1,746   -   -   1,826 
                 
Financial liabilities:                
Deposits  675,449   -   -   675,306 
Short-term repurchase agreements  1,349   -   1,349   - 
Borrowings from FHLB  150,000   -   149,094   - 
Accrued interest payable  329   -   329   - 
Advance payments by borrowers for taxes and insurance  783   -   783   - 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 Carrying  Fair Value Measurements Using:  Carrying Fair Value Measurements
Using:
(In thousands) Amount  Level 1  Level 2  Level 3 
    Amount Level 1 Level 2 Level 3 
September 30, 2017:                
   (In thousands)
March 31, 2020:         
Financial assets:                                
Cash and due from banks $11,017  $11,017  $-  $-  $11,790  $11,790  $-  $- 
Interest-bearing deposits with banks  23,242   23,242   -   -   10,813   10,813   -   - 
Interest-bearing time deposits  2,435   -   2,435   -   2,510   -   2,510   - 
Trading account securities  7,175   -   7,175   - 
Securities available for sale  178,099   -   178,099   -   184,684   -   184,684   - 
Securities held to maturity  2,878   -   3,306   -   2,189   -   2,521   - 
                
Loans, net  586,456   -   -   579,074 
                
Residential mortgage loans held for sale  727   -   727   -   139,084   -   139,084   - 
SBA loans held for sale  24,908   -   27,980   -   24,843   -   -   27,409 
Loans, net  877,276   -   -   934,710 
FRB and FHLB stock  6,936   N/A   N/A   N/A   16,618   N/A   N/A   N/A 
Accrued interest receivable  3,398   -   3,398   -   5,157   -   5,157   - 
Loan servicing rights (included in other assets)  1,389   -   -   1,456 
SBA loan servicing rights (included in other assets)  2,891   -   -   2,891 
Residential mortgage loan servicing rights (included in other assets)  4,055   -   -   4,055 
Derivative assets (included in other assets)  5,708   -   30   5,678 
Equity securities (included in other assets)  58   58   -   - 
                                
Financial liabilities:                                
Deposits  669,382   -   -   670,050   937,306   -   -   939,967 
Short-term repurchase agreements  1,348   -   1,348   - 
Borrowings from FHLB  118,065   -   117,920   -   270,000   -   272,292   - 
Subordinated note  19,763   -   22,015   - 
Accrued interest payable  283   -   283   -   787   -   787   - 
Advance payments by borrowers for taxes and insurance  1,212   -   1,212   -   1,985   -   1,985   - 
Derivative liabilities (included in other liabilities)  7,420   -   7,420   - 

  

The carrying amounts in the preceding tables are included in the consolidated balance sheets under the applicable captions. The fair value of financial instruments with off-balance-sheet risk is not material. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Cash and Cash Equivalents

             
  Carrying  Fair Value Measurements
Using:
 Amount  Level 1  Level 2  Level 3 
      (In thousands)
September 30, 2019:       
Financial assets:                
   Cash and due from banks $13,008  $13,008  $-  $- 
   Interest-bearing deposits with banks  28,424   28,424   -   - 
   Interest-bearing time deposits  2,265   -   2,265   - 
   Securities available for sale  177,302   -   177,302   - 
   Securities held to maturity  2,336   -   2,670   - 
   Residential mortgage loans held for sale  80,457   -   80,457   - 
   SBA loans held for sale  15,613   -   17,040   - 
   Loans, net  810,658   -   -   841,646 
   FRB and FHLB stock  13,040   N/A   N/A   N/A 
   Accrued interest receivable  5,041   -   5,041   - 
   SBA Loan servicing rights (included in other assets)  3,030   -   -   3,030 
   Residential mortgage loan servicing rights (included in other assets)  934   -   -   934 
   Derivative assets (included in other assets)  3,399   -   130   3,269 
   Equity securities (included in other assets)  85   85   -   - 
                 
Financial liabilities:                
   Deposits  834,384   -   -   835,384 
   Federal funds purchased  4,000   -   4,000   - 
   Borrowings from FHLB  222,544   -   222,432   - 
   Subordinated note  19,729   -   21,143   - 
   Accrued interest payable  935   -   935   - 
   Advance payments by borrowers for taxes and insurance  1,906   -   1,906   - 
   Derivative liabilities (included in other liabilities)  329   -   329   - 

 

For cash and short-term instruments, including cash and due from banks, interest-bearing deposits with banks with original maturities of 90 days or less, and money market funds, the carrying amount is a reasonable estimate of fair value.

Investment Securities and Interest-Bearing Time Deposits

For debt securities and interest-bearing time deposits, the Company obtains fair value measurements from an independent pricing service and the fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors.

Loans

The fair value of loans, excluding loans held for sale, is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and terms. Impaired loans are valued at the lower of their carrying value or fair value, as previously described. The carrying amount of accrued interest receivable approximates its fair value.

The fair value of loans held for sale is estimated based on specific prices of underlying contracts for sales to investors, as previously described.

FRB and FHLB Stock

It is not practical to determine the fair value of FRB and FHLB stock due to restrictions placed on transferability.

Loan Servicing Rights

The fair value of loan serving rights is determined by a valuation model employed by an independent third party using market-based discount rate and prepayment assumptions, as previously described.

Deposits

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

Borrowed Funds

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

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

9.8.Employee Stock Ownership Plan

 

On October 6, 2008, the Company established a leveraged employee stock ownership plan (“ESOP”) covering substantially all employees. The ESOP trust acquired 203,363 shares of Company common stock at a cost of $10.00 per share financed by a term loan with the Company. The employer loan and the related interest income are not recognized in the consolidated financial statements because 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. The ESOP loan was repaid in full during the quarter ended December 31, 2015 and all shares have been allocated to participants in the planplan; therefore, no compensation expense was recognized for the three monththree- and six-month periods ended DecemberMarch 31, 20172020 and 2016.2019. The ESOP trust held 158,511124,117 and 161,115136,219 shares of Company common stock at DecemberMarch 31, 20172020 and September 30, 2017,2019, respectively.

 

10.9.Stock Based Compensation Plans

 

The Company maintains two equity incentive plans under which stock options and restricted stock have been or canmay be granted, the 2010 Equity Incentive Plan (“2010 Plan”), approved by the Company’s shareholders in February 2010, and the 2016 Equity Incentive Plan (“2016 Plan”), approved by the Company’s shareholders in February 2016. At December 31, 2017, all available awards had been granted under the 2010 Plan. The aggregate number of shares of the Company’s common stock available for issuance under the 2016 Plan may not exceed 88,000 shares, consisting of 66,000 stock options and 22,000 shares of restricted stock. At DecemberMarch 31, 2017, 13,7402020, there were no remaining shares of the Company’s common stock available for issuance under the 2010 Plan. At March 31, 2020, 7,255 shares of the Company’s common stock were available for issuance under the 2016 Plan, consistingall of 10,505which were available for stock optionsoptions. There are no restricted stock shares available for issuance under the 2016 Plan as of March 31, 2020. The Company accounts for any forfeitures as they occur, and 3,235 shares of restricted stock.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)any previously recognized compensation cost for an award is reversed in the period the award is forfeited.

 

Stock Options

 

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.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

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 three monthsix-month period ended DecemberMarch 31, 20172020 was determined using the following assumptions:

 

Expected dividend yield  1.75%
Risk-free interest rate  2.13%
Expected volatility  14.6%
Expected life of options  7.5 years 
Weighted average fair value at grant date $6.13 
Expected dividend yield1.75%
Risk-free interest rate2.13%
Expected volatility14.6%
Expected life of options7.0 years
Weighted average fair value at grant date$6.13

 

A summary of stock option activity as of DecemberMarch 31, 2017,2020, and changes during the three monthsix-month period then ended is presented below.

 

 Number of
Shares		 Weighted
Average
Exercise Price		 Weighted
Average
Remaining
Contractual
Term (Years)		 Aggregate 
Intrinsic Value		  Number of
Shares		 Weighted
Average
Exercise Price		 Weighted
Average
Remaining
Contractual
Term (Years)		 Aggregate
Intrinsic
Value
Outstanding at beginning of year  197,529  $20.15         
 (Dollars in thousands, except per share data)
Outstanding at beginning of period  84,806  $34.13       
Granted  4,200   56.56           11,958   66.35       
Exercised  (8,400)  14.53           (28,361)  14.01       
Forfeited or expired  -   -           -   -       
Outstanding at end of year  193,329  $21.24   4.3  $6,917,000 
Outstanding at end of period  68,403  $48.11   7.4 $-
Vested and expected to vest  193,329  $21.24   4.3  $6,917,000   68,403  $48.11   7.4 $-
Exercisable at end of year  148,493  $15.01   2.8  $6,238,000 
Exercisable at end of period  29,067  $42.04   6.8 $-

 

The intrinsic value of stock options exercised during the six-month period ended March 31, 2020 was $1.4 million. The intrinsic value of stock options exercised during the six-month period ended March 31, 2019 was $2.4 million. The Company recognized compensation expense related to stock options of $22,000 and $42,000 for the three- and six-month periods ended March 31, 2020, respectively. The Company recognized compensation expense related to stock options of $17,000 and $35,000 for the three- and six-month periods ended March 31, 2019, respectively. At March 31, 2020, there was $205,000 of unrecognized compensation expense related to nonvested stock options. The compensation expense is expected to be recognized over a weighted average period of 2.92 years. Cash received from the exercise of stock options and the tax benefit from the exercise of stock options were $148,000 and $134,000, respectively, for the six-month period ended March 31, 2020.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The intrinsic value of stock options exercised during the three month period ended December 31, 2017 was $355,000. The Company recognized compensation expense related to stock options of $16,000 and $8,000 for the three month periods ended December 31, 2017 and 2016, respectively. At December 31, 2017, there was $269,000 of unrecognized compensation expense related to nonvested stock options. The compensation expense is expected to be recognized over the remaining vesting period of 4.9 years.

Restricted Stock

 

The vesting period of restricted stock granted under the plans is generally five years beginning one year after the date of grant of the awards. Compensation expense is measured based on the fair market value of the restricted stock at the grant date and is recognized ratably over the vesting period. Compensation expense related to restricted stock recognized for the threethree- and six-month periods ended DecemberMarch 31, 20172020 was $49,000 and 2016$96,000, respectively. Compensation expense related to restricted stock recognized for the three and six-month periods ended March 31, 2019 was $37,000$44,000 and $17,000,$85,000, respectively.

 

A summary of the Company’s nonvested restricted shares activity as of DecemberMarch 31, 20172020 and changes during the three monthsix-month period then ended is presented below.

  

    Weighted  Number
of
Shares		 

Weighted

Average

Grant Date

Fair Value

 
 Number Average 
 of Grant Date 
 Shares  Fair Value 
     
Nonvested at October 1, 2017  17,265  $

40.09

 
Nonvested at October 1, 2019  13,458  $44.62 
Granted  1,500  $56.56   1,436  $66.35 
Vested  3,453  $40.09   (4,086) $43.24 
Forfeited  -   -   -   - 
Nonvested at December 31, 2017  15,312  $41.70 
Nonvested at March 31, 2020  10,808  $48.04 

 

TheThere were 4,086 restricted shares vested during the six-month period ended March 31, 2020 with a total fair value of $271,000. There were 3,653 restricted shares that vested during the three monthsix-month period ended DecemberMarch 31, 2017 was $195,000. There were no restricted shares vested during the three month period December2019 with a total fair value of $216,000. At March 31, 2016. At December 31, 20172020, there was $619,000$446,000 of unrecognized compensation expense related to nonvested restricted shares. The compensation expense is expected to be recognized over the remaining vestinga weighted average period of 4.92.78 years.

10.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 loans 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 accompanying consolidated balance sheets 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.

 

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

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 Company may be required to post margin collateral to derivative counterparties based on agreements with the dealers. At March 31, 2020, the Company had cash collateral posted with certain derivative counterparties of $7.1 million against its derivative obligations. The Company had no cash collateral posted with derivative counterparties at September 30, 2019. Cash collateral related to derivative contracts is recorded in other liabilities in the consolidated balance sheets.

The tables below provide information on the Company’s derivative financial instruments as of March 31, 2020 and September 30, 2019.

(In thousands)  

Notional
Amount

March 31,
2020

  

Asset
Derivatives
March 31,

2020

  

Liability
Derivatives

March 31,
2020

 
Interest rate lock commitments $392,638  $5,678  $- 
Forward mortgage loan sale contracts  291,250   30   7,420 
             
  $683,888  $5,708  $7,420 

(In thousands) Notional
Amount
September 30,
2019		  Asset
Derivatives
September 30,
2019		  Liability
Derivatives
September 30,
2019		 
Interest rate lock commitments $258,545  $3,269  $- 
Forward mortgage loan sale contracts  203,250   130   329 
             
  $461,795  $3,399  $329 

Income (loss) related to derivative financial instruments included in mortgage banking income in the accompanying consolidated statements of income for the three- and six-month periods ended March 31, 2020 and 2019 is as follows:

  Three Months Ended  Six Months Ended 
  March 31,  March 31, 
(In thousands) 2020  2019  2020  2019 
Interest rate lock commitments $2,757  $1,047  $2,409  $1,325 
Forward mortgage loan sale contracts  (10,380)  (624)  (10,817)  (775)
                 
  $(7,623) $423  $(8,408) $550 

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

11.Regulatory Capital

 

The Company and Bank areis subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III rules”) became effective for the Company and the Bank on January 1, 2015, with full compliance with all of the requirements being phased in over a multi-year schedule through January 1, 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 beingwas phased in from 0.0% for 2015 to 2.5% byfor 2019. The capital conservation buffer is 1.25% for 2017 andwas 1.875% for 2018.2018 and 2.5% for 2019. The Company and Bank met all capital adequacy requirements to which they areit was subject as of DecemberMarch 31, 20172020 and September 30, 2017.2019.

 

As of DecemberMarch 31, 2017,2020, the most recent notification from the Federal Reserve Bank 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 I1 risk-based, common equity Tier 1 risk-based and Tier I1 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.

 

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The Company’s and Bank’s actual capital amounts and ratios are also presented in the table. The Company is not subject to the Federal Reserve Bank’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 the Bank’s required disclosures in the table below. No amount was deducted from capital for interest-rate risk at either period.date.

  

  Actual  Minimum
For Capital Adequacy
Purposes:		  Minimum
 To Be Well
 Capitalized Under
 Prompt Corrective
 Action Provisions:		 
(Dollars in thousands) Amount  Ratio  Amount  Ratio  Amount  Ratio 
                   
As of December 31, 2017:                        
                         
Total capital (to risk-weighted assets):                     
Consolidated $91,976   12.79% $57,524   8.00%  N/A   N/A 
Bank  88,495   12.33   57,439   8.00  $71,799   10.00%
                         
Tier I capital (to risk-weighted assets):                     
Consolidated $83,465   11.61% $43,143   6.00%  N/A   N/A 
Bank  79,984   11.14   43,079   6.00  $57,439   8.00%
                         
Common equity tier I capital (to risk-weighted assets):                 
Consolidated $83,465   11.61% $32,357   4.50%  N/A   N/A 
Bank  79,984   11.14   32,310   4.50  $46,669   6.50%
                         
Tier I capital (to average adjusted total assets):                    
Consolidated $83,465   9.22% $36,226   4.00%  N/A   N/A 
Bank  79,984   8.88   36,021   4.00  $45,027   5.00%
                         
As of September 30, 2017:                        
                         
Total capital (to risk-weighted assets):                    
Consolidated $88,179   12.69% $55,587   8.00%  N/A   N/A 
Bank  84,720   12.22   55,476   8.00  $69,345   10.00%
                         
Tier I capital (to risk-weighted assets):                     
Consolidated $80,087   11.53% $41,690   6.00%  N/A   N/A 
Bank  76,628   11.05   41,607   6.00  $55,476   8.00%
                         
Common equity tier I capital (to risk-weighted assets):                 
Consolidated $80,087   11.53% $31,267   4.50%  N/A   N/A 
Bank  76,628   11.05   31,205   4.50  $45,074   6.50%
                         
Tier I capital (to average adjusted total assets):                   
Consolidated $80,087   9.14% $35,031   4.00%  N/A   N/A 
Bank  76,628   8.79   34,887   4.00  $43,608   5.00%

        Minimum 
        To Be Well 
     Minimum  Capitalized Under 
     For Capital  Prompt Corrective 
  Actual  Adequacy Purposes:  Action Provisions: 
  Amount  Ratio  Amount  Ratio  Amount  Ratio 
        (Dollars in thousands)       
As of March 31, 2020:                  
Total capital (to risk-weighted assets):                        
Consolidated $134,721   12.48% $86,356   8.00%  N/A   N/A 
Bank  125,723   11.67   86,150   8.00  $107,687   10.00%
Tier 1 capital (to risk-weighted assets):                        
Consolidated $103,267   9.57% $64,767   6.00%  N/A   N/A 
Bank  114,032   10.59   64,612   6.00  $86,150   8.00%
Common equity tier 1 capital (to risk-weighted assets):                        
Consolidated $103,267   9.57% $48,575   4.50%  N/A   N/A 
Bank  114,032   10.59   48,459   4.50  $69,997   6.50%
Tier 1 capital (to average adjusted total assets):                        
Consolidated $103,267   7.97% $51,857   4.00%  N/A   N/A 
Bank  114,032   8.91   51,215   4.00  $64,019   5.00%
                         
As of September 30, 2019:                        
Total capital (to risk-weighted assets):                        
Consolidated $130,700   13.85% $75,474   8.00%  N/A   N/A 
Bank  121,160   12.88   75,249   8.00  $94,061   10.00%
Tier 1 capital (to risk-weighted assets):                        
Consolidated $100,931   10.70% $56,606   6.00%  N/A   N/A 
Bank  111,120   11.81   56,437   6.00  $75,249   8.00%
Common equity tier 1 capital (to risk-weighted assets):                        
Consolidated $100,931   10.70% $42,454   4.50%  N/A   N/A 
Bank  111,120   11.81   42,327   4.50  $61,140   6.50%
Tier 1 capital (to average adjusted total assets):                        
Consolidated $100,931   8.39% $48,142   4.00%  N/A   N/A 
Bank  111,120   9.34   47,564   4.00  $59,455   5.00%

 

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

12.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 Accounting Standards Update (“ASU”) No. 2016-02,Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases with the main difference being that operating leases are to be recorded in the statement of financial position as right-of-use assets and lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. Under the new guidance, lessor accounting is largely unchanged. 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 ofIn July 2018, the guidance is permitted. InFASB issued ASU No. 2018-11,Leases (Topic 842): Targeted Improvements, which provides an additional, optional transition entities are requiredmethod related to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Management is evaluatingimplementing the new guidanceleases standard. ASU 2018-11 provides that companies can initially apply the new leases standard at adoption and expectsrecognize a cumulative-effect adjustment to report increased assetsthe opening balance of retained earnings in the period of adoption. The Company has adopted the new leases standard on October 1, 2019, and liabilities as a result the Company recorded a right-of-use asset of recording right-of-use assets$6.2 million, a lease liability of $6.3 million and lease liabilities. However, based on currenta cumulative-effect adjustment of $166,000 to increase retained earnings. The Company has elected all applicable practical expedients permitted under the standard, including the option to expense short-term leases management doeswith a term of one year or less. The Company also utilized the transition method allowed under ASU 2028-11 and did not expect therestate prior periods. See Note 15 for further details regarding adoption of this guidance to have a material impact on the Company’s consolidated financial position or results of operations.

new leases standard.

 

In June 2016, the FASB issued ASU No. 2016-13,Financial Instruments – Credit Losses (Topic 326). The update commonly referred to as the current expected credit loss methodology (“CECL”) 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 arewere 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.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

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. The Company is a smaller reporting company as defined by the SEC, and currently assessing the impact the guidance will have upon adoption, but management expectsdoes not intend to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

In January 2017, the FASB issued ASU No. 2017-04,Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment. The update simplifies the measurement of goodwill impairment by eliminating Step 2 from the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss should not exceed the total amount of goodwill allocated to the reporting unit. The amendments in the update are effective for the Company for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim and annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial position or results of operations.early adopt CECL.

 

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 Companyadoption of this update effective October 1, 2019 did not 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 currently assessingpermitted upon issuance of the impact the guidance will have upon adoption, but theupdate. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

 

13.Segment Reporting

 

The Company’s operations include twothree primary segments: core banking, SBA lending, and SBA lending.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 that are 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.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The core banking segment is comprised primarily by the Bank and First Savings Investments, Inc., while the SBA lending segment’s revenues are comprised primarily of net interest income and gains on the sales of SBA loans generated by Q2 beginning January 1, 2017 and SBA loan related incomeQ2. The mortgage banking segment operates as a separate division of the Bank prior to the formation of Q2.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)and began operations in April 2018.

 

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 twothree segments are the same as those of the Company. Holding companyThe 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, and are reflected in the column labeled “Other” below, along with amounts to eliminate transactions between segments.

 

  Core
Banking		  SBA
Lending		  Other  Consolidated
Totals		 
  (In thousands) 
Three Months Ended December 31, 2017:                
Net interest income $7,519  $527  $7  $8,053 
Net gains on sales of loans, SBA  -   1,539   -   1,539 
Noncash items:                
Provision for loan losses  (394)  856   -   462 
Depreciation and amortization  287   13   -   300 
Income tax expense (benefit)  687   -   (65)  622 
Segment profit  3,155   218   33   3,406 
Segment assets at December 31, 2017  924,594   63,030   (57,472)  930,152 
  Core
Banking		  SBA
Lending		  Mortgage
Banking		  Other  Consolidated
Totals		 
  (In thousands) 
Three Months Ended March 31, 2020:               
Net interest income (loss) $9,536  $1,151  $523  $(300) $10,910 
Provision for loan losses  216   1,489   -   -   1,705 
Net interest income (loss) after provision  9,320   (338)  523   (300)  9,205 
Net gains on sales of loans, SBA  -   1,229   -   -   1,229 
Mortgage banking income  3   -   8,269   -   8,272 
Noninterest income  1,411   1,209   8,374   -   10,994 
Noninterest expense (income)  6,062   1,841   14,261   (89)  22,075 
Income (loss) before taxes  4,669   (970)  (5,364)  (211)  (1,876)
Income tax expense (benefit)  901   (124)  (1,341)  (210)  (774)
Segment profit (loss)  3,768   (846)  (4,023)  (1)  (1,102)
Non cash items:                    
Depreciation and amortization  279   14   42   17   352 
Segment assets at March 31, 2020  1,197,685   106,296   161,134   (96,863)  1,368,252 

 

  Core
Banking		  SBA
Lending		  Other  Consolidated
Totals		 
  (In thousands) 
Three Months Ended December 31, 2016:                
Net interest income $6,695   $289  $5  $6,989 
Net gains on sales of loans, SBA  -   854   -   854 
Noncash items:                
Provision for loan losses  166   140   -   306 
Depreciation and amortization  283   10   -   293 
Income tax expense (benefit)  722   -   (41)  681 
Segment profit  1,921   243   173   2,337 
Segment assets at December 31, 2016  790,726   29,529   2,304   822,559 
  Core
Banking		  SBA
Lending		  Mortgage
Banking		  Other  Consolidated
Totals		 
  (In thousands) 
Six Months Ended March 31, 2020:               
Net interest income (loss) $19,021  $2,368  $1,010  $(597) $21,802 
Provision for loan losses  736   1,474   -   -   2,210 
Net interest income (loss) after provision  18,285   894   1,010   (597)  19,592 
Net gains on sales of loans, SBA  -   1,990   -   -   1,990 
Mortgage banking income  4   -   24,085   -   24,089 
Noninterest income  2,802   2,138   24,180   -   29,120 
Noninterest expense (income)  13,691   3,666   29,163   (173)  46,347 
Income (loss) before taxes  7,396   (634)  (3,973)  (424)  2,365 
Income tax expense (benefit)  1,334   (81)  (993)  (396)  (136)
Segment profit (loss)  6,062   (553)  (2,980)  (28)  2,501 
Non cash items:                    
Depreciation and amortization  621   27   79   34   761 
Segment assets at March 31, 2020  1,197,685   106,296   161,134   (96,863)  1,368,252 

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

  Core
Banking		  SBA
Lending		  Mortgage
Banking		  Other  Consolidated
Totals		 
  (In thousands) 
Three Months Ended March 31, 2019:               
Net interest income (loss) $9,126  $934  $110  $(309) $9,861 
Provision (credit) for loan losses  (492)  832   -   -   340 
Net interest income (loss) after provision  9,618   102   110   (309)  9,521 
Net gains on sales of loans, SBA  -   521   -   -   521 
Mortgage banking income  3   -   5,071   -   5,074 
Noninterest income  1,337   673   5,079   -   7,089 
Noninterest expense (income)  6,998   1,322   4,563   (3)  12,880 
Income (loss) before taxes  3,957   (547)  626   (306)  3,730 
Income tax expense (benefit)  694   (70)  176   (334)  466 
Segment profit (loss)  3,263   (477)  450   28   3,264 
Non cash items:                    
Depreciation and amortization  323   12   23   18   376 
Segment assets at March 31, 2019  1,093,766   80,521   27,346   (71,911)  1,129,722 

 

 

  Core Banking   SBA Lending   Mortgage Banking   Other   Consolidated Totals 
   (In thousands) 
Six Months Ended March 31, 2019:                    
Net interest income (loss) $17,863  $1,842  $341  $(609) $19,437 
Provision (credit) for loan losses  (508)  1,163   -   -   655 
Net interest income (loss) after provision  18,371   679   341   (609)  18,782 
Net gains on sales of loans, SBA  -   1,485   -   -   1,485 
Mortgage banking income  30   -   8,333   -   8,363 
Noninterest income  2,716   1,810   8,344   -   12,870 
Noninterest expense (income)  13,603   2,684   8,031   (22)  24,296 
Income (loss) before taxes  7,484   (195)  654   (587)  7,356 
Income tax expense (benefit)  1,319   (25)  163   (469)  988 
Segment profit (loss)  6,165   (170)  491   (118)  6,368 
Non cash items:                    
Depreciation and amortization  759   24   43   34   860 
Segment assets at March 31, 2019  1,093,766   80,521   27,346   (71,911)  1,129,722 

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

14.Subsequent Event – Pending AcquisitionRevenue from Contracts with Customers

 

On July 21, 2017,Substantially 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 three- and six-month periods ended March 31, 2020 and 2019:

  Three Months Ended   Six Months Ended 
  March 31,  March 31, 
  2020  2019  2020  2019 
     (In thousand)     
Service charges on deposit accounts $441  $449  $950  $960 
ATM and interchange fees  524   446   1,027   899 
Investment advisory income  83   77   110   134 
Other  31   43   57   80 
   Revenue from contracts with customers  1,079   1,015   2,144   2,073 
                 
Gain (loss) on sale of securities  7   1   7   1 
Gain on sale of SBA loans  1,229   521   1,990   1,485 
Mortgage banking income  8,272   5,074   24,089   8,363 
Increase in cash value of life insurance  194   147   356   258 
Real estate lease income  152   157   303   315 
Other  61   174   231   375 
   Other noninterest income  9,915   6,074   26,976   10,797 
                 
   Total noninterest income $10,994  $7,089  $29,120  $12,870 

A description of the Company’s revenue streams accounted for under FASB ASC 606 follows:

Service Charges on Deposit Accounts: The Company entered into a definitive agreement to acquire Dearmin Bancorp, Inc. (“Dearmin”)earns fees from its deposit customers for transaction-based, account maintenance, and its majority owned subsidiary, The First National Bank of Odon (“FNBO”) pursuant tooverdraft services. Transaction-based fees, which FNBO will be merged intoinclude services such as wire fees, stop payment charges, statement rendering, and ACH fees, are recognized at the Bank. The all-cash transaction is valued at $10.6 million, subject to possible adjustment. The closing oftime the transaction is subjectexecuted 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.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

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.

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.

15.Leases

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company is a lessor in certain customary conditions, including shareholderleasing agreements, such as for office space, and regulatory approval. Closing is expecteda lessee in others, such as for certain office space and equipment. The Company’s operating leases have terms that expire at different dates through August 2028, and some include options to occurextend the leases in five year increments.

On October 1, 2019, the Company adopted FASB ASC 842 and all subsequent updates that modified FASB ASC 842. For the Company, this update primarily affected the accounting treatment for operating lease agreements. With the adoption of FASB ASC 842, operating lease agreements are required to be recognized on the consolidated balance sheet as a “right of use” (“ROU”) asset and a corresponding lease liability. All of the Company’s leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheet.

The Company’s right to use an asset over the life of a lease is recorded as an ROU asset included in other assets on the consolidated balance sheet and was $7.0 million at March 31, 2020. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or incentives received. The Company recorded a lease liability in other liabilities on the consolidated balance sheet, which had a balance of $7.1 million at March 31, 2020.

The calculated amount of the ROU assets and lease liabilities are impacted by the length of the lease term and the discount rate used to calculate the present value of minimum lease payments. Regarding the discount rate, FASB ASC 842 requires the use of the rate implicit in the first calendar quarterlease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to October 1, 2019, the rate for the remaining lease term as of 2018. As of December 31, 2017, FNBO had $106.0 million of assets, including net loans of $34.7 million and securities available for sale of $42.3 million.October 1, 2019 was used.

 

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Leases with an initial term of 12 months or less are not recorded on the balance sheet and the Company recognizes lease expense for these leases on a straight-line basis over the term of the lease. Certain leases include one or more options to renew, with renewal terms that can extend the lease term from one to 20 years or more. The exercise of renewal options on operating leases is at the Company’s sole discretion, and certain leases may include options to purchase the leased property. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. The Company does not enter into lease agreements which contain material residual value guarantees or material restrictive covenants. At March 31, 2020, the Company had not entered into any leases that had yet to commence.

Lease expense for the three-and six-month periods ended March 31, 2019 was $283,000 and $551,000, respectively. The components of lease expense for the three- and six-month periods ended March 31, 2020 were as follows:

  Three Months
Ended		  Six Months
Ended		 
  March 31, 2020  March 31, 2020 
Operating lease cost $295  $585 
Short-term lease cost  195   315 
  $490  $900 

Future minimum commitments due under these lease agreements as of March 31, 2020 are as follows, including renewal options that are reasonably certain to be exercised:

2020 (remaining six months) $629 
2021  941 
2022  758 
2023  610 
2024  502 
Thereafter  5,897 
     Total lease payments  9,337 
     Less imputed interest  (2,255)
        Total $7,082 

The lease term and discount rate at March 31, 2020 were as follows:

Weighted-average remaining lease term (years) -45-20.4 
Weighted-average discount rate2.58%

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Supplemental cash flow information for the six-month period ended March 31, 2020 related to leases was as follows:

  Six Months Ended 
  March 31, 2020 
Cash paid for amounts included in the measurement of lease liabilities:    
Operating cash flows from operating leases $524 
     
ROU assets obtained in exchange for lease obligations:    
Operating leases $7,506 

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

Safe Harbor Statement for Forward-Looking Statements

 

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

 

Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the Company's actual results, performance and achievements being materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, the scope, duration and severity of the COVID-19 pandemic and its effects on our business and operations, our customers, including their ability to make timely payments on loans, our service providers, and on the economy and financial markets, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; the quality and composition of the loan and investment securities portfolio; loan demand; deposit flows; competition; and changes in accounting principles and guidelines. Additional factors that may affect our results are discussed herein and in our Annual Report on Form 10-K for the year ended September 30, 20172019 under “Part II, Item 1A. Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.

 

Critical Accounting Policies

 

During the three monthsix-month period ended DecemberMarch 31, 2017,2020, there was no significant change in the Company's critical accounting policies or the application of critical accounting policies as disclosed in the Company's Annual Report on Form 10-K for the year ended September 30, 2017.2019.

 

Comparison of Financial Condition at December 31, 2017 and September 30, 2017COVID-19 Pandemic

 

CashOn March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States and Cash Equivalents. Casharound the world. The COVID-19 pandemic has placed significant health, economic and cash equivalents increased $4.7 million from $34.3 million at September 30, 2017 to $39.0 million at December 31, 2017.other major hardships throughout the communities we serve, the United States and the entire world. The outbreak of COVID-19, or any other such outbreak of a highly contagious disease, occurring in the United States could negatively affect our business operations, asset valuations, financial condition and results of operations.

 

Loans. Net loans receivable increased $30.5 million, from $586.5 million at September 30, 2017 to $617.0 million at December 31, 2017, due primarily to increases in commercial real estate of $19.1 million, residential construction loans of $5.0 million and commercial construction loans of $4.1 million.

Loans Held for Sale. Loans held for sale increased $3.7 million, from $25.6 million at September 30, 2017 to $29.3 million at December 31, 2017, due to increases in SBA loans held for sale of $4.3 million, which more than offset a decrease in residential mortgage loans held for sale of $604,000. The Company originated $46.1 millionhas implemented a number of SBA loans held for saleprocedures in response to the secondary market forpandemic to support the three month period ended December 31, 2017 compared to $27.0 million in originations for the three month period ended December 31, 2016, as management continues to focus on expanding the SBA lending program.safety and well-being of our customers, employees, and communities:

 

-46-·Following the guidelines of the Center for Disease Control and local governments, we have updated our branch operating procedures. While our branches remain open, the lobbies have been closed and transactions are being conducted through drive-up windows or by appointment. For employees that continue to work from our offices, we have enhanced daily cleaning of our facilities and have instructed them to maintain appropriate social distancing. We also actively encourage customers to utilize alternative channels such as our online and mobile banking platforms. Our customer service and retail departments remain fully staffed and available to assist customers remotely.

·We have expanded our use of technology to allow many of our employees to work safely and productively from home. Most of our normally scheduled meetings, including Board of Director meetings and various committee meetings, are now held virtually instead of in-person.

·We are assisting our customers experiencing COVID-19 related hardships by approving payment extensions or loan forbearance agreements, and waiving or refunding certain fees. As of May 8, 2020, we had approved payment extensions or loan forbearance agreements on approximately $86.1 million of balances in the loan portfolio, of which $77.7 million related to commercial real estate, $5.8 million related to residential real estate and consumer loans, and $2.6 million related to SBA lending relationships. These payment extensions or loan forbearance agreements are generally for periods of three months or less.

·As a result of the passage of the CARES Act, the SBA will make six months of principal and interest payments for loans of existing SBA borrowers that were in “regular servicing status” (not delinquent) at March 27, 2020 and for SBA loans of new borrowers originated between March 27, 2020 and September 27, 2020. The aforementioned $2.6 million of SBA lending relationships that were provided payment extensions and forbearance by the Company will also receive the six months of SBA-made payments once the forbearance periods have expired. In addition, the majority of the Company’s SBA borrowers applied for participation in the SBA’s Paycheck Protection Program (“PPP”).

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

·We are actively participating in the PPP and had received SBA authorizations for 652 customers totaling approximately $194.4 million for PPP loans as of May 8, 2020. These loans will be disbursed as soon as administratively feasible during the third fiscal quarter of 2020. We anticipate that the majority of the fee income associated with the origination of these loans to be recognized in the fourth fiscal quarter of 2020.

·The Company had outstanding loan balances to restaurants and hotels with aggregate balances of $92.0 million and $16.9 million, respectively as of March 31, 2020. Of the $92.0 million balance of loans to restaurants, $72.3 million represents commercial real estate loans where the collateral property is leased to national-brand, investment-grade tenants and $5.2 million is fully guaranteed by the SBA. Of the $16.9 million balance of loans to hotels, $3.1 million is fully guaranteed by the SBA. The leisure and hospitality industries carry a higher degree of credit risk due to the COVID-19 pandemic. Based on our evaluation at March 31, 2020, management believes the allowance for loan losses is adequate to cover estimated losses at that date. However, as the pandemic continues, additional losses could be recognized.

Management continues to closely monitor the pandemic and will take additional action to respond to the pandemic as the situation continues to evolve. We cannot determine or estimate the impact on our business at this time because the length and severity of the economic downturn is not known. We are committed to continuing to serve our customers, employees and communities.

Comparison of Financial Condition at March 31, 2020 and September 30, 2019

Trading Account Securities.Cash and Cash Equivalents. Trading account securitiesCash and cash equivalents decreased $536,000,$18.8 million from $7.2$41.4 million at September 30, 20172019 to $6.6$22.6 million at DecemberMarch 31, 2017. Trading account securities are comprised2020.

Loans. Net loans receivable increased $66.6 million, from $810.7 million at September 30, 2019 to $877.3 million at March 31, 2020, due primarily to increases in commercial real estate loans of investment grade municipal bonds and the portfolio is managed by an investment advisory firm registered with the U.S. Securities and Exchange Commission.$47.3 million.

 

Loans Held for Sale. Loans held for sale increased $67.8 million, from $96.1 million at September 30, 2019 to $163.9 million at March 31, 2020, due to an increase in residential mortgage loans held for sale of $58.6 million and an increase in SBA loans held for sale of $9.2 million. The increase in residential mortgage loans held for sale is due to additional staff hired in 2019 and 2020 for the purpose of expanding the Company’s mortgage banking activities. As a result of this expansion, the Company originated $1.08 billion of residential loans held for sale in the secondary market for the six-month period ended March 31, 2020 compared to $177.1 million in originations for the six-month period ended March 31, 2019.

Securities Available for Sale. Securities available for sale decreased $1.6increased $7.4 million, from $178.1$177.3 million at September 30, 20172019 to $176.5$184.7 million at DecemberMarch 31, 2017,2020, due primarily to decreasespurchases of $27.4 million, partially offset by calls and maturities of $4.1 million, sales of $3.2 million, principal repayments of $3.7 million, and a decrease in net unrealized gains/lossesgains on securities available for sale of $1.5 million, calls and maturities$8.7 million. See additional discussion regarding pricing of $355,000 and principal repayments of $3.6 million, which more than offset purchases of $4.1 million.the available for sale securities portfolio in the “Equity” section below.

 

Securities Held to Maturity. Investment securities held to maturity decreased $34,000,$147,000 from $2.9 million at September 30, 20172019 to $2.8 million at DecemberMarch 31, 2017.2020 due to partial calls and principal repayments. There were no purchases of securities held to maturity and partial calls and principal repayments on mortgage-backed securities and municipal obligations totaled $33,000 during the three monthsix-month period ended DecemberMarch 31, 2017.2020.

 

Deposits. Total deposits increased $6.0$102.9 million, from $669.4$834.4 million at September 30, 20172019 to $675.4$937.3 million at DecemberMarch 31, 2017,2020, due primarily to increases in interest bearing deposit accounts and non-interest bearing deposit accounts of $97.1 million and $5.8 million, respectively. The increase in interest bearing depositsdeposit accounts is primarily due to an increase of $4.9$73.6 million and $1.1 million, respectively.

in brokered time deposits.

 

Borrowings. Borrowings from the FHLB increased $31.9$47.5 million, from $118.1$222.5 million at September 30, 20172019 to $150.0$270.0 million at DecemberMarch 31, 2017.2020. The increase in borrowings was primarily used to fund loan growth.growth and the expansion of the Company’s mortgage lending activities.

 

Equity. Equity increased $2.3Stockholders’ equity attributable to the Company was $116.7 million at March 31, 2020, a decrease of $4.4 million from $93.1 million at September 30, 20172019 due primarily to $95.4a $6.8 million at December 31, 2017. The increasedecrease in equity is primarilyaccumulated other comprehensive income due to retained net incomea decline in the market value of $3.1 million which wasavailable for sale securities, partially offset by a decreasean increase in net unrealized gains on securitiesretained earnings of $2.2 million. The Company obtains pricing for its available for sale securities portfolio from an independent third party pricing service approximately 10 days prior to each month end. Due to significant market movements at the end of $1.0 million.March 2020 in response to COVID-19, the values obtained for the available for sale securities portfolio showed a significant decrease in unrealized gains. However, based on changes in the market subsequent to the valuation date management believes the decrease in the unrealized gain on the available for sale securities portfolio would have been partially mitigated at March 31, 2020.

 

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

Results of Operations for the Three Months Ended DecemberMarch 31, 20172020 and 20162019

 

Overview. The Company reported a net incomeloss of $3.4 million,$627,000, or $1.44a net loss of $0.26 per diluted share, for the three monththree-month period ended DecemberMarch 31, 20172020 compared to net income of $2.3$3.5 million, or $1.00$1.50 per diluted share, for the three monththree-month period ended DecemberMarch 31, 2016. 2019.

The annualized return on average assets and average equity were 1.49% and 14.58%, respectively,net loss of $627,000 for the three month periodquarter ended DecemberMarch 31, 2017. The annualized return on average assets and average equity were 1.15% and 10.85%, respectively,2020 was primarily the result of a $4.0 million net loss recorded for the three month period ended December 31, 2016.mortgage banking segment and provision for loan losses of $1.7 million during the period. The net loss for the mortgage banking segment is primarily the result of unfavorable market value movements related to forward mortgage loan sale contracts, interest rate lock commitments, loans held for sale and mortgage servicing assets towards the end of the quarter and due primarily to market disruptions arising from the COVID-19 pandemic. Stimulus packages enacted by the Federal Reserve Bank, which included the purchase of $525 billion of agency mortgage-backed securities (”MBS”), the vehicle used by the Company to hedge the locked pipeline, caused a decrease in the valuation of the MBS market and as a result, a significant increase in derivative liabilities related to the Company’s forward mortgage loan sale contracts. In addition, stress within the mortgage servicing market, caused by liquidity issues and concerns regarding the length and commitment of deferral periods for residential mortgage payments, caused nearly all investors and servicing companies to withdraw participation from the mortgage purchase and servicing market in late March 2020. These withdrawals caused a reduction in the fair market values of the Company’s interest rate lock commitments, mortgage loans held for sale and mortgage servicing assets. The increase in the provision for loan losses included changes to qualitative factors within the allowance for loan losses calculation related to economic uncertainties surrounding COVID-19.

 

Net Interest Income. Net interest income increased $1.1$1.0 million, or 15.2%10.6%, for the three monththree-month period ended DecemberMarch 31, 20172020 as compared to the same period in 2016.2019. Average interest-earning assets increased $114.7$167.2 million and average interest-bearing liabilities increased $80.9$156.0 million when comparing the two periods. The tax-equivalent net interest margin was 3.88%3.73% for 20172020 compared to 3.94%3.92% for 2016.2019.

 

Total interest income increased $1.4 million, or 17.7%11.3%, when comparing the two periods due primarily to an increase in the average balance of interest-earning assets of $114.7$167.2 million, from $744.6 million$1.04 billion for 20162019 to $859.3 million$1.20 billion for 2017, and an increase2020, partially offset by a decrease in the average tax equivalent yield on interest-earning assets from 4.49%4.86% for 20162019 to 4.52%4.65% for 2017.2020. The majority of the increase in average interest-earning assets was attributable to loans. The average balance of loans which increased $103.8$167.4 million, or 20.9%, compared to 2016.2019.

 

Total interest expense increased $351,000,$337,000, or 34.3%13.8%, due to an increase in the average balance of interest-bearing liabilities of $80.9$156.0 million, from $628.4$828.2 million for 20162019 to $709.3$984.2 million for 2017, and an increase2020, which was partially offset by a decrease in the average cost of interest-bearing liabilities from 0.65%1.18% for 20162019 to 0.77%1.13% for 2017.2020.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

Average Balance Sheets.The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs for the three monththree-month periods ended DecemberMarch 31, 20172020 and 2016.2019. 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. Average balances presented are daily averages. 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 hashave been adjusted to a tax equivalent basis using thea federal marginal tax rate of 24.5% for 2017 and 34.0% for 2016.21%.

 

  Three Months Ended December 31, 
  2017  2016 
  Average
Balance		  Interest
and
Dividends		  Yield/
Cost		  Average
Balance		  Interest
and
Dividends		  Yield/
Cost		 
  (Dollars in thousands) 
Assets:                        
Interest-bearing deposits with banks $29,463  $71   0.96% $23,205  $22   0.38%
Loans  642,130   7,702   4.80   538,318   6,372   4.73 
Investment securities  144,049   1,624   4.51   131,715   1,653   5.02 
Agency mortgage-backed securities  35,759   214   2.39   44,437   234   2.11 
Dividend income  7,934   90   4.54   6,936   79   4.56 
Total interest-earning assets  859,335   9,701   4.52   744,611   8,360   4.49 
                         
Noninterest-earning assets  55,116           65,780         
Total assets $914,451          $810,391         
                         
Liabilities and equity:                        
NOW accounts $188,852  $126   0.27% $169,545  $83   0.20%
Money market deposit accounts  72,716   74   0.41   62,021   39   0.25 
Savings accounts  91,614   17   0.07   84,950   15   0.07 
Time deposits  225,539   645   1.14   211,947   475   0.90 
Total interest-bearing deposits  578,721   862   0.60   528,463   612   0.46 
                         
Borrowings (1)  130,628   511   1.56   99,947   410   1.64 
Total interest-bearing liabilities  709,349   1,373   0.77   628,410   1,022   0.65 
                         
Noninterest-bearing deposits  101,131           88,670         
Other noninterest-bearing liabilities  10,521           7,184         
Total liabilities  821,001           724,264         
                         
Total equity  93,450           86,127         
Total liabilities and equity $914,451          $810,391         
Net interest income (taxable equivalent basis)     8,328          7,338     
Less:  taxable equivalent adjustment      (275)          (349)    
Net interest income     $8,053          $6,989     
Interest rate spread          3.75%          3.84%
Net interest margin          3.88%          3.94%

Average interest-earning assets to average interest-bearing liabilities

          121.14%          118.49%

  Three Months Ended March 31, 
  2020  2019 
  

Average

Balance

  

Interest

and

Dividends

  

Yield/

Cost

  

Average

Balance

  

Interest

and

Dividends

  

Yield/

Cost

 
  (Dollars in thousands) 
Assets:                        
   Interest-bearing deposits with banks $48,306  $153   1.27% $36,317  $221   2.43%
   Loans  970,083   11,875   4.90   802,652   10,227   5.10 
   Investment securities  158,116   1,728   4.37   161,170   1,819   4.51 
   Agency mortgage-backed securities  10,870   76   2.80   24,682   179   2.90 
   FRB and FHLB stock  14,878   151   4.06   10,196   142   5.57 
         Total interest-earning assets  1,202,253   13,983   4.65   1,035,017   12,588   4.86 
                         
   Noninterest-earning assets  107,096           71,261         
         Total assets $1,309,349          $1,106,278         
                         
Liabilities and equity:                        
   NOW accounts $185,809  $137   0.29% $176,596  $113   0.26%
   Money market deposit accounts  110,500   244   0.88   112,839   360   1.28 
   Savings accounts  122,719   24   0.08   119,593   23   0.08 
   Time deposits  297,023   1,220   1.64   284,099   1,111   1.56 
      Total interest-bearing deposits  716,051   1,625   0.91   693,127   1,607   0.93 
                         
   Repurchase agreements  -   -   0.00   1,353   1   0.30 
   Fed funds  purchased  143   -   0.00   -   -   0.00 
   FHLB borrowings  248,205   838   1.35   114,044   520   1.82 
   Other borrowings (1)  19,752   320   6.48   19,684   318   6.46 
      Total interest-bearing liabilities  984,151   2,783   1.13   828,208   2,446   1.18 
                         
   Noninterest-bearing deposits  174,951           161,737         
   Other noninterest-bearing liabilities  24,772           10,573         
         Total liabilities  1,183,874           1,000,518         
                         
   Total stockholders’ equity  125,462           104,275         
   Noncontrolling interest in subsidiary  13           1,485         
      Total equity  125,475           105,760         
                         
      Total liabilities and equity $1,309,349          $1,106,278         
   Net interest income (taxable equivalent basis)      11,200           10,142     
   Less:  taxable equivalent adjustment      (290)          (281)    
   Net interest income     $10,910          $9,861     
   Interest rate spread          3.52%          3.68%
   Net interest margin          3.73%          3.92%
Average interest-earning assets to
average interest-bearing liabilities		          122.16%          124.97%

 

(1) Includes FHLB borrowings, federal funds purchased and repurchase agreements.subordinated debt.

 

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

Rate/Volume Analysis.The following table sets forth the effects of changing rates and volumes on our net interest income on a tax equivalent basis for the three-month periods ended DecemberMarch 31, 20172020 and 2016.2019. 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.

 

 

Three Months Ended December 31, 2017

Compared to

Three Months Ended December 31, 2016

  

Three Months Ended March 31, 2020

Compared to

Three Months Ended March 31, 2019

 
 

Increase (Decrease)

Due to

  

Increase (Decrease)

Due to

 
 Rate Volume Net  Rate Volume Net 
 (In thousands)       (In thousands)     
Interest income:                        
Interest-bearing deposits with banks $42  $7  $49  $(124) $56  $(68)
Loans  95   1,244   1,330   (443)  2,091   1,648 
Investment securities  (168)  154   (29)  (57)  (34)  (91)
Agency mortgage-backed securities  41   (61)  (20)  (5)  (98)  (103)
Dividend income  -   11   11 
FRB and FHLB stock  (47)  56   9 
Total interest-earning assets  10   1,355   1,341   (676)  2,071   1,395 
                        
Interest expense:                        
Deposits  190   60   250   (37)  55   18 
Borrowings (1)  (19)  120   101 
Repurchase agreements  -   (1)  (1)
Borrowings from FHLB  (214)  532   318 
Subordinated debt  -   1   2 
Total interest-bearing liabilities  171   180   351   (250)  587   337 
                        

Net increase (decrease) in net interest income (tax equivalent basis)

 $(161) $1,175  $990  $(426) $1,484  $1,058 

 

(1) Includes FHLB borrowings, federal funds purchased and repurchase agreements.

Provision for Loan Losses. The provision for loan losses was $462,000$1.7 million for the three monththree-month period ended DecemberMarch 31, 20172020 compared to $306,000,$340,000, for the same period in 2016. The increase in the provision for loans losses for 2017 as compared to the prior period was due primarily to growth in the loan portfolio.2019. Gross loans increased approximately $30.9$26.7 million for the three monththree-month period ended DecemberMarch 31, 20172020 compared to an increase of approximately $16.3$28.9 million for the three monththree-month period ended DecemberMarch 31, 2016.

2019.

 

The Company recognized net charge-offs of $43,000$544,000 for the three monththree-month period ended DecemberMarch 31, 2017 compared2020, of which $402,000 was related to unguaranteed portions of SBA loans. The Company recognized net charge-offs of $9,000$26,000 for the same period in 2016.2019. The increase in the provision for loan losses for 2020 was primarily due to increased nonperforming assets and net charge-offs for the period, as well as changes to qualitative factors within the allowance for loan losses calculation related to economic uncertainties surrounding COVID-19.

 

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

Noninterest Income.Income. Noninterest income increased $1.0$3.9 million for the three month periodmonths ended DecemberMarch 31, 20172020 as compared to the same period in 2016.2019. The increase was due primarily to an increase in mortgage banking income of $3.2 million and a $708,000 increase in net gain on sales of SBA loans. 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 Company’s SBA lending activities are performed under Q2, which specializes in the origination and servicing of SBA loans. The Bank owns 51% of Q2 with the option to purchase the minority interest in September 2020. Gross revenues and expenses related to Q2 are reported in the consolidated statements of income, and the net income or net loss attributable to noncontrolling interests is then subtracted from (in the case of net income) or added to (in the case of net loss) net income to arrive at net income attributable to the Company. Additional details regarding the financial performance of the mortgage banking and SBA lending segments are included in Note 13 to the consolidated financial statements.

Noninterest Expense. Noninterest expense increased $9.2 million for the three months ended March 31, 2020 as compared to the same period in 2019. The increase was due primarily to increases in the net gain on sale of loans guaranteed by the SBA and the net gain on trading account securities of $685,000 and $432,000, respectively, partially offset by a gain on life insurance of $189,000 recognized during the quarter ended December 31, 2016. The net gain on sales of loans guaranteed by the SBA was $1.5 million for the three month period ended December 31, 2017 as compared to $854,000 for the same period in 2016. The net gain on trading account securities was $150,000 for the three month period ended December 31, 2017 as compared to a net loss of $282,000 for the same period in 2016.

Noninterest Expense. Noninterest expenses increased $842,000 for the three month period ended December 31, 2017 as compared to the same period in 2016 primarily due to an increase in compensation and benefits and advertising of $470,000.$6.7 million and $1.2 million, respectively. The increase in compensation and benefits wasexpense is attributable to the addition of new employees to support the Company’sgrowth of the Company, primarily its mortgage banking and SBA lending activities, as well asand normal salary and benefits increases.adjustments. The increase in advertising is primarily due to the mortgage banking segment.

 

Income Tax Expense. The Company recognized an income tax expensebenefit of $622,000$774,000 for the three month periodmonths ended DecemberMarch 31, 2017, for an effective tax rate of 15.1%2020 as compared to income tax expense of $681,000, for an effective tax rate of 22.6%,$466,000 for the same period in 2016.2019. The tax benefit for the quarter ended March 31, 2020 was primarily the result of a pretax operating loss for the quarter.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Results of Operations for the Six Months Ended March 31, 2020 and 2019

Overview. The Company reported net income of $2.8 million, or $1.18 per diluted share, for the six-month period ended March 31, 2020 compared to net income of $6.5 million, or $2.73 per diluted share, for the six-month period ended March 31, 2019.

Net Interest Income. Net interest income increased $2.4 million, or 12.2%, for the six-month period ended March 31, 2020 as compared to the same period in 2019. Average interest-earning assets increased $171.8 million and average interest-bearing liabilities increased $157.1 million when comparing the two periods. The tax-equivalent net interest margin was 3.78% for 2020 compared to 3.95% for 2019.

Total interest income increased $3.4 million, or 13.9%, when comparing the two periods due primarily to an increase in the average balance of interest-earning assets of $171.8 million, from $1.01 billion for 2019 to $1.18 billion for 2020, partially offset by a decrease in the effectiveaverage tax rateequivalent yield on interest-earning assets from 4.87% for 2019 to 4.74% for 2020. The majority of the increase in average interest-earning assets was attributable to loans. The average balance of loans increased $169.6 million, or 21.7%, compared to 2019.

Total interest expense increased $987,000, or 21.1%, due to the $122,000 benefit from the revaluation of net deferred tax liabilities during the quarter and a reductionan increase in the Company’s statutoryaverage balance of interest-bearing liabilities of $157.1 million, from $802.4 million for 2019 to $959.5 million for 2020, and an increase in the average cost of interest-bearing liabilities from 1.16% for 2019 to 1.18% for 2020.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Average Balance Sheets.The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs for the six-month periods ended March 31, 2020 and 2019. 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. Average balances presented are daily averages. 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 have been adjusted to a tax rate resulting from the recently enacted Federal tax reform legislation. Asequivalent basis using a result of the tax legislation, the Company will utilize a blended federal marginal tax rate of 24.5% for its fiscal year ending September 30, 2018, and a rate of 21% thereafter..

 

  Six Months Ended March 31, 
  2020  2019 
  

Average

Balance

  

Interest

and

Dividends

  

Yield/

Cost

  

Average

Balance

  

Interest

and

Dividends

  

Yield/

Cost 

 
Assets: (Dollars in thousands) 
   Interest-bearing deposits with banks $47,295  $358   1.51% $33,261  $374   2.25%
   Loans  952,552   23,705   4.98   782,930   20,055   5.12 
   Investment securities  157,603   3,508   4.45   158,845   3,602   4.54 
   Agency mortgage-backed securities  11,969   159   2.66   26,932   372   2.76 
   FRB and FHLB stock  14,511   305   4.20   10,183   263   5.17 
         Total interest-earning assets  1,183,930   28,035   4.74   1,012,151   24,666   4.87 
                         
   Noninterest-earning assets  103,103           68,878         
         Total assets $1,287,033          $1,081,029         
                         
Liabilities and equity:                        
   NOW accounts $185,550  $277   0.30% $177,734  $238   0.27%
   Money market deposit accounts  113,479   549   0.97   111,793   676   1.21 
   Savings accounts  121,167   48   0.08   119,298   46   0.08 
   Time deposits  291,565   2,500   1.71   263,038   2,071   1.57 
      Total interest-bearing deposits  711,761   3,374   0.95   671,863   3,031   0.90 
                         
   Repurchase agreements  -   -   0.00   1,352   2   0.30 
   Fed funds purchased  71   1   2.82   -   -   0.00 
   FHLB borrowings  227,918   1,646   1.44   109,472   998   1.82 
   Other borrowings (1)  19,743   637   6.45   19,675   640   6.51 
      Total interest-bearing liabilities  959,493   5,658   1.18   802,362   4,671   1.16 
                         
   Noninterest-bearing deposits  177,969           164,818         
  Other noninterest-bearing liabilities  25,592           10,710         
         Total liabilities  1,163,054           977,890         
                         
   Total stockholders’ equity  123,919           101,706         
   Noncontrolling interest in subsidiary  60           1,433         
      Total equity  123,979          $103,139         
                         
      Total liabilities and equity $1,287,033          $1,081,029         
   Net interest income (taxable equivalent basis)      22,377           19,995     
   Less:  taxable equivalent adjustment      (575)          (558)    
   Net interest income     $21,802          $19,437     
   Interest rate spread          3.56%          3.71%
   Net interest margin        �� 3.78%          3.95%
Average interest-earning assets to
average interest-bearing liabilities		          123.39%          126.15%

(1) Includes subordinated debt.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Rate/Volume Analysis.The following table sets forth the effects of changing rates and volumes on our net interest income on a tax equivalent basis for the six-month periods ended March 31, 2020 and 2019. 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.

  

Six Months Ended March 31, 2020

Compared to

Six Months Ended March 31, 2019

 
   

Increase (Decrease)

Due to

   Rate   Volume   Net 
   (In thousands) 
Interest income:            
   Interest-bearing deposits with banks $(148) $132  $(16)
   Loans  (633)  4,282   3,650 
   Investment securities  (66)  (28)  (94)
   Agency mortgage-backed securities  (10)  (203)  (213)
   FRB and FHLB stock  (58)  100   42 
         Total interest-earning assets  (915)  4,284   3,369 
             
Interest expense:            
   Deposits  158   185   343 
   Repurchase agreements  -   (2)  (2)
   Fed funds purchased  -   1   1 
   Borrowings from FHLB  (317)  965   648 
   Subordinated debt  (5)  2   (3)
         Total interest-bearing liabilities  (164)  1,151   987 
             
   Net increase (decrease) in net interest income (tax equivalent basis) $(751) $3,133  $2,382 

Provision for Loan Losses. The provision for loan losses was $2.2 million for the six-month period ended March 31, 2020 compared to $655,000, for the same period in 2019. Gross loans increased approximately $68.2 million for the six-month period ended March 31, 2020 compared to an increase of approximately $59.0 million for the six-month period ended March 31, 2019.

The Company recognized net charge-offs of $559,000 for the six-month period ended March 31, 2020, of which $364,000 was related to unguaranteed portions of SBA loans. The Company recognized net charge-offs of $44,000 for the same period in 2019. The increase in the provision for loan losses for 2020 was primarily due to increased nonperforming assets and net charge-offs for the period, as well as changes to qualitative factors within the allowance for loan losses calculation related to economic uncertainties surrounding COVID-19.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

Noninterest Income. Noninterest income increased $16.3 million for the six months ended March 31, 2020 as compared to the same period in 2019. The increase was due primarily to increases in mortgage banking income and net gain on sales of SBA loans of $15.7 million and $505,000, respectively. The increase in mortgage banking income is due to production from the secondary-market residential mortgage lending segment that commenced operations in April 2018. Additional details regarding the financial performance of the mortgage banking and SBA lending segments are included in Note 13 to the consolidated financial statements.

Noninterest Expense. Noninterest expense increased $22.1 million for the six months ended March 31, 2020 as compared to the same period in 2019. The increase was due primarily to increases in compensation and benefits, advertising, occupancy and equipment, and other operating expenses of $17.2 million, $2.3 million, $1.2 million and $1.1 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 routine salary and benefits adjustments. The increase in advertising is primarily due to the mortgage banking segment. 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 primarily related to the mortgage banking segment. The increase in other operating expenses is primarily due to increases in loan expense related to the mortgage banking activities and charitable contributions.

Income Tax Expense. The Company recognized an income tax benefit of $136,000 for the six months ended March 31, 2020, compared to income tax expense of $988,000 for the same period in 2019. The income tax benefit for 2020 is a result of the Company’s tax-exempt income and investments in tax credit bonds.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Liquidity and Capital Resources

 

Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Bank’s primary sources of funds are customer deposits, proceeds from loan repayments, maturing securities and FHLB borrowings. While loan repayments and maturities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, general economic conditions and competition. At DecemberMarch 31, 2017,2020, the Bank had cash and cash equivalents of $39.0 million, trading account securities with a fair value of $6.6$22.4 million and securities available-for-sale with a fair value of $176.5$184.7 million. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB, borrowing capacity on a federal funds purchased line of credit facility with another financial institution and additional collateral eligible for repurchase agreements.

 

The Bank’s primary investing activity is the origination of commercial real estate and one-to-four family mortgage loans and, to a lesser extent, consumer, multi-family, commercial business and residential and commercial real estate construction loans. The Bank also invests in U.S. government agency and sponsored enterprises securities, mortgage-backed securities and collateralized mortgage obligations issued by U.S. government agencies and sponsored enterprises, and municipal bonds.

 

The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. Historically, the Bank has been able to retain a significant amount of its deposits as they mature. If these maturing deposits do not remain with the Bank, we will be required to seek other sources of funds, including other certificates of deposit and borrowings.

 

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 and the Captive. The amount of dividends that the Bank may declare and pay to the Company in any calendar year cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. At DecemberMarch 31, 2017,2020, the Company (unconsolidated basis) had liquid assets of $968,000.$5.8 million.

 

Capital Management. The Bank is required to maintain specific amounts of capital pursuant to regulatory requirements. As of DecemberMarch 31, 2017,2020, the Bank was in compliance with all regulatory capital requirements that were effective as of such date, with Tier 1 capital (to average total assets), common equity Tier 1 capital (to risk-weighted assets), Tier 1 capital (to risk-weighted assets) and total capital (to risk-weighted assets) ratios of 8.88%8.91%, 11.14%10.59%, 11.14%10.59% and 12.33%11.67%, respectively. The regulatory requirements at that date were 5.0%, 6.5%, 8.0% and 10.0%, respectively, in order to be categorized as “well capitalized” under applicable regulatory guidelines. At DecemberMarch 31, 2017,2020, the Bank was considered “well-capitalized” under applicable regulatory guidelines.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

Off-Balance Sheet Arrangements

 

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded on the Company's financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are primarily used to manage customers’ requests for funding and take the form of loan commitments and letters of credit. A further presentation of the Company’s off-balance sheet arrangements is presented in the Company’s Annual Report on Form 10-K for the year ended September 30, 2017.2019.

 

For the three monthsix-month period ended DecemberMarch 31, 2017,2020, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.

 

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I – ITEM 3

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

 

Qualitative Aspects of Market Risk. Market risk is the risk that the estimated fair value of our assets, liabilities, and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that our net income will be significantly reduced by interest rate changes.

 

The Company’s principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates by operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity. The Company has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. In order to reduce the exposure to interest rate fluctuations, the Company has developed strategies to manage its liquidity, shorten its effective maturities of certain interest-earning assets and decrease the interest rate sensitivity of its asset base. Management has sought to decrease the average maturity of its assets by emphasizing the origination of short-term residential mortgage, commercial mortgage and commercial business loans, all of which are retained by the Company for its portfolio. The Company relies on retail deposits as its primary source of funds. Management believes the primary use of retail deposits, complimented with a modest allocation of brokered certificates of deposit and FHLB borrowings, reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds.

 

Quantitative Aspects of Market Risk. Potential cash flows, sales, or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates. This interest rate risk arises primarily from our normal business activities of gathering deposits and extending loans. Many factors affect our exposure to changes in interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and re-pricing characteristics of financial instruments. Our earnings can also be affected by the monetary and fiscal policies of the U.S. Government and its agencies, particularly the Federal Reserve Board. Furthermore, the Company does not engage in hedging activities or purchase high-risk derivative instruments and also is not subject to foreign currency exchange rate risk or commodity price risk.

 

An element in our ongoing process is to measure and monitor interest rate risk using a Net Interest Income at Risk simulation to model the interest rate sensitivity of the balance sheet and to quantify the impact of changing interest rates on the Company. The model quantifies the effects of various possible interest rate scenarios on projected net interest income over a one-year horizon. The model assumes a semi-static balance sheet and measures the impact on net interest income relative to a base case scenario of hypothetical changes in interest rates over twelve months and provides no effect given to any steps that management might take to counter the effect of the interest rate movements. The scenarios include prepayment assumptions, changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates in order to capture the impact from re-pricing, yield curve, option, and basis risks.

 

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I – ITEM 3

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

 

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.

  At December 31, 2017  At September 30, 2017 
Immediate Change One Year Horizon  One Year Horizon 
in the Level Dollar  Percent  Dollar  Percent 
of Interest Rates Change  Change  Change  Change 
  (Dollars in thousands) 
300bp $233   0.76% $319   1.04%
200bp  624   2.02   332   1.08 
100bp  309   1.00   155   0.51 
(100)bp  (254)  (0.82)  (463)  (1.51)

  At March 31, 2020  At September 30, 2019 
Immediate Change One Year Horizon  One Year Horizon 
in the Level 

Dollar

  Percent  Dollar  Percent 
of Interest Rates  Change   Change   Change  Change 
   (Dollars in thousands) 
300bp $(1,896)  (4.40)% $(4,945) (12.43)%
200bp  (477)  (1.11)  (2,197) (5.52)
100bp  714  1.66  (993) (2.50)
(100)bp  (1,830)  (4.25)  750  1.89 
(200)bp  (2,900)  (6.74)  (616) (1.55)

 

At DecemberMarch 31, 2017,2020, our simulated exposure to an increase in interest rates shows that an immediate and sustained increase in rates of 1.00% will increase our net interest income by $309,000,$714,000, or 1.00%1.66%, 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 increasedecrease by 2.02%1.11% and 0.76%4.40%, respectively. Conversely, anAn immediate and sustained decrease in rates of 1.00% will decrease our net interest income by $254,000,$1.8 million, or 0.82%4.25%, over a one year horizon compared to a flat interest rate scenario.scenario while a rate decrease of 2.00% would cause our net interest income to decrease by 6.74%. All estimated changes presented in the above table are within the policy guidelines approved by the Company’s Board of Directors.

 

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 4

 

CONTROLS AND PROCEDURES

 

Controls and Procedures

 

The Company’s management, includingEvaluation of Disclosure Controls and Procedures. As of March 31, 2020, (the “Evaluation Date”), the Company’s principal executive officerCompany performed an evaluation, under the supervision of and with the Company’s principal financial officer, have evaluatedparticipation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the Company’s “disclosuredesign and operation of our disclosure controls and procedures,” as such term is defined inunder Rule 13a-15(e) ofand 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on their evaluation, the principal executive officer and the principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosureDisclosure controls and procedures were effective for the purpose of ensuringare controls and procedures designed to ensure that information required to be disclosed by us in reports that the Company filesfiled or submitssubmitted under the Securities Exchange Act with the SEC (1)of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s Rulesrules and Formsforms of the SEC, and (2)that such information is accumulated and communicated to the Company’sour management, including its principal executiveour Chief Executive Officer and principal financial officers,our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on the evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of the Evaluation Date, our disclosure controls and procedures were not effective due to the material weaknesses disclosed in our Annual Report on Form 10-K for the year ended September 30, 2019 filed with the SEC on December 16, 2019 (the “2019 Form 10-K”).

 

DuringChanges in Internal Controls. There have been no changes in our internal controls over financial reporting that occurred during the quarter ended DecemberMarch 31, 2017, there were no changes in the Company's internal control over financial reporting2020, that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting. As disclosed in our 2019 Form 10-K, management implemented additional controls and procedures described therein starting in the fourth quarter of 2019 in order to remediate the material weaknesses identified, and will continue to take steps as necessary that management and the Audit Committee believe will remediate the control deficiencies. Specifically, since the material weaknesses were identified management has updated its procedures to periodically test the estimate of direct loan origination costs and other assumptions used to calculate the fair value of interest rate lock commitments and loans held for sale, changed its methods of accruing and paying incentive compensation for the mortgage banking segment, and undertaken a process to review and update the compensation agreements for employees within the mortgage banking segment. In addition, management has engaged a consulting firm to independently review the assumptions used to value interest rate lock commitments and loans held for sale, as well as review the accounting and monthly closing processes for the mortgage banking segment to identify areas where efficiency can be improved. However, the identified control deficiencies that led to the material weaknesses in internal control over financial reporting will not be considered fully addressed until the new and additional controls, processes and procedures have been in operation for a sufficient period of time to allow the Company’s management to conclude, through testing, that the controls are operating effectively and the material weaknesses have been fully remediated. Management expects the remediation of the material weaknesses will be completed by September 30, 2020.

 

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART II

 

OTHER INFORMATION

 

Item 1.Legal Proceedings

 

The Company is not a party to any legal proceedings. Periodically, there have been various claims and lawsuits involving the Bank, mainly as a plaintiff, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank’s business. The Bank is not a party to any pending legal proceedings that it believes would have a material adverse effect on its financial condition or results of operations.

 

Item 1A.Risk Factors

 

In addition to the risk factor disclosed below and other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 20172019 which could materially affect our business, financial condition or future results. There have been no material changes to the risk factors described in our Annual Report on Form 10-K, however,except as described below. However, these are not the only risks that we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or results of operations.

 

The COVID-19 pandemic has adversely impacted our business and financial results and that of many of our customers, and the ultimate impact will depend on future developments, which are highly uncertain, cannot be predicted and are largely outside of our control, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic has created extensive disruptions to the global and U.S. economies and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal and monetary stimulus, and legislation designed to deliver financial aid and other relief. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and the efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted market interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our Form 10-K could be exacerbated and the effects of COVID-19 could have a material adverse impact on us in a number of ways as described in more detail below.

Credit Risk – Our risks of timely loan repayment and the value of collateral supporting the loans are affected by the strength of our borrowers’ businesses. Concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan payments. Hotel and restaurant operators and others in the leisure, hospitality and travel industries, among other industries, have been particularly harmed by COVID-19. See “Part I – Item 2 – Management’s Discussion and Analysis for Financial Condition and Results of Operations – Covid-19 Pandemic” for information about the Company’s outstanding loans to borrowers in the hotel and restaurant industries. If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover our credit exposure. The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and services, and the financial condition and credit risk of our customers. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation actions, such as foreclosure. In addition, we have unfunded commitments to extend credit to customers. During a challenging economic environment, our customers depend more on our credit commitments and increased borrowings under these commitments could adversely impact our liquidity. Furthermore, in an effort to support our communities during the pandemic, we are participating in the Paycheck Protection Program under the CARES Act whereby loans to small businesses are made and those loans are subject to the regulatory requirements that would require forbearance of loan payments for a specified time or that would limit our ability to pursue all available remedies in the event of a loan default. If the borrower under the PPP loan fails to qualify for loan forgiveness, we are at the heightened risk of holding these loans at unfavorable interest rates as compared to the loans to customers that we would have otherwise extended credit.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART II

OTHER INFORMATION

Strategic Risk – Our success may be affected by a variety of external factors that may affect the price or marketability of our products and services, changes in interest rates that may increase our funding costs, reduced demand for our financial products due to economic conditions and the various response of governmental and nongovernmental authorities. The COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets. Furthermore, many of the governmental actions have been directed toward curtailing household and business activity to contain COVID-19. These actions have been rapidly expanding in scope and intensity. For example, in many of our markets, local governments have acted to temporarily close or restrict the operations of most businesses. The future effects of COVID-19 on economic activity could negatively affect the future banking products we provide, including a decline in originating loans.

Operational Risk – Current and future restrictions on our workforce’s access to our facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations. We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, we have modified our business practices with a portion of our employees working remotely from their homes to have our operations uninterrupted as much as possible. Further, technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk from phishing, malware, and other cybersecurity attacks, all of which could expose us to risks of data or financial loss and could seriously disrupt our operations and the operations of any impacted customers.

Moreover, we rely on many third parties in our business operations, including the appraiser of the real property collateral, vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and local and federal government agencies, offices, and courthouses. In light of the developing measures responding to the pandemic, many of these entities may limit the availability and access of their services. If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.

Interest Rate Risk/Market Value Risk – Our net interest income, lending and investment activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0% to 0.25%, citing concerns about the impact of COVID-19 on financial markets and market stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions could increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in prevailing fair market values of our investment securities and other assets, including mortgage servicing rights and SBA loan servicing rights. Fluctuations in interest rates will impact both the level of income and expense recorded on many of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.

Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of COVID-19’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work-from-home arrangements, third party providers’ ability to support our operations, and any actions taken by governmental authorities and other third parties in response to the pandemic. The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART II

 

OTHER INFORMATION

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table presents information regarding the Company’s stock repurchase activity during the quarter ended DecemberMarch 31, 2017:2020:

 

Period 

(a)
Total number of
shares (or units)
purchased

  

(b)

Average price

paid per share

(or unit)

  

(c)

Total number of shares
(or units) purchased as
part of publicly
announced plans or
programs (1)

  

(d)

Maximum number (or
appropriate dollar value) of
shares (or units) that may yet
be purchased under the plans
or programs

 
October 1, 2017 through October 31, 2017  -  $-   -   67,201 
November 1, 2017 through November 30, 2017  815  $56.56   815   66,386 
December 1, 2017 through December 31, 2017  -  $-   -   66,386 
Total  815  $56.56   815   66,386 

Period 

(a)

Total number of
shares (or units)
purchased

  

(b)

Average price

paid per share

(or unit)

  

(c)

Total number of shares
(or units) purchased as
part of publicly
announced plans or
programs (1)

  

(d)

Maximum number
(or appropriate dollar value)
of shares (or units)
that may yet be
purchased under
the plans or programs

 

Jan 1, 2020 through Jan 31, 2020

  -  $-   -   48,708 

Feb 1, 2020 through Feb 29, 2020

  3,906  $63.68   3,906   44,802 

Mar 1, 2020 through Mar 31, 2020

  -  $-   -   44,802 
Total  3,906  $63.68   3,906   44,802 
                                         

(1) On November 16, 2012, the Company announced that its Board of Directors authorized a stock repurchase program to acquire up to 230,217 shares, or 10.0% of the Company’s outstanding common stock. Under the program, repurchases are to be conducted through open market purchases or privately negotiated transactions, and are to be made from time to time depending on market conditions and other factors. There is no guarantee as to the exact number of shares to be repurchased by the Company. Repurchased shares will beare held in treasury.

 

Item 3.Defaults upon Senior Securities

 

Not applicable.

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART II

 

OTHER INFORMATION

 

Item 5.Other Information

 

None.

 

Item 6.Exhibits

 

31.1Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
   
32.1Section 1350 Certification of Chief Executive Officer
   
32.2Section 1350 Certification of Chief Financial Officer
   
101101The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended DecemberMarch 31, 2017,2020, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statement of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) related notes

 

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SIGNATURES

 

Pursuant to the requirements 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.

 

 FIRST SAVINGS FINANCIAL GROUP, INC.
 (Registrant)
  
DatedFebruary 9, 2018  May 18, 2020       BY:/s/ Larry W. Myers
  Larry W. Myers
  President and Chief Executive Officer
  
DatedFebruary 9, 2018  May 18, 2020       BY:/s/ Anthony A. Schoen
  Anthony A. Schoen
  Chief Financial Officer

 

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