First Savings Financial (FSFG) 10-Q 2021 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2020

OR

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

For the transition period from                                 to                             

Commission File No. 1-34155

First Savings Financial Group, Inc.

(Exact name of registrant as specified in its charter)

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

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

(Address of principal executive offices) (Zip Code)

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

(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 share	FSFG	The 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. Yes ⌧ No ◻

Indicate by check mark whether the registrant has submitted electronically 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 such files). Yes ⌧ No ◻

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.

Large Accelerated Filer ◻	Accelerated Filer ◻
Non-accelerated Filer ⌧	Smaller Reporting Company ⌧
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 ☐ No ☒

The number of shares outstanding of the registrant’s common stock as of February 2, 2021 was 2,374,927.

FIRST SAVINGS FINANCIAL GROUP, INC.

INDEX

		Page
Part I	Financial Information
	Item 1. Financial Statements
	Consolidated Balance Sheets as of December 31, 2020 and September 30, 2020 (unaudited)	3
	Consolidated Statements of Income for the three months ended December 31, 2020 and 2019 (unaudited)	4
	Consolidated Statements of Comprehensive Income (Loss) for the three months ended December 31, 2020 and 2019 (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity for the three months ended December 31, 2020 and 2019 (unaudited)	6
	Consolidated Statements of Cash Flows for the three months ended December 31, 2020 and 2019 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	47
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	55
	Item 4. Controls and Procedures	57
Part II	Other Information
	Item 1. Legal Proceedings	58
	Item 1A. Risk Factors	58
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	58
	Item 3. Defaults Upon Senior Securities	58
	Item 4. Mine Safety Disclosures	58
	Item 5. Other Information	59
	Item 6. Exhibits	59
Signatures		60

-2-

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)	2020		2020
ASSETS
Cash and due from banks	$	16,042	$	12,807
Interest-bearing deposits with banks		19,350		20,919
Total cash and cash equivalents		35,392		33,726
Interest-bearing time deposits		2,723		2,964
Securities available for sale, at fair value		203,593		201,965
Securities held to maturity		2,068		2,102
Loans held for sale, residential mortgage ($267,577 at fair value at December 31, 2020 and $208,493 at fair value at September 30, 2020)		330,178		263,406
Loans held for sale, Small Business Administration		27,064		22,119
Loans, net of allowance for loan losses of $17,124 at December 31, 2020 and $17,026 at September 30, 2020		1,114,708		1,090,063
Federal Reserve Bank and Federal Home Loan Bank stock, at cost		19,310		17,293
Premises and equipment		25,018		24,412
Other real estate owned, held for sale		2,043		1,728
Accrued interest receivable:
Loans		5,139		4,585
Securities		2,284		1,877
Cash surrender value of life insurance		31,944		31,758
Goodwill		9,848		9,848
Core deposit intangibles		1,149		1,202
Residential mortgage loan servicing rights, at fair value		31,510		21,703
SBA loan servicing rights		3,722		3,748
Other assets		25,218		30,126
Total Assets	$	1,872,911	$	1,764,625
LIABILITIES
Deposits:
Noninterest-bearing	$	272,241	$	242,673
Interest-bearing		849,079		805,403
Total deposits		1,121,320		1,048,076
Federal Home Loan Bank borrowings		340,092		310,858
Federal Reserve PPPLF borrowings		172,772		174,834
Other borrowings		19,814		19,797
Accrued interest payable		795		683
Advance payments by borrowers for taxes and insurance		1,600		2,615
Accrued expenses and other liabilities		50,773		50,197
Total Liabilities		1,707,166		1,607,060
EQUITY
Preferred stock of $.01 par value per share; authorized 1,000,000 shares; NaN issued		—		—
Common stock of $.01 par value per share; authorized 20,000,000 shares; issued 2,568,842 shares (2,567,842 at September 30, 2020 ); outstanding 2,374,927 shares (2,375,324 shares at September 30, 2020)		26		26
Additional paid-in capital		25,737		27,480
Retained earnings - substantially restricted		132,680		123,158
Accumulated other comprehensive income		11,889		11,209
Unearned stock compensation		(292)		(348)
Less treasury stock, at cost - 193,915 shares (192,518 shares at September 30, 2020)		(4,295)		(4,253)
Total First Savings Financial Group, Inc. Stockholders' Equity		165,745		157,272
Noncontrolling interests in subsidiary		—		293
Total Equity		165,745		157,565
Total Liabilities and Equity	$	1,872,911	$	1,764,625

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)	2020		2019
INTEREST INCOME
Loans, including fees	$	14,238	$	11,707
Securities:
Taxable		471		585
Tax-exempt		1,191		1,010
Dividend income		108		154
Interest-bearing deposits with banks		18		205
Total interest income		16,026		13,661
INTEREST EXPENSE
Deposits		936		1,749
Federal Home Loan Bank borrowings		861		808
Federal Reserve PPPLF borrowings		153		—
Other borrowings		337		318
Total interest expense		2,287		2,875
Net interest income		13,739		10,786
Provision for loan losses		668		505
Net interest income after provision for loan losses		13,071		10,281
NONINTEREST INCOME
Service charges on deposit accounts		396		509
ATM and interchange fees		632		503
Net unrealized gain on equity securities		11		2
Net gain on sales of loans, Small Business Administration		1,267		761
Mortgage banking income		42,300		15,923
Increase in cash surrender value of life insurance		186		162
Commission income		134		27
Real estate lease income		147		151
Net loss on premises and equipment		—		(4)
Other income		1,110		198
Total noninterest income		46,183		18,232
NONINTEREST EXPENSE
Compensation and benefits		33,862		17,820
Occupancy and equipment		2,585		1,922
Data processing		789		502
Advertising		2,311		1,466
Professional fees		1,274		627
FDIC insurance premiums		140		4
Net loss on other real estate owned		3		5
Other operating expenses		3,438		1,926
Total noninterest expense		44,402		24,272
Income before income taxes		14,852		4,241
Income tax expense		4,527		638
Net Income		10,325		3,603
Less: net income attributable to noncontrolling interests		402		164
Net Income Attributable to First Savings Financial Group, Inc.	$	9,923	$	3,439
Net income per share:
Basic	$	4.19	$	1.47
Diluted	$	4.16	$	1.44
��
Weighted average shares outstanding:
Basic		2,367,061		2,340,619
Diluted		2,384,702		2,382,754
Dividends per share	$	0.17	$	0.16

See notes to consolidated financial statements.

-4-

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended
	December 31,
(In thousands)	2020		2019
Net Income	$	10,325	$	3,603
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period		861		(747)
Income tax (expense) benefit		(181)		163
Net of tax amount		680		(584)
Other Comprehensive Income (Loss)		680		(584)
Comprehensive Income		11,005		3,019
Less: comprehensive income attributable to noncontrolling interests		402		164
Comprehensive Income Attributable to First Savings Financial Group, Inc.	$	10,603	$	2,855

See notes to consolidated financial statements.

-5-

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

							Accumulated
							Other		Unearned				Noncontrolling
	Common		Additional		Retained		Comprehensive		Stock		Treasury		Interests in
(In thousands, except share and per share data)	Stock		Paid-in Capital		Earnings		Income		Compensation		Stock		Subsidiary		Total
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		—		—		3,439		—		—		—		164		3,603
Other comprehensive loss		—		—		—		(584)		—		—		—		(584)
Common stock dividends - $0.16 per share		—		—		(378)		—		—		—		—		(378)
Restricted stock grants - 1,436 shares		—		95		—		—		(95)		—		—		—
					��
Stock compensation expense		—		21		—		—		46		—		—		67
Stock option exercises - 6,000 shares		—		(28)		—		—		—		128		—		100
Purchase of 796 treasury shares		—		—		—		—		—		(53)		—		(53)
Balances at December 31, 2019	$	26	$	27,582	$	94,455	$	6,712	$	(495)	$	(4,470)	$	368	$	124,178
Balances at October 1, 2020	$	26	$	27,480	$	123,158	$	11,209	$	(348)	$	(4,253)	$	293	$	157,565
Net income		—		—		9,923		—		—		—		402		10,325
Acquisition of minority interests in Q2		—		(1,757)		—		—		—		—		(695)		(2,452)
Other comprehensive income		—		—		—		680		—		—		—		680
Common stock dividends - $0.17 per share		—		—		(401)		—		—		—		—		(401)
Restricted stock forfeitures - 200 shares		—		(8)		—		—		8		—		—		—
Stock compensation expense		—		22		—		—		48		—		—		70
Stock option exercises - 1,200 shares		—		—		—		—		—		—		—		—
Purchase of 1,397 treasury shares		—		—		—		—		—		(42)		—		(42)
Balances at December 31, 2020	$	26	$	25,737	$	132,680	$	11,889	$	(292)	$	(4,295)	$	—	$	165,745

See notes to consolidated financial statements.

-6-

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended
	December 31,
(In thousands)	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	10,325	$	3,603
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses		668		505
Depreciation and amortization		548		409
Amortization of premiums and accretion of discounts on securities, net		168		116
Amortization and accretion of fair value adjustments on loans, net		(423)		(211)
Loans originated for sale		(1,449,271)		(554,450)
Proceeds on sales of loans		1,412,419		550,122
Net realized and unrealized gain on loans held for sale		(34,482)		(12,385)
Capitalization of loan servicing rights		(13,199)		(2,498)
Net change in value of loan servicing rights		3,418		204
Net realized and unrealized gain on other real estate owned		(6)		—
Increase in cash surrender value of life insurance		(186)		(162)
Net gain on equity securities		(11)		(2)
Net loss on sale of premises and equipment		—		4
Deferred income taxes		2,170		271
Stock compensation expense		70		68
Increase in accrued interest receivable		(961)		(533)
Increase (decrease) in accrued interest payable		112		(163)
Change in other assets and liabilities, net		2,475		4,397
Net Cash Used In Operating Activities		(66,166)		(10,705)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in interest-bearing time deposits		(252)		(490)
Proceeds from sales and maturities of interest-bearing time deposits		490		245
Purchase of securities available for sale		(5,285)		(4,556)
Proceeds from maturities of securities available for sale		3,370		1,205
Proceeds from maturities of securities held to maturity		30		30
Principal collected on securities		983		2,101
Net increase in loans		(25,678)		(41,629)
Purchase of Federal Home Loan Bank stock		(2,017)		(1,109)
Investment in cash surrender value of life insurance		—		(4,481)
Proceeds from sale of other real estate owned		61		—
Purchase of premises and equipment		(1,096)		(4,102)
Proceeds from sales of premises and equipment		12		118
Acquisition of minority interests in Q2		(1,745)		—
Net Cash Used In Investing Activities		(31,127)		(52,668)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		73,244		51,214
Net decrease in federal funds purchased		0		(4,000)
Decrease in Federal Home Loan Bank line of credit		(766)		(2,978)
Proceeds from Federal Home Loan Bank advances		280,000		120,000
Repayment of Federal Home Loan Bank advances		(250,000)		(100,000)
Net decrease in Federal Reserve PPPLF borrowings		(2,062)		—
Net decrease in advance payments by borrowers for taxes and insurance		(1,015)		(637)
Proceeds from exercise of stock options		—		100
Taxes paid on stock award shares for employees		(41)		(53)
Dividends paid on common stock		(401)		(378)
Net Cash Provided By Financing Activities		98,959		63,268
Net Increase (Decrease) in Cash and Cash Equivalents		1,666		(105)
Cash and cash equivalents at beginning of period		33,726		41,432
Cash and Cash Equivalents at End of Period	$	35,392	$	41,327

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 16 locations in southern Indiana. The Bank attracts deposits primarily from the general public and uses those funds, along with other borrowings, primarily to originate 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 originally owned 51% of Q2’s membership interests.  On December 31, 2020, the Bank completed the acquisition of the minority interests in Q2, and Q2 became a wholly-owned subsidiary of the Bank.  As part of the acquisition of the minority interests, the Bank paid total consideration of $3.0 million. The acquisition was accounted for as an equity transaction, and resulted in the reclassification of the noncontrolling interests of $695,000, the recognition of net deferred tax assets of $590,000 and a reduction of additional paid-in capital of $1.8 million.  

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments considered necessary to present fairly the financial position as of December 31, 2020, the results of operations for the three-month periods ended December 31, 2020 and 2019, and the cash flows for the three-month periods ended December 31, 2020 and 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, 2020 included in the Company’s Annual Report on Form 10-K.

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

U.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; 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 pass-through asset-backed securities guaranteed by the SBA representing participating interests in pools of long term debentures issued by state and local development companies certified by the SBA. Privately issued CMO and asset-backed securities (“ABS”) are complex securities issued by non-government special purpose entities that are collateralized by residential mortgage loans and residential home equity loans.

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

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:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gain		Losses		Value
	(In thousands)
December 31, 2020:
Securities available for sale:
U.S. agency bonds and notes	$	500	$	—	$	—	$	500
Agency mortgage-backed		6,864		441		—		7,305
Agency CMO		9,215		389		—		9,604
Privately-issued CMO		806		84		7		883
Privately-issued ABS		838		73		3		908
SBA certificates		616		56		2		670
Municipal bonds		169,704		14,097		78		183,723
Total securities available for sale	$	188,543	$	15,140	$	90	$	203,593
Securities held to maturity:
Agency mortgage-backed	$	79	$	6	$	—	$	85
Municipal bonds		1,989		262		—		2,251
Total securities held to maturity	$	2,068	$	268	$	—	$	2,336

-9-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gain		Losses		Value
	(In thousands)
September 30, 2020:
Securities available for sale:
Agency mortgage-backed	$	7,499	$	453	$	0	$	7,952
Agency CMO		9,398		407		0		9,805
Privately-issued CMO		886		80		8		958
Privately-issued ABS		884		81		5		960
SBA certificates		639		58		3		694
Municipal bonds		168,472		13,180		56		181,596
Total securities available for sale	$	187,778	$	14,259	$	72	$	201,965
Securities held to maturity:
Agency mortgage-backed	$	82	$	7	$	0	$	89
Municipal bonds		2,020		276		0		2,296
Total securities held to maturity	$	2,102	$	283	$	0	$	2,385

The amortized cost and fair value of investment securities as of December 31, 2020 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
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In thousands)
Due within one year	$	8,419	$	8,514	$	247	$	275
Due after one year through five years		30,377		31,601		1,023		1,151
Due after five years through ten years		28,901		31,121		648		743
Due after ten years		102,507		112,987		71		82
CMO		10,021		10,487		—		—
ABS		838		908		—		—
SBA certificates		616		670		—		—
Mortgage-backed securities		6,864		7,305		79		85
	$	188,543	$	203,593	$	2,068	$	2,336

-10-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Information pertaining to investment securities with gross unrealized losses at December 31, 2020 and September 30, 2020, aggregated by investment category and the length of time that individual securities have been in a continuous loss position, follows:

	Number of			Gross
	Investment	Fair		Unrealized
	Positions	Value		Losses
	(Dollars in thousands)
December 31, 2020:
Securities available for sale:
Continuous loss position less than twelve months:
Municipal bonds	3	$	2,232	$	78
Total less than twelve months	3		2,232		78
Continuous loss position more than twelve months:
Privately-issued CMO	1		23		7
Privately-issued ABS	1		420		3
SBA certificates	1		169		2
Total more than twelve months	3		612		12
Total securities available for sale	6	$	2,844	$	90
September 30, 2020:
Securities available for sale:
Continuous loss position less than twelve months:
Privately-issued ABS	1	$	446	$	5
Municipal bonds	2		2,444		56
Total less than twelve months	3		2,890		61
Continuous loss position more than twelve months:
Privately-issued CMO	1		26		8
SBA certificates	1		188		3
Total more than twelve months	2		214		11
Total securities available for sale	5	$	3,104	$	72

At December 31, 2020 and September 30, 2020, the Company did not have any securities held to maturity with an unrealized loss.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market 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 December 31, 2020, which consisted of privately issued CMOs, privately issued ABS, municipal bonds and SBA certificates, had a fair value as a percentage of amortized cost of 96.93%. The

-11-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

municipal securities are issued by municipal governments, and are generally secured by municipal project revenues or general obligations of the municipality.

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 December 31, 2020, the Company held twelve privately-issued CMO and ABS securities, acquired in a 2009 bank merger, with an aggregate amortized cost of $868,000 and fair value of $931,000 that have been downgraded to a substandard regulatory classification due to the security’s credit quality rating by various rating agencies.

At December 31, 2020, 1 privately-issued CMO security and one privately-issued ABS were in a loss position, and had depreciated approximately 2.21% from the Company’s carrying value and were collateralized by residential mortgage loans. These securities had a total fair value of $443,000 and a total unrealized loss of $10,000 at December 31, 2020. Based on the independent third party analysis of the expected cash flows, management determined that no other-than-temporary impairment was required to be recognized on the privately issued CMO and ABS portfolios at December 31, 2020. While the Company does not anticipate additional credit-related impairment losses at December 31, 2020, additional deterioration in market and economic conditions may have an adverse impact on the credit quality of the portfolio, and therefore, require a credit related impairment charge in the future.

The unrealized losses on 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, 2020 and 2019, 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 to secure FHLB borrowings at December 31, 2020 and September 30, 2020, and may be pledged to secure federal funds borrowings.

-12-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

3. Loans and Allowance for Loan Losses

Loans at December 31, 2020 and September 30, 2020 consisted of the following:

	December 31,		September 30,
	2020		2020
		(In thousands)
Real estate mortgage:
1-4 family residential	$	193,239	$	191,781
Commercial		139,218		141,522
Single tenant net lease		359,227		334,636
SBA		55,953		55,508
Multifamily residential		39,161		42,368
Residential construction		5,838		9,361
Commercial construction		8,148		6,941
Land and land development		11,541		9,403
Commercial business		61,679		60,513
SBA commercial business (1)		204,693		206,807
Consumer		55,141		50,576
Total loans		1,133,838		1,109,416
Deferred loan origination fees and costs, net (2)		(2,006)		(2,327)
Allowance for loan losses		(17,124)		(17,026)
Loans, net	$	1,114,708	$	1,090,063

(1) Includes $178.5 million and $180.6 million of loans originated under the SBA’s Paycheck Protection Program ("PPP") at December 31, 2020 and September 30, 2020, respectively.

(2) Includes $2.7 million and $3.2 million of net deferred loan fees related to PPP loans as of December 31, 2020 and September 30, 2020, respectively.

During the three-month period ended December 31, 2020, there were no significant changes 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, 2020.

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

-13-

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 December 31, 2020:

	Principal		Accrued		Net Deferred		Recorded
	Loan		Interest		Loan Origination		Investment
	Balance		Receivable		Fees and Costs		in Loans
	(In thousands)
Recorded Investment in Loans:
Residential real estate	$	193,239	$	633	$	(228)	$	193,644
Commercial real estate		139,218		858		(194)		139,882
Single tenant net lease		359,227		1,194		(198)		360,223
SBA commercial real estate		55,953		461		982		57,396
Multifamily		39,161		117		(35)		39,243
Residential construction		5,838		9		(26)		5,821
Commercial construction		8,148		28		(35)		8,141
Land and land development		11,541		27		(13)		11,555
Commercial business		61,679		193		34		61,906
SBA commercial business		204,693		1,475		(2,272)		203,896
Consumer		55,141		144		(21)		55,264
	$	1,133,838	$	5,139	$	(2,006)	$	1,136,971

	Individually		Collectively		Recorded
	Evaluated for		Evaluated for		Investment in
	Impairment		Impairment		Loans
	(In thousands)
Recorded Investment in Loans as Evaluated for Impairment:
Residential real estate	$	4,356	$	189,288	$	193,644
Commercial real estate		1,111		138,771		139,882
Single tenant net lease		—		360,223		360,223
SBA commercial real estate		5,423		51,973		57,396
Multifamily		678		38,565		39,243
Residential construction		—		5,821		5,821
Commercial construction		—		8,141		8,141
Land and land development		3		11,552		11,555
Commercial business		1,625		60,281		61,906
SBA commercial business		704		203,192		203,896
Consumer		457		54,807		55,264
	$	14,357	$	1,122,614	$	1,136,971

-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 September 30, 2020:

	Principal		Accrued		Net Deferred		Recorded
	Loan		Interest		Loan Origination		Investment
	Balance		Receivable		Fees and Costs		in Loans
	(In thousands)
Recorded Investment in Loans:
Residential real estate	$	191,781	$	644	$	(156)	$	192,269
Commercial real estate		141,522		812		(197)		142,137
Single tenant net lease		334,636		1,198		(234)		335,600
SBA commercial real estate		55,508		387		1,082		56,977
Multifamily		42,368		139		(37)		42,470
Residential construction		9,361		25		(28)		9,358
Commercial construction		6,941		24		(26)		6,939
Land and land development		9,403		20		(11)		9,412
Commercial business		60,513		186		43		60,742
SBA commercial business		206,807		975		(2,740)		205,042
Consumer		50,576		175		(23)		50,728
	$	1,109,416	$	4,585	$	(2,327)	$	1,111,674

	Individually		Collectively		Recorded
	Evaluated for		Evaluated for		Investment in
	Impairment		Impairment		Loans
	(In thousands)
Recorded Investment in Loans as Evaluated for Impairment:
Residential real estate	$	5,359	$	186,910	$	192,269
Commercial real estate		1,134		141,003		142,137
Single tenant net lease		—		335,600		335,600
SBA commercial real estate		6,927		50,050		56,977
Multifamily		698		41,772		42,470
Residential construction		—		9,358		9,358
Commercial construction		—		6,939		6,939
Land and land development		2		9,410		9,412
Commercial business		1,670		59,072		60,742
SBA commercial business		695		204,347		205,042
Consumer		199		50,529		50,728
	$	16,684	$	1,094,990	$	1,111,674

-15-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The following table presents the balance in the allowance for loan losses by portfolio segment and based on impairment method as of December 31, 2020 and September 30, 2020:

	Individually		Collectively
	Evaluated for		Evaluated for		Ending
	Impairment		Impairment		Balance
	(In thousands)
December 31, 2020:
Residential real estate	$	—	$	1,176	$	1,176
Commercial real estate		—		3,007		3,007
Single tenant net lease		—		3,233		3,233
SBA commercial real estate		367		3,257		3,624
Multifamily		—		713		713
Residential construction		—		149		149
Commercial construction		—		212		212
Land and land development		—		300		300
Commercial business		—		1,487		1,487
SBA commercial business		4		1,532		1,536
Consumer		—		1,687		1,687
	$	371	$	16,753	$	17,124
September 30, 2020:
Residential real estate	$	30	$	1,225	$	1,255
Commercial real estate		—		3,058		3,058
Single tenant net lease		—		3,017		3,017
SBA commercial real estate		1,366		2,788		4,154
Multifamily		—		772		772
Residential construction		—		243		243
Commercial construction		—		181		181
Land and land development		—		243		243
Commercial business		—		1,449		1,449
SBA commercial business		47		1,492		1,539
Consumer		—		1,115		1,115
	$	1,443	$	15,583	$	17,026

-16-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended December 31, 2020 and 2019:

	Beginning								Ending
	Balance		Provisions		Charge-Offs		Recoveries		Balance
	(In thousands)
December 31, 2020:
Residential real estate	$	1,255	$	(79)	$	(5)	$	5	$	1,176
Commercial real estate		3,058		(51)		—		—		3,007
Single tenant net lease		3,017		216		—		—		3,233
SBA commercial real estate		4,154		(15)		(522)		7		3,624
Multifamily		772		(59)		—		—		713
Residential construction		243		(94)		—		—		149
Commercial construction		181		31		—		—		212
Land and land development		243		56		—		1		300
Commercial business		1,449		28		—		10		1,487
SBA commercial business		1,539		(12)		—		9		1,536
Consumer		1,115		647		(75)		—		1,687
	$	17,026	$	668	$	(602)	$	32	$	17,124
December 31, 2019:
Residential real estate	$	317	$	24	$	(32)	$	9	$	318
Commercial real estate		2,540		55		—		—		2,595
Single tenant net lease		1,675		272		—		—		1,947
SBA commercial real estate		2,293		(49)		(8)		46		2,282
Multifamily		478		3		—		—		481
Residential construction		248		(20)		—		—		228
Commercial construction		67		(10)		—		—		57
Land and land development		209		(7)		—		—		202
Commercial business		889		73		—		5		967
SBA commercial business		750		36		—		—		786
Consumer		574		128		(64)		29		667
	$	10,040	$	505	$	(104)	$	89	$	10,530

-17-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The following table presents impaired loans individually evaluated for impairment as of December 31, 2020 and for the three months ended December 31, 2020 and 2019. The Company did not recognize any interest income on impaired loans using the cash receipts method during the three-month periods ended December 31, 2020 and 2019.

							Three Months Ended
	At December 31, 2020						December 31,
							2020		2020		2019		2019
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
	(In thousands)
Loans with no related allowance recorded:
Residential real estate	$	4,356	$	4,891	$	0	$	5,294	$	27	$	4,884	$	27
Commercial real estate		1,111		1,168		0		1,176		6		5,311		62
Single tenant net lease		0		0		0		0		0		0		0
SBA commercial real estate		4,045		4,742		0		2,960		0		494		0
Multifamily		678		694		0		697		0		0		0
Residential construction		0		0		0		0		0		0		0
Commercial construction		0		0		0		0		0		0		0
Land and land development		3		1		0		1		0		0		0
Commercial business		1,625		1,665		0		1,670		0		99		1
SBA commercial business		322		416		0		416		0		0		0
Consumer		125		139		0		101		1		82		2
	$	12,265	$	13,716	$	0	$	12,315	$	34	$	10,870	$	92
Loans with an allowance recorded:
Residential real estate	$	0	$	0	$	0	$	65	$	0	$	59	$	0
Commercial real estate		0		0		0		0		0		50		0
Single tenant net lease		0		0		0		0		0		0		0
SBA commercial real estate		1,378		1,549		367		3,788		0		2,355		0
Multifamily		0		0		0		0		0		0		0
Residential construction		0		0		0		0		0		0		0
Commercial construction		0		0		0		0		0		0		0
Land and land development		0		0		0		0		0		0		0
Commercial business		0		0		0		0		0		0		0
SBA commercial business		382		399		4		433		0		0		0
Consumer		332		332		0		235		0		181		0
	$	2,092	$	2,280	$	371	$	4,521	$	0	$	2,645	$	0
Total:
Residential real estate	$	4,356	$	4,891	$	0	$	5,359	$	27	$	4,943	$	27
Commercial real estate		1,111		1,168		0		1,176		6		5,361		62
Single tenant net lease		0		0		0		0		0		0		0
SBA commercial real estate		5,423		6,291		367		6,748		0		2,849		0
Multifamily		678		694		0		697		0		0		0
Residential construction		0		0		0		0		0		0		0
Commercial construction		0		0		0		0		0		0		0
Land and land development		3		1		0		1		0		0		0
Commercial business		1,625		1,665		0		1,670		0		99		1
SBA commercial business		704		815		4		849		0		0		0
Consumer		457		471		0		336		1		263		2
	$	14,357	$	15,996	$	371	$	16,836	$	34	$	13,515	$	92

-18-

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, 2020.

			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
	(In thousands)
Loans with no related allowance recorded:
Residential real estate	$	5,185	$	5,697	$	0
Commercial real estate		1,134		1,185		0
Single tenant net lease		0		0		0
SBA commercial real estate		1,245		1,178		0
Multifamily		698		700		0
Residential construction		0		0		0
Commercial construction		0		0		0
Land and land development		2		1		0
Commercial business		1,670		1,675		0
SBA commercial business		322		416		0
Consumer		61		63		0
	$	10,317	$	10,915	$	0
Loans with an allowance recorded:
Residential real estate	$	174	$	175	$	30
Commercial real estate		0		0		0
Single tenant net lease		0		0		0
SBA commercial real estate		5,682		6,086		1,366
Multifamily		0		0		0
Residential construction		0		0		0
Commercial construction		0		0		0
Land and land development		0		0		0
Commercial business		0		0		0
SBA commercial business		373		399		47
Consumer		138		138		0
	$	6,367	$	6,798	$	1,443
Total:
Residential real estate	$	5,359	$	5,872	$	30
Commercial real estate		1,134		1,185		0
Single tenant net lease		0		0		0
SBA commercial real estate		6,927		7,264		1,366
Multifamily		698		700		0
Residential construction		0		0		0
Commercial construction		0		0		0
Land and land development		2		1		0
Commercial business		1,670		1,675		0
SBA commercial business		695		815		47
Consumer		199		201		0
	$	16,684	$	17,713	$	1,443

-19-

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 December 31, 2020 and September 30, 2020:

	At December 31, 2020						At September 30, 2020
			Loans 90+						Loans 90+
			Days		Total				Days		Total
	Nonaccrual		Past Due		Nonperforming		Nonaccrual		Past Due		Nonperforming
	Loans		Still Accruing		Loans		Loans		Still Accruing		Loans
	(In thousands)
Residential real estate	$	2,907	$	0	$	2,907	$	2,797	$	—	$	2,797
Commercial real estate		665		0		665		685		—		685
Single tenant net lease		0		0		—		—		—		0
SBA commercial real estate		5,423		0		5,423		6,927		—		6,927
Multifamily		678		0		678		698		—		698
Residential construction		0		0		—		—		—		0
Commercial construction		0		0		—		—		—		0
Land and land development		3		0		3		2		—		2
Commercial business		1,624		0		1,624		1,668		—		1,668
SBA commercial business		704		0		704		695		—		695
Consumer		403		0		403		143		—		143
		���
Total	$	12,407	$	0	$	12,407	$	13,615	$	—	$	13,615

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

	30-59 Days		60-89 Days		90+ Days		Total				Total
	Past Due		Past Due		Past Due		Past Due		Current		Loans
	(In thousands)
Residential real estate	$	1,376	$	236	$	1,687	$	3,299	$	190,345	$	193,644
Commercial real estate		13		0		665		678		139,204		139,882
Single tenant net lease		0		0		—		—		360,223		360,223
SBA commercial real estate		375		461		4,418		5,254		52,142		57,396
Multifamily		0		0		—		—		39,243		39,243
Residential construction		0		0		—		—		5,821		5,821
Commercial construction		0		0		—		—		8,141		8,141
Land and land development		0		0		3		3		11,552		11,555
Commercial business		22		6		—		28		61,878		61,906
SBA commercial business		0		0		704		704		203,192		203,896
Consumer		223		22		71		316		54,948		55,264
Total	$	2,009	$	725	$	7,548	$	10,282	$	1,126,689	$	1,136,971

-20-

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 September 30, 2020:

	30-59		60-89		90+
	Days		Days		Days		Total				Total
	Past Due		Past Due		Past Due		Past Due		Current		Loans
	(In thousands)
Residential real estate	$	1,693	$	480	$	1,631	$	3,804	$	188,465	$	192,269
Commercial real estate		109		0		685		794		141,343		142,137
Single tenant net lease		0		0		-		-		335,600		335,600
SBA commercial real estate		0		0		1,874		1,874		55,103		56,977
Multifamily		0		0		-		-		42,470		42,470
Residential construction		0		0		-		-		9,358		9,358
Commercial construction		0		0		-		-		6,939		6,939
Land and land development		0		0		2		2		9,410		9,412
Commercial business		63		0		-		63		60,679		60,742
SBA commercial business		373		0		322		695		204,347		205,042
Consumer		233		59		4		296		50,432		50,728
Total	$	2,471	$	539	$	4,518	$	7,528	$	1,104,146	$	1,111,674

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.

-21-

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. The following table presents the recorded investment in loans by risk category as of December 31, 2020:

			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
	(In thousands)
December 31, 2020:
Residential real estate	$	190,311	$	—	$	3,146	$	187	$	—	$	193,644
Commercial real estate		131,728		4,110		4,044		—		—		139,882
Single tenant net lease		360,223		—		—		—		—		360,223
SBA commercial real estate		39,989		5,448		8,540		3,403		16		57,396
Multifamily		38,565		—		678		—		—		39,243
Residential construction		5,821		—		—		—		—		5,821
Commercial construction		8,141		—		—		—		—		8,141
Land and land development		11,552		—		3		—		—		11,555
Commercial business		59,932		150		1,824		—		—		61,906
SBA commercial business		199,488		255		4,153		—		—		203,896
Consumer		55,193		—		71		—		—		55,264
Total	$	1,100,943	$	9,963	$	22,459	$	3,590	$	16	$	1,136,971

The following table presents the recorded investment in loans by risk category as of September 30, 2020:

			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
	(In thousands)
September 30, 2020:
Residential real estate	$	188,707	$	—	$	3,435	$	127	$	—	$	192,269
Commercial real estate		133,685		4,112		4,340		—		—		142,137
Single tenant net lease		335,600		—		—		—		—		335,600
SBA commercial real estate		38,124		6,518		12,335		—		—		56,977
Multifamily		41,772		—		698		—		—		42,470
Residential construction		9,358		—		—		—		—		9,358
Commercial construction		6,939		—		—		—		—		6,939
Land and land development		9,410		—		2		—		—		9,412
Commercial business		58,707		235		1,800		—		—		60,742
SBA commercial business		200,578		294		4,170		—		—		205,042
Consumer		50,701		—		27		—		—		50,728
Total	$	1,073,581	$	11,159	$	26,807	$	127	$	—	$	1,111,674

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.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

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 December 31, 2020 and September 30, 2020. There was no specific reserve included in the allowance for loan losses related to TDRs at December 31, 2020. There was $538,000 of specific reserve included in the allowance for loan losses related to TDRs at September 30, 2020.

	Accruing		Nonaccrual		Total
	(In thousands)
December 31,  2020:
Residential real estate	$	1,449	$	114	$	1,563
Commercial real estate		446		504		950
SBA commercial real estate		—		3,295		3,295
Multifamily		—		678		678
Commercial business		1		1,624		1,625
Consumer		54		—		54
Total	$	1,950	$	6,215	$	8,165
September 30,  2020:
Residential real estate	$	2,562	$	116	$	2,678
Commercial real estate		449		512		961
SBA commercial real estate		—		3,800		3,800
Multifamily		—		698		698
Commercial business		2		1,668		1,670
Consumer		56		—		56
Total	$	3,069	$	6,794	$	9,863

There were 0 TDRs that were restructured during the three-month periods ended December 31, 2020 and 2019.

At December 30, 2020 and September 30, 2020, the Company had committed to lend $1,000 to customers with outstanding loans classified as TDRs.

There were principal charge-offs totaling $398,000 recorded as a result of TDRs during the three-month period ended December 31, 2020. There were 0 principal charge-offs recorded as a result of TDRs during the three-month period ended December 31, 2019. There were 0 provisions for loan losses related to TDRs for the three-month periods ended December 31, 2020 or 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-month periods ended December 31, 2020 and 2019, the Company did not have any TDRs that were 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

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

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. The Consolidated Appropriations Act of 2021, signed into law on December 27, 2020, further extended the relief from TDR accounting for qualified modifications to the earlier of January 1, 2022 or 60 days after the national emergency concerning COVID-19 terminates As of December 31, 2020, the Company had approved payment extensions or loan forbearance agreements using this guidance on approximately $95.4 million of balances in the loan portfolio, of which $76.9 million related to commercial real estate and commercial business loans, $6.9 million related to residential real estate and consumer loans, and $11.6 million related to SBA lending relationships. These payment extensions or loan forbearance agreements are generally for periods of three months or less, but may be extended if the borrower continues to be impacted by the COVID-19 pandemic.  At December 31, 2020, loans totaling $27.3 million remained under the Company’s payment extension program or a loan forbearance agreement, of which $14.6 million related to commercial real estate and commercial business loans, $1.1 million related to residential real estate and consumer loans, and $11.6 million related to SBA loan relationships.

SBA Loan Servicing Rights

The Company originates loans to commercial customers under the SBA 7(a) program and other programs, 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 $208.9 million, $209.1 million and $169.1 million at December 31, 2020, September 30, 2020 and December 31, 2019, respectively. Contractually specified late fees and ancillary fees earned on SBA loans were $25,000 and $16,000 for the three-month periods ended December 31, 2020 and 2019, respectively. Net servicing income (contractually specified servicing fees offset by direct servicing expenses) related to SBA loans was $468,000 and $412,000 for the three-month periods ended December 31, 2020 and 2019, respectively.  Net servicing income and costs are included in other noninterest income in the consolidated statements of income.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

An analysis of SBA loan servicing rights for the three-month periods ended December 31, 2020 and 2019 is as follows:

	2020		2019
	(In thousands)
Balance, beginning of period	$	3,748	$	3,030
Servicing rights capitalized		327		221
Amortization		(202)		(216)
Direct write-offs		(183)		0
Change in valuation allowance		32		(30)
Balance, end of period	$	3,722	$	3,005

There was 0 valuation allowance related to SBA loan servicing rights at December 31, 2020. The valuation allowance related to SBA loan servicing rights at September 30, 2020 was $32,000.

Mortgage Servicing Rights (“MSRs”)

The Company originates residential mortgage loans for sale in the secondary market and 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 are determined using the present value of estimated expected net servicing income using assumptions about expected mortgage loan prepayment rates, discount rate, servicing costs, and other economic factors, which are determined based on current market conditions.  Changes in these underlying assumptions could cause the fair value of MSRs to change significantly in the future.  Changes in fair value of MSRs are recorded in mortgage banking income in the accompanying consolidated statements of income.  MSRs are subject to changes in value from, among other things, changes in interest rates, prepayments of the underlying loans and changes in the credit quality of the underlying 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 December 31, 2020 and September 30, 2020 were as follows:

	Range of Assumption	Range of Assumption
	(Weighted Average)	(Weighted Average)
Assumption	December 31, 2020	September 30, 2020
Discount rate	9.00%	9.25%
Prepayment rate	2.44% to 84.21% (14.22%)	2.99% to 86.98% (18.08%)

The unpaid principal balance of residential mortgage loans serviced for others was $3.25 billion and $2.26 billion at December 31, 2020 and September 30, 2020, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing and other liabilities were $20.4 million and $19.3 million at December 31, 2020 and September 30, 2020, 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 $929,000 and $19,000 for the three-month periods ended December 31, 2020 and September 30, 2020, respectively, and are included in other noninterest income in the consolidated statements of income.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Changes in the carrying value of MSRs accounted for at fair value for the three-month periods December 31, 2020 and 2019 were as follows:

	2020		2019
	(In thousands)
Fair value as of beginning of period	$	21,703	$	934
Servicing rights capitalized		12,872		2,277
Changes in fair value related to:
Loan repayments		(1,816)		(39)
Changes in valuation model inputs or assumptions		(1,249)		82
Fair value as of end of period	$	31,510	$	3,254

4. Deposits

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

	December 31,		September 30,
	2020		2020
	(In thousands)
Noninterest-bearing demand deposits	$	272,241	$	242,673
NOW accounts		242,749		218,581
Money market accounts		154,299		143,867
Savings accounts		148,467		142,609
Retail time deposits		156,074		168,276
Brokered and reciprocal time deposits		147,490		132,070
Total	$	1,121,320	$	1,048,076

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

5. Supplemental Disclosure for Net Income Per Share

Net income per share information is presented below for the three-month periods ended December 31, 2020 and 2019.

(In thousands, except share and per share data)	Three Months Ended
	December 31,
	2020		2019
Basic:
Earnings:
Net income attributable to First Savings Financial Group, Inc. available to common shareholders	$	9,923	$	3,439
Shares:
Weighted average common shares outstanding, basic		2,367,061		2,340,619
Net income per common share, basic	$	4.19	$	1.47
Diluted:
Earnings:
Net income attributable to First Savings Financial Group, Inc. available to common shareholders	$	9,923	$	3,439
Shares:
Weighted average common shares outstanding, basic		2,367,061		2,340,619
Add: Dilutive effect of outstanding options		14,147		37,008
Add: Dilutive effect of restricted stock		3,494		5,127
Weighted average common shares outstanding, as adjusted		2,384,702		2,382,754
Net income per common share, diluted	$	4.16	$	1.44

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

Stock options for 26,713 and 16,758 shares of common stock were excluded from the calculation of diluted net income per common share for the three-month periods ended December 31, 2020 and 2019, respectively, because their effect was antidilutive. There were 0 antidilutive restricted stock awards excluded from the calculation of diluted net income per share for the three-month periods ended December 31,2020 and 2019.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

6. Supplemental Disclosures of Cash Flow Information

	Three Months Ended
	December 31,
	2020		2019
	(In thousands)
Cash payments for:
Interest	$	2,180	$	3,044
Income taxes (net of refunds received)		—		—
Noncash investing and financing activities:
Transfers from loans to other real estate owned		370		—
Noncash exercise of stock options		48		—
Promissory note issued in acqusition of minority interests in Q2		1,296		—

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

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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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(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 December 31, 2020 and September 30, 2020.

	Carrying Value
	Level 1		Level 2		Level 3		Total
	(In thousands)
December 31,  2020:
Assets Measured – Recurring Basis:
Securities available for sale:
U.S. agency bonds and notes	$	—	$	500	$	—	$	500
Agency mortgage-backed		—		7,305		—		7,305
Agency CMO		—		9,604		—		9,604
Privately-issued CMO		—		883		—		883
Privately-issued ABS		—		908		—		908
SBA certificates		—		670		—		670
Municipal		—		183,723		—		183,723
Total securities available for sale	$	—	$	203,593	$	—	$	203,593
Residential mortgage loans held for sale – fair value option elected	$	—	$	267,577	$	—	$	267,577
Derivative assets (included in other assets)	$	—	$	—	$	11,415	$	11,415
Equity securities (included in other assets)	$	77	$	—	$	—	$	77
Residential mortgage servicing rights (included in other assets)	$	—	$	—	$	31,510	$	31,510
Liabilities Measured – Recurring Basis:
Derivative liabilities (included in other liabilities)	$	—	$	4,811	$	—	$	4,811
Assets Measured – Nonrecurring Basis:
Impaired loans:
Residential real estate	$	—	$	—	$	4,356	$	4,356
Commercial real estate		—		—		1,111		1,111
SBA commercial real estate		—		—		5,056		5,056
Multifamily		—		—		678		678
Land and land development		—		—		3		3
Commercial business		—		—		1,625		1,625
SBA commercial business		—		—		700		700
Consumer		—		—		457		457
Total impaired loans	$	—	$	—	$	13,986	$	13,986
Residential mortgage loans held for sale – fair value option not elected	$	—	$	62,601	$	—	$	62,601
SBA loans held for sale	$	—	$	27,064	$	—	$	27,064
SBA loan servicing rights	$	—	$	—	$	3,722	$	3,722
Other real estate owned, held for sale:
SBA commercial real estate	$	—	$	—	$	315	$	315
Former bank premises		—		—		1,728		1,728
Total other real estate owned	$	—	$	—	$	2,043	$	2,043

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

	Carrying Value
	Level 1		Level 2		Level 3		Total
	(In thousands)
September 30, 2020:
Assets Measured – Recurring Basis
Securities available for sale:
Agency mortgage-backed	$	0	$	7,952	$	0	$	7,952
Agency CMO		0		9,805		0		9,805
Privately-issued CMO		0		958		0		958
Privately-issued ABS		0		960		0		960
SBA certificates		0		694		0		694
Municipal bonds		0		181,596		0		181,596
Total securities available for sale	$	0	$	201,965	$	0	$	201,965
Residential mortgage loans held for sale – fair value option elected	$	0	$	208,493	$	0	$	208,493
Derivative assets (included in other assets)	$	0	$	226	$	14,937	$	15,163
Equity securities (included in other assets)	$	66	$	0	$	0	$	66
Residential mortgage servicing rights	$	0	$	0	$	21,703	$	21,703
Liabilities Measured – Recurring Basis
Derivative liabilities (included in other liabilities)	$	0	$	1,827	$	0	$	1,827
Assets Measured – Nonrecurring Basis
Impaired loans:
Residential real estate	$	0	$	0	$	5,329	$	5,329
Commercial real estate		0		0		1,134		1,134
SBA commercial real estate		0		0		5,561		5,561
Multifamily		0		0		698		698
Land and land development		0		0		2		2
Commercial business		0		0		1,670		1,670
SBA commercial business		0		0		648		648
Consumer		0		0		199		199
Total impaired loans	$	0	$	0	$	15,241	$	15,241
Residential mortgage loans held for sale – fair value option not elected	$	0	$	54,913	$	0	$	54,913
SBA loans held for sale	$	0	$	22,119	$	0	$	22,119
SBA loan servicing rights	$	0	$	0	$	3,748	$	3,748
Other real estate owned, held for sale:
Former bank premises	$	0	$	0	$	1,728	$	1,728
Total other real estate owned	$	0	$	0	$	1,728	$	1,728

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.

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. 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-month period ended December 31, 2020.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Securities Available for Sale and Equity Securities. Securities classified as available for sale and equity securities are reported at fair value on a recurring basis. These securities are classified as Level 1 of the valuation hierarchy where quoted market prices from reputable third-party brokers are available in an active market. If quoted market prices are not available, the Company obtains fair value measurements from an independent pricing service. These securities are reported using Level 2 inputs and the fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. For securities where quoted market prices, market prices of similar securities or prices from an independent third party pricing service are not available, fair values are calculated using discounted cash flows or other market indicators and are classified within Level 3 of the fair value hierarchy. Changes in fair value of equity securities are reported in noninterest income. Changes in fair value of securities available for sale are recorded in other comprehensive income, net of income tax effect.

Residential Mortgage Loans Held for Sale. The Company has 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 December 31, 2020 and September 30, 2020, 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.

Derivative Financial Instruments. Derivative financial instruments consist of mortgage banking interest rate lock commitments and forward mortgage loan sale commitments. The fair value of forward mortgage loan sale commitments is obtained from an independent third party and is based on the gain or loss that would occur if the Company were to pair-off the sales transaction with the investor. The fair value of forward mortgage loan sale commitments is classified as Level 2 in the fair value hierarchy.

The fair value of interest rate lock commitments is also obtained from an independent third party and is based on investor prices for the underlying loans or current secondary market prices for loans with similar characteristics, less estimated costs to originate the loans and adjusted for the anticipated funding probability (pull-through rate). The fair value of interest rate lock commitments is classified as Level 3 in the fair value hierarchy.

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-month periods ended December 31, 2020 and 2019:

	Three Months Ended
	December 31,
(In thousands)	2020		2019
Beginning balance	$	14,937	$	3,269
Unrealized gains recognized in earnings, net of settlements		(3,522)		(348)
Ending balance	$	11,415	$	2,921

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

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 December 31, 2020 and 2019 attributable to Level 3 derivative assets held at the balance sheet date were $11.4 million and $2.9 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 December 31, 2020 and September 30, 2020.

		Range of Inputs	Range of Inputs
		(Weighted Average)	(Weighted Average)
	Significant	December 31,	September 30,
Financial Instrument	Unobservable Inputs	2020	2020
Interest rate lock commitments	Pull-through rate	9% - 100% (79%)	0% - 100% (80%)
	Direct costs to close	0.32% - 1.05% (0.54%)	0.31% - 1.01% (0.52%)

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 valuations 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.

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 December 31, 2020 and September 30, 2020, 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 December 31, 2020 and September 30, 2020, the significant unobservable inputs used in the fair value measurement of impaired loans included discounts from appraised value ranging from 0.0% to 100.0% and 0.0% to 75.0%, respectively, and estimated costs to sell the collateral ranging from 0.0% to 6.0% and 0.0% to 12.0%, respectively. The Company recognized no provision for loan losses on impaired loans for the three-month period ended December 31, 2020. During the three-month periods ended December 31, 2019, the Company recognized provisions for loan losses on impaired loans of $143,000.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

SBA Loan Servicing Rights. SBA loan servicing rights represent the value associated with servicing SBA loans that have been sold. The fair value of SBA loan servicing rights is determined on a quarterly basis by an independent third party valuation model using market-based discount rate and prepayment assumptions, and is classified as Level 3 in the fair value hierarchy. At December 31, 2020, the significant unobservable inputs used in the fair value measurement of SBA loan servicing rights included discount rates ranging from 3.61% to 19.86% with a weighted average of 8.14% and prepayment speed assumptions ranging from 8.69% to 26.68% with a weighted average rate of 17.15%.  At September 30, 2020, the significant unobservable inputs used in the fair value measurement of SBA loan servicing rights included discount rates ranging from 3.58% to 19.68% with a weighted average of 8.36% and prepayment speed assumptions ranging from 8.69% to 26.68% with a weighted average rate of 17.46%.  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 reversed impairment charges of $32,000 on SBA loan servicing rights for the three-month period ended December 31, 2020, and recognized impairment charges of $30,000 on SBA loan servicing rights for the three-month period ended December 31, 2019.

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 December 31, 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 10.9% to 30.9% with a weighted average of 28.4%.   At September 30, 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) of 30.9%.  The Company did not recognize any charges to write down other real estate owned to fair value for the three-month periods ended December 31, 2020 and 2019.

There were no transfers into or out of the Company’s Levels 3 financial assets of the fair value hierarchy for the three-month period ended December 31, 2020.

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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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The Company has elected the fair value option for substantially all of its residential mortgage loans held for sale effective July 1, 2018, excluding participation interests acquired from correspondent lenders.  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. NaN of these loans were 90 days or more past due, nor were any on nonaccrual status, as of December 31, 2020 and September 30, 2020.

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 December 31, 2020 and September 30, 2020.

			Aggregate
	Aggregate		Principal
	Fair Value		Balance
	December 31,		December 31,
(In thousands)	2020		2020		Difference
Residential mortgage loans held for sale	$	267,577	$	255,183	$	12,394

			Aggregate
	Aggregate		Principal
	Fair Value		Balance
	September 30,		September 30,
(In thousands)	2020		2020		Difference
Residential mortgage loans held for sale	$	208,493	$	198,138	$	10,355

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-month periods ended December 31, 2020 and 2019:

	Three Months Ended
	December 31,
(In thousands)	2020		2019
Gains – included in mortgage banking income	$	8,608	$	2,376
Interest income		1,833		785
	$	10,441	$	3,161

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(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.

			Fair Value Measurements
	Carrying		Using:
	Amount		Level 1		Level 2		Level 3
	(In thousands)
December 31, 2020:
Financial assets:
Cash and due from banks	$	16,042	$	16,042	$	—	$	—
Interest-bearing deposits with banks		19,350		19,350		—		—
Interest-bearing time deposits		2,723		—		2,723		—
Securities available for sale		203,593		—		203,593		—
Securities held to maturity		2,068		—		2,336		—
Residential mortgage loans held for sale		330,178		—		330,178		—
SBA loans held for sale		27,064		—		—		30,048
Loans, net		1,114,708		—		—		1,169,822
FRB and FHLB stock		19,310		N/A		N/A		N/A
Accrued interest receivable		7,423		—		7,423		—
SBA loan servicing rights		3,722		—		—		4,122
Residential mortgage loan servicing rights		31,510		—		—		31,510
Derivative assets (included in other assets)		11,415		—		—		11,415
Equity securities (included in other assets)		77		77		—		—
Financial liabilities:
Deposits		1,121,320		—		—		1,122,806
Borrowings from FHLB		340,092		—		341,792		—
Federal Reserve PPPLF borrowings		172,772		—		172,745		—
Subordinated note		19,814		—		23,669		—
Accrued interest payable		795		—		795		—
Advance payments by borrowers for taxes and insurance		1,600		—		1,600		—
Derivative liabilities (included in other liabilities)		4,811		—		4,811		—

-35-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

			Fair Value Measurements
	Carrying		Using:
	Amount		Level 1		Level 2		Level 3
	(In thousands)
September 30, 2020:
Financial assets:
Cash and due from banks	$	12,807	$	12,807	$	0	$	0
Interest-bearing deposits with banks		20,919		20,919		0		0
Interest-bearing time deposits		2,964		0		2,964		0
Securities available for sale		201,965		0		201,965		0
Securities held to maturity		2,102		0		2,385		0
Residential mortgage loans held for sale		263,406		0		263,519		0
SBA loans held for sale		22,119		0		24,666		0
Loans, net		1,090,063		0		0		1,152,962
FRB and FHLB stock		17,293		N/A		N/A		N/A
Accrued interest receivable		6,462		0		6,462		0
SBA loan servicing rights		3,748		0		0		3,934
Residential mortgage loan servicing rights		21,703		0		0		21,703
Derivative assets (included in other assets)		15,163		0		226		14,937
Equity securities (included in other assets)		66		66		0		0
Financial liabilities:
Deposits		1,048,076		0		0		1,050,569
Borrowings from FHLB		310,858		0		310,766		0
Subordinated note		19,797		0		23,788		0
Federal Reserve PPPLF borrowings		174,834		0		174,808		0
Accrued interest payable		683		0		683		0
Advance payments by borrowers for taxes and insurance		2,615		0		2,615		0
Derivative liabilities (included in other liabilities)		1,827		0		1,827		0

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 plan; therefore, no compensation expense was recognized for the three-month periods ended December 31, 2020 and 2019. The ESOP trust held 119,148 and 119,654 shares of Company common stock at December 31, 2020 and September 30, 2020, respectively.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

9. Stock Based Compensation Plans

The Company maintains two equity incentive plans under which stock options and restricted stock have been or may be granted, the 2010 Equity Incentive Plan (“2010 Plan”), approved by the Company’s shareholders in February 2010, and the 2016 Equity Incentive Plan (“2016 Plan”), approved by the Company’s shareholders in February 2016. The aggregate number of shares of the Company’s common stock available for issuance under the 2016 Plan may not exceed 88,000 shares, consisting of 66,000 stock options and 22,000 shares of restricted stock. At December 31, 2020, there were 0 remaining shares of the Company’s common stock available for issuance under the 2010 Plan. At December 31, 2020, 500 shares of the Company’s common stock were available for issuance under the 2016 Plan, of which 200 shares were available for restricted stock and 300 shares were available for stock options. The Company accounts for any forfeitures as they occur, and any previously recognized compensation cost for an award is reversed in the period the award is forfeited.

Stock 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.

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-month period ended December 31, 2020 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

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

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

				Weighted
				Average
				Remaining
		Weighted		Contractual	Aggregate
	Number of	Average		Term	Intrinsic
	Shares	Exercise Price		(Years)	Value
	(Dollars in thousands, except per share data)
Outstanding at beginning of period	68,403	$	48.11
Granted	7,555		63.30
Exercised	(1,200)		40.09
Forfeited or expired	(600)		40.09
Outstanding at end of period	74,158	$	49.85	7.0	$	1,146
Vested and expected to vest	74,158	$	49.85	7.0	$	1,146
Exercisable at end of period	42,208	$	44.03	6.2	$	896

The intrinsic value of stock options exercised during the three-month periods ended December 31, 2020 and 2019 were $29,000 and $338,000, respectively. The Company recognized compensation expense related to stock options of $23,000 and $20,000 for the three-month periods ended December 31, 2020 and 2019, respectively. At December 31, 2020, there was $181,000 of unrecognized compensation expense related to nonvested stock options. The compensation expense is expected to be recognized over a weighted average period of 3.07 years. There was 0 cash received from the exercise of stock options during the three-month period ended December 31, 2020. The tax benefit from the exercise of stock options for the three-month period ended December 31, 2020 was $5,000. Cash received from the exercise of stock options and the tax benefit from the exercise of stock options were $100,000 and $44,000, respectively, for the three-month period ended December 31, 2019.

Restricted Stock

The vesting period of restricted stock granted under the plans is generally five years beginning one year after the date of grant of the awards. Compensation expense is measured based on the fair market value of the restricted stock at the grant date and is recognized ratably over the vesting period. Compensation expense related to restricted stock recognized for the three-month periods ended December 31, 2020 and 2019 was $48,000 and $47,000, respectively.

A summary of the Company’s nonvested restricted shares activity as of December 31, 2020 and changes during the three-month period then ended is presented below.

		Weighted
	Number	Average
	of	Grant Date
	Shares	Fair Value
Nonvested at October 1, 2020	10,808	$	48.04
Granted	—	$	—
Vested	(4,375)	$	44.77
Forfeited	(200)	$	40.09
Nonvested at December 31, 2020	6,233	$	50.59

-38-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

There were 4,375 restricted shares vested during the three-month period ended December 31, 2020 with a total fair value of $277,000. There were 4,086 restricted shares that vested during the three-month period ended December 31, 2019 with a total fair value of $271,000. At December 31, 2020, there was $292,000 of unrecognized compensation expense related to nonvested restricted shares. The compensation expense is expected to be recognized over a weighted average period of 2.30 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.

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 December 31, 2020 and September 30, 2020, the Company had cash collateral posted with certain derivative counterparties of $1.6 million and $3.0 million, respectively, against its derivative obligations.  Cash collateral related to derivative contracts is recorded in interest-bearing deposits with banks or other assets in the consolidated balance sheets.

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

	Notional		Asset		Liability
	Amount		Derivatives		Derivatives
	December 31,		December 31,		December 31,
(In thousands)	2020		2020		2020
Interest rate lock commitments	$	698,145	$	11,415	$	—
Forward mortgage loan sale contracts		606,500		—		4,811
	$	1,304,645	$	11,415	$	4,811

	Notional		Asset		Liability
	Amount		Derivatives		Derivatives
	September 30,		September 30,		September 30,
(In thousands)		2020		2020		2020
Interest rate lock commitments	$	793,671	$	14,937	$	—
Forward mortgage loan sale contracts		605,750		226		1,827
	$	1,399,421	$	15,163	$	1,827

-39-

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

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

	Three Months Ended
	December 31,
(In thousands)	2020		2019
Interest rate lock commitments	$	(3,522)	$	(348)
Forward mortgage loan sale contracts		(7,363)		(437)
	$	(10,885)	$	(785)

11. Regulatory Capital

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III rules”) became effective for the Bank on January 1, 2015, with full compliance with all of the requirements being phased in over a multi-year schedule through 2019. Under the Basel III rules, the Bank must hold a conservation buffer above the adequately capitalized risk-based capital ratios disclosed in the table below. The capital conservation buffer was phased in from 0.0% for 2015 to 2.5% by 2019. The capital conservation buffer was 2.50% for 2020. The Bank met all capital adequacy requirements to which it was subject as of December 31, 2020 and September 30, 2020.

As of December 31, 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 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.

-40-

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 date.

									Minimum
									To Be Well
					Minimum				Capitalized Under
					For Capital				Prompt Corrective
	Actual				Adequacy Purposes:				Action Provisions:
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2020:
Total capital (to risk-weighted assets):
Consolidated	$	178,160	13.17	%	$	108,254	8.00	%		N/A	N/A
Bank		170,362	12.61			108,049	8.00		$	135,062	10.00	%
Tier 1 capital (to risk-weighted assets):
Consolidated	$	141,457	10.45	%	$	81,191	6.00	%		N/A	N/A
Bank		153,473	11.36			81,037	6.00		$	108,049	8.00	%
Common equity tier 1 capital (to risk-weighted assets):
Consolidated	$	141,457	10.45	%	$	60,893	4.50	%		N/A	N/A
Bank		153,473	11.36			60,778	4.50		$	87,790	6.50	%
Tier 1 capital (to average adjusted total assets):
Consolidated	$	141,457	8.92	%	$	63,407	4.00	%		N/A	N/A
Bank		153,473	9.78			62,738	4.00		$	78,423	5.00	%
As of September 30, 2020:
Total capital (to risk-weighted assets):
Consolidated	$	168,617	13.37	%	$	100,929	8.00	%		N/A	N/A
Bank		160,452	12.75			100,672	8.00		$	125,840	10.00	%
Tier 1 capital (to risk-weighted assets):
Consolidated	$	133,520	10.58	%	$	75,697	6.00	%		N/A	N/A
Bank		145,152	11.53			75,504	6.00		$	100,672	8.00	%
Common equity tier 1 capital (to risk-weighted assets):
Consolidated	$	133,520	10.58	%	$	56,773	4.50	%		N/A	N/A
Bank		145,152	11.53			56,428	4.50		$	81,796	6.50	%
Tier 1 capital (to average adjusted total assets):
Consolidated	$	133,520	8.53	%	$	62,617	4.00	%		N/A	N/A
Bank		145,152	9.37			61,966	4.00		$	77,458	5.00	%

-41-

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 June 2016, the FASB issued Accounting  Standards Update (“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 were originally effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact the guidance will have upon adoption. Management expects to recognize a one-time cumulative-effect adjustment to the allowance for loan losses through retained earnings as of the beginning of the first reporting period in which the new standard is effective; however, the magnitude of the adjustment is unknown. In planning for the implementation of ASU 2016-13, management is currently evaluating software solutions, data requirements and loss methodologies.

In November 2019, the FASB issued ASU No. 2019-10 which delayed the effective date of ASU 2016-13 for smaller reporting companies (as defined by the SEC) and other non-SEC reporting entities to fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods.  Early adoption is permitted as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is a smaller reporting company as defined by the SEC, and currently does not intend to early adopt CECL.

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The update removes, modifies and adds certain disclosure requirements for fair value measurements. Among other changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements, but will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in the update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. The adoption of this update effective October 1, 2020 did not have a material impact on the Company’s consolidated financial position or results of operations.

The Company has determined that all other recently issued accounting pronouncements will not have a material impact on the Company’s consolidated financial statements or do not apply to its operations.

13. Segment Reporting

The Company’s operations include 3 primary segments: core banking, SBA lending, and mortgage banking. The core banking segment originates residential, commercial and consumer loans and attracts deposits from its customer base. Net interest income from loans and investments 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.

-42-

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. The mortgage banking segment operates as a separate division of the Bank 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 three segments are the same as those of the Company. The amounts reflected in the “Other” column in the tables below represent combined balances of the Company and the Captive, and are the primary differences between the sum of the segment amounts and consolidated totals, along with amounts to eliminate transactions between segments.

	Core		SBA		Mortgage				Consolidated
	Banking		Lending		Banking		Other		Totals
	(In thousands)
Three Months Ended December 31, 2020:
Net interest income (loss)	$	11,165	$	2,147	$	731	$	(304)	$	13,739
Provision (credit) for loan losses		702		(34)		—		—		668
Net interest income (loss) after provision		10,463		2,181		731		(304)		13,071
Net gains on sales of loans, SBA		—		1,267		—		—		1,267
Mortgage banking income (loss)		(2)		—		42,302		—		42,300
Noninterest income		1,552		1,385		43,246		—		46,183
Noninterest expense (income)		8,286		2,746		33,544		(174)		44,402
Income (loss) before taxes		3,729		820		10,433		(130)		14,852
Income tax expense (benefit)		689		105		3,852		(119)		4,527
Segment profit (loss)		3,040		715		6,581		(11)		10,325
Non cash items:
Depreciation and amortization		461		11		59		17		548
Segment assets at December 31, 2020		1,485,523		288,824		376,278		(277,714)		1,872,911

	Core		SBA		Mortgage				Consolidated
	Banking		Lending		Banking		Other		Totals
	(In thousands)
Three Months Ended December 31, 2019:
Net interest income (loss)	$	9,309	$	1,217	$	557	$	(297)	$	10,786
Provision (credit) for loan losses		520		(15)		0		0		505
Net interest income (loss) after provision		8,789		1,232		557		(297)		10,281
Net gains on sales of loans, SBA		0		761		0		0		761
Mortgage banking income		1		0		15,922		0		15,923
Noninterest income		1,391		929		15,912		0		18,232
Noninterest expense (income)		7,193		1,825		15,338		(84)		24,272
Income (loss) before taxes		2,987		336		1,131		(213)		4,241
Income tax expense (benefit)		516		43		265		(186)		638
Segment profit (loss)		2,471		293		866		(27)		3,603
Non cash items:
Depreciation and amortization		359		13		37		0		409
Segment assets at December 31, 2019		1,174,608		88,989		107,637		(78,661)		1,292,573

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

14. Revenue from Contracts with Customers

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-month periods ended December 31, 2020 and 2019:

	Three Months Ended
	December 31,
	2020		2019
	(In thousands)
Service charges on deposit accounts	$	396	$	509
ATM and interchange fees		632		503
Investment advisory income		134		27
Other		23		26
Revenue from contracts with customers		1,185		1,065
Gain on sale of SBA loans		1,267		761
Mortgage banking income		42,300		15,923
Increase in cash value of life insurance		186		162
Real estate lease income		147		151
Other		1,098		170
Other noninterest income		44,998		17,167
Total noninterest income	$	46,183	$	18,232

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

Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as wire fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs.

ATM and Interchange Fees: The Company earns ATM usage fees and interchange fees from debit cardholder transactions conducted through a payment network. ATM fees are recognized when the transaction occurs. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The costs of related loyalty rewards programs are netted against interchange income as a direct cost of the revenue generating activity.

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.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

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 leasing agreements, such as for office space, and is a 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 extend 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 $8.3 million and $7.9 million at December 31, 2020 and September 30,2020,respectively.  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 $8.4 million and $8.0 million at December 31, 2020 and September 30, 2020, respectively.

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 lease 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 October 1, 2019 was used.

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 December 31, 2020, the Company had not entered into any leases that had yet to commence.

Lease expense for the three–month periods ended December 31, 2020 and 2019 was $551,000 and $410,000, respectively. The components of lease expense for the three-month periods ended December 31, 2020 and 2019 were as follows:

	2020		2019
Operating lease cost	$	374	$	290
Short-term lease cost		177		120
	$	551	$	410

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

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

2021 (remaining nine months)	$	1,153
2022		1,411
2023		988
2024		812
2025		569
Thereafter		5,528
Total lease payments		10,461
Less imputed interest		(2,033)
Total	$	8,428

The lease term and discount rate at December 31, 2020 and September 30, 2020 were as follows:

	December 31,		September 30,
	2020		2020
Weighted-average remaining lease term (years)	17.7		22.6
Weighted-average discount rate	2.25	%	2.75	%

Supplemental cash flow information for the three–month periods ended December 31, 2020 and 2019 related to operating leases was as follows:

	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	390	$	234
ROU assets obtained in exchange for lease obligations:
Operating leases	$	1,843	$	6,239

-46-

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, 2020 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-month period ended December 31, 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, 2020.

COVID-19 Pandemic

The COVID-19 pandemic has placed, and continues to place, significant health, economic and 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.

The Company has implemented a number of procedures in response to the pandemic to support the safety and well-being of our customers, employees, and communities:

● 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 were temporarily closed and transactions were being conducted through drive-up windows or by appointment.  Our branches have returned to pre-pandemic service levels, but have implemented safety precautions, including the use of personal protective equipment (“PPE”) (where and when prudent), enhanced daily cleaning and instructions to maintain appropriate social distancing.

● We also actively encourage customers to utilize PPE and alternative banking channels, such as our online and mobile banking platforms.  Our customer service and retail departments remain fully staffed and available to assist customers remotely.

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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

● Our corporate and operations offices have predominantly returned to pre-pandemic schedules and processes, but we have enhanced daily cleaning and instructed employees to maintain appropriate social distancing.  Our employees maintain the ability to work remotely, both safely and efficiently using technology, in the event that such is required or necessary.  Most of our normally scheduled meetings, including Board of Director meetings and various committee meetings, are now held virtually instead of in-person.

● We continue to assist customers experiencing COVID-19 related hardships by approving payment extensions or loan forbearance agreements, and waiving or refunding certain fees.  During the initial onset of the COVID-19 pandemic, we proactively contacted all commercial borrowers and offered uniform payment extensions or loan forbearance agreements, while requests from consumer borrowers were reviewed and approved on a case-by-case basis.  Payment extensions or loan forbearance agreements were generally for periods of three months and included deferment of both principal and interest.  Following the expiration of the initial payment extensions or loan forbearance agreements, we entertain requests for extended periods on a case-by-case basis, which will generally include deferment of only the principal portion of payments for a period of up to three months. The table below summarizes payment extensions or loan forbearance agreements that were in effect at January 22, 2021.

				SBA-
		Outstanding		Guaranteed
	Number of	Principal		Principal
	Loans	Balance (1)		Balance
(Dollars in thousands)
Residential real estate	4	$	315	$	—
Commercial real estate	4		10,788		—
SBA commercial real estate	10		7,444		3,063
Multifamily	1		3,590		—
SBA commercial business	15		4,134		—
Consumer	1		30		—
Total	35	$	26,301	$	3,063

(1) The outstanding principal balance includes amounts guaranteed by the SBA.

● Under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which was signed into law on March 27, 2020, the SBA will make six months of principal and interest payments for loans of existing SBA clients that were in “regular servicing status” (not delinquent) at March 27, 2020 and for loans of new SBA clients originated between March 27, 2020 and September 27, 2020.  The CARES Act provided financial support for many of the Company’s SBA borrowers, which resulted in relatively few of such requiring payment extensions or loan forbearance agreements.  Following the expiration of the SBA-provided loan payments under the CARES Act, the 25 SBA loan borrowers included in the preceding table, which operate in COVID-sensitive industries, were granted payment extensions or loan forbearance agreements.  The Coronavirus Response and Relief Supplemental Appropriations Act (“CRRSAA”), which was signed into law on December 27, 2020, will provide additional SBA-provided loan payments to eligible SBA borrowers beginning in February 2021, including the aforementioned 25 SBA borrowers following the expiration of their payment extensions or loan forbearance agreements.

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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

● The Company actively participated in the SBA’s Paycheck Protection Program (“PPP”), which was originally authorized by the CARES Act.  At December 31, 2020, the outstanding principal balance of PPP loans was $178.5 million and net deferred loan fees related to PPP loans was approximately $2.7 million, which will be recognized over the life of the loans and as borrowers are granted forgiveness.  The Company is also participating in the second round of the PPP, which was authorized by the CRRSAA and is in its early stages.

● As a result of the COVID-19 pandemic, the leisure and hospitality industries carry a higher degree of credit risk.  At December 31, 2020, the outstanding principal balance of loans secured by restaurant related collateral was $168.2 million, of which $74.9 million is fully guaranteed by the SBA, including $74.5 million of PPP loans, and $83.8 million is secured by commercial real estate where the collateral property is leased to national-brand, investment-grade tenants.  At December 30, 2020, the outstanding principal balance of loans secured by hotel real estate was $17.4 million, of which $3.7 million is fully guaranteed by the SBA, including $606,000 of PPP loans.  Based on our evaluation of the allowance for loan losses at December 31, 2020, management believes the allowance for loan losses is adequate to cover estimated losses at that date.  However, as the pandemic continues, losses could be recognized beyond estimates at December 31, 2020.

Management continues to closely monitor the pandemic and may take additional action to respond to the pandemic’s effects on the Company’s business 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 believe we are well-positioned to withstand any challenges that may be presented, and we are committed to continuing to serve our customers, employees and communities.

Comparison of Financial Condition at December 31, 2020 and September 30, 2020

Cash and Cash Equivalents. Cash and cash equivalents increased $1.7 million from $33.7 million at September 30, 2020 to $35.4 million at December 31, 2020.

Loans. Net loans receivable increased $24.6 million, from $1.09 billion at September 30, 2020 to $1.11 billion at December 31, 2020, primarily due to continued growth in the single tenant net lease commercial real estate loan portfolio, which increased $24.6 million during the period.

Loans Held for Sale. Loans held for sale increased $71.7 million, from $285.5 million at September 30, 2020 to $357.2 million at December 31, 2020, due to an increase in residential mortgage loans held for sale of $66.8 million and an increase in SBA loans held for sale of $4.9 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 and the decline in market interest rates which have significantly increased refinance activity.  As a result of this expansion, the Company originated $1.43 billion of residential loans held for sale in the secondary market for the three-month period ended December 31, 2020 compared to $542.6 million in originations for the three-month period ended December 31, 2019.

Securities Available for Sale. Securities available for sale increased $1.6 million, from $202.0 million at September 30, 2020 to $203.6 million at December 31, 2020, due primarily to purchases of $5.3 million and an increase in unrealized gains on securities available for sale of $861,000, partially offset by calls and maturities of $3.4 million and principal repayments of $979,000.

Securities Held to Maturity. Investment securities held to maturity decreased $34,000 from September 30, 2020 to December 31, 2020 due to partial calls and principal repayments.  There were no purchases of securities held to maturity during the three-month period ended December 31, 2020.

Deposits. Total deposits increased $73.2 million, from $1.05 billion at September 30, 2020 to $1.12 billion at December 31, 2020, due to increases in interest bearing deposit accounts and non-interest bearing deposit accounts of $43.6 million and $29.6 million,

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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

respectively.  The increase in interest bearing deposit accounts is primarily due to increases in NOW accounts and brokered and reciprocal time deposits of $24.2 million and $15.4 million, respectively.

FHLB Borrowings. Borrowings from the FHLB increased $29.2 million, from $310.9 million at September 30, 2020 to $340.1 million at December 30, 2020. The increase in borrowings was primarily used to fund loan growth and the expansion of the Company’s mortgage lending activities.

Federal Reserve PPPLF Borrowings. The Company utilizes the Federal Reserve PPP Liquidity Facility (“PPPLF”) to fund certain PPP loans, which are pledged as collateral to secure the borrowings. PPPLF borrowings decreased $2.1 million, from $174.8 million at September 30, 2020 to $172.8 million at December 31, 2020, due to repayments.

Equity. Stockholders’ equity attributable to the Company was $165.7 million at December 31, 2020, an increase of $8.5 million from September 30, 2020 due primarily to a $9.5 million increase in retained earnings and a $680,000 increase in accumulated other comprehensive income due to an increase in the market value of available for sale securities.

Results of Operations for the Three Months Ended December 31, 2020 and 2019

Overview. The Company reported net income of $9.9 million, or $4.16 per diluted share, for the three-month period ended December 31, 2020 compared to net income of $3.4 million, or $1.44 per diluted share, for the three-month period ended December 31, 2019.

Net Interest Income. Net interest income increased $3.0 million, or 27.3%, for the three-month period ended December 31, 2020 as compared to the same period in 2019.  Average interest-earning assets increased $460.0 million and average interest-bearing liabilities increased $375.7 million when comparing the two periods.  The tax-equivalent net interest margin was 3.46% for 2020 compared to 3.80% for 2019.

Total interest income increased $2.4 million, or 17.3%, when comparing the two periods due primarily to an increase in the average balance of interest-earning assets of $460.0 million, from $1.17 billion for 2019 to $1.63 billion for 2020, partially offset by a decrease in the average tax equivalent yield on interest-earning assets from 4.79% for 2019 to 4.03% for 2020.  The majority of the increase in average interest-earning assets was attributable to loans.  The average balance of loans increased $449.4 million, or 48.1%, compared to 2019, including an increase of $179.3 million related to PPP loans.

Total interest expense decreased $588,000, or 20.3%, due to a decrease in the average cost of interest-bearing liabilities from 1.23% for 2019 to 0.70% for 2020, partially offset by an increase in the average balance of interest-bearing liabilities of $375.7 million, from $935.1 million for 2019 to $1.31 billion for 2020.

-50-

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-month periods ended December 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 equivalent basis using a federal marginal tax rate of 21%.

	Three Months Ended December 31,
	2020						2019
			Interest						Interest
	Average		and		Yield/		Average		and		Yield/
	Balance		Dividends		Cost		Balance		Dividends		Cost
	(Dollars in thousands)
Assets:
Interest-bearing deposits with banks	$	34,412	$	18	0.21	%	$	46,296	$	205	1.77	%
Loans, excluding PPP loans		1,205,278		13,171	4.37			935,211		11,724	5.01
PPP loans		179,316		1,085	2.42			—		—	0.00
Investment securities - taxable		42,462		471	4.44			50,132		585	4.67
Investment securities - nontaxable		146,374		1,508	4.12			120,018		1,278	4.26
FRB and FHLB stock		17,992		108	2.40			14,149		154	4.35
Total interest-earning assets		1,625,834		16,361	4.03			1,165,806		13,946	4.79
Noninterest-earning assets		151,061						99,153
Total assets	$	1,776,895					$	1,264,959
Liabilities and equity:
NOW accounts	$	246,606	$	198	0.32	%	$	185,295	$	138	0.30	%
Money market deposit accounts		147,677		173	0.47			116,426		305	1.05
Savings accounts		145,296		22	0.06			119,631		24	0.08
Time deposits		271,437		543	0.80			286,166		1,282	1.79
Total interest-bearing deposits		811,016		936	0.46			707,518		1,749	0.99
FHLB borrowings		306,299		861	1.12			207,851		808	1.55
Federal Reserve PPPLF borrowings		173,701		153	0.35			—		—	0.00
Subordinated debt		19,803		337	6.81			19,735		318	6.45
Total interest-bearing liabilities		1,310,819		2,287	0.70			935,104		2,875	1.23
Noninterest-bearing deposits		251,925						180,955
Other noninterest-bearing liabilities		51,763						26,400
Total liabilities		1,614,507						1,142,459
Total stockholders’ equity		161,903						122,393
Noncontrolling interest in subsidiary		485						107
Total equity		162,388						122,500
Total liabilities and equity	$	1,776,895					$	1,264,959
Net interest income (taxable equivalent basis)				14,074						11,071
Less: taxable equivalent adjustment				(335)						(285)
Net interest income			$	13,739					$	10,786
Interest rate spread (taxable equivalent basis)					3.33	%					3.56	%
Net interest margin (taxable equivalent basis)					3.46	%					3.80	%
Average interest-earning assets to average interest-bearing liabilities					124.03	%					124.67	%

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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 December 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.

	Three Months Ended December 31, 2020
	Compared to
	Three Months Ended December 31, 2019
	Increase (Decrease)
	Due to
	Rate		Volume		Net
			(In thousands)
Interest income:
Interest-bearing deposits with banks	$	(157)	$	(30)	$	(187)
Loans, excluding PPP loans		(1,712)		3,159		1,447
PPP loans		-		1,085		1,085
Investment securities - taxable		(27)		(87)		(114)
Investment securities - nontaxable		(47)		277		230
FRB and FHLB stock		(78)		32		(46)
Total interest-earning assets		(2,021)		4,436		2,415
Interest expense:
Deposits		(1,006)		193		(813)
Borrowings from FHLB		(275)		328		53
Federal Reserve PPPLF borrowings		—		153		153
Subordinated debt		18		1		19
Total interest-bearing liabilities		(1,263)		675		(588)
		���
Net increase (decrease) in net interest income (taxable equivalent basis)	$	(758)	$	3,761	$	3,003

Provision for Loan Losses. The provision for loan losses was $668,000 for the three-month period ended December 31, 2020 compared to $505,000, for the same period in 2019.  

The Company recognized net charge-offs of $570,000 for the three-month period ended December 31, 2020 compared to net charge-offs of $15,000 for the same period in 2019.  The increase in the provision for loan losses for 2020 was primarily due to increased charge-offs during the quarter as well as changes to qualitative factors within the allowance for loan losses calculation related to economic uncertainties surrounding COVID-19.

Noninterest Income. Noninterest income increased $28.0 million for the three-month period ended December 31, 2020 as compared to the same period in 2019.  The increase was due primarily to an increase in mortgage banking income of $26.4 million and net gains on sales of SBA loans of $506,000.  The increase in mortgage banking income was 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 $20.1 million for the three-month period ended December 31, 2020 as compared to the same period in 2019.  The increase was due primarily to increases in compensation and benefits of $16.0 million and

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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

increases in other operating expense and advertising expense of $1.5 million and $845,000, respectively.  The increase in compensation and benefits expense is attributable to the addition of new employees primarily to support the growth of the Company’s mortgage banking and SBA lending activities, routine salary and benefits adjustments and increased incentive compensation primarily as a result of the performance of the Company’s mortgage banking segment.  The increases in other operating expense and advertising expense were due to increased volume from the mortgage banking segment.

Income Tax Expense. The Company recognized income tax expense of $4.5 million for the three-month period ended December 31, 2020 as compared to income tax expense of $638,000 for the same period in 2019.  The effective tax rate increased from 15.0% for the quarter ended December 31, 2019 to 30.5% for the quarter ended December 31, 2020 primarily due to increases in pre-tax income and nondeductible executive compensation.

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 December 31, 2020, the Bank had cash and cash equivalents of $35.4 million and securities available-for-sale with a fair value of $203.6 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 December 31, 2020, the Company (unconsolidated basis) had liquid assets of $5.1 million.

Capital Management. The Bank is required to maintain specific amounts of capital pursuant to regulatory requirements.  As of December 31, 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 9.78%, 11.36%, 11.36% and 12.61%, 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 December 31, 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, 2020.

For the three-month period ended December 31, 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, which are retained by the Company for its portfolio, and by generally selling all fixed rate residential mortgage loans in the secondary markets. 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 and reciprocal 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 (other than the use of forward mortgage loan sale contracts in connection with our mortgage banking 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, 2020				At September 30, 2020
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	$	(4,433)	(10.28)	%	$	(2,493)	(5.30)	%
200bp		(1,637)	(3.79)			(593)	(1.26)
100bp		612	1.42			942	2.00
(100)bp		(1,254)	(2.91)			(1,132)	(2.40)
(200)bp		(2,056)	(4.77)			(1,939)	(4.12)

At December 31, 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 $612,000, or 1.42%, over a one year horizon compared to a flat interest rate scenario. Furthermore, rate increases of 2.00% and 3.00% would cause net interest income to decrease by 3.79% and 10.28%, respectively.  An immediate and sustained decrease in rates of 1.00% will decrease our net interest income by $1.3 million, or 2.91%, over a one year horizon compared to a flat interest rate scenario while a rate decrease of 2.00% would cause our net interest income to decrease by 4.77%. 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

Evaluation of Disclosure Controls and Procedures. As of December 31, 2020 (the “Evaluation Date”), the Company performed an evaluation, under the supervision of and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and 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 effective.

Changes in Internal Controls. There have been no changes in our internal controls over financial reporting that occurred during the quarter ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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 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, 2020 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, 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.

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 December 31, 2020:

					(d)
				(c)	Maximum number
				Total number of shares	(or appropriate dollar value)
	(a)	(b)		(or units) purchased as	of shares (or��units)
	Total number of	Average price		part of publicly	that may yet be
	shares (or units)	paid per share		announced plans or	purchased under
Period	purchased	(or unit)		programs (1)	the plans or programs
October 1, 2020 through October 31, 2020	—	$	—	—	44,802
November 1, 2020 through November 30, 2020	—	$	—	—	44,802
December 1, 2020 through December 31, 2020	1,397	$	63.94	—	43,405
Total	—	$	—	—	43,405

(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 are 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

31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Chief Financial Officer
101	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 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)
Dated February 11, 2021	BY:	/s/ Larry W. Myers
		Larry W. Myers
		President and Chief Executive Officer
Dated February 11, 2021	BY:	/s/ Anthony A. Schoen
		Anthony A. Schoen
		Chief Financial Officer

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