10-Q 1 v438817_10q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2016

 

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)

 

501 East Lewis & Clark Parkway, Clarksville, Indiana 47129

(Address of principal executive offices) (Zip Code)

 

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

 

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

The number of shares outstanding of the registrant’s common stock as of March 31, 2016 was 2,204,787.

 

 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

 

INDEX

 

    Page
     
Part I Financial Information  
     
  Item 1.  Financial Statements  
     
  Consolidated Balance Sheets as of March 31, 2016 and September 30, 2015 (unaudited) 3
     
  Consolidated Statements of Income for the three months and six months ended March 31, 2016 and 2015 (unaudited) 4
     
  Consolidated Statements of Comprehensive Income for the three months and six months ended March 31, 2016 and 2015 (unaudited) 5
     
  Consolidated Statements of Changes in Stockholders’ Equity for the six months ended March 31, 2016 and 2015 (unaudited) 6
     
  Consolidated Statements of Cash Flows for the six months ended March 31, 2016 and 2015 (unaudited) 7
     
  Notes to Consolidated Financial Statements (unaudited) 8-43
     
  Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 44-55
     
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk 56-58
     
  Item 4.  Controls and Procedures 59
     
Part II Other Information  
     
  Item 1.  Legal Proceedings 60
     
  Item 1A.  Risk Factors 60
     
  Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 61
     
  Item 3.  Defaults Upon Senior Securities 61
     
  Item 4.  Mine Safety Disclosures 61
     
  Item 5.  Other Information 62
     
  Item 6.  Exhibits 62
     
Signatures 63

 

-2-

 

 

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   March 31,   September 30, 
(In thousands, except share and per share data)  2016   2015 
           
ASSETS          
Cash and due from banks  $8,961   $9,884 
Interest-bearing deposits with banks   14,991    15,110 
Total cash and cash equivalents   23,952    24,994 
           
Interest-bearing time deposits   2,855    3,100 
Trading account securities, at fair value   9,131    9,044 
Securities available for sale, at fair value   177,444    178,328 
Securities held to maturity   3,445    4,620 
           
Loans held for sale ($5,835 at fair value at September 30, 2015)   5,361    6,803 
Loans, net   478,518    457,112 
           
Federal Reserve Bank and Federal Home Loan Bank stock, at cost   6,936    6,720 
Real estate development and construction   6,978    7,079 
Premises and equipment   13,573    13,838 
Other real estate owned, held for sale   594    618 
Accrued interest receivable:          
Loans   1,414    1,259 
Securities   1,368    1,396 
Cash surrender value of life insurance   17,993    17,766 
Goodwill   7,936    7,936 
Core deposit intangibles   1,209    1,381 
Other assets   6,412    7,952 
           
Total Assets  $765,119   $749,946 
           
LIABILITIES          
Deposits:          
Noninterest-bearing  $75,885   $71,184 
Interest-bearing   491,537    462,113 
Total deposits   567,422    533,297 
           
Repurchase agreements   1,343    1,342 
Borrowings from Federal Home Loan Bank   100,000    104,867 
Other long-term debt   4,537    4,632 
Accrued interest payable   200    186 
Advance payments by borrowers for taxes and insurance   869    883 
Accrued expenses and other liabilities   9,503    10,382 
Total Liabilities   683,874    655,589 
           
STOCKHOLDERS' EQUITY          
Preferred stock of $.01 par value per share
Authorized 982,880 shares; none issued		   -    - 
Senior Non-Cumulative Perpetual Preferred Stock, Series A, $.01 par value; Authorized 17,120 shares; issued and outstanding 17,120 shares at September 30, 2015; aggregate liquidation preference of $17,120 at September 30, 2015   -    - 
Common stock of $.01 par value per share Authorized 20,000,000 shares; issued 2,542,042 shares; outstanding 2,204,787 shares (2,183,510 shares at September 30, 2015)   25    25 
Additional paid-in capital - preferred   -    17,120 
Additional paid-in capital - common   27,182    26,796 
Retained earnings - substantially restricted   55,040    52,760 
Accumulated other comprehensive income   5,068    4,210 
Unearned ESOP shares   -    (197)
Less treasury stock, at cost - 337,255 shares
(358,532 shares at September 30, 2015)		   (6,070)   (6,357)
Total Stockholders' Equity   81,245    94,357 
           
Total Liabilities and Stockholders' Equity  $765,119   $749,946 

 

See notes to consolidated financial statements.

 

-3-

 

 

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   March 31,   March 31, 
(In thousands, except share and per share data)  2016   2015   2016   2015 
                 
INTEREST INCOME                    
Loans, including fees  $5,546   $5,350   $11,011   $10,720 
Securities:                    
Taxable   969    992    1,927    2,084 
Tax-exempt   509    489    1,119    960 
Dividend income   78    83    154    146 
Interest-bearing deposits with banks   45    10    62    23 
Total interest income   7,147    6,924    14,273    13,933 
                     
INTEREST EXPENSE                    
Deposits   595    598    1,179    1,240 
Repurchase agreements   1    1    2    2 
Borrowings from Federal Home Loan Bank   392    308    735    548 
Loans payable   40    45    80    93 
Total interest expense   1,028    952    1,996    1,883 
                     
Net interest income   6,119    5,972    12,277    12,050 
Provision for loan losses   125    212    125    419 
                     
Net interest income after provision for loan losses   5,994    5,760    12,152    11,631 
                     
NONINTEREST INCOME                    
Service charges on deposit accounts   282    305    604    676 
Net gain on trading account securities   251    89    428    160 
Unrealized loss on derivative contract   -    (1)   -    (1)
Net gain on sales of loans   97    49    327    134 
Increase in cash surrender value of life insurance   112    117    227    245 
Commission income   70    107    213    168 
Real estate lease income   163    150    326    301 
Other income   287    262    581    506 
Total noninterest income   1,262    1,078    2,706    2,189 
                     
NONINTEREST EXPENSE                    
Compensation and benefits   2,805    2,637    6,368    5,638 
Occupancy and equipment   721    652    1,373    1,256 
Data processing   414    348    767    729 
Advertising   135    147    235    253 
Professional fees   319    201    611    515 
FDIC insurance premiums   122    115    243    224 
Net (gain) loss on other real estate owned   (24)   16    50    21 
Other operating expenses   740    760    1,477    1,614 
Total noninterest expense   5,232    4,876    11,124    10,250 
Income before income taxes   2,024    1,962    3,734    3,570 
Income tax expense   389    435    856    843 
Net Income  $1,635   $1,527   $2,878   $2,727 
                     
Preferred stock dividends declared   19    43    62    86 
Net Income Available to Common Shareholders  $1,616   $1,484   $2,816   $2,641 
                     
Net income per common share:                    
Basic  $0.73   $0.69   $1.28   $1.24 
Diluted  $0.70   $0.66   $1.22   $1.18 
                     
Weighted average common shares outstanding:                    
Basic   2,204,787    2,138,931    2,195,727    2,125,369 
Diluted   2,303,946    2,245,371    2,300,695    2,231,574 
                     
Dividends per common share  $0.13   $0.12   $0.25   $0.23 

 

See notes to consolidated financial statements.

 

-4-

 

 

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   March 31,   March 31, 
(In thousands)  2016   2015   2016   2015 
                 
Net Income  $1,635   $1,527   $2,878   $2,727 
                     
OTHER COMPREHENSIVE INCOME, NET OF TAX                    
Unrealized gains on securities available for sale:                    
Unrealized holding gains arising during the period   1,072    1,173    1,292    2,168 
Income tax expense   (374)   (417)   (434)   (770)
Net of tax amount   698    756    858    1,398 
                     
Other Comprehensive Income   698    756    858    1,398 
                     
Comprehensive Income  $2,333   $2,283   $3,736   $4,125 

 

See notes to consolidated financial statements.

 

-5-

 

 

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

 

 

                   Accumulated   Unearned         
                   Other   Stock         
   Preferred   Common   Additional   Retained   Comprehensive   Compensation   Treasury     
(In thousands, except share and per share data)  Stock   Stock   Paid-in Capital   Earnings   Income   and ESOP   Stock   Total 
                                 
Six Months Ended March 31, 2015:                                        
Balances at October 1, 2014  $-   $25   $43,199   $47,175   $3,853   $(699)  $(6,473)  $87,080 
                                         
Net income   -    -    -    2,727    -    -    -    2,727 
                                         
Other comprehensive income   -    -    -    -    1,398    -    -    1,398 
                                         
Preferred stock dividends   -    -    -    (86)   -    -    -    (86)
                                         
Common stock dividends ($0.23 per share)   -    -    -    (471)   -    -    -    (471)
                                         
Stock compensation expense   -    -    108    -    -    131    -    239 
                                         
Shares released by ESOP trust   -    -    397    -    -    256    -    653 
                                         
Stock options exercises - 20,972 shares   -    -    (89)   -    -    -    367    278 
                                         
Purchase of 4,791 treasury shares   -    -    -    -    -    -    (119)   (119)
                                         
Balances at March 31, 2015  $-   $25   $43,615   $49,345   $5,251   $(312)  $(6,225)  $91,699 
                                         
Six Months Ended March 31, 2016:                                        
Balances at October 1, 2015  $-   $25   $43,916   $52,760   $4,210   $(197)  $(6,357)  $94,357 
                                         
Net income   -    -    -    2,878    -    -    -    2,878 
                                         
Other comprehensive income   -    -    -    -    858    -    -    858 
                                         
Preferred stock dividends   -    -    -    (62)   -    -    -    (62)
                                         
Common stock dividends ($0.25 per share)   -    -    -    (536)   -    -    -    (536)
                                         
Shares released by ESOP trust   -    -    504    -    -    197    -    701 
                                         
Stock options exercises - 26,210 shares   -    -    (118)   -    -    -    466    348 
                                         
Redemption of preferred stock - 17,120 shares   -    -    (17,120)   -    -    -    -    17,120 
                                         
Purchase of 4,933 treasury shares   -    -    -    -    -    -    (179)   (179)
                                         
Balances at March 31, 2016  $-   $25   $27,182   $55,040   $5,068   $-   $(6,070)  $81,245 

 

See notes to consolidated financial statements.

 

-6-

 

 

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Six Months Ended 
   March 31, 
(In thousands)  2016   2015 
         
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $2,878   $2,727 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   125    419 
Depreciation and amortization   737    721 
Amortization of premiums and accretion of discounts on securities, net   265    388 
(Increase) decrease in trading account securities   (87)   90 
Loans originated for sale   (13,949)   (4,436)
Proceeds on sales of loans   14,446    4,531 
Net gain on sales of loans   (327)   (134)
Net realized and unrealized (gain) loss on other real estate owned   (4)   12 
Unrealized loss on derivative contract   -    1 
Increase in cash surrender value of life insurance   (227)   (245)
Deferred income taxes   (199)   (247)
ESOP and stock compensation expense   628    808 
(Increase) decrease in accrued interest receivable   (127)   1 
Increase in accrued interest payable   14    4 
Change in other assets and liabilities, net   483    (91)
Net Cash Provided By Operating Activities   4,656    4,549 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
(Investment in) redemption of interest-bearing time deposits   245    (735)
Purchase of securities available for sale   (10,284)   (11,684)
Proceeds from maturities of securities available for sale   5,395    6,117 
Proceeds from maturities of securities held to maturity   1,123    342 
Principal collected on securities   6,827    8,737 
Net increase in loans   (20,489)   (11,652)
Purchase of Federal Reserve Bank stock   -    (945)
Purchase of Federal Home Loan Bank stock   (216)   (461)
Proceeds from redemption of Federal Home Loan Bank stock   -    461 
Investment in historic tax credit entity   -    (417)
Proceeds from sale of other real estate owned   299    495 
Investment in real estate development and construction   2    - 
Purchase of premises and equipment   (201)   (204)
Net Cash Used In Investing Activities   (17,299)   (9,946)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Net increase in deposits   34,125    3,743 
Net increase in repurchase agreements   1    2 
Decrease in Federal Home Loan Bank line of credit   (14,867)   (7,994)
Proceeds from Federal Home Loan Bank advances   35,000    205,000 
Repayment of Federal Home Loan Bank advances   (25,000)   (195,000)
Repayment of other long-term debt   (95)   (88)
Net decrease in advance payments by borrowers for taxes and insurance   (14)   (1)
Redemption of preferred stock   (17,120)   - 
Proceeds from exercise of stock options   169    278 
Purchase of treasury stock   -    (119)
Dividends paid on preferred stock   (62)   (86)
Dividends paid on common stock   (536)   (471)
Net Cash Provided By Financing Activities   11,601    5,264 
           
Net Decrease in Cash and Cash Equivalents   (1,042)   (133)
           
Cash and cash equivalents at beginning of period   24,994    20,330 
           
Cash and Cash Equivalents at End of Period  $23,952   $20,197 

 

See notes to consolidated financial statements.

 

-7-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

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 fourteen locations in southern Indiana. The Bank attracts deposits primarily from the general public and uses those funds, along with other borrowings, primarily to originate commercial mortgage, residential mortgage, construction, commercial business and consumer loans, and to a lesser extent, to invest in mortgage-backed securities and other securities. The Bank has three wholly-owned subsidiaries: First Savings Investments, Inc., a Nevada corporation that manages a securities portfolio; FFCC, Inc. (“FFCC”), which is an Indiana corporation that participates in commercial real estate development and leasing; and Southern Indiana Financial Corporation, which is currently inactive.

 

The Captive, which is a wholly-owned insurance subsidiary of the Company formed during the fourth fiscal quarter of 2014, is a Nevada corporation that provides property and casualty insurance to the Company, the Bank and the Bank’s active subsidiaries. In addition, the Captive provides reinsurance to eight other third-party insurance captives for which insurance may not be currently available or economically feasible in the insurance marketplace.

 

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments considered necessary to present fairly the financial position as of March 31, 2016, the results of operations for the three- and six-month periods ended March 31, 2016 and 2015, and the cash flows for the six-month periods ended March 31, 2016 and 2015. 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, 2015 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. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

2.Investment Securities

 

Agency bonds and notes, agency mortgage-backed securities and agency collateralized mortgage obligations (“CMO”) include securities issued by the Government National Mortgage Association (“GNMA”), a U.S. government agency, and the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal Home Loan Bank (“FHLB”), which are U.S. government-sponsored enterprises. The Company holds municipal bonds issued by municipal governments within the U.S. The Company also holds a pass-through asset-backed security guaranteed by the U.S. Small Business Administration (“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.

 

Trading Account Securities

 

The Company invests in small and medium lot, investment grade municipal bonds through a managed brokerage account. The brokerage account is managed by an investment advisory firm registered with the U.S. Securities and Exchange Commission. At March 31, 2016 and September 30, 2015, trading account securities recorded at fair value totaled $9.1 million and $9.0 million, respectively, and were comprised of investment grade municipal bonds. During the six-months ended March 31, 2016, the Company reported net gains on trading account securities of $428,000, including net realized gains on the sale of securities of $425,000 and net unrealized gains on securities still held as of the balance sheet date of $3,000. During the three-months ended March 31, 2016, the Company reported net gains on trading account securities of $251,000, including net realized gains on the sale of securities of $232,000 and net unrealized gains on securities still held as of the balance sheet date of $19,000. During the six-months ended March 31, 2015, the Company reported net gains on trading account securities of $160,000, including net realized gains on the sale of securities of $159,000 and net unrealized gains on securities still held as of the balance sheet date of $1,000. During the three-months ended March 31, 2015, the Company reported net gains on trading account securities of $89,000, including net realized gains on the sale of securities of $82,000 and net unrealized gains on securities still held as of the balance sheet date of $7,000.

 

-9-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Securities Available for Sale and Held to Maturity

 

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

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (In thousands) 
March 31, 2016:                    
Securities available for sale:                    
                     
Agency bonds and notes  $1,044   $11   $-   $1,055 
Agency mortgage-backed   50,632    776    28    51,380 
Agency CMO   17,843    108    87    17,864 
Privately-issued CMO   2,744    360    -    3,104 
Privately-issued ABS   4,257    989    3    5,243 
SBA certificates   1,314    6    -    1,320 
Municipal bonds   91,727    5,770    19    97,478 
                     
Total securities available for sale  $169,561   $8,020   $137   $177,444 
                     
Securities held to maturity:                    
                     
Agency mortgage-backed  $280   $26   $-   $306 
Municipal bonds   3,165    445    -    3,610 
                     
Total securities held to maturity  $3,445   $471   $-   $3,916 

 

-10-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (In thousands) 
September 30, 2015:                    
Securities available for sale:                    
                     
Agency bonds and notes  $5,564   $18   $-   $5,582 
Agency mortgage-backed   47,418    901    41    48,278 
Agency CMO   18,943    118    47    19,014 
Privately-issued CMO   3,005    465    -    3,470 
Privately-issued ABS   4,820    1,289    -    6,109 
SBA certificates   1,472    8    -    1,480 
Municipal bonds   90,380    4,185    170    94,395 
                     
Total securities available for sale  $171,602   $6,984   $258   $178,328 
                     
Securities held to maturity:                    
                     
Agency mortgage-backed  $345   $31   $-   $376 
Municipal bonds   4,275    540    -    4,815 
                     
Total securities held to maturity  $4,620   $571   $-   $5,191 

 

The amortized cost and fair value of investment securities as of March 31, 2016 by contractual maturity are shown below. Expected maturities of mortgage-backed securities, CMO and ABS may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty.

 

   Available for Sale   Held to Maturity 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
   (In thousands) 
                     
Due within one year  $2,269   $2,303   $372   $402 
Due after one year through five years   5,895    6,278    946    1,079 
Due after five years through ten years   20,330    22,127    1,225    1,413 
Due after ten years   64,277    67,825    622    716 
    92,771    98,533    3,165    3,610 
                     
CMO   20,587    20,968    -    - 
ABS   4,257    5,243    -    - 
SBA certificates   1,314    1,320    -    - 
Mortgage-backed securities   50,632    51,380    280    306 
                     
   $169,561   $177,444   $3,445   $3,916 

 

-11-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Information pertaining to investment securities with gross unrealized losses at March 31, 2016, aggregated by investment category and the length of time that individual securities have been in a continuous loss position, follows:

 

   Number       Gross 
   of Investment   Fair   Unrealized 
   Positions   Value   Losses 
   (Dollars in thousands) 
Securities available for sale:               
                
Continuous loss position less than twelve months:               
Agency mortgage-backed   5   $4,189   $15 
Agency CMO   2    3,345    7 
Privately-issued ABS   2    77    3 
Municipal bonds   1    388    4 
                
Total less than twelve months   10    7,999    29 
                
Continuous loss position more than twelve months:               
Agency mortgage-backed   2    1,826    13 
Agency CMO   2    5,673    80 
Municipal bonds   2    1,308    15 
                
Total more than twelve months   6    8,807    108 
                
Total securities available for sale   16   $16,806   $137 

 

At March 31, 2016, 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 March 31, 2016, which consisted of U.S. government agency mortgage-backed securities and CMO and municipal bonds, had depreciated approximately 0.79% from their amortized cost basis and are fixed and variable rate securities with a weighted-average yield of 1.90% and a weighted-average coupon rate of 3.15% at March 31, 2016. All of the agency and municipal securities are issued by U.S. government-sponsored enterprises and municipal governments, and are generally secured by first mortgage loans and municipal project revenues.

 

-12-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

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 March 31, 2016, the Company held seventeen privately-issued CMO and ABS securities acquired in a 2009 bank acquisition with an aggregate carrying value of $2.2 million and fair value of $3.1 million that have been downgraded to a substandard regulatory classification due to a downgrade of the security’s credit quality rating by various nationally recognized statistical rating organizations (“NRSRO”).

 

At March 31, 2016, two privately-issued ABS were in loss positions and had depreciated approximately 4.04% from the Company’s carrying value and were collateralized by residential mortgage loans. These securities had a total fair value of $77,000 and a total unrealized loss of $3,000 at March 31, 2016, and were rated below investment grade by NRSROs. Based on the independent third party analysis of the expected cash flows, management has determined that the decline in value for these securities are temporary and, as a result, no other-than-temporary impairment was recognized on the privately-issued CMO and ABS portfolios at March 31, 2016. While the Company did not recognize a credit-related impairment loss at March 31, 2016, additional deterioration in market and economic conditions may have an adverse impact on the credit quality in the future and therefore, require a credit-related impairment charge.

 

The unrealized losses on U.S. government agency mortgage-backed securities and CMO 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- and six-month periods ended March 31, 2016 and March 31, 2015, the Company did not realize any gross gains or losses on sales of available for sale securities.

 

Certain available for sale debt securities were pledged under repurchase agreements and to secure FHLB borrowings at March 31, 2016 and September 30, 2015, and may be pledged to secure federal funds borrowings.

 

-13-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

3.Loans and Allowance for Loan Losses

 

Loans at March 31, 2016 and September 30, 2015 consisted of the following:

 

   March 31,   September 30, 
   2016   2015 
   (In thousands) 
Real estate mortgage:          
1-4 family residential  $180,215   $181,873 
Commercial   186,105    172,995 
Multifamily residential   22,212    21,647 
Residential construction   21,590    19,723 
Commercial construction   14,655    15,548 
Land and land development   10,429    11,061 
Commercial business loans   39,530    32,574 
Consumer:          
Home equity loans   19,942    19,423 
Auto loans   5,048    5,452 
Other consumer loans   1,998    2,159 
Gross loans   501,724    482,455 
Undisbursed portion of construction loans   (16,314)   (18,599)
Principal loan balance   485,410    463,856 
           
Deferred loan origination fees and costs, net   (141)   (120)
Allowance for loan losses   (6,751)   (6,624)
           
Loans, net  $478,518   $457,112 

 

During the six-month period ended March 31, 2016, there was no significant change in the Company’s lending activities or 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, 2015.

 

At March 31, 2016 and September 30, 2015, the recorded investment in consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure was $796,000 and $806,000, respectively.

 

-14-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The following table provides the components of the recorded investment in loans as of March 31, 2016:

 

  

Residential

Real Estate

  

Commercial

Real Estate

   Multifamily   Construction  

Land & Land

Development

  

Commercial

Business

   Consumer   Total 
   (In thousands) 
                                 
Recorded Investment in Loans:                         
Principal loan balance  $180,215   $186,105   $22,212   $19,931   $10,429   $39,530   $26,988   $485,410 
                                         
Accrued interest receivable   549    550    44    48    30    134    59    1,414 
                                         
Net deferred loan origination fees and costs   235    (269)   (19)   (74)   8    (13)   (9)   (141)
                                         
Recorded investment in loans  $180,999   $186,386   $22,237   $19,905   $10,467   $39,651   $27,038   $486,683 
                                         
Recorded Investment in Loans as Evaluated for Impairment:                        
Individually evaluated for impairment  $4,495   $6,485   $-   $-   $-   $273   $274   $11,527 
                                         
Collectively evaluated for impairment   176,088    179,901    22,237    19,905    10,467    39,378    26,735    474,711 
                                         
Acquired with deteriorated credit quality   416    -    -    -    -    -    29    445 
                                         
Ending balance  $180,999   $186,386   $22,237   $19,905   $10,467   $39,651   $27,038   $486,683 

 

-15-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The following table provides the components of the recorded investment in loans as of September 30, 2015:

 

  

Residential

Real Estate

  

Commercial

Real Estate

   Multifamily   Construction  

Land & Land

Development

  

Commercial

Business

   Consumer   Total 
   (In thousands) 
                                 
Recorded Investment in Loans:                         
Principal loan balance  $181,873   $172,995   $21,647   $16,672   $11,061   $32,574   $27,034   $463,856 
                                         
Accrued interest receivable   552    454    47    23    30    95    58    1,259 
                                         
Net deferred loan origination fees and costs   283    (294)   (21)   (63)   8    (28)   (5)   (120)
                                         
Recorded investment in loans  $182,708   $173,155   $21,673   $16,632   $11,099   $32,641   $27,087   $464,995 
                                         
Recorded Investment in Loans as Evaluated for Impairment:                         
Individually evaluated for impairment  $4,391   $7,041   $-   $-   $-   $222   $290   $11,944 
                                         
Collectively evaluated for impairment   177,873    166,114    21,673    16,632    11,099    32,419    26,767    452,577 
                                         
Acquired with deteriorated credit quality   444    -    -    -    -    -    30    474 
                                         
Ending balance  $182,708   $173,155   $21,673   $16,632   $11,099   $32,641   $27,087   $464,995 

 

-16-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

An analysis of the allowance for loan losses as of March 31, 2016 is as follows:

 

  

Residential

Real Estate

  

Commercial

Real Estate

   Multifamily   Construction  

Land & Land

Development

  

Commercial

Business

   Consumer   Total 
   (In thousands)     
Ending Allowance Balance Attributable to Loans:                         
Individually evaluated for impairment  $-   $-   $-   $-   $-   $-   $3   $3 
                                         
Collectively evaluated for impairment   286    4,595    157    651    345    625    89    6,748 
                                         
Acquired with deteriorated credit quality   -    -    -    -    -    -    -    - 
                                         
Ending balance  $286   $4,595   $157   $651   $345   $625   $92   $6,751 

 

An analysis of the allowance for loan losses as of September 30, 2015 is as follows:

 

  

Residential

Real Estate

  

Commercial

Real Estate

   Multifamily   Construction  

Land & Land

Development

  

Commercial

Business

   Consumer   Total 
   (In thousands)     
Ending Allowance Balance Attributable to Loans:                         
Individually evaluated for impairment  $9   $-   $-   $-   $-   $-   $5   $14 
                                         
Collectively evaluated for impairment   435    4,327    156    551    369    678    94    6,610 
                                         
Acquired with deteriorated credit quality   -    -    -    -    -    -    -    - 
                                         
Ending balance  $444   $4,327   $156   $551   $369   $678   $99   $6,624 

 

-17-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

An analysis of the changes in the allowance for loan losses for the three months ended March 31, 2016 is as follows:

 

  

Residential

Real Estate

  

Commercial

Real Estate

   Multifamily   Construction  

Land & Land

Development

  

Commercial

Business

   Consumer   Total 
   (In thousands)     
Changes in Allowance for Loan Losses:                         
Beginning balance  $370   $4,514   $147   $594   $338   $575   $106   $6,644 
Provisions   (62)   81    10    57    7    50    (18)   125 
Charge-offs   (30)   -    -    -    -    -    (18)   (48)
Recoveries   8    -    -    -    -    -    22    30 
                                         
Ending balance  $286   $4,595   $157   $651   $345   $625   $92   $6,751 

  

An analysis of the changes in the allowance for loan losses for the six months ended March 31, 2016 is as follows:

 

  

Residential

Real Estate

  

Commercial

Real Estate

   Multifamily   Construction  

Land & Land

Development

  

Commercial

Business

   Consumer   Total 
   (In thousands)     
Changes in Allowance for Loan Losses:                         
Beginning balance  $444   $4,327   $156   $551   $369   $678   $99   $6,624 
Provisions   (182)   268    1    100    (24)   (53)   15    125 
Charge-offs   (56)   -    -    -    -    -    (57)   (113)
Recoveries   80    -    -    -    -    -    35    115 
                                         
Ending balance  $286   $4,595   $157   $651   $345   $625   $92   $6,751 

 

-18-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

An analysis of the changes in the allowance for loan losses for the three months ended March 31, 2015 is as follows:

 

  

Residential

Real Estate

  

Commercial

Real Estate

   Multifamily   Construction  

Land & Land

Development

  

Commercial

Business

   Consumer   Total 
   (In thousands)     
Changes in Allowance for Loan Losses:                         
Beginning balance  $442   $4,217   $163   $344   $299   $826   $159   $6,450 
Provisions   145    (108)   -    111    17    59    (12)   212 
Charge-offs   (131)   -    -    -    -    -    (41)   (172)
Recoveries   1    -    -    -    -    1    22    24 
                                         
Ending balance  $457   $4,109   $163   $455   $316   $886   $128   $6,514 

 

An analysis of the changes in the allowance for loan losses for the six months ended March 31, 2015 is as follows:

 

  

Residential

Real Estate

  

Commercial

Real Estate

   Multifamily   Construction  

Land & Land

Development

  

Commercial

Business

   Consumer   Total 
   (In thousands)     
Changes in Allowance for Loan Losses:                         
Beginning balance  $577   $3,808   $146   $443   $302   $795   $179   $6,250 
Provisions   (2)   301    17    12    14    90    (13)   419 
Charge-offs   (143)   -    -    -    -    -    (73)   (216)
Recoveries   25    -    -    -    -    1    35    61 
                                         
Ending balance  $457   $4,109   $163   $455   $316   $886   $128   $6,514 

 

-19-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents impaired loans individually evaluated for impairment as of March 31, 2016 and for the three and six months ended March 31, 2016 and 2015.

 

   At March 31, 2016   Three Months Ended March 31,   Six Months Ended March 31, 
               2016   2016   2015   2015   2016   2016   2015   2015 
  

Recorded

Investment

  

Unpaid

Principal

Balance

   Related
Allowance		  

Average

Recorded

Investment

  

Interest

Income

Recognized

  

Average

Recorded

Investment

  

Interest

Income

Recognized

  

Average

Recorded

Investment

  

Interest

Income

Recognized

  

Average

Recorded

Investment

  

Interest

Income

Recognized

 
   (In thousands) 
Loans with no related allowance recorded:
Residential real estate  $4,774   $5,253   $-   $5,591   $38   $5,685   $37   $5,437   $73   $5,729   $72 
Commercial real estate   6,485    6,546    -    6,594    48    5,689    55    6,711    100    5,702    113 
Multifamily   -    -    -    -    -    -    -    -    -    -    - 
Construction   -    -    -    -    -    -    -    -    -    -    - 
Land and land development   -    -    -    -    -    -    -    -    -    -    - 
Commercial business   273    258    -    329    1    254    1    322    2    216    1 
Consumer   197    202    -    203    2    238    1    205    3    248    3 
   $11,729   $12,259   $-   $12,717   $89   $11,866   $94   $12,675   $178   $11,895   $189 
                                                        
Loans with an allowance recorded:                                        
Residential real estate  $-   $-   $-   $-   $-   $142   $-   $1   $-   $152   $- 
Commercial real estate   -    -    -    -    -    6    -    -    -    3    - 
Multifamily   -    -    -    -    -    -    -    -    -    -    - 
Construction   -    -    -    -    -    -    -    -    -    -    - 
Land and land development   -    -    -    -    -    -    -    -    -    -    - 
Commercial business   -    -    -    -    -    12    -    -    -    7    - 
Consumer   77    77    3    75    -    85    -    76    -    91    - 
   $77   $77   $3   $75   $-   $245   $-   $77   $-   $253   $- 
                                                        
Total:                                                       
Residential real estate  $4,774   $5,253   $-   $5,591   $38   $5,827   $37   $5,438   $73   $5,881   $72 
Commercial real estate   6,485    6,546    -    6,594    48    5,695    55    6,711    100    5,705    113 
Multifamily   -    -    -    -    -    -    -    -    -    -    - 
Construction   -    -    -    -    -    -    -    -    -    -    - 
Land and land development   -    -    -    -    -    -    -    -    -    -    - 
Commercial business   273    258    -    329    1    266    1    322    2    223    1 
Consumer   274    279    3    278    2    323    1    281    3    339    3 
   $11,806   $12,336   $3   $12,792   $89   $12,111   $94   $12,752   $178   $12,148   $189 

 

The Company recognized $5,000 of interest income on an impaired commercial real estate loan using the cash receipts method during the six-month period ended March 31, 2015. The Company did not recognize any interest income using the cash receipts method during the three-month periods ended March 31, 2015. The Company did not recognize any interest income using the cash receipts method during the three and six-month periods ended March 31, 2016.

 

-20-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The following table presents impaired loans individually evaluated for impairment as of September 30, 2015.

 

   Recorded
Investment		   Unpaid
Principal
Balance		   Related
Allowance		 
   (In thousands) 
 
Loans with no related allowance recorded:
Residential real estate  $4,681   $5,245   $- 
Commercial real estate   7,041    7,079    - 
Multifamily   -    -    - 
Construction   -    -    - 
Land and land development   -    -    - 
Commercial business   222    282    - 
Consumer   210    214    - 
                
   $12,154   $12,820   $- 
                
Loans with an allowance recorded:
Residential real estate  $9   $9   $9 
Commercial real estate   -    -    - 
Multifamily   -    -    - 
Construction   -    -    - 
Land and land development   -    -    - 
Commercial business   -    -    - 
Consumer   80    80    5 
                
   $89   $89   $14 
                
Total:               
Residential real estate  $4,690   $5,254   $9 
Commercial real estate   7,041    7,079    - 
Multifamily   -    -    - 
Construction   -    -    - 
Land and land development   -    -    - 
Commercial business   222    282    - 
Consumer   290    294    5 
                
   $12,243   $12,909   $14 

 

-21-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

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 March 31, 2016:

 

   Nonaccrual
Loans		   Loans 90+
Days
Past Due
Still Accruing		   Total
Nonperforming
Loans		 
   (In thousands) 
             
Residential real estate  $1,880   $103   $1,983 
Commercial real estate   1,688    126    1,814 
Multifamily   -    -    - 
Construction   -    -    - 
Land and land development   -    90    90 
Commercial business   173    -    173 
Consumer   157    -    157 
                
Total  $3,898   $319   $4,217 

 

The following table presents the recorded investment in nonperforming loans at September 30, 2015:

 

  

Nonaccrual

Loans

  

Loans 90+

Days

Past Due

Still Accruing

  

Total

Nonperforming

Loans

 
   (In thousands) 
             
Residential real estate  $1,923   $155   $2,078 
Commercial real estate   1,855    -    1,855 
Multifamily   -    -    - 
Construction   -    -    - 
Land and land development   -    -    - 
Commercial business   210    94    304 
Consumer   165    3    168 
                
Total  $4,153   $252   $4,405 

 

-22-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The following table presents the aging of the recorded investment in past due loans at March 31, 2016:

 

   30-59
Days
Past Due		   60-89
Days
Past Due		   90 +
Days
Past Due		   Total
Past Due		   Current   Total
Loans		 
   (In thousands) 
                         
Residential real estate  $2,361   $531   $1,643   $4,535   $176,464   $180,999 
Commercial real estate   276    -    302    578    185,808    186,386 
Multifamily   -    -    -    -    22,237    22,237 
Construction   -    -    -    -    19,905    19,905 
Land and land development   245    -    90    335    10,132    10,467 
Commercial business   4    -    173    177    39,474    39,651 
Consumer   94    3    32    129    26,909    27,038 
                               
Total  $2,980   $534   $2,240   $5,754   $480,929   $486,683 

 

The following table presents the aging of the recorded investment in past due loans at September 30, 2015:

 

   30-59
Days
Past Due		   60-89
Days
Past Due		   90 +
Days
Past Due		   Total
Past Due		   Current   Total
Loans		 
   (In thousands) 
                         
Residential real estate  $3,635   $1,419   $1,530   $6,584   $176,124   $182,708 
Commercial real estate   1,098    113    139    1,350    171,805    173,155 
Multifamily   504    -    -    504    21,169    21,673 
Construction   -    -    -    -    16,632    16,632 
Land and land development   253    -    -    253    10,846    11,099 
Commercial business   15    -    303    318    32,323    32,641 
Consumer   81    14    32    127    26,960    27,087 
                               
Total  $5,586   $1,546   $2,004   $9,136   $455,859   $464,995 

 

-23-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, public information, historical payment experience, credit documentation, and current economic conditions and trends, among other factors. The Company classifies loans based on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings:

 

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

 

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Loss: Loans classified as loss are considered uncollectible and of such little value that their continuance on the Company’s books as an asset is not warranted.

 

-24-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. As of March 31, 2016, and based on the most recent analysis performed, the recorded investment in loans by risk category was as follows:

 

  

Residential

Real Estate

  

Commercial

Real Estate

   Multifamily   Construction   Land and Land
Development		   Commercial
Business		   Consumer   Total 
   (In thousands) 
                                 
Pass  $174,592   $179,426   $22,237   $19,905   $10,222   $39,478   $26,780   $472,640 
Special Mention   1,006    176    -    -    -    -    11    1,193 
Substandard   5,231    6,784    -    -    245    173    244    12,677 
Doubtful   170    -    -    -    -    -    3    173 
Loss   -    -    -    -    -    -    -    - 
                                         
Total  $180,999   $186,386   $22,237   $19,905   $10,467   $39,651   $27,038   $486,683 

 

As of September 30, 2015, the recorded investment in loans by risk category was as follows:

 

  

Residential

Real Estate

  

Commercial

Real Estate

   Multifamily   Construction  

Land and Land

Development

  

Commercial

Business

   Consumer   Total 
   (In thousands) 
                                 
Pass  $175,662   $160,224   $21,673   $16,632   $11,079   $32,335   $26,793   $444,398 
Special Mention   799    5,342    -    -    -    96    13    6,250 
Substandard   5,871    7,589    -    -    20    173    274    13,927 
Doubtful   376    -    -    -    -    37    7    420 
Loss   -    -    -    -    -    -    -    - 
                                         
Total  $182,708   $173,155   $21,673   $16,632   $11,099   $32,641   $27,087   $464,995 

 

-25-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Troubled Debt Restructurings

 

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

 

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

 

The following table summarizes the Company’s recorded investment in TDRs at March 31, 2016 and September 30, 2015. There was no specific reserve included in the allowance for loan losses related to TDRs at March 31, 2016 and September 30, 2015.

 

   Accruing   Nonaccrual   Total 
   (In thousands) 
March 31, 2016:               
Residential real estate  $2,894   $111   $3,005 
Commercial real estate   4,797    1,511    6,308 
Commercial business   100    28    128 
Consumer   117    -    117 
                
Total  $7,908   $1,650   $9,558 
                
September 30, 2015:               
Residential real estate  $2,767   $110   $2,877 
Commercial real estate   5,186    1,523    6,709 
Commercial business   12    -    12 
Consumer   125    -    125 
                
Total  $8,090   $1,633   $9,723 

 

-26-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The following table summarizes information in regard to TDRs that were restructured during the three and six-month periods ended March 31, 2016 and 2015:

 

   Number of
Loans		   Pre-
Modification
Principal
Balance		   Post-
Modification
Principal
Balance		 
   (In thousands) 
March 31, 2016:               
Three Months Ended March 31, 2016:               
Residential real estate   1   $107   $121 
                
Total   1   $107   $121 
                
Six Months Ended March 31, 2016:               
Residential real estate   5   $181   $247 
Commercial business   2    88    118 
                
Total   7   $269   $365 
                
March 31, 2015:               
Six Months Ended March 31, 2015:               
Residential real estate   2   $165   $172 
                
Total   2   $165   $172 

 

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

 

At March 31, 2016 and September 30, 2015, the Company had committed to lend $3,000 and $2,000, respectively, in additional funds to a customer with outstanding loans classified as TDRs.

 

There were no principal charge-offs recorded as a result of TDRs during the six-month periods ended March 31, 2016 and 2015. There was no specific allowance for loan losses related to TDRs modified during the six-month periods ended March 31, 2016 and 2015. 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 six-month periods ended March 31, 2016 and 2015, the Company did not have any TDRs that were modified within the previous twelve months and for which there was a payment default. No charge-offs were recognized for TDRs with subsequent payment defaults for the six-month periods ended March 31, 2016 and 2015.

 

-27-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Loan Servicing Rights

 

The Company originates loans to commercial customers under the SBA 7(a) program. During the fiscal year ending September 30, 2016, the Company began selling the guaranteed portion of the commercial SBA 7(a) loans with servicing retained. Loan servicing rights on originated commercial SBA 7(a) loans that have been sold are initially recorded at fair value. Capitalized servicing rights are then amortized in proportion to and over the period of estimated net servicing income. Impairment of servicing rights is assessed using the present value of estimated future cash flows.

 

The aggregate fair value of loan servicing rights at March 31, 2016 approximated its carrying value. A valuation model employed by an independent third party calculates the present value of future cash flows and is used to estimate fair value at the date of sale and on a quarterly basis for impairment analysis purposes. Management periodically compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. Key assumptions used to estimate the fair value of the loan servicing rights 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 loan servicing rights. Impairment is recognized through a valuation allowance to the extent that fair value is less than the carrying amount. Changes in the valuation allowance are reported in net gain on sales of loans in the consolidated statements of income.

 

The unpaid principal balance of commercial SBA 7(a) loans serviced for others was $5.9 million at March 31, 2016. There were no commercial SBA 7(a) loans serviced for others at September 30, 2015 or March 31, 2015. Contractually specified servicing fees, late fees and ancillary fees earned on commercial SBA 7(a) loans of $15,000 and $27,000 for the three- and six-month periods ended March 31, 2016, respectively, are included in interest income on loans in the consolidated statements of income.  This income is offset by direct servicing expenses related to commercial SBA 7(a) loans of $20,000 and $35,000 for the three- and six-month periods ended March 31, 2016, respectively.

 

An analysis of loan servicing rights for the six-month period ended March 31, 2016 is as follows:

 

(In thousands)    
     
Balance, beginning of period  $- 
Servicing rights resulting from transfers of loans   156 
Amortization   - 
Change in valuation allowance   - 
      
Balance, end of period  $156 

 

Residential mortgage loans originated for sale in the secondary market continue to be sold with servicing released.

 

-28-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

4.Real Estate Development and Construction

 

The Company is developing a parcel of land in New Albany, Indiana for retail purposes through the Bank’s subsidiary, FFCC. The total cost of the development is expected to be approximately $7.7 million, of which $7.6 million was incurred as of March 31, 2016. The development costs are partially funded by a loan from another financial institution. The development is substantially completed, with only certain tenant improvements in a multi-tenant retail building to be completed for current and future lessees, and eleven tenants have commenced occupancy as of March 31, 2016. The development plans provide for up to thirteen tenants when fully occupied.

 

Depreciation expense of $50,000 and $99,000 was recognized for real estate development and construction for the three- and six-month periods ended March 31, 2016, respectively. Depreciation expense of $49,000 and $98,000 was recognized for real estate development and construction for the three- and six-month periods ended March 31, 2015, respectively.

 

As a result of the Bank’s conversion to an Indiana-chartered commercial bank and entry in the Federal Reserve System on December 19, 2014, the Company is required under federal regulations to divest of its commercial real estate development by December 19, 2016 but may apply to the Federal Reserve System for extension of the conformance period for up to three additional years, in three one-year increments. The Company is required under Indiana statute to divest of its commercial real estate development within a ten-year period, or prior to December 19, 2024. In connection with its charter conversion, the Bank has committed under a plan of divestiture filed with the Indiana Department of Financial Institutions to divest of the commercial real estate development prior to December 31, 2017, which may require approval from the Federal Reserve System for extension of the federal conformance period beyond December 19, 2016.

 

5.Investment in Historic Tax Credit Entity

 

On October 15, 2014, the Company entered into an agreement to participate in the rehabilitation of a certified historic structure located in Louisville, Kentucky with a regional commercial developer. As part of the agreement, the Bank committed to invest $4.2 million into a limited liability company organized in the state of Kentucky by the commercial developer, for which it received a 99% equity interest in the entity and will receive an allocation of 99% of the operating profit and losses and any historic tax credits generated by the entity. The tax credits expected to be allocated to the Bank include federal rehabilitation investment credits totaling $4.6 million available under Internal Revenue Code Section 47. The Bank invested $417,000 on October 15, 2014 and an additional $417,000 on September 11, 2015 upon 50% completion of the project, and has committed to invest the remaining $3.3 million when the project is fully completed and the certificate of occupancy is received. The project is expected to be fully completed in June 2016.

 

The Bank’s investment in the historic tax credit entity is accounted for under the equity method of accounting. At March 31, 2016, the Bank’s investment of $4.2 million was included in other assets and its unfunded capital contribution commitment of $3.3 million was included in other liabilities in the accompanying consolidated balance sheet.

 

-29-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

6.Supplemental Disclosure for Earnings Per Share

 

When presented, basic earnings per share are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Earnings per share information is presented below for the three- and six-month periods ended March 31, 2016 and 2015.

 

   Three Months Ended   Six Months Ended 
   March 31,   March 31, 
   2016   2015   2016   2015 
   (Dollars in thousands, except per share data) 
     
Basic:                    
Earnings:                    
Net income  $1,635   $1,527   $2,878   $2,727 
Less: Preferred stock dividends declared   (19)   (43)   (62)   (86)
                     
Net income available to common shareholders  $1,616   $1,484   $2,816   $2,641 
                     
Shares:                    
Weighted average common shares outstanding   2,204,787    2,138,931    2,195,727    2,125,369 
                     
Net income per common share, basic  $0.73   $0.69   $1.28   $1.24 
                     
Diluted:                    
Earnings:                    
Net income  $1,635   $1,527   $2,878   $2,727 
Less: Preferred stock dividends declared   (19)   (43)   (62)   (86)
                     
Net income available to common shareholders  $1,616   $1,484   $2,816   $2,641 
                     
Shares:                    
Weighted average common shares outstanding   2,204,787    2,138,931    2,195,727    2,125,369 
Add: Dilutive effect of outstanding options   99,159    96,436    104,968    96,967 
Add: Dilutive effect of restricted stock   -    10,004    -    9,238 
Weighted average common shares outstanding as adjusted   2,303,946    2,245,371    2,300,695    2,231,574 
                     
Net income per common share, diluted  $0.70   $0.66   $1.22   $1.18 

 

Unearned ESOP and nonvested Unearned ESOP and nonvested restricted stock shares are not considered as outstanding for purposes of computing weighted average common shares outstanding.

 

-30-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

7.Supplemental Disclosures of Cash Flow Information

 

   Six Months Ended 
   March 31, 
   2016   2015 
   (In thousands) 
Cash payments for:          
Interest  $2,017   $1,953 
Taxes   618    864 
           
Transfers from loans held for sale to loans   1,319    - 
           
Transfers from loans to foreclosed real estate   415    398 
           
Proceeds from sales of foreclosed real estate financed through loans   134    290 
           
Noncash exercise of stock options   179    - 

 

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

 

Financial Accounting Standards Board (“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.

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets carried at fair value or the lower of cost or fair value. The tables below present the balances of financial assets measured at fair value on a recurring and nonrecurring basis as of March 31, 2016 and September 30, 2015. The Company had no liabilities measured at fair value as of March 31, 2016 or September 30, 2015.

 

-31-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

  

   Carrying Value 
   Level 1   Level 2   Level 3   Total 
   (In thousands) 
March 31, 2016:                    
Assets Measured - Recurring Basis:                    
Trading account securities  $-   $9,131   $-   $9,131 
                     
Securities available for sale:                    
Agency bonds and notes  $-   $1,055   $-   $1,055 
Agency mortgage-backed   -    51,380    -    51,380 
Agency CMO   -    17,864    -    17,864 
Privately-issued CMO   -    3,104    -    3,104 
Privately-issued ABS   -    5,243    -    5,243 
SBA certificates   -    1,320         1,320 
Municipal   -    97,478    -    97,478 
Total securities available for sale  $-   $177,444   $-   $177,444 
                     
Assets Measured - Nonrecurring Basis:                    
Impaired loans:                    
Residential real estate  $-   $-   $4,774   $4,774 
Commercial real estate   -    -    6,485    6,485 
Commercial business   -    -    273    273 
Consumer   -    -    271    271 
Total impaired loans  $-   $-   $11,803   $11,803 
                     
Loans held for sale  $-   $5,361   $-   $5,361 
                     
Loan servicing rights  $-   $-   $156   $156 
                     
Other real estate owned, held for sale:                    
Residential real estate  $-   $-   $209   $209 
Commercial real estate   -    -    383    383 
Land and land development   -    -    2    2 
Total other real estate owned  $-   $-   $594   $594 

 

-32-

 

 

FIRST SAVINGS FINANCIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

   Carrying Value 
   Level 1   Level 2   Level 3   Total 
   (In thousands) 
September 30, 2015:                    
Assets Measured - Recurring Basis:                    
Trading account securities  $-   $9,044   $-   $9,044 
                     
Securities available for sale:                    
Agency bonds and notes  $-   $5,582   $-   $5,582 
Agency mortgage-backed   -    48,278    -    48,278 
Agency CMO   -    19,014    -    19,014 
Privately-issued CMO   -    3,470    -    3,470 
Privately-issued ABS   -    6,109    -    6,109 
SBA certificates   -    1,480         1,480 
Municipal   -    94,395    -    94,395 
Total securities available for sale  $-   $178,328   $-   $178,328 
                     
SBA loans held for sale  $-   $5,835   $-   $5,835 
                     
Assets Measured - Nonrecurring Basis:                    
Impaired loans:                    
Residential real estate  $-   $-   $4,681   $4,681 
Commercial real estate   -    -    7,041    7,041 
Commercial business   -    -    222    222 
Consumer   -    -    285    285 
Total impaired loans  $-   $-   $12,229   $12,229 
                     
Residential mortgage loans held for sale  $-   $965   $-   $965 
                     
Other real estate owned, held for sale:                    
Residential real estate  $-   $-   $434   $434 
Commercial real estate   -    -    181    181 
Land and land development   -    -    3    3 
Total other real estate owned  $-   $-   $618   $618 

 

Fair value is based upon quoted market prices where available. If quoted market prices are not available, fair value is based on internally developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters or a matrix pricing model that employs the Bond Market Association’s standard calculations for cash flow and price/yield analysis and observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value, or at the lower of cost or fair value. These adjustments may include unobservable parameters. Any such valuation adjustments have been applied consistently over time.

 

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(Unaudited)

 

The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. 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 six-month period ended March 31, 2016.

 

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

 

Impaired Loans. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of impaired loans is classified as Level 3 in the fair value hierarchy.

 

Impaired loans are measured at the present value of estimated future cash flows using the loan's effective interest rate or the fair value of the collateral if the loan is a collateral-dependent loan. 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 March 31, 2016 and September 30, 2015, the significant unobservable inputs used in the fair value measurement of impaired loans included a discount from appraised value ranging from 0.0% to 15.0% and estimated costs to sell the collateral ranging from 0.0% to 6.0%. During the three- and six-month periods ended March 31, 2015, the Company recognized provisions for loan losses of $49,000 for impaired loans. No provision for loan losses were recognized for the three- and six-month periods ended March 31, 2016 for impaired loans.

 

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(Unaudited)

 

Loans Held for Sale. Loans held for sale is comprised of residential mortgage loans and SBA loans. Residential mortgage loans held for sale are carried at the lower of cost or market value. At March 31, 2016, SBA loans held for sale were carried at the lower of cost or market value. As discussed further below, SBA loans held for sale at September 30, 2015 were reported at fair value in accordance with FASB ASC 825-10. The fair value of loans held for sale is based on specific prices of the underlying contracts for sale to investors, and is classified as Level 2 in the fair value hierarchy.

 

Loan Servicing Rights. Loan servicing rights represent the value associated with servicing commercial SBA loans that have been sold. The fair value of loan servicing rights is determined on a quarterly basis by an independent third party valuation model using market-based discount rate and prepayment assumptions, and is classified as Level 3 in the fair value hierarchy. Impairment of the loan servicing rights is recognized on a quarterly basis through a valuation allowance to the extent that fair value is less than the carrying amount.

 

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 March 31, 2016, the significant unobservable inputs used in the fair value measurement of other real estate owned included a discount from appraised value (including estimated costs to sell the property) ranging from 0.0% to 61.5% with a weighted average of 21.7%. At September 30, 2015, the significant unobservable inputs used in the fair value measurement of other real estate owned included a discount from appraised value (including estimated costs to sell the property) ranging from 15.0% to 56.5% with a weighted average of 23.6%. The Company recognized charges of $20,000 and $79,000 to write down other real estate owned to fair value for the three and six months ended March 31, 2016, respectively. The Company recognized charges of $3,000 and $33,000 to write down other real estate owned to fair value for the three and six months ended March 31, 2015, respectively.

 

Transfers Between Categories. There were no transfers into or out of Level 3 financial assets for the six-month periods ended March 31, 2016 and 2015. In addition, there were no transfers into or out of Levels 1 and 2 of the fair value hierarchy during the six-month periods ended March 31, 2016 and 2015.

 

Financial Instruments Recorded Using Fair Value Option. Under FASB ASC 825-10, the Company may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis, with changes in fair value reported in income. The election is made at the acquisition of an eligible financial asset or financial liability, and may not be revoked once made.

 

The Company elected the fair value option for SBA loans held for sale at September 30, 2015. These loans were intended for sale and the Company believed that the fair value was the best indicator of the resolution of these loans. Interest income was recorded based on the contractual terms of the loans and in accordance with the Company’s policy on loans held for investment. None of these loans were 90 days or more past due, nor were any on nonaccrual status as of September 30, 2015. At September 30, 2015, the difference between the aggregate fair value ($5.8 million) and the aggregate unpaid principal balance ($5.3 million) of SBA loans held for sale was $558,000. Each of the SBA loans held for sale at September 30, 2015 was sold during the three-month period ended December 31, 2015. Subsequent to September 30, 2015, the Company did not elect the fair value option on SBA loans held for sale and, as such, all loans held for sale were carried at the lower of cost or market value at March 31, 2016.

 

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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:

 

   Carrying   Fair Value Measurements Using: 
March 31, 2016:  Amount   Level 1   Level 2   Level 3 
   (In thousands) 
                 
Financial assets:                    
Cash and due from banks  $8,961   $8,961   $-   $- 
Interest-bearing deposits with banks   14,991    14,991    -    - 
Interest-bearing time deposits   2,855    -    2,861    - 
Trading account securities   9,131    -    9,131    - 
Securities available for sale   177,444    -    177,444    - 
Securities held to maturity   3,445    -    3,916    - 
                     
Loans, net   478,518    -    -    483,900 
                     
Loans held for sale   5,361    -    5,361    - 
FRB and FHLB stock   6,936    -    6,936    - 
Accrued interest receivable   2,782    -    2,782    - 
Loan servicing rights                    
(included in other assets)   156