10-Q 1 tv526824_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 June 30, 2019

 

OR

 

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

 

For the transition period from_____________________ to__________________

 

Commission File 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)

 

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

 

Common stock, $0.01 par value per share   FSFG  
(Title of each class) (Trading Symbol)  

 

The NASDAQ Stock Market, LLC

(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 x  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 x  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 x
   
Non-accelerated Filer ¨ Smaller Reporting Company x
   
Emerging Growth Company ¨  

 

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

 

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

 

The number of shares outstanding of the registrant’s common stock as of August 2, 2019 was 2,350,229.

 

 

 

 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

 

INDEX

 

    Page
     
Part I Financial Information  
     
  Item 1.  Financial Statements  
     
  Consolidated Balance Sheets as of June 30, 2019  and September 30, 2018 (unaudited) 3
     
  Consolidated Statements of Income for the three months and nine months ended June 30, 2019 and 2018 (unaudited) 4
     
  Consolidated Statements of Comprehensive Income   for the three months and nine months ended June 30, 2019 and 2018 (unaudited) 5
     
  Consolidated Statements of Changes in Stockholders’ Equity for  the nine months ended June 30, 2019 and 2018 (unaudited) 6
     
  Consolidated Statements of Cash Flows for the nine months ended June 30, 2019 and 2018 (unaudited) 7
     
  Notes to Consolidated Financial Statements (unaudited) 8-53
     
  Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 54-65
     
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk 66-67
     
  Item 4.  Controls and Procedures 68
     
Part II Other Information  
     
  Item 1.  Legal Proceedings 69
     
  Item 1A.  Risk Factors 69
     
  Item 2.  Unregistered Sales of Equity Securities and  Use of Proceeds 70
     
  Item 3.  Defaults Upon Senior Securities 70
     
  Item 4.  Mine Safety Disclosures 70
     
  Item 5.  Other Information 71
     
  Item 6.  Exhibits 71
     
Signatures 72

 

 -2- 

 

 

PART I - FINANCIAL INFORMATION
FIRST SAVINGS FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

 

   June 30,   September 30, 
(In thousands, except share and per share data)  2019   2018 
         
ASSETS          
Cash and due from banks  $10,760   $14,191 
Interest-bearing deposits with banks   54,345    28,083 
Total cash and cash equivalents   65,105    42,274 
           
Interest-bearing time deposits   2,620    2,501 
Securities available for sale, at fair value   179,991    184,373 
Securities held to maturity   2,430    2,607 
           
Loans held for sale, residential mortgage ($81,083 at fair value in 2019; $9,952 at fair value in 2018)   81,083    10,466 
Loans held for sale, Small Business Administration   15,056    21,659 
Loans, net of allowance for loan losses of $9,616 and $9,323   796,994    704,271 
           
Federal Reserve Bank and Federal Home Loan Bank stock, at cost   12,980    9,621 
Premises and equipment   18,658    13,013 
Other real estate owned, held for sale   1,896    103 
Accrued interest receivable:          
Loans   3,150    2,687 
Securities   2,234    1,600 
Cash surrender value of life insurance   26,381    19,966 
Goodwill   9,848    9,848 
Core deposit intangibles   1,469    1,727 
Other assets   9,477    7,690 
           
Total Assets  $1,229,372   $1,034,406 
           
LIABILITIES          
Deposits:          
Noninterest-bearing  $172,915   $167,705 
Interest-bearing   715,230    643,407 
Total deposits   888,145    811,112 
           
Repurchase agreements   1,354    1,352 
Borrowings from Federal Home Loan Bank   189,255    90,000 
Other borrowings   19,712    19,661 
Accrued interest payable   983    743 
Advance payments by borrowers for taxes and insurance   1,359    1,218 
Accrued expenses and other liabilities   12,574    10,075 
Total Liabilities   1,113,382    934,161 
           
STOCKHOLDERS' EQUITY          
Preferred stock of $.01 par value per share; authorized 1,000,000 shares; none issued   -    - 
Common stock of $.01 par value per share; authorized 20,000,000 shares; issued 2,565,606 shares (2,560,907 at September 30, 2018); outstanding 2,350,229 shares (2,292,021 shares at September 30, 2018)   26    26 
Additional paid-in capital   27,476    27,630 
Retained earnings - substantially restricted   87,126    76,523 
Accumulated other comprehensive income   6,221    382 
Unearned stock compensation   (490)   (479)
Less treasury stock, at cost - 215,377 shares (268,886 shares at September 30, 2018)   (4,545)   (5,269)
Total First Savings Financial Group, Inc. Stockholders' Equity   115,814    98,813 
           
Noncontrolling interests in subsidiary   176    1,432 
Total Equity   115,990    100,245 
           
Total Liabilities and Equity  $1,229,372   $1,034,406 

 

See notes to consolidated financial statements.

 

 -3- 

 

 

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   June 30,   June 30, 
(In thousands, except share and per share data)  2019   2018   2019   2018 
                 
INTEREST INCOME                    
Loans, including fees  $10,905   $8,866   $30,926   $24,726 
Securities:                    
Taxable   710    1,201    2,184    2,787 
Tax-exempt   1,042    920    3,018    2,620 
Dividend income   196    107    459    346 
Interest-bearing deposits with banks   205    112    579    299 
Total interest income   13,058    11,206    37,166    30,778 
                     
INTEREST EXPENSE                    
Deposits   1,548    1,222    4,579    2,891 
Repurchase agreements   1    -    3    - 
Borrowings from Federal Home Loan Bank   898    1    1,896    3 
Other borrowings   319    476    959    1,601 
Total interest expense   2,766    1,699    7,437    4,495 
                     
Net interest income   10,292    9,507    29,729    26,283 
Provision for loan losses   337    266    992    1,099 
                     
Net interest income after provision for loan losses   9,955    9,241    28,737    25,184 
                     
NONINTEREST INCOME                    
Service charges on deposit accounts   484    461    1,444    1,237 
ATM and interchange fees   529    439    1,428    1,101 
Net gain (loss) on sales of available for sale securities   (56)   99    (55)   99 
Other than temporary impairment loss on securities   -    (95)   -    (95)
Net gain (loss) on trading account securities   -    (48)   -    43 
Net gain on sales of loans, Small Business Administration   1,515    1,558    3,000    4,585 
Mortgage banking income   10,028    91    18,391    259 
Increase in cash surrender value of life insurance   157    112    415    325 
Commission income   87    99    221    325 
Real estate lease income   158    2    473    3 
Net gain on sale of premises and equipment   7    5    16    20 
Income on tax credit investment   -    340    -    340 
Other income   189    191    635    485 
Total noninterest income   13,098    3,254    25,968    8,727 
                     
NONINTEREST EXPENSE                    
Compensation and benefits   11,456    5,113    26,953    13,532 
Occupancy and equipment   1,572    894    4,317    2,559 
Data processing   448    408    1,354    1,979 
Advertising   727    162    1,690    457 
Professional fees   496    370    1,460    1,236 
FDIC insurance premiums   112    135    290    382 
Net (gain) loss on other real estate owned   (30)   7    (44)   (171)
Other operating expenses   1,446    1,033    4,503    2,889 
Total noninterest expense   16,227    8,122    40,523    22,863 
Income before income taxes   6,826    4,373    14,182    11,048 
Income tax expense   1,020    696    2,008    1,656 
Net Income   5,806    3,677    12,174    9,392 
Less: net income attributable to noncontrolling interests   571    571    475    1,234 
Net Income Attributable to First Savings Financial Group, Inc.  $5,235   $3,106   $11,699   $8,158 
                     
Net income per share:                    
Basic  $2.24   $1.37   $5.07   $3.62 
Diluted  $2.21   $1.31   $4.94   $3.44 
                     
Weighted average shares outstanding:                    
Basic   2,333,502    2,274,951    2,308,359    2,251,387 
Diluted   2,373,578    2,378,839    2,369,421    2,369,710 
                     
Dividends per share  $0.16   $0.15   $0.47   $0.44 

 

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   Nine Months Ended 
   June 30,   June 30, 
(In thousands)  2019   2018   2019   2018 
                 
Net Income  $5,806   $3,677   $12,174   $9,392 
                     
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX                    
Unrealized gains (losses) on securities available for sale:                    
Unrealized holding gains (losses) arising during the period   2,671    (545)   7,416    (3,851)
Income tax benefit (expense)   (584)   35    (1,621)   742 
Net of tax amount   2,087    (510)   5,795    (3,109)
                     
Less: reclassification adjustment for realized (gains) losses included in net income   56    (99)   55    (99)
Income tax expense (benefit)   (11)   26    (11)   26 
Net of tax amount   45    (73)   44    (73)
                     
Less: reclassification adjustment for other-than-temporary impairment loss on securities included in net income   -    95    -    95 
Income tax benefit    -    (25)   -    (25)
Net of tax amount   -    70    -    70 
                     
Other Comprehensive Income (Loss)   2,132    (513)   5,839    (3,112)
                     
Comprehensive Income   7,938    3,164    18,013    6,280 
Less: comprehensive income attributable to noncontrolling interests   571    571    475    1,234 
                     
Comprehensive Income Attributable to First Savings Financial Group, Inc.  $7,367   $2,593   $17,538   $5,046 

 

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 
                                 
Nine Months Ended June 30, 2018:                                        
Balances at October 1, 2017  $25   $27,798   $67,583   $4,158   $(571)  $(5,878)  $-   $93,115 
                                         
Net income   -    -    8,158    -    -    -    1,234    9,392 
                                         
Other comprehensive loss   -    -    -    (3,112)   -    -    -    (3,112)
                                         
Reclassification from AOCI to retained earnings for change in federal tax rate   -    -    (619)   619    -    -    -    - 
                                         
Common stock dividends - $0.44 per share   -    -    (999)   -    -    -    -    (999)
                                         
Distributions to noncontrolling interests   -    -    -    -    -    -    (5)   (5)
                                         
Restricted stock grants - 1,000 shares   1    56    -    -    (57)   -    -    - 
                                         
Stock compensation expense   -    50    -    -    111    -    -    161 
                                         
Stock option exercises - 55,296 shares   -    (292)   -    -    -    1,042    -    750 
                                         
Purchase of 6,729 treasury shares   -    -    -    -    -    (433)   -    (433)
                                         
Balances at June 30, 2018  $26   $27,612   $74,123   $1,665   $(517)  $(5,269)  $1,229   $98,869 
                                         
Nine Months Ended June 30, 2019:                                        
Balances at October 1, 2018  $26   $27,630   $76,523   $382   $(479)  $(5,269)  $1,432   $100,245 
                                         
Net income   -    -    11,699    -    -    -    475   12,174 
                                         
Other comprehensive income   -    -    -    5,839    -    -    -    5,839 
                                         
Common stock dividends - $0.47 per share   -    -    (1,096)   -    -    -    -    (1,096)
                                         
Distributions to noncontrolling interests   -    -    -    -    -    -    (1,731)   (1,731)
                                         
Restricted stock grants, net of forfeitures - 2,329 shares   -    141    -    -    (141)   -    -    - 
                                         
Stock compensation expense   -    54    -    -    130    -    -    184 
                                         
Stock option exercises - 66,877 shares   -    (349)   -    -    -    1,297    -    948 
                                         
Purchase of 10,968 treasury shares   -    -    -    -    -    (573)   -    (573)
                                         
Balances at June 30, 2019  $26   $27,476   $87,126   $6,221   $(490)  $(4,545)  $176   $115,990 

 

See notes to consolidated financial statements.

 

 -6- 

 

 

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Nine Months Ended 
   June 30, 
(In thousands)  2019   2018 
         
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $12,174   $9,392 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Provision for loan losses   992    1,099 
Depreciation and amortization   1,221    995 
Amortization of premiums and accretion of discounts on securities, net   370    118 
Decrease in trading account securities   -    7,175 
Amortization and accretion of fair value adjustments on loans, net   (440)   (311)
Loans originated for sale   (472,486)   (87,277)
Proceeds on sales of loans   426,723    94,208 
Net realized and unrealized gain on loans held for sale   (18,171)   (4,844)
Net realized and unrealized gain on other real estate owned   (59)   (212)
Net (gain) loss on sales of available for sale securities   55    (99)
Other than temporary impairment loss on securities   -    95 
Increase in cash surrender value of life insurance   (415)   (325)
Net gain on sale of premises and equipment   (16)   (20)
Income on tax credit investment   -    (340)
Deferred income taxes   (137)   883 
Stock compensation expense   184    161 
Increase in accrued interest receivable   (1,097)   (788)
Increase in accrued interest payable   240    144 
Change in other assets and liabilities, net   287    (393)
Net Cash Provided By (Used In) Operating Activities   (50,575)   19,661 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Investment in interest-bearing time deposits   (840)   (490)
Proceeds from sales and maturities of interest-bearing time deposits   738    3,986 
Purchase of securities available for sale   (21,577)   (44,482)
Proceeds from sales of securities available for sale   13,948    37,315 
Proceeds from maturities of securities available for sale   3,600    1,280 
Proceeds from maturities of securities held to maturity   162    150 
Principal collected on securities   15,456    11,542 
Net increase in loans   (94,479)   (74,046)
Proceeds from redemption of Federal Reserve Bank stock   -    21 
Purchase of Federal Home Loan Bank stock   (3,359)   (2,562)
Investment in cash surrender value of life insurance   (6,000)   - 
Proceeds from life insurance   -    540 
Proceeds from sale of other real estate owned   178    606 
Purchase of premises and equipment   (8,452)   (918)
Proceeds from sales of premises and equipment   51    20 
Net cash received in the acquisition of Dearmin Bancorp and FNBO   -    6,667 
Net Cash Used In Investing Activities   (100,574)   (60,371)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Net increase in deposits   77,033    73,607 
Net increase in repurchase agreements   2    3 
Increase (decrease) in Federal Home Loan Bank line of credit   14,255    (18,065)
Proceeds from Federal Home Loan Bank advances   245,000    209,500 
Repayment of Federal Home Loan Bank advances   (160,000)   (219,500)
Net increase (decrease) in advance payments by          
borrowers for taxes and insurance   141    (404)
Proceeds from exercise of stock options   408    362 
Taxes paid on stock award shares for employees   (32)   (46)
Dividends paid on common stock   (1,096)   (999)
Distributions to noncontrolling interests   (1,731)   (5)
Net Cash Provided By Financing Activities   173,980    44,453 
           
Net Increase in Cash and Cash Equivalents   22,831    3,743 
           
Cash and cash equivalents at beginning of period   42,274    34,259 
           
Cash and Cash Equivalents at End of Period  $65,105   $38,002 

 

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 owns 51% of Q2 with the option to purchase the minority interest between July 1, 2020 and September 30, 2020. In accordance with Q2’s operating agreement, the Bank was allocated the first $1.7 million of Q2’s cumulative net income with any additional profits and losses allocated 51% to the Bank and 49% to Q2’s minority members.

 

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments considered necessary to present fairly the financial position as of June 30, 2019, the results of operations for the three- and nine-month periods ended June 30, 2019 and 2018, and the cash flows for the nine-month periods ended June 30, 2019 and 2018. 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, 2018 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.Acquisition of Dearmin Bancorp and The First National Bank of Odon

 

On February 9, 2018, the Company acquired Dearmin Bancorp, Inc. (“Dearmin”) and its majority owned subsidiary, The First National Bank of Odon (“FNBO”), a full service community bank located in Odon, Indiana. The acquisition expanded the Company’s presence into Daviess County, Indiana. The Company expects to benefit from growth in this market area as well as from expansion of the banking services provided to the existing customers of FNBO. Cost savings are also expected for the combined bank through economies of scale, efficiencies and the consolidation of business operations.

 

Pursuant to the terms of the merger agreement, FNBO stockholders received $265.00 in cash for each share of FNBO common stock for total cash consideration of $10.6 million. Under the acquisition method of accounting, the purchase price is assigned to the identifiable assets acquired and liabilities assumed based on their fair values, net of applicable income tax effects. In accounting for the acquisition, the excess of cost over the fair value of the acquired net assets of $1.9 million was recorded as goodwill. Transaction and integration costs related to the acquisition totaling $1.3 million were expensed as incurred for the nine-month period ended June 30, 2018. No transaction and integration costs were recognized for the three-month period ended June 30, 2018 or the three- and nine-month periods ended June 30, 2019.

 

Following is a condensed balance sheet providing the estimated fair values of the assets acquired and the liabilities assumed as of the date of acquisition:

 

   (In thousands) 
     
Cash and due from banks  $1,310 
Interest-bearing deposits with banks   15,957 
Interest-bearing time deposits with banks   3,817 
Investment securities   39,978 
Loans, net   34,467 
Premises and equipment   1,125 
Goodwill arising in the acquisition   1,912 
Core deposit intangible   1,487 
Other assets   2,890 
Total assets acquired   102,943 
      
Deposit accounts   91,765 
Net deferred tax liabilities   205 
Other liabilities   373 
Total liabilities assumed   92,343 
      
Total consideration  $10,600 

 

In accounting for the acquisition, $1.5 million was assigned to a core deposit intangible which is amortized over a weighted-average estimated economic life of 9.1 years. It is not anticipated that the core deposit intangible will have a significant residual value. No amount of the goodwill or core deposit intangible arising in the acquisition is deductible for income tax purposes.

 

 -9- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, applies to a loan with evidence of deterioration of credit quality since origination, acquired by completion of a transfer for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. On the acquisition date, no loans were identified with evidence of deterioration of credit quality since origination. Loans acquired not subject to ASC 310-30 included non-impaired loans with a fair value of $34.5 million and gross contractual amounts receivable of $41.5 million at the date of acquisition.

 

3.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.

 

Trading Account Securities

 

Prior to June 30, 2018, the Company invested in small and medium lot, investment grade municipal bonds through a managed brokerage account. The brokerage account was managed by an investment advisory firm registered with the U.S. Securities and Exchange Commission. During May 2018, the Company ceased its trading activity and had no trading account securities at September 30, 2018 or June 30, 2019. As such, there were no gains or losses on trading account securities during the three and nine-month periods ended June 30, 2019. During the three-month period ended June 30, 2018, the Company reported a net loss on trading account securities of $48,000. During the nine-month period ended June 30, 2018, the Company reported a net gain on trading account securities of $43,000.

 

 -10- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Securities Available for Sale and Held to Maturity

 

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

 

   Amortized
Cost		   Gross
Unrealized
Gain		   Gross
Unrealized
Losses		   Fair
 Value		 
   (In thousands) 
June 30, 2019:                    
Securities available for sale:                    
                     
Agency mortgage-backed  $16,037   $277   $33   $16,281 
Agency CMO   7,132    159    8    7,283 
Privately-issued CMO   1,281    138    3    1,416 
Privately-issued ABS   1,075    212    -    1,287 
SBA certificates   1,152    40    5    1,187 
Municipal bonds   145,331    7,271    65    152,537 
                     
Total securities available for sale  $172,008   $8,097   $114   $179,991 
                     
Securities held to maturity:                    
                     
Agency mortgage-backed  $120   $7   $-   $127 
Municipal bonds   2,310    320    -    2,630 
                     
Total securities held to maturity  $2,430   $327   $-   $2,757 

 

 -11- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

   Amortized
Cost		   Gross
Unrealized
Gain		   Gross
Unrealized
Losses		   Fair
Value		 
   (In thousands) 
September 30, 2018:                    
Securities available for sale:                    
                     
Agency mortgage-backed  $31,686   $90   $646   $31,130 
Agency CMO   10,754    -    313    10,441 
Privately-issued CMO   1,434    148    3    1,579 
Privately-issued ABS   1,538    346    -    1,884 
SBA certificates   1,305    53    7    1,351 
Municipal bonds   137,144    2,189    1,345    137,988 
                     
Total securities available for sale  $183,861   $2,826   $2,314   $184,373 
                     
Securities held to maturity:                    
                     
Agency mortgage-backed  $134   $8   $-   $142 
Municipal bonds   2,473    281    -    2,754 
                     
Total securities held to maturity  $2,607   $289   $-   $2,896 

 

The amortized cost and fair value of investment securities as of June 30, 2019 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
Cost		   Fair 
Value		   Amortized
Cost		   Fair 
Value		 
   (In thousands) 
Due within one year  $3,655   $3,675   $246   $275 
Due after one year through five years   20,236    20,885    995    1,120 
Due after five years through ten years   29,938    31,413    804    926 
Due after ten years   91,502    96,564    265    309 
CMO   8,413    8,699    -    - 
ABS   1,075    1,287    -    - 
SBA certificates   1,152    1,187    -    - 
Mortgage-backed securities   16,037    16,281    120    127 
                     
   $172,008   $179,991   $2,430   $2,757 

 

 -12- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Information pertaining to investment securities with gross unrealized losses at June 30, 2019 and September 30, 2018, aggregated by investment category and the length of time that individual securities have been in a continuous loss position, follows:

 

   Number of
Investment
Positions		   Fair
Value		   Gross
Unrealized
Losses		 
   (Dollars in thousands) 
June 30, 2019:               
Securities available for sale:               
                
Continuous loss position more than twelve months:               
Agency mortgage-backed   6   $4,402   $33 
Agency CMO   2    1,065    8 
Privately-issued CMO   1    37    3 
SBA certificates   1    480    5 
Municipal bonds   6    3,548    65 
                
Total more than twelve months   16    9,532    114 
                
Total securities available for sale   16   $9,532   $114 
                
September 30, 2018:               
Securities available for sale:               
                
Continuous loss position less than twelve months:               
Agency mortgage-backed   15   $14,814   $313 
Agency CMO   4    2,560    54 
Municipal bonds   93    44,162    944 
                
Total less than twelve months   112    61,536    1,311 
                
Continuous loss position more than twelve months:               
Agency mortgage-backed   11    9,283    333 
Agency CMO   9    7,881    259 
Privately-issued CMO   1    37    3 
SBA certificates   1    617    7 
Municipal bonds   8    6,106    401 
                
Total more than twelve months   30    23,924    1,003 
                
Total securities available for sale   142   $85,460   $2,314 

 

At June 30, 2019, the Company did not have any securities available for sale in a continuous loss position less than twelve months. At June 30, 2019 and September 30, 2018, the Company did not have any securities held to maturity with an unrealized loss.

 

 -13- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

The total available for sale debt securities in loss positions at June 30, 2019, which consisted of U.S. government agency mortgage backed securities and CMOs, privately issued CMOs, SBA certificates and municipal bonds, had a fair value as a percentage of amortized cost of 99.81%. All of the agency and municipal securities are issued by U.S. government-sponsored enterprises and municipal governments, and are generally secured by first mortgage loans and municipal project revenues.

 

The Company evaluates the existence of a potential credit loss component related to the decline in fair value of the privately issued CMO and ABS portfolios each quarter using an independent third party analysis. At June 30, 2019, the Company held thirteen privately-issued CMO and ABS securities, acquired in a 2009 bank merger, with an aggregate amortized cost of $1.1 million and fair value of $1.3 million that have been downgraded to a substandard regulatory classification due to the security’s credit quality rating by various nationally recognized statistical rating organizations (“NRSROs”).

 

At June 30, 2019, one privately-issued CMO was in a loss position and had depreciated approximately 8.23% from the Company’s carrying value and was collateralized by residential mortgage loans. This security had a total fair value of $37,000 and a total unrealized loss of $3,000 at June 30, 2019, and was rated below investment grade by NRSROs. Based on the independent third party analysis of the expected cash flows, management has determined that no other-than-temporary impairment is required to be recognized on the remaining privately issued CMO and ABS portfolios. While the Company had not anticipated additional credit-related impairment losses at June 30, 2019, 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 in the future.

 

The unrealized losses on U.S. government agency mortgage-backed securities and CMOs, SBA certificates and municipal bonds relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government, its agencies, or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As management has the ability to hold debt securities to maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other-than-temporary.

 

 -14- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

During the three month period ended June 30, 2019, the Company realized gross gains of $67,000 and gross losses of $123,000 on sales of available for sale securities. During the nine month period ended June 30, 2019, the Company realized gross gains of $68,000 and gross losses of $123,000 on sales of available for sale securities. During the three and nine-month periods ended June 30, 2018, the Company realized gross gains of $119,000 and gross losses of $20,000 on sales of available for sale securities.

 

Certain available for sale debt securities were pledged under repurchase agreements and to secure FHLB borrowings at June 30, 2019 and September 30, 2018, and may be pledged to secure federal funds borrowings.

 

4.Loans and Allowance for Loan Losses

 

Loans at June 30, 2019 and September 30, 2018 consisted of the following:

 

   June 30,  2019   September 30,
2018		 
   (In thousands) 
Real estate mortgage:          
1-4 family residential  $201,966   $195,274 
Commercial   406,726    343,498 
Multifamily residential   39,252    28,814 
Residential construction   14,356    19,527 
Commercial construction   9,375    8,669 
Land and land development   12,151    10,504 
Commercial business   80,008    67,786 
           
Consumer:          
Home equity   25,861    24,635 
Auto   13,695    11,720 
Other consumer   2,840    2,918 
Total Loans   806,230    713,345 
           
Deferred loan origination fees and costs, net   380    249 
Allowance for loan losses   (9,616)   (9,323)
           
Loans, net  $796,994   $704,271 

 

During the nine-month period ended June 30, 2019, there was no significant change in the Company’s lending activities or the methodology used to estimate the allowance for loan losses as disclosed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2018.

 

At June 30, 2019 and September 30, 2018, the balance of other real estate owned includes $57,000 and $103,000, respectively, of residential real estate properties where physical possession has been obtained. At June 30, 2019 and September 30, 2018, the recorded investment in consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure was $1.3 million.

 

 -15- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

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

 

  

Residential

Real Estate

  

Commercial

Real Estate

  

Multifamily

  

 

Construction

  

Land & Land

Development

  

Commercial

Business

  

Consumer

  

Total

 
   (In thousands) 
Recorded Investment in Loans:                                        
Principal loan balance  $201,966   $406,726   $39,252   $23,731   $12,151   $80,008   $42,396   $806,230 
                                         
Accrued interest receivable   731    1,618    123    119    50    437    72    3,150 
                                         
Net deferred loan origination fees and costs   (92)   197    (36)   14    (4)   333    (32)   380 
                                         
Recorded investment in loans  $202,605   $408,541   $39,339   $23,864   $12,197   $80,778   $42,436   $809,760 
                                         
Recorded Investment in Loans as Evaluated for Impairment:                                        
Individually evaluated for impairment  $4,276   $8,619   $-   $-   $-   $240   $197   $13,332 
                                         
Collectively evaluated for impairment   198,329    399,922    39,339    23,864    12,197    80,538    42,239    796,428 
                                         
Ending balance  $202,605   $408,541   $39,339   $23,864   $12,197   $80,778   $42,436   $809,760 

 

 -16- 

 

 

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, 2018:

 

  

Residential

Real Estate

  

Commercial

Real Estate

  

 

Multifamily

  

 

Construction

  

Land & Land

Development

  

Commercial

Business

  

 

Consumer

  

 

Total

 
   (In thousands) 
Recorded Investment in Loans:                                        
Principal loan balance  $195,274   $343,498   $28,814   $28,196   $10,504   $67,786   $39,273   $713,345 
                                         
Accrued interest receivable   589    1,403    81    156    24    365    69    2,687 
                                         
Net deferred loan origination fees and costs   (62)   104    (30)   (5)   (4)   275    (29)   249 
                                         
Recorded investment in loans  $195,801   $345,005   $28,865   $28,347   $10,524   $68,426   $39,313   $716,281 
                                         
Recorded Investment in Loans as Evaluated for Impairment:                                        
Individually evaluated for impairment  $5,107   $7,719   $-   $-   $27   $231   $243   $13,327 
                                         
Collectively evaluated for impairment   190,694    337,286    28,865    28,347    10,497    68,195    39,070    702,954 
                                         
Ending balance  $195,801   $345,005   $28,865   $28,347   $10,524   $68,426   $39,313   $716,281 

 

 -17- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

An analysis of the allowance for loan losses as of June 30, 2019 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  $42   $422   $-   $-   $-   $14   $14   $492 
                                         
Collectively evaluated for impairment   328    5,386    491    492    242    1,690    495    9,124 
                                         
Ending balance  $370   $5,808   $491   $492   $242   $1,704   $509   $9,616 

 

An analysis of the allowance for loan losses as of September 30, 2018 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  $7   $492   $-   $-   $-   $-   $12   $511 
                                         
Collectively evaluated for impairment   267    6,333    195    580    210    1,041    186    8,812 
                                         
Ending balance  $274   $6,825   $195   $580   $210   $1,041   $198   $9,323 

 

 -18- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

An analysis of the changes in the allowance for loan losses for the three months ended June 30, 2019 is as follows:

 

  

Residential

Real Estate

  

Commercial

Real Estate

   Multifamily   Construction  

Land & Land

Development

  

Commercial

Business

   Consumer   Total 
   (In thousands) 
Changes in Allowance for Loan Losses:                                        
Beginning balance  $220   $6,696   $232   $515   $237   $1,535   $499   $9,934 
Provisions   142    (316)   259    (23)   5    228    42    337 
Charge-offs   -    (574)   -    -    -    (71)   (45)   (690)
Recoveries   8    2    -    -    -    12    13    35 
                                         
Ending balance  $370   $5,808   $491   $492   $242   $1,704   $509   $9,616 

 

An analysis of the changes in the allowance for loan losses for the nine months ended June 30, 2019 is as follows:

 

  

Residential

Real Estate

  

Commercial

Real Estate

   Multifamily   Construction  

Land & Land

Development

  

Commercial

Business

   Consumer   Total 
   (In thousands) 
Changes in Allowance for Loan Losses:                                        
Beginning balance  $274   $6,825   $195   $580   $210   $1,041   $198   $9,323 
Provisions   84    (445)   296    (88)   32    721    392    992 
Charge-offs   (10)   (574)   -    -    -    (71)   (126)   (781)
Recoveries   22    2    -    -    -    13    45    82 
                                         
Ending balance  $370   $5,808   $491   $492   $242   $1,704   $509   $9,616 

 

 -19- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

An analysis of the changes in the allowance for loan losses for the three months ended June 30, 2018 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  $248   $6,182   $146   $985   $230   $927   $146   $8,864 
Provisions   147    383    47    (473)   (38)   60    140    266 
Charge-offs   (69)   -    -    -    -    -    (83)   (152)
Recoveries   21    -    -    -    -    11    16    48 
                                         
Ending balance  $347   $6,565   $193   $512   $192   $998   $219   $9,026 

 

An analysis of the changes in the allowance for loan losses for the nine months ended June 30, 2018 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  $252   $5,739   $106   $810   $223   $839   $123   $8,092 
Provisions   146    826    87    (298)   (31)   147    222    1,099 
Charge-offs   (93)   -    -    -    -    -    (167)   (260)
Recoveries   42    -    -    -    -    12    41    95 
                                         
Ending balance  $347   $6,565   $193   $512   $192   $998   $219   $9,026 

 

 -20- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The following table presents impaired loans individually evaluated for impairment as of June 30, 2019 and for the three and nine months ended June 30, 2019 and 2018.

 

   At June 30, 2019   Three Months Ended June 30,   Nine Months Ended June 30, 
               2019   2019   2018   2018   2019   2019   2018   2018 
   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  $3,897   $4,397   $-   $4,873   $26   $4,964   $37   $5,095   $89   $5,054   $108 
Commercial real estate   6,368    6,593    -    6,451    78    6,847    81    6,608    240    6,677    225 
Multifamily   -    -    -    -    -    -    -    -    -    -    - 
Construction   -    -    -    -    -    -    -    -    -    -    - 
Land and land development   -    -    -    -    -    29    -    8    -    29    - 
Commercial business   121    74    -    171    2    355    3    246    6    309    9 
Consumer   81    83    -    106    1    139    1    115    3    118    3 
   $10,467   $11,147   $-   $11,601   $107   $12,334   $122   $12,072   $338   $12,187   $345 
                                                        
Loans with an allowance recorded:                                                       
Residential real estate  $379   $378   $42   $94   $-   $376   $-   $158   $-   $308   $- 
Commercial real estate   2,251    2,640    422    2,549    -    136    -    1,971    -    54    - 
Multifamily   -    -    -    -    -    -    -    -    -    -    - 
Construction   -    -    -    -    -    -    -    -    -    -    - 
Land and land development   -    -    -    -    -    -    -    -    -    -    - 
Commercial business   119    120    14    90    -    -    -    36    -    -    - 
Consumer   116    117    14    140    -    145    -    160    -    133    - 
   $2,865   $3,255   $492   $2,873   $-   $657   $-   $2,325   $-   $495   $- 
                                                        
Total:                                                       
Residential real estate  $4,276   $4,775   $42   $4,967   $26   $5,340   $37   $5,253   $89   $5,362   $108 
Commercial real estate   8,619    9,233    422    9,000    78    6,983    81    8,579    240    6,731    225 
Multifamily   -    -    -    -    -    -    -    -    -    -    - 
Construction   -    -    -    -    -    -    -    -    -    -    - 
Land and land development   -    -    -    -    -    29    -    8    -    29    - 
Commercial business   240    194    14    261    3    355    3    282    6    309    9 
Consumer   197    200    14    246    1    284    1    275    3    251    3 
   $13,332   $14,402   $492   $14,474   $107   $12,991   $122   $14,397   $338   $12,682   $345 

 

The Company did not recognize any interest income using the cash receipts method during the three- and nine-month periods ended June 30, 2019 and 2018.

 

 -21- 

 

 

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, 2018.

 

   Recorded
Investment		   Unpaid
Principal
Balance		   Related
Allowance		 
   (In thousands) 
 
Loans with no related allowance recorded:               
Residential real estate  $4,833   $5,285   $- 
Commercial real estate   6,568    6,715    - 
Multifamily   -    -    - 
Construction   -    -    - 
Land and land development   27    28    - 
Commercial business   231    241    - 
Consumer   122    123    - 
                
   $11,781   $12,392   $- 
                
Loans with an allowance recorded:               
Residential real estate  $274   $282   $7 
Commercial real estate   1,151    1,293    492 
Multifamily   -    -    - 
Construction   -    -    - 
Land and land development   -    -    - 
Commercial business   -    -    - 
Consumer   121    128    12 
                
   $1,546   $1,703   $511 
                
Total:               
Residential real estate  $5,107   $5,567   $7 
Commercial real estate   7,719    8,008    492 
Multifamily   -    -    - 
Construction   -    -    - 
Land and land development   27    28    - 
Commercial business   231    241    - 
Consumer   243    251    12 
                
   $13,327   $14,095   $511 
 -22- 

 

 

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 June 30, 2019:

 

   Nonaccrual
Loans		   Loans 90+
Days
Past Due
Still Accruing		   Total
Nonperforming
Loans		 
   (In thousands) 
             
Residential real estate  $2,381   $1   $2,382 
Commercial real estate   2,547    -    2,547 
Multifamily   -    -    - 
Construction   -    -    - 
Land and land development   -    -    - 
Commercial business   56    -    56 
Consumer   122    -    122 
                
Total  $5,106   $1   $5,107 

 

The following table presents the recorded investment in nonperforming loans at September 30, 2018:

 

   Nonaccrual
Loans		  

Loans 90+

Days
Past Due
Still Accruing

  

Total

Nonperforming
Loans

 
   (In thousands) 
             
Residential real estate  $2,711   $91   $2,802 
Commercial real estate   1,284    -    1,284 
Multifamily   -    -    - 
Construction   -    -    - 
Land and land development   27    -    27 
Commercial business   -    -    - 
Consumer   160    -    160 
                
Total  $4,182   $91   $4,273 

 

 -23- 

 

 

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 June 30, 2019:

 

   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  $2,455   $699   $770   $3,924   $198,681   $202,605 
Commercial real estate   228    464    1,618    2,310    406,231    408,541 
Multifamily   -    -    -    -    39,339    39,339 
Construction   -    -    -    -    23,864    23,864 
Land and land development   -    -    -    -    12,197    12,197 
Commercial business   183    -    -    183    80,595    80,778 
Consumer   105    14    -    119    42,317    42,436 
                               
Total  $2,971   $1,177   $2,388   $6,536   $803,224   $809,760 

 

The following table presents the aging of the recorded investment in past due loans at September 30, 2018:

 

   30-59
Days
Past Due		   60-89
Days
Past Due		   90 +
Days
Past Due		   Total
Past Due		   Current   Total
Loans		 
   (In thousands) 
                         
Residential real estate  $2,088   $649   $1,202   $3,939   $191,862   $195,801 
Commercial real estate   696    -    210    906    344,099    345,005 
Multifamily   -    -    -    -    28,865    28,865 
Construction   -    -    -    -    28,347    28,347 
Land and land development   -    27    -    27    10,497    10,524 
Commercial business   7    -    -    7    68,419    68,426 
Consumer   43    37    32    112    39,201    39,313 
                               
Total  $2,834   $713   $1,444   $4,991   $711,290   $716,281 

 

 -24- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

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

 

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

 

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

 

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

 

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

 

 -25- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. As of June 30, 2019, 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  $198,483   $399,743   $38,862   $23,864   $12,197   $77,915   $42,352   $793,416 
Special Mention   -    490    -    -    -    398    -    888 
Substandard   4,060    8,308    477    -    -    2,465    82    15,392 
Doubtful   62    -    -    -    -    -    2    64 
Loss   -    -    -    -    -    -    -    - 
                                         
Total  $202,605   $408,541   $39,339   $23,864   $12,197   $80,778   $42,436   $809,760 

 

As of September 30, 2018, 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  $190,647   $338,256   $28,365   $28,347   $10,207   $66,162   $39,246   $701,230 
Special Mention   19    -    -    -    290    -    -    309 
Substandard   5,061    6,749    500    -    27    2,264    67    14,668 
Doubtful   74    -    -    -    -    -    -    74 
Loss   -    -    -    -    -    -    -    - 
                                         
Total  $195,801   $345,005   $28,865   $28,347   $10,524   $68,426   $39,313   $716,281 

 

 -26- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Troubled Debt Restructurings

 

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

 

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

 

The following table summarizes the Company’s recorded investment in TDRs at June 30, 2019 and September 30, 2018. There was $56,000 of specific reserve included in the allowance for loan losses related to TDRs at June 30, 2019. There was $5,000 of specific reserve included in the allowance for loan losses related to TDRs at September 30, 2018.

 

   Accruing   Nonaccrual   Total 
   (In thousands) 
June 30, 2019:               
Residential real estate  $1,895   $357   $2,252 
Commercial real estate   6,072    62    6,134 
Commercial business   184    -    184 
Consumer   75    -    75 
Total  $8,226   $419   $8,645 
                
September 30, 2018:               
Residential real estate  $2,396   $21   $2,417 
Commercial real estate   6,435    65    6,500 
Commercial business   231    -    231 
Consumer   83    -    83 
Total  $9,145   $86   $9,231 

 

 -27- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

There were no TDRs that were restructured during the three- and nine-month periods ended June 30, 2019. There were no TDRs that were restructured during the three month period ended June 30, 2018.

 

The following table summarizes information in regard to TDRs that were restructured during the nine-month period ended June 30, 2018:

 

   Number of
Loans		   Pre-
Modification
Principal
Balance		   Post-
Modification
Principal
Balance		 
   (Dollars in thousands) 
Nine Months Ended June 30, 2018:               
Residential real estate   1   $140   $120 
Commercial real estate   1    1,674    1,674 
Commercial business   1    170    170 
Consumer   1    3    3 
Total   4   $1,987   $1,967 

 

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 June 30, 2019 and September 30, 2018, the Company had committed to lend $1,000 to customers with outstanding loans classified as TDRs.

 

There were no principal charge-offs recorded as a result of TDRs during the three- and nine-month periods ended June 30, 2019 and 2018. There was no specific allowance for loan losses related to TDRs modified during the three- and nine-month periods ended June 30, 2019 and 2018. 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 nine-month period ended June 30, 2019, the Company had one TDR with an outstanding balance of $114,000 that was modified within the previous twelve months and for which there was a payment default. During the three month period ended June 30, 2019 and the three- and nine-month periods ended June 30, 2018, the Company did not have any TDRs that were modified within the previous twelve months and for which there was a payment default.

 

 -28- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Loan Servicing Rights

 

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

 

The aggregate fair value of loan servicing rights 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 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 SBA loans serviced for others was $151.4 million, $120.6 million and $113.5 million at June 30, 2019, September 30, 2018 and June 30, 2018, respectively. Contractually specified late fees and ancillary fees earned on SBA loans were $11,000 and $27,000 for the three- and nine-month periods ended June 30, 2019, respectively. Contractually specified late fees and ancillary fees earned on SBA loans were $3,000 and $12,000 for the three- and nine-month periods ended June 30, 2018, respectively. Net servicing income (contractually specified servicing fees offset by direct servicing expenses) related to SBA loans was $317,000 and $890,000 for the three- and nine-month periods ended June 30, 2019, respectively. Net servicing income (contractually specified servicing fees offset by direct servicing expenses) related to SBA loans was $240,000 and $581,000 for the three- and nine-month periods ended June 30, 2018, respectively. Net servicing income and costs are included in other noninterest income in the consolidated statements of income.

 

 -29- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

An analysis of SBA loan servicing rights for the three- and nine-month periods ended June 30, 2019 and 2018 is as follows:

 

   Three Months Ended   Nine Months Ended 
   June 30,   June 30, 
(In thousands)  2019   2018   2019   2018 
   (In thousands) 
Balance, beginning of period  $2,595   $2,116   $2,405   $1,389 
Servicing rights resulting from transfers of loans   449    430    892    1,297 
Amortization   (130)   (83)   (383)   (223)
Direct write-offs   (142)   -    (142)   - 
Change in valuation allowance   72    (18)   72    (18)
                     
Balance, end of period  $2,844   $2,445   $2,844   $2,445 

 

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

 

The valuation allowance related to SBA loan servicing rights at June 30, 2019 and September 30, 2018 was $105,000 and $177,000, respectively.

 

5.Deposits

 

Deposits at June 30, 2019 and September 30, 2018 consisted of the following:

 

   June 30, 
2019		   September 30,
2018		 
   (In thousands) 
         
Noninterest-bearing demand deposits  $172,915   $167,705 
NOW accounts   172,381    173,543 
Money market accounts   128,057    107,124 
Savings accounts   120,010    120,995 
Retail time deposits   136,280    123,007 
Brokered time deposits   158,502    118,738 
           
Total  $888,145   $811,112 

 

 -30- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

6.Supplemental Disclosure for Earnings Per Share

 

Earnings per share information is presented below for the three- and nine-month periods ended June 30, 2019 and 2018.

 

   Three Months Ended   Nine Months Ended 
   June 30,   June 30, 
   2019   2018   2019   2018 
   (Dollars in thousands, except per share data) 
Basic:                    
Earnings:                    
Net income attributable to First Savings Financial Group, Inc.  $5,235   $3,106   $11,699   $8,158 
Shares:                    
Weighted average common shares outstanding, basic   2,333,502    2,274,951    2,308,359    2,251,387 
                     
Net income per common share, basic  $2.24   $1.37   $5.07   $3.62 
                     
Diluted:                    
Earnings:                    
Net income attributable to First Savings Financial Group, Inc.  $5,235   $3,106   $11,699   $8,158 
Shares:                    
Weighted average common shares outstanding, basic   2,333,502    2,274,951    2,308,359    2,251,387 
Add: Dilutive effect of outstanding options   35,669    96,662    55,692    111,382 
Add: Dilutive effect of restricted stock   4,407    7,226    5,370    6,941 
Weighted average common shares outstanding, as adjusted   2,373,578    2,378,839    2,369,421    2,369,710 
                     
Net income per common share, diluted  $2.21   $1.31   $4.94   $3.44 

 

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

 

There were no antidilutive restricted stock awards excluded from the calculation of diluted net income per share for the three- and nine-month periods ended June 30, 2019 and 2018. Stock options for 7,200 and 10,200 shares of common stock were excluded from the calculation of diluted net income per common share for the three- and nine-month periods ended June 30, 2019, respectively, because their effect was antidilutive. Stock options for 4,800 shares of common stock were excluded from the calculation of diluted net income per share for the three- and nine-month periods ended June 30, 2018, because their effect was antidilutive.

 

 -31- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

7.Supplemental Disclosures of Cash Flow Information

 

   Nine Months Ended 
   June 30, 
   2019   2018 
   (In thousands) 
Cash payments for:          
Interest  $7,205   $4,348 
Income taxes (net of refunds received)   308    1,762 
           
Noncash investing and financing activities:          
Transfers from loans held for sale to loans   -    509 
           
Transfers from loans to foreclosed real estate   224    69 
           
Proceeds from sales of foreclosed real estate financed through loans   47    427 
           
Noncash exercise of stock options   542    387 
           
Transfers from premises and equipment to  other real estate owned   1,838    - 

 

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

 

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

 

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

 

Level 2:Inputs to the valuation methodology include quoted market prices for similar assets or liabilities in active markets; quoted market prices for identical or similar assets or liabilities in markets that are not active; or inputs that are derived principally from or can be corroborated by observable market data by correlation or other means.

 

Level 3:Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

 -32- 

 

 

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 June 30, 2019 and September 30, 2018. The Company had no liabilities measured at fair value as of September 30, 2018.

 

   Carrying Value 
   Level 1   Level 2   Level 3   Total 
   (In thousands) 
June 30, 2019:                    
Assets Measured - Recurring Basis:                    
Securities available for sale:                    
Agency mortgage-backed  $-   $16,281   $-   $16,281 
Agency CMO   -    7,283    -    7,283 
Privately-issued CMO   -    1,416    -    1,416 
Privately-issued ABS   -    1,287    -    1,287 
SBA certificates   -    1,187    -    1,187 
Municipal   -    152,537    -    152,537 
Total securities available for sale  $-   $179,991   $-   $179,991 
Residential mortgage loans held for sale – fair value option elected  $-   $81,083   $-   $81,083 
Derivative assets (included in other assets)  $-   $-   $3,292   $3,292 
                     
Liabilities Measured – Recurring Basis:                    
Derivative liabilities (included in other liabilities)  $        -   $916   $-   $916 
                     
Assets Measured - Nonrecurring Basis:                    
Impaired loans:                    
Residential real estate  $-   $-   $4,234   $4,234 
Commercial real estate   -    -    8,197    8,197 
Commercial business   -    -    226    226 
Consumer   -    -    183    183 
Total impaired loans  $-   $-   $12,840   $12,840 
SBA loans held for sale  $-   $-   $15,056   $15,056 
Loan servicing rights  $-   $-   $2,844   $2,844 
Other real estate owned, held for sale:                    
Residential real estate  $-   $-   $57   $57 
Former bank premises   -    -    1,839    1,839 
Total other real estate owned  $-   $-   $1,896   $1,896 

 

 -33- 

 

 

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, 2018:                    
Assets Measured - Recurring Basis:                    
Securities available for sale:                    
Agency mortgage-backed  $-   $31,130   $-   $31,130 
Agency CMO   -    10,441    -    10,441 
Privately-issued CMO   -    1,579    -    1,579 
Privately-issued ABS   -    1,884    -    1,884 
SBA certificates   -    1,351    -    1,351 
Municipal   -    137,988    -    137,988 
Total securities available for sale  $-   $184,373   $-   $184,373 
Residential mortgage loans held for sale – fair value option elected  $-   $9,952   $-   $9,952 
Derivative assets (included in other assets)  $-   $41   $380   $421 
Assets Measured - Nonrecurring Basis:                    
Impaired loans:                    
Residential real estate  $-   $-   $5,100   $5,100 
Commercial real estate   -    -    7,227    7,227 
Land and land development   -    -    27    27 
Commercial business   -    -    231    231 
Consumer   -    -    231    231 
Total impaired loans  $-   $-   $12,816   $12,816 
Residential mortgage loans held for sale – fair value option not elected  $-   $514   $-   $514 
SBA loans held for sale  $-   $21,659   $-   $21,659 
Loan servicing rights  $-   $-   $2,405   $2,405 
Other real estate owned, held for sale:                    
Residential real estate  $-   $-   $103   $103 
Total other real estate owned  $-   $-   $103   $103 

 

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.

 

 -34- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(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. Other than SBA loans held for sale (see discussion below), there have been no changes in the valuation techniques and related inputs used for assets measured at fair value on a recurring and nonrecurring basis during the nine-month period ended June 30, 2019.

 

Securities Available for Sale. Securities classified as 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 securities available for sale are recorded in other comprehensive income, net of income tax effect.

 

Residential Mortgage Loans Held for Sale. Prior to June 30, 2018, residential mortgage loans held for sale were carried at the lower of cost or market value. Effective July 1, 2018, the Company elected to record substantially all of its residential mortgage loans held for sale at fair value in accordance with FASB ASC 825-10. The fair value of residential mortgage loans held for sale is based on specific prices of the underlying contracts for sale to investors or current secondary market prices for loans with similar characteristics, and is classified as level 2 in the fair value hierarchy.

 

SBA Loans Held for Sale. SBA loans held for sale are carried at the lower of cost or market value. At September 30, 2018, the fair value of SBA loans held for sale was obtained from an independent third party pricing firm based on specific prices of the underlying contracts for sale to investors or current secondary market prices for loans with similar characteristics, and was classified as Level 2 in the fair value hierarchy. At June 30, 2019, the fair value of SBA loans held for sale reflects management’s estimate based on the weighted average price of SBA loans sold to investors during the prior quarter and is classified as Level 3 in the fair value hierarchy.

 

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

 

 -35- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

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

 

The table below presents a reconciliation of derivative assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three- and nine-months ended June 30, 2019 and 2018:

 

   Three Months Ended   Nine Months Ended 
   June 30,   June 30, 
(In thousands)  2019   2018   2019   2018 
                 
Beginning balance  $1,705   $-   $380   $- 
Unrealized gains recognized in earnings, net of settlements   1,587    -    2,912    - 
                     
Ending balance  $3,292   $-   $3,292   $- 

 

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- and nine-months ended June 30, 2019 attributable to Level 3 assets held at the balance sheet date were $3.3 million.

 

The table below presents information about significant unobservable inputs (Level 3) used in the valuation of assets measured at fair value on a recurring basis as of June 30, 2019 and September 30, 2018.

 

Financial Instrument  Significant 
Unobservable Inputs		  Range of
Inputs June
30, 2019		  Range of
Inputs
September 30,
2018
          
Interest rate lock commitments  Pull-through rate  40% - 100%  72% - 95%
   Direct costs to close  1%  1% - 3%

 

 -36- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

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

 

Impaired loans are measured at the present value of estimated future cash flows using the loan's effective interest rate or the fair value of the collateral if the loan is a collateral-dependent loan. At June 30, 2019 and September 30, 2018, all impaired loans were considered to be collateral dependent for the purpose of determining fair value. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and its fair value is generally determined based on real estate appraisals or other independent evaluations by qualified professionals. The appraisals are 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 June 30, 2019 and September 30, 2018, the significant unobservable inputs used in the fair value measurement of impaired loans included discounts from appraised value ranging from 0.0% to 15.0% and estimated costs to sell the collateral ranging from 0.0% to 6.0%. During the three-month periods ended June 30, 2019 and 2018, the Company recognized provisions for loan losses of $171,000 and $331,000, respectively, for impaired loans. During the nine-month periods ended June 30, 2019 and 2018, the Company recognized provisions for loan losses of $717,000 and $349,000, respectively, for impaired loans.

 

Loan Servicing Rights. Loan servicing rights represent the value associated with servicing SBA loans that have been sold. The fair value of loan servicing rights is determined on a quarterly basis by an independent third party valuation model using market-based discount rate and prepayment assumptions, and is classified as Level 3 in the fair value hierarchy. At June 30, 2019, the significant unobservable inputs used in the fair value measurement of loan servicing rights included discount rates ranging from 6.81% to 16.74% with a weighted average of 10.80% and prepayment speed assumptions ranging from 5.68% to 18.23% with a weighted average rate of 12.30%. At September 30, 2018, the significant unobservable inputs used in the fair value measurement of loan servicing rights included discount rates ranging from 10.84% to 23.22% with a weighted average of 14.63% and prepayment speed assumptions ranging from 4.32% to 14.43% with a weighted average rate of 10.08%. Impairment of the loan servicing rights is recognized on a quarterly basis through a valuation allowance to the extent that fair value is less than the carrying amount. The Company recognized $70,000 of impairment charges on loan servicing rights for the three- and nine-month periods ended June 30, 2019 and 2018. The Company recognized $18,000 of impairment charges on loan servicing rights for the three- and nine-month periods ended June 30, 2018.

 

 -37- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Other Real Estate Owned. Other real estate owned held for sale is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of other real estate owned is classified as Level 3 in the fair value hierarchy.

 

Other real estate owned is reported at fair value, less estimated costs to dispose of the property. The fair values are determined by real estate appraisals, which are then generally discounted by management in order to reflect management’s estimate of the fair value of the property given current market conditions and the condition of the property. At June 30, 2019, the significant unobservable inputs used in the fair value measurement of other real estate owned included a discount from appraised value (including estimated costs to sell the property) ranging from 15.0% to 18.4% with a weighted average of 16.2%. At September 30, 2018, the significant unobservable inputs used in the fair value measurement of other real estate owned included a discount from appraised value (including estimated costs to sell the property) ranging from 15.0% to 100.0% with a weighted average of 48.9%. The Company did not recognize any charges to write down other real estate owned to fair value for the three- and nine-month periods ended June 30, 2019. The Company recognized charges of $4,000 and $63,000 to write-down other real estate owned to fair value for the three- and nine-month periods ended June 30, 2018.

 

Transfers Between Categories. As previously described, management used different valuation methodologies related to SBA loans held for sale at June 30, 2019 and September 30, 2018, resulting in a change in classification from Level 2 to Level 3 for those types of instruments. Other than that change, there were no transfers into or out of Levels 1, 2, or 3 of the fair value hierarchy for the three- and nine-month periods ended June 30, 2019 and 2018.

 

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.

 

 -38- 

 

 

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, including all loans originated by the Company’s wholesale lending division. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loans and in accordance with the Company’s policy on loans held for investment. None of these loans were 90 days or more past due, nor were any on nonaccrual status, as of June 30, 2019 and September 30, 2018.

 

The table below presents the difference between the aggregate fair value and the aggregate remaining principal balance for residential mortgage loans held for sale for which the fair value option had been elected as of June 30, 2019 and September 30, 2018.

 

(In thousands)  Aggregate
Fair Value
June 30,
2019		   Aggregate
Principal
Balance
June 30,
2019		   Difference 
                
Residential mortgage loans held for sale  $81,083   $78,005   $3,078 

 

(In thousands)  Aggregate
Fair Value
September
30, 2018		   Aggregate
Principal
Balance
September
30, 2018		   Difference 
                
Residential mortgage loans held for sale  $9,952   $9,695   $257 

 

The table below presents gains and losses and interest included in earnings related to financial assets measured at fair value under the fair value option for the three- and nine-month periods ended June 30, 2019 and 2018:

 

   Three Months Ended   Nine Months Ended 
   June 30,   June 30, 
(In thousands)  2019   2018   2019   2018 
                 
Gains – included in mortgage banking income  $1,890   $-   $2,916   $- 
Interest income   425    -    766    - 
                     
   $2,315   $-   $3,682   $- 

 

 -39- 

 

 

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. In accordance with the Company’s adoption of Accounting Standards Update (“ASU”) 2016-01 effective October 1, 2018, the table below for June 30, 2019 presents the fair values measured using an exit price notion. The fair value of loans at September 30, 2018 was measured using an entry price notion.

 

   Carrying   Fair Value Measurements
Using:		 
   Amount   Level 1   Level 2   Level 3 
   (In thousands) 
June 30, 2019:                    
Financial assets:                    
Cash and due from banks  $10,760   $10,760   $-   $- 
Interest-bearing deposits with banks   54,345    54,345    -    - 
Interest-bearing time deposits   2,620    -    2,620    - 
Securities available for sale   179,991    -    179,991    - 
Securities held to maturity   2,430    -    2,757    - 
                     
Loans, net   796,994    -    -    832,026 
                     
Residential mortgage loans held for sale   81,083    -    81,083    - 
SBA loans held for sale   15,056    -    -    16,587 
FRB and FHLB stock   12,980    N/A    N/A    N/A 
Accrued interest receivable   5,384    -    5,384    - 
Loan servicing rights (included in other assets)   2,844    -    -    2,844 
Derivative assets (included in other assets)   3,292    -    -    3,292 
Financial liabilities:                    
Deposits   888,145    -    -    888,369 
Short-term repurchase agreements   1,354    -    1,354    - 
Borrowings from FHLB   189,255    -    188,506    - 
Subordinated note   19,712    -    19,712    - 
Accrued interest payable   983    -    983    - 
Advance payments by borrowers for taxes and insurance   1,359    -    1,359    - 
Derivative liabilities (included in other liabilities)   916    -    916    - 

 

 -40-