Company Quick10K Filing
Quick10K
First Savings Financial Group
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$53.90 2 $124
10-Q 2018-12-31 Quarter: 2018-12-31
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-K 2015-09-30 Annual: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-K 2014-09-30 Annual: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-02-20 Other Events, Exhibits
8-K 2019-02-19 Shareholder Vote
8-K 2019-02-19 Officers
8-K 2019-01-29 Earnings, Exhibits
8-K 2018-11-21 Other Events, Exhibits
8-K 2018-11-14 Earnings, Exhibits
8-K 2018-09-20 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2018-08-15 Other Events, Exhibits
8-K 2018-08-02 Earnings, Exhibits
8-K 2018-05-16 Other Events, Exhibits
8-K 2018-05-08 Earnings, Exhibits
8-K 2018-02-21 Other Events, Exhibits
8-K 2018-02-20 Shareholder Vote
8-K 2018-01-26 Earnings, Exhibits
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FSFG 2018-12-31
Part I - Financial Information
Part I - Item 2
Part I - Item 3
Part I - Item 4
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Part II
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Part II
Item 5. Other Information
Item 6. Exhibits
EX-31.1 tv512690_ex31-1.htm
EX-31.2 tv512690_ex31-2.htm
EX-32.1 tv512690_ex32-1.htm
EX-32.2 tv512690_ex32-2.htm

First Savings Financial Group Earnings 2018-12-31

FSFG 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv512690_10q.htm FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended December 31, 2018

 

OR

 

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

 

For the transition period from                                 to                                

 

Commission File No. 1-34155

 

First Savings Financial Group, Inc.

(Exact name of registrant as specified in its charter)

 

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

 

501 East Lewis & Clark Parkway, Clarksville, Indiana 47129

(Address of principal executive offices) (Zip Code)

 

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

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 January 31, 2019 was 2,304,310.

 

 

 

   

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

 

INDEX

 

    Page
Part I Financial Information  
     
  Item 1.  Financial Statements  
     
  Consolidated Balance Sheets as of December 31, 2018 and September 30, 2018 (unaudited) 3
     
  Consolidated Statements of Income for the three months ended December 31, 2018 and 2017 (unaudited) 4
     
  Consolidated Statements of Comprehensive Income for the three months ended December 31, 2018  and 2017 (unaudited) 5
     
  Consolidated Statements of Changes in Stockholders’ Equity for the three months ended December 31, 2018 and 2017 (unaudited) 6
     
  Consolidated Statements of Cash Flows for the three months ended December 31, 2018 and 2017 (unaudited) 7
     
  Notes to Consolidated Financial Statements (unaudited) 8-49
     
  Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 50-57
     
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk 58-59
     
  Item 4.  Controls and Procedures 60
     
Part II Other Information  
     
  Item 1.  Legal Proceedings 61
     
  Item 1A.  Risk Factors 61
     
  Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 62
     
  Item 3.  Defaults Upon Senior Securities 62
     
  Item 4.  Mine Safety Disclosures 62
     
  Item 5.  Other Information 63
     
  Item 6.  Exhibits 63
     
Signatures 64

 

 -2- 

 

 

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited) 

 

(In thousands, except share and per share data)  December 31,
2018
   September 30,
2018
 
         
ASSETS          
Cash and due from banks  $11,524   $14,191 
Interest-bearing deposits with banks   24,820    28,083 
Total cash and cash equivalents   36,344    42,274 
           
Interest-bearing time deposits   2,991    2,501 
Securities available for sale, at fair value   186,260    184,373 
Securities held to maturity   2,570    2,607 
           
Loans held for sale, residential mortgage ($15,920 at fair value at December 31, 2018; $9,952 at fair value at September 30, 2018)   15,920    10,466 
Loans held for sale, Small Business Administration   22,032    21,659 
Loans, net of allowance for loan losses of $9,620 and $9,323   734,061    704,271 
           
Federal Reserve Bank and Federal Home Loan Bank stock, at cost   10,196    9,621 
Premises and equipment   20,159    13,013 
Other real estate owned, held for sale   232    103 
Accrued interest receivable:          
Loans   2,794    2,687 
Securities   2,014    1,600 
Cash surrender value of life insurance   20,077    19,966 
Goodwill   9,848    9,848 
Core deposit intangibles   1,601    1,727 
Other assets   6,890    7,690 
           
Total Assets  $1,073,989   $1,034,406 
           
LIABILITIES          
Deposits:          
Noninterest-bearing  $169,062   $167,705 
Interest-bearing   663,011    643,407 
Total deposits   832,073    811,112 
           
Repurchase agreements   1,352    1,352 
Borrowings from Federal Home Loan Bank   107,019    90,000 
Other borrowings   19,678    19,661 
Accrued interest payable   996    743 
Advance payments by borrowers for taxes and insurance   855    1,218 
Accrued expenses and other liabilities   7,455    10,075 
Total Liabilities   969,428    934,161 
           
STOCKHOLDERS' EQUITY          
Common stock of $.01 par value per share; authorized 20,000,000 shares; issued 2,563,736 shares (2,560,907 at September 30, 2018); outstanding 2,304,310 shares (2,292,021 shares at September 30, 2018)   26    26 
Additional paid-in capital   27,746    27,630 
Retained earnings - substantially restricted   79,109    76,523 
Accumulated other comprehensive income   1,772    382 
Unearned stock compensation   (580)   (479)
Less treasury stock, at cost - 259,426 shares (268,886 shares at September 30, 2018)   (5,105)   (5,269)
Total First Savings Financial Group, Inc. Stockholders' Equity   102,968    98,813 
           
Noncontrolling interests in subsidiary   1,593    1,432 
Total Equity   104,561    100,245 
           
Total Liabilities and Equity  $1,073,989   $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
December, 31
 
(In thousands, except share and per share data)  2018   2017 
         
INTEREST INCOME          
Loans, including fees  $9,810   $7,687 
Securities:          
Taxable   747    777 
Tax-exempt   970    801 
Dividend income   121    90 
Interest-bearing deposits with banks   153    71 
Total interest income   11,801    9,426 
           
INTEREST EXPENSE          
Deposits   1,424    862 
Repurchase agreements   1    1 
Borrowings from Federal Home Loan Bank   478    510 
Other borrowings   322    - 
Total interest expense   2,225    1,373 
           
Net interest income   9,576    8,053 
Provision for loan losses   315    462 
           
Net interest income after provision for loan losses   9,261    7,591 
           
NONINTEREST INCOME          
Service charges on deposit accounts   511    377 
ATM and interchange fees   453    363 
Net gain on trading account securities   -    150 
Net gain on sales of loans, Small Business Administration   964    1,539 
Mortgage banking income   3,289    115 
Increase in cash surrender value of life insurance   111    107 
Commission income   57    128 
Real estate lease income   158    - 
Net gain on sale of premises and equipment   1    7 
Other income   237    120 
Total noninterest income   5,781    2,906 
           
NONINTEREST EXPENSE          
Compensation and benefits   7,257    4,011 
Occupancy and equipment   1,325    742 
Data processing   427    347 
Advertising   396    117 
Professional fees   460    373 
FDIC insurance premiums   66    119 
Net gain on other real estate owned   (21)   (156)
Other operating expenses   1,506    829 
Total noninterest expense   11,416    6,382 
Income before income taxes   3,626    4,115 
Income tax expense (benefit)   522    622 
Net Income   3,104    3,493 
Less: net income attributable to noncontrolling interests   173    87 
Net Income Attributable to First Savings Financial Group, Inc.  $2,931   $3,406 
           
Net income per share:          
Basic  $1.28   $1.53 
Diluted  $1.24   $1.44 
           
Weighted average shares outstanding:          
Basic   2,284,665    2,228,256 
Diluted   2,371,480    2,358,935 
           
Dividends per share  $0.15   $0.14 

 

See notes to consolidated financial statements.

 

 -4- 

 

 

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

  

   Three Months Ended
December 31,
 
(In thousands)  2018   2017 
         
Net Income  $3,104   $3,493 
           
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX          
Unrealized gains (losses) on securities available for sale:          
Unrealized holding gains (losses) arising during the period   1,780    (1,566)
Income tax benefit (expense)   (390)   550 
Other Comprehensive Income (Loss)   1,390    (1,016)
           
Comprehensive Income   4,494    2,477 
Less: comprehensive income attributable to noncontrolling interests   173    87 
           
Comprehensive Income Attributable to First Savings Financial Group, Inc.  $4,321   $2,390 

 

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 
                                 
Three Months Ended December 31, 2017:                                        
Balances at October 1, 2017  $25   $27,798   $67,583   $4,158   $(571  $(5,878)  $-   $93,115 
                                         
Net income   -    -    3,406    -    -    -    87    3,493 
                                         
Other comprehensive loss   -    -    -    (1,016)   -    -    -    (1,016)
                                         
Common stock dividends - $0.14 per share   -    -    (315)   -    -    -    -    (315)
                                         
Restricted stock grants - 1,500 shares   1    84    -    -    (85)   -    -    -
                                         
Stock compensation expense   -    17    -    -    37    -    -    54 
                                         
Stock option exercises - 8,400 shares   -    (27)   -    -    -    149    -    122
                                         
Purchase of 815 treasury shares   -    -    -    -    -    (46   -    (46
                                         
Balances at December 31, 2017  $26   $27,872   $70,674   $3,142   $(619)  $(5,775)  $87   $95,407 
                                         
Three Months Ended December 31, 2018:                                        
Balances at October 1, 2018  $26   $27,630   $76,523   $382   $(479)  $(5,269)  $1,432   $100,245 
                                         
Net income   -    -    2,931    -    -    -    173    3,104 
                                         
Other comprehensive loss   -    -    -    1,390    -    -    -    1,390 
                                         
Common stock dividends - $0.15 per share   -    -    (345)   -    -    -    -    (345)
                                         
Distributions to noncontrolling interests   -    -    -    -    -    -    (12)   (12)
                                         
Restricted stock grants, net of forfeitures - 2,329 shares   -    141    -    -    (141)   -    -    - 
                                         
Stock compensation expense   -    19    -    -    40    -    -    59 
                                         
Stock option exercises - 10,500 shares   -    (44)   -    -    -    196    -    152 
                                         
Purchase of 540 treasury shares   -    -    -    -    -    (32)   -    (32)
                                         
Balances at December 31, 2018  $26   $27,746   $79,109   $1,772   $(580)  $(5,105)  $1,593   $104,561 

 

See notes to consolidated financial statements.

 

 -6- 

 

 

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Three Months Ended
December 31,
 
(In thousands)  2018   2017 
         
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $3,104   $3,493 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Provision for loan losses   315    462 
Depreciation and amortization   484    300 
Amortization of premiums and accretion of discounts on securities, net   126    146 
Decrease in trading account securities   -    536 
Amortization and accretion of fair value adjustments on loans, net   (129)   (71)
Loans originated for sale   (79,437)   (48,992)
Proceeds on sales of loans   76,830    49,096 
Net realized and unrealized gain on loans held for sale   (3,270)   (1,654)
Net realized and unrealized gain on other real estate owned   (27)   (180)
Increase in cash surrender value of life insurance   (111)   (107)
Net gain on sale of premises and equipment   (1)   (7)
Deferred income taxes   (52)   796 
Stock compensation expense   59    54 
Increase in accrued interest receivable   (521)   (595)
Increase in accrued interest payable   253    46 
Change in other assets and liabilities, net   (1,798)   (2,814)
Net Cash Provided By (Used In) Operating Activities   (4,175)   509 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Investment in interest-bearing time deposits   (490)   (490)
Proceeds from sales and maturities of interest-bearing time deposits   -    245 
Purchase of securities available for sale   (8,530)   (4,112)
Proceeds from maturities of securities available for sale   385    355 
Proceeds from maturities of securities held to maturity   30    25 
Principal collected on securities   7,919    3,652 
Net increase in loans   (30,430)   (30,569)
Purchase of Federal Reserve Bank stock   -    (2,562)
Purchase of Federal Home Loan Bank stock   (575)   - 
Proceeds from sale of other real estate owned   49    484 
Purchase of premises and equipment   (7,544)   (100)
Proceeds from sales of premises and equipment   51    - 
Net Cash Used In Investing Activities   (39,135)   (33,072)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Net increase in deposits   20,961    6,067 
Net increase in repurchase agreements   -    1 
Increase (decrease) in Federal Home Loan Bank line of credit   17,019    (18,065)
Proceeds from Federal Home Loan Bank advances   15,000    94,500 
Repayment of Federal Home Loan Bank advances   (15,000)   (44,500)
Net increase in advance payments by borrowers for taxes and insurance   (363)   (429)
Proceeds from exercise of stock options   152    122 
Taxes paid on stock award shares for employees    (32)   (46)
Dividends paid on common stock   (345)   (315)
Distributions to noncontrolling interests   (12)   - 
Net Cash Provided By Financing Activities   37,380    37,335 
           

Net Increase (Decrease) in Cash and Cash Equivalents

   (5,930)   4,772 
           
Cash and cash equivalents at beginning of period    42,274    34,259 
           
Cash and Cash Equivalents at End of Period  $36,344   $39,031 

 

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 December 31, 2018, the results of operations for the three-month periods ended December 31, 2018 and 2017, and the cash flows for the three-month periods ended December 31, 2018 and 2017. 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 year ended September 30, 2018 including $24,000 incurred for the three-month period ended December 31, 2017. No transaction and integration costs were recognized for the three-month period ended December 31, 2018.

 

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 December 31, 2018. During the three-month period ended December 31, 2017, the Company reported a net gain on trading account securities of $150,000.

 

 -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) 
December 31, 2018:                
Securities available for sale:                    
                     
Agency mortgage-backed  $24,533   $76   $416   $24,193 
Agency CMO   12,262    20    233    12,049 
Privately-issued CMO   1,367    129    4    1,492 
Privately-issued ABS   1,289    300    -    1,589 
SBA certificates   1,277    46    5    1,318 
Municipal bonds   143,239    3,053    673    145,619 
                     
Total securities available for sale  $183,967   $3,624   $1,331   $186,260 
                     
Securities held to maturity:                    
                     
Agency mortgage-backed  $128   $7   $-   $135 
Municipal bonds   2,442    320    -    2,762 
                     
Total securities held to maturity  $2,570   $327   $-   $2,897 

 

 -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 December 31, 2018 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  $5,625   $5,661   $240   $270 
Due after one year through five years   19,373    19,793    1,008    1,140 
Due after five years through ten years   31,265    31,999    866    983 
Due after ten years   86,976    88,166    328    369 
CMO   13,629    13,541    -    - 
ABS   1,289    1,589    -    - 
SBA certificates   1,277    1,318    -    - 
Mortgage-backed securities   24,533    24,193    128    135 
                     
   $183,967   $186,260   $2,570   $2,897 

 

 -12- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Information pertaining to investment securities with gross unrealized losses at December 31, 2018 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) 
December 31, 2018:               
Securities available for sale:               
                
Continuous loss position less than twelve months:               
Agency mortgage-backed   5   $6,097   $46 
Agency CMO   1    119    6 
Municipal bonds   38    19,599    165 
                
Total less than twelve months   44    25,815    217 
                
Continuous loss position more than twelve months:               
Agency mortgage-backed   18    12,293    370 
Agency CMO   12    10,000    227 
Privately-issued CMO   1    36    4 
SBA certificates   1    595    5 
Municipal bonds   26    14,669    508 
                
Total more than twelve months   58    37,593    1,114 
                
Total securities available for sale   102   $63,408   $1,331 
                
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 December 31, 2018 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 December 31, 2018, 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 97.94%. 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 December 31, 2018, the Company held fourteen privately-issued CMO and ABS securities, acquired in a 2009 bank merger, with an aggregate amortized cost of $1.2 million and fair value of $1.5 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 December 31, 2018, one privately-issued CMO was in a loss position and had depreciated approximately 9.45% from the Company’s carrying value and was collateralized by residential mortgage loans. This security had a total fair value of $36,000 and a total unrealized loss of $4,000 at December 31, 2018, 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 does not anticipate additional credit-related impairment losses at December 31, 2018, additional deterioration in market and economic conditions may have an adverse impact on the credit quality in the future and therefore, require a credit related impairment charge.

 

The unrealized losses on U.S. government agency mortgage-backed securities and 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 periods ended December 31, 2018 and 2017, the Company did not realize any gross gains or losses on sales of available for sale securities.

 

Certain available for sale debt securities were pledged under repurchase agreements and to secure FHLB borrowings at December 31, 2018 and September 30, 2018, and may be pledged to secure federal funds borrowings.

 

4.Loans and Allowance for Loan Losses

 

Loans at December 31, 2018 and September 30, 2018 consisted of the following:

 

   December 31,
2018
   September 30,
2018
 
   (In thousands) 
Real estate mortgage:          
1-4 family residential  $196,810   $195,274 
Commercial   355,951    343,498 
Multifamily residential   27,731    28,814 
Residential construction   23,825    19,527 
Commercial construction   10,383    8,669 
Land and land development   10,960    10,504 
Commercial business   75,834    67,786 
           
Consumer:          
Home equity   25,133    24,635 
Auto   12,007    11,720 
Other consumer   4,802    2,918 
Total Loans   743,436    713,345 
           
Deferred loan origination fees and costs, net   245    249 
Allowance for loan losses   (9,620)   (9,323)
           
Loans, net  $734,061   $704,271 

 

During the three-month period ended December 31, 2018, there was no significant change in the Company’s lending activities or methodology used to estimate the allowance for loan losses as disclosed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2018.

 

At December 31, 2018 and September 30, 2018, the recorded investment in consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure was $1.2 million and $1.3 million, respectively.

 

 -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 December 31, 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  $196,810   $355,951   $27,731   $34,208   $10,960   $75,834   $41,942   $743,436 
                                         
Accrued interest receivable   552    1,546    65    127    22    412    70    2,794 
                                         
Net deferred loan origination fees and costs   (73)   114    (29)   (22)   (4)   288    (29)   245 
                                         
Recorded investment in loans  $197,289   $357,611   $27,767   $34,313   $10,978   $76,534   $41,983   $746,475 
                                         
Recorded Investment in Loans as Evaluated for Impairment:                                        
Individually evaluated for impairment  $4,924   $7,848   $-   $-   $-   $294   $340   $13,406 
                                         
Collectively evaluated for impairment   192,365    349,763    27,767    34,313    10,978    76,240    41,643    733,069 
                                         
Ending balance  $197,289   $357,611   $27,767   $34,313   $10,978   $76,534   $41,983   $746,475 

 

 -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 December 31, 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  $2   $654   $-   $-   $-   $-   $39   $695 
                                         
Collectively evaluated for impairment   247    6,062    158    693    219    1,288    258    8,925 
                                         
Ending balance  $249   $6,716   $158   $693   $219   $1,288   $297   $9,620 

 

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 December 31, 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  $274   $6,825   $195   $580   $210   $1,041   $198   $9,323 
Provisions   (30)   (109)   (37)   113    9    247    122    315 
Charge-offs   (1)   -    -    -    -    -    (42)   (43)
Recoveries   6    -    -    -    -    -    19    25 
                                         
Ending balance  $249   $6,716   $158   $693   $219   $1,288   $297   $9,620 

 

An analysis of the changes in the allowance for loan losses for the three months ended December 31, 2017 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   (18)   367    (4)   93    (4)   (23)   51    462 
Charge-offs   (13)   -    -    -    -    -    (52)   (65)
Recoveries   12    -    -    -    -    -    10    22 
                                         
Ending balance  $233   $6,106   $102   $903   $219   $816   $132   $8,511 

 

 -19- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The following table presents impaired loans individually evaluated for impairment as of December 31, 2018 and for the three months ended December 31, 2018 and 2017.

 

   At December 31, 2018   Three Months Ended 
December 31,
 
               2018   2018   2017   2017 
   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
   Average
Recorded
Investment
   Interest
Income
Recognized
 
   (In thousands) 
     
Loans with no related allowance recorded:                                   
Residential real estate  $4,654   $5,135   $-   $4,744   $34   $4,751   $36 
Commercial real estate   6,525    6,714    -    6,547    82    6,147    64 
Multifamily   -    -    -    -    -    -    - 
Construction   -    -    -    -    -    -    - 
Land and land development   -    -    -    14    -    30    - 
Commercial business   294    305    -    263    2    274    2 
Consumer   117    126    -    120    1    100    1 
   $11,590   $12,280   $-   $11,688   $119   $11,302   $103 
                                    
Loans with an allowance recorded:                                   
Residential real estate  $270   $281   $2   $272   $-   $235   $- 
Commercial real estate   1,323    1,376    654    1,237    -    -    - 
Multifamily   -    -    -    -    -    -    - 
Construction   -    -    -    -    -    -    - 
Land and land development   -    -    -    -    -    -    - 
Commercial business   -    -    -    -    -    -    - 
Consumer   223    223    39    172    -    101    - 
   $1,816   $1,880   $695   $1,681   $-   $336   $- 
                                    
Total:                                   
Residential real estate  $4,924   $5,416   $2   $5,016   $34   $4,986   $36 
Commercial real estate   7,848    8,090    654    7,784    82    6,147    64 
Multifamily   -    -    -    -    -    -    - 
Construction   -    -    -    -    -    -    - 
Land and land development   -    -    -    14    -    30    - 
Commercial business   294    305    -    263    2    274    2 
Consumer   340    349    39    292    1    201    1 
   $13,406   $14,160   $695   $13,369   $119   $11,638   $103 

 

The Company did not recognize any interest income on impaired loans using the cash receipts method during the three-month periods ended December 31, 2018 and 2017.

 

 -20- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

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

 

 -21- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Nonperforming loans consist of nonaccrual loans and loans over 90 days past due and still accruing interest. The following table presents the recorded investment in nonperforming loans at December 31, 2018:

 

  

Nonaccrual

Loans

  

Loans 90+
Days

Past Due

Still Accruing

   Total
Nonperforming
Loans
 
   (In thousands) 
             
Residential real estate  $2,684   $57   $2,741 
Commercial real estate   1,528    -    1,528 
Multifamily   -    -    - 
Construction   -    -    - 
Land and land development   -    -    - 
Commercial business   79    -    79 
Consumer   260    -    260 
                
Total  $4,551   $57   $4,608 

 

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 

 

 -22- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The following table presents the aging of the recorded investment in past due loans at December 31, 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  $1,903   $815   $998   $3,716   $193,573   $197,289 
Commercial real estate   1,306    -    1,239    2,545    355,066    357,611 
Multifamily   80    -    -    80    27,687    27,767 
Construction   -    -    -    -    34,313    34,313 
Land and land development   -    -    -    -    10,978    10,978 
Commercial business   43    -    79    122    76,412    76,534 
Consumer   159    12    3    174    41,809    41,983 
                               
Total  $3,491   $827   $2,319   $6,637   $739,838   $746,475 

 

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 

 

 -23- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

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

 

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

 

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

 

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

 

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

 

 -24- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. As of December 31, 2018, 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  $192,749   $344,399   $27,275   $34,313   $10,895   $74,208   $41,932   $725,771 
Special Mention   -    5,096    -    -    83    -    -    5,179 
Substandard   4,470    8,116    492    -    -    2,326    51    15,455 
Doubtful   70    -    -    -    -    -    -    70 
Loss   -    -    -    -    -    -    -    - 
                                         
Total  $197,289   $357,611   $27,767   $34,313   $10,978   $76,534   $41,983   $746,475 

 

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 

 

 -25- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Troubled Debt Restructurings

 

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

 

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

 

The following table summarizes the Company’s recorded investment in TDRs at December 31, 2018 and September 30, 2018. There was no specific reserve included in the allowance for loan losses related to TDRs at December 31, 2018. 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) 
December 31, 2018:            
Residential real estate  $2,240   $136   $2,376 
Commercial real estate   6,320    68    6,388 
Commercial business   215    -    215 
Consumer   80    -    80 
Total  $8,855   $204   $9,059 
                
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 

 

 -26- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

There were no TDRs that were restructured during the three-month period ended December 31, 2018.

 

The following table summarizes information in regard to TDRs that were restructured during the three-month period ended December 31, 2017:

 

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

 

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 December 31, 2018 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-month periods ended December 31, 2018 and 2017. There was no specific allowance for loan losses related to TDRs modified during the three-month periods ended December 31, 2018 and 2017. In the event that a TDR subsequently defaults, the Company evaluates the restructuring for possible impairment. As a result, the related allowance for loan losses may be increased or charge-offs may be taken to reduce the carrying amount of the loan.

 

During the three-month period ended December 30, 2018, 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 December 30, 2017, the Company did not have any TDRs that were modified within the previous twelve months and for which there was a payment default.

 

 -27- 

 

 

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 $131.8 million, $120.6 million and $77.7 million at December 31, 2018, September 30, 2018 and December 31, 2017, respectively. Contractually specified late fees and ancillary fees earned on SBA loans were $7,000 and $2,000 for the three-month periods ended December 31, 2018 and 2017, respectively. Net servicing income (contractually specified servicing fees offset by direct servicing expenses) related to SBA loans were $272,000 and $150,000 for the three-month periods ended December 31, 2018 and 2017, respectively. Net servicing income and costs are included in other noninterest income in the consolidated statements of income.

 

An analysis of SBA loan servicing rights for the three month periods ended December 31, 2018 and 2017 is as follows:

 

(In thousands)  Three Months Ended
December 31, 2018
 
   2018   2017 
     
Balance, beginning of period  $2,405   $1,389 
Servicing rights resulting from transfers of loans   251    429 
Amortization   (102)   (72)
Change in valuation allowance   -    - 
           
Balance, end of period  $2,554   $1,746 

 

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 was $177,000 at December 31, 2018 and September 30, 2018. There was no valuation allowance related to SBA loan servicing rights at December 31, 2017.

 

 -28- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

5.Deposits

 

Deposits at December 31, 2018 and September 30, 2018 consisted of the following:

 

   December 31,
2018
   September 30,
2018
 
   (In thousands) 
         
Noninterest-bearing demand deposits  $169,062   $167,705 
NOW accounts   178,439    173,543 
Money market accounts   121,379    107,124 
Savings accounts   118,903    120,995 
Retail time deposits   118,645    123,007 
Brokered time deposits   125,645    118,738 
           
Total  $832,073   $811,112 

 

 -29- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

6.Supplemental Disclosure for Earnings Per Share

 

Earnings per share information is presented below for the three month periods ended December 31, 2018 and 2017.

 

   Three Months Ended 
   December 31, 
(Dollars in thousands, except per share data)  2018   2017 
         
Basic:          
Earnings:          
Net income attributable to First Savings Financial Group, Inc.  $2,931   $3,406 
           
Shares:          
Weighted average shares outstanding   2,284,665    2,228,256 
           
Net income per share, basic  $1.28   $1.53 
           
Diluted:          
Earnings:          
Net income attributable to First Savings Financial Group, Inc.  $2,931   $3,406 
           
Shares:          
Weighted average shares outstanding   2,284,665    2,228,256 
Add: Dilutive effect of outstanding options   81,210    124,466 
Add: Dilutive effect of nonvested restricted stock   5,605    6,213 
Weighted average shares outstanding, as adjusted   2,371,480    2,358,935 
           
Net income per share, diluted  $1.24   $1.44 

 

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-month periods ended December 31, 2018 and 2017. Stock options for 10,200 shares of common stock were excluded from the calculation of diluted net income per common share for the three-month period ended December 31, 2018, because their effect was antidilutive. No stock options were excluded from the calculation of diluted net income per common share for the three-month period ended December 31, 2017.

 

 -30- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

7.Supplemental Disclosures of Cash Flow Information

 

   Three Months Ended 
   December 31, 
   2018   2017 
   (In thousands) 
Cash payments for:          
Interest  $1,974   $1,333 
Income taxes (net of refunds received)   (117)   (723)
           
Noncash investing activities:          
Transfers from loans held for sale to loans   -    851 
           
Transfers from loans to foreclosed real estate   203    - 
           
Proceeds from sales of foreclosed real estate financed through loans   47    337 

 

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.

 

 -31- 

 

  

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and liabilities carried at fair value or the lower of cost or fair value. The tables below present the balances of financial assets and liabilities measured at fair value on a recurring and nonrecurring basis as of December 31, 2018 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) 
December 31, 2018:                    
Assets Measured - Recurring Basis:                    
Securities available for sale:                    
Agency mortgage-backed  $-   $24,193   $-   $24,193 
Agency CMO   -    12,049    -    12,049 
Privately-issued CMO   -    1,492    -    1,492 
Privately-issued ABS   -    1,589    -    1,589 
SBA certificates   -    1,318    -    1,318 
Municipal   -    145,619    -    145,619 
Total securities available for sale  $-   $186,260   $-   $186,260 
Residential mortgage loans held for sale – fair value option elected  $-   $15,920   $-   $15,920 
Derivative assets (included in other assets)  $-   $-   $658   $658 
Liabilities Measured – Recurring Basis:                    
Derivative liabilities (included in other liabilities)  $-   $132   $-   $132 
                     
Assets Measured - Nonrecurring Basis:                    
Impaired loans:                    
Residential real estate  $-   $-   $4,922   $4,922 
Commercial real estate   -    -    7,194    7,194 
Land and land development   -    -    -    - 
Commercial business   -    -    294    294 
Consumer   -    -    301    301 
Total impaired loans  $-   $-   $12,711   $12,711 
SBA loans held for sale  $-   $-   $22,032   $22,032 
Loan servicing rights  $-   $-   $2,554   $2,554 
Other real estate owned, held for sale:                    
Residential real estate  $-   $-   $122   $122 
Commercial real estate   -    -    110    110 
Total other real estate owned  $-   $-   $232   $232 

 

 -32- 

 

 

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.

 

 -33- 

 

 

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 three-month period ended December 31, 2018.

 

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 December 31, 2018, 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.

 

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.

 

 -34- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

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 months ended December 31, 2018 and 2017:

 

(In thousands)  2018   2017 
     
Beginning balance  $380   $- 
Unrealized gains recognized in earnings   658    - 
Net settlements   (380)   - 
           
Ending balance  $658   $- 

 

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 months ended December 31, 2018 attributable to Level 3 assets held at the balance sheet date were $658,000.

 

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 December 31, 2018 and September 30, 2018.

 

Financial Instrument  Significant
Unobservable Inputs
  Range of
Inputs
Range of
Inputs
      December 31, 2018   September 30, 2018
Interest rate lock commitments  Pull-through rate  69% - 97%   72% - 95%
   Direct costs to close  1%   1% - 3%

 

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

 

Impaired loans are measured at the present value of estimated future cash flows using the loan's effective interest rate or the fair value of the collateral if the loan is a collateral-dependent loan. At December 31, 2018 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 December 31, 2018 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 December 31, 2018 and 2017, the Company recognized provisions for loan losses of $194,000 and $2,000, respectively, for impaired loans.

 

 -35- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

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 December 31, 2018, the significant unobservable inputs used in the fair value measurement of loan servicing rights included discount rates ranging from 10.28% to 21.19% with a weighted average of 13.10% and prepayment speed assumptions ranging from 5.03% to 16.38% with a weighted average rate of 11.18%. 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 did not recognize any impairment charges on loan servicing rights for the three-month periods ended December 31, 2018 and 2017.

 

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

 

Other real estate owned is reported at fair value, less estimated costs to dispose of the property. The fair values are determined by real estate appraisals, which are then generally discounted by management in order to reflect management’s estimate of the fair value of the property given current market conditions and the condition of the property. At December 31, 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 18.4% with a weighted average of 15.9%. 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 month period ended December 31, 2018. The Company recognized charges of $10,000 to write down other real estate owned to fair value for the three month period ended December 31, 2017.

 

Transfers Between Categories. As previously described, management used different valuation methodologies related to SBA loans held for sale at December 31, 2018 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 month periods ended December 31, 2018 and 2017.

 

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.

 

 -36- 

 

 

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 newly formed wholesale lending division. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loans and in accordance with the Company’s policy on loans held for investment. None of these loans were 90 days or more past due, nor were any on nonaccrual status as of December 31, 2018 or 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 December 31, 2018 and September 30, 2018.

 

(In thousands)   Aggregate
Fair Value
December
31, 2018
   Aggregate
Principal
Balance
December
31, 2018
   Difference 
                
Residential mortgage loans held for sale  $15,920   $15,331   $589 

 

(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 month periods ended December 31, 2018 and 2017:

 

(In thousands)  2018   2017 
     
Gains – included in mortgage banking income  $589   $- 
Interest income   154    - 
           
   $743   $- 

 

 -37- 

 

 

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 December 31, 2018 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) 
December 31, 2018:                    
Financial assets:                    
Cash and due from banks  $11,524   $11,524   $-   $- 
Interest-bearing deposits with banks   24,820    24,820    -    - 
Interest-bearing time deposits   2,991    -    2,978    - 
Securities available for sale   186,260    -    186,260    - 
Securities held to maturity   2,570    -    2,897    - 
Residential mortgage loans held for sale   15,920    -    15,920    - 
SBA loans held for sale   22,032    -    -    24,128 
                     
Loans, net   734,061    -    -    698,595 
                     
FRB and FHLB stock   10,196    N/A    N/A    N/A 
Accrued interest receivable   4,808    -    4,808    - 
Loan servicing rights (included in other assets)   2,554    -    -    2,614 
Derivative assets (included in other    assets)   658    -    -    658 
Financial liabilities:                    
Deposits   832,073    -    -    830,814 
Short-term repurchase agreements   1,352    -    1,352    - 
Borrowings from FHLB   107,019    -    102,984    - 
Subordinated note   19,678    -    19,678    - 
Accrued interest payable   996    -    996    - 
Advance payments by borrowers for taxes and insurance   855    -    855    - 
Derivative liabilities (included in other liabilities)   132    -    132    - 

 

 -38- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

   Carrying   Fair Value Measurements
Using:
 
   Amount   Level 1   Level 2   Level 3 
   (In thousands) 
September 30, 2018:                    
Financial assets:                    
Cash and due from banks  $14,191   $14,191   $-   $- 
Interest-bearing deposits with banks   28,083    28,083    -    - 
Interest-bearing time deposits   2,501    -    2,494    - 
Securities available for sale   184,373    -    184,373    - 
Securities held to maturity   2,607    -    2,896    - 
Residential mortgage loans held for sale   10,466    -    10,476    - 
SBA loans held for sale   21,659    -    23,488    - 
Loans, net   704,271    -    -    673,652 
FRB and FHLB stock   9,621    N/A    N/A    N/A 
Accrued interest receivable   4,287    -    4,287    - 
Loan servicing rights (included in other assets)   2,405    -    -    2,405 
Derivative assets (included in other assets)   421    -    41    380 
                     
Financial liabilities:                    
Deposits   811,112    -    -    809,305 
Short-term repurchase agreements   1,352    -    1,352    - 
Borrowings from FHLB   90,000    -    84,175    - 
Subordinated note   19,661    -    19,661    - 
Accrued interest payable   743    -    743    - 
Advance payments by borrowers for taxes and insurance   1,218    -    1,218    - 

 

 -39- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

9.Employee Stock Ownership Plan

 

On October 6, 2008, the Company established a leveraged employee stock ownership plan (“ESOP”) covering substantially all employees. The ESOP trust acquired 203,363 shares of Company common stock at a cost of $10.00 per share financed by a term loan with the Company. The employer loan and the related interest income are not recognized in the consolidated financial statements because the debt is serviced from Company contributions. Dividends payable on allocated shares are charged to retained earnings and are satisfied by the allocation of cash dividends to participant accounts or by utilizing the dividends as additional debt service on the ESOP loan. Dividends payable on unallocated shares are not considered dividends for financial reporting purposes. Shares held by the ESOP trust are allocated to participant accounts based on the ratio of the current year principal and interest payments to the total of the current year and future years’ principal and interest to be paid on the employer loan. Compensation expense is recognized based on the average fair value of shares released for allocation to participant accounts during the year with a corresponding credit to stockholders’ equity. The ESOP loan was repaid in full during the quarter ended December 31, 2015 and all shares have been allocated to participants in the plan therefore no compensation expense was recognized for the three-month periods ended December 31, 2018 and 2017. The ESOP trust held 151,509 and 151,999 shares of Company common stock at December 31, 2018 and September 30, 2018, respectively.

 

10.Stock Based Compensation Plans

 

The Company maintains two equity incentive plans under which stock options and restricted stock have or can be granted, the 2010 Equity Incentive Plan (“2010 Plan”), approved by the Company’s shareholders in February 2010, and the 2016 Equity Incentive Plan (“2016 Plan”), approved by the Company’s shareholders in February 2016. The aggregate number of shares of the Company’s common stock available for issuance under the 2016 Plan may not exceed 88,000 shares, consisting of 66,000 stock options and 22,000 shares of restricted stock. At December 31, 2018, 8,658 shares of the Company’s common stock were available for issuance under the 2010 Plan as stock options and 11,661 shares of the Company’s common stock were available for issuance under the 2016 Plan, consisting of 10,255 stock options and 1,406 shares of restricted stock.

 

 -40- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Stock Options

 

Under the plans, the Company may grant both non-statutory and incentive stock options that may not have a term exceeding ten years. In the case of incentive stock options, the aggregate fair value (determined at the time the incentive stock options are granted) which are first exercisable during any calendar year shall not exceed $100,000. Exercise prices generally may not be less than the fair market value of the underlying stock at the date of the grant. The terms of the plans also include provisions whereby all unearned options and restricted shares become immediately exercisable and fully vested upon a change in control.

 

Stock options granted generally vest ratably over five years and are exercisable in whole or in part for a period up to ten years from the date of the grant. Compensation expense is measured based on the fair market value of the options at the grant date and is recognized ratably over the period during which the shares are earned (the vesting period). The fair market value of stock options granted is estimated at the date of grant using a binomial option pricing model. Expected volatilities are based on historical volatility of the Company’s stock. The expected term of options granted represents the period of time that options are expected to be outstanding. The risk free rate for the expected life of the options is based on the U.S. Treasury yield curve in effect at the grant date.

 

The fair value of options granted during the three-month period ended December 31, 2018 was determined using the following assumptions:

 

Expected dividend yield   1.75%
Risk-free interest rate   2.13%
Expected volatility   14.6%
Expected life of options   7.5 years 
Weighted average fair value at grant date  $6.13 

 

A summary of stock option activity as of December 31, 2018, and changes during the three-month period then ended is presented below.

 

   Number of
Shares
   Weighted
Average
Exercise Price
   Weighted
Average
Remaining
Contractual
Term
(Years)
   Aggregate
Intrinsic
Value
 
   (Dollars in thousands, except per share data) 
     
Outstanding at beginning of period   150,033   $24.88           
Granted   2,400    59.23           
Exercised   (10,500)   14.53           
Forfeited or expired   (450)   40.09           
Outstanding at end of period   141,483   $26.18    4.2   $3,758 
Vested and expected to vest   141,483   $26.18    4.2   $3,758 
Exercisable at end of period   101,856   $18.57    2.7   $3,402 

 

 -41- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The intrinsic value of stock options exercised during the three-month period ended December 31, 2018 was $470,000. The intrinsic value of stock options exercised during the three-month period ended December 31, 2017 was $355,000. The Company recognized compensation expense related to stock options of $18,000 and $16,000 for the three-month periods ended December 31, 2018 and 2017, respectively. At December 31, 2018, there was $231,000 of unrecognized compensation expense related to nonvested stock options. The compensation expense is expected to be recognized over the remaining vesting period of 4.9 years.

 

Restricted Stock

 

The vesting period of restricted stock granted under the plans is generally five years beginning one year after the date of grant of the awards. Compensation expense is measured based on the fair market value of the restricted stock at the grant date and is recognized ratably over the vesting period. Compensation expense related to restricted stock recognized for the three-month periods ended December 31, 2018 and 2017 was $41,000 and $37,000, respectively.

 

A summary of the Company’s nonvested restricted shares activity as of December 31, 2018 and changes during the three-month period then ended is presented below.

 

       Weighted 
   Number   Average 
   of   Grant Date 
   Shares   Fair Value 
         
Nonvested at October 1, 2018   14,812   $41.20 
Granted   2,500   $59.23 
Vested   (3,653)  $40.99 
Forfeited   (171)  $40.09 
Nonvested at December 31, 2018   13,488   $44.61 

 

There were 3,653 restricted shares vested during the three-month period ended December 31, 2018 with a total fair value of $216,000. There were 3,453 restricted shares that vested during the three-month period ended December 30, 2017 with a total fair value of $195,000. At December 31, 2018, there was $580,000 of unrecognized compensation expense related to nonvested restricted shares. The compensation expense is expected to be recognized over the remaining vesting period of 4.9 years.

 

11.Derivative Financial Instruments

 

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (i.e., rate lock commitment). The Company also enters into forward mortgage loan commitments to sell to various investors to protect itself against exposure to various factors and to reduce sensitivity to interest rate movements. Both the interest rate lock commitments and the related forward mortgage loan sales contracts are considered derivatives and are recorded on the balance sheet at fair value in accordance with FASB ASC 815, Derivatives and Hedging, with changes in fair value recorded in mortgage banking income in the accompanying consolidated statements of income. All such derivatives are considered stand-alone derivatives and have not been formally designated as hedges by management.

 

 -42- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

Certain financial instruments, including derivatives, may be eligible for offset in the balance sheet when the “right of setoff” exists or when the instruments are subject to an enforceable master netting agreement, which includes the right of the non-defaulting party or non-affected party to offset recognized amounts, including collateral posted with the counterparty, to determine a net receivable or net payable upon early termination of the agreement. Certain of the Company’s derivative instruments are subject to master netting agreements. However, the Company has not elected to offset such financial instruments in the consolidated balance sheets.

 

The tables below provide information on the Company’s derivative financial instruments as of December 31, 2018 and September 30, 2018.

 

(In thousands)  Notional
Amount
December 31,
2018
   Asset
Derivatives
December 31,
2018
   Liability
Derivatives
December 31,
2018
 
     
Interest rate lock commitments  $28,049   $658   $- 
Forward mortgage loan sale contracts   24,750    -    132 
                
   $52,799   $658   $132 

 

(In thousands)  Notional
Amount
September 30,
2018
   Asset
Derivatives
September 30,
2018
   Liability
Derivatives
September 30,
2018
 
     
Interest rate lock commitments  $16,634   $380   $- 
Forward mortgage loan sale contracts   13,750    41    - 
                
   $30,384   $421   $- 

 

Income (loss) related to derivative financial instruments included in mortgage banking income in the accompanying consolidated statements of income for the three-month periods ended December 31, 2018 and 2017 is as follows:

 

(In thousands)  2018   2017     
     
Interest rate lock commitments  $278   $-      
Forward mortgage loan sale contracts   (151)   -      
                
   $127   $-      

 

 -43- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

12.Regulatory Capital

 

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

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III rules”) became effective for the Company and the Bank on January 1, 2015, with full compliance with all of the requirements being phased in over a multi-year schedule through 2019. Under the Basel III rules, the Bank must hold a conservation buffer above the adequately capitalized risk-based capital ratios disclosed in the table below. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.5% by 2019. The capital conservation buffer was 1.25% for 2017 and is 1.875% for 2018. The Company and Bank met all capital adequacy requirements to which they are subject as of December 31, 2018 and September 30, 2018.

 

As of December 31, 2018, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.

 

 -44- 

 

 

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

 

The Company’s and Bank’s actual capital amounts and ratios are also presented in the table. No amount was deducted from capital for interest-rate risk at either period.

 

               Minimum 
               To Be Well 
           Minimum   Capitalized Under 
           For Capital   Prompt Corrective 
   Actual   Adequacy Purposes:   Action Provisions: 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
   (Dollars in thousands) 
                         
As of December 31, 2018: