First Savings Financial Group, Inc. - Quarter Report: 2022 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2022


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

For the transition period from to

Commission File No. 1-34155

First Savings Financial Group, Inc.

(Exact name of registrant as specified in its charter)

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

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

(Address of principal executive offices) (Zip Code)

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

(Former name, former address and former fiscal year, if changed since last report)

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


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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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


	Large Accelerated Filer ☐	Accelerated Filer ☒

	Non-accelerated Filer ☐	Smaller Reporting Company ☒

	Emerging Growth Company ☐

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

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

The number of shares outstanding of the registrant’s common stock as of August 2, 2022 was 7,090,631.

Table of Contents

FIRST SAVINGS FINANCIAL GROUP, INC.

INDEX

Part I	Financial Information	Page

	Item 1. Financial Statements

	Consolidated Balance Sheets as of June 30, 2022 and September 30, 2021 (unaudited)	3

	Consolidated Statements of Income for the three and nine months ended June 30, 2022 and 2021 (unaudited)	4

	Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended June 30, 2022 and 2021 (unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended June 30, 2022 and 2021 (unaudited)	6

	Consolidated Statements of Cash Flows for the nine months ended June 30, 2022 and 2021 (unaudited)	7

	Notes to Consolidated Financial Statements (unaudited)	8-50

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	51-61

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	62-63

	Item 4. Controls and Procedures	64

Part II	Other Information

	Item 1. Legal Proceedings	65

	Item 1A. Risk Factors	65

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	65

	Item 3. Defaults Upon Senior Securities	65

	Item 4. Mine Safety Disclosures	65

	Item 5. Other Information	66

	Item 6. Exhibits	66

Signatures		67

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Table of Contents

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	June 30,		September 30,
(In thousands, except share and per share data)	2022		2021

ASSETS
Cash and due from banks	$	14,074	$	14,191
Interest-bearing deposits with banks		23,394		19,237
Total cash and cash equivalents		37,468		33,428

Interest-bearing time deposits		1,616		2,222
Securities available for sale, at fair value		307,376		206,681
Securities held to maturity		1,651		1,837

Loans held for sale, residential mortgage, at fair value		94,670		167,813
Loans held for sale, single tenant net lease		73,276		23,020
Loans held for sale, Small Business Administration		20,085		24,107
Loans, net of allowance for loan losses of $14,980 at June 30, 2022 and $14,301 at September 30, 2021		1,267,816		1,075,936
Federal Reserve Bank and Federal Home Loan Bank stock, at cost		19,704		19,258
Premises and equipment		27,120		27,669
Other real estate owned, held for sale		1,007		1,728
Accrued interest receivable:
Loans		4,777		4,398
Securities		3,052		1,845
Cash surrender value of life insurance		44,935		44,152
Goodwill		9,848		9,848
Core deposit intangibles		828		988
Residential mortgage loan servicing rights, at fair value		64,839		49,579
Nonresidential mortgage loan servicing rights, at fair value		150		—
SBA loan servicing rights		4,050		4,447
Other assets		22,398		22,438

Total Assets	$	2,006,666	$	1,721,394

LIABILITIES
Deposits:
Noninterest-bearing	$	343,292	$	291,039
Interest-bearing		1,002,415		936,541
Total deposits		1,345,707		1,227,580

Federal Home Loan Bank borrowings		404,098		250,000
Other borrowings		50,160		19,865
Accrued interest payable		720		258
Advance payments by borrowers for taxes and insurance		1,116		2,076
Accrued expenses and other liabilities		35,652		41,238
Total Liabilities		1,837,453		1,541,017

STOCKHOLDERS' EQUITY
Preferred stock of $.01 par value per share; authorized 1,000,000 shares; none issued		—		—
Common stock of $.01 par value per share; authorized 20,000,000 shares; issued 7,754,316 shares (7,708,566 at September 30, 2021); outstanding 7,110,706 shares (7,125,888 shares at September 30, 2021)		78		78
Additional paid-in capital		27,158		25,721
Retained earnings - substantially restricted		161,438		150,185
Accumulated other comprehensive income (loss)		(12,560)		8,900
Unearned stock compensation		(1,075)		(138)
Less treasury stock, at cost - 643,610 shares (582,678 shares at September 30, 2021)		(5,826)		(4,369)
Total Stockholders' Equity		169,213		180,377

Total Liabilities and Stockholders' Equity	$	2,006,666	$	1,721,394

See notes to consolidated financial statements.

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Table of Contents

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
(In thousands, except share and per share data)	2022		2021		2022		2021

INTEREST INCOME
Loans, including fees	$	15,934	$	14,347	$	43,917	$	43,632
Securities:
Taxable		769		447		1,594		1,350
Tax-exempt		1,570		1,181		4,003		3,548
Dividend income		169		161		464		436
Interest-bearing deposits with banks		37		14		64		50
Total interest income		18,479		16,150		50,042		49,016

INTEREST EXPENSE
Deposits		1,047		723		2,596		2,430
Federal Home Loan Bank borrowings		811		780		2,222		2,474
Federal Reserve PPPLF borrowings		—		98		—		388
Other borrowings		710		320		1,397		976
Total interest expense		2,568		1,921		6,215		6,268

Net interest income		15,911		14,229		43,827		42,748
Provision (credit) for loan losses		532		(2,730)		1,028		(1,775)

Net interest income after provision (credit) for loan losses		15,379		16,959		42,799		44,523

NONINTEREST INCOME
Service charges on deposit accounts		462		343		1,329		1,067
ATM and interchange fees		774		650		2,047		1,795
Net gain on sales of available for sale securities		476		—		476		—
Net unrealized gain (loss) on equity securities		(11)		(2)		(11)		36
Net gain on sales of loans, Small Business Administration		486		2,322		3,449		6,828
Net gain on sales of loans, single tenant net lease		—		—		719		—
Mortgage banking income		7,093		14,351		36,091		91,503
Increase in cash surrender value of life insurance		277		179		782		539
Commission income		177		406		522		905
Real estate lease income		155		148		451		444
Net gain on premises and equipment		—		7		—		78
Income from tax credit investment		—		—		10		—
Other income		144		381		831		746
Total noninterest income		10,033		18,785		46,696		103,941

NONINTEREST EXPENSE
Compensation and benefits		15,215		21,330		49,982		84,673
Occupancy and equipment		2,069		2,586		6,261		7,685
Data processing		679		717		1,957		2,055
Advertising		806		1,349		2,600		5,712
Professional fees		1,410		1,491		3,973		4,360
FDIC insurance premiums		121		106		346		340
Net gains on other real estate owned		—		(48)		—		(44)
Other operating expenses		2,535		3,088		8,029		9,524
Total noninterest expense		22,835		30,619		73,148		114,305
Income before income taxes		2,577		5,125		16,347		34,159
Income tax expense (benefit)		(61)		817		2,369		9,039
Net Income		2,638		4,308		13,978		25,120
Less: net income attributable to noncontrolling interests		—		—		—		402
Net Income Attributable to First Savings Financial Group, Inc.	$	2,638	$	4,308	$	13,978	$	24,718

Net income per share:
Basic	$	0.37	$	0.61	$	1.97	$	3.48
Diluted	$	0.37	$	0.60	$	1.95	$	3.45

Weighted average shares outstanding:
Basic		7,073,204		7,109,481		7,082,034		7,106,505
Diluted		7,145,288		7,178,943		7,166,632		7,166,235

Dividends per share	$	0.13	$	0.12	$	0.38	$	0.24

*	All share and per share amounts have been adjusted to reflect the three-for-one stock split effective September 15, 2021.

See notes to consolidated financial statements.

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Table of Contents

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
(In thousands)	2022		2021		2022		2021

Net Income	$	2,638	$	4,308	$	13,978	$	25,120

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period		(13,732)		1,488		(26,689)		(1,077)
Income tax (expense) benefit		2,884		(312)		5,605		226
Net of tax amount		(10,848)		1,176		(21,084)		(851)

Less: reclassification adjustment for realized gains included in net income		(476)		—		(476)		—
Income tax expense		100		—		100		—
Net of tax amount		(376)		—		(376)		—

Other Comprehensive Income (Loss)		(11,224)		1,176		(21,460)		(851)

Comprehensive Income (Loss)		(8,586)		5,484		(7,482)		24,269
Less: comprehensive income attributable to noncontrolling interests		—		—		—		402

Comprehensive Income (Loss) Attributable to First Savings Financial Group, Inc.	$	(8,586)	$	5,484	$	(7,482)	$	23,867

See notes to consolidated financial statements.

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Table of Contents

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 June 30, 2021:
Balances at April 1, 2021	$	26	$	25,682	$	142,738	$	9,182	$	(245)	$	(4,343)	$	—	$	173,040

Net income		—		—		4,308		—		—		—		—		4,308

Other comprehensive income		—		—		—		1,176		—		—		—		1,176

Common stock dividends - $0.06 per share		—		—		(855)		—		—		—		—		(855)

Restricted stock forfeitures - 900 shares		—		(17)		—		—		17		—		—		—

Stock compensation expense		—		22		—		—		44		—		—		66

Stock option exercises - 1,440 shares		—		28		—		—		—		—		—		28

Purchase of 1,233 treasury shares		—		—		—		—		—		(28)		—		(28)

Balances at June 30, 2021	$	26	$	25,715	$	146,191	$	10,358	$	(184)	$	(4,371)	$	—	$	177,735

Three Months Ended June 30, 2022:
Balances at April 1, 2022	$	78	$	27,076	$	159,732	$	1,336	$	(1,180)	$	(4,417)	$	—	$	179,953

Net income		—		—		2,638		—		—		—		—		2,638

Other comprehensive loss		—		—		—		(11,224)		—		—		—		(11,224)

Common stock dividends - $0.13 per share		—		—		(932)		—		—		—		—		(932)

Stock compensation expense		—		82		—		—		105		—		—		187

Purchase of 59,120 treasury shares		—		—		—		—		—		(1,409)		—		(1,409)

Balances at June 30, 2022	$	78	$	27,158	$	161,438	$	(12,560)	$	(1,075)	$	(5,826)	$	—	$	169,213

Nine Months Ended June 30, 2021:
Balances at October 1, 2020	$	26	$	27,480	$	123,158	$	11,209	$	(348)	$	(4,253)	$	293	$	157,565

Net income		—		—		24,718		—		—		—		402		25,120

Acquisition of minority interests in Q2		—		(1,888)		—		—		—		—		(695)		(2,583)

Other comprehensive loss		—		—		—		(851)		—		—		—		(851)

Common stock dividends - $0.24 per share		—		—		(1,685)		—		—		—		—		(1,685)

Restricted stock forfeitures - 1,500 shares		—		(25)		—		—		25		—		—		—

Stock compensation expense		—		68		—		—		139		—		—		207

Stock option exercises - 5,340 shares		—		80		—		—		—		—		—		80

Purchase of 5,424 treasury shares		—		—		—		—		—		(118)		—		(118)

Balances at June 30, 2021	$	26	$	25,715	$	146,191	$	10,358	$	(184)	$	(4,371)	$	—	$	177,735

Nine Months Ended June 30, 2022:
Balances at October 1, 2021	$	78	$	25,721	$	150,185	$	8,900	$	(138)	$	(4,369)	$	—	$	180,377

Net income		—		—		13,978		—		—		—		—		13,978

Other comprehensive loss		—		—		—		(21,460)		—		—		—		(21,460)

Common stock dividends - $0.38 per share		—		—		(2,725)		—		—		—		—		(2,725)

Restricted stock grants - 45,750 shares		—		1,222		—		—		(1,222)		—		—		—

Stock compensation expense		—		215		—		—		285		—		—		500

Purchase of 60,932 treasury shares		—		—		—		—		—		(1,457)		—		(1,457)

Balances at June 30, 2022	$	78	$	27,158	$	161,438	$	(12,560)	$	(1,075)	$	(5,826)	$	—	$	169,213

*	All share and per share amounts have been adjusted to reflect the three-for-one stock split effective September 15, 2021.

See notes to consolidated financial statements.

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Table of Contents

PART I - FINANCIAL INFORMATION

FIRST SAVINGS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended
	June 30,
(In thousands)	2022		2021

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	13,978	$	25,120
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		1,028		(1,775)
Depreciation and amortization		1,850		1,700
Amortization of premiums and accretion of discounts on securities, net		679		576
Amortization and accretion of fair value adjustments on loans, net		(1,176)		(1,122)
Loans originated for sale		(1,485,308)		(3,570,792)
Proceeds on sales of loans		1,561,351		3,672,227
Net realized and unrealized (gain) loss on loans held for sale		11,928		(50,401)
Capitalization of loan servicing rights		(11,513)		(34,255)
Net change in value of loan servicing rights		(3,510)		7,928
Net realized and unrealized gain on other real estate owned		—		(54)
Net gain on sales of available for sale securities		(476)		—
Increase in cash surrender value of life insurance		(782)		(539)
Net (gain)/loss on equity securities		11		(36)
Net gain on sale of premises and equipment		—		(78)
Income from tax credit investment		(10)		—
Deferred income taxes		3,356		6,702
Stock compensation expense		500		207
Increase in accrued interest receivable		(1,586)		(549)
Increase in accrued interest payable		462		1
Change in other assets and liabilities, net		(2,226)		(3,550)
Net Cash Provided by Operating Activities		88,556		51,310

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in interest-bearing time deposits		—		(252)
Proceeds from sales and maturities of interest-bearing time deposits		595		980
Purchase of securities available for sale		(177,646)		(22,273)
Proceeds from maturities of securities available for sale		33,494		—
Proceeds from maturities of securities held to maturity		10,690		11,686
Proceeds from maturities of securities held to maturity		172		165
Principal collected on securities		5,424		3,295
Net increase in loans		(253,166)		(16,542)
Proceeds from redemption of Federal Reserve Bank stock		592		53
Purchase of Federal Home Loan Bank stock		(1,038)		(2,018)
Investment in cash surrender value of life insurance		—		(12,042)
Proceeds from life insurance		575		—
Proceeds from sale of other real estate owned		—		424
Purchase of premises and equipment		(329)		(4,589)
Proceeds from sales of premises and equipment		—		438
Investment in partnership interests		(340)		—
Acquisition of minority interests in Q2		—		(3,172)
Net Cash Used In Investing Activities		(380,977)		(43,847)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		118,127		79,079
Net increase (decrease) in Federal Home Loan Bank line of credit		29,098		(17,569)
Proceeds from Federal Home Loan Bank advances		600,000		435,000
Repayment of Federal Home Loan Bank advances		(475,000)		(445,000)
Net proceeds from subordinated debt		30,258		—
Net decrease in Federal Reserve PPPLF borrowings		—		(67,005)
Net decrease in advance payments by borrowers for taxes and insurance		(960)		(1,063)
Proceeds from exercise of stock options		—		4
Taxes paid on stock award shares for employees		(48)		(41)
Purchase of treasury shares		(1,434)		—
Dividends paid on common stock		(3,580)		(1,685)
Net Cash Provided By (Used In) Financing Activities		296,461		(18,280)

Net Increase (Decrease) in Cash and Cash Equivalents		4,040		(10,817)

Cash and cash equivalents at beginning of period		33,428		33,726

Cash and Cash Equivalents at End of Period	$	37,468	$	22,909

See notes to consolidated financial statements.

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Table of Contents

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	Presentation of Interim Information

First Savings Financial Group, Inc. (the “Company”) is a financial holding company and the parent of First Savings Bank (the “Bank”) and First Savings Insurance Risk Management, Inc. (the “Captive”).

The Bank, which is a wholly-owned Indiana-chartered commercial bank subsidiary of the Company, provides a variety of banking services to individuals and business customers through 16 locations in southern Indiana. The Bank attracts deposits primarily from the general public and uses those funds, along with other borrowings, primarily to originate commercial mortgage, residential mortgage, construction, commercial business and consumer loans, and to a lesser extent, to invest in mortgage-backed securities, municipal bonds and other investment securities. The Bank has two wholly-owned subsidiaries: First Savings Investments, Inc., a Nevada corporation that manages a securities portfolio, and Southern Indiana Financial Corporation, which is currently inactive.

The Captive, which is a wholly-owned insurance subsidiary of the Company, is a Nevada corporation that provides property and casualty insurance to the Company, the Bank and the Bank’s active subsidiaries. In addition, the Captive provides reinsurance to 11 other third-party insurance captives for which insurance may not be currently available or economically feasible in the insurance marketplace.

On April 25, 2017, the Bank formed Q2 Business Capital, LLC (“Q2”), which is an Indiana limited liability company that specializes in the origination and servicing of U.S. Small Business Administration (“SBA”) loans. The Bank originally owned 51% of Q2’s membership interests. On December 31, 2020, the Bank completed the acquisition of the minority interests in Q2, and Q2 became a wholly-owned subsidiary of the Bank. As part of the acquisition of the minority interests, the Bank paid total consideration of $3.1 million. The acquisition was accounted for as an equity transaction, and resulted in the reclassification of the noncontrolling interests of $695,000, the recognition of net deferred tax assets of $590,000 and a reduction of additional paid-in capital of $1.9 million.

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments considered necessary to present fairly the financial position as of June 30, 2022, the results of operations for the three- and nine-month periods ended June 30, 2022 and 2021, and the cash flows for the nine-month periods ended June 30, 2022 and 2021. 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, 2021 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.

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Table of Contents

FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

2.	Investment Securities

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

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

Securities Available for Sale and Held to Maturity

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


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gain		Losses		Value

	(In thousands)
June 30, 2022:
Securities available for sale:

U.S. Treasury bills and notes	$	30,774	$	—	$	1,605	$	29,169
Agency mortgage-backed		27,268		24		1,602		25,690
Agency CMO		10,672		—		416		10,256
Privately-issued CMO		657		4		23		638
Privately-issued ABS		595		20		7		608
SBA certificates		1,712		2		15		1,699
Municipal bonds		251,596		1,214		13,494		239,316

Total securities available for sale	$	323,274	$	1,264	$	17,162	$	307,376

Securities held to maturity:

Agency mortgage-backed	$	50	$	1	$	—	$	51
Municipal bonds		1,601		69		—		1,670

Total securities held to maturity	$	1,651	$	70	$	—	$	1,721

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gain		Losses		Value

	(In thousands)
September 30, 2021:
Securities available for sale:

U.S. Treasury bills	$	250	$	—	$	—	$	250
Agency mortgage-backed		8,143		293		52		8,384
Agency CMO		13,315		235		20		13,530
Privately-issued CMO		729		81		7		803
Privately-issued ABS		721		51		—		772
SBA certificates		2,157		2		21		2,138
Municipal bonds		170,102		11,055		353		180,804

Total securities available for sale	$	195,417	$	11,717	$	453	$	206,681

Securities held to maturity:

Agency mortgage-backed	$	64	$	5	$	—	$	69
Municipal bonds		1,773		212		—		1,985

Total securities held to maturity	$	1,837	$	217	$	—	$	2,054

The amortized cost and fair value of investment securities as of June 30, 2022 by contractual maturity are shown below. CMO, ABS, SBA certificates, and mortgage-backed securities which do not have a single maturity date are shown separately.


	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

	(In thousands)
Due within one year	$	8,609	$	8,618	$	247	$	255
Due after one year through five years		24,872		25,103		817		848
Due after five years through ten years		65,933		64,376		537		567
Due after ten years		182,956		170,388		—		—
CMO		11,329		10,894		—		—
ABS		595		608		—		—
SBA certificates		1,712		1,699		—		—
Mortgage-backed securities		27,268		25,690		50		51

	$	323,274	$	307,376	$	1,651	$	1,721

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Information pertaining to investment securities with gross unrealized losses at June 30, 2022 and September 30, 2021, aggregated by investment category and the length of time that individual securities have been in a continuous loss position, follows:


	Number of			Gross
	Investment	Fair		Unrealized
	Positions	Value		Losses

	(Dollars in thousands)
June 30, 2022:
Securities available for sale:
Continuous loss position less than twelve months:
U.S. Treasury bills and notes	7	$	29,169	$	1,605
Agency mortgage-backed securities	10		22,415		1,188
Agency CMO	11		8,947		273
Privately-issued CMO	2		591		15
Municipal bonds	145		139,487		13,229

Total less than twelve months	175		200,609		16,310

Continuous loss position more than twelve months:
Agency mortgage-backed securities	1		2,421		414
Agency CMO	2		1,309		143
Privately-issued CMO	1		20		8
Privately-issued ABS	1		299		7
SBA certificates	2		1,663		15
Municipal bonds	1		1,735		265

Total more than twelve months	8		7,447		852

Total securities available for sale	183	$	208,056	$	17,162

September 30, 2021:
Securities available for sale:
Continuous loss position less than twelve months:
Agency mortgage-backed securities	1	$	3,056	$	52
Agency CMO	2		1,466		20
SBA certificates	1		2,013		20
Municipal bonds	18		13,904		254

Total less than twelve months	22		20,439		346

Continuous loss position more than twelve months:
Privately-issued CMO	1		23		7
SBA certificates	1		88		1
Municipal bonds	1		1,902		99

Total more than twelve months	3		2,013		107

Total securities available for sale	25	$	22,452	$	453

At June 30, 2022, the Company had one held to maturity agency mortgage-backed security with a fair value of $21.0 million and an unrealized loss of $44,000. At September 30, 2021, the Company did not have any securities held to maturity with an unrealized loss.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

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

The total available for sale debt securities in loss positions at June 30, 2022, which consisted of U.S. Treasury bills and notes, agency mortgage-backed securities, agency CMOs, privately-issued CMOs, privately-issued ABS, municipal bonds and SBA certificates, had a fair value as a percentage of amortized cost of 92.4%. The municipal securities are issued by municipal governments, and are generally secured by municipal project revenues or general obligations of the municipality.

The Company evaluates the existence of a potential credit loss component related to the decline in fair value of the privately issued CMO and ABS portfolios each quarter using an independent third party analysis. At June 30, 2022, the Company held five privately-issued CMO and ABS securities, acquired in a 2009 bank merger, with an aggregate amortized cost of $414,000 and fair value of $404,000 that have been downgraded to a substandard regulatory classification due to the security’s credit quality rating by various rating agencies.

At June 30, 2022, three privately-issued CMO securities and one privately-issued ABS were in a loss position, and had depreciated approximately 3.2% from the Company’s carrying value and were collateralized by residential mortgage loans. These securities had a total fair value of $910,000 and a total unrealized loss of $30,000 at June 30, 2022. Based on the independent third party analysis of the expected cash flows, management determined that no other-than-temporary impairment was required to be recognized on the privately issued CMO and ABS portfolios at June 30, 2022. While the Company does not anticipate additional credit-related impairment losses at June 30, 2022, additional deterioration in market and economic conditions may have an adverse impact on the credit quality of the portfolio, and therefore, require a credit related impairment charge in the future.

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

During the three and nine-month periods ended June 30, 2021, the Company did not realize any gross gains or losses on sales of available for sale securities. During the three and nine-month periods ended June 30, 2022, the Company recognized $489,000 of gross gains and $13,000 of gross losses on sales of available for sale securities.

Certain available for sale debt securities were pledged to secure FHLB borrowings at June 30, 2022 and September 30, 2021, and may be pledged to secure federal funds borrowings.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

3.	Loans and Allowance for Loan Losses

Loans at June 30, 2022 and September 30, 2021 consisted of the following:


	June 30,		September 30,
	2022		2021

		(In thousands)
Real estate mortgage:
1-4 family residential	$	332,491	$	241,425
Commercial		168,588		149,600
Single tenant net lease		506,798		403,692
SBA		61,584		62,805
Multifamily residential		33,870		40,324
Residential construction		17,111		8,330
Commercial construction		4,894		2,717
Land and land development		9,549		10,217
Commercial business		89,897		59,883
SBA commercial business (1)		22,354		80,400
Consumer		34,637		30,563
Total loans		1,281,773		1,089,956

Deferred loan origination fees and costs, net (2)		1,023		281
Allowance for loan losses		(14,980)		(14,301)

Loans, net	$	1,267,816	$	1,075,936

(1)

Includes $1.8 million and $56.7 million of loans originated under the SBA’s Paycheck Protection Program (“PPP”) at June 30, 2022 and September 30, 2021, respectively.

(2)

Includes $24,000 and $757,000 of net deferred loan fees related to PPP loans as of June 30, 2022 and September 30, 2021, respectively.

During the nine-month period ended June 30, 2022, there were no significant changes in the Company’s lending activities or the methodology used to estimate the allowance for loan losses as disclosed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2021.

At June 30, 2022 and September 30, 2021, the Company did not own any residential real estate properties where physical possession has been obtained. At June 30, 2022 and September 30, 2021, the recorded investment in consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure was $66,000 and $124,000, respectively.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The following table provides the components of the recorded investment in loans as of June 30, 2022:


	Principal		Accrued		Net Deferred		Recorded
	Loan		Interest		Loan Origination		Investment
Recorded Investment in Loans:	Balance		Receivable		Fees and Costs		in Loans

	(In thousands)
Residential real estate	$	332,491	$	1,325	$	116	$	333,932
Commercial real estate		168,588		500		(286)		168,802
Single tenant net lease		506,798		1,754		(55)		508,497
SBA commercial real estate		61,584		444		1,145		63,173
Multifamily		33,870		63		(41)		33,892
Residential construction		17,111		35		(75)		17,071
Commercial construction		4,894		8		(27)		4,875
Land and land development		9,549		15		(9)		9,555
Commercial business		89,897		305		51		90,253
SBA commercial business		22,354		164		225		22,743
Consumer		34,637		164		(21)		34,780
	$	1,281,773	$	4,777	$	1,023	$	1,287,573


	Individually		Collectively		Recorded
	Evaluated for		Evaluated for		Investment in
Recorded Investment in Loans as Evaluated for Impairment:	Impairment		Impairment		Loans

	(In thousands)
Residential real estate	$	2,408	$	331,524	$	333,932
Commercial real estate		942		167,860		168,802
Single tenant net lease		—		508,497		508,497
SBA commercial real estate		6,885		56,288		63,173
Multifamily		363		33,529		33,892
Residential construction		—		17,071		17,071
Commercial construction		—		4,875		4,875
Land and land development		—		9,555		9,555
Commercial business		1,037		89,216		90,253
SBA commercial business		809		21,934		22,743
Consumer		260		34,520		34,780
	$	12,704	$	1,274,869	$	1,287,573

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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, 2021:


					Net Deferred
			Accrued		Loan		Recorded
	Principal Loan		Interest		Origination		Investment
Recorded Investment in Loans:	Balance		Receivable		Fees and Costs		in Loans

	(In thousands)

Residential real estate	$	241,425	$	821	$	24	$	242,270
Commercial real estate		149,600		563		(208)		149,955
Single tenant net lease		403,692		1,369		(123)		404,938
SBA commercial real estate		62,805		475		1,106		64,386
Multifamily		40,324		76		(47)		40,353
Residential construction		8,330		14		(49)		8,295
Commercial construction		2,717		6		(28)		2,695
Land and land development		10,217		18		(6)		10,229
Commercial business		59,883		171		49		60,103
SBA commercial business		80,400		791		(420)		80,771
Consumer		30,563		94		(17)		30,640
	$	1,089,956	$	4,398	$	281	$	1,094,635


	Individually		Collectively		Recorded
	Evaluated for		Evaluated for		Investment in
Recorded Investment in Loans as Evaluated for Impairment:	Impairment		Impairment		Loans

	(In thousands)

Residential real estate	$	3,067	$	239,203	$	242,270
Commercial real estate		1,021		148,934		149,955
Single tenant net lease		—		404,938		404,938
SBA commercial real estate		9,153		55,233		64,386
Multifamily		482		39,871		40,353
Residential construction		—		8,295		8,295
Commercial construction		—		2,695		2,695
Land and land development		—		10,229		10,229
Commercial business		1,476		58,627		60,103
SBA commercial business		1,296		79,475		80,771
Consumer		248		30,392		30,640
	$	16,743	$	1,077,892	$	1,094,635

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The following table presents the balance in the allowance for loan losses by portfolio segment and based on impairment method as of June 30, 2022 and September 30, 2021:


	Individually		Collectively
	Evaluated for		Evaluated for		Ending
	Impairment		Impairment		Balance

	(In thousands)
June 30, 2022:
Residential real estate	$	29	$	2,412	$	2,441
Commercial real estate		—		1,535		1,535
Single tenant net lease		—		3,563		3,563
SBA commercial real estate		291		2,541		2,832
Multifamily		—		263		263
Residential construction		—		288		288
Commercial construction		—		88		88
Land and land development		—		161		161
Commercial business		—		1,240		1,240
SBA commercial business		558		1,613		2,171
Consumer		—		398		398

	$	878	$	14,102	$	14,980

September 30, 2021:
Residential real estate	$	—	$	1,438	$	1,438
Commercial real estate		—		2,806		2,806
Single tenant net lease		—		2,422		2,422
SBA commercial real estate		114		3,361		3,475
Multifamily		—		518		518
Residential construction		—		191		191
Commercial construction		—		63		63
Land and land development		—		235		235
Commercial business		—		1,284		1,284
SBA commercial business		18		1,328		1,346
Consumer		1		522		523

	$	133	$	14,168	$	14,301

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2022 and 2021:


	Beginning Balance		Provisions (Credits)		Charge-Offs		Recoveries		Ending Balance

		(In thousands)
June 30, 2022:
Residential real estate	$	1,345	$	1,091	$	—	$	5	$	2,441
Commercial real estate		2,451		(916)		—		—		1,535
Single tenant net lease		2,619		944		—		—		3,563
SBA commercial real estate		3,633		(745)		(71)		15		2,832
Multifamily		353		(90)		—		—		263
Residential construction		233		55		—		—		288
Commercial construction		67		21		—		—		88
Land and land development		243		(82)		—		—		161
Commercial business		1,303		(93)		—		30		1,240
SBA commercial business		1,775		377		(1)		20		2,171
Consumer		453		(30)		(37)		12		398
	$	14,475	$	532	$	(109)	$	82	$	14,980

June 30, 2021:
Residential real estate	$	1,622	$	(209)	$	—	$	7	$	1,420
Commercial real estate		3,060		(263)		—		—		2,797
Single tenant net lease		3,349		(1,045)		—		—		2,304
SBA commercial real estate		3,802		(168)		(59)		—		3,575
Multifamily		810		(125)		—		—		685
Residential construction		136		66		—		—		202
Commercial construction		239		(168)		—		—		71
Land and land development		283		(17)		—		—		266
Commercial business		1,536		(159)		—		—		1,377
SBA commercial business		1,549		(162)		(21)		10		1,376
Consumer		1,033		(480)		(28)		44		569
	$	17,419	$	(2,730)	$	(108)	$	61	$	14,642

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended June 30, 2022 and 2021:


	Beginning		Provisions						Ending
	Balance		(Credits)		Charge-Offs		Recoveries		Balance

	(In thousands)
June 30, 2022:
Residential real estate	$	1,438	$	1,015	$	(23)	$	11	$	2,441
Commercial real estate		2,806		(1,271)		—		—		1,535
Single tenant net lease		2,422		1,141		—		—		3,563
SBA commercial real estate		3,475		(548)		(110)		15		2,832
Multifamily		518		(255)		—		—		263
Residential construction		191		97		—		—		288
Commercial construction		63		25		—		—		88
Land and land development		235		(74)		—		—		161
Commercial business		1,284		(133)		—		89		1,240
SBA commercial business		1,346		1,059		(285)		51		2,171
Consumer		523		(28)		(127)		30		398
	$	14,301	$	1,028	$	(545)	$	196	$	14,980

June 30, 2021:
Residential real estate	$	1,255	$	154	$	(5)	$	16	$	1,420
Commercial real estate		3,058		(261)		—		—		2,797
Single tenant net lease		3,017		(713)		—		—		2,304
SBA commercial real estate		4,154		(5)		(581)		7		3,575
Multifamily		772		(87)		—		—		685
Residential construction		243		(41)		—		—		202
Commercial construction		181		(110)		—		—		71
Land and land development		243		23		—		—		266
Commercial business		1,449		(77)		—		5		1,377
SBA commercial business		1,539		(172)		(21)		30		1,376
Consumer		1,115		(486)		(125)		65		569
	$	17,026	$	(1,775)	$	(732)	$	123	$	14,642

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The following table presents impaired loans individually evaluated for impairment as of June 30, 2022 and for the three and nine-months ended June 30, 2022 and 2021. The Company did not recognize any interest income on impaired loans using the cash receipts method during the three and nine-month periods ended June 30, 2022 and 2021.


	At June 30, 2022						Three Months Ended June 30,								Nine Months Ended June 30,
							2022		2022		2021		2021		2022		2022		2021		2021
			Unpaid				Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized

	(In thousands)

Loans with no related allowance recorded:
Residential real estate	$	2,144	$	2,439	$	—	$	3,129	$	15	$	3,890	$	15	$	3,286	$	44	$	4,591	$	53
Commercial real estate		942		1,013		—		1,024		7		1,149		7		1,052		21		1,163		22
Single tenant net lease		—		—		—		—		—		—		—		—		—		—		—
SBA commercial real estate		5,159		5,793		—		6,441		—		2,856		—		7,271		—		2,908		—
Multifamily		363		406		—		411		3		627		—		419		5		662		—
Residential construction		—		—		—		—		—		—		—		—		—		—		—
Commercial construction		—		—		—		—		—		—		—		—		—		—		—
Land and land development		—		—		—		—		—		1		—		—		—		1		—
Commercial business		1,037		1,134		—		1,188		10		1,709		1		1,350		18		1,690		2
SBA commercial business		449		805		—		444		—		931		—		473		—		674		—
Consumer		91		84		—		100		—		75		1		94		1		88		2
	$	10,185	$	11,674	$	—	$	12,737	$	35	$	11,238	$	24	$	13,945	$	89	$	11,777	$	79

Loans with an allowance recorded:
Residential real estate	$	264	$	267	$	29	$	261	$	—	$	151	$	—	$	257	$	—	$	119	$	—
Commercial real estate		—		—		—		—		—		—		—		—		—		—		—
Single tenant net lease		—		—		—		—		—		—		—		—		—		—		—
SBA commercial real estate		1,726		2,507		291		1,510		—		3,958		—		1,267		—		3,888		—
Multifamily		—		—		—		—		—		—		—		—		—		—		—
Residential construction		—		—		—		—		—		—		—		—		—		—		—
Commercial construction		—		—		—		—		—		—		—		—		—		—		—
Land and land development		—		—		—		—		—		—		—		—		—		—		—
Commercial business		—		—		—		—		—		2		—		—		—		1		—
SBA commercial business		360		373		558		454		—		210				337		—		304		—
Consumer		169		169		—		154		—		115		—		146		—		175		—
	$	2,519	$	3,316	$	878	$	2,379	$	—	$	4,436	$	—	$	2,007	$	—	$	4,487	$	—

Total:
Residential real estate	$	2,408	$	2,706	$	29	$	3,390	$	15	$	4,041	$	15	$	3,543	$	44	$	4,710	$	53
Commercial real estate		942		1,013		—		1,024		7		1,149		7		1,052		21		1,163		22
Single tenant net lease		—		—		—		—		—		—		—		—		—		—		—
SBA commercial real estate		6,885		8,300		291		7,951		—		6,814		—		8,538		—		6,796		—
Multifamily		363		406		—		411		3		627		—		419		5		662		—
Residential construction		—		—		—		—		—		—		—		—		—		—		—
Commercial construction		—		—		—		—		—		—		—		—		—		—		—
Land and land development		—		—		—		—		—		1		—		—		—		1		—
Commercial business		1,037		1,134		—		1,188		10		1,711		1		1,350		18		1,691		2
SBA commercial business		809		1,178		558		898		—		1,141		—		810		—		978		—
Consumer		260		253		—		254		—		190		1		240		1		263		2
	$	12,704	$	14,990	$	878	$	15,116	$	35	$	15,674	$	24	$	15,952	$	89	$	16,264	$	79

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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, 2021.


			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance

	(In thousands)
Loans with no related allowance recorded:
Residential real estate	$	3,002	$	3,551	$	—
Commercial real estate		1,021		1,092		—
Single tenant net lease		—		—		—
SBA commercial real estate		8,184		8,873		—
Multifamily		482		539		—
Residential construction		—		—		—
Commercial construction		—		—		—
Land and land development		—		—		—
Commercial business		1,476		1,559		—
SBA commercial business		1,278		1,534		—
Consumer		103		97		—
	$	15,546	$	17,245	$	—

Loans with an allowance recorded:
Residential real estate	$	65	$	65	$	—
Commercial real estate		—		—		—
Single tenant net lease		—		—		—
SBA commercial real estate		969		1,394		114
Multifamily		—		—		—
Residential construction		—		—		—
Commercial construction		—		—		—
Land and land development		—		—		—
Commercial business		—		—		—
SBA commercial business		18		21		18
Consumer		145		144		1
	$	1,197	$	1,624	$	133

Total:
Residential real estate	$	3,067	$	3,616	$	—
Commercial real estate		1,021		1,092		—
Single tenant net lease		—		—		—
SBA commercial real estate		9,153		10,267		114
Multifamily		482		539		—
Residential construction		—		—		—
Commercial construction		—		—		—
Land and land development		—		—		—
Commercial business		1,476		1,559		—
SBA commercial business		1,296		1,555		18
Consumer		248		241		1
	$	16,743	$	18,869	$	133

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Nonperforming loans consist of nonaccrual loans and loans over 90 days past due and still accruing interest. The following table presents the recorded investment in nonperforming loans at June 30, 2022 and September 30, 2021:


	At June 30, 2022						At September 30, 2021
			Loans 90+						Loans 90+
			Days		Total				Days		Total
	Nonaccrual		Past Due		Nonperforming		Nonaccrual		Past Due		Nonperforming
	Loans		Still Accruing		Loans		Loans		Still Accruing		Loans

	(In thousands)

Residential real estate	$	1,358	$	—	$	1,358	$	1,894	$	—	$	1,894
Commercial real estate		543		—		543		599		—		599
Single tenant net lease		—		—		—		—		—		—
SBA commercial real estate		6,885		—		6,885		9,153		472		9,625
Multifamily		—		—		—		482		—		482
Residential construction		—		—		—		—		—		—
Commercial construction		—		—		—		—		—		—
Land and land development		—		—		—		—		—		—
Commercial business		27		—		27		1,370		—		1,370
SBA commercial business		809		—		809		1,296		—		1,296
Consumer		260		—		260		206		—		206

Total	$	9,882	$	—	$	9,882	$	15,000	$	472	$	15,472

The following table presents the aging of the recorded investment in past due loans at June 30, 2022:




	30-59 Days		60-89 Days		90+ Days		Total				Total
	Past Due		Past Due		Past Due		Past Due		Current		Loans

	(In thousands)

Residential real estate	$	839	$	40	$	156	$	1,035	$	332,897	$	333,932
Commercial real estate		26		—		543		569		168,233		168,802
Single tenant net lease		—		—		—		—		508,497		508,497
SBA commercial real estate		—		—		2,936		2,936		60,237		63,173
Multifamily		197		—		—		197		33,695		33,892
Residential construction		—		—		—		—		17,071		17,071
Commercial construction		—		—		—		—		4,875		4,875
Land and land development		—		—		—		—		9,555		9,555
Commercial business		17		248		27		292		89,961		90,253
SBA commercial business		—		—		211		211		22,532		22,743
Consumer		15		43		54		112		34,668		34,780

Total	$	1,094	$	331	$	3,927	$	5,352	$	1,282,221	$	1,287,573

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The following table presents the aging of the recorded investment in past due loans at September 30, 2021:



	30-59 Days		60-89 Days		90+ Days		Total				Total
	Past Due		Past Due		Past Due		Past Due		Current		Loans

	(In thousands)

Residential real estate	$	818	$	352	$	347	$	1,517	$	240,753	$	242,270
Commercial real estate		—		—		599		599		149,356		149,955
Single tenant net lease		—		—		—		—		404,938		404,938
SBA commercial real estate		—		208		4,990		5,198		59,188		64,386
Multifamily		—		—		—		—		40,353		40,353
Residential construction		—		—		—		—		8,295		8,295
Commercial construction		—		—		—		—		2,695		2,695
Land and land development		—		—		—		—		10,229		10,229
Commercial business		—		—		3		3		60,100		60,103
SBA commercial business		18		104		848		970		79,801		80,771
Consumer		33		20		70		123		30,517		30,640

Total	$	869	$	684	$	6,857	$	8,410	$	1,086,225	$	1,094,635

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. The following table presents the recorded investment in loans by risk category as of June 30, 2022:


			Special
June 30, 2022:	Pass		Mention		Substandard		Doubtful		Loss		Total

	(In thousands)
Residential real estate	$	331,893	$	—	$	1,875	$	164	$	—	$	333,932
Commercial real estate		168,043		—		759		—		—		168,802
Single tenant net lease		508,497		—		—		—		—		508,497
SBA commercial real estate		51,628		1,144		8,736		1,665		—		63,173
Multifamily		33,529		—		363		—		—		33,892
Residential construction		17,071		—		—		—		—		17,071
Commercial construction		4,875		—		—		—		—		4,875
Land and land development		9,555		—		—		—		—		9,555
Commercial business		88,919		—		1,334		—		—		90,253
SBA commercial business		20,032		—		2,670		41		—		22,743
Consumer		34,689		—		91		—		—		34,780

Total	$	1,268,731	$	1,144	$	15,828	$	1,870	$	—	$	1,287,573

The following table presents the recorded investment in loans by risk category as of September 30, 2021:


			Special
September 30, 2021:	Pass		Mention		Substandard		Doubtful		Loss		Total

	(In thousands)
Residential real estate	$	240,078	$	—	$	2,018	$	174	$	—	$	242,270
Commercial real estate		143,031		4,059		2,865		—		—		149,955
Single tenant net lease		404,938		—		—		—		—		404,938
SBA commercial real estate		45,465		5,343		10,339		3,239		—		64,386
Multifamily		39,871		—		482		—		—		40,353
Residential construction		8,295		—		—		—		—		8,295
Commercial construction		2,695		—		—		—		—		2,695
Land and land development		10,229		—		—		—		—		10,229
Commercial business		58,583		—		1,520		—		—		60,103
SBA commercial business		70,019		6,914		3,808		30		—		80,771
Consumer		30,570		—		70		—		—		30,640

Total	$	1,053,774	$	16,316	$	21,102	$	3,443	$	—	$	1,094,635

Troubled Debt Restructurings

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

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

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

The following table summarizes the Company’s recorded investment in TDRs at June 30, 2022 and September 30, 2021. There was $3,000 of specific reserve included in the allowance for loan losses related to TDRs at June 30, 2022. There was no specific reserve included in the allowance for loan losses related to TDRs at September 30, 2021.


	Accruing		Nonaccrual		Total

	(In thousands)
June 30, 2022:
Residential real estate	$	1,050	$	—	$	1,050
Commercial real estate		399		444		843
SBA commercial real estate		—		1,627		1,627
Multifamily		363		—		363
Commercial business		1,010		—		1,010
SBA commercial business		—		281		281
Total	$	2,822	$	2,352	$	5,174

September 30, 2021:
Residential real estate	$	1,173	$	—	$	1,173
Commercial real estate		422		465		887
SBA commercial real estate		—		3,240		3,240
Multifamily		—		482		482
Commercial business		106		1,367		1,473
Consumer		42		—		42
Total	$	1,743	$	5,554	$	7,297

The following table summarizes information regarding TDRs that were restructured during the three- and nine-month periods ended June 30, 2022 and the nine-month period ended June 30, 2021:


		Pre-Modification		Post-Modification
	Number of Loans	Principal Balance		Principal Balance

	(Dollars in thousands)
Three Months Ended June 30, 2022:
SBA commercial business	1	$	397	$	397
Total	1	$	397	$	397
Nine Months Ended June 30, 2022:
Commercial business	1	$	397	$	397
Total	1	$	397	$	397
Nine Months Ended June 30, 2021:
Commercial business	1	$	126	$	126
Total	1	$	126	$	126

There were no TDRs that were restructured during the three- months ended June 30, 2021.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

At June 30, 2022 and September 30, 2021, the Company had committed to lend $1,000 to customers with outstanding loans classified as TDRs.

There were no principal charge-offs recorded as a result of TDRs during the three- and nine-month periods ended June 30, 2022. There were principal charge-offs totaling $59,000 and $457,000 recorded as a result of TDRs during the three- and nine-month periods ended June 30, 2021, respectively. 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- and nine-month periods ended June 30, 2022 and 2021, the Company did not have any TDRs that were modified within the previous twelve months and for which there was a payment default.

On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”. This guidance encouraged financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance indicated that, in consultation with the Financial Accounting Standards Board (“FASB”), the federal banking agencies concluded that short-term modifications (e.g., six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not TDRs. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020. The CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. The Consolidated Appropriations Act of 2021, signed into law on December 27, 2020, further extended the relief from TDR accounting for qualified modifications to the earlier of January 1, 2022 or 60 days after the national emergency concerning COVID-19 terminates. At June 30, 2022, no loans remained under the Company’s payment extension program.

SBA Loan Servicing Rights

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

The aggregate fair value of SBA loan servicing rights approximates its carrying value. A valuation model employed by an independent third party calculates the present value of future cash flows and is used to estimate fair value at the date of sale and on a quarterly basis for impairment analysis purposes. Management periodically compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. Key assumptions used to estimate the fair value of the SBA loan servicing rights include the discount rate and prepayment speed assumptions. For purposes of impairment, risk characteristics such as interest rate, loan type, term and investor type are used to stratify the SBA loan servicing rights. Impairment is recognized through a valuation allowance to the extent that fair value is less than the carrying amount. Changes in the valuation allowance are reported in other noninterest income in the consolidated statements of income.

The unpaid principal balance of SBA loans serviced for others was $247.5 million, $244.8 million and $239.5 million at June 30, 2022, September 30, 2021 and June 30, 2021, respectively. Contractually specified late fees and ancillary fees earned on SBA loans were $20,000 and $74,000 for the three- and nine-month periods ended June 30, 2022, respectively. Contractually specified late fees and ancillary fees earned on SBA loans were $32,000 and $69,000 for the three- and nine-month periods ended June 30, 2021, respectively. Net servicing income (contractually specified servicing fees offset by direct servicing expenses) related to SBA loans was $606,000 and $1.9 million for the three- and nine-month periods ended June 30, 2022, respectively. Net servicing income (contractually specified servicing fees offset by direct servicing expenses) related to SBA loans was $591,000 and $1.6 million for the three- and nine-month periods ended June 30, 2021, respectively. Net servicing income and costs related to SBA loans are included in other noninterest income in the consolidated statements of income.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

An analysis of SBA loan servicing rights for the three- and nine-month periods ended June 30, 2022 and 2021 is as follows:


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2022		2021		2022		2021

	(In thousands)
Balance, beginning of period	$	4,447	$	4,122	$	4,447	$	3,748
Servicing rights capitalized		112		505		772		1,577
Amortization		(219)		(227)		(771)		(603)
Direct write-offs		(103)		(105)		(217)		(380)
Change in valuation allowance		(187)		70		(181)		23
Balance, end of period	$	4,050	$	4,365	$	4,050	$	4,365

There was a valuation allowance of $187,000 and $6,000 related to SBA loan servicing rights at June 30, 2022 and September 30, 2021, respectively.

Mortgage Servicing Rights (“MSRs”)

The Company originates residential mortgage loans for sale in the secondary market and retains servicing for certain of these loans when they are sold. MSRs retained for originated loans that have been sold are accounted for at fair value. The fair value of MSRs are determined using the present value of estimated expected net servicing income using assumptions about expected mortgage loan prepayment rates, discount rate, servicing costs, and other economic factors, which are determined based on current market conditions. Changes in these underlying assumptions could cause the fair value of MSRs to change significantly in the future. Changes in fair value of MSRs are recorded in mortgage banking income in the accompanying consolidated statements of income. MSRs are subject to changes in value from, among other things, changes in interest rates, prepayments of the underlying loans and changes in the credit quality of the underlying loans.

A valuation model employed by an independent third party calculates the present value of future cash flows and is used to value the MSRs on a monthly basis. Management periodically compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. Key assumptions used to estimate the fair value of the MSRs at June 30, 2022 and September 30, 2021 were as follows:


	Range of Assumption	Range of Assumption
	(Weighted Average)	(Weighted Average)
Assumption	June 30, 2022	September 30, 2021
Discount rate	9.00% to 14.00% (9.01%)	8.50% to 10.00% (8.51%)
Prepayment rate	0.00% to 74.82% (6.62%)	6.04% to 43.27% (10.00%)

The unpaid principal balance of residential mortgage loans serviced for others was $4.94 billion and $4.64 billion at June 30, 2022 and September 30, 2021, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing and other liabilities were $40.7 million and $40.5 million at June 30, 2022 and September 30, 2021, respectively. Contractually specified servicing fees (net of direct servicing expenses), late fees and other ancillary fees related to residential mortgage loans serviced for others were $2.2 million and $6.6 million for the three- and nine-month periods ended June 30, 2022, respectively. Contractually specified servicing fees (net of direct servicing expenses), late fees and other ancillary fees related to residential mortgage loans serviced for others were $1.6 million and $4.0 million for the three- and nine-month periods ended June 30, 2021, respectively. Contractually specified servicing fees are included in mortgage banking income in the consolidated statements of income.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Changes in the carrying value of MSRs accounted for at fair value for the three- and nine-month periods ended June 30, 2022 and 2021 were as follows:



	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2022		2021		2022		2021

	(In thousands)

Fair value, beginning of period	$	63,660	$	45,245	$	49,579	$	21,703
Servicing rights capitalized		2,731		5,195		10,581		32,678
Changes in fair value related to:
Loan repayments		(1,695)		(2,336)		(6,117)		(6,885)
Change in valuation model inputs or assumptions		143		(691)		10,796		(83)
Balance, end of period	$	64,839	$	47,413	$	64,839	$	47,413

Nonresidential MSRs

The Company also periodically sells single tenant net lease loans with servicing rights retained. Loan servicing rights on these nonresidential mortgage loans are initially recorded at fair value and are then amortized in proportion to and over the period of estimated net servicing income. Impairment of nonresidential MSRs is assessed using the present value of estimated future cash flows. The aggregate fair value of nonresidential MSRs approximates its carrying value. A valuation model employed by management 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 nonresidential MSRs include the discount rate and prepayment speed assumptions. 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 other noninterest income in the consolidated statements of income.

The unpaid principal balance of nonresidential mortgage loans serviced for others was $44.4 million at June 30, 2022. Contractually specified servicing fees, late fees and other ancillary fees related to nonresidential mortgage loans serviced for others were $16,000 and $35,000 for the three- and nine-month periods ended June 30, 2022. Contractually specified servicing fees on nonresidential mortgage loans serviced for others are included in other noninterest income in the consolidated statements of income.

An analysis of nonresidential MSRs for the three- and nine-month periods ended June 30, 2022 is as follows:


	Three Months Ended		Nine Months Ended
	June 30, 2022		June 30, 2022

	(In thousands)

Balance, beginning of period	$	160	$	—
Servicing rights capitalized		—		160
Amortization		(10)		(10)
Direct write-offs		—		—
Change in valuation allowance		—		—
Balance, end of period	$	150	$	150

There was no valuation allowance related to nonresidential MSRs at June 30, 2022.

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FIRST SAVINGS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Deposits

Deposits at June 30, 2022 and September 30, 2021 consisted of the following:


	June 30,		September 30,
	2022		2021

	(In thousands)

Noninterest-bearing demand deposits	$	343,292	$	291,039
NOW accounts		329,941		315,169
Money market accounts		214,021		222,972
Savings accounts		172,687		162,033
Retail time deposits		126,641		136,309
Brokered & reciprocal time deposits		159,125		100,058
Total	$	1,345,707	$	1,227,580

5.	Supplemental Disclosure for Net Income Per Share

Net income per share information is presented below for the three- and nine-month periods ended June 30, 2022 and 2021. All share and per share amounts have been adjusted to reflect the three-for-one stock split effective September 15, 2021.


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2022		2021		2022		2021

	(Dollars in thousands, except per share data)
Basic:
Earnings:
Net income attributable to First Savings Financial Group, Inc.	$	2,638	$	4,308	$	13,978	$	24,718
Shares:
Weighted average common shares outstanding, basic		7,073,204		7,109,481		7,082,034		7,106,505

Net income per common share, basic	$	0.37	$	0.61	$	1.97	$	3.48

Diluted:
Earnings:
Net income attributable to First Savings Financial Group, Inc.	$	2,638	$	4,308	$	13,978	$	24,718
Shares:
Weighted average common shares outstanding, basic		7,073,204		7,109,481		7,082,034		7,106,505
Add: Dilutive effect of outstanding options		66,816		60,066		74,781		50,739
Add: Dilutive effect of restricted stock		5,268		9,396		9,817		8,991
Weighted average common shares outstanding, as adjusted		7,145,288		7,178,943		7,166,632		7,166,235

Net income per common share, diluted	$	0.37	$	0.60	$	1.95	$	3.45

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

Stock options for 137,250 shares of common stock were excluded from the calculation of diluted net income per common share for the three- and nine-month periods ended June 30, 2022, because their effect was antidilutive. Stock options for 14,400 and

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72,939 shares of common stock were excluded from the calculation of diluted net income per common share for the three- and nine-month periods ended June 30, 2021, respectively, because their effect was antidilutive. There were no antidilutive restricted stock awards excluded from the calculation of diluted net income per share for the three- and nine-month periods ended June 30, 2022 and 2021.

6.	Supplemental Disclosures of Cash Flow Information


	Nine Months Ended
	June 30,
	2022		2021

	(In thousands)
Cash payments for:
Interest	$	5,753	$	6,272
Income taxes (net of refunds received)		77		8,937
Noncash investing and financing activities:
Transfers from loans to other real estate owned		—		375
Transfers from other real estate owned to premises and equipment		721		—
Transfers from loans to loans held for sale		60,662		41,703
Noncash exercise of stock options		—		77

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

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

Level 1:

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

Level 2:

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

Level 3:

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

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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. The tables below present the balances of financial assets and liabilities measured at fair value on a recurring and nonrecurring basis as of June 30, 2022 and September 30, 2021.


	Carrying Value
	Level 1		Level 2		Level 3		Total

	(In thousands)
June 30, 2022:
Assets Measured – Recurring Basis:
Securities available for sale:
U.S. Treasury bills and notes	$	—	$	29,169	$	—	$	29,169
Agency mortgage-backed		—		25,690		—		25,690
Agency CMO		—		10,256		—		10,256
Privately-issued CMO		—		638		—		638
Privately-issued ABS		—		608		—		608
SBA certificates		—		1,699		—		1,699
Municipal		—		239,316		—		239,316
Total securities available for sale	$	—	$	307,376	$	—	$	307,376
Residential mortgage loans held for sale	$	—	$	94,670	$	—	$	94,670
Derivative assets (included in other assets)	$	—	$	348	$	904	$	1,252
Equity securities (included in other assets)	$	101	$	—	$	—	$	101
Residential mortgage servicing rights	$	—	$	—	$	64,839	$	64,839

Liabilities Measured – Recurring Basis:
Derivative liabilities (included in other liabilities)	$	—	$	404	$	301	$	705

Assets Measured – Nonrecurring Basis:
Impaired loans:
Residential real estate	$	—	$	—	$	235	$	235
Commercial real estate		—		—		—		—
SBA commercial real estate		—		—		1,905		1,905
Multifamily		—		—		—		—
Commercial business		—		—		—		—
SBA commercial business		—		—		—		—
Consumer		—		—		—		—
Total impaired loans	$	—	$	—	$	2,140	$	2,140
SBA loan servicing rights	$	—	$	—	$	3,056	$	3,056

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	Carrying Value
	Level 1		Level 2		Level 3		Total

	(In thousands)
September 30, 2021:
Assets Measured – Recurring Basis
Securities available for sale:
U.S. Treasury bills and notes	$	—	$	250	$	—	$	250
Agency mortgage-backed		—		8,384		—		8,384
Agency CMO		—		13,530		—		13,530
Privately-issued CMO		—		803		—		803
Privately-issued ABS		—		772		—		772
SBA certificates		—		2,138		—		2,138
Municipal bonds		—		180,804		—		180,804
Total securities available for sale	$	—	$	206,681	$	—	$	206,681
Residential mortgage loans held for sale	$	—	$	167,813	$	—	$	167,813
Derivative assets (included in other assets)	$	—	$	1,465	$	2,167	$	3,632
Equity securities (included in other assets)	$	112	$	—	$	—	$	112
Residential mortgage servicing rights	$	—	$	—	$	49,579	$	49,579

Liabilities Measured – Recurring Basis
Derivative liabilities (included in other liabilities)	$	—	$	35	$	600	$	635

Assets Measured – Nonrecurring Basis
Impaired loans:
Residential real estate	$	—	$	—	$	71	$	71
Commercial real estate		—		—		—		—
SBA commercial real estate		—		—		4,169		4,169
Multifamily		—		—		—		—
Commercial business		—		—		—		—
SBA commercial business		—		—		—		—
Consumer		—		—		8		8
Total impaired loans	$	—	$	—	$	4,248	$	4,248
SBA loan servicing rights	$	—	$	—	$	1,184	$	1,184

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

The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. There have been no changes in the valuation techniques and related inputs used for assets measured at fair value on a recurring and nonrecurring basis during the nine-month period ended June 30, 2022.

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

Residential Mortgage Loans Held for Sale. The Company has elected to record 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 and Single Tenant Net Lease Loans Held for Sale. SBA and single tenant net lease loans held for sale are carried at the lower of cost or market value. At September 30, 2021, 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. 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 current quarter, and is classified as Level 3 in the fair value hierarchy. At June 30, 2022, the fair value of single tenant net lease loans held for sale is estimated to approximate carrying value and is classified as Level 3 in the fair value hierarchy. At June 30, 2022 and September 30, 2021, the Company did not have any SBA or single tenant net lease loans held for sale measured at fair value on a nonrecurring basis.

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.

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The table below presents a reconciliation of derivative assets and liabilities (interest rate lock commitments) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three - and nine-month periods ended June 30, 2022 and 2021:


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
(In thousands)	2022		2021		2022		2021

Beginning balance	$	(2,923)	$	262	$	1,567	$	14,937
Unrealized gains (losses) recognized in earnings, net of settlements		3,526		1,777		(964)		(12,898)

Ending balance	$	603	$	2,039	$	603	$	2,039

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 nine-month periods ended June 30, 2022 and 2021 attributable to Level 3 derivative assets and liabilities held at the balance sheet date were $603,000 and $2.0 million, respectively.

The table below presents information about significant unobservable inputs (Level 3) used in the valuation of derivative financial instruments measured at fair value on a recurring basis as of June 30, 2022 and September 30, 2021.


		Range of Inputs	Range of Inputs
	Significant	(Weighted Average)	(Weighted Average)
	Unobservable	June 30,	September 30,
Financial Instrument	Inputs	2022	2021

Interest rate lock commitments	Pull-through rate	44% - 100% (84%)	58% - 100% (83%)
	Direct costs to close	0.28% - 1.75% (0.52%)	0.37% - 1.74% (0.86%)

Residential Mortgage Servicing Rights. The current market for residential MSRs is not sufficiently liquid to provide participants with quoted market prices. Therefore, the Company uses a discounted cash flow valuation model from an independent third party to determine the fair value of residential MSRs. The discounted cash flow model approach consists of projecting expected servicing cash flows and calculating the present value. The key assumptions used in the valuation of residential MSRs include mortgage prepayment speeds, discount rates and loan servicing costs. Due to the nature of the valuation inputs, residential MSRs are classified within Level 3 of the valuation hierarchy. A reconciliation of residential MSRs measured at fair value on a recurring basis using significant unobservable inputs (Level 3) and a summary of the significant unobservable inputs used in the residential MSR valuations is presented in Note 3. Changes in the fair value of residential MSRs are included in mortgage banking income in the accompanying consolidated statements of income.

Impaired Loans. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. In accordance with accounting standards, only impaired loans for which an allowance for loan loss has been established or a partial charge-off recorded require classification in the fair value hierarchy.

The fair value of impaired loans is generally based on the fair value of the underlying collateral less estimated costs to sell. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable. The fair value of the collateral is generally determined based on real estate appraisals or other independent evaluations by qualified professionals, adjusted for estimated costs to sell the property, costs to complete or repair the property and other factors to reflect management’s estimate of the fair value of the collateral given the current market conditions and the condition of the collateral. The fair value of impaired loans is classified as Level 3 in the fair value hierarchy.

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At June 30, 2022 and September 30, 2021, the significant unobservable inputs used in the fair value measurement of impaired loans included discounts from appraised value ranging from 0.0% to 100.0%, for both periods, and estimated costs to sell the collateral ranging from 0.0% to 10.0% and 0.0% to 26.0%, respectively. During the three-and nine-month periods ended June 30, 2022, the Company recognized provisions for loan losses on impaired loans of $508,000 and $1.7 million, respectively. During the three- and nine-month periods ended June 30, 2021, the Company recognized provisions for loan losses on impaired loans of $87,000 and $354,000, respectively.

SBA and Nonresidential Loan Servicing Rights. SBA loan servicing rights represent the value associated with servicing SBA loans that have been sold. The fair value of SBA loan servicing rights is determined on a quarterly basis by an independent third party valuation model using market-based discount rate and prepayment assumptions, and is classified as Level 3 in the fair value hierarchy. At June 30, 2022, the significant unobservable inputs used in the fair value measurement of SBA loan servicing rights measured at fair value included discount rates ranging from 0.50% to 25.00% with a weighted average of 12.05% and prepayment speed assumptions ranging from 0.00% to 25.29% with a weighted average rate of 14.84%. At September 30, 2021, the significant unobservable inputs used in the fair value measurement of SBA loan servicing rights measured at fair value included discount rates ranging from 4.62% to 22.34% with a weighted average of 14.45% and prepayment speed assumptions ranging from 8.30% to 24.51% with a weighted average rate of 15.84%. Impairment of the SBA loan servicing rights is recognized on a quarterly basis through a valuation allowance to the extent that fair value is less than the carrying amount. The Company recognized impairment charges of $187,000 on SBA loan servicing rights for the three- and nine-month periods ended June 30, 2022, respectively. The Company reversed impairment charges of $70,000 and $23,000 on SBA loan servicing rights for the three- and nine-month periods ended June 30, 2021, respectively.

Nonresidential mortgage loan servicing rights represent the value associated with servicing single tenant net lease loans that have been sold. The fair value of nonresidential mortgage loan servicing rights is determined by management on a quarterly basis using a discounted cash flow model, and is classified as Level 3 in the fair value hierarchy. At June 30, 2022 and September 30, 2021, the Company did not have any nonresidential mortgage loan servicing rights measured at fair value on a nonrecurring basis. The Company did not recognize any impairment charges on nonresidential mortgage loan servicing rights for the three- and nine-month periods ended June 30, 2022 and 2021.

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

Other real estate owned is reported at fair value, less estimated costs to dispose of the property. The fair values are determined by real estate appraisals, which are then generally discounted by management in order to reflect management’s estimate of the fair value of the property given current market conditions and the condition of the property. At June 30, 2022 and September 30, 2021, the Company did not have any other real estate owned measured at fair value on a nonrecurring basis. The Company did not recognize any charges to write down other real estate owned to fair value for the three - and nine-month periods ended June 30, 2022 and 2021.

There were no transfers into or out of the Company’s Level 3 financial assets of the fair value hierarchy for the three- and nine-month periods ended June 30, 2022.

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

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The Company has elected the fair value option for substantially all of its residential mortgage loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loans and in accordance with the Company’s policy on loans held for investment. None of these loans were 90 days or more past due, nor were any on nonaccrual status, as of June 30, 2022 and September 30, 2021.

The table below presents the difference between the aggregate fair value and the aggregate remaining principal balance for residential mortgage loans held for sale for which the fair value option had been elected as of June 30, 2022 and September 30, 2021.


			Aggregate
	Aggregate		Principal
	Fair Value		Balance
(In thousands)	June 30, 2022		June 30, 2022		Difference

Residential mortgage loans held for sale	$	94,670	$	93,665	$	1,005


			Aggregate
	Aggregate		Principal
	Fair Value		Balance
	September 30,		September 30,
(In thousands)	2021		2021		Difference

Residential mortgage loans held for sale	$	167,813	$	163,158	$	4,655

The table below presents gains and losses and interest included in earnings related to financial assets measured at fair value under the fair value option for the three-and nine-month periods ended June 30, 2022 and 2021:


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
(In thousands)	2022		2021		2022		2021

Gains (losses) – included in mortgage banking income	$	804	$	4,647	$	(117)	$	4,838
Interest income		1,127		1,134		3,080		4,398

	$	1,931	$	5,781	$	2,963	$	9,236

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


	Carrying		Fair Value Measurements Using:
	Amount		Level 1		Level 2		Level 3

	(In thousands)
June 30, 2022:
Financial assets:
Cash and due from banks	$	14,074	$	14,074	$	—	$	—
Interest-bearing deposits with banks		23,394		23,394		—		—
Interest-bearing time deposits		1,616		—		1,616		—
Securities available for sale		307,376		—		307,376		—
Securities held to maturity		1,651		—		1,721		—
Residential mortgage loans held for sale		94,670		—		94,670		—
Single tenant net lease loans held for sale		73,276		—		—		73,276
SBA loans held for sale		20,085		—		—		22,576
Loans, net		1,267,816		—		—		1,288,444
FRB and FHLB stock		19,704		N/A		N/A		N/A
Accrued interest receivable		7,829		—		7,829		—
Residential mortgage loan servicing rights		64,839		—		—		64,839
Nonresidential mortgage loan servicing rights		150		—		—		150
SBA loan servicing rights		4,050		—		—		4,053
Derivative assets (included in other assets)		1,252		—		348		904
Equity securities (included in other assets)		101		101		—		—

Financial liabilities:
Deposits		1,345,707		—		—		1,342,122
Borrowings from FHLB		404,098		—		400,106		—
Subordinated note		50,160		—		50,145		—
Accrued interest payable		720		—		720		—
Advance payments by borrowers for taxes and insurance		1,116		—		1,116		—
Derivative liabilities (included in other liabilities)		705		—		404		301

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	Carrying		Fair Value Measurements Using:
	Amount		Level 1		Level 2		Level 3

	(In thousands)
September 30, 2021:
Financial assets:
Cash and due from banks	$	14,191	$	14,191	$	—	$	—
Interest-bearing deposits with banks		19,237		19,237		—		—
Interest-bearing time deposits		2,222		—		2,222		—
Securities available for sale		206,681		—		206,681		—
Securities held to maturity		1,837		—		2,054		—
Residential mortgage loans held for sale		167,813		—		167,813		—
Single tenant net lease loans held for sale		23,020		—		—		23,020
SBA loans held for sale		24,107		—		27,312		—
Loans, net		1,075,936		—		—		1,124,226
FRB and FHLB stock		19,258		N/A		N/A		N/A
Accrued interest receivable		6,243		—		6,243		—
Residential mortgage loan servicing rights		49,579		—		—		49,579
SBA loan servicing rights		4,447		—		—		4,646
Derivative assets (included in other assets)		3,632		—		1,465		2,167
Equity securities (included in other assets)		112		112		—		—

Financial liabilities:
Deposits		1,227,580		—		—		1,228,147
Borrowings from FHLB		250,000		—		251,877		—
Subordinated note		19,865		—		21,083		—
Accrued interest payable		258		—		258		—
Advance payments by borrowers for taxes and insurance		2,076		—		2,076		—
Derivative liabilities (included in other liabilities)		635		—		35		600

The methods and assumptions used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, interest-bearing time deposits, accrued interest receivable and payable, advance payments by borrowers for taxes and insurance, demand deposits and other transaction accounts. The fair value of loans (excluding loans held for sale), fixed-maturity certificates of deposit, and borrowed funds is based on discounted cash flows using current market rates applied to the estimated life and credit risk of the instrument. It is not practicable to determine the fair value of FHLB and other restricted stock due to restrictions placed on its transferability. The methods and assumptions used to estimate the fair value of investment securities, loans held for sale, loan servicing rights, and derivative assets and liabilities are discussed previously in Note 7. The methods utilized to measure the fair value of financial instruments at June 30, 2022 and September 30, 2021 represent an approximation of exit price, but an actual exit price may differ.

8.	Employee Stock Ownership Plan

On October 6, 2008, the Company established a leveraged employee stock ownership plan (“ESOP”) covering substantially all employees. The ESOP trust acquired 203,363 shares of Company common stock at a cost of $10.00 per share financed by a term loan with the Company. The employer loan and the related interest income are not recognized in the consolidated financial statements because the debt is serviced from Company contributions. Dividends payable on allocated shares are charged to retained earnings and are satisfied by the allocation of cash dividends to participant accounts or by utilizing the dividends as additional debt service on the ESOP loan. Dividends payable on unallocated shares are not considered dividends for financial reporting purposes. Shares held by the ESOP trust are allocated to participant accounts based on the ratio of the current year

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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- and nine -month periods ended June 30, 2022 and 2021. The ESOP trust held 309,304 and 335,958 shares of Company common stock at June 30, 2022 and September 30, 2021, respectively.

9.	Stock Based Compensation Plans

The Company maintains three equity incentive plans under which stock options and restricted stock have been or may be granted, the 2010 Equity Incentive Plan (“2010 Plan”), approved by the Company’s shareholders in February 2010, the 2016 Equity Incentive Plan (“2016 Plan”), approved by the Company’s shareholders in February 2016, and the 2021 Equity Incentive Plan (“2021 Plan”) approved by the Company’s shareholders in February 2021. The aggregate number of shares of the Company’s common stock available for issuance under the 2016 Plan may not exceed 264,000 shares, consisting of 198,000 stock options and 66,000 shares of restricted stock. The aggregate number of shares of the Company’s common stock available for issuance under the 2021 Plan may not exceed 356,058 shares, consisting of 267,043 stock options and 89,015 shares of restricted stock. At June 30, 2022, there were no remaining shares of the Company’s common stock available for issuance under the 2010 Plan. At June 30, 2022, 4,560 shares of the Company’s common stock were available for issuance under the 2016 Plan, of which 1,500 shares were available for restricted stock and 3,060 shares were available for stock options. At June 30, 2022, 173,058 shares of the Company’s common stock were available for issuance under the 2021 Plan, of which 43,265 shares were available for restricted stock and 129,793 shares were available for stock options. The Company generally issues new shares under the 2016 and 2021 Plans from its authorized but unissued shares. The Company accounts for any forfeitures as they occur, and any previously recognized compensation cost for an award is reversed in the period the award is forfeited.

Stock Options

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

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

The fair value of options granted during the nine-month period ended June 30, 2022 was determined using the following assumptions:


Expected dividend yield		2.32	%
Risk-free interest rate		1.55	%
Expected volatility		27.0	%
Expected life of options		7.1 years
Weighted average fair value at grant date	$	7.03

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A summary of stock option activity as of June 30, 2022, and changes during the nine-month period then ended is presented below.


				Weighted
				Average
				Remaining
		Weighted		Contractual	Aggregate
	Number of	Average		Term	Intrinsic
	Shares	Exercise Price		(Years)	Value

	(Dollars in thousands, except per share data)

Outstanding at beginning of period	217,074	$	16.58
Granted	137,250		26.72
Exercised	—		—
Forfeited or expired	—		—
Outstanding at end of period	354,324	$	20.51	7.0	$	1,598
Vested and expected to vest	354,324	$	20.51	7.0	$	1,598
Exercisable at end of period	171,299	$	15.25	4.9	$	1,489

There were no stock options exercised during the nine-month period ended June 30, 2022. The intrinsic value of stock options exercised during the nine-month period ended June 30, 2021 was $36,000. The Company recognized compensation expense related to stock options of $81,000 and $214,000 for the three- and nine-month periods ended June 30, 2022, respectively. The Company recognized compensation expense related to stock options of $22,000 and $69,000 for the three- and nine-month periods ended June 30, 2021, respectively. At June 30, 2022, there was $858,000 of unrecognized compensation expense related to nonvested stock options. The compensation expense is expected to be recognized over a weighted average period of 4.24 years. There was no cash received or tax benefit from the exercise of stock options during the nine-month period ended June 30, 2022. Cash received from the exercise of stock options and the tax benefit from the exercise of stock options totaled $4,000 and $6,000, respectively, for the nine-month period ended June 30, 2021.

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- and nine-month periods ended June 30, 2022 was $105,000 and $286,000, respectively. Compensation expense related to restricted stock recognized for the three- and nine-month periods ended June 30, 2021 was $43,000 and $138,000, respectively.

A summary of the Company’s nonvested restricted shares activity as of June 30, 2022 and changes during the nine-month period then ended is presented below.


		Weighted
	Number	Average
	of	Grant Date
	Shares	Fair Value
Nonvested at October 1, 2021	17,799	$	16.72
Granted	45,750	$	26.72
Vested	(12,225)	$	14.88
Forfeited	—	$	—
Nonvested at March 31, 2022	51,324	$	26.07

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There were 12,225 restricted shares vested during the nine-month period ended June 30, 2022 with a total fair value of $327,000. There were 13,125 restricted shares that vested during the nine-month period ended June 30, 2021 with a total fair value of $277,000. At June 30, 2022, there was $1.1 million of unrecognized compensation expense related to nonvested restricted shares. The compensation expense is expected to be recognized over a weighted average period of 4.20 years.

10.	Derivative Financial Instruments

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

Certain financial instruments, including derivatives, may be eligible for offset in the balance sheet when the “right of setoff” exists or when the instruments are subject to an enforceable master netting agreement, which includes the right of the non-defaulting party or non-affected party to offset recognized amounts, including collateral posted with the counterparty, to determine a net receivable or net payable upon early termination of the agreement. Certain of the Company’s derivative instruments are subject to master netting agreements. However, the Company has not elected to offset such financial instruments in the consolidated balance sheets. The Company may be required to post margin collateral to derivative counterparties based on agreements with the dealers. At both June 30, 2022 and September 30, 2021, the Company had cash collateral posted with certain derivative counterparties of $2.4 million, against its derivative obligations. Cash collateral related to derivative contracts is recorded in interest-bearing deposits with banks or other assets in the consolidated balance sheets.

The tables below provide information on the Company’s derivative financial instruments as of June 30, 2022 and September 30, 2021.


	Notional		Asset		Liability
	Amount		Derivatives		Derivatives
(In thousands)	June 30, 2022		June 30, 2022		June 30, 2022

Interest rate lock commitments	$	151,745	$	904	$	301
Forward mortgage loan sale contracts		111,000		348		404

	$	262,745	$	1,252	$	705


	Notional		Asset		Liability
	Amount		Derivatives		Derivatives
	September 30,		September 30,		September 30,
(In thousands)	2021		2021		2021

Interest rate lock commitments	$	331,178	$	2,167	$	600
Forward mortgage loan sale contracts		291,750		1,465		35

	$	622,928	$	3,632	$	635

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Income (loss) related to derivative financial instruments included in mortgage banking income in the accompanying consolidated statements of income for the three- and nine-month periods ended June 30, 2022 and 2021 is as follows:


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
(In thousands)	2022		2021		2022		2021

Interest rate lock commitments	$	3,526	$	1,777	$	(964)	$	(12,898)
Forward mortgage loan sale contracts		6,091		(6,308)		19,098		5,306

	$	9,617	$	(4,531)	$	18,134	$	(7,592)

11.	Regulatory Capital

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III rules”) became effective for the Bank on January 1, 2015, with full compliance with all of the requirements being phased in over a multi-year schedule through 2019. Under the Basel III rules, the Bank must hold a conservation buffer above the adequately capitalized risk-based capital ratios disclosed in the table below. The capital conservation buffer was phased in from 0.0% for 2015 to 2.5% by 2019. The capital conservation buffer was 2.50% for 2022 and 2021. The Bank met all capital adequacy requirements to which it was subject as of June 30, 2022 and September 30, 2021.

As of June 30, 2022, 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.

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The Company’s and Bank’s actual capital amounts and ratios are also presented in the table. The Company is not subject to the Federal Reserve Bank’s consolidated capital requirements because it has less than $3 billion in total consolidated assets. However, management has elected to disclose the Company’s capital amounts and ratios in addition to the Bank’s required disclosures in the table below. No amount was deducted from capital for interest-rate risk at either date.


									Minimum To Be Well
					Minimum				Capitalized Under
					For Capital				Prompt Corrective
	Actual				Adequacy Purposes:				Action Provisions:
	Amount		Ratio		Amount		Ratio		Amount		Ratio

	(Dollars in thousands)
As of June 30, 2022:

Total capital (to risk-weighted assets):
Consolidated	$	224,143	13.17	%	$	136,125	8.00	%		N/A	N/A
Bank		204,708	12.04			135,964	8.00		$	169,955	10.00	%

Tier 1 capital (to risk-weighted assets):
Consolidated	$	159,003	9.34	%	$	102,093	6.00	%		N/A	N/A
Bank		189,728	11.16			101,973	6.00		$	135,964	8.00	%

Common equity tier 1 capital (to risk-weighted assets):
Consolidated	$	159,003	9.34	%	$	76,570	4.50	%		N/A	N/A
Bank		189,728	11.16			76,480	4.50		$	110,471	6.50	%

Tier 1 capital (to average adjusted total assets):
Consolidated	$	159,003	8.38	%	$	75,878	4.00	%		N/A	N/A
Bank		189,728	9.98			76,069	4.00		$	95,086	5.00	%

As of September 30, 2021:

Total capital (to risk-weighted assets):
Consolidated	$	193,476	14.28	%	$	108,401	8.00	%		N/A	N/A
Bank		183,885	13.60			108,156	8.00		$	135,195	10.00	%

Tier 1 capital (to risk-weighted assets):
Consolidated	$	159,310	11.76	%	$	81,301	6.00	%		N/A	N/A
Bank		169,584	12.54			81,117	6.00		$	108,156	8.00	%

Common equity tier 1 capital (to risk-weighted assets):
Consolidated	$	159,310	11.76	%	$	60,976	4.50	%		N/A	N/A
Bank		169,584	12.54			60,838	4.50		$	87,877	6.50	%

Tier 1 capital (to average adjusted total assets):
Consolidated	$	159,310	9.73	%	$	65,480	4.00	%		N/A	N/A
Bank		169,584	10.07			67,333	4.00		$	84,166	5.00	%

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12.	Recent Accounting Pronouncements

The following are summaries of recently issued or adopted accounting pronouncements that impact the accounting and reporting practices of the Company:

In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326). The update commonly referred to as the current expected credit loss methodology (“CECL”) replaces the incurred loss methodology for recognizing credit losses under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Under the new guidance, an entity will measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The expected loss model will apply to loans and leases, unfunded lending commitments, held-to-maturity debt securities and other debt instruments measured at amortized cost. The impairment model for available-for-sale debt securities will require the recognition of credit losses through a valuation allowance when fair value is less than amortized cost, regardless of whether the impairment is considered to be other-than-temporary. For the Company, the amendments in the update were originally effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact the guidance will have upon adoption. Management expects to recognize a one-time cumulative-effect adjustment to the allowance for loan losses through retained earnings as of the beginning of the first reporting period in which the new standard is effective; however, the magnitude of the adjustment is unknown. In planning for the implementation of ASU 2016-13, management is currently evaluating software solutions, data requirements and loss methodologies.

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

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the current accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan. For public business entities, the ASU also requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. For entities that have not yet adopted the amendments in ASU No. 2016-13, the effective dates for the amendments in the ASU are the same as the effective dates in ASU No. 2016-13. The amendments should generally be applied prospectively, although for the transition method related to the recognition and measurement of TDRs an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. The Company is currently assessing the impact of the guidance, but its adoption is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurements (Topic 820), Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The ASU clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. It also clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted and the amendments in the ASU should be applied prospectively with any adjustments from the adoption of the amendments recognized in earnings and disclosed on the date of adoption. The adoption of the ASU is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

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

13.	Segment Reporting

The Company’s operations include three primary segments: core banking, SBA lending, and mortgage banking. The core banking segment originates residential, commercial and consumer loans and attracts deposits from its customer base. Net interest income from loans and investments that are funded by deposits and borrowings is the primary revenue for the core banking segment. The SBA lending segment originates loans guaranteed by the SBA, subsequently selling the guaranteed portion to outside investors. Net gains on sales of loans and net interest income are the primary sources of revenue for the SBA lending segment. The mortgage banking segment originates residential mortgage loans and sells them in the secondary market. Net gains on the sales of loans, income from derivative financial instruments and net interest income are the primary sources of revenue for the mortgage banking segment.

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

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The following segment financial information has been derived from the internal financial statements of the Company which are used by management to monitor and manage financial performance. The accounting policies of the three segments are the same as those of the Company. The amounts reflected in the “Other” column in the tables below represent combined balances of the Company and the Captive, and are the primary differences between the sum of the segment amounts and consolidated totals, along with amounts to eliminate transactions between segments.


	Core		SBA		Mortgage				Consolidated
	Banking		Lending		Banking		Other		Totals

	(In thousands)
Three Months Ended June 30, 2022:
Net interest income (loss)	$	14,543	$	1,449	$	614	$	(695)	$	15,911
Provision (credit) for loan losses		910		(378)		—		—		532
Net interest income (loss) after provision		13,633		1,827		614		(695)		15,379
Net gains on sales of loans, SBA		—		486		—		—		486
Mortgage banking income		—		—		7,093		—		7,093
Noninterest income		2,379		584		7,070		—		10,033
Noninterest expense (income)		10,324		2,341		10,307		(137)		22,835
Income (loss) before taxes		5,688		70		(2,623)		(558)		2,577
Income tax expense (benefit)		797		26		(655)		(229)		(61)
Segment profit (loss)		4,891		44		(1,968)		(329)		2,638
Non-cash items:
Depreciation and amortization		538		7		39		(30)		614
Segment assets at June 30, 2022		1,816,229		103,448		169,765		(82,776)		2,006,666


	Core		SBA		Mortgage				Consolidated
	Banking		Lending		Banking		Other		Totals

	(In thousands)
Nine Months Ended June 30, 2022:
Net interest income (loss)	$	38,559	$	4,926	$	1,711	$	(1,369)	$	43,827
Provision (credit) for loan losses		526		502		—		—		1,028
Net interest income (loss) after provision		38,033		4,424		1,711		(1,369)		42,799
Net gains on sales of loans, SBA		—		3,449		—		—		3,449
Mortgage banking income		(2)		—		36,093		—		36,091
Noninterest income		6,484		4,143		36,069		—		46,696
Noninterest expense (income)		29,687		6,830		36,838		(207)		73,148
Income (loss) before taxes		14,830		1,737		942		(1,162)		16,347
Income tax expense (benefit)		1,954		531		440		(556)		2,369
Segment profit (loss)		12,876		1,206		502		(606)		13,978
Non-cash items:
Depreciation and amortization		1,607		23		129		91		1,850
Segment assets at June 30, 2022		1,816,229		103,448		169,765		(82,776)		2,006,666

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	Core		SBA		Mortgage				Consolidated
	Banking		Lending		Banking		Other		Totals

	(In thousands)
Three Months Ended June 30, 2021:
Net interest income (loss)	$	11,709	$	2,510	$	318	$	(308)	$	14,229
Provision (credit) for loan losses		(2,401)		(329)		—		—		(2,730)
Net interest income (loss) after provision		14,110		2,839		318		(308)		16,959
Net gains on sales of loans, SBA		—		2,322		—		—		2,322
Mortgage banking income		—		—		14,351		—		14,351
Noninterest income		1,509		2,675		14,601		—		18,785
Noninterest expense		9,250		2,206		19,049		114		30,619
Income (loss) before taxes		6,369		3,308		(4,130)		(422)		5,125
Income tax expense (benefit)		917		790		(765)		(125)		817
Segment profit (loss)		5,452		2,518		(3,365)		(297)		4,308
Non-cash items:
Depreciation and amortization		479		11		61		17		568
Segment assets at June 30, 2021		1,439,697		200,827		301,858		(183,754)		1,758,628


	Core		SBA		Mortgage				Consolidated
	Banking		Lending		Banking		Other		Totals

	(In thousands)
Nine Months Ended June 30, 2021:
Net interest income (loss)	$	34,296	$	7,884	$	1,488	$	(920)	$	42,748
Provision (credit) for loan losses		(1,593)		(182)		—		—		(1,775)
Net interest income (loss) after provision		35,889		8,066		1,488		(920)		44,523
Net gains on sales of loans, SBA		—		6,828		—		—		6,828
Mortgage banking income		2		—		91,501		—		91,503
Noninterest income		4,551		7,467		91,923		—		103,941
Noninterest expense (income)		26,760		7,401		80,437		(293)		114,305
Income (loss) before taxes		13,680		8,132		12,974		(627)		34,159
Income tax expense (benefit)		2,239		1,900		5,270		(370)		9,039
Segment profit (loss)		11,441		6,232		7,704		(257)		25,120
Non-cash items:
Depreciation and amortization		1,433		34		182		51		1,700
Segment assets at June 30, 2021		1,439,697		200,827		301,858		(183,754)		1,758,628

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14.	Revenue from Contracts with Customers

Substantially all of the Company’s revenue from contracts with customers within the scope of FASB ASC 606 is included in the core banking segment and is recognized within noninterest income. The following table presents the Company’s sources of noninterest income for the three- and nine-month periods ended June 30, 2022 and 2021:


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2022		2021		2022		2021

	(In thousands)

Service charges on deposit accounts	$	462	$	343	$	1,329	$	1,067
ATM and interchange fees		774		650		2,047		1,795
Investment advisory income		177		406		522		905
Other		26		26		84		81
Revenue from contracts with customers		1,439		1,425		3,982		3,848

Gain on securities		465		—		465		—
Gain on sale of SBA loans		486		2,322		3,449		6,828
Gain on sale of single tenant net lease loans		—		—		719		—
Mortgage banking income		7,093		14,351		36,091		91,503
Increase in cash value of life insurance		277		179		782		539
Real estate lease income		155		148		451		444
Other income		118		360		757		779
Other noninterest income		8,594		17,360		42,714		100,093

Total noninterest income	$	10,033	$	18,785	$	46,696	$	103,941

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

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

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

Investment Advisory Income: The Company earns trust, insurance commissions, brokerage commissions and annuities income from its contracts with customers to manage assets for investment, and/or to transact on their accounts. These fees are primarily earned over time as the Company provides the contracted services and are generally assessed based on the market value of assets under management. Fees that are transaction based, including trade execution services, are recognized when the transaction is executed. Other related fees, which are based on a fixed fee schedule, are recognized when the services are rendered.

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(Unaudited)

Other Income: Other income from contracts with customers includes check cashing and cashier’s check fees, safe deposit box fees and cash advance fees. This revenue is recognized at the time the transaction is executed or over the period the Company satisfies the performance obligation.

15.

Leases

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

The Company has adopted FASB ASC 842 and all subsequent updates that modified FASB ASC 842. With the adoption of FASB ASC 842, operating lease agreements are required to be recognized on the consolidated balance sheet as a “right of use” (“ROU”) asset and a corresponding lease liability. All of the Company’s leases are classified as operating leases.

The Company’s right to use an asset over the life of a lease is recorded as an ROU asset included in other assets on the consolidated balance sheet and was $4.6 million and $5.8 million at June 30, 2022 and September 30,2021, respectively. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or incentives received. The Company recorded a lease liability in other liabilities on the consolidated balance sheet, which had a balance of $4.7 million and $5.9 million at June 30, 2022 and September 30, 2021, respectively.

The calculated amount of the ROU assets and lease liabilities are impacted by the length of the lease term and the discount rate used to calculate the present value of minimum lease payments. Regarding the discount rate, FASB ASC 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to October 1, 2019, the rate for the remaining lease term as of October 1, 2019 was used.

Leases with an initial term of 12 months or less are not recorded on the balance sheet and the Company recognizes lease expense for these leases on a straight-line basis over the term of the lease. Certain leases include one or more options to renew, with renewal terms that can extend the lease term from one to 20 years or more. The exercise of renewal options on operating leases is at the Company’s sole discretion, and certain leases may include options to purchase the leased property. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. The Company does not enter into lease agreements which contain material residual value guarantees or material restrictive covenants. At June 30, 2022, the Company had not entered into any leases that had yet to commence.

Lease expense for the three- and nine-month periods ended June 30, 2022 was $288,000 and $890,000, respectively. Lease expense for the three- and nine-month periods ended June 30, 2021 was $573,000 and $1.6 million, respectively. The components of lease expense for the three- and nine-month periods ended June 30, 2022 and 2021 were as follows:


	Three		Three		Nine		Nine
	Months		Months		Months		Months
	Ended		Ended		Ended		Ended
	June 30,		June 30,		June 30,		June 30,
	2022		2021		2022		2021

	(In thousands)
Operating lease cost	$	239	$	323	$	496	$	957
Short-term lease cost		49		250		394		662
	$	288	$	573	$	890	$	1,619

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Future minimum commitments due under these lease agreements as of June 30, 2022 are as follows, including renewal options that are reasonably certain to be exercised:


	(In thousands)
2022 (remaining three months)	$	118
2023		451
2024		333
2025		228
2026		203
Thereafter		5,202
Total lease payments		6,535
Less imputed interest		(1,848)
Total	$	4,687

The lease term and discount rate at June 30, 2022 and September 30, 2021 were as follows:


	June 30,		September 30,
	2022		2021
Weighted-average remaining lease term (years)	23.6		21.5
Weighted-average discount rate	2.86	%	2.53	%

Supplemental cash flow information for the nine-month periods ended June 30, 2022 and 2021 related to leases was as follows:


	2022		2021

	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	489	$	1,016
ROU assets obtained in exchange for lease obligations:
Operating leases	$	275	$	2,038

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16.Mortgage Banking Income

The components of mortgage banking income for the three- and nine-month periods ended June 30, 2022 and 2021 were as follows:


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2022		2021		2022		2021

	(In thousands)

Origination and sale of mortgage loans (1)	$	(6,768)	$	9,769	$	(2,231)	$	71,701
Mortgage brokerage income		175		655		713		856
Net change in fair value of loans held for sale and interest rate lock commitments		4,330		6,423		(3,098)		(15,564)
Realized and unrealized hedging gains (losses)		6,091		(6,308)		19,098		5,306
Capitalized residential mortgage loan servicing rights		2,731		5,195		10,581		32,678
Net change in fair value of residential mortgage loan servicing rights		(1,552)		(3,027)		4,679		(6,968)
Provisions for loan repurchases and indemnifications		(154)		41		(246)		(533)
Servicing income		2,240		1,603		6,595		4,027
Total mortgage banking income	$	7,093	$	14,351	$	36,091	$	91,503

(1)

Includes origination fees and realized gains and losses on the sale of mortgage loans in the secondary market.

17.Loss Contingency

The Bank received notice of a class action lawsuit on March 23, 2021 regarding its policy and practice of assessing customer fees related to items presented on accounts with insufficient funds (NSF items). The Company has reached a verbal settlement agreement with the claimant, and the Company has accrued a loss contingency for this pending settlement at June 30, 2022, the amount of which had an immaterial effect on the consolidated financial statements.

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Safe Harbor Statement for Forward-Looking Statements

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

Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the Company’s actual results, performance and achievements being materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, the scope, duration and severity of the COVID-19 pandemic and its effects on our business and operations, our customers, including their ability to make timely payments on loans, our service providers, and on the economy and financial markets, general economic conditions, including the effects of inflation, changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; the quality and composition of the loan and investment securities portfolio; loan demand; deposit flows; competition; and changes in accounting principles and guidelines. Additional factors that may affect our results are discussed herein and in our Annual Report on Form 10-K for the year ended September 30, 2021 under “Part II, Item 1A. Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.

Critical Accounting Policies; Critical Accounting Estimates

During the nine-month period ended June 30, 2022, there was no significant change in the Company’s critical accounting policies or the application of critical accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2021.

COVID-19 Pandemic

The COVID-19 pandemic caused significant health, economic and other major hardships throughout the communities we serve, the United States and the entire world, the effects of which continue to prevail in varying degrees. The outbreak of COVID-19, or any other such outbreak of a highly contagious disease, occurring in the United States could negatively affect our business operations, asset valuations, financial condition and results of operations.

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

●

Following the guidelines of the Center for Disease Control and local governments, we have updated our branch operating procedures. While our branches remain open, the lobbies were temporarily closed and transactions were being conducted through drive-up windows or by appointment. Our branches have returned to pre-pandemic service levels, but have implemented safety precautions, including the use of personal protective equipment (“PPE”) (where and when prudent), enhanced daily cleaning and instructions to maintain appropriate social distancing.

●

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

●

Our corporate and operations offices have predominantly returned to pre-pandemic schedules and processes, but we have enhanced daily cleaning and instructed employees to maintain appropriate social distancing. Our employees maintain the ability to work remotely, both safely and efficiently using technology, in the event that such is required or

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necessary. Most of our normally scheduled meetings, including Board of Director meetings and various committee meetings, have returned to in-person.

●

We continue to assist customers experiencing COVID-19 related hardships by approving payment extensions or loan forbearance agreements, and waiving or refunding certain fees. During the initial onset of the COVID-19 pandemic, we proactively contacted all commercial borrowers and offered uniform payment extensions or loan forbearance agreements, while requests from consumer borrowers were reviewed and approved on a case-by-case basis. Payment extensions or loan forbearance agreements were generally for periods of three months and included deferment of both principal and interest. Following the expiration of the initial payment extensions or loan forbearance agreements, we entertain requests for extended periods on a case-by-case basis, which will generally include deferment of only the principal portion of payments for a period of up to three months. As of June 30, 2022, no loans remained under the Company’s deferral program.

●

Under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which was signed into law on March 27, 2020, the SBA made six months of principal and interest payments for loans of existing SBA clients that were in “regular servicing status” (not delinquent) at March 27, 2020 and for loans of new SBA clients originated between March 27, 2020 and September 27, 2020. The CARES Act provided financial support for many of the Company’s SBA borrowers, which resulted in relatively few of such requiring payment extensions or loan forbearance agreements. The Coronavirus Response and Relief Supplemental Appropriations Act (“CRRSAA”), which was signed into law on December 27, 2020, provided additional SBA-provided loan payments to eligible SBA borrowers beginning in February 2021.

●

The Company participated in the first round of the SBA’s Paycheck Protection Program (“PPP”), which was originally authorized by the CARES Act, and the second round of the PPP, which was authorized by the CRRSAA. At June 30, 2022, the outstanding principal balance of PPP loans was $1.8 million and net deferred loan fees related to PPP loans was approximately $24,000, which will be recognized over the life of the loans and as borrowers are granted forgiveness.

●

As a result of the COVID-19 pandemic, the leisure and hospitality industries carry a higher degree of credit risk. At June 30, 2022, the outstanding principal balance of loans secured by restaurant related collateral was $146.4 million, of which $127.8 million was secured by commercial real estate where the collateral property is leased to national-brand, investment-grade tenants. None of the loans secured by restaurant related collateral were fully guaranteed by the SBA. At June 30, 2022, the outstanding principal balance of loans secured by hotel real estate was $21.6 million, of which $3.0 million is fully guaranteed by the SBA. Based on our evaluation of the allowance for loan losses at June 30, 2022, management believes the allowance for loan losses is adequate to cover estimated losses at that date. However, as the pandemic continues, losses could be recognized beyond those estimated at June 30, 2022.

Management continues to closely monitor the pandemic and may take additional action to respond to the pandemic’s effects on the Company’s business as the situation continues to evolve. We cannot determine or estimate the impact on our business at this time because the length and severity of the economic downturn is not known. We believe we are well-positioned to withstand any challenges that may be presented, and we are committed to continuing to serve our customers, employees and communities.

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Comparison of Financial Condition at June 30, 2022 and September 30, 2021

Cash and Cash Equivalents. Cash and cash equivalents increased $4.1 million from $33.4 million at September 30, 2021 to $37.5 million at June 30, 2022.

Loans. Net loans receivable increased $191.9 million, from $1.08 billion at September 30, 2021 to $1.27 billion at June 30, 2022, primarily due to growth in residential mortgage loans, single tenant net lease commercial real estate loans and non-SBA commercial business loans, which increased $91.1 million, $103.1 million and $30.0 million, respectively, partially offset by a $54.9 million decrease in PPP loans during the period.

Loans Held for Sale. Loans held for sale decreased $26.9 million, from $214.9 million at September 30, 2021 to $188.0 million at June 30, 2022, due to decreases in residential mortgage loans held for sale and SBA loans held for sale of $73.1 million and $4.0 million, respectively, partially offset by an increase in single tenant net lease loans held for sale of $50.2 million. The decreases in residential mortgage loans held for sale and SBA loans held for sale were due to loan sales outpacing originations during the period.

Securities Available for Sale. Securities available for sale increased $100.7 million, from $206.7 million at September 30, 2021 to $307.4 million at June 30, 2022, due to purchases of $177.6 million, partially offset by sales of $33.5 million, calls and maturities of $10.7 million, principal repayments of $5.4 million and unrealized losses of $26.7 million. The unrealized losses were primarily due to increasing market interest rates during the period.

Securities Held to Maturity. Investment securities held to maturity decreased $186,000 from $1.8 million at September 30, 2021 to $1.7 million at June 30, 2022, due primarily to calls and maturities during the period.

Mortgage Servicing Rights. Residential mortgage loan servicing rights increased $15.3 million, from $49.6 million at September 30, 2021 to $64.8 million at June 30, 2022, due to capitalized servicing rights of $10.6 million and an increase in fair value of $10.8 million during the period, partially offset by loan repayments resulting in a decrease in servicing rights of $6.1 million.

Deposits. Total deposits increased $118.1 million, from $1.23 billion at September 30, 2021 to $1.35 billion at June 30, 2022, primarily due to a $59.1 million increase in brokered and reciprocal deposits and a $52.3 million increase in non-interest bearing deposits during the period.

FHLB Borrowings. Borrowings from the FHLB increased $154.1 million, from $250.0 million at September 30, 2021 to $404.1 million at June 30, 2022. The increase in borrowings was primarily used to fund loan growth during the period.

Other Borrowings. Other borrowings increased $30.3 million from $19.9 million at September 30, 2021 to $50.2 million at June 30, 2022 primarily due to a $31.0 million subordinated debt issuance in March 2022.

Equity. Stockholders’ equity attributable to the Company decreased $11.2 million from $180.4 million at September 30, 2021 to $169.2 million at June 30, 2022, due primarily to a decrease in accumulated other comprehensive income of $21.5 million, partially offset by retained net income of $11.3 million. The decrease in accumulated other comprehensive income was primarily due to increasing market interest rates during the nine months ended June 30, 2022, which resulted in a decrease in the fair value of the available-for-sale securities portfolio.

Results of Operations for the Three Months Ended June 30, 2022 and 2021

Overview. The Company reported net income of $2.6 million, or $0.37 per diluted share, for the three-month period ended June 30, 2022 compared to net income of $4.3 million, or $0.60 per diluted share, for the three-month period ended June 30, 2021.

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Net Interest Income. Net interest income increased $1.7 million, or 11.8%, for the three-month period ended June 30, 2022 as compared to the same period in 2021. Average interest-earning assets increased $182.7 million and average interest-bearing liabilities increased $160.0 million when comparing the two periods. The tax-equivalent net interest margin was 3.77% for 2022 compared to 3.75% for 2021.

Total interest income increased $2.3 million, or 14.4%, when comparing the two periods due primarily to an increase in the average balance of interest-earning assets of $182.7 million, from $1.55 billion for 2021 to $1.74 billion for 2022, and an increase in the average tax equivalent yield on interest-earning assets from 4.25% for 2021 to 4.36% for 2022. The increase in the average balance of interest-earning assets was due to increases in the average balance of investment securities and total loans of $111.4 million and $84.4 million, respectively.

Total interest expense increased $647,000, or 34.1%, due to an increase in the average balance of interest-bearing liabilities of $160.0 million, from $1.21 billion for 2021 to $1.37 billion for 2022, and an increase in the average cost of interest-bearing liabilities from 0.63% for 2021 to 0.75% for 2022. The increase in the average cost of interest-bearing liabilities for 2022 was due primarily to higher rates paid for brokered deposits during the period.

Average Balance Sheets. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs for the three-month periods ended June 30, 2022 and 2021. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances presented are daily averages. Nonaccrual loans are included in average balances only. Loan fees are included in interest income on loans and are not material. Tax exempt income on loans and investment securities have been adjusted to a tax equivalent basis using a federal marginal tax rate of 21%.

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	Three Months Ended June 30,
	2022						2021
			Interest						Interest
	Average		and		Yield/		Average		and		Yield/
	Balance		Dividends		Cost		Balance		Dividends		Cost

	(Dollars in thousands)
Assets:
Interest-bearing deposits with banks	$	25,068	$	37	0.59	%	$	37,683	$	14	0.15	%
Loans, excluding PPP loans		1,381,366		15,788	4.57			1,155,958		13,017	4.50
PPP loans		4,271		177	16.58			145,227		1,347	3.71
Investment securities - taxable		103,536		769	2.97			46,392		447	3.85
Investment securities - nontaxable		202,534		1,987	3.92			148,280		1,496	4.04
FRB and FHLB stock		18,691		169	3.62			19,258		161	3.34
Total interest-earning assets		1,735,466		18,927	4.36			1,552,798		16,482	4.25

Noninterest-earning assets		175,238						165,263
Total assets	$	1,910,704					$	1,718,061

Liabilities and equity:
NOW accounts	$	333,416	$	265	0.32	%	$	274,541	$	187	0.27	%
Money market deposit accounts		227,993		235	0.41			179,379		175	0.39
Savings accounts		172,661		27	0.06			161,399		25	0.06
Time deposits		264,798		520	0.79			192,023		336	0.70
Total interest-bearing deposits		998,868		1,047	0.42			807,342		723	0.36

FHLB borrowings		325,460		811	1.00			272,834		780	1.14
Federal Reserve PPPLF borrowings		—		—	0.00			114,453		98	0.34
Subordinated debt		50,152		710	5.66			19,836		320	6.45
Total interest-bearing liabilities		1,374,480		2,568	0.75			1,214,465		1,921	0.63

Noninterest-bearing deposits		325,948						288,027
Other noninterest-bearing liabilities		36,115						42,146
Total liabilities		1,736,543						1,544,638

Total stockholders’ equity		174,161						173,423

Total liabilities and equity	$	1,910,704					$	1,718,061
Net interest income (taxable equivalent basis)				16,359						14,561
Less: taxable equivalent adjustment				(448)						(332)
Net interest income			$	15,911					$	14,229
Interest rate spread (taxable equivalent basis)					3.61	%					3.62	%
Net interest margin (taxable equivalent basis)					3.77	%					3.75	%
Net interest margin, excluding PPP and PPPLF (taxable equivalent basis)					3.74	%					3.78	%
Average interest-earning assets to average interest-bearing liabilities					126.26	%					127.86	%

Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income on a tax equivalent basis for the three-month periods ended June 30, 2022 and 2021. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. Changes attributable to changes in both rate and volume have been allocated proportionally based on the absolute dollar amounts of change in each.

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	Three Months Ended June 30, 2022
	Compared to
	Three Months Ended June 30, 2021
	Increase (Decrease)
	Due to
	Rate		Volume		Net
			(In thousands)
Interest income:
Interest-bearing deposits with banks	$	35	$	(12)	$	23
Loans, excluding PPP loans		215		2,556		2,771
PPP loans		2,405		(3,575)		(1,170)
Investment securities - taxable		(165)		487		322
Investment securities - nontaxable		(49)		540		491
FRB and FHLB stock		13		(5)		8
Total interest-earning assets		2,454		(9)		2,445

Interest expense:
Deposits		137		187		324
Borrowings from FHLB		(110)		141		31
Federal Reserve PPPLF borrowings		—		(98)		(98)
Subordinated debt		(69)		459		390
Total interest-bearing liabilities		(42)		689		647

Net increase (decrease) in net interest income (taxable equivalent basis)	$	2,496	$	(698)	$	1,798

Provision for Loan Losses. The Company recognized a provision for loan losses of $532,000 for the three-month period ended June 30, 2022, due to loan portfolio growth, compared to a credit of $2.7 million for the same period in 2021.

The Company recognized net charge-offs of $27,000 for the three-month period ended June 30, 2022 compared to net charge-offs of $47,000 for the same period in 2021.

Noninterest Income. Noninterest income decreased $8.8 million for the three-month period ended June 30, 2022 as compared to the same period in 2021. The decrease was due primarily to decreases in mortgage banking income and net gain on sale of SBA loans of $7.3 million and $1.8 million, respectively. The decrease in mortgage banking income was primarily due to a $16.6 million decrease in production revenue from lower originations for sale and a $2.5 million decrease in capitalized residential mortgage loan servicing rights, partially offset by $6.1 million in realized and unrealized hedging gains in 2022 compared to $6.3 million in realized and unrealized hedging losses in 2021. Mortgage loans originated for sale were $421.4 million in the three months ended June 30, 2022 as compared to $739.5 million in the same period in 2021. The decrease in net gain on sales of SBA loans was due primarily to decreases in production and sales volume from the SBA lending segment, as well as lower premiums in the secondary market.

Noninterest Expense. Noninterest expense decreased $7.8 million for the three-month period ended June 30, 2022 as compared to the same period in 2021. The decrease was due primarily to a decrease in compensation and benefits of $6.1 million. The decrease in compensation and benefits expense is due primarily to a reduction in incentive compensation for the Company’s mortgage banking segment as a result of decreased mortgage banking income.

Income Tax Expense. The Company recognized an income tax benefit of $61,000 for the three-month period ended June 30, 2022 as compared to tax expense of $817,000 for the same period in 2021. The tax benefit for 2022 was primarily the result of lower pretax income, the Company’s utilization of capital loss carryovers during the period and the purchase of additional tax-exempt municipal bonds during the period.

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Results of Operations for the Nine Months Ended June 30, 2022 and 2021

Overview. The Company reported net income of $14.0 million, or $1.95 per diluted share, for the nine-month period ended June 30, 2022 compared to net income of $24.7 million, or $3.45 per diluted share, for the nine-month period ended June 30, 2021.

Net Interest Income. Net interest income increased $1.1 million, or 2.5%, for the nine-month period ended June 30, 2022 as compared to the same period in 2021. Average interest-earning assets increased $1.7 million and average interest-bearing liabilities decreased $13.0 million when comparing the two periods. The tax-equivalent net interest margin was 3.73% for 2022 compared to 3.63% for 2021.

Total interest income increased $1.0 million, or 2.1%, when comparing the two periods due primarily to an increase in the average tax equivalent yield on interest-earning assets from 4.15% for 2021 to 4.25% for 2022, and an increase in the average balance of interest-earning assets of $1.7 million.

Total interest expense decreased $53,000, or 0.8%, due to a decrease in the average balance of interest-bearing liabilities of $13.0 million, from $1.28 billion for 2021 to $1.27 billion for 2022. The average cost of interest-bearing liabilities was 0.65% for both the 2021 and 2022 periods.

Average Balance Sheets. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs for the nine-month periods ended June 30, 2022 and 2021. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances presented are daily averages. Nonaccrual loans are included in average balances only. Loan fees are included in interest income on loans and are not material. Tax exempt income on loans and investment securities have been adjusted to a tax equivalent basis using a federal marginal tax rate of 21%.

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	Nine Months Ended June 30,
	2022						2021
			Interest						Interest
	Average		and		Yield/		Average		and		Yield/
	Balance		Dividends		Cost		Balance		Dividends		Cost

	(Dollars in thousands)
Assets:
Interest-bearing deposits with banks	$	31,376	$	64	0.27	%	$	39,994	$	50	0.17	%
Loans, excluding PPP loans		1,290,570		42,956	4.44			1,192,834		39,221	4.38
PPP loans		25,945		1,030	5.29			163,079		4,463	3.65
Investment securities – taxable		67,297		1,594	3.16			43,760		1,350	4.11
Investment securities – nontaxable		172,949		5,067	3.91			146,934		4,491	4.08
FRB and FHLB stock		18,991		464	3.26			18,843		436	3.09
Total interest-earning assets		1,607,128		51,175	4.25			1,605,444		50,011	4.15

Noninterest-earning assets		180,561						156,766
Total assets	$	1,787,689					$	1,762,210

Liabilities and equity:
NOW accounts	$	326,208	$	855	0.35	%	$	256,685	$	539	0.28	%
Money market deposit accounts		228,137		657	0.38			165,239		528	0.43
Savings accounts		168,708		79	0.06			153,586		70	0.06
Time deposits		221,682		1,005	0.60			244,020		1,293	0.71
Total interest-bearing deposits		944,735		2,596	0.37			819,530		2,430	0.40

FHLB borrowings		290,032		2,222	1.02			291,030		2,474	1.13
Federal Reserve PPPLF borrowings		—		—	0.00			148,892		407	0.36
Subordinated debt		31,521		1,397	5.91			19,819		956	6.43
Total interest-bearing liabilities		1,266,288		6,215	0.65			1,279,271		6,267	0.65

Noninterest-bearing deposits		304,806						268,275
Other noninterest-bearing liabilities		36,250						46,759
Total liabilities		1,607,344						1,594,305

Total stockholders’ equity		180,345						167,743
Noncontrolling interest in subsidiary		—						162
Total equity		180,345						167,905

Total liabilities and equity	$	1,787,689					$	1,762,210
Net interest income (taxable equivalent basis)				44,960						43,744
Less: taxable equivalent adjustment				(1,133)						(996)
Net interest income			$	43,827					$	42,748
Interest rate spread (taxable equivalent basis)					3.60	%					3.50	%
Net interest margin (taxable equivalent basis)					3.73	%					3.63	%
Net interest margin, excluding PPP and PPPLF (taxable equivalent basis)					3.70	%					3.67	%
Average interest-earning assets to average interest-bearing liabilities					126.92	%					125.50	%

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Table of Contents

FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income on a tax equivalent basis for the nine-month periods ended June 30, 2022 and 2021. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. Changes attributable to changes in both rate and volume have been allocated proportionally based on the absolute dollar amounts of change in each.


	Nine Months Ended June 30, 2022
	Compared to
	Nine Months Ended June 30, 2021
	Increase (Decrease)
	Due to
	Rate		Volume		Net
	(In thousands)
Interest income:
Interest-bearing deposits with banks	$	28	$	(14)	$	14
Loans, excluding PPP loans		502		3,233		3,735
PPP loans		1,164		(4,597)		(3,433)
Investment securities – taxable		(398)		642		244
Investment securities – nontaxable		(203)		779		576
FRB and FHLB stock		24		4		28
Total interest-earning assets		1,117		47		1,164

Interest expense:
Deposits		(196)		362		166
Borrowings from FHLB		(244)		(8)		(252)
Federal Reserve PPPLF borrowings		(206)		(201)		(407)
Subordinated debt		(101)		542		441
Total interest-bearing liabilities		(747)		695		(52)

Net increase (decrease) in net interest income (taxable equivalent basis)	$	1,864	$	(648)	$	1,216

Provision for Loan Losses. The Company recognized a provision for loan losses of $1.0 million for the nine-month period ended June 30, 2022, primarily due to loan portfolio growth, compared to a credit of $1.8 million for the same period in 2021.

The Company recognized net charge-offs of $349,000 for the nine-month period ended June 30, 2022, of which $218,000 was related to unguaranteed portions of SBA loans, compared to net charge-offs of $609,000 for the same period in 2021, of which $565,000 was related to unguaranteed portions of SBA loans.

Noninterest Income. Noninterest income decreased $57.2 million for the nine-month period ended June 30, 2022 as compared to the same period in 2021. The decrease was due primarily to decreases in mortgage banking income and net gain on sale of SBA loans of $55.4 million and $3.4 million, respectively. The decrease in mortgage banking income was primarily due to a $73.9 million decrease in production revenue from lower originations for sale and decreasing margins, and a $22.1 million decrease in capitalized residential mortgage loan servicing rights, partially offset by a $13.8 million increase in realized and unrealized hedging gains, a $3.1 million decrease in the fair value of loans held for sale and interest rate lock commitments as compared to a $15.6 million decrease in fair value recognized in 2021, and a $4.7 million increase in the fair value of the residential mortgage loan servicing rights portfolio in 2022 as compared to a $7.0 million decrease in fair value recognized in 2021. Mortgage loans originated for sale were $1.42 billion in the nine months ended June 30, 2022 as compared to $3.51 billion in the same period in 2021. The decrease in net gain on sales of SBA loans was due primarily to decreases in production and sales volume from the SBA lending segment, as well as lower premiums in the secondary market.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Noninterest Expense. Noninterest expense decreased $41.2 million for the nine-month period ended June 30, 2022 as compared to the same period in 2021. The decrease was due primarily to decreases in compensation and benefits and advertising expense of $34.7 million and $3.1 million, respectively. The decrease in compensation and benefits expense is due primarily to a reduction in incentive compensation for the Company’s mortgage banking segment as a result of decreased mortgage banking income. The decrease in advertising expense was related to the reduced loan origination volume of the mortgage banking segment.

Income Tax Expense. The Company recognized income tax expense of $2.4 million for the nine-month period ended June 30, 2022 as compared to income tax expense of $9.0 million for the same period in 2021. The effective tax rate for 2022 was 14.5% as compared to 26.5% for 2021. The lower effective tax rate for 2022 was primarily due to lower taxable income and lower nondeductible executive compensation expense in 2022 as compared to 2021.

Liquidity and Capital Resources

Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Bank’s primary sources of funds are customer deposits, proceeds from loan repayments, maturing securities and FHLB borrowings. While loan repayments and maturities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, general economic conditions and competition. At June 30, 2022, the Bank had cash and cash equivalents of $37.5 million and securities available-for-sale with a fair value of $307.4 million. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB, borrowing capacity on federal funds purchased lines of credit facilities with other financial institutions and additional collateral eligible for repurchase agreements.

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

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

The Company is a separate legal entity from the Bank and must provide for its own liquidity to pay its operating expenses and other financial obligations, to pay any dividends and to repurchase any of its outstanding common stock. The Company’s primary source of income is dividends received from the Bank and the Captive. The amount of dividends that the Bank may declare and pay to the Company in any calendar year cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. At June 30, 2022, the Company (unconsolidated basis) had liquid assets of $21.9 million.

Capital Management. The Bank is required to maintain specific amounts of capital pursuant to regulatory requirements. As of June 30, 2022, the Bank was in compliance with all regulatory capital requirements that were effective as of such date, with Tier 1 capital (to average total assets), common equity Tier 1 capital (to risk-weighted assets), Tier 1 capital (to risk-weighted assets) and total capital (to risk-weighted assets) ratios of 9.98%, 11.16%, 11.16% and 12.04%, respectively. The regulatory requirements at that date were 5.0%, 6.5%, 8.0% and 10.0%, respectively, in order to be categorized as “well capitalized” under applicable regulatory guidelines. At June 30, 2022, the Bank was considered “well-capitalized” under applicable regulatory guidelines.

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Table of Contents

FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Off-Balance Sheet Arrangements

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded on the Company’s financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are primarily used to manage customers’ requests for funding and take the form of loan commitments and letters of credit. A further presentation of the Company’s off-balance sheet arrangements is presented in the Company’s Annual Report on Form 10-K for the year ended September 30, 2021.

For the nine-month period ended June 30, 2022, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

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Table of Contents

FIRST SAVINGS FINANCIAL GROUP, INC.

PART I – ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

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

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

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

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

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

Results of our simulation modeling, which assumes an immediate and sustained parallel shift in market interest rates, project that the Company’s net interest income could change as follows over a one-year horizon, relative to our base case scenario.


	At June 30, 2022				At September 30, 2021
Immediate Change	One Year Horizon				One Year Horizon
in the Level	Dollar		Percent		Dollar		Percent
of Interest Rates	Change		Change		Change		Change

	(Dollars in thousands)
300bp	$	(12,303)	(23.97)	%	$	(3,593)	(7.65)	%
200bp		(6,792)	(13.23)			(1,508)	(3.21)
100bp		(3,343)	(6.51)			387	0.82
(100)bp		3,531	6.88			(1,635)	(3.48)
(200)bp		6,359	12.39			(2,370)	(5.05)

At June 30, 2022, our simulated exposure to an increase in interest rates shows that an immediate and sustained increase in rates of 1.00% will decrease our net interest income by $3.3 million, or 6.51%, over a one year horizon compared to a flat interest rate scenario. Furthermore, rate increases of 2.00% and 3.00% would cause net interest income to decrease by 13.23% and 23.97%, respectively. An immediate and sustained decrease in rates of 1.00% will increase our net interest income by $3.5 million, or 6.88%, over a one year horizon compared to a flat interest rate scenario while a rate decrease of 2.00% would cause our net interest income to increase by 12.39%.

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FIRST SAVINGS FINANCIAL GROUP, INC.

PART I - ITEM 4

CONTROLS AND PROCEDURES

Controls and Procedures

Evaluation of Disclosure Controls and Procedures. As of June 30, 2022 (the “Evaluation Date”), the Company performed an evaluation, under the supervision of and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on the evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective.

Changes in Internal Controls. There have been no changes in our internal controls over financial reporting that occurred during the quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Table of Contents

FIRST SAVINGS FINANCIAL GROUP, INC.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not a party to any legal proceedings. Periodically, there have been various claims and lawsuits involving the Bank, mainly as a plaintiff, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank’s business. The Bank is not a party to any pending legal proceedings that it believes would have a material adverse effect on its financial condition or results of operations. As previously discussed in Note 17 of the Consolidated Financial Statements, the Bank received notice of a class action lawsuit on March 23, 2021 regarding its policy and practice of assessment of customer fees related to items presented on accounts with insufficient funds (NSF items).

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2021 which could materially affect our business, financial condition or future results. There have been no material changes to the risk factors described in our Annual Report on Form 10-K. However, these are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or results of operations.

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

The following table presents information regarding the Company’s stock repurchase activity during the quarter ended June 30, 2022:


				(c)	(d)
				Total number of shares	Maximum number (or
	(a)	(b)		(or units) purchased as	appropriate dollar value) of
	Total number of	Average price		part of publicly	shares (or units) that may yet
	shares (or units)	paid per share		announced plans or	be purchased under the plans
Period	purchased	(or unit)		programs (1)	or programs
April 1, 2022 through April 30, 2022	—	$	—	—	354,408
May 1, 2022 through May 31, 2022	—	$	—	—	354,408
June 1, 2022 through June 30, 2022	59,120	$	23.83	59,120	295,288
Total	59,120	$	23.83	59,120	295,288

(1)

On August 16, 2021, the Company announced that its Board of Directors authorized a stock repurchase program to acquire up to 356,220 shares, or 5.0% of the Company’s outstanding common stock. This replaces the previously existing stock repurchase program announced by the Company on November 16, 2012, which had 346,776 (split-adjusted) remaining for repurchase.

Item 3. Defaults upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

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Table of Contents

FIRST SAVINGS FINANCIAL GROUP, INC.

PART II

OTHER INFORMATION

Item 5. Other Information

None.

Item 6. Exhibits

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

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.1		Section 1350 Certification of Chief Executive Officer

32.2		Section 1350 Certification of Chief Financial Officer

101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statement of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) related notes
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FIRST SAVINGS FINANCIAL GROUP, INC.
	(Registrant)

Dated August 9, 2022	BY:	/s/ Larry W. Myers
		Larry W. Myers
		President and Chief Executive Officer

Dated August 9, 2022	BY:	/s/ Anthony A. Schoen
		Anthony A. Schoen
		Chief Financial Officer

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