Executive Summary / Key Takeaways

• First Savings Financial Group (FSFG) is demonstrating improved profitability, driven by significant net interest margin expansion in the first half of fiscal year 2025, with the tax-equivalent net interest margin increasing to 2.84% for the six months ended March 31, 2025, compared to 2.67% in the prior year period.
• The Company has undergone a strategic realignment, exiting its national mortgage banking operation and dissolving its captive insurance subsidiary, focusing instead on core community banking in southern Indiana and its specialized SBA lending segment.
• Recent financial results show strong earnings growth, with net income reaching $11.7 million or $1.68 per diluted share for the six months ended March 31, 2025, a substantial increase from $5.8 million or $0.85 per diluted share in the comparable prior year period.
• FSFG maintains a robust capital position, with the Bank subsidiary classified as well-capitalized, providing a solid foundation for operations and strategic flexibility, including the recent redemption of $20.0 million in subordinated notes.
• While facing competition from larger, more technologically advanced regional banks, FSFG leverages its community focus and niche SBA lending expertise as key differentiators, though its smaller scale and operational efficiency lag some peers.

The Shifting Landscape of a Community Bank

First Savings Financial Group, Inc., the holding company for First Savings Bank, operates primarily as a community-focused financial institution serving southern Indiana through 16 branch locations. Its foundational business revolves around traditional banking activities: gathering deposits from the local populace and deploying those funds into a diverse loan portfolio encompassing commercial mortgage, residential mortgage, construction, commercial business, and consumer loans. Complementing its core banking operations, the Company maintains a specialized U.S. Small Business Administration (SBA) lending segment and manages an investment securities portfolio.

The Company's history, while rooted in community banking, has seen strategic evolution. Notably, FSFG previously operated a national mortgage banking division and a captive insurance subsidiary. However, recent strategic decisions have reshaped its operational footprint. Effective September 30, 2023, the captive insurance entity was dissolved. More significantly, during the quarter ended December 31, 2023, the national originate-to-sell mortgage banking operation was ceased. This marks a pivot back towards a more concentrated geographic and business model, although the Bank continues local residential mortgage lending and first-lien home equity lines of credit origination in specific markets. This strategic realignment aims to streamline operations and focus resources on core profitable areas.

In the competitive arena, FSFG faces a multifaceted challenge. Direct competition comes from larger regional players like Old National Bancorp (ONB), First Financial Bancorp (FFBC), Huntington Bancshares (HBAN), and Fifth Third Bancorp (FITB), who possess greater scale, broader geographic reach, and often more advanced digital infrastructures. These larger banks can process transactions faster and potentially at lower costs per unit, posing a threat to FSFG's market share, particularly in areas where digital convenience is paramount. For instance, larger peers may offer loan approval times of 3-5 days compared to potentially longer cycles at FSFG, and their digital platforms might enable 30-40% faster transaction processing.

Beyond traditional banks, fintech firms like Block (SQ) (formerly Square) and Ally Financial (ALLY) represent indirect competition, offering digital-only banking and alternative lending solutions with potentially lower fees and faster processing. These players can erode market share, especially among digitally native customers.

FSFG's competitive positioning relies heavily on its established presence and community ties in southern Indiana, fostering customer loyalty. Its specialized SBA lending segment also provides a niche advantage, allowing it to capture a specific segment of the small business market. However, FSFG's smaller scale results in higher operating costs per unit compared to larger rivals, and its investment in technological innovation appears to lag, potentially impacting efficiency and customer experience in an increasingly digital banking environment. While information does not detail specific technological differentiators or R&D initiatives for FSFG with quantifiable benefits, the comparison to peers suggests that technological advancement is an area where larger banks currently hold an edge in operational efficiency and service delivery speed. FSFG's strategic response appears to be centered on leveraging its community relationships and focusing on profitable niche lending rather than competing head-to-head on technological scale or breadth of digital offerings.

Financial Performance Reflecting Strategic Shifts and Margin Strength

The financial results for the first six months of fiscal year 2025 demonstrate a significant improvement in profitability for FSFG, largely driven by strength in net interest income. For the three months ended March 31, 2025, net income rose to $5.5 million, or $0.79 per diluted share, compared to $4.9 million, or $0.72 per diluted share, in the same period of 2024. The six-month results are even more pronounced, with net income climbing to $11.7 million, or $1.68 per diluted share, for the period ended March 31, 2025, up from $5.8 million, or $0.85 per diluted share, in the prior year.

A key driver of this performance is the expansion of the net interest margin. The tax-equivalent net interest margin increased to 2.93% for the three months ended March 31, 2025, compared to 2.66% for the same period in 2024. For the six-month period, the margin improved to 2.84% from 2.67%. This expansion occurred despite an increase in average interest-bearing liabilities, primarily because the average cost of interest-bearing liabilities decreased, particularly for brokered deposits and money market accounts, reflecting lower short-term market interest rates. Concurrently, the average tax equivalent yield on interest-earning assets increased, contributing to the wider margin.

Interest income saw a modest increase of $807,000 for the three-month period and a more substantial $4.6 million increase for the six-month period, primarily due to growth in the average balance of total loans. Interest expense decreased by $846,000 in the three-month period but increased by $1.6 million over the six-month period, reflecting the changing mix and cost of funding sources.

Credit quality showed signs of stability or improvement in the recent period. The Company recognized a credit for credit losses for loans of $357,000 for the three months ended March 31, 2025, primarily attributable to a decrease in the qualitative reserve, a notable shift from a provision of $713,000 in the prior year quarter. Net recoveries of $156,000 were recorded in the recent quarter, contrasting with net charge-offs of $110,000 in the comparable 2024 period. Nonperforming loans decreased by $4.2 million from September 30, 2024, to March 31, 2025, falling to $12.7 million.

Noninterest income experienced a slight decrease of $150,000 in the three-month comparison, mainly due to the absence of a gain on the sale of mortgage servicing rights recognized in the prior year, partially offset by increases in service charges on deposit accounts and SBA loan sale gains. However, for the six-month period, noninterest income increased significantly by $3.2 million, boosted by a $2.5 million net gain from a bulk sale of home equity lines of credit and $403,000 in gains on equity security sales, partially offset by the aforementioned decrease in other income related to mortgage servicing rights.

Noninterest expense increased by $1.9 million in the three-month period and $824,000 in the six-month period. This was primarily driven by higher compensation and benefits, including increased bonus and incentive accruals, and fluctuations in other operating expenses, which included a smaller reversal of accrued loss contingencies for SBA-guaranteed loans and a sick pay accrual in the current year, partially offset by reduced professional fees and occupancy costs following the exit from national mortgage banking.

The effective income tax rate remained well below the statutory rate, coming in at 9.7% for the three months and 10.9% for the six months ended March 31, 2025, primarily due to the recognition of investment tax credits related to solar projects.

The balance sheet reflects these operational and strategic shifts. Total assets decreased slightly from $2.45 billion at September 30, 2024, to $2.38 billion at March 31, 2025. Cash and cash equivalents decreased as excess cash was used to reduce brokered deposits. Net loans receivable decreased by $83.7 million, largely due to the $87.2 million bulk sale of home equity lines of credit. Loans held for sale increased, primarily due to an increase in residential mortgage loans held for sale, specifically HELOCs. Securities available for sale decreased due to fair value declines from rising long-term rates, calls, and maturities, partially offset by purchases. Total deposits decreased by $91.7 million, driven by a significant reduction in brokered deposits ($112.4 million), partially offset by growth in money market and interest-bearing demand accounts. Federal Home Loan Bank (FHLB) borrowings increased by $23.7 million, utilized to manage funding needs as brokered deposits declined. Stockholders' equity saw a modest increase, primarily from retained net income, partially offset by an increase in accumulated other comprehensive loss due to unrealized losses on available-for-sale securities.

FSFG maintains a strong liquidity position, with cash and available-for-sale securities, including $133.6 million unpledged, providing readily available funds. The Bank also has substantial borrowing capacity with the FHLB ($800 million total capacity, $325.3 million outstanding), federal funds lines of credit, and the Federal Reserve Discount Window. Uninsured deposits, while a factor for all banks, were estimated at 31.8% of total deposits, or 15.1% excluding Indiana public funds, at March 31, 2025.

Capital levels remain robust, with the Bank comfortably exceeding the requirements to be categorized as well-capitalized under regulatory guidelines. This strong capital base provides flexibility for strategic actions, such as the redemption of $20.0 million of 5.95% subordinated notes in April 2025, funded partly by a dividend from the Bank which was in turn funded by short-term wholesale borrowings. Both the Company and the Bank maintained strong capital ratios post-redemption. The Company also continues to execute on its stock repurchase program, with 1,437 shares purchased in the recent quarter, leaving over 10,000 shares available under the current authorization.

Outlook and Key Considerations

While FSFG does not provide explicit forward-looking financial guidance in company documents, analyst projections offer some insight into expectations. The Zacks Consensus Estimate for 2025 EPS stands at $2.90, representing a significant year-over-year growth rate of over 70%, with some analysts projecting slightly higher figures, such as $2.97, citing better-than-expected margin expansion. This optimism is grounded in the recent trend of margin improvement and the anticipated benefits of streamlining operations following the exit from the national mortgage banking business.

However, the outlook is not without its challenges. The competitive landscape, particularly the digital capabilities and scale of larger regional banks, continues to pose a long-term pressure on efficiency and market share. While FSFG's community focus and SBA niche provide resilience, sustained investment in technology will likely be necessary to remain competitive in service delivery.

Interest rate risk remains a significant factor. The Company's simulation modeling indicates that while a decrease in rates could positively impact net interest income, an immediate and sustained increase in rates could lead to a decrease in net interest income over a one-year horizon. For instance, a 100 basis point increase is projected to decrease net interest income by 2.57%, and a 200 basis point increase by 4.69%. These sensitivities highlight the importance of effective asset/liability management in the current rate environment.

Credit risk, while currently showing improvement with net recoveries and a decrease in nonperforming loans, is an ongoing consideration, particularly within the commercial real estate and construction portfolios, which are sensitive to economic conditions. The allowance for credit losses is managed based on historical experience, current conditions, and forward-looking forecasts, but unexpected economic downturns could necessitate increased provisions.

Liquidity management will continue to be crucial, especially regarding the stability of uninsured deposits and the cost of wholesale funding sources like FHLB borrowings and brokered deposits, which have been utilized to manage funding needs.

Conclusion

First Savings Financial Group is navigating a period of strategic transition, exiting less profitable or non-core businesses to sharpen its focus on community banking and specialized SBA lending. The financial results for the first half of fiscal year 2025 demonstrate the positive impact of this focus, particularly evident in robust net interest margin expansion and strong profitability growth. The Company's solid capital position provides a stable foundation and flexibility for capital management initiatives like the recent subordinated debt redemption.

While FSFG faces inherent challenges from larger, more technologically advanced competitors and remains sensitive to interest rate fluctuations, its established community presence and profitable SBA niche offer key differentiators. The outlook, as reflected in analyst expectations, suggests continued earnings strength, contingent on sustained margin performance and effective management of credit and interest rate risks. Investors should monitor the Company's ability to maintain margin strength, manage its loan portfolio quality, and strategically adapt to the evolving competitive landscape, particularly regarding technological adoption, as these factors will be critical to sustaining long-term value creation.