Executive Summary / Key Takeaways

• First US Bancshares (FUSB) is pursuing targeted asset growth, particularly in its high-performing indirect consumer lending and multi-family real estate segments, which drove a 5.9% increase in total loans in the first half of 2025.
• Recent financial performance reflects a challenging interest rate environment and increased credit risk, with net income declining by 54.5% year-over-year in the first six months of 2025 due to a significant $3.2 million provision for credit losses.
• Despite strong capital ratios and robust liquidity, FUSB faces competitive pressures for deposits and a compressed net interest margin, which management is actively working to improve amidst economic volatility.
• The company's strategy emphasizes localized customer service and technology upgrades, but its smaller scale and slower innovation pace present competitive disadvantages against larger regional banks with more advanced digital capabilities.
• Strategic investments in new banking centers in Daphne and Mobile, Alabama, signal a commitment to expanding its physical footprint and supporting the high-growth indirect lending operation, aiming to bolster future deposit gathering and loan origination.

Setting the Stage: A Regional Bank's Enduring Strategy

First US Bancshares, Inc. (FUSB) operates as the bank holding company for First US Bank, a regional financial institution with a history dating back to 1952. Headquartered in Birmingham, Alabama, the bank serves its customers through 15 full-service offices across Alabama, Tennessee, and Virginia, complemented by loan production offices in strategic areas like Mobile, Alabama, and Chattanooga, Tennessee. FUSB's core business revolves around a comprehensive suite of commercial banking services, including demand, savings, and time deposits, alongside a diverse portfolio of personal and commercial loans. The company's overarching strategy centers on delivering exceptional financial services, prioritizing customer satisfaction through a blend of attentive service and continuous technological enhancements.

The banking industry currently navigates a period of heightened economic volatility. The first quarter of 2025 saw a contraction in U.S. GDP, followed by a rebound in the second quarter, while inflation remained elevated at 2.7% in June 2025, above the Federal Reserve's 2.0% target. This backdrop, coupled with an unchanged federal funds rate but market expectations of future cuts, creates a complex operating environment. Furthermore, new trade policies and tariffs introduce additional economic uncertainty, potentially impacting loan repayment capabilities across the sector.

FUSB's approach to technology is geared towards enhancing customer satisfaction and convenience, with ongoing investments in financial services technology and employee training. While the company consistently upgrades its systems, it does not appear to possess specific proprietary or highly differentiated technological advantages that provide a unique competitive moat in the manner of a specialized tech firm. Instead, FUSB's technological focus appears to be on maintaining competitive parity and operational efficiency within its service model. This contrasts with larger regional competitors who often leverage substantial investments in digital innovation to achieve faster processing, broader accessibility, and potentially lower operating costs. The broader industry trend of AI and data center growth, while not directly tied to FUSB's core technology, could indirectly influence lending opportunities in related infrastructure development, an area where larger, more technologically advanced banks might have an edge.

Performance Under Pressure: Growth Amidst Credit Headwinds

FUSB's financial performance in the first half of 2025 illustrates a period of strategic asset growth tempered by rising credit costs. For the six months ended June 30, 2025, net income totaled $1.9 million, a significant decrease from $4.2 million in the comparable 2024 period. This 54.5% decline was primarily driven by a substantial increase in the provision for credit losses.

Net interest income saw a modest increase of 0.9%, reaching $18.37 million for the first six months of 2025, up from $18.22 million in the prior year. This growth was supported by a $42.9 million increase in average interest-earning assets, primarily from loan expansion. However, the net interest margin compressed to 3.56% from 3.67% year-over-year, reflecting the impact of a declining interest rate environment where earning assets repriced faster than interest-bearing liabilities. Management is actively working to improve this margin, though the outcomes remain subject to market rate fluctuations.

Total loans expanded by 5.9% to $871.4 million as of June 30, 2025, from $823.0 million at December 31, 2024. This growth was predominantly fueled by the indirect consumer loan portfolio, which surged by 21.4% to $376.1 million, and multi-family residential real estate loans, which increased by 17.6% to $118.8 million. The indirect lending platform strategically targets the higher end of the credit spectrum, evidenced by a weighted average credit score of 798 for new originations. Conversely, construction and non-residential commercial real estate loan categories experienced reductions, partially offsetting overall portfolio growth.

The most significant headwind was the $3.2 million provision for credit losses recorded in the first half of 2025, compared to no provision in the prior-year period. Of this, $2.3 million was allocated to the expanding indirect consumer loan portfolio, and $0.9 million was for specific reserves on two individually evaluated commercial loans. Net charge-offs also rose sharply to $2.0 million, or 0.47% of average loans, from $0.4 million, or 0.10%, in the prior year. This increase was attributed to a $1.2 million partial charge-off of a commercial loan (fully reserved in 2024) and higher charge-offs in the indirect portfolio. Despite this, nonperforming assets decreased to $3.7 million (0.33% of total assets) from $5.5 million (0.50%) at year-end 2024, and the Allowance for Credit Losses (ACL) as a percentage of total loans increased to 1.31% from 1.24%.

On the funding side, total deposits increased by 1.5% to $986.8 million. However, core deposits, excluding large time and brokered deposits, saw a slight decline in their proportion of total deposits, moving from 86.1% to 82.7%. This indicates a greater reliance on managed liabilities, including an increase in short-term borrowings to $35.0 million from $10.0 million, used to manage liquidity and deposit costs. FUSB maintains a strong capital position, with Common Equity Tier 1 and Tier 1 risk-based capital ratios both at 10.70%, well above regulatory requirements for a well-capitalized institution.

Competitive Arena: Local Strength vs. Scale and Innovation

FUSB operates in a competitive regional banking landscape, vying for market share against larger, more diversified players such as Regions Financial (RF), Synovus Financial (SNV), and Pinnacle Financial Partners (PNFP). FUSB's competitive advantages are rooted in its strong community ties, deep local expertise, and established branch network, which foster personalized customer relationships. This localized approach can translate into enhanced pricing power in niche markets and stronger customer loyalty, potentially leading to more stable, recurring revenue streams.

However, FUSB's smaller scale and comparatively slower pace of technological innovation present notable competitive disadvantages. While FUSB focuses on technology upgrades for customer convenience, competitors like Synovus Financial often demonstrate faster innovation cycles in digital tools, offering more accessible and efficient services. Pinnacle Financial Partners, with its aggressive growth strategy, also highlights the challenge FUSB faces in matching the expansion and operational efficiencies of larger rivals.

A quantitative comparison of key financial metrics underscores these dynamics. FUSB's trailing twelve-month (TTM) net profit margin of 9.74% significantly lags behind Regions Financial's 20%, Synovus Financial's 14%, and Pinnacle Financial Partners' 17%. This suggests FUSB may face higher operational costs or less favorable pricing power compared to its larger peers. While FUSB's Price-to-Earnings (P/E) ratio of 12.05 is within the range of its competitors (RF: 11.38, SNV: 15.31, PNFP: 18.41), its Price-to-Book (P/B) ratio of 0.69 is notably lower than RF (1.21), SNV (1.41), and PNFP (1.36). This lower P/B ratio could indicate that the market values FUSB's assets less favorably or perceives lower growth potential relative to its book value compared to its peers.

The competitive environment for deposits remains elevated in FUSB's local markets, making it challenging to lower funding costs. This pressure, combined with ongoing economic uncertainty, complicates efforts to expand net interest margin. Indirect competitors, including fintech companies and online banks, further challenge traditional banking models by offering streamlined digital services, potentially eroding FUSB's market share in consumer lending and deposits. FUSB's strategic response involves leveraging its niche market expertise, particularly in indirect consumer lending, and expanding its physical presence in key growth areas to deepen customer relationships and gather deposits.

Strategic Initiatives and Future Outlook

FUSB is actively pursuing strategic initiatives to bolster its market position and drive future growth. A key focus is the expansion of its physical footprint and infrastructure. The company is renovating a banking center in Daphne, Alabama, acquired from another financial institution, with an anticipated opening in the first half of 2026. This facility is intended to serve as a crucial deposit gathering hub in the Daphne-Mobile area. Further demonstrating its commitment to the region and its high-growth indirect lending segment, FUSB has purchased land in Mobile, Alabama, with plans to develop an office complex to house its indirect lending operations and an additional banking center. These investments underscore the strategic importance of the indirect lending portfolio and the broader Mobile market to FUSB's long-term growth trajectory.

Management anticipates that non-interest expense will increase over time. This outlook is attributed to inflationary trends, ongoing market competition for personnel, the continuous pace of technological change, and the company's organic growth initiatives. This expectation follows a period where FUSB successfully reduced and maintained non-interest expenses at relatively flat levels through strategic initiatives introduced in 2021, with the majority of those efficiency improvements now realized.

Regarding capital allocation, FUSB's Board of Directors continues to evaluate future dividend payments, aiming to reward shareholders while maintaining a strong capital base. The company also has an active share repurchase program, with 872,813 shares remaining available for repurchase as of June 30, 2025. This indicates a commitment to returning capital to shareholders, balanced with strategic growth and capital preservation. Regulatory changes, such as the recently signed One Big Beautiful Bill Act, are currently being evaluated, but preliminary analysis suggests no material impact on FUSB's 2025 estimated annual effective tax rate or consolidated financial statements.

Key Risks to the Investment Thesis

The investment thesis for FUSB is subject to several pertinent risks. The significant increase in the provision for credit losses and net charge-offs in the first half of 2025 highlights the inherent credit risk, particularly within the rapidly growing indirect consumer loan portfolio and specific commercial loans. Economic volatility, including potential U.S. GDP contractions, elevated inflation, and uncertainty surrounding trade tariffs, could negatively impact customers' ability to repay loans, leading to further increases in credit losses.

Interest rate risk remains a critical concern. While management is working to improve net interest margin, unexpected or significant shifts in market interest rates could negatively impact profitability. The competitive environment, especially for deposits, poses a challenge to managing funding costs effectively. Furthermore, the banking industry's ongoing technological evolution, including cybersecurity threats and the emergence of artificial intelligence, presents both opportunities and risks, requiring continuous investment and adaptation. Factors beyond FUSB's control, such as broader economic forecasts or regional economic deterioration, could materially affect asset quality and the adequacy of the Allowance for Credit Losses.

Conclusion

First US Bancshares is a regional bank deeply rooted in its communities, strategically pursuing growth in high-potential segments like indirect consumer lending and multi-family real estate. This targeted expansion, while driving asset growth, has introduced increased credit risk, leading to a notable decline in net income in the first half of 2025. The company's ability to balance this growth with prudent risk management and operational efficiency in a volatile interest rate environment will be crucial.

FUSB's competitive standing is characterized by its strength in localized customer relationships, which provides a resilient foundation. However, it faces the challenge of competing with larger regional players that often possess greater scale, more advanced technological capabilities, and superior profitability margins. Strategic investments in new banking centers and infrastructure for its indirect lending operations are clear signals of FUSB's commitment to reinforcing its market presence and driving future deposit and loan growth. For investors, FUSB represents a regional banking play focused on niche market expansion, where the success of its growth initiatives and its ability to manage credit quality and interest rate sensitivity will be key determinants of its long-term value.