10-Q: First US Bancshares Reports Profit Decline Amid Rising Loan Losses

First US Bancshares, Inc. reported a significant drop in net income for the first half of 2025, primarily due to a substantial increase in its provision for credit losses, despite growth in total assets and loans.

Summary

• Net income for the six months ended June 30, 2025, was $1.9 million, a decrease from $4.2 million for the same period in 2024.
• Diluted net income per share fell to $0.32 for the first half of 2025, down from $0.68 in the prior year period.
• Total assets increased by 3.8% to $1,143.4 million as of June 30, 2025, from $1,101.1 million at December 31, 2024.
• Total loans grew by 5.9% to $871.4 million as of June 30, 2025, primarily driven by a $66.4 million increase in consumer indirect loans and $17.8 million in multi-family residential real estate lending.
• The provision for credit losses surged to $3.2 million for the six months ended June 30, 2025, compared to no provision in the same period of 2024, with $2.3 million attributed to the consumer indirect loan portfolio and $0.9 million to specific commercial loans.
• Net charge-offs as a percentage of average loans increased to 0.47% for the first half of 2025, up from 0.10% in the prior year period, including a $1.2 million charge-off on one commercial loan and $0.9 million from the indirect portfolio.
• The allowance for credit losses (ACL) on loans and leases as a percentage of total loans increased to 1.31% as of June 30, 2025, from 1.24% at December 31, 2024.
• Net interest income saw a modest increase of 0.9% to $18.373 million for the six months ended June 30, 2025, compared to $18.216 million in the prior year period.
• Net interest margin decreased to 3.56% for the first half of 2025, from 3.67% for the same period in 2024, though it improved sequentially over the last two quarters.
• Total deposits increased by 1.5% to $986.8 million as of June 30, 2025, driven by interest-bearing demand deposit accounts and brokered certificates of deposit.
• Short-term borrowings significantly increased to $35.0 million as of June 30, 2025, from $10.0 million at December 31, 2024, used to maintain liquidity.
• Shareholders' equity increased by 3.3% to $101.9 million as of June 30, 2025, primarily due to earnings, net of dividends and share repurchases, and reductions in accumulated other comprehensive loss.
• Cash dividends declared increased to $0.14 per share for the six months ended June 30, 2025, up from $0.10 per share in the prior year period.

Sentiment

Score: 3

Explanation: The sentiment is negative due to a significant decline in net income and EPS, a substantial increase in the provision for credit losses and net charge-offs, and a decrease in net interest margin. While there was asset and loan growth, and a decrease in nonperforming assets, the core profitability and credit quality metrics show deterioration, indicating challenges in the current economic environment.

Positives

• Total assets increased by 3.8% to $1,143.4 million as of June 30, 2025.
• Total loans grew by 5.9% to $871.4 million, driven by strong growth in consumer indirect loans and multi-family residential real estate lending.
• Nonperforming assets decreased to $3.7 million as of June 30, 2025, from $5.5 million at December 31, 2024, representing a decline from 0.50% to 0.33% of total assets.
• Total deposits increased by 1.5% to $986.8 million, indicating continued funding capacity.
• Shareholders' equity increased by 3.3% to $101.9 million, supported by earnings and a reduction in accumulated other comprehensive loss.
• Cash dividends per share increased to $0.14 for the six months ended June 30, 2025, from $0.10 in the prior year period.
• Net interest income increased modestly by 0.9% for the six months ended June 30, 2025.
• Net interest margin showed sequential improvement over the last two quarters of 2025.
• Maintained capital ratios above well-capitalized institution requirements, with Common Equity Tier 1 and Tier 1 risk-based capital ratios at 10.70% and a Total Capital Ratio of 11.93% as of June 30, 2025.

Negatives

• Net income significantly decreased to $1.9 million for the six months ended June 30, 2025, from $4.2 million in the prior year period.
• Diluted net income per share fell to $0.32 for the first half of 2025, from $0.68 in the prior year period.
• Provision for credit losses increased substantially to $3.2 million for the six months ended June 30, 2025, from no provision in the same period of 2024.
• Net charge-offs as a percentage of average loans increased significantly to 0.47% for the first half of 2025, compared to 0.10% in the prior year period.
• Net interest margin decreased to 3.56% for the six months ended June 30, 2025, from 3.67% in the prior year period.
• Short-term borrowings increased significantly to $35.0 million as of June 30, 2025, from $10.0 million at December 31, 2024, indicating increased reliance on wholesale funding.
• Core deposits as a percentage of total deposits decreased to 82.7% as of June 30, 2025, from 86.1% at December 31, 2024.
• The increase in the allowance for credit losses as a percentage of total loans (1.31% vs 1.24%) indicates a higher perceived credit risk in the loan portfolio.

Risks

• Adverse developments in the financial services industry.
• Loan losses may be greater than anticipated.
• Inability to ensure sufficient cash flow and liquid assets are available to satisfy current and future financial obligations.
• Increased lending risks associated with commercial real estate lending.
• Potential weakness in the residential real estate market.
• Liquidity risks.
• Impact of national and local market conditions on business and operations.
• Effects of significant changes to the structure and operations of the federal government, including any government shutdown.
• Strong competition in the banking industry.
• Impact of changes in interest rates and monetary policy on performance and financial condition.
• Effects of fiscal challenges facing the U.S. government.
• Impact of technological changes in the banking and financial service industries and potential information system failures.
• Cybersecurity and data privacy threats.
• Risks and challenges presented by the development and use of artificial intelligence (AI).
• Costs of complying with extensive governmental regulation.
• Risk that internal controls and procedures might fail or be circumvented.
• Impact of changing accounting standards and tax laws on financial results.
• Potential impact of climate change and related legislative and regulatory initiatives.
• Possibility that acquisitions may not produce anticipated results and result in unforeseen integration difficulties.
• Volatility of stock price.
• Dependence on the soundness of other financial institutions.
• Economic uncertainty from new trade and other economic policies, including tariffs, could negatively impact customers and increase credit losses.
• Elevated competition for deposits in local markets, making it difficult to lower funding costs.
• Uncertainty in commercial lending as businesses assess the potential impact of trade tariffs and the interest rate environment.
• Increased credit risk from both commercial and consumer borrowers if economic conditions worsen.
• Negative impact on net interest margin and net interest income if market interest rates or the federal funds rate increase or decrease significantly over a short period.

Future Outlook

Management anticipates that core deposits will continue to be the primary source of funding. Non-interest expense is expected to increase over time due to inflationary trends, market competition for personnel, technological changes, and ongoing growth. The company is evaluating the impact of the One Big Beautiful Bill Act (OBBBA) on deferred tax assets and liabilities, effective tax rate, and tax-related processes, but does not currently expect a material impact on its 2025 estimated annual effective tax rate or consolidated financial statements. The company continues efforts to improve net interest margin, but results are not fully predictable, and significant changes in market interest rates could negatively impact net interest margin and net interest income.

Management Comments

• Delivery of the best possible financial services to customers remains an overall operational focus.
• Attention to detail and responsiveness to customers' desires are critical to customer satisfaction.
• The company continues to upgrade technology, both in its financial services and in the training of its 148 full-time equivalent employees, to ensure customer satisfaction and convenience.
• Management continues to monitor ongoing developments related to economic conditions, the federal funds rate, and market interest rates.
• While the methodologies and calculations used in determining the Allowance for Credit Losses (ACL) are believed to be adequate, the determination of the ACL's appropriateness is complex and requires judgment about inherently uncertain matters.
• Management believes the company's on-balance sheet and other readily available liquidity provide strong indicators of its ability to fund obligations in a stressed liquidity environment.

Industry Context

The financial services industry continues to face economic volatility, marked by reductions in U.S. GDP during Q1 2025, modest increases in inflation (CPI at 2.7% in June 2025, above the Federal Reserve's 2% target), and ongoing uncertainty from trade tariffs introduced in April 2025. The U.S. unemployment rate has remained stable at 4.0%-4.2% since May 2024. Despite the Federal Reserve keeping the federal funds rate at 4.25%-4.50% in H1 2025, minutes from June 2025 meetings suggest a shift towards higher interest rate expectations through 2026, with implied rate cuts. Local markets experience elevated competition for deposits, making it challenging to lower funding costs. Commercial lending faces uncertainty due to tariffs and interest rates, though the company saw significant growth in higher-credit-spectrum consumer indirect lending.

Comparison to Industry Standards

• NA

Corporate Governance

Legal Proceedings

• The company is a party to certain ordinary course litigation and intends to vigorously defend itself in all such litigation.
• Management believes the outcome of such ordinary course litigation should not have a material adverse effect on the company's consolidated financial statements or results of operations.

Related Party Transactions

• The Bank makes loans to certain officers and directors of the Company, including companies with which they are associated, on the same terms as those prevailing for comparable transactions with unrelated parties.
• Aggregate balances of such related party loans and commitments were $22.9 million as of June 30, 2025, up from $11.4 million as of December 31, 2024.
• During the six months ended June 30, 2025, new loans of $11.5 million were made to related parties, with no repayments.

Stakeholder Impact

• Shareholders: Experienced a significant decrease in net income and diluted EPS, but also an increase in dividends per share and an increase in shareholders' equity.
• Employees: The company continues to upgrade technology and training for its 148 full-time equivalent employees.
• Customers: The company focuses on delivering the best possible financial services and responsiveness to customer desires. Commercial customers face uncertainty due to trade tariffs and interest rates, potentially impacting their ability to repay loans. Consumer indirect lending customers are at the higher end of the credit spectrum.
• Creditors/Lenders: Increased short-term borrowings and reliance on brokered deposits indicate a shift in funding strategy, potentially impacting the company's funding costs and risk profile for lenders.
• Regulators: The Bank continues to maintain capital ratios at higher levels than required to be considered a well-capitalized institution.

Next Steps

• Continue renovation of a banking center office in Daphne, Alabama, with an expected public opening during the first half of 2026.
• Develop land purchased in Mobile, Alabama, into an office complex to house the indirect lending operation and provide an additional banking center.
• Management will continue efforts to improve net interest margin.
• Ongoing evaluation of the impact of the One Big Beautiful Bill Act (OBBBA) on deferred tax assets and liabilities, effective tax rate, and tax-related processes.

Key Dates

Recommendation

While First US Bancshares, Inc. reported a substantial decline in net income and EPS, primarily driven by a significant increase in the provision for credit losses and net charge-offs, there are also some offsetting positives. The company achieved notable growth in total assets and loans, particularly in consumer indirect lending, and saw a decrease in nonperforming assets. Shareholders also benefited from an increased dividend. The sequential improvement in net interest margin is a positive sign, suggesting some stabilization after a challenging period. However, the elevated credit loss provision and charge-offs indicate underlying asset quality concerns that warrant caution. A seasoned investor would likely 'hold' to monitor if the credit quality issues are a temporary blip or a sustained trend, and to assess if the sequential improvement in net interest margin can translate into a recovery in overall profitability in subsequent quarters. The increased short-term borrowings and related party loan activity also bear watching.

Keywords

Banking, Financial Services, Regional Bank, Commercial Banking, Consumer Lending, Indirect Lending, SEC Filing, 10-Q, Financial Results, Credit Quality, Loan Portfolio, Deposits, Net Interest Margin, Capital Ratios, Risk Management