Assessing First US Bancshares as a Turnaround Candidate in a Post-Recessionary Banking Sector

The post-recessionary banking sector has entered a period of recalibration. As central banks unwind years of aggressive rate hikes and consumers and businesses adjust to a new economic normal, regional banks like First US Bancshares (FUSB) face a dual challenge: managing credit risk in a fragile economy while capitalizing on opportunities in a market still skewed in their favor. The company's early 2025 earnings reports—marked by sharp volatility in Q2—offer a case study in the risks and potential of smaller banks navigating this transitional landscape.

Q1 2025: A Glimpse of Strength

First US Bancshares' Q1 2025 earnings, reported on April 30, 2025, revealed a net income of $1.8 million, or $0.29 per diluted share, slightly ahead of the previous quarter but down 23% year-over-year. While the decline from Q1 2024's $2.1 million raised eyebrows, the underlying metrics told a more nuanced story. The company's net interest margin (NIM) improved to 3.53% from 3.41% in Q4 2024, driven by disciplined deposit pricing and a 3.1% growth in total loans, particularly in indirect consumer lending (e.g., RV and equipment financing). This segment, which saw a $41.3 million increase, demonstrated resilience in a sector where consumer balance sheets remain under pressure.

The efficiency ratio of 70.8% also highlighted FUSB's cost management, though it lagged behind the industry average of 60%. CEO James F. House's emphasis on “disciplined lending” and a 1.23% allowance for credit losses (up slightly from 1.24% in Q4 2024) signaled a cautious approach to risk. For investors, the Q1 results suggested a company with a strong core deposit base (84.6% of total deposits) and a liquid investment portfolio, but one still grappling with the sector-wide shift from interest income to noninterest revenue streams.

Q2 2025: The Credit Risk Shock

The second quarter, however, revealed a darker side of FUSB's strategy. On July 30, 2025, the company reported a net income of just $0.2 million, or $0.03 per diluted share, a 90% plunge from Q1. The culprit? A staggering $2.7 million provision for credit losses, up from $528,000 in Q1 and $0 in Q2 2024. Mr. House attributed the spike to two factors: a surge in indirect consumer lending (which saw a 25% increase in net charge-offs) and additional reserves on two commercial loans.

While the provision for credit losses is a drag on earnings, it also reflects FUSB's proactive risk management. The company's net interest income rose 6.5% to $9.5 million in Q2, and its NIM expanded further to 3.59%, indicating that the loan growth strategy, though costly, is generating revenue. The question for investors is whether this is a temporary setback or a sign of deeper vulnerabilities.

Context: A Sector in Transition

The broader banking sector offers both caution and opportunity. Net interest margins across the industry are projected to settle at 3% by year-end, a decline driven by rate normalization and rising deposit costs. However, noninterest income is expected to rise to 1.5% of average assets in 2025, the highest in five years, as banks pivot to fee-based models. For FUSB, which derives 65% of its income from interest, this shift is a double-edged sword. While the company's Q2 net interest income growth was a positive, its reliance on loan growth exposes it to credit cycles more acutely than diversified peers like U.S. Bancorp, which reported a 6.1% increase in trust and investment fees in Q1 2025.

Regulatory tailwinds, such as the Basel III Endgame re-proposal, may ease capital constraints for smaller banks, but FUSB's 12.23% total capital ratio (well above “well-capitalized” thresholds) suggests it has room to absorb losses without regulatory intervention. Meanwhile, the company's tangible common equity to tangible assets ratio of 8.38% remains robust, supporting its dividend and buyback programs.

The Turnaround Thesis

FUSB's potential as a turnaround candidate hinges on three pillars:
1. Credit Risk Mitigation: The Q2 provisions were a necessary but painful correction. If the company can stabilize its indirect lending portfolio and avoid overexposure to commercial real estate (a sector still under stress), it can rebuild investor confidence.
2. NIM Expansion: The 3.59% NIM in Q2, while below the 3.65% seen in Q1 2024, outperformed the sector average. Continued deposit pricing discipline and a focus on high-yield consumer loans could sustain this trend.
3. Strategic Expansion: FUSB's plans to open a banking center in Daphne, Alabama, by Q4 2025 signal a long-term commitment to organic growth. This complements its digital initiatives, which include AI-driven customer analytics—a critical edge in a sector increasingly dominated by fintechs.

Risks and Rewards

Investors must weigh FUSB's risks against its potential. The company's exposure to indirect consumer lending—a segment with historically higher default rates—remains a concern, especially if economic conditions deteriorate further. Additionally, its efficiency ratio lags behind peers, suggesting room for cost optimization.

However, FUSB's low P/E ratio of 8.5x (as of July 2025) and a forward P/E of 6.3x, compared to U.S. Bancorp's 11.2x, reflect its undervaluation. The market's skepticism is understandable but may be overcorrecting for the company's resilience in a challenging environment.

Conclusion: A High-Risk, High-Reward Play

For investors with a medium-term horizon and a tolerance for volatility, FUSB presents an intriguing opportunity. The company's Q2 earnings were a wake-up call, but its Q1 performance and strategic initiatives—including a $13.38 average buyback price—suggest management is prioritizing long-term stability.

A key watchpoint is the evolution of its indirect lending portfolio. If FUSB can reduce net charge-offs in this segment to pre-2025 levels (0.09% in Q1 2024) while maintaining NIM gains, its stock could see a re-rating. For now, the company remains a speculative bet, but one with the potential to outperform in a sector still sorting itself out.