FUSB First US Bancshares, Inc.

Management Discussion

• Net interest income is calculated as the difference between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest-bearing liabilities, can materially impact net interest income. The Company’s earning assets consist of loans at both the Bank and ALC, as well as taxable and tax-exempt investments, federal funds sold by the Bank and interest-bearing deposits in banks. Interest-bearing liabilities consist of interest-bearing demand deposits and savings and time deposits, as well as short-term borrowings.
• Interest earned on loans at the Bank increased in both the three- and nine-month periods ended September 30, 2019 compared to the corresponding periods of the previous year, primarily due to the increase in average loan balance resulting from the acquisition of TPB. Comparing the three- and nine-month periods, the average loan balance increased by $115.0 million and $139.2 million, respectively. Yield on loans at the Bank increased in part due to higher yielding loans acquired from TPB, as well as accretion of the purchase accounting discount, which is included in interest income. At ALC, interest income was flat comparing the three and nine months ended September 30, 2019 to the corresponding periods of 2018. Increases in the average balance of loans at ALC were generally offset by a decrease in average yield resulting from the continuing shift of ALC’s earning assets mix to a higher percentage of indirect sales loans relative to the loan portfolio total. Indirect sales lending has been ALC’s prominent focus over the past several years, and generally provides loans of higher credit quality than ALC’s other consumer loan categories, but at lower yields. Interest income from taxable and tax-exempt investment securities decreased in both the three- and nine-month periods ended September 30, 2019 compared to the corresponding periods of the previous year, primarily due to maturities and sales of investment securities. Interest income from other earnings assets, including federal funds sold and interest-bearing deposits in banks, increased in both the three- and nine-month periods ended September 30, 2019 compared to the corresponding periods of the previous year, primarily due to higher yields.
• Interest expense increased comparing the three and nine months ended September 30, 2019 to the corresponding periods of 2018, primarily due to an increase in average interest-bearing liabilities resulting from the acquisition of TPB. Average interest-bearing liabilities increased $61.3 million and $105.6 million comparing the three- and nine-month periods ended September 30, 2019 to the corresponding periods of 2018, respectively. Additionally, the average rate on interest-bearing liabilities increased 29 and 36 basis points comparing the three- and nine-month periods ended September 30, 2019 to the corresponding periods of 2018, respectively.