First Seacoast Bancorp, Inc. — Q3 2023 Form 10-Q Summary
Business Context and Reporting Period
First Seacoast Bancorp, Inc. is the holding company for First Seacoast Bank, a New Hampshire community bank with five full-service branches serving southeastern New Hampshire and southern Maine. The Bank provides residential lending, commercial banking, personal banking and wealth management services. The filing covers the three and nine months ended September 30, 2023, with comparisons to the same periods in 2022 and to December 31, 2022 for balance-sheet data.
On January 19, 2023, the mutual-to-stock conversion was completed. The Company sold 2.805 million shares at $10.00 per share, including shares purchased by the employee stock ownership plan, and began trading on Nasdaq under “FSEA” on January 20, 2023.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 |
|---|---|---|---|---|
| Total interest and dividend income | $5.2 million | $4.2 million | $14.8 million | $12.1 million |
| Net interest and dividend income | $2.6 million | $3.8 million | $8.7 million | $11.3 million |
| Provision for credit losses | $120 thousand | $(60) thousand release | $170 thousand | $0 |
| Non-interest income | $314 thousand | $365 thousand | $1.8 million | $1.2 million |
| Non-interest expense | $4.1 million | $3.7 million | $12.1 million | $11.3 million |
| Net income (loss) | $(911) thousand | $468 thousand | $(987) thousand | $1.04 million |
| Basic and diluted EPS | $(0.20) | $0.10 | $(0.21) | $0.22 |
| Net interest margin | 1.92% | 3.01% | 2.21% | 3.07% |
Interest income increased as loan balances and asset yields grew, but higher deposit and borrowing costs more than offset the benefit. The average rate on interest-bearing deposits increased to 2.03% in Q3 2023 from 0.20%, while the average borrowing rate increased to 4.75% from 1.53%.
Financial Condition, Cash Flow and Liquidity
- Total assets increased 3.7% to $557.2 million at September 30, 2023, from $537.4 million at December 31, 2022.
- Net loans increased 6.3% to $424.1 million. Residential loans were $264.5 million, commercial real estate loans were $87.3 million and commercial and industrial loans were $24.9 million.
- Total deposits increased 7.7% to $411.8 million. Core deposits increased 2.0% to $327.0 million, while time deposits increased $23.0 million. Estimated uninsured deposits were $106.3 million, or 25.8% of total deposits.
- FHLB advances declined to $44.9 million from $99.4 million. The Bank also had $25.0 million outstanding under the Federal Reserve Bank Term Funding Program.
- Cash and due from banks totaled $7.2 million. The Bank had approximately $99.2 million of unused FHLB borrowing capacity, $7.3 million of remaining BTFP capacity and $55.5 million of capacity under its Borrower-In-Custody facility at September 30, 2023.
- Nine-month operating cash flow was $(417) thousand, investing cash flow was $(25.5) million and financing cash flow was $24.8 million. Financing cash flow included $25.6 million of net stock-offering proceeds.
- Stockholders’ equity increased 36.3% to $67.3 million, primarily from the conversion proceeds, partly offset by $5.1 million of other comprehensive loss.
- The Bank was categorized as well-capitalized. Its total risk-based capital ratio was 17.92%, Tier 1 leverage ratio was 11.12% and common equity Tier 1 ratio was 16.88% at September 30, 2023.
Material Changes Versus Prior Comparable Period
- Quarterly net loss of $911 thousand replaced net income of $468 thousand; nine-month net loss of $987 thousand replaced net income of $1.04 million.
- Net interest income declined 32.3% in Q3 and 22.8% for the nine months, reflecting deposit repricing and higher borrowing costs.
- Net interest margin fell 109 basis points in Q3 and 86 basis points for the nine months.
- Loan growth and higher yields increased interest income, but funding costs rose more rapidly.
- Non-interest income for the nine months increased primarily because of an $849 thousand gain from terminating two interest-rate swaps. This gain was unusual and non-recurring in nature.
- Non-interest expense increased 10.5% in Q3 and 6.4% for the nine months, driven principally by salaries and employee benefits, deposit insurance, data processing and marketing.
- The Company adopted CECL effective January 1, 2023. The adoption reduced the loan allowance by $295 thousand and increased the allowance for qualifying off-balance-sheet exposures by $290 thousand, with no material overall impact on the financial statements.
- Unrealized losses on available-for-sale securities increased, resulting in $14.8 million of accumulated other comprehensive loss at September 30, 2023. Management attributed the losses to market-rate and other non-credit factors and recorded no securities credit-loss allowance.
Guidance, Outlook, Commentary and Risks
The filing does not provide formal earnings, revenue or margin guidance. Management states that its strategy is to grow the balance sheet through residential and consumer loan originations while increasing commercial real estate and commercial and industrial lending, expanding core deposits and using FHLB, Federal Reserve and brokered funding as needed.
Management expects sufficient funds to meet current funding commitments and reports no material capital-expenditure commitments. Subsequent to quarter-end, the Company purchased $25.0 million of available-for-sale securities, borrowed $25.0 million from the FHLB at 4.48%, entered into a new $25.0 million fair-value hedge and extended its core technology agreement through April 2032, with an option to exit in April 2028.
- Interest-rate risk: The filing estimates that a 200-basis-point increase in rates would reduce economic value of equity by 22.2%, exceeding the Board-approved 20.0% limit.
- Margin pressure: Deposit and borrowing costs may continue to reprice faster than yields on longer-term loans and securities.
- Liquidity and deposit risk: Uninsured deposits increased as a percentage of total deposits, and the Company relies on wholesale and brokered funding to support growth.
- Credit risk: Loan performance depends on real estate values, local economic conditions, borrower repayment capacity and macroeconomic forecasts used in the CECL model.
- Investment portfolio risk: The available-for-sale securities portfolio had $20.2 million of gross unrealized losses at September 30, 2023, primarily related to higher market interest rates.
- Operational and regulatory risk: Management identifies cybersecurity, third-party service providers, regulatory changes, competition and the ability to retain employees as additional risks.
The Company reported no material pending legal proceedings, no stock repurchases during the quarter and effective disclosure controls as of September 30, 2023.
Investor Verification Items
- Whether deposit pricing and wholesale funding costs stabilize sufficiently to recover net interest margin.
- The composition, maturity profile and unrealized-loss exposure of the $102.6 million available-for-sale securities portfolio.
- Changes in uninsured, brokered and time deposits and the availability and cost of FHLB and Federal Reserve funding.
- Credit quality trends, CECL assumptions and the adequacy of the $3.3 million loan allowance as loan balances grow.
- The sustainability of loan growth, particularly in residential and commercial real estate lending.
- The effect of the new fair-value hedge, subsequent FHLB borrowing and $25.0 million securities purchase on future earnings and interest-rate sensitivity.
- Whether the $849 thousand interest-rate-swap termination gain is excluded when assessing recurring earnings power.