First Seacoast Bancorp, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The company operates through First Seacoast Bank, providing residential lending, commercial banking, personal banking and wealth management services in New Hampshire and surrounding areas. The filing is the first quarterly report following completion of the mutual-to-stock conversion and related offering on January 19, 2023; common stock began trading under Nasdaq symbol FSEA on January 20, 2023.
Key Financial Metrics
| Metric | Q1 2023 / March 31, 2023 | Comparable / December 31, 2022 |
|---|---|---|
| Total assets | $548.5 million | $537.4 million |
| Total loans | $406.6 million gross; $403.3 million net | $402.5 million gross; $398.9 million net |
| Deposits | $415.3 million | $382.4 million |
| FHLB borrowings | $52.7 million | $99.4 million |
| Stockholders’ equity | $74.2 million | $49.3 million |
| Net income | $464,000 | $392,000 in Q1 2022 |
| Basic and diluted EPS | $0.10 | $0.08 in Q1 2022 |
| Net interest income | $3.2 million | $3.7 million in Q1 2022 |
| Net interest margin | 2.46% | 3.10% in Q1 2022 |
| Non-interest income | $1.2 million | $442,000 in Q1 2022 |
| Non-interest expense | $3.8 million | $3.7 million in Q1 2022 |
| Cash and due from banks | $16.6 million | $8.3 million at December 31, 2022 |
Revenue, Profitability and Cash Flow
- Total interest and dividend income increased 18.4% to $4.6 million, driven by higher average interest-earning assets and higher yields.
- Interest expense increased to $1.4 million from $179,000, primarily because of higher deposit and borrowing costs. Average borrowings increased to $88.3 million from $40.3 million in the prior-year quarter, although period-end FHLB borrowings declined substantially.
- Net interest income after provision for credit losses declined to $3.2 million from $3.7 million. The net interest margin compressed to 2.46% from 3.10%, reflecting faster increases in funding costs than in asset yields.
- Non-interest income increased by $719,000, primarily because of an $849,000 gain on termination of interest rate swaps. Customer service fees, investment services fees and loan servicing income declined year over year.
- Non-interest expense increased 4.2% to $3.8 million, primarily from higher salaries and benefits, marketing, data processing and director compensation.
- Net income increased 18.4% to $464,000, but the improvement was substantially supported by the nonrecurring swap-termination gain. The effective tax rate was 7.9%, compared with 12.9% in Q1 2022.
- Operating cash flow was negative $361,000, compared with positive cash flow of $141,000 in Q1 2022. Investing cash use was $2.1 million, while financing activities provided $10.8 million. Ending cash increased to $16.6 million.
Material Changes Versus Prior Comparable Period
- Loan balances increased 1.0% year over year based on reported gross balances, with net loans increasing $4.4 million from year-end 2022. One- to four-family residential loans increased $5.8 million from year-end, while commercial real estate loans declined $2.1 million.
- Deposits increased $32.9 million, or 8.6%, from year-end, including a $28.2 million increase in core deposits. Management reported estimated uninsured deposits of up to $118.1 million, or 28.4% of total deposits, at March 31, 2023.
- FHLB borrowings decreased $46.7 million from year-end, primarily using conversion-offering proceeds and deposit growth to reduce borrowings. Remaining unused FHLB borrowing capacity was approximately $92.2 million.
- Stockholders’ equity increased $24.9 million, primarily from approximately $25.7 million of net conversion-offering proceeds, net income and favorable other comprehensive income, partially offset by the $2.2 million ESOP stock purchase.
- The company adopted CECL effective January 1, 2023. The loan allowance decreased $295,000, while the allowance for qualifying off-balance-sheet exposures increased $290,000; management reported no material overall impact on the financial statements.
- Accumulated other comprehensive loss improved to $8.9 million from $9.7 million, primarily due to reduced unrealized losses on available-for-sale securities, partially offset by the reclassification of swap-related amounts.
Guidance, Outlook, Commentary and Risks
- No formal earnings or financial guidance was provided. Management stated that its strategy is to grow the balance sheet through loan originations and selective loan purchases, increase core deposits and use FHLB advances and brokered deposits to support loan growth.
- Management expects sufficient liquidity to meet current funding commitments and reported no material capital expenditure commitments. The Bank was categorized as well capitalized under applicable regulatory requirements.
- Interest-rate risk is significant. A modeled instantaneous 200-basis-point increase in rates would reduce estimated economic value of equity by 17.6%; a 200-basis-point decrease would increase it by 10.3%. Actual results may differ from modeled outcomes.
- Management identified risks from deposit pricing and retention, funding access, interest-rate volatility, margin compression, real estate values, loan delinquencies and losses, economic conditions, competition, regulatory changes, cybersecurity, third-party providers and operational execution.
- Available-for-sale securities had a fair value of $108.1 million and gross unrealized losses of $12.6 million. Management attributed the losses to noncredit factors and recorded no related credit-loss allowance.
- Nonperforming loans were $88,000 at March 31, 2023, with no foreclosed assets. The primary nonaccrual residential loan was repaid after the related property was sold in April 2023.
- The two $5 million interest-rate swaps were terminated on January 17, 2023 for an $849,000 gain. The company no longer had swap assets at March 31, 2023.
- The filing reported no material pending legal proceedings, no share repurchases during the quarter and effective disclosure controls and procedures.
Most Important Facts to Verify
- Whether the $849,000 swap-termination gain materially overstates recurring Q1 earnings and how future net interest margin responds to funding-cost increases.
- The sustainability and composition of the $32.9 million deposit increase, including the 28.4% estimated uninsured-deposit concentration and $18.1 million of brokered time deposits.
- CECL assumptions, including the six-quarter forecast period, reversion methodology and sensitivity of the $3.3 million loan allowance to economic and credit-quality changes.
- Exposure to commercial real estate, residential real estate and securities-market valuation risk, including the $12.6 million of unrealized securities losses.
- Availability and terms of FHLB and other borrowing capacity, as well as the effect of continued rate increases on liquidity and capital.
- Progress of the wealth-management client-account transition, including the remaining purchase-price obligation due by June 30, 2023 or earlier completion of the transition.