First Seacoast Bancorp, Inc. — Q1 2024 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 operating five full-service branches. The Bank focuses on residential lending, commercial real estate and commercial and industrial lending, personal banking, commercial banking and wealth management. The report covers the three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023 and income-statement comparisons are to the three months ended March 31, 2023. Unless stated otherwise, amounts are in thousands.
Key financial metrics
| Metric | Q1 2024 / March 31, 2024 | Comparable period / December 31, 2023 |
|---|---|---|
| Total assets | $576.5 million | $571.0 million |
| Total loans | $431.9 million | $430.0 million |
| Net loans | $428.4 million | $426.6 million |
| Available-for-sale securities | $124.2 million | $121.9 million |
| Total deposits | $405.6 million | $404.8 million |
| Total borrowings | $98.4 million | $93.0 million |
| Stockholders’ equity | $64.7 million | $66.6 million |
| Total interest and dividend income | $6.1 million | $4.6 million |
| Net interest and dividend income | $2.9 million | $3.2 million |
| Net interest margin | 2.07% | 2.46% |
| Net income/(loss) | $(1.2) million, or $(0.24) diluted EPS | $464 thousand, or $0.10 diluted EPS |
| Operating cash flow | $(70) thousand | $(361) thousand |
| Cash and due from banks | $6.7 million | $6.1 million |
Interest income rose 30.9% to $6.1 million as average interest-earning assets increased to $559.1 million and the average yield rose to 4.34%. These gains were more than offset by a 120.8% increase in interest expense to $3.2 million, driven by higher deposit and borrowing costs. Average interest-bearing deposit costs increased to 2.39% from 0.79%, while borrowing costs increased to 4.72% from 3.87%.
Non-interest income was $297 thousand, down from $1.2 million, primarily because Q1 2023 included an $849 thousand gain from terminating interest-rate swaps. Non-interest expense increased 4.6% to $4.0 million. The company recognized $362 thousand of income tax expense despite the pretax loss, primarily because it recorded a 100% valuation allowance against its $6.9 million net deferred tax assets.
Material changes versus the prior comparable period
- Net income declined by $1.6 million, from $464 thousand of income to a $1.2 million loss.
- Net interest income decreased $305 thousand, and net interest margin contracted 39 basis points to 2.07% as funding costs rose faster than asset yields.
- Average interest-earning assets increased $39.9 million, while average interest-bearing liabilities increased $57.0 million.
- Loans increased $1.8 million, led by residential real estate loans up $1.8 million, commercial real estate loans up $1.2 million and HELOCs up $1.1 million. Acquisition, development and land loans decreased $2.3 million.
- Deposits increased only $797 thousand. Core deposits declined $1.8 million, while time deposits increased $2.6 million.
- Borrowings increased $5.4 million to $98.4 million, including $78.4 million of FHLB advances and a $20.0 million Federal Reserve Bank advance.
- Stockholders’ equity decreased $1.9 million, primarily from the $1.2 million net loss and $923 thousand of other comprehensive loss caused by unrealized losses on available-for-sale securities.
- The allowance for credit losses on loans increased to $3.420 million from $3.390 million. The company recorded a $20 thousand net release of credit losses, consisting of a $30 thousand loan provision and a $50 thousand release for off-balance-sheet exposures.
Liquidity, capital and credit quality
Cash and cash equivalents ended the quarter at $6.7 million. Operating activities used $70 thousand, investing activities used $6.9 million and financing activities provided $7.6 million. Available FHLB borrowing capacity was approximately $66.4 million, and the Bank had $49.5 million of available capacity under its Federal Reserve Borrower-In-Custody facility. Management stated that it expects sufficient funds to meet current commitments.
The $20.0 million Federal Reserve Bank Term Funding Program advance matures December 13, 2024 at a fixed rate of 4.89%. The Bank had $103.7 million, or 25.6% of deposits, estimated to be uninsured as of March 31, 2024. Non-performing loans were $141 thousand, with no foreclosed assets, no loans over 90 days past due and accruing interest, and no residential properties in foreclosure.
The Bank was categorized as well capitalized. At March 31, 2024, total capital to risk-weighted assets was 14.88%, Tier 1 capital to risk-weighted assets was 13.85%, Tier 1 capital to average assets was 8.92% and common equity Tier 1 capital to risk-weighted assets was 13.85%.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management intends to grow the balance sheet through loan originations, selected commercial loan participations, residential mortgage lending and consumer lending, while increasing core deposits and using FHLB advances and brokered deposits to fund growth.
- Interest-rate risk remains significant. The company’s net portfolio value would decline 23.8% under an instantaneous 200-basis-point rate increase, exceeding the stated 20% policy limit; a 400-basis-point increase would reduce NPV by 47.9%.
- Management expects deposit and borrowing costs to reprice faster than yields on longer-term loans and investments in a rising-rate environment, potentially further compressing margins.
- Available-for-sale securities had $10.8 million of gross unrealized losses at March 31, 2024. Management attributed the losses to noncredit factors and recorded no securities credit-loss allowance.
- The company’s loan portfolio is concentrated in real estate, particularly $270.8 million of one- to four-family residential loans and $87.8 million of commercial real estate loans. Real estate values, borrower performance and local economic conditions are key credit risks.
- On April 11, 2024, the board authorized repurchases of up to 507,707 shares, approximately 10% of shares outstanding, subject to market conditions.
- On April 17, 2024, the Bank agreed to sell and lease back five properties for $7.9 million. The transaction was expected to close in Q2 2024, with 15-year initial lease terms and no branch closures.
- On April 29, 2024, the Bank borrowed $25.0 million from the FHLB at 4.75% to replace a callable advance. On May 3, 2024, it purchased $8.1 million of callable brokered deposits at 5.20%.
- The company reported effective disclosure controls as of March 31, 2024, no material changes in internal controls, no material litigation and no repurchases during the quarter.
Important facts for investors to verify
- Whether elevated deposit and borrowing costs continue to compress net interest margin and profitability.
- The sustainability of loan growth and the effect of residential and commercial real estate concentration on future credit losses.
- Changes in uninsured deposits, brokered deposits and reliance on FHLB and Federal Reserve funding.
- The impact and closing status of the $7.9 million sale-leaseback, including future lease expense and accounting treatment.
- Whether the authorized share repurchase program is implemented and how repurchases affect capital and per-share results.
- Whether the $6.9 million deferred tax asset valuation allowance changes as taxable-income expectations develop.
- The company’s ability to bring interest-rate sensitivity back within its stated policy limits.