First Seacoast Bancorp, Inc. — Q2 2023 Form 10-Q Summary
Business Context and Reporting Period
First Seacoast Bancorp, Inc. is the holding company for First Seacoast Bank, serving Strafford and Rockingham Counties in New Hampshire and York County in southern Maine. The Bank provides residential lending, commercial banking, personal banking and wealth management services through five full-service branches. The filing covers the three and six months ended June 30, 2023; financial statements are unaudited.
The company completed the mutual-to-stock conversion and related offering on January 19, 2023. It sold 2.805 million shares at $10.00 per share, including shares purchased by the employee stock ownership plan. Common stock began trading on Nasdaq under FSEA on January 20, 2023.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Total interest and dividend income | $5.0 million | $4.0 million | +24.6% |
| Net interest and dividend income | $3.0 million | $3.8 million | -21.4% |
| Net interest margin | 2.25% | 3.11% | -86 basis points |
| Non-interest income | $346,000 | $398,000 | -13.1% |
| Non-interest expense | $4.1 million | $3.9 million | +4.6% |
| Net income | $(540,000) | $180,000 | Decline of $720,000 |
| Diluted loss per share | $(0.12) | $0.04 | Unfavorable |
| Metric | Six Months 2023 | Six Months 2022 | Change |
|---|---|---|---|
| Total interest and dividend income | $9.6 million | $7.9 million | +21.5% |
| Net interest and dividend income | $6.2 million | $7.5 million | -18.0% |
| Net interest margin | 2.36% | 3.10% | -74 basis points |
| Non-interest income | $1.5 million | $840,000 | +79.4% |
| Non-interest expense | $8.0 million | $7.6 million | +4.4% |
| Net income | $(76,000) | $572,000 | Decline of $648,000 |
Financial Condition, Liquidity and Capital
- Total assets were $552.7 million at June 30, 2023, up 2.8% from $537.4 million at December 31, 2022.
- Net loans increased 3.7% to $413.7 million. Total loans were $414.5 million, led by one-to-four-family residential loans of $259.6 million and commercial real estate loans of $88.1 million.
- Securities available-for-sale increased 3.6% to $109.9 million. The portfolio had $13.8 million of gross unrealized losses, which management attributed to interest-rate and market conditions rather than credit deterioration; no securities ACL was recorded.
- Total deposits increased 1.7% to $388.9 million, while core deposits declined 1.5% to $315.9 million. Estimated uninsured deposits were up to $96.5 million, or 24.8% of total deposits.
- FHLB advances decreased to $85.6 million from $99.4 million. The Bank had approximately $60.0 million of additional FHLB borrowing capacity, a $3.0 million overnight FHLB line and $5.0 million of unsecured correspondent-bank lines, all undrawn at June 30.
- The Bank also had available borrowing capacity of $33.4 million under the Federal Reserve Bank Term Funding Program and $61.1 million under its Borrower-In-Custody program.
- Cash and due from banks were $6.6 million. Six-month operating cash flow was an outflow of $724,000, investing cash flow was an outflow of $17.1 million and financing cash flow was an inflow of $16.2 million. The company ended the period with $6.6 million of cash and cash equivalents.
- Stockholders’ equity increased 47.6% to $72.8 million, principally due to $25.6 million of net proceeds from the conversion offering, partially offset by the $2.2 million ESOP stock purchase.
- The Bank was categorized as well-capitalized. At June 30, 2023, total capital to risk-weighted assets was 18.69%, Tier 1 capital was 17.64% and common equity Tier 1 capital was 17.64%.
Material Changes Versus Prior Comparable Period
- Asset yields improved, but funding costs rose substantially. Q2 interest expense increased 848.6% to $2.0 million, including deposit interest expense of $1.2 million and borrowing interest expense of $811,000.
- The average yield on interest-earning assets increased to 3.77% from 3.28%, while the average cost of interest-bearing liabilities increased to 2.09% from 0.24%. This compressed the net interest margin to 2.25% from 3.11%.
- Loan growth and higher market rates increased loan interest income, but higher deposit pricing and borrowing costs more than offset the benefit.
- Six-month non-interest income included an $849,000 gain from terminating two interest-rate swaps on January 17, 2023. This was a nonrecurring or unusual item and helped offset weaker core earnings.
- The company adopted CECL effective January 1, 2023. The transition reduced the loan ACL by $295,000 and increased the off-balance-sheet credit exposure allowance by $290,000, with no material overall impact on the financial statements.
- The loan ACL was $3.3 million at June 30, 2023, compared with $3.6 million at December 31, 2022. Provision expense was $20,000 in Q2 and $50,000 for the first six months.
- Nonperforming loans declined to $3,000 from $89,000 at year-end 2022 after repayment of a previously nonperforming residential mortgage loan.
Guidance, Outlook, Commentary and Risks
Management did not provide formal earnings or financial guidance. Management stated that it intends to grow the balance sheet through loan originations and selected loan purchases, increase core deposits, and use FHLB advances and brokered deposits to fund loan growth. The filing states that management expects sufficient funds to meet current funding commitments and has no material capital expenditure commitments as of June 30, 2023.
- Interest-rate risk is significant. Management expects deposit and borrowing costs to reprice faster than long-term loan and investment yields in a rising-rate environment, potentially compressing spreads and profitability.
- The June 30, 2023 economic value of equity analysis estimated a 20.8% decline under an instantaneous 200-basis-point rate increase, slightly exceeding the Board-approved 20.0% limit.
- Key risks include deposit competition and withdrawal activity, reliance on wholesale funding, uninsured deposits, real estate values, commercial real estate credit quality, loan demand, liquidity access, changing regulation, cybersecurity, third-party service providers and macroeconomic conditions.
- The company entered into a new $25.0 million fair-value hedge in June 2023 covering a portion of the residential mortgage loan portfolio.
- Subsequent to quarter-end, the Bank purchased $10.0 million of brokered deposits at a fixed annual rate of 5.25% and borrowed $25.0 million under the FRB BTFP at a fixed annual rate of 5.48%.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material pending legal proceedings were reported.
Important Facts for Investors to Verify
- Whether deposit pricing and wholesale funding costs continue to compress the net interest margin and delay a return to profitability.
- The sustainability of loan growth, particularly in residential and commercial real estate, and the adequacy of the CECL allowance under changing economic forecasts.
- The level and stability of uninsured and brokered deposits, including the effect of the post-quarter-end funding transactions.
- The company’s ability to remain within Board-approved interest-rate risk limits after the reported 200-basis-point sensitivity exceeded the stated limit.
- The extent to which six-month earnings benefited from the $849,000 interest-rate swap termination gain, which was not a recurring operating revenue source.
- The market value and duration sensitivity of the available-for-sale securities portfolio, including its $13.8 million of unrealized losses.