First Seacoast Bancorp, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. The filing covers First Seacoast Bancorp and wholly owned First Seacoast Bank, a community savings bank serving the New Hampshire and southern Maine Seacoast region through five offices. The financial statements primarily relate to the predecessor federal corporation before the January 19, 2023 second-step mutual-to-stock conversion.
Key Financial Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total assets | $537.4 million | $487.1 million | +10.3% |
| Total loans | $402.5 million | $376.6 million | +6.9% |
| Net loans | $398.9 million | $373.1 million | +6.9% |
| Deposits | $382.4 million | $393.2 million | -2.8% |
| FHLB borrowings | $99.4 million | $29.5 million | +237.4% |
| Stockholders’ equity | $49.3 million | $60.5 million | -18.4% |
| Net interest income | $14.9 million | $14.3 million | +4.2% |
| Net income/(loss) | $(565,000) | $2.6 million | Declined $3.2 million |
| Net interest margin | 2.99% | 3.04% | -5 basis points |
| Return on average assets | (0.11%) | 0.55% | Decreased |
| Return on average equity | (1.05%) | 4.38% | Decreased |
Cash Flow, Liquidity and Capital
- Net cash provided by operating activities was $973,000, compared with $2.4 million in 2021.
- Investing activities used $58.1 million, primarily for loan growth and purchases of available-for-sale securities.
- Financing activities provided $58.7 million, principally from increased FHLB advances.
- Cash and due from banks totaled $8.3 million at year-end.
- The Bank had $36.5 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 year-end.
- Core deposits were $320.6 million, or 83.9% of total deposits. Net loans to deposits were 104.3%.
- The Bank was categorized as well capitalized. December 31, 2022 ratios included total risk-based capital of 15.53%, Tier 1 risk-based capital of 14.45%, common equity Tier 1 capital of 14.45% and Tier 1 leverage capital of 9.20%.
Material Changes Versus 2021
- Loan growth was led by one- to four-family residential loans, which increased to $251.5 million, and commercial real estate loans, which increased to $80.5 million. Home equity and consumer loans also grew, while acquisition, development and land loans, commercial and industrial loans and multifamily loans declined.
- Commercial and industrial loans declined partly because $5.5 million of PPP loans were forgiven; excluding PPP loans, commercial and industrial loans increased by $2.7 million.
- Available-for-sale securities increased to $106.1 million, but rising interest rates generated $14.5 million of gross unrealized losses and reduced equity through accumulated other comprehensive loss. The after-tax reduction to equity from securities and interest-rate swap valuation changes was $10.4 million.
- Interest expense increased 41.5% to $1.7 million, reflecting higher rates and increased borrowings. The net interest margin narrowed to 2.99%.
- Non-interest income fell 60.5% to $888,000, including a $747,000 net realized loss on securities and substantially lower gains on loan sales.
- Non-interest expense increased 28.2% to $16.8 million. Salaries and employee benefits included a $1.5 million charge related to withdrawal from the Pentegra defined benefit plan, as well as higher staffing, compensation and stock-based compensation costs.
- Asset quality improved: non-performing loans declined to $89,000, or 0.02% of total loans, from $837,000, or 0.22%. The allowance for loan losses was $3.6 million, or 0.89% of total loans, compared with 0.95% in 2021.
Business Strategy, Outlook and Risks
Management intends to grow the balance sheet, expand higher-yielding commercial real estate and commercial and industrial lending, increase core deposits, reduce reliance on higher-cost borrowings and pursue organic growth. The filing states that there were no current plans for de novo branching or acquisitions, although opportunistic expansion may be considered.
- Management expects continued loan growth and portfolio diversification, subject to market conditions, regulatory restrictions and credit standards.
- Interest-rate risk is significant because longer-duration loans and investments are funded substantially by deposits and borrowings that may reprice faster. Management estimated that a 200-basis-point rate increase would reduce economic value of equity by 16.7% at December 31, 2022.
- The securities portfolio had substantial unrealized losses from higher rates. Management did not intend to sell the securities and concluded the losses were primarily market-rate related rather than credit related.
- Credit risks include commercial real estate, construction, land development and commercial lending, where repayment may depend on property values, business cash flows and local economic conditions.
- Liquidity risks include declining core deposits, a loan-to-deposit ratio above 100%, reliance on FHLB advances and brokered deposits, and competition for deposits.
- The Company continued to identify COVID-19, inflation, economic conditions, competition, regulatory change, technology, cybersecurity and third-party service performance as potential risks. Exposure to transportation and hospitality/restaurant industries was less than 5% of the loan portfolio.
- The Company used the incurred-loss model in 2022 and expected to adopt the CECL model on January 1, 2023. Management expected a decrease in the allowance for loan losses, partly offset by a higher allowance for non-cancelable off-balance-sheet commitments, with no material consolidated financial statement impact expected.
Unusual Items and Subsequent Events
- The Company recognized a $565,000 net loss for 2022, partly offset by a $451,000 income tax benefit.
- The Company withdrew from the Pentegra defined benefit plan. The final withdrawal liability was $1.5 million; $1.3 million was accrued at December 31, 2022 and paid in January 2023.
- Two interest-rate swaps with aggregate $10.0 million notional amounts were terminated in January 2023 at a gain of $849,000, and $536,000 of posted collateral was returned.
- On January 19, 2023, the mutual holding company conversion and related stock offering were completed. First Seacoast Bancorp, Inc. sold 2.805 million shares at $10.00 per share, and its common stock began trading on Nasdaq under “FSEA” on January 20, 2023. Approximately 5.077 million shares were outstanding after the conversion.
- The filing reports no material pending legal proceedings and management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2022.
Important Facts for Investors to Verify
- Whether the 2023 CECL adoption materially changed the allowance for loan losses, retained earnings or regulatory capital.
- The sustainability of loan growth and the effect of higher deposit and borrowing costs on the net interest margin.
- Deposit trends, including core deposit attrition, brokered deposits and the 104.3% net loans-to-deposits ratio.
- The duration, credit quality and potential future valuation changes of the $106.1 million available-for-sale securities portfolio.
- Execution and costs associated with the January 2023 mutual-to-stock conversion and $28.05 million stock offering proceeds.
- Whether commercial real estate, construction and commercial lending growth produces higher credit losses as economic and interest-rate conditions change.
- The terms and financial impact of the Pentegra withdrawal liability, interest-rate swap termination and other 2023 subsequent events.