First Seacoast Bancorp, Inc. — FY2023 Form 10-K Summary
Business context and reporting period
First Seacoast Bancorp, Inc. is the savings and loan holding company for First Seacoast Bank, a community bank serving southeastern New Hampshire and southern Maine. The filing covers the fiscal year ended December 31, 2023; it is an annual filing rather than a standalone fourth-quarter report. The Bank operates five full-service branches and provides residential lending, commercial banking, personal banking and wealth management services. Assets under wealth management were approximately $123.5 million at year-end, but are not included in consolidated assets.
On January 19, 2023, the Company completed the mutual-to-stock conversion of First Seacoast Bancorp, MHC and a related stock offering. The Company sold 2.805 million shares at $10.00 per share and received $25.6 million of net proceeds.
Financial condition and operating metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total assets | $571.0 million | $537.4 million | 6.3% increase |
| Total loans | $430.0 million | $402.5 million | 6.8% increase |
| Net loans | $426.6 million | $398.9 million | 6.9% increase |
| Total deposits | $404.8 million | $382.4 million | 5.9% increase |
| Total borrowings | $93.0 million | $99.4 million | 6.4% decrease |
| Stockholders’ equity | $66.6 million | $49.3 million | 35.0% increase |
| Interest and dividend income | $20.6 million | $16.6 million | 24.0% increase |
| Net interest income | $11.5 million | $14.9 million | 22.6% decrease |
| Net loss | $10.7 million | $0.6 million | Loss increased |
| Basic and diluted loss per share | $2.29 loss | $0.12 loss | Worsened |
| Net interest margin | 2.16% | 2.99% | Down 83 basis points |
| Return on average assets | (1.93%) | (0.11%) | Worsened |
| Return on average equity | (15.10%) | (1.05%) | Worsened |
- Residential real estate loans remained the largest portfolio category at $268.9 million, or 62.5% of total loans. Commercial real estate loans were $86.6 million, commercial and industrial loans were $25.5 million, and acquisition, development and land loans were $17.5 million.
- Interest and dividend income rose primarily from loan growth and higher yields, but interest expense increased to $9.1 million from $1.7 million. The average cost of interest-bearing deposits rose to 1.67% from 0.23%, while the average borrowing rate rose to 4.70% from 1.64%.
- Non-interest income was a loss of $2.0 million versus income of $0.9 million in 2022, primarily because of $4.2 million of net securities losses. The Company also recognized an $849,000 gain on termination of interest-rate swaps.
- Non-interest expense declined 4.4% to $16.0 million, helped by the absence of the $1.5 million pension-plan withdrawal charge recorded in 2022.
- Income tax expense was $3.9 million despite the pretax loss, primarily because the Company established a full valuation allowance against deferred tax assets. The effective tax rate was 58.8%.
- Operating cash flow was negative $1.9 million. Investing activities used $39.5 million, while financing activities provided $39.2 million, including stock-offering proceeds and changes in deposits and borrowings.
Material changes versus the prior comparable period
- Loan growth was concentrated in one- to four-family residential loans, commercial real estate loans, home equity loans and consumer loans. Commercial and industrial lending also increased, consistent with management’s diversification strategy.
- Core deposits declined 2.2% to $313.5 million, while higher-cost time deposits increased 47.9% to $91.3 million. Brokered deposits included $23.6 million in time deposits and $20.9 million in savings deposits.
- Non-interest-bearing deposits fell $26.9 million, while money market deposits rose $24.4 million. The shift increased funding costs and contributed to margin compression.
- FHLB advances declined to $73.0 million from $99.4 million, while the Bank added a $20.0 million Federal Reserve Bank Term Funding Program advance, maturing December 13, 2024 at a fixed 4.89% rate.
- Available-for-sale securities increased to $121.9 million from $106.1 million. In November 2023, the Company sold $40.6 million of lower-yielding securities at an after-tax realized loss of $3.1 million and reinvested the proceeds in higher-yielding securities.
- Accumulated other comprehensive loss improved to $5.9 million from $9.7 million, primarily because of changes in unrealized securities losses. The Bank has elected to exclude AOCI from regulatory capital.
- The Company adopted CECL effective January 1, 2023. The loan ACL decreased by $295,000 at adoption, offset by a $290,000 increase in the allowance for off-balance-sheet credit exposures. The year-end loan ACL was $3.4 million, or 0.79% of loans.
- Non-performing loans increased to $141,000, or 0.03% of total loans, from $89,000, or 0.02%. There were no foreclosed assets.
Guidance, outlook, management commentary, risks and unusual items
Management intends to grow the balance sheet organically, expand higher-yielding commercial real estate and commercial and industrial lending, increase core deposits, reduce reliance on higher-cost borrowings and consider opportunistic acquisitions or branching. The filing provides no quantitative earnings or revenue guidance and states that execution will depend on market conditions, regulatory restrictions and other factors.
- Interest-rate risk: The Bank’s modeled economic value of equity would decline 21.5% under an immediate 200-basis-point increase in rates, exceeding its 20% policy limit. Management attributes the deterioration partly to deposit migration into more rate-sensitive products.
- Funding and liquidity: Net loans were 105.4% of deposits. Uninsured deposits were estimated at $102.5 million, or 25.3% of total deposits. Available capacity included $71.8 million from the FHLB, $3.5 million under BTFP, $50.6 million under the BIC facility and $5.0 million of unsecured correspondent-bank lines.
- Credit risk: Commercial real estate, construction, multifamily and commercial loans carry greater risk than traditional residential mortgages. Future ACL requirements could increase if economic conditions, real estate values, borrower cash flows or regulatory assessments deteriorate.
- Securities risk: The securities portfolio had $9.9 million of gross unrealized losses at year-end. Management attributed the losses primarily to interest-rate movements and reported no intent or expected need to sell before recovery.
- Tax valuation allowance: The Company recorded a $6.05 million valuation allowance adjustment in 2023, resulting in a full valuation allowance against deferred tax assets. Future taxable income could change the allowance, but the filing does not provide a specific recovery timetable.
- Subsequent event: On March 22, 2024, the Bank signed a letter of intent to sell and lease back its five owned properties for an aggregate cash price of $7.9 million. The proposed leases would have initial 15-year terms. Closing remains subject to due diligence and definitive agreements, and no branches or markets are expected to close.
- Other unusual items: The 2023 results included the securities repositioning loss, the gain on swap termination, CECL adoption effects and the stock conversion. The filing states that cybersecurity incidents have not materially affected the Company to date, and no material litigation was pending at year-end.
Most important facts an investor should verify
- Whether deposit pricing and the mix shift toward time and brokered deposits continue to compress net interest margin.
- The repayment or refinancing plan for the $20.0 million BTFP advance maturing in December 2024 and the callable FHLB advances.
- The sensitivity of capital, liquidity and earnings to further interest-rate increases, including the reported policy-limit breach in the 200-basis-point scenario.
- Whether commercial real estate, construction and commercial lending growth produces deterioration in classified assets, delinquencies or CECL reserves.
- The recoverability of deferred tax assets and the potential for future tax benefits from $9.8 million of federal and $8.4 million of New Hampshire net operating loss carryforwards.
- The final terms, accounting impact and liquidity benefit of the proposed $7.9 million sale-leaseback transaction.
- Future profitability excluding the significant securities loss, swap gain and other conversion-related or nonrecurring items.
- The filing’s audited financial statements and regulatory capital disclosures: the Bank remained well capitalized, with a 15.32% total risk-based capital ratio, 14.27% CET1 ratio and 9.19% leverage ratio at December 31, 2023.