UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from _______________ to _______________
Commission File No.
(Exact Name of Registrant as Specified in Its Charter)
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(State or Other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
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(Address of Principal Executive Offices) |
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(Zip Code) |
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(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of November 3, 2023, there were
Table of Contents
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Page |
PART I. |
2 |
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Item 1. |
2 |
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Consolidated Balance Sheets at September 30, 2023 (unaudited) and December 31, 2022 |
2 |
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3 |
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4 |
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5 |
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6 |
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7 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
38 |
Item 3. |
48 |
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Item 4. |
51 |
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PART II. |
52 |
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Item 1. |
52 |
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Item 1A. |
52 |
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Item 2. |
Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities |
52 |
Item 3. |
52 |
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Item 4. |
52 |
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Item 5. |
52 |
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Item 6. |
53 |
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54 |
1
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
FIRST SEACOAST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED Balance Sheets
(Dollars in thousands) |
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(Unaudited) |
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December 31, |
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ASSETS |
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Cash and due from banks |
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$ |
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$ |
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Interest bearing time deposits with other banks |
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— |
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Securities available-for-sale, at fair value |
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Federal Home Loan Bank stock |
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Total loans |
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Less allowance for credit losses on loans |
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Net loans |
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Land, building and equipment, net |
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Bank-owned life insurance |
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Accrued interest receivable |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Deposits: |
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Non-interest bearing deposits |
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$ |
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$ |
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Interest bearing deposits |
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Total deposits |
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Advances from Federal Home Loan Bank |
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Advances from Federal Reserve Bank |
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— |
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Mortgagors’ tax escrow |
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Deferred compensation liability |
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Other liabilities |
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Total liabilities |
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Stockholders' Equity: |
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Preferred Stock, $ |
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Common Stock, $ |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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Treasury stock, at cost: |
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Unearned stock compensation |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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(1)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
2
FIRST SEACOAST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF (LOSS) INCOME (UNAUDITED)
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Three Months Ended |
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Nine Months Ended |
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(Dollars in thousands, except per share data) |
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2023 |
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2022 |
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2023 |
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2022 |
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Interest and dividend income: |
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Interest and fees on loans |
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$ |
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$ |
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$ |
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$ |
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Interest on debt securities: |
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Taxable |
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Non-taxable |
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Total interest on debt securities |
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Dividends |
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Total interest and dividend income |
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Interest expense: |
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Interest on deposits |
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Interest on borrowings |
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Total interest expense |
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Net interest and dividend income |
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Provision (release) for credit losses |
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— |
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Net interest and dividend income after provision (release) for credit losses |
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Non-interest income: |
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Customer service fees |
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Gain on sale of loans |
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— |
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— |
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— |
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Securities gains, net |
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— |
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— |
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— |
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Gain on termination of interest rate swaps |
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— |
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— |
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— |
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Income from bank-owned life insurance |
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Loan servicing fee income |
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Investment services fees |
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Other income |
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Total non-interest income |
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Non-interest expense: |
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Salaries and employee benefits |
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Director compensation |
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Occupancy expense |
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Equipment expense |
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Marketing |
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Data processing |
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Deposit insurance fees |
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Professional fees and assessments |
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Debit card fees |
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Employee travel and education expenses |
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Other expense |
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Total non-interest expense |
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(Loss) income before income tax (benefit) expense |
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( |
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Income tax (benefit) expense |
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( |
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( |
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Net (loss) income |
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$ |
( |
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$ |
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$ |
( |
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$ |
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(Loss) earnings per share: |
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Basic (1) |
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$ |
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$ |
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$ |
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$ |
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Diluted (1) |
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$ |
( |
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$ |
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$ |
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$ |
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Weighted average shares: |
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Basic (1) |
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Diluted (1), (2) |
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(1)
(2)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
FIRST SEACOAST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED Statements of COMPREHENSIVE LOSS (UNAUDITED)
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Three Months Ended |
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Nine Months Ended |
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(Dollars in thousands) |
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2023 |
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2022 |
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2023 |
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2022 |
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Net (loss) income |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Other comprehensive loss, net of income taxes: |
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Securities available-for-sale: |
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Unrealized holding losses on securities available-for-sale |
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( |
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( |
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( |
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Reclassification adjustment for securities gains, net and net |
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Total unrealized loss on securities available-for-sale |
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( |
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Derivatives: |
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Change in interest rate swaps, net of income taxes of $- |
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— |
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( |
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Reclassification adjustment for net interest expense on swaps |
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— |
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( |
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( |
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( |
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Total change in interest rate swaps |
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— |
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( |
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Other comprehensive loss |
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( |
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( |
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( |
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( |
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Comprehensive loss |
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$ |
( |
) |
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$ |
( |
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$ |
( |
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$ |
( |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
FIRST SEACOAST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED Statements of Changes in STOCKHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands) |
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Shares of |
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Common |
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Additional |
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Retained Earnings |
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Accumulated |
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Treasury |
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Unearned Stock |
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Total Stockholders' Equity |
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Three months ended September 30, |
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Balance June 30, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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( |
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Other comprehensive loss |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Amortization of unearned stock compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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— |
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— |
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ESOP shares earned - |
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— |
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— |
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( |
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— |
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— |
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— |
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Balance September 30, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Nine months ended September 30, |
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Balance December 31, 2022(1) |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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( |
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Other comprehensive loss |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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— |
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( |
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Cumulative adjustment for change in accounting principle |
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— |
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— |
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— |
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— |
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— |
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— |
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Reorganization: Conversion of First Seacoast Bancorp, Inc. |
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( |
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— |
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— |
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— |
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— |
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Purchase of |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Issuance of stock compensation |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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Amortization of unearned stock compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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— |
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— |
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ESOP shares earned - |
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— |
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— |
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( |
) |
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— |
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— |
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— |
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Balance September 30, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
) |
$ |
( |
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$ |
( |
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$ |
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Three months ended September 30, |
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Balance June 30, 2022(1) |
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$ |
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$ |
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$ |
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$ |
( |
) |
$ |
( |
) |
$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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Other comprehensive loss |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
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Amortization of unearned stock compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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ESOP shares earned - |
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— |
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— |
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— |
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— |
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Balance September 30, 2022(1) |
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$ |
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$ |
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$ |
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$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
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Nine months ended September 30, |
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|
|
|
|
|
|
||||||||
Balance December 31, 2021(1) |
|
|
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
||||||
Net income |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
|
||
Other comprehensive loss |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
— |
|
|
( |
) |
Treasury stock activity |
|
|
( |
) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
( |
) |
Amortization of unearned stock compensation |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
||
ESOP shares earned - |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|||
Balance September 30, 2022(1) |
|
|
|
$ |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
FIRST SEACOAST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
Nine Months Ended |
|
|||||
(Dollars in thousands) |
|
2023 |
|
|
2022 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net (loss) income |
|
$ |
( |
) |
|
$ |
|
|
Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities: |
|
|
|
|
|
|
||
Cumulative change in accounting principle (ASU 2016-13) |
|
|
|
|
|
— |
|
|
ESOP expense |
|
|
|
|
|
|
||
Stock based compensation |
|
|
|
|
|
|
||
Loss on disposition of property and equipment |
|
|
|
|
|
— |
|
|
Depreciation and amortization |
|
|
|
|
|
|
||
Net amortization of bond premium |
|
|
|
|
|
|
||
Provision for credit losses |
|
|
|
|
|
— |
|
|
Gain on sale of loans |
|
|
— |
|
|
|
( |
) |
Securities gains, net |
|
|
— |
|
|
|
( |
) |
Gain on termination of interest rate swaps |
|
|
( |
) |
|
|
— |
|
Proceeds from loans sold |
|
|
— |
|
|
|
|
|
Origination of loans sold |
|
|
— |
|
|
|
( |
) |
Increase in bank-owned life insurance |
|
|
( |
) |
|
|
( |
) |
Increase in deferred costs on loans |
|
|
( |
) |
|
|
( |
) |
Deferred tax (benefit) expense |
|
|
( |
) |
|
|
|
|
Increase in accrued interest receivable |
|
|
( |
) |
|
|
( |
) |
Decrease (increase) in other assets |
|
|
|
|
|
( |
) |
|
Increase in deferred compensation liability |
|
|
|
|
|
|
||
(Decrease) increase in other liabilities |
|
|
( |
) |
|
|
|
|
Net cash (used) provided by operating activities |
|
|
( |
) |
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
||
Proceeds from sales, maturities and principal payments received on securities available-for-sale |
|
|
|
|
|
|
||
Purchase of securities available-for-sale |
|
|
( |
) |
|
|
( |
) |
Purchase of property and equipment |
|
|
( |
) |
|
|
( |
) |
Loan purchases |
|
|
( |
) |
|
|
( |
) |
Loan originations and principal collections, net |
|
|
( |
) |
|
|
( |
) |
Net redemption (purchase) of Federal Home Loan Bank stock |
|
|
|
|
|
( |
) |
|
Proceeds from sales of interest bearing time deposits with other banks |
|
|
|
|
|
|
||
Proceeds from termination of interest rate swaps |
|
|
|
|
|
— |
|
|
Net cash used by investing activities |
|
|
( |
) |
|
|
( |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
||
Net increase (decrease) in NOW, demand deposits, money market and savings accounts |
|
|
|
|
|
( |
) |
|
Net increase (decrease) in time deposits |
|
|
|
|
|
( |
) |
|
Increase in mortgagors’ escrow accounts |
|
|
|
|
|
|
||
Proceeds from sale of common stock, net |
|
|
|
|
|
— |
|
|
Common stock purchased by ESOP |
|
|
( |
) |
|
|
— |
|
Return of capital from conversion of First Seacoast Bancorp, Inc. |
|
|
|
|
|
— |
|
|
Treasury stock purchases |
|
|
— |
|
|
|
( |
) |
Net (payments) proceeds from short-term FHLB advances |
|
|
( |
) |
|
|
|
|
Proceeds from long-term FHLB advances |
|
|
— |
|
|
|
|
|
Payments on long-term FHLB advances |
|
|
( |
) |
|
|
( |
) |
Proceeds from advances from Federal Reserve Bank |
|
|
|
|
|
— |
|
|
Net cash provided by financing activities |
|
|
|
|
|
|
||
Net change in cash and cash equivalents |
|
|
( |
) |
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
||
Cash activities: |
|
|
|
|
|
|
||
Cash paid for interest |
|
$ |
|
|
$ |
|
||
Cash paid for income taxes |
|
|
|
|
|
|
||
Noncash activities: |
|
|
|
|
|
|
||
Effect of change in fair value of securities available-for-sale: |
|
|
|
|
|
|
||
Securities available-for-sale |
|
|
( |
) |
|
|
( |
) |
Deferred taxes |
|
|
|
|
|
|
||
Other comprehensive loss |
|
|
( |
) |
|
|
( |
) |
Effect of change in fair value of interest rate swaps: |
|
|
|
|
|
|
||
Interest rate swaps |
|
|
( |
) |
|
|
|
|
Deferred taxes |
|
|
|
|
|
( |
) |
|
Other comprehensive (loss) income |
|
|
( |
) |
|
|
|
|
Cumulative fair value hedging adjustment - loans |
|
|
|
|
|
— |
|
|
Effect of the adoption of ASU 2016-13: |
|
|
|
|
|
|
||
Allowance for credit losses on loans |
|
|
( |
) |
|
NA |
|
|
Other liabilities |
|
|
|
|
NA |
|
||
Effect of the adoption of ASU 2016-02: |
|
|
|
|
|
|
||
Other assets |
|
|
— |
|
|
|
|
|
Other liabilities |
|
|
— |
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
FIRST SEACOAST BANCORP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The accompanying unaudited consolidated financial statements include the accounts of First Seacoast Bancorp, Inc. (the “Company”), its wholly-owned subsidiary, First Seacoast Bank (the “Bank”), and the Bank’s wholly-owned subsidiary, FSB Service Corporation, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company were prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim consolidated financial information, general practices within the banking industry and with instructions for Form 10-Q and Regulation S-X. Accordingly, these interim financial statements do not include all the information or footnotes required by U.S. GAAP for annual financial statements. However, in the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of these consolidated financial statements have been included. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results which may be expected for the entire year. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 24, 2023.
Corporate Structure
On January 19, 2023, the conversion of First Seacoast Bancorp, MHC from mutual to stock form and the related stock offering by First Seacoast Bancorp, Inc., the new holding company for First Seacoast Bank, was completed. As a result, both First Seacoast Bancorp, MHC and First Seacoast Bancorp (a federal corporation) ceased to exist. First Seacoast Bancorp, Inc.’s common stock began trading on the Nasdaq Capital Market under the trading symbol “FSEA” on January 20, 2023. As a result of the subscription offering, the community offering and the syndicated community offering, First Seacoast Bancorp, Inc. sold a total of
The Bank offers a full range of banking and wealth management services to its customers. The Bank focuses on
The Bank is engaged principally in the business of attracting deposits from the public and investing those funds in various types of loans, including residential and commercial real estate loans, and a variety of commercial and consumer loans. The Bank also invests its deposits and borrowed funds in investment securities. Deposits at the Bank are insured by the Federal Deposit Insurance Corporation (“FDIC”) for the maximum amount permitted by law.
The Company has
Investment management services are offered through FSB Wealth Management. FSB Wealth Management is a division of First Seacoast Bank. The division currently consists of two financial advisors who are located in Dover, New Hampshire. FSB Wealth Management provides access to non-FDIC insured products that include retirement planning, portfolio management, investment and insurance strategies, business retirement plans and college planning to individuals throughout our primary market area. These investments and services are offered through a third-party registered broker-dealer and investment advisor. FSB Wealth Management receives fees from advisory services and commissions on individual investment and insurance products purchased by clients. The assets held for wealth management customers are not assets of the Company and, accordingly, are not reflected in the Company’s consolidated balance sheets.
7
On August 17, 2021, the Bank entered into a definitive agreement with an investment advisory and wealth management firm (the “seller”) to purchase certain of its client accounts and client relationships for a final adjusted purchase price of $
Recently Adopted Accounting Standards
As an “emerging growth company,” as defined in Title 1 of Jumpstart Our Business Startups (JOBS) Act, the Company has elected to use the extended transition period to delay adoption of new or reissued accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. As a result, the Company’s consolidated financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards without an extended transition period. As of September 30, 2023, there was no significant difference in the comparability of the Company’s consolidated financial statements as a result of this extended transition period. The Company’s status as an “emerging growth company” will end on the earlier of:
In March 2022, the FASB issued ASU 2022-2,“Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures,” which eliminates the troubled debt restructuring (“TDR”) accounting model for creditors that have adopted Topic 326, “Financial Instruments – Credit Losses.” All other creditors must continue to apply the TDR accounting model until they adopt ASU 2016-13,“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Due to the removal of the TDR accounting model, all loan modifications are accounted for under the general loan modification guidance in Subtopic 310-20. In addition, on a prospective basis, entities are subject to new disclosure requirements covering modifications of receivables to borrowers experiencing financial difficulty. Public business entities within the scope of the Topic 326 vintage disclosure requirements also are required to prospectively disclose current-period gross write-off information by vintage (that is, year of origination). This ASU becomes effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The
In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” to increase stakeholder awareness of the improvements made to the various amendments to Topic 326 and to clarify certain areas of guidance as companies transition to the new standard. Also during November 2019, the FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” finalizing various effective date deferrals for private companies, not-for-profit organizations and certain smaller reporting companies applying the credit losses (CECL), leases and hedging standards. The effective date for ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” is deferred to years beginning after December 15, 2022. The effective dates for ASU 2016-02, “Leases (Topic 842)” was deferred to fiscal years beginning after December 15, 2021. The
In April 2019, the FASB issued ASU 2019-04,“Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” to increase stakeholders’ awareness of the amendments and to expedite improvements to the Codification. In May 2019, the FASB issued ASU 2019-05,“Financial Instruments—Credit Losses, Topic 326.” This ASU addresses certain stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. On October 16, 2019, the FASB approved a proposal to delay the implementation of this standard for smaller reporting companies to years beginning after December 15, 2022.
8
In June 2016, the FASB issued ASU 2016-13,“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which creates a new credit impairment standard for financial assets measured at amortized cost and available-for-sale debt securities. The ASU requires financial assets measured at amortized cost (including loans and held-to-maturity debt securities) to be presented at the net amount expected to be collected, through an allowance for credit losses that are expected to occur over the remaining life of the asset, rather than incurred losses. The ASU requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a direct write-down. The measurement of credit losses for newly recognized financial assets (other than certain purchased assets) and subsequent changes in the allowance for credit losses are recorded in the statement of (loss) income as the amounts expected to be collected change. The ASU was originally to be effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. In November 2018, the FASB issued ASU 2018-19,“Codification Improvements to Topic 326, Financial Instruments-Credit Losses,” extending the implementation date by one year for smaller reporting companies and clarifying that operating lease receivables are outside the scope of Accounting. In November, 2019, the FASB issued ASU 2019-10, which delayed the effective date for ASU 2016-13 for smaller reporting companies, resulting in ASU 2016-13 becoming effective in the first quarter of 2023 for the Company. The ASU requires the measurement of all expected credit losses for loans held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, the ASU requires the use of forward-looking information to form credit loss estimates. Many of the loss estimation techniques applied today are still permitted, though the inputs to those techniques have changed to reflect the full amount of expected credit losses. The Company has selected a loss estimation methodology which utilizes a third-party software application. The Company has recorded the effect of implementing this ASU using a modified-retrospective approach through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which the ASU was effective, which was
January 1, 2023 CECL Transition (Day 1) Impact
The CECL methodology reflects the Company's view of the state of the economy and forecasted macroeconomic conditions and their impact on the Company's loan portfolio as of the adoption date.
The following table illustrates the impact of the adoption of ASU 2016-13:
|
|
January 1, 2023 |
|
|||||||
|
|
As reported under ASC 326 |
|
Pre-ASC 326 Adoption |
|
Impact of ASC 326 Adoption |
|
|||
|
|
(Dollars in thousands) |
|
|||||||
ASSETS |
|
|
|
|
|
|
|
|||
Allowance for credit losses on loans: |
|
|
|
|
|
|
|
|||
Commercial real estate (CRE) |
|
$ |
|
$ |
|
$ |
( |
) |
||
Multifamily (MF) |
|
|
|
|
|
|
|
|||
Commercial and industrial (C+I) |
|
|
|
|
|
|
|
|||
Acquisition, development, and land (ADL) |
|
|
|
|
|
|
( |
) |
||
1-4 family residential (RES) |
|
|
|
|
|
|
( |
) |
||
Home equity line of credit (HELOC) |
|
|
|
|
|
|
|
|||
Consumer (CON) |
|
|
|
|
|
|
|
|||
Unallocated |
|
|
|
|
|
|
( |
) |
||
Allowance for credit losses on loans |
|
$ |
|
$ |
|
|
( |
) |
||
LIABILITIES |
|
|
|
|
|
|
|
|||
Allowance for credit losses on OBS credit exposures |
|
$ |
|
$ |
|
$ |
|
Recent Accounting Pronouncements Yet To Be Adopted
The Company considers the applicability and impact of all ASUs. Recent accounting pronouncements issued by the FASB not listed below did not have, or are not expected to have, a material impact on the Company's present or future consolidated financial statements.
In January 2021, the FASB issued ASU 2021-1, “Reference Rate Reform (Topic 848) (Scope),” which clarifies certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting applied to derivatives that are affected by the discounting transition. This ASU was to become effective immediately for all entities on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The effective date was extended by the issuance of
9
ASU No. 2022-06, “Reference Rate Reform (Topic 848),” which, as noted above, defers the sunset date of Topic 848 from December 2022 to December 2024. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
The amortized cost and fair value of securities available-for-sale, and the corresponding amounts of gross unrealized gains and losses for which an allowance for credit losses has not been recorded, are as follows as of September 30, 2023 and December 31, 2022:
|
|
September 30, 2023 |
|
|||||||||||||
|
|
Amortized |
|
|
Gross |
|
|
Gross |
|
|
Fair |
|
||||
|
|
(Dollars in thousands) |
|
|||||||||||||
U.S. Government-sponsored enterprises obligations |
|
$ |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
|
||
U.S. Government agency small business administration |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Collateralized mortgage obligations issued by the |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Residential mortgage-backed securities |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Municipal bonds |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Corporate debt |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Corporate subordinated debt |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
|
|
$ |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
December 31, 2022 |
|
|||||||||||||
|
|
Amortized |
|
|
Gross |
|
|
Gross |
|
|
Fair |
|
||||
|
|
(Dollars in thousands) |
|
|||||||||||||
U.S. Government-sponsored enterprises obligations |
|
$ |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
|
||
U.S. Government agency small business administration |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Collateralized mortgage obligations issued by the |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Residential mortgage-backed securities |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Municipal bonds |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Corporate debt |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Corporate subordinated debt |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
The amortized cost and fair values of securities available-for-sale at September 30, 2023 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
September 30, 2023 |
|
|||||
|
|
Amortized |
|
|
Fair Value |
|
||
|
|
(Dollars in thousands) |
|
|||||
Due in one year or less |
|
$ |
— |
|
|
$ |
— |
|
Due after one year through five years |
|
|
|
|
|
|
||
Due after five years through ten years |
|
|
|
|
|
|
||
Due after ten years |
|
|
|
|
|
|
||
Total U.S. Government-sponsored enterprises obligations, |
|
|
|
|
|
|
||
U.S. Government agency small business pools guaranteed |
|
|
|
|
|
|
||
Collateralized mortgage obligations issued by the FHLMC, |
|
|
|
|
|
|
||
Residential mortgage-backed securities(1) |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
(1)
10
The following is a summary of gross unrealized losses and fair value for those investments with unrealized losses for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, at September 30, 2023 and December 31, 2022.
|
|
Less than 12 Months |
|
|
More than 12 Months |
|
|
Total |
|
|||||||||||||||||||||||
|
|
Number of |
|
|
Fair |
|
|
Unrealized |
|
|
Number of |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
||||||||
|
|
(Dollars in thousands) |
|
|||||||||||||||||||||||||||||
September 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
U.S. Government sponsored |
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
U.S. Government agency small |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Collateralized mortgage |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||||
Residential mortgage |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||||
Municipal bonds |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||||
Corporate debt |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
|||
Corporate subordinated debt |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||||
|
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||||
December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
U.S. Government sponsored |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||||
U.S. Government agency small |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||||
Collateralized mortgage |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||||
Residential mortgage |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||||
Municipal bonds |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||||
Corporate debt |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
|||
Corporate subordinated debt |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
|||
|
|
|
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management evaluates securities available-for-sale in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. Consideration is given to (1) the extent to which the fair value is less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value. At September 30, 2023, the Company had
11
Proceeds from sales, maturities, principal payments received and gross realized gains and losses on securities available-for-sale were as follows for the three and nine months ended September 30, 2023 and 2022:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
|
|
(Dollars in thousands) |
|
|||||||||||||
Proceeds from sales, maturities and principal payments |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Gross realized gains |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Gross realized losses |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net realized gains |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
As of September 30, 2023 and December 31, 2022, there were
The Company's lending activities are primarily conducted in and around Dover, New Hampshire and in the areas surrounding its branches. The Company grants commercial real estate loans, multifamily 5+ dwelling unit loans, commercial and industrial loans, acquisition, development and land loans, 1–4 family residential loans, home equity line of credit loans and consumer loans. Most loans are collateralized by real estate. The ability and willingness of real estate, commercial and construction loan borrowers to honor their repayment commitments is generally dependent on the health of the real estate sector in the borrowers’ geographic area and the general economy.
Loans consisted of the following at September 30, 2023 and December 31, 2022:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
(Dollars in thousands) |
|
|||||
Commercial real estate (CRE) |
|
$ |
|
|
$ |
|
||
Multifamily (MF) |
|
|
|
|
|
|
||
Commercial and industrial (C+I) |
|
|
|
|
|
|
||
Acquisition, development, and land (ADL) |
|
|
|
|
|
|
||
1-4 family residential (RES) |
|
|
|
|
|
|
||
Home equity line of credit (HELOC) |
|
|
|
|
|
|
||
Consumer (CON) |
|
|
|
|
|
|
||
Total loans |
|
|
|
|
|
|
||
Net deferred loan costs |
|
|
|
|
|
|
||
Allowance for credit losses on loans |
|
|
( |
) |
|
|
( |
) |
Total loans, net |
|
$ |
|
|
$ |
|
Allowance for Credit Losses on Loans ("ACL")
Effective
12
The ACL is the sum of various components including the following: (a) historical loss experience, (b) a reasonable and supportable forecast, (c) loans evaluated individually, and (d) changes in relevant environmental factors. The historical loss component is segmented by loan type and serves as the core of the ACL adequacy methodology. The Company has selected the Weighted Average Remaining Maturity Model (“WARM”), for the loss calculation of each of the Bank’s loan pools utilizing a third-party software application. The WARM uses a quarterly loss rate and future expectations of loan balances to calculate an ACL. A loss rate is applied to pool balances over time.
CECL may create more volatility in the ACL, specifically the ACL on loans and ACL on off-balance sheet credit exposures. Under CECL, the ACL may increase or decrease period to period based on many factors, including, but not limited to: (i) macroeconomic forecasts and conditions; (ii) forecast period and reversion speed; (iii) prepayment speed assumption; (iv) loan portfolio volumes and changes in mix; (v) credit quality; and (vi) various qualitative factors outlined in ASU 2016-13.
The significant key assumptions used with the ACL calculation at September 30, 2023 using the CECL methodology, included:
Macroeconomic factors (loss drivers): Monitoring and assessing local and national unemployment, changes in national GDP and other macroeconomic factors which may be the most predictive indicator of losses within the loan portfolio. The macroeconomic factors considered in determining the ACL may change from time to time.
Forecast Period and Reversion speed: ASU 2016-13 requires a company to use a reasonable and supportable forecast period in developing the ACL, which represents the time period that management believes it can reasonably forecast the identified loss drivers. Generally, the forecast period management believes to be reasonable and supportable will be set annually and validated through an assessment of economic leading indicators. In periods of greater volatility and uncertainty, such as the current interest rate environment, management will likely use a shorter forecast period, whereas when markets, economies, interest rate environment, political matters, and other factors are considered to be more stable and certain, a longer forecast period may be used. Also, in times of greater uncertainty, management may consider a range of possible forecasts and evaluate the probability of each scenario. Generally, the forecasted period is expected to range from one to three years. Once the reasonable and supportable forecast period is determined, ASU 2016-13 requires a company to revert its loss expectations to the long-run historical mean for the remainder of the contract life of the asset, adjusted for prepayments. In determining the length of time over which the reversion will take place (i.e. "reversion speed"), factors such as, historical credit loss experience over previous economic cycles, as well as where the Company believes it is within the current economic cycle, will be considered. The Company has chosen a forecast period of six quarters which will be similar to the historical loss period between September 2007 and March 2009 and then reverting to the long-term average over the following six quarters using the straight-line reversion method. The Company believes this historical forecast period to be representative of potential economic conditions over the next eighteen months.
Prepayment speeds: Prepayment speeds are determined for each loan segment utilizing the Company's historical loan data, as well as consideration of current environmental factors. The prepayment speed assumption is utilized with the WARM method to forecast expected cash flows over the contractual life of the loan, adjusted for expected prepayments. A higher prepayment speed assumption will drive a lower ACL, and vice versa.
Qualitative factors: As within previous accounting guidance used for the "incurred loss" model, ASU 2016-13 requires companies to consider various qualitative factors that may impact expected credit losses. The Company continues to consider qualitative factors in determining and arriving at an ACL at each reporting period such as: (i) actual or expected changes in economic trends and conditions, (ii) changes in the value of underlying collateral for loans, (iii) changes to lending policies, underwriting standards and/or management personnel performing such functions, (iv) delinquency and other credit quality trends, (v) credit risk concentrations, if any, (vi) changes to the nature of the Company's business impacting the loan portfolio, (vii) and other external factors, that may include, but are not limited to, results of internal loan reviews and examinations by bank regulatory agencies.
Certain loans which may not share similar risk characteristics with other loans in the portfolio may be tested individually for estimated credit losses, including (i) loans classified as special mention, substandard or doubtful and are on non-accrual, (ii) a loan modified for a borrower experiencing financial difficulty or (iii) loans that have other unique characteristics. Factors considered in measuring the extent of the expected credit loss for these loans may include payment status, collateral value, borrower's financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due.
13
Changes in the ACL for the three and nine months ended September 30, 2023, under the CECL model, by portfolio segment, are summarized as follows:
(Dollars in thousands) |
|
CRE |
|
|
MF |
|
|
C+I |
|
|
ADL |
|
|
RES |
|
|
HELOC |
|
|
CON |
|
|
Unallocated |
|
|
Total |
|
|||||||||
Balance, June 30, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||||
Provision for credit losses on loans |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
Charge-offs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Recoveries |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Balance, September 30, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Balance, December 31, 2022, Prior to Adoption of ASC 326 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||||
Impact of adopting ASC 326 |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||||
Provision for credit losses on loans |
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Charge-offs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Recoveries |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Balance, September 30, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
Changes in the allowance for credit losses on loans for the three and nine months ended September 30, 2022, under the incurred loss model, by portfolio segment, are summarized as follows:
(Dollars in thousands) |
|
CRE |
|
|
MF |
|
|
C+I |
|
|
ADL |
|
|
RES |
|
|
HELOC |
|
|
CON |
|
|
Unallocated |
|
|
Total |
|
|||||||||
Balance, June 30, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||||
Provision for loan losses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||||
Charge-offs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Recoveries |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Balance, September 30, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Balance, December 31, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||||
Provision for loan losses |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||||
Charge-offs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Recoveries |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|||
Balance, September 30, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
As of September 30, 2023 and December 31, 2022, information about loans, the ACL and the ALL, by portfolio segment, are summarized below:
(Dollars in thousands) |
|
CRE |
|
|
MF |
|
|
C+I |
|
|
ADL |
|
|
RES |
|
|
HELOC |
|
|
CON |
|
|
Unallocated |
|
|
Total |
|
|||||||||
September 30, 2023 Loan Balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Individually evaluated to determine expected credit losses |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
Collectively evaluated to determine expected credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||||||||
ACL related to the loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Individually evaluated to determine expected credit losses |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Collectively evaluated to determine expected credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||||||||
December 31, 2022 Loan Balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Individually evaluated for impairment |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|||
Collectively evaluated for impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||||||||
ALL related to the loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Individually evaluated for impairment |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Collectively evaluated for impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
14
The following is an aging analysis of past due loans by portfolio segment as of September 30, 2023, including non-accrual loans without an ACL:
(Dollars in thousands) |
|
30-59 Days |
|
|
60-89 Days |
|
|
90 + Days |
|
|
Total Past Due |
|
|
Current |
|
|
Total Loans |
|
|
Non-Accrual |
|
|||||||
CRE |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
||
MF |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
||
C+I |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
||
ADL |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
||
RES |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
||
HELOC |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
||
CON |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
||
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
Interest income recognized on non-accrual loans during three and nine months ended September 30, 2023 was $-
The following is an aging analysis of past due loans by portfolio segment as of December 31, 2022:
(Dollars in thousands) |
|
30-59 |
|
|
60-89 |
|
|
90 + |
|
|
Total |
|
|
Current |
|
|
Total |
|
|
Non- |
|
|||||||
CRE |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
||
MF |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
||
C+I |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
||
ADL |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
||
RES |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
HELOC |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
||||
CON |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
The Company's
There were
The following table provides information on impaired loans as of and for the year ended December 31, 2022:
|
|
As of December 31, 2022 |
|
|
At December 31, 2022 |
|
||||||||||||||
(Dollars in thousands) |
|
Recorded |
|
|
Unpaid |
|
|
Related |
|
|
Average |
|
|
Interest |
|
|||||
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
CRE |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
MF |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
C+I |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
ADL |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
RES |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
HELOC |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
CON |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
There were
15
Credit Quality Information
The Company utilizes a ten-grade internal loan rating system for its commercial real estate, multifamily, commercial and industrial and acquisition, development, and land loans. Residential real estate, home equity line of credit and consumer loans are considered “pass” rated loans until they become delinquent. Once delinquent, loans can be rated an 8, 9 or 10 as applicable.
Loans rated 1 through 6: Loans in these categories are considered “pass” rated loans with low to average risk.
Loans rated 7: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.
Loans rated 8: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Bank will sustain some loss if the weakness is not corrected.
Loans rated 9: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
Loans rated 10: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted and should be charged off.
On an annual basis, or more often if needed, the Company formally reviews the ratings on its commercial and industrial, commercial real estate and multifamily loans. On a periodic basis, the Company engages an independent third party to review a significant portion of loans within these segments and to assess the credit risk management practices of its commercial lending department. Management uses the results of these reviews as part of its annual review process, adequacy of the ACL on loans and overall credit risk administration.
On a quarterly basis, the Company formally reviews the ratings on its applicable residential real estate and home equity loans if they have become classified as non-accrual. Criteria used to determine ratings consist of loan-to-value ratios and days delinquent.
16
Based upon the most recent analysis performed, the risk category of loans by portfolio segment by vintage, reported under the CECL methodology, was as follows as of September 30, 2023:
(Dollars in thousands) |
|
2023 |
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|
Prior |
|
|
Revolving Loans Amortized Cost Basis |
|
|
Revolving Loans Converted to Term |
|
|
Total |
|
|||||||||
CRE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Risk rating: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Pass |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||||||||
Special mention |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Substandard |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total CRE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||||
MF: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Risk rating: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Pass |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||
Special mention |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Substandard |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total MF |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||
C+I: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Risk rating: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Pass |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||||
Special mention |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Substandard |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total C+I |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||||
ADL: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Risk rating: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Pass |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||||
Special mention |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Substandard |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total ADL |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||||
RES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Risk rating: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Pass |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||||||
Special mention |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Substandard |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total RES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||||||
HELOC: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Risk rating: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Pass |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Special mention |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Substandard |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total HELOC |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
CON: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Risk rating: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Pass |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||||||
Special mention |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Substandard |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total CON |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
17
The following presents the internal risk rating of loans by portfolio segment as of December 31, 2022:
(Dollars in thousands) |
|
Pass |
|
|
Special |
|
|
Substandard |
|
|
Total |
|
||||
CRE |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|||
MF |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
C+I |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
ADL |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
RES |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
HELOC |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
CON |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Certain directors and executive officers of the Company and entities in which they have significant ownership interests are customers of the Bank. Loans outstanding to these persons and entities at September 30, 2023 and December 31, 2022 were $
Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of such loans were $
The Company’s mortgage servicing activities include: collecting principal, interest and escrow payments from borrowers; making tax and insurance payments on behalf of borrowers; monitoring delinquencies and executing foreclosure proceedings; and accounting for and remitting principal and interest payments to investors. Loan servicing income, including late and ancillary fees, was $
The following summarizes activity in mortgage servicing rights for the three and nine months ended September 30, 2023 and 2022:
(Dollars in thousands) |
|
2023 |
|
|
2022 |
|
||
Balance, June 30, |
|
$ |
|
|
$ |
|
||
Additions |
|
|
— |
|
|
|
|
|
Payoffs |
|
|
( |
) |
|
|
( |
) |
Change in fair value due to change in assumptions |
|
|
( |
) |
|
|
|
|
Balance, September 30, |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Balance, January 1, |
|
|
|
|
|
|
||
Additions |
|
|
— |
|
|
|
|
|
Payoffs |
|
|
( |
) |
|
|
( |
) |
Change in fair value due to change in assumptions |
|
|
( |
) |
|
|
|
|
Balance, September 30, |
|
$ |
|
|
$ |
|
Deposits consisted of the following at September 30, 2023 and December 31, 2022:
(Dollars in thousands) |
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||
NOW and demand deposits |
|
$ |
|
|
$ |
|
||
Money market deposits |
|
|
|
|
|
|
||
Savings deposits |
|
|
|
|
|
|
||
Time deposits of $250,000 and greater |
|
|
|
|
|
|
||
Time deposits less than $250,000 |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
18
At September 30, 2023, the scheduled maturities of time deposits were as follows:
(Dollars in thousands) |
|
Total |
|
|
2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
|
|
$ |
|
There were $
Federal Home Loan Bank (“FHLB”)
A summary of borrowings from the FHLB is as follows:
|
|
September 30, 2023 |
|
|||||
Principal Amounts |
|
|
Maturity Dates |
|
|
Interest Rates |
||
(Dollars in thousands) |
||||||||
$ |
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
$ |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
|
December 31, 2022 |
|
|||||
Principal Amounts |
|
|
Maturity Dates |
|
|
Interest Rates |
||
(Dollars in thousands) |
||||||||
$ |
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
$ |
|
|
|
|
|
|
All borrowings from the FHLB are secured by a blanket security agreement on qualified collateral, principally residential mortgage loans, in an aggregate amount equal to outstanding advances. The Bank’s unused remaining available borrowing capacity at the FHLB was approximately $
At September 30, 2023 and December 31, 2022, the Bank had an overnight line of credit with the FHLB that may be drawn up to $
19
Federal Reserve Bank of Boston (“FRB”)
During June 2023, the Bank established two secured credit facilities with the FRB – Bank Term Funding Program (“BTFP”) and Borrower-In-Custody of Collateral Program (“BIC”). On July 25, 2023, the Bank borrowed $
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans, unadvanced funds on loans and standby letters of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but generally includes secured interests in mortgages.
Standby letters of credit are conditional commitments issued by the Bank to guarantee performance by a customer to a third-party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Notional amounts of financial instruments with off-balance sheet credit risk are as follows as of September 30, 2023 and December 31, 2022:
|
|
2023 |
|
|
2022 |
|
||
Unadvanced portions of loans |
|
$ |
|
|
$ |
|
||
Commitments to originate loans |
|
|
|
|
|
|
||
Standby letters of credit |
|
|
— |
|
|
|
|
The Company records an ACL for off-balance sheet credit exposures that are not unconditionally cancelable through a charge to the provision for credit losses on the Company’s consolidated statements of (loss) income. At September 30, 2023 and December 31, 2022, the ACL for off-balance sheet credit exposures totaled $
401(k) Plan
The Company sponsors a 401(k) defined contribution plan for substantially all employees pursuant to which employees of the Company could elect to make contributions to the plan subject to Internal Revenue Service limits. The Company makes matching and profit-sharing contributions to eligible participants in accordance with plan provisions. The Company’s contributions for the three months ended September 30, 2023 and 2022 were $
20
Pension Plan
The Company participated in the Pentegra Defined Benefit Plan for Financial Institutions (The Pentegra DB Plan), a tax-qualified defined benefit pension plan. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan. The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413 (c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan, contributions made by a participating employer may be used to provide benefits to participants of other participating employers.
The Company enacted a “hard freeze” for the Pentegra DB Plan as of December 31, 2018, eliminating all future service-related accruals for participants. Prior to this enactment the Company maintained a “soft freeze” status that continued service-related accruals for its active participants with no new participants permitted into the Pentegra DB Plan. On May 26, 2022, the board of directors approved a resolution authorizing the Company to give notice of its intent to withdraw from the Pentegra DB Plan as of September 30, 2022. On September 30, 2022, the Company proceeded with its notification to withdraw from the Pentegra DB Plan as of September 30, 2022. As a result, a contribution amount that achieved a funded status of
Total pension plan (credit) expense for the three months ended September 30, 2023 and 2022 was $-
Supplemental Executive Retirement Plans
Salary Continuation Plan
The Company maintains a nonqualified supplemental retirement plan for its current President and its former President. The plan provides supplemental retirement benefits payable in installments over a period of years upon retirement or death. The recorded liability at September 30, 2023 and December 31, 2022 relating to this supplemental retirement plan was $
Directors Deferred Supplemental Retirement Plan
The Company has a supplemental retirement plan for eligible directors that provides for monthly benefits based upon years of service to the Company, subject to certain limitations as set forth in the agreements. The present value of these future payments is being accrued over the estimated period of service. The estimated liability at September 30, 2023 and December 31, 2022 relating to this plan was $
The Company enacted a “hard freeze” for this supplemental retirement plan as of January 1, 2022. On February 10, 2022, the Bank and the non-employee members of the board of directors of the Bank entered into amendments to the Supplemental Director Retirement Agreements (the “Agreements”) previously entered into by the Bank and the directors. The amendments eliminate the formula for determining the normal annual retirement benefit (previously “
Additionally, the Company has a deferred director’s fee plan, which allows members of the board of directors to defer the receipt of fees that otherwise would be paid to them in cash. At September 30, 2023 and December 31, 2022, the total deferred directors' fees amounted to $
Employee Stock Ownership Plan
The Company maintains the First Seacoast Bank Employee Stock Ownership Plan (“ESOP”) to provide eligible employees of the Company the opportunity to own Company stock. The ESOP is a tax-qualified retirement plan for the benefit of Company
21
employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal limits. The number of shares committed to be released per year through 2047 is
The ESOP funded its purchase of
Under applicable accounting requirements, the Company records compensation expense for the ESOP equal to fair market value of shares when they are committed to be released from the suspense account to participants’ accounts under the plan. Total compensation expense recognized in connection with the ESOP for the three months ended September 30, 2023 and 2022 was $
|
|
September 30, 2023 |
|
|
December 31, 2022(1) |
|
||
Shares held by the ESOP include the following: |
|
|
|
|
|
|
||
Allocated |
|
|
|
|
|
|
||
Committed to be allocated |
|
|
|
|
|
|
||
Unallocated |
|
|
|
|
|
|
||
Total |
|
|
|
|
|
|
(1)
The fair value of unallocated shares was approximately $
Equity Incentive Plan
Effective May 27, 2021, the Company adopted the First Seacoast Bancorp 2021 Equity Incentive Plan (the “2021 Plan”). The Company’s stockholders approved the 2021 plan on that date. The 2021 Plan provides for the granting of incentive and non-statutory stock options to purchase shares of common stock and the granting of shares of restricted stock awards and restricted stock units.
The 2021 Plan authorizes the issuance or delivery to participants of up to
On May 25, 2023,
22
A summary of stock options outstanding as of September 30, 2023 and changes during the nine months ended September 30, 2023 is presented below:
|
September 30, 2023 |
|
|||||||||||||
|
Number of Shares |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Term (in Years) |
|
|
Aggregate Intrinsic Value |
|
||||
Stock options: |
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
||||
Balance at beginning of period |
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
Granted |
|
|
|
|
|
|
|
|
|
|
— |
|
|||
Vested |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Forfeited |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Balance at end of period |
|
|
|
$ |
|
|
|
|
|
$ |
— |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Date of grant |
|
|
|
|
|
|
|
|
|
|
|||||
Options granted |
|
|
|
|
|
|
|
|
|
|
|
||||
Exercise price |
$ |
|
|
|
|
|
|
|
|
|
|
||||
Vesting period(1) |
|
|
|
|
|
|
|
|
|
|
|||||
Expiration date |
|
|
|
|
|
|
|
|
|
|
|||||
Expected volatility |
|
% |
|
|
|
|
|
|
|
|
|
||||
Expected term |
|
|
|
|
|
|
|
|
|
|
|||||
Expected dividend yield |
|
% |
|
|
|
|
|
|
|
|
|
||||
Expected forfeiture rate |
|
% |
|
|
|
|
|
|
|
|
|
||||
Risk free interest rate |
|
% |
|
|
|
|
|
|
|
|
|
||||
Fair value per option |
$ |
|
|
|
|
|
|
|
|
|
|
||||
(1) Vesting is ratably and the period begins on the date of the grant. |
|
|
|
|
|
|
|
|
|
|
|
On June 1, 2023,
|
September 30, 2023 |
|
|||||
|
Number of Shares |
|
|
Weighted Average Grant Value |
|
||
Restricted stock: |
|
|
|
|
|
||
Non-vested at beginning of period |
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
||
Vested |
|
|
|
|
|
||
Forfeited |
|
|
|
|
|
||
Non-vested at end of period |
|
|
|
$ |
|
|
December 31, 2022 |
|
|||||
|
Number of Shares |
|
|
Weighted Average Grant Value |
|
||
Restricted stock: |
|
|
|
|
|
|
|
Non-vested at beginning of period |
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
||
Vested |
|
( |
|
|
|
|
|
Forfeited |
|
( |
|
|
|
|
|
Non-vested at end of period |
|
|
|
$ |
|
23
The expense recognized for this equity incentive plan was $
The Company is obligated under various lease agreements for one of its branch offices and certain equipment. These agreements are accounted for as operating leases and their terms expire between
The Company adopted ASU 2016-02 – Leases (Topic 842)– on January 1, 2022 and began recognizing its operating leases on its consolidated balance sheet by recording a net lease liability, representing the Company’s legal obligation to make these lease payments, and a Right-Of-Use (“ROU”) asset, representing the Company’s legal right to use the leased assets. The Company, by policy, does not include renewal options for leases as part of its ROU asset and lease liabilities unless they are deemed reasonably certain to exercise. The Company does not have any sub-lease agreements.
The following table summarizes information related to the Company’s right-of-use asset and net lease liability:
|
|
September 30, 2023 |
||||
|
|
Operating Leases |
|
|
Balance Sheet Location |
|
|
|
(Dollars in thousands) |
||||
Right-of-use asset |
|
$ |
|
|
||
Net lease liability |
|
|
|
|
||
|
|
|
|
|
|
|
|
|
December 31, 2022 |
||||
|
|
Operating Leases |
|
|
Balance Sheet Location |
|
|
|
(Dollars in thousands) |
||||
Right-of-use asset |
|
$ |
|
|
||
Net lease liability |
|
|
|
|
The Company determines whether a contract contains a lease based on whether a contract, or a part of a contract, conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The discount rate is either implicit in the lease or, when a rate cannot be readily determined, the Company’s incremental borrowing rate is used. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term.
24
The components of operating lease cost and other related information are as follows:
|
|
Three months ended September 30, |
|
|||||
(Dollars in thousands) |
|
2023 |
|
|
2022 |
|
||
Operating lease cost |
|
$ |
|
|
$ |
|
||
Short-term lease cost |
|
|
— |
|
|
|
— |
|
Variable lease cost (cost excluded from lease payments) |
|
|
— |
|
|
|
— |
|
Sublease income |
|
|
— |
|
|
|
— |
|
Total operating lease cost |
|
|
|
|
|
|
||
Other Information: |
|
|
|
|
|
|
||
Cash paid for amounts included in the measurement of lease liabilities - operating cash flows from operating leases |
|
|
|
|
|
|
||
Operating lease - operating cash flows (liability reduction) |
|
$ |
— |
|
|
$ |
— |
|
Weighted average lease term remaining (in years) |
|
|
|
|
|
|
||
Weighted average discount rate |
|
|
% |
|
|
% |
||
|
|
Nine months ended September 30, |
|
|||||
(Dollars in thousands) |
|
2023 |
|
|
2022 |
|
||
Operating lease cost |
|
$ |
|
|
$ |
|
||
Short-term lease cost |
|
|
— |
|
|
|
— |
|
Variable lease cost (cost excluded from lease payments) |
|
|
— |
|
|
|
— |
|
Sublease income |
|
|
— |
|
|
|
— |
|
Total operating lease cost |
|
|
|
|
|
|
||
Other Information: |
|
|
|
|
|
|
||
Cash paid for amounts included in the measurement of lease liabilities - operating cash flows from operating leases |
|
|
|
|
|
|
||
Operating lease - operating cash flows (liability reduction) |
|
$ |
— |
|
|
$ |
— |
|
Weighted average lease term remaining (in years) |
|
|
|
|
|
|
||
Weighted average discount rate |
|
|
% |
|
|
% |
The total minimum lease payments due in future periods for lease agreements in effect at September 30, 2023 were as follows:
As of September 30, 2023 |
|
Future Minimum Lease Payments |
|
|
|
|
(Dollars in thousands) |
|
|
Remainder of 2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Total minimum lease payments |
|
|
|
|
Less: interest |
|
|
( |
) |
Total lease liability |
|
$ |
|
During the three months ended September 30, 2023 the Company completed a conversion of all of its branch ATMs from owned equipment to leased equipment and recognized a $
The Company's obligation under the operating lease related to one of its branches expires in
25
The Company reports certain items as “other comprehensive income or loss” and reflects total accumulated other comprehensive loss (“AOCI”) in the consolidated financial statements for all periods containing elements of other comprehensive income or loss.
|
|
Three Months Ended September 30, |
|
|
|
|||||
Reclassification Adjustments |
|
2023 |
|
|
2022 |
|
|
Affected Line Item in |
||
|
|
(Dollars in thousands) |
|
|
|
|||||
Gains on sale of securities available-for-sale |
|
$ |
— |
|
|
$ |
— |
|
|
Securities gains, net |
Tax effect |
|
|
— |
|
|
|
— |
|
|
Income tax (benefit) expense |
|
|
|
— |
|
|
|
— |
|
|
Net (loss) income |
Net amortization of bond premiums |
|
|
|
|
|
|
|
Interest on debt securities |
||
Tax effect |
|
|
( |
) |
|
|
( |
) |
|
Income tax (benefit) expense |
|
|
|
|
|
|
|
|
Net (loss) income |
||
Net interest expense on swaps |
|
|
— |
|
|
|
( |
) |
|
Interest on borrowings |
Tax effect |
|
|
— |
|
|
|
|
|
Income tax (benefit) expense |
|
|
|
|
— |
|
|
|
( |
) |
|
Net (loss) income |
Total reclassification adjustments |
|
$ |
|
|
$ |
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|||||
Reclassification Adjustments |
|
2023 |
|
|
2022 |
|
|
Affected Line Item in |
||
|
|
(Dollars in thousands) |
|
|
|
|||||
Gains on sale of securities available-for-sale |
|
$ |
— |
|
|
$ |
( |
) |
|
Securities gains, net |
Tax effect |
|
|
— |
|
|
|
|
|
Income tax (benefit) expense |
|
|
|
|
— |
|
|
|
( |
) |
|
Net (loss) income |
Net amortization of bond premiums |
|
|
|
|
|
|
|
Interest on debt securities |
||
Tax effect |
|
|
( |
) |
|
|
( |
) |
|
Income tax (benefit) expense |
|
|
|
|
|
|
|
|
Net (loss) income |
||
Gains on termination of interest rate swaps |
|
|
( |
) |
|
|
— |
|
|
Gain on termination of interest rate swaps |
Tax effect |
|
|
|
|
|
— |
|
|
Income tax (benefit) expense |
|
|
|
|
( |
) |
|
|
— |
|
|
Net (loss) income |
Net interest expense on swaps |
|
|
— |
|
|
|
( |
) |
|
Interest on borrowings |
Tax effect |
|
|
— |
|
|
|
|
|
Income tax (benefit) expense |
|
|
|
|
— |
|
|
|
( |
) |
|
Net (loss) income |
Total reclassification adjustments |
|
$ |
( |
) |
|
$ |
|
|
|
26
The following tables present the changes in each component of AOCI for the periods indicated:
(Dollars in thousands) |
|
Net Unrealized (Losses) Gains on AFS |
|
|
Net Unrealized Gains |
|
|
AOCI(1) |
|
|||
Balance at June 30, 2023 |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
( |
) |
Other comprehensive loss before reclassification |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Amounts reclassified from AOCI |
|
|
|
|
|
— |
|
|
|
|
||
Other comprehensive loss |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance at September 30, 2023 |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|||
Balance at June 30, 2022 |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Other comprehensive (loss) income before reclassification |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Amounts reclassified from AOCI |
|
|
|
|
|
( |
) |
|
|
|
||
Other comprehensive (loss) income |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Balance at September 30, 2022 |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
Balance at December 31, 2022 |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Other comprehensive loss before reclassification |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Amounts reclassified from AOCI |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Other comprehensive loss |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance at September 30, 2023 |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|||
Balance at December 31, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Other comprehensive (loss) income before reclassification |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Amounts reclassified from AOCI |
|
|
|
|
|
( |
) |
|
|
|
||
Other comprehensive (loss) income |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Balance at September 30, 2022 |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
27
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below). As of September 30, 2023, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank, as well capitalized under the regulatory framework, for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum capital amounts and ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category. Management believes that, as of September 30, 2023 and December 31, 2022, the Bank met all capital adequacy requirements to which it was subject, including the capital conservation buffer, at those dates.
The following table presents actual and required capital ratios as of September 30, 2023 and December 31, 2022 for the Bank under the Basel Committee on Banking Supervisions capital guidelines for U.S. banks (“Basel III Capital Rules”) as fully phased-in on January 1, 2019.
|
|
|
|
|
|
|
|
Minimum |
|
|
Minimum |
|
|
Minimum Capital |
|
|||||||||||||||||
|
|
Actual |
|
|
Requirement |
|
|
Capitalized |
|
|
Fully Phased-In |
|
||||||||||||||||||||
(Dollars in thousands) |
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
||||||||
September 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Total Capital (to risk-weighted assets) |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||||||
Tier 1 Capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Tier 1 Capital (to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Common Equity Tier 1 (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum |
|
|
Minimum |
|
|
Minimum Capital |
|
|||||||||||||||||
|
|
Actual |
|
|
Requirement |
|
|
Capitalized |
|
|
Fully Phased-In |
|
||||||||||||||||||||
(Dollars in thousands) |
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
||||||||
December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Total Capital (to risk-weighted assets) |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||||||
Tier 1 Capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Tier 1 Capital (to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Common Equity Tier 1 (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Common Stock Repurchases
On September 23, 2020, the board of directors of First Seacoast Bancorp (a federal corporation) authorized the repurchase of up to
Equity Incentive Plan
A certain member of management elected to surrender
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. These derivative financial instruments are reported at fair value in other assets or other liabilities and are not reported on a net basis.
Derivatives Designated as Hedging Instruments
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed rate payments or the receipt of fixed rate amounts from a counterparty in exchange for the Company making variable rate payments over the life of the agreements without exchange of the underlying notional amount.
The Company entered into
On January 17, 2023, the Company terminated both of its interest rate swap derivative instruments at a gain of $
29
The following table summarizes the Company's cash flow hedges associated with its interest rate risk management activities:
|
|
|
|
|
|
|
|
December 31, 2022 |
|
|||||||||
(Dollars in thousands) |
|
Start Date |
|
Maturity Date |
|
Rate |
|
Notional |
|
|
Assets |
|
|
Liabilities |
|
|||
Debt Hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Hedging Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Interest Rate Swap 2020 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|||||
Interest Rate Swap 2021 |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|||||
Total Hedging Instruments |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
||
Hedged Items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Variability in cash flows related to |
|
|
|
|
|
|
|
N/A |
|
|
$ |
— |
|
|
$ |
|
The following tables summarize the effect of cash flow hedge accounting on the consolidated statements of (loss) income for the three and nine months ended September 30, 2023 and 2022 :
|
Location and Amount of Gain or Loss Recognized in Consolidated Statements of (Loss) Income |
|
|||||||||||||
|
Three Months Ended September 30, |
|
|||||||||||||
(Dollars in thousands) |
2023 |
|
|
2022 |
|
||||||||||
|
Interest Income (Expense) |
|
|
Other Income (Expense) |
|
|
Interest Income (Expense) |
|
|
Other Income (Expense) |
|
||||
The effect of cash flow hedge accounting: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from AOCI into expense |
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
Location and Amount of Gain or Loss Recognized in Consolidated Statements of (Loss) Income |
|
|||||||||||||
|
Nine Months Ended September 30, |
|
|||||||||||||
(Dollars in thousands) |
2023 |
|
|
2022 |
|
||||||||||
|
Interest Income (Expense) |
|
|
Other Income (Expense) |
|
|
Interest Income (Expense) |
|
|
Other Income (Expense) |
|
||||
The effect of cash flow hedge accounting: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from AOCI into expense |
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
The credit risk associated with these interest rate swaps was the risk of default by the counterparty. To minimize this risk, the Company only enters into interest rate swap agreements with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements did not represent amounts exchanged by the parties and, therefore, was not a measure of the potential loss exposure. Risk management results for the three and nine months ended September 30, 2023 and 2022, related to the balance sheet hedging of $
Fair Value Hedges of Interest Rate Risk
On June 5, 2023, the Company entered into an interest rate contract that was designated as a fair value hedge utilizing a pay fixed interest rate swap to hedge a portion of the residential mortgage loan portfolio's change in fair value attributable to the movement in the one-month SOFR. The Company is exposed to changes in the fair value of certain pools of fixed-rate assets due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate. The Company's interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreement without the exchange of the underlying notional amount. The hedging strategy effectively converts these mortgage loans to SOFR floating rate loans for the term of the swap starting on the effective date.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.
30
As of September 30, 2023, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges:
Location in Consolidated Balance Sheets |
|
Carrying Amount of Hedged Assets/(Liabilities) |
|
|
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities) |
|
||||||||||
(Dollars in thousands) |
|
September 30, 2023 |
|
|
December 31, 2022 |
|
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||||
Total loans |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
||
Total |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
These amounts include the amortized cost basis of closed portfolios of fixed-rate residential loans used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At inception, the amortized cost basis of the closed portfolios used in these hedging relationships was $
Derivatives not Designated as Hedging Instruments
Customer Loan Swaps
Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain commercial banking customers. On May 19, 2023, the Company entered into an interest rate swap with a commercial loan borrower. The Company executes interest rate swaps with customers to facilitate their respective risk management strategies. The interest rate swap contract with the commercial loan borrower allows them to convert floating-rate loan payments based on SOFR to fixed-rate loan payments. This interest rate swap is simultaneously hedged by an offsetting derivative that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet hedge accounting requirements, changes in the fair value of both the customer derivative and the offsetting derivative are recognized directly in earnings.
The following table presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheet:
|
Derivative Assets |
|
|
Derivative Liabilities |
|
||||||||||||||
|
Notional Amount |
|
|
Location |
|
Fair Value |
|
|
Notional Amount |
|
|
Location |
|
Fair Value |
|
||||
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
September 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives designated as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate contracts - fair value hedge |
$ |
|
|
|
$ |
|
|
$ |
— |
|
|
Other liabilities |
|
$ |
— |
|
|||
Total derivatives designated as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
hedging instruments |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
— |
|
|||
Derivatives not designated as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Customer loan swaps |
$ |
|
|
|
$ |
|
|
$ |
|
|
|
$ |
|
||||||
Total derivatives not designated as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
hedging instruments |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives designated as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate contracts - cash flow hedge |
$ |
|
|
|
$ |
|
|
$ |
— |
|
|
Other liabilities |
|
$ |
— |
|
|||
Total derivatives designated as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
hedging instruments |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
— |
|
31
The following table presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the consolidated statements of (loss) income for the periods presented:
|
|
|
|
Amount of (Loss) Gain Recognized in Income |
|
|||||||||||||
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
|
September 30, 2023 |
|
|
September 30, 2022 |
|
|
September 30, 2023 |
|
|
September 30, 2022 |
|
||||
(Dollars in thousands) |
|
Location of (Loss) Gain |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Customer loan swaps |
|
|
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
Credit-risk-related Contingent Features
By entering into derivative transactions, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the Company’s credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty. The Company seeks to minimize counterparty credit risk through credit approvals, limits, and other monitoring procedures. Institutional counterparties must have an investment grade credit rating and be approved by the Company’s board of directors. As such, management believes the risk of incurring credit losses on derivative contracts with institutional counterparties is remote. As of September 30, 2023 and December 31, 2022, the Company posted $
Balance Sheet Offsetting
Certain financial instruments may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. The Company’s derivative transactions with institutional counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. Generally, the Company does not offset such financial instruments for financial reporting purposes.
The following tables present the information about derivative positions that are eligible for offset in the consolidated balance sheets as of September 30, 2023 and December 31, 2022:
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset |
|
|
|
|
|||||||||
(Dollars in thousands) |
|
Gross Amounts Recognized |
|
|
Gross Amounts Offset |
|
|
Net Amounts Recognized |
|
|
Financial Instruments Pledged (Received) |
|
|
Cash Collateral Pledged (Received)(1) |
|
|
Net Amount |
|
||||||
September 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Derivative Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest rate contracts (2) |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|||
Customer loan swaps - commercial customer (3) |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Derivative Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Customer loan swaps - dealer bank (3) |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|||
December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Derivative Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest rate contracts (2) |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
(1)
(2)
(3)
At September 30, 2023 and December 31, 2022, there were
32
Determination of Fair Value
The fair value of an asset or liability is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from one level to another. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various assets and liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value of cash flows or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded, and the observability and reliability of the assumptions used to determine fair value.
Level 1 - Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 - Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 - Level 3 inputs are unobservable inputs for the asset or liability.
For assets and liabilities, fair value is based upon the lowest level of observable input that is significant to the fair value measurement.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that primarily use, as inputs, observable market-based parameters. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and, therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented therein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth below. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all the Company’s financial assets and financial liabilities carried at fair value at September 30, 2023 and December 31, 2022.
33
Financial Assets and Financial Liabilities: Financial assets and financial liabilities measured at fair value on a recurring basis include the following:
Securities Available-for-Sale: The Company’s investment in U.S. Government-sponsored entities bonds, U.S Government agency small business administration pools guaranteed by the SBA, collateralized mortgage obligations issued by the FHLMC, residential mortgage-backed securities and other municipal bonds is generally classified within Level 2 of the fair value hierarchy. For these securities, the Company obtains fair value measurements from independent pricing services. The fair value measurements consider observable data that may include reported trades, dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.
Mortgage Servicing Rights: Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes interest rate, prepayment speed and default rate assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data (see Note 4, Loan Servicing, for more information). These assumptions are inherently sensitive to change as these unobservable inputs are not based on quoted prices in active markets or otherwise observable.
Derivative Instruments and Hedges: The valuation of these instruments is determined using the discounted cash flow method on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.
The following table summarizes financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
|
|
(Dollars in thousands) |
|
|||||||||||||
September 30, 2023 |
|
|
|
|||||||||||||
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Government-sponsored enterprises obligations |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
||
U.S Government agency small business administration |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Collateralized mortgage obligations issued by |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Residential mortgage-backed-securities |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Municipal bonds |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Corporate debt |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Corporate subordinated debt |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Mortgage servicing rights |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Derivatives |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Other liabilities: |
|
|
|
|||||||||||||
Derivatives |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
|
|
(Dollars in thousands) |
|
|||||||||||||
December 31, 2022 |
|
|
|
|||||||||||||
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Government-sponsored enterprises obligations |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
||
U.S Government agency small business administration |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Collateralized mortgage obligations issued by |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Residential mortgage-backed-securities |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Municipal bonds |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Corporate debt |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Corporate subordinated debt |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Mortgage servicing rights |
|
$ |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Derivatives |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
34
For the nine months ended September 30, 2023 and 2022, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:
(Dollars in thousands) |
|
Mortgage Servicing Rights (1) |
|
|
Balance as of January 1, 2023 |
|
$ |
|
|
Included in net (loss) income |
|
|
( |
) |
Balance as of September 30, 2023 |
|
$ |
|
|
Total unrealized net gains (losses) |
|
$ |
— |
|
|
|
|
|
|
Balance as of January 1, 2022 |
|
$ |
|
|
Included in net (loss) income |
|
|
|
|
Balance as of September 30, 2022 |
|
$ |
|
|
Total unrealized net gains (losses) |
|
$ |
— |
|
For Level 3 assets measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows:
|
|
September 30, 2023 |
|
|||||||||
(Dollars in thousands) |
|
Valuation Technique |
|
Description |
|
Range |
|
Weighted Average (1) |
|
Fair Value |
|
|
|
Discounted Cash Flow |
|
|
|
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
|||||||||
(Dollars in thousands) |
|
Valuation Technique |
|
Description |
|
Range |
|
Weighted Average (1) |
|
Fair Value |
|
|
|
Discounted Cash Flow |
|
|
|
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
The significant unobservable inputs used in the fair value measurement of the Company’s mortgage servicing rights are the weighted-average prepayment rate, weighted-average discount rate, weighted average delinquency rate and weighted-average default rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. Although the prepayment rate and the discount rate are not directly interrelated, they generally move in opposite directions of each other.
The Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. Observable and unobservable inputs are entered into this model as prescribed by an independent third party to arrive at an estimated fair value. See Note 4, Loan Servicing, for a roll forward of our Level 3 item and related inputs used to determine fair value at September 30, 2023.
35
Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets measured at fair value on a non-recurring basis during the reported periods may include certain individually evaluated loans reported at the fair value of the underlying collateral. Fair value is measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates and other market factors on current values. Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data. Therefore, real estate collateral related nonrecurring fair value measurement adjustments have generally been classified as Level 3.
Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3. Financial assets measured at fair value on a non-recurring basis during the reported periods also include loans held for sale. Residential mortgage loans held for sale are recorded at the lower of cost or fair value and are therefore measured at fair value on a non-recurring basis. The fair values for loans held for sale are estimated based on commitments in effect from investors or prevailing market prices for loans with similar terms to borrowers of similar credit quality and are included in Level 3. At September 30, 2023 and December 31, 2022, there were
Non-Financial Assets and Non-Financial Liabilities: The Company has
ASC Topic 825,“Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. ASU 2016-01 requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The exit price notion is a market-based measurement of fair value that is represented by the price to sell an asset or transfer a liability in the principal market (or most advantageous market in the absence of a principal market) on the measurement date. At September 30, 2023 and December 31, 2022, fair values of loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.
36
Summary of Fair Values of Financial Instruments not Carried at Fair Value
The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments at September 30, 2023 and December 31, 2022 are as follows:
(Dollars in thousands) |
|
Carrying |
|
|
Fair |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||||
September 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash and due from banks |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|||
Federal Home Loan Bank stock |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|||
Bank-owned life insurance |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|||
Loans, net |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Accrued interest receivable |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Deposits |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
||||
Advances from Federal Home Loan Bank |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|||
Advances from Federal Reserve Bank |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|||
Mortgagors’ tax escrow |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|||
Accrued interest payable |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||
December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash and due from banks |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|||
Interest-bearing time deposits with other banks |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|||
Federal Home Loan Bank stock |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|||
Bank-owned life insurance |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|||
Loans, net |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Accrued interest receivable |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|||
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Deposits |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
||||
Advances from Federal Home Loan Bank |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|||
Mortgagors’ tax escrow |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|||
Accrued interest payable |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
During October 2023, the Company purchased $
On October 31, 2023, the Company agreed to a contract extension with its core technology provider, FISERV. The new agreement expires on April 30, 2032, with an unconditional option to exit the agreement in April 2028 and includes lower pricing for transaction and processing services that become effective immediately.
On November 1, 2023, the Company borrowed $
On November 1, 2023, the Company entered into an interest rate contract with a notional amount of $
37
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the Company’s consolidated financial condition at September 30, 2023 and consolidated results of operations for the three and nine months ended September 30, 2023 and 2022. It should be read in conjunction with our unaudited consolidated financial statements and accompanying notes presented elsewhere in this report and with the Company’s audited consolidated financial statements and accompanying notes presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed on March 24, 2023 with the Securities and Exchange Commission. Certain prior year amounts have been reclassified to conform to the current year presentation.
Overview
Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations and borrowings from the FHLB, in one- to four-family residential real estate loans, commercial real estate and multi-family loans, acquisition, development and land loans, commercial and industrial loans, home equity loans and lines of credit and consumer loans. In recent years, we have increased our focus, consistent with what we believe to be conservative underwriting standards, on originating higher yielding commercial real estate and commercial and industrial loans.
We conduct our operations from four full-service banking offices in Strafford County, New Hampshire and one full-service banking office in Rockingham County, New Hampshire. We consider our primary lending market area to be Strafford and Rockingham Counties in New Hampshire and York County in Southern Maine.
Cautionary Note Regarding Forward-Looking Statements
This quarterly report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
38
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Except as required by applicable law or regulation, we do not undertake, and we specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
Critical Accounting Policies and Use of Critical Accounting Estimates
The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with generally accepted accounting principles used in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
Our critical accounting policies involve the calculation of the allowance for credit losses ("ACL") and the measurement of the fair value of financial instruments. A detailed description of these critical accounting policies can be found in Note 2 of the Company’s consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Comparison of Financial Condition at September 30, 2023 (unaudited) and December 31, 2022
Total Assets. Total assets were $557.2 million as of September 30, 2023, an increase of $19.7 million, or 3.7%, compared to total assets of $537.4 million at December 31, 2022. The increase was due primarily to a $25.2 million increase in net loans and a $1.2 million increase in other assets which resulted from an increase in a deferred tax benefit related to the increase in our net unrealized losses within the available-for-sale securities portfolio offset by a $1.1 million decrease in cash and due from banks, a $3.5 million decrease in securities available-for-sale and a $1.5 million decrease in Federal Home Loan Bank stock.
Cash and Due From Banks. Cash and due from banks decreased $1.1 million, or 13.1%, to $7.2 million at September 30, 2023 from $8.3 million at December 31, 2022. The decrease was due primarily to a $25.2 million increase in net loans and a $29.5 million decrease in borrowings offset by $25.6 million of net proceeds from the stock offering in connection with the conversion of the former First Seacoast Bancorp, MHC and a $29.4 million increase in total deposits during the nine months ended September 30, 2023.
Available-for-Sale Securities. Available-for-sale securities decreased by $3.5 million, or 3.3%, to $102.6 million at September 30, 2023 from $106.1 million at December 31, 2022. This decrease was due primarily to a $5.9 million increase in net unrealized losses within the portfolio and $3.7 million of proceeds from principal payments offset by investment purchases totaling $6.8 million during the nine months ended September 30, 2023. Management believes that the unrealized losses within the portfolio are due to noncredit-related factors, including changes in market interest rates and other market conditions, and therefore we recorded no allowance for credit losses on available-for-sale debt securities as of September 30, 2023.
39
Net Loans. Net loans increased $25.2 million, or 6.3%, to $424.1 million at September 30, 2023 from $398.9 million at December 31, 2022. During the nine months ended September 30, 2023, we originated $24.0 million of loans, net of principal collections, and purchased $1.2 million of consumer loans secured by manufactured housing properties. As of September 30, 2023 and December 31, 2022, the portfolio of purchased loans had outstanding principal balances of $30.7 million and $30.5 million, respectively, and were performing in accordance with their original repayment terms. Net deferred loan costs increased $231,000, or 9.4%, to $2.7 million at September 30, 2023 from $2.4 million at December 31, 2022 due primarily to the increase in deferred costs on consumer loans. SBA fee and interest income recognized during the three and nine months ended September 30, 2023 was $-0-, as compared to $7,000 and $233,000 during the three and nine months ended September 30, 2022, respectively. SBA fee and interest income is included in interest and fees on loans.
One- to four-family residential mortgage loans increased $13.0 million, or 5.2%, to $264.5 million at September 30, 2023 from $251.5 million at December 31, 2022. Commercial real estate mortgage loans increased $6.8 million, or 8.4%, to $87.3 million at September 30, 2023 from $80.5 million at December 31, 2022. Multi-family loans decreased $506,000, or 6.2%, to $7.7 million at September 30, 2023 from $8.2 million at December 31, 2022. Commercial and industrial loans increased $816,000, or 3.4%, to $24.9 million at September 30, 2023 from $24.1 million at December 31, 2022. Acquisition, development, and land loans increased $765,000, or 4.1%, to $19.3 million at September 30, 2023 from $18.5 million at December 31, 2022. Home equity loans and lines of credit increased $2.5 million, or 24.1%, to $12.6 million at September 30, 2023 from $10.2 million at December 31, 2022. Consumer loans increased $1.4 million, or 19.8%, to $8.6 million at September 30, 2023 from $7.2 million at December 31, 2022.
Our strategy to grow the balance sheet continues to be through originations and, to a lesser extent, purchases of one- to four-family residential mortgage loans and consumer loans secured by manufactured housing properties, while also diversifying into higher yielding commercial real estate mortgage loans and commercial and industrial loans to improve net margins and manage interest rate risk. We also continue to consider selling selected, conforming 15-year and 30-year residential fixed rate mortgage loans to the secondary market on a servicing retained basis as market conditions allow, providing us a recurring source of revenue from loan servicing income and gains on the sale of such loans.
Our ACL on loans decreased $232,000 to $3.3 million at September 30, 2023 from $3.6 million at December 31, 2022, due primarily to a $295,000 adjustment from the adoption of ASU 2016-13 and its new credit impairment standard for financial assets measured at amortized cost offset by $65,000 of provision for credit losses on loans for the nine months ended September 30, 2023 . The ASU requires financial assets measured at amortized cost, including loans, to be presented at the net amount expected to be collected, through an ACL that are expected to occur over the remaining life of the asset, rather than incurred losses. The ASU requires the measurement of all expected credit losses for loans held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, the ASU requires the use of forward-looking information to form credit loss estimates. Many of the loss estimation techniques applied at prior reporting dates are still permitted, though the inputs to those techniques have changed to reflect the full amount of expected credit losses. The Bank has selected the Weighted Average Remaining Maturity Model (“WARM” or "CECL model"), for the loss calculation of each of the Bank’s loan pools utilizing a third-party software application. The WARM uses a quarterly loss rate and future expectations of loan balances to calculate an ACL. A loss rate is applied to pool balances over time.
The effect of implementing this ASU was recorded as a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which the ASU is effective, which was January 1, 2023. The adoption of the new standard resulted in a $295,000 decrease to the ACL which was offset by a $290,000 increase in the allowance for off-balance sheet commitments that are not unconditionally cancelable. The decrease in ACL was due to a reduced emphasis on qualitative factors under the CECL model as the underlying historical loss data of the selected peer group is more robust with broader time horizons as compared to our actual historical loss data used under the incurred loss methodology. Under the CECL model, subsequent changes in the ACL are recorded through a charge to the provision for credit losses in the statement of (loss) income as the amounts expected to be collected change.
Deposits. Our deposits are generated primarily from residents within our primary market area. We offer a selection of deposit accounts, including non-interest-bearing and interest-bearing checking accounts, savings accounts, money market accounts and time deposits, for both individuals and businesses. As of September 30, 2023 and December 31, 2022, the aggregate amount of uninsured total deposit balances, which is the portion exceeding the $250,000 FDIC insurance limit, was estimated not to exceed $106.3 million, or 25.8% of total deposits, and $82.0 million, or 21.4% of total deposits, respectively.
Deposits increased $29.4 million, or 7.7%, to $411.8 million at September 30, 2023 from $382.4 million at December 31, 2022 primarily as a result of an $21.6 million increase in commercial deposits and a $7.8 million increase in retail deposits. Core deposits (defined as deposits other than time deposits) increased $6.4 million, or 2.0%, to $327.0 million at September 30, 2023 from $320.6 million at December 31, 2022. As of September 30, 2023, savings deposits increased $12.0 million, money market deposits increased $24.9 million, NOW and demand deposit accounts decreased $30.5 million and time deposits increased $23.0 million. There were $23.6 million and $18.1 million of brokered deposits included in time deposits at September 30, 2023 and December 31, 2022, respectively. Additionally, there were $20.6 million and $-0- of brokered deposits included in savings deposits at September 30, 2023 and December 31, 2022, respectively.
40
Borrowings. Total advances from Federal Home Loan Bank decreased $54.5 million, or 54.9%, to $44.9 million at September 30, 2023 from $99.4 million at December 31, 2022 due primarily to the net repayment of advances from the receipt of $25.6 million of net proceeds from the stock offering in connection with the conversion of the former First Seacoast Bancorp, MHC, a $29.4 million increase in total deposits and a $25.0 million advance from Federal Reserve Bank under the Federal Reserve's Bank Term Funding Program.
Total Stockholders’ Equity. Total stockholders’ equity increased $17.9 million, or 36.3%, to $67.3 million at September 30, 2023 from $49.3 million at December 31, 2022. This increase was due primarily to $25.6 million of net proceeds received from the conversion of the former First Seacoast Bancorp, MHC offset by the purchase of $2.2 million of common stock by the ESOP and an other comprehensive loss of $5.1 million related primarily to net changes in unrealized holding losses in the available-for-sale securities portfolio as a result of an increase in market interest rates during the nine months ended September 30, 2023.
Non-performing Assets. Non-performing assets include loans that are 90 or more days past due or on non-accrual status and real estate and other loan collateral acquired through foreclosure and repossession. Management determines that a loan is non-performing when it is probable at least a portion of the loan will not be collected in accordance with the original terms due to a deterioration in the financial condition of the borrower or the value of the underlying collateral if the loan is collateral dependent. When a loan is determined to be non-performing, the measurement of the loan in the ACL is based on present value of expected future cash flows, except that all collateral-dependent loans are measured for non-performance based on the fair value of the collateral. Non-accrual loans are loans for which collectability is questionable and, therefore, interest on such loans will no longer be recognized on an accrual basis.
We generally cease accruing interest on our loans when contractual payments of principal or interest have become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. Interest received on non-accrual loans generally is applied against principal or applied to interest on a cash basis. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for at least six consecutive months and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Non-performing loans were $-0- and $89,000 at September 30, 2023 and December 31, 2022, respectively. At December 31, 2022, non-performing loans consisted primarily of a residential mortgage loan to a deceased borrower which had an outstanding balance of $84,000. The property was sold in April 2023 and the outstanding loan balance was paid in full. At September 30, 2023 and December 31, 2022, we had no foreclosed assets.
Comparison of Operating Results for the Three Months Ended September 30, 2023 and September 30, 2022
Net Income. Net loss was $911,000 for the three months ended September 30, 2023, compared to net income of $468,000 for the three months ended September 30, 2022, a decrease of $1.4 million. The decrease was due primarily to a decrease in net interest and dividend income after provision (release) for credit losses of $1.4 million, an increase in non-interest expenses of $391,000 and a decrease in non-interest income of $51,000 offset by a decrease in income tax expense of $466,000 during the three months ended September 30, 2023 compared to the three months ended September 30, 2022.
Interest and Dividend Income. Total interest and dividend income increased $946,000, or 22.4%, to $5.2 million for the three months ended September 30, 2023 compared to $4.2 million for the three months ended September 30, 2022. This increase was due to a $208,000 increase in interest and dividend income on investments and a $738,000 increase in interest and fees on loans. Interest and fees on loans for the three months ended September 30, 2023 and 2022 included $-0- and $7,000 of SBA fee and interest income earned on PPP loans, respectively.
Average interest-earning assets increased $32.1 million, to $536.2 million for the three months ended September 30, 2023 from $504.1 million for the three months ended September 30, 2022. The weighted average annualized yield on interest earning-assets increased to 3.85% for the three months ended September 30, 2023 from 3.35% for the three months ended September 30, 2022 primarily due to an increase in market interest rates. The weighted average annualized yield for the loan portfolio increased to 4.09% for the three months ended September 30, 2023 from 3.66% for the three months ended September 30, 2022 due primarily to an increase in market interest rates. The weighted average annualized yield for all other interest-earning assets increased to 3.00% for the three months ended September 30, 2023 from 2.31% for the three months ended September 30, 2022 due primarily to an increase in market interest rates.
Interest Expense. Total interest expense increased $2.2 million to $2.6 million for the three months ended September 30, 2023 from $427,000 for the three months ended September 30, 2022. Interest expense on deposits increased $1.5 million to $1.7 million for the three months ended September 30, 2023 from $151,000 for the three months ended September 30, 2022. The average balance of interest-bearing deposits increased $28.9 million, or 9.7%, to $328.5 million for the three months ended September 30, 2023 from $299.6 million for the three months ended September 30, 2022 primarily as a result of an increase in the average balance of money market, savings and time deposits offset by a decrease in the average balances of NOW and demand deposits. The weighted average annualized rate of interest-bearing deposits increased to 2.03% for the three months ended September 30, 2023 from 0.20% for the
41
three months ended September 30, 2022 primarily as a result of an increase in market interest rates and to respond to deposit pricing by competitors.
Interest expense on borrowings increased $652,000 to $928,000 for the three months ended September 30, 2023 from $276,000 for the three months ended September 30, 2022 primarily due to an increase in the average balance of borrowings and an increase in market interest rates. The average balance of borrowings increased $6.1 million, or 8.5%, to $78.2 million for the three months ended September 30, 2023 from $72.1 million for the three months ended September 30, 2022. The weighted average annualized rate of borrowings increased to 4.75% for the three months ended September 30, 2023 from 1.53% for the three months ended September 30, 2022 due to an increase in market interest rates.
Net Interest and Dividend Income. Net interest and dividend income decreased $1.2 million, or 32.3%, to $2.6 million for the three months ended September 30, 2023 from $3.8 million for the three months ended September 30, 2022. This decrease was due to an increase of $34.9 million, or 9.4%, in the average balance of interest-bearing liabilities, consisting primarily of an increase in the average balance of borrowings and time deposits, during the three months ended September 30, 2023 offset by a $32.1 million, or 6.4%, increase in the average balance of interest-earning assets, consisting primarily of increases in the average balances of loans and non-taxable debt securities. Annualized net interest margin decreased to 1.92% for the three months ended September 30, 2023 from 3.01% for the three months ended September 30, 2022 due primarily to an increase in the average rate of borrowings and interest-bearing deposits offset by an increase in the average yield on interest-earning assets.
Provision for Credit Losses. Based on management’s analysis of the ACL, a $120,000 provision for credit losses expense was recorded for the three months ended September 30, 2023, compared to a $60,000 release for credit losses for the three months ended September 30, 2022. The provision for credit losses expense for the three months ended September 30, 2023 consisted of a $30,000 provision for credit losses on loans and a $90,000 provision for credit losses on off-balance sheet credit exposures.
Non-Interest Income. Non-interest income decreased $51,000, or 14.0%, to $314,000 for the three months ended September 30, 2023 compared to $365,000 for the three months ended September 30, 2022. The decrease in non-interest income during the three months ended September 30, 2023 was due primarily to a $34,000 decrease in customer service fees and an $18,000 decrease in loan servicing fee income.
Non-Interest Expense. Non-interest expense increased $391,000, or 10.5%, to $4.1 million for the three months ended September 30, 2023 from $3.7 million for the three months ended September 30, 2022. The increase was primarily due to a $258,000, or 11.6%, increase in salaries and employee benefits, a $27,000, or 77.1%, increase in deposit insurance fees, a $75,000, or 22.8%, increase in data processing, a $37,000, or 27.0%, increase in marketing and a $26,000, or 14.5%, increase in occupancy expense offset by a $69,000, or 26.0%, decrease in professional fees and assessments. The increase in salaries and employee benefits during the three months ended September 30, 2023, was due to headcount additions and normal salary increases.
Income Taxes. Income tax expense decreased $466,000 to a benefit of $427,000 for the three months ended September 30, 2023 from an expense of $39,000 for the three months ended September 30, 2022. The effective tax rate was (31.9)% and 7.7% for the three months ended September 30, 2023 and 2022, respectively. The decrease in income tax expense and the effective tax rate for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 was due primarily to a $1.8 million decrease in income before income tax (benefit) expense for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.
42
Average Balance Sheets
The following table sets forth average balance sheets, average yields and costs and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual loans are included in the computation of average balances only. The yields set forth below include the effect of net deferred fee (expense) income, discounts and premiums that are amortized or accreted to interest income or interest expense. Average loan balances exclude loans held for sale, if applicable. The following table includes no out-of-period items or adjustments.
|
|
For the Three Months Ended September 30, |
|
|||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||||||||||
|
|
Average |
|
|
Interest |
|
|
Average |
|
|
Average |
|
|
Interest |
|
|
Average |
|
||||||
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Loans (4) |
|
$ |
418,744 |
|
|
$ |
4,281 |
|
|
|
4.09 |
% |
|
$ |
387,604 |
|
|
$ |
3,543 |
|
|
|
3.66 |
% |
Taxable debt securities |
|
|
49,828 |
|
|
|
345 |
|
|
|
2.77 |
% |
|
|
55,966 |
|
|
|
271 |
|
|
|
1.94 |
% |
Non-taxable debt securities |
|
|
59,743 |
|
|
|
443 |
|
|
|
2.97 |
% |
|
|
50,726 |
|
|
|
342 |
|
|
|
2.70 |
% |
Interest-bearing deposits with other banks |
|
|
5,164 |
|
|
|
40 |
|
|
|
3.10 |
% |
|
|
6,802 |
|
|
|
24 |
|
|
|
1.41 |
% |
Federal Home Loan Bank stock |
|
|
2,701 |
|
|
|
54 |
|
|
|
8.00 |
% |
|
|
2,982 |
|
|
|
37 |
|
|
|
4.96 |
% |
Total interest-earning assets |
|
|
536,180 |
|
|
|
5,163 |
|
|
|
3.85 |
% |
|
|
504,080 |
|
|
|
4,217 |
|
|
|
3.35 |
% |
Non-interest-earning assets |
|
|
18,833 |
|
|
|
|
|
|
|
|
|
16,539 |
|
|
|
|
|
|
|
||||
Total assets |
|
$ |
555,013 |
|
|
|
|
|
|
|
|
$ |
520,619 |
|
|
|
|
|
|
|
||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
NOW and demand deposits |
|
$ |
99,442 |
|
|
$ |
120 |
|
|
|
0.48 |
% |
|
$ |
116,690 |
|
|
$ |
43 |
|
|
|
0.15 |
% |
Money market deposits |
|
|
78,327 |
|
|
|
571 |
|
|
|
2.92 |
% |
|
|
65,596 |
|
|
|
31 |
|
|
|
0.19 |
% |
Savings accounts |
|
|
68,500 |
|
|
|
320 |
|
|
|
1.87 |
% |
|
|
63,526 |
|
|
|
8 |
|
|
|
0.05 |
% |
Time deposits |
|
|
82,240 |
|
|
|
655 |
|
|
|
3.19 |
% |
|
|
53,760 |
|
|
|
69 |
|
|
|
0.51 |
% |
Total interest-bearing deposits |
|
|
328,509 |
|
|
|
1,666 |
|
|
|
2.03 |
% |
|
|
299,572 |
|
|
|
151 |
|
|
|
0.20 |
% |
Borrowings |
|
|
78,191 |
|
|
|
928 |
|
|
|
4.75 |
% |
|
|
72,079 |
|
|
|
276 |
|
|
|
1.53 |
% |
Other |
|
|
1,530 |
|
|
|
2 |
|
|
|
0.52 |
% |
|
|
1,642 |
|
|
|
— |
|
|
|
— |
|
Total interest-bearing liabilities |
|
|
408,230 |
|
|
|
2,596 |
|
|
|
2.54 |
% |
|
|
373,293 |
|
|
|
427 |
|
|
|
0.46 |
% |
Non-interest-bearing deposits |
|
|
69,813 |
|
|
|
|
|
|
|
|
|
90,645 |
|
|
|
|
|
|
|
||||
Other noninterest-bearing liabilities |
|
|
4,526 |
|
|
|
|
|
|
|
|
|
4,029 |
|
|
|
|
|
|
|
||||
Total liabilities |
|
|
482,569 |
|
|
|
|
|
|
|
|
|
467,967 |
|
|
|
|
|
|
|
||||
Total stockholders' equity |
|
|
72,444 |
|
|
|
|
|
|
|
|
|
52,652 |
|
|
|
|
|
|
|
||||
Total liabilities and stockholders' equity |
|
$ |
555,013 |
|
|
|
|
|
|
|
|
$ |
520,619 |
|
|
|
|
|
|
|
||||
Net interest income |
|
|
|
|
$ |
2,567 |
|
|
|
|
|
|
|
|
$ |
3,790 |
|
|
|
|
||||
Net interest rate spread (1) |
|
|
|
|
|
|
|
|
1.31 |
% |
|
|
|
|
|
|
|
|
2.89 |
% |
||||
Net interest-earning assets (2) |
|
$ |
127,950 |
|
|
|
|
|
|
|
|
$ |
130,787 |
|
|
|
|
|
|
|
||||
Net interest margin (3) |
|
|
|
|
|
|
|
|
1.92 |
% |
|
|
|
|
|
|
|
|
3.01 |
% |
||||
Average interest-earning assets to interest-bearing liabilities |
|
|
131.34 |
% |
|
|
|
|
|
|
|
|
135.04 |
% |
|
|
|
|
|
|
43
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.
|
|
Three Months Ended September 30, 2023 vs. 2022 |
|
|||||||||
|
|
Increase (Decrease) Due to Change in |
|
|||||||||
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|||
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|||
Loans |
|
$ |
298 |
|
|
$ |
440 |
|
|
$ |
738 |
|
Taxable debt securities |
|
|
(32 |
) |
|
|
106 |
|
|
|
74 |
|
Non-taxable debt securities |
|
|
65 |
|
|
|
36 |
|
|
|
101 |
|
Interest-bearing deposits with other banks |
|
|
(7 |
) |
|
|
23 |
|
|
|
16 |
|
Federal Home Loan Bank stock |
|
|
(4 |
) |
|
|
21 |
|
|
|
17 |
|
Total interest-earning assets |
|
|
320 |
|
|
|
626 |
|
|
|
946 |
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|||
NOW and demand deposits |
|
|
(7 |
) |
|
|
84 |
|
|
|
77 |
|
Money market deposits |
|
|
7 |
|
|
|
533 |
|
|
|
540 |
|
Savings accounts |
|
|
1 |
|
|
|
311 |
|
|
|
312 |
|
Time deposits |
|
|
54 |
|
|
|
532 |
|
|
|
586 |
|
Total interest-bearing deposits |
|
|
55 |
|
|
|
1,460 |
|
|
|
1,515 |
|
Borrowings |
|
|
25 |
|
|
|
627 |
|
|
|
652 |
|
Other |
|
|
— |
|
|
|
2 |
|
|
|
2 |
|
Total interest-bearing liabilities |
|
|
80 |
|
|
|
2,089 |
|
|
|
2,169 |
|
Change in net interest income |
|
$ |
240 |
|
|
$ |
(1,463 |
) |
|
$ |
(1,223 |
) |
Comparison of Operating Results for the Nine Months Ended September 30, 2023 and September 30, 2022
Net Income. Net loss was $987,000 for the nine months ended September 30, 2023, compared to net income of $1.0 million for the nine months ended September 30, 2022, a decrease of $2.0 million, or 194.9%. The decrease was due primarily to a decrease in net interest and dividend income after provision (release) for credit losses of $2.7 million and an increase in non-interest expenses of $727,000 offset by an increase in non-interest income of $616,000 and a decrease in income tax expense of $830,000 during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.
Interest and Dividend Income. Total interest and dividend income increased $2.7 million, or 21.9%, to $14.8 million for the nine months ended September 30, 2023 compared to $12.1 million for the nine months ended September 30, 2022. This increase was due to a $865,000 increase in interest and dividend income on investments and a $1.8 million increase in interest and fees on loans. Interest and fees on loans for the nine months ended September 30, 2023 and 2022 included $-0- and $233,000 of SBA fee and interest income earned on PPP loans, respectively.
Average interest-earning assets increased $36.8 million, to $528.5 million for the nine months ended September 30, 2023 from $491.7 million for the nine months ended September 30, 2022. The weighted average annualized yield on interest earning-assets increased to 3.73% for the nine months ended September 30, 2023 from 3.29% for the nine months ended September 30, 2022 primarily due to an increase in market interest rates. The weighted average annualized yield for the loan portfolio increased to 3.96% for the nine months ended September 30, 2023 from 3.64% for the nine months ended September 30, 2022 due primarily to an increase in market interest rates. The weighted average annualized yield for all other interest-earning assets increased to 2.92% for the nine months ended September 30, 2023 from 2.07% for the nine months ended September 30, 2022 due primarily to an increase in market interest rates.
Interest Expense. Total interest expense increased $5.2 million to $6.0 million for the nine months ended September 30, 2023 from $818,000 for the nine months ended September 30, 2022. Interest expense on deposits increased $3.1 million to $3.5 million for the nine months ended September 30, 2023 from $400,000 for the nine months ended September 30, 2022. The average balance of interest-bearing deposits increased $15.3 million, or 5.2%, to $312.0 million for the nine months ended September 30, 2023 from $296.7 million for the nine months ended September 30, 2022 primarily as a result of an increase in the average balance of money market, savings and time deposits offset by a decrease in the average balances of NOW and demand deposits. The weighted average annualized rate of interest-bearing deposits increased to 1.46% for the nine months ended September 30, 2023 from 0.18% for the nine months ended September 30, 2022 primarily as a result of an increase in market interest rates and to respond to deposit pricing by competitors.
44
Interest expense on borrowings increased $2.2 million to $2.6 million for the nine months ended September 30, 2023 from $418,000 for the nine months ended September 30, 2022 primarily due to an increase in the average balance of borrowings and an increase in market interest rates. The average balance of borrowings increased $22.6 million, or 40.9%, to $78.0 million for the nine months ended September 30, 2023 from $55.4 million for the nine months ended September 30, 2022. The weighted average annualized rate of borrowings increased to 4.43% for the nine months ended September 30, 2023 from 1.01% for the nine months ended September 30, 2022 due to an increase in market interest rates.
Net Interest and Dividend Income. Net interest and dividend income decreased $2.6 million, or 22.8%,to $8.7 million for the nine months ended September 30, 2023 from $11.3 million for the nine months ended September 30, 2022. This decrease was due to an increase of $38.0 million, or 10.8%, in the average balance of interest-bearing liabilities, consisting primarily of an increase in the average balance of borrowings and time deposits, during the nine months ended September 30, 2023 offset by a $36.8 million, or 7.5%, increase in the average balance of interest-earning assets, consisting primarily of increases in the average balances of loans and non-taxable debt securities. Annualized net interest margin decreased to 2.21% for the nine months ended September 30, 2023 from 3.07% for the nine months ended September 30, 2022 due primarily to an increase in the average rate of borrowings and interest-bearing deposits offset by an increase in the average yield on interest-earning assets.
Provision for Credit Losses. Based on management’s analysis of the ACL, a $170,000 provision for credit losses expense was recorded for the nine months ended September 30, 2023, compared to a $-0- provision for credit losses expense for the nine months ended September 30, 2022. The provision for credit losses expense for the nine months ended September 30, 2023 consisted of a $65,000 provision for credit losses on loans and a $105,000 provision for credit losses on off-balance sheet credit exposures.
Non-Interest Income. Non-interest income increased $616,000, or 51.1%, to $1.8 million for the nine months ended September 30, 2023 compared to $1.2 million for the nine months ended September 30, 2022. The increase in non-interest income during the nine months ended September 30, 2023 was due primarily to an $849,000 gain on termination of interest rate swaps offset by a $52,000 decrease in securities gains, net, a $91,000 decrease in customer service fees, a $32,000 decrease in investment service fees and a $69,000 decrease in loan servicing fee income.
Non-Interest Expense. Non-interest expense increased $727,000, or 6.4%, to $12.1 million for the nine months ended September 30, 2023 from $11.3 million for the nine months ended September 30, 2022. The increase was primarily due to a $423,000, or 6.1%, increase in salaries and employee benefits, a $85,000, or 78.0%, increase in deposit insurance fees, a $139,000, or 13.2%, increase in data processing, a $92,000, or 32.2%, increase in marketing, and a $30,000, or 5.4%, increase in occupancy expense, offset by a $54,000, or 6.9%, decrease in professional fees and assessments. The increase in salaries and employee benefits during the nine months ended September 30, 2023, was due primarily to normal salary increases.
Income Taxes. Income tax expense decreased $830,000 to a benefit of $667,000 for the nine months ended September 30, 2023 from an expense of $163,000 for the nine months ended September 30, 2022. The effective tax rate was (40.3)% and 13.5% for the nine months ended September 30, 2023 and 2022, respectively. The decrease in income tax expense and the effective tax rate for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was due primarily to a $2.9 million decrease in income before income tax (benefit) expense and an increase in the amount of non-taxable income as a percentage of income before income tax (benefit) expense for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.
45
Average Balance Sheets
The following table sets forth average balance sheets, average yields and costs and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual loans are included in the computation of average balances only. The yields set forth below include the effect of net deferred fee (expense) income, discounts and premiums that are amortized or accreted to interest income or interest expense. Average loan balances exclude loans held for sale, if applicable. The following table includes no out-of-period items or adjustments.
|
|
For the Nine Months Ended September 30, |
|
|||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||||||||||
|
|
Average |
|
|
Interest |
|
|
Average |
|
|
Average |
|
|
Interest |
|
|
Average |
|
||||||
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Loans (4) |
|
$ |
410,902 |
|
|
$ |
12,215 |
|
|
|
3.96 |
% |
|
$ |
381,466 |
|
|
$ |
10,427 |
|
|
|
3.64 |
% |
Taxable debt securities |
|
|
49,684 |
|
|
|
928 |
|
|
|
2.49 |
% |
|
|
52,915 |
|
|
|
706 |
|
|
|
1.78 |
% |
Non-taxable debt securities |
|
|
58,677 |
|
|
|
1,305 |
|
|
|
2.97 |
% |
|
|
48,298 |
|
|
|
900 |
|
|
|
2.48 |
% |
Interest-bearing deposits with other banks |
|
|
6,330 |
|
|
|
159 |
|
|
|
3.35 |
% |
|
|
6,535 |
|
|
|
46 |
|
|
|
0.93 |
% |
Federal Home Loan Bank stock |
|
|
2,934 |
|
|
|
185 |
|
|
|
8.41 |
% |
|
|
2,483 |
|
|
|
60 |
|
|
|
3.22 |
% |
Total interest-earning assets |
|
|
528,527 |
|
|
|
14,792 |
|
|
|
3.73 |
% |
|
|
491,697 |
|
|
|
12,139 |
|
|
|
3.29 |
% |
Non-interest-earning assets |
|
|
17,935 |
|
|
|
|
|
|
|
|
|
14,946 |
|
|
|
|
|
|
|
||||
Total assets |
|
$ |
546,462 |
|
|
|
|
|
|
|
|
$ |
506,643 |
|
|
|
|
|
|
|
||||
Interest-bearing liabilities: |
|
|
|
|
` |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
NOW and demand deposits |
|
$ |
102,994 |
|
|
$ |
268 |
|
|
|
0.35 |
% |
|
$ |
111,978 |
|
|
$ |
75 |
|
|
|
0.09 |
% |
Money market deposits |
|
|
69,302 |
|
|
|
1,122 |
|
|
|
2.16 |
% |
|
|
67,407 |
|
|
|
86 |
|
|
|
0.17 |
% |
Savings deposits |
|
|
65,774 |
|
|
|
674 |
|
|
|
1.37 |
% |
|
|
61,510 |
|
|
|
21 |
|
|
|
0.05 |
% |
Time deposits |
|
|
73,973 |
|
|
|
1,354 |
|
|
|
2.44 |
% |
|
|
55,813 |
|
|
|
218 |
|
|
|
0.52 |
% |
Total interest-bearing deposits |
|
|
312,043 |
|
|
|
3,418 |
|
|
|
1.46 |
% |
|
|
296,708 |
|
|
|
400 |
|
|
|
0.18 |
% |
Borrowings |
|
|
78,043 |
|
|
|
2,593 |
|
|
|
4.43 |
% |
|
|
55,404 |
|
|
|
418 |
|
|
|
1.01 |
% |
Other |
|
|
1,798 |
|
|
|
36 |
|
|
|
2.67 |
% |
|
|
1,747 |
|
|
|
— |
|
|
|
— |
|
Total interest-bearing liabilities |
|
|
391,884 |
|
|
|
6,047 |
|
|
|
2.06 |
% |
|
|
353,859 |
|
|
|
818 |
|
|
|
0.31 |
% |
Non-interest-bearing deposits |
|
|
78,925 |
|
|
|
|
|
|
|
|
|
93,617 |
|
|
|
|
|
|
|
||||
Other non-interest-bearing liabilities |
|
|
4,073 |
|
|
|
|
|
|
|
|
|
3,807 |
|
|
|
|
|
|
|
||||
Total liabilities |
|
|
474,882 |
|
|
|
|
|
|
|
|
|
451,283 |
|
|
|
|
|
|
|
||||
Total stockholders' equity |
|
|
71,580 |
|
|
|
|
|
|
|
|
|
55,360 |
|
|
|
|
|
|
|
||||
Total liabilities and stockholders' equity |
|
$ |
546,462 |
|
|
|
|
|
|
|
|
$ |
506,643 |
|
|
|
|
|
|
|
||||
Net interest income |
|
|
|
|
$ |
8,745 |
|
|
|
|
|
|
|
|
$ |
11,321 |
|
|
|
|
||||
Net interest rate spread (1) |
|
|
|
|
|
|
|
|
1.67 |
% |
|
|
|
|
|
|
|
|
2.98 |
% |
||||
Net interest-earning assets (2) |
|
$ |
136,643 |
|
|
|
|
|
|
|
|
$ |
137,838 |
|
|
|
|
|
|
|
||||
Net interest margin (3) |
|
|
|
|
|
|
|
|
2.21 |
% |
|
|
|
|
|
|
|
|
3.07 |
% |
||||
Average interest-earning assets to interest-bearing liabilities |
|
|
134.87 |
% |
|
|
|
|
|
|
|
|
138.95 |
% |
|
|
|
|
|
|
46
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.
|
|
Nine Months Ended September 30, 2023 vs. 2022 |
|
|||||||||
|
|
Increase (Decrease) Due to |
|
|
Total Increase |
|
||||||
|
|
Volume |
|
|
Rate |
|
|
(Decrease) |
|
|||
(In thousands) |
|
|
|
|
|
|
|
|
|
|||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|||
Loans |
|
$ |
838 |
|
|
$ |
950 |
|
|
$ |
1,788 |
|
Taxable debt securities |
|
|
(45 |
) |
|
|
267 |
|
|
|
222 |
|
Non-taxable debt securities |
|
|
212 |
|
|
|
193 |
|
|
|
405 |
|
Interest-bearing deposits with other banks |
|
|
(1 |
) |
|
|
114 |
|
|
|
113 |
|
Federal Home Loan Bank stock |
|
|
13 |
|
|
|
112 |
|
|
|
125 |
|
Total interest-earning assets |
|
|
1,017 |
|
|
|
1,636 |
|
|
|
2,653 |
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|||
NOW and demand deposits |
|
|
(7 |
) |
|
|
200 |
|
|
|
193 |
|
Money market deposits |
|
|
2 |
|
|
|
1,034 |
|
|
|
1,036 |
|
Savings deposits |
|
|
2 |
|
|
|
651 |
|
|
|
653 |
|
Time deposits |
|
|
92 |
|
|
|
1,044 |
|
|
|
1,136 |
|
Total interest-bearing deposits |
|
|
89 |
|
|
|
2,929 |
|
|
|
3,018 |
|
Borrowings |
|
|
234 |
|
|
|
1,941 |
|
|
|
2,175 |
|
Other |
|
|
— |
|
|
|
36 |
|
|
|
36 |
|
Total interest-bearing liabilities |
|
|
323 |
|
|
|
4,906 |
|
|
|
5,229 |
|
Change in net interest income |
|
$ |
694 |
|
|
$ |
(3,270 |
) |
|
$ |
(2,576 |
) |
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. As of September 30, 2023 and December 31, 2022, the aggregate amount of uninsured total deposit balances, which is the portion exceeding the $250,000 FDIC insurance limit, had an estimated value not exceeding $106.3 million, or 25.8% of total deposits, and $82.0 million, or 21.4% of total deposits, respectively. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans and proceeds from sales and maturities of securities. We also rely on borrowings from the FHLB as supplemental sources of funds. At September 30, 2023 and December 31, 2022, we had $44.9 million and $99.4 million outstanding in advances from the FHLB, respectively, and the ability to borrow an additional $99.2 million and $36.5 million, respectively. Additionally, at September 30, 2023 and December 31, 2022, we had an overnight line of credit with the FHLB for up to $3.0 million and unsecured Fed Funds borrowing lines of credit with two correspondent banks for up to $5.0 million. At September 30, 2023 and December 31, 2022, there were no outstanding balances under any of these additional credit facilities.
The Bank has established two secured credit facilities with the FRB – Bank Term Funding Program (“BTFP”) and Borrower-In-Custody of Collateral Program (“BIC”). At September 30, 2023, the Bank’s remaining borrowing capacity is $7.3 million under the BTFP and is based upon eligible collateral, principally government-sponsored enterprise obligations, mortgage-backed securities and collateralized mortgage obligations issued by various U.S. Government agencies, owned as of March 12, 2023. The interest rate for term advances under the BTFP will be the one-year overnight index swap rate plus 10 basis points and fixed for the term of the advance – up to one year - on the day the advance is made. Advances can be requested under the BTFP until at least March 11, 2024. At September 30, 2023, the Bank’s borrowing capacity is $55.5 million under the BIC and is based upon eligible collateral - principally general obligation municipal bonds. The entire balance of this credit facility was available at September 30, 2023.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions and competition. Our most liquid assets are cash and cash equivalents and available-for-sale investment securities. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period.
47
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities and financing activities. Net cash (used) provided by operating activities was $(417,000) and $1.8 million for the nine months ended September 30, 2023 and 2022, respectively. Net cash used by investing activities, which consists primarily of disbursements for loan originations and purchases, and the purchase of securities available-for-sale, offset by proceeds from the unwinding of interest rate swaps, principal collections on loans and proceeds from the sale, maturity and principal payments on securities available-for-sale, was $25.5 million and $49.4 million for the nine months ended September 30, 2023 and 2022, respectively. Net cash provided by financing activities, consisting primarily of proceeds from the sale of common stock, activity in deposit accounts and FHLB and FRB advances, was $24.8 million and $47.7 million for the nine months ended September 30, 2023 and 2022, respectively.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position daily. We anticipate that we will have sufficient funds to meet our current funding commitments. We have no material commitments for capital expenditures as of September 30, 2023. Our current strategy is to increase core deposits and utilize FHLB and FRB advances, as well as brokered deposits, to fund loan growth.
First Seacoast Bancorp, Inc. is a separate legal entity from First Seacoast Bank and must provide for its own liquidity to pay its operating expenses and other financial obligations and to fund repurchases of shares of common stock. The Company’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company is governed by applicable bank regulations. At September 30, 2023, the Company (on an unconsolidated basis) had liquid assets of $20.0 million.
At September 30, 2023, First Seacoast Bank exceeded all its regulatory capital requirements. See Note 12 of the unaudited consolidated financial statements appearing under Item 1 of this quarterly report. Management is not aware of any conditions or events that would change First Seacoast Bank’s categorization as well-capitalized.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
General. Most of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage our exposure to changes in market interest rates. Accordingly, the board of directors established a management-level Asset/Liability Management Committee (the “ALCO”), which takes responsibility for overseeing the asset/liability management process and related procedures. The ALCO meets on at least a quarterly basis and reviews asset/liability strategies, liquidity positions, alternative funding sources, interest rate risk measurement reports, capital levels and economic trends at both national and local levels. Our interest rate risk position is also monitored quarterly by the board of directors.
We manage our interest rate risk in an effort to minimize the exposure of our earnings and capital to changes in market interest rates. We have implemented the following strategies to manage our interest rate risk: originating loans with adjustable interest rates; promoting core deposit products; selling a portion of fixed-rate one- to four-family residential real estate loans; maintaining investments as available-for-sale; diversifying our loan portfolio; utilizing interest rate swaps; and strengthening our capital position. By following these strategies, we believe that we are better positioned to react to changes in market interest rates.
Net Portfolio Value Simulation. We analyze our sensitivity to changes in interest rates through a net portfolio value of equity (“NPV”) model. NPV represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities adjusted for the value of off-balance sheet contracts. The NPV ratio represents the dollar amount of our NPV divided by the present value of our total assets for a given interest rate scenario. NPV attempts to quantify our economic value using a discounted cash flow methodology, while the NPV ratio reflects that value as a form of capital ratio. We estimate what our NPV would be at a specific date. We then calculate what the NPV would be at the same date throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve. We currently calculate NPV under the assumptions that interest rates increase 100, 200, 300 and 400 basis points from current market rates and that interest rates decrease 100, 200, 300 and 400 basis points from current market rates.
48
The following table presents the estimated changes in our net portfolio value that would result from changes in market interest rates as of September 30, 2023 and December 31, 2022:
As of September 30, 2023:
|
|
Net Portfolio Value ("NPV") |
|
|
NPV as Percent of |
|
||||||||||||||
Basis Point ("bp") Change in Interest Rates |
|
Dollar |
|
|
Dollar |
|
|
Percent |
|
|
NPV |
|
|
Change |
|
|||||
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|||||||||||
400 bp |
|
$ |
46,543 |
|
|
$ |
(33,881 |
) |
|
|
(42.1 |
)% |
|
|
10.7 |
% |
|
$ |
(506 |
) |
300 bp |
|
|
54,344 |
|
|
|
(26,080 |
) |
|
|
(32.4 |
) |
|
|
12.1 |
|
|
|
(373 |
) |
200 bp |
|
|
62,570 |
|
|
|
(17,854 |
) |
|
|
(22.2 |
) |
|
|
13.3 |
|
|
|
(245 |
) |
100 bp |
|
|
72,087 |
|
|
|
(8,337 |
) |
|
|
(10.4 |
) |
|
|
14.7 |
|
|
|
(105 |
) |
0 |
|
|
80,424 |
|
|
|
— |
|
|
|
— |
|
|
|
15.8 |
|
|
|
— |
|
(100) bp |
|
|
88,231 |
|
|
|
7,807 |
|
|
|
9.7 |
|
|
|
16.6 |
|
|
|
85 |
|
(200) bp |
|
|
94,262 |
|
|
|
13,838 |
|
|
|
17.2 |
|
|
|
17.1 |
|
|
|
133 |
|
(300) bp |
|
|
97,630 |
|
|
|
17,206 |
|
|
|
21.4 |
|
|
|
17.1 |
|
|
|
133 |
|
(400) bp |
|
|
98,183 |
|
|
|
17,759 |
|
|
|
22.1 |
|
|
|
16.7 |
|
|
|
88 |
|
As of December 31, 2022:
|
|
Net Portfolio Value ("NPV") |
|
|
NPV as Percent of |
|
||||||||||||||
Basis Point ("bp") Change in Interest Rates |
|
Dollar |
|
|
Dollar |
|
|
Percent |
|
|
NPV |
|
|
Change |
|
|||||
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|||||||||||
400 bp |
|
$ |
64,978 |
|
|
$ |
(31,915 |
) |
|
|
(32.9 |
)% |
|
|
15.3 |
% |
|
$ |
(401 |
) |
300 bp |
|
|
72,904 |
|
|
|
(23,989 |
) |
|
|
(24.8 |
) |
|
|
16.4 |
|
|
|
(284 |
) |
200 bp |
|
|
80,715 |
|
|
|
(16,178 |
) |
|
|
(16.7 |
) |
|
|
17.5 |
|
|
|
(180 |
) |
100 bp |
|
|
89,144 |
|
|
|
(7,749 |
) |
|
|
(8.0 |
) |
|
|
18.5 |
|
|
|
(78 |
) |
0 |
|
|
96,893 |
|
|
|
— |
|
|
|
— |
|
|
|
19.3 |
|
|
|
— |
|
(100) bp |
|
|
102,856 |
|
|
|
5,963 |
|
|
|
6.2 |
|
|
|
19.6 |
|
|
|
37 |
|
(200) bp |
|
|
106,776 |
|
|
|
9,883 |
|
|
|
10.2 |
|
|
|
19.6 |
|
|
|
35 |
|
(300) bp |
|
|
107,095 |
|
|
|
10,202 |
|
|
|
10.5 |
|
|
|
19.0 |
|
|
|
(29 |
) |
(400) bp |
|
|
99,984 |
|
|
|
3,091 |
|
|
|
3.2 |
|
|
|
17.3 |
|
|
|
(199 |
) |
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the way actual yields and costs respond to changes in market interest rates. The above table assumes that the composition of our interest-sensitive assets and liabilities existing at the date indicated remains constant uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our NPV and will differ from actual results.
49
Economic Value of Equity. Like most financial institutions, our profitability depends to a large extent upon our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and securities, and our interest expense on interest-bearing liabilities adjusted for the value of off-balance sheet contracts, such as deposits and borrowed funds. Accordingly, our results of operations depend largely on movements in market interest rates and our ability to manage our interest-rate sensitive assets and liabilities in response to these movements. Factors such as inflation, and instability in financial markets, among other factors beyond our control, may affect interest rates.
In a rising interest rate environment, we would expect that the rates on our deposits and borrowings would reprice upwards faster than the rates on our long-term loans and investments, which would be expected to compress our interest rate spread and have a negative effect on our profitability. Furthermore, increases in interest rates may adversely affect the ability of our borrowers to make loan repayments on adjustable-rate loans, as the interest owed on such loans would increase as interest rates increase. Conversely, decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such loan or securities proceeds into lower-yielding assets, which might also negatively impact our income. If interest rates rise, we expect that our economic value of equity would decrease. Economic value of equity represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities. The Company’s economic value of equity analysis as of September 30, 2023 estimated that, in the event of an instantaneous 200 basis point increase in interest rates, the Company would experience a 22.2% decrease in economic value of equity which was above the Board approved limit of 20.0%. At the same date, our analysis estimated that, in the event of an instantaneous 200 basis point decrease in interest rates, the Company would experience a 17.2% increase in the economic value of equity which was within Board approved limits.
Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings. Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating results.
50
Item 4. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures. As of September 30, 2023, the Company conducted an evaluation, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2023 for recording, processing, summarizing and reporting the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in SEC rules and forms.
The effectiveness of a system of disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Due to such inherent limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.
Changes in Internal Controls over Financial Reporting. During the quarter ended September 30, 2023, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
51
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
Periodically, we are involved in claims and lawsuits, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. At September 30, 2023, we were not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
Item 1A. Risk Factors
Not applicable, as First Seacoast Bancorp, Inc. is a “smaller reporting company.”
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no stock repurchases or sales of unregistered securities during the quarter ended September 30, 2023.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
52
Item 6. Exhibits
Exhibit Number |
|
Description |
|
|
|
31.1 |
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2 |
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1 |
|
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2 |
|
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
101 |
|
The following materials for the quarter ended September 30, 2023, formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of (Loss) Income, (iii) Consolidated Statements of Comprehensive Loss, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements |
104 |
|
Cover Page Interactive Data Files (embedded within Inline XBRL document) |
53
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
FIRST SEACOAST BANCORP, INC. |
|
|
|
|
|
|
Date: November 9, 2023 |
|
/s/ James R. Brannen |
|
|
James R. Brannen |
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
Date: November 9, 2023 |
|
/s/ Richard M. Donovan |
|
|
Richard M. Donovan |
|
|
Senior Vice President and Chief Financial Officer |
54