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First Seacoast Bancorp, Inc. (NASDAQ:FSEA): Navigating the Challenges of a Volatile Interest Rate Environment
Published on September 24, 2024 | Ticker: FSEA

First Seacoast Bancorp, Inc. (NASDAQ:FSEA) is a bank holding company headquartered in Dover, New Hampshire, that provides a range of banking and wealth management services through its wholly-owned subsidiary, First Seacoast Bank. The company operates five full-service branch locations in Strafford and Rockingham Counties in New Hampshire, as well as York County in Southern Maine.

Financials

For the full year 2023, First Seacoast Bancorp reported annual net income of -$10.66 million on annual revenue of $9.31 million. The company's annual operating cash flow was -$1.92 million, while its annual free cash flow stood at -$2.26 million. These financial results reflect the challenges the company has faced in navigating the volatile interest rate environment.

In the first quarter of 2024, First Seacoast Bancorp reported a net loss of $1.15 million, compared to net income of $464,000 in the same period of the prior year. This decline was primarily driven by a $305,000, or 9.5%, decrease in net interest and dividend income, as well as a $864,000, or 74.4%, decrease in non-interest income. The decrease in net interest and dividend income was due to an increase of $57.0 million, or 15.0%, in the average balance of interest-bearing liabilities, consisting primarily of an increase in the average balance of interest-bearing deposits, during the three months ended March 31, 2024, offset by a $39.9 million, or 7.7%, increase in the average balance of interest-earning assets, consisting primarily of increases in the average balances of loans and taxable debt securities. The decrease in non-interest income was primarily due to a one-time $849,000 gain on termination of interest rate swaps recognized only during the three months ended March 31, 2023.

The company's total assets stood at $576.5 million as of March 31, 2024, an increase of $5.4 million, or 1.0%, compared to $571.0 million as of December 31, 2023. This increase was primarily driven by a $644,000 increase in cash and due from banks, a $1.8 million increase in net loans, and a $2.3 million increase in securities available-for-sale.

Loan Portfolio

First Seacoast Bancorp's loan portfolio totaled $431.9 million as of March 31, 2024, an increase of $1.8 million, or 0.4%, from $430.0 million as of December 31, 2023. The company's loan portfolio is diversified, with one- to four-family residential mortgage loans accounting for $270.8 million, or 62.7%, of total loans, commercial real estate loans accounting for $87.8 million, or 20.3%, of total loans, and commercial and industrial loans accounting for $25.4 million, or 5.9%, of total loans.

Deposit Base

The company's deposit base totaled $405.6 million as of March 31, 2024, an increase of $797,000, or 0.2%, from $404.8 million as of December 31, 2023. Core deposits (defined as deposits other than time deposits, including CDARS® and ICS deposits) decreased $1.8 million, or 0.6%, to $311.7 million as of March 31, 2024, from $313.5 million as of December 31, 2023. The company's cost of interest-bearing deposits increased to 2.39% for the three months ended March 31, 2024, from 0.79% for the three months ended March 31, 2023, primarily due to the rising interest rate environment.

Borrowings

Total borrowings, which include advances from the Federal Home Loan Bank and the Federal Reserve Bank, increased $5.4 million, or 5.8%, to $98.4 million as of March 31, 2024, from $93.0 million as of December 31, 2023, in support of the company's investment and loan growth initiatives. The weighted average annualized rate of borrowings increased to 4.72% for the three months ended March 31, 2024, from 3.87% for the three months ended March 31, 2023, also reflecting the impact of the rising interest rate environment.

Net Interest Margin

First Seacoast Bancorp's net interest margin decreased to 2.07% for the three months ended March 31, 2024, from 2.46% for the three months ended March 31, 2023, due primarily to the increase in the average rate of interest-bearing deposits and borrowings, offset by an increase in the average yield on interest-earning assets.

Capital Position

The company's capital position remains strong, with a total risk-based capital ratio of 14.88% and a Tier 1 leverage ratio of 8.92% as of March 31, 2024, both of which exceed the regulatory requirements for a well-capitalized institution. However, the company's economic value of equity analysis as of March 31, 2024 estimated that, in the event of an instantaneous 200 basis point increase in interest rates, the company would experience a 23.8% decrease in economic value of equity, which was above the company's policy limit of 20%.

Liquidity

The company's liquidity position is also strong, with $20.4 million in liquid assets at the holding company level and the ability to borrow an additional $66.4 million from the Federal Home Loan Bank as of March 31, 2024. The company's 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. The company also relies on borrowings from the Federal Home Loan Bank and the Federal Reserve Bank as supplemental sources of funds.

Risks and Challenges

Looking ahead, First Seacoast Bancorp faces several key risks and challenges. The company's profitability is highly sensitive to changes in interest rates, and the continued rise in interest rates could further compress the company's net interest margin and have a negative impact on its earnings. Additionally, the company's loan portfolio is concentrated in commercial real estate and residential mortgage loans, which could be vulnerable to a downturn in the real estate market.

Outlook

Despite these challenges, the company remains focused on growing its loan portfolio, particularly in the commercial real estate and commercial and industrial loan segments, while also diversifying its deposit base and managing its interest rate risk exposure. The company's management team is actively monitoring the interest rate environment and implementing strategies to mitigate the negative impact of rising rates on the company's financial performance.

Conclusion

In conclusion, First Seacoast Bancorp is navigating a challenging interest rate environment, as evidenced by its recent financial results. The company's loan portfolio and deposit base continue to grow, but the rising cost of funding and the impact on net interest margin have weighed on the company's profitability. Going forward, the company's ability to effectively manage its interest rate risk and continue to diversify its revenue streams will be critical to its long-term success.

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