First Seacoast Bancorp (FSEA)

Executive Summary / Key Takeaways

• Interest Rate Risk Exceeds Policy Limits: First Seacoast Bancorp's Net Portfolio Value (NPV) sensitivity has breached internal risk thresholds, with a 200 basis point rate increase projected to reduce economic value of equity by 20.9%—a structural vulnerability that threatens capital stability and explains the market's discount to book value.

• Scale Disadvantage Creates Persistent Cost Headwinds: At $609.6 million in assets, FSEA operates at a fraction of regional peers' size, resulting in materially higher operating costs per asset and limiting technology investment, which compresses margins and hampers competitive positioning against larger, more efficient rivals.

• Margin Recovery Remains Fragile: While Q3 2025 showed net interest margin improvement to 2.32% and quarterly net income of $390,000, year-to-date losses of $758,000 reflect the challenge of offsetting one-time gains and rising expenses, suggesting the turnaround narrative remains unproven.

• Commercial Lending Pivot Offers Upside but Execution Risk: The strategic shift toward higher-yielding commercial real estate and C&I loans is directionally correct for margin expansion, but the modest absolute growth ($1.2 million and $971,000 increases, respectively) and declining ADL portfolio signal execution challenges in a competitive New England market.

• Valuation Discount Reflects Fundamental Challenges: Trading at 0.84x book value with negative returns on equity (-3.36%) and assets (-0.36%), the stock prices in continued underperformance, offering potential upside only if management successfully navigates interest rate risk while achieving operational leverage that has historically eluded small community banks.

Setting the Scene: A 135-Year-Old Institution at a Strategic Crossroads

First Seacoast Bancorp, founded in 1890 as the Dover Co-Operative Savings Fund and Loan Association, represents the archetypal American community bank confronting modern banking's structural challenges. Headquartered in Dover, New Hampshire, the company operates five full-service branches across the Seacoast region with $609.6 million in assets as of September 30, 2025. This scale positions FSEA as a niche player in a market dominated by regional giants like NBT Bancorp ($16.1 billion assets), Berkshire Hills Bancorp (BHLB) ($12.0 billion), and Webster Financial ($83.2 billion), each leveraging broader geographic footprints and superior technology investments to capture market share.

The bank's 2019 mutual holding company reorganization and NASDAQ listing marked a pivotal transition from a depositor-owned structure to public ownership, raising $25.1 million to fund growth. This capital infusion enabled a strategic pivot away from traditional residential mortgage lending toward higher-yielding commercial real estate and commercial and industrial loans. However, the transformation coincided with the most challenging interest rate environment in decades, exposing a fundamental vulnerability: a deposit base migrating from low-cost NOW and demand accounts to higher-cost money market and time deposits, creating asset-liability duration mismatches that now exceed policy limits.

FSEA's business model relies on attracting core deposits from individuals and businesses in its local markets, then deploying those funds into a diversified loan portfolio while selling conforming fixed-rate mortgages to the secondary market to manage interest rate risk and generate servicing income. The bank supplements core deposits with Federal Home Loan Bank advances and brokered deposits to fund loan growth, a funding mix that becomes increasingly expensive as rates rise. This structure places FSEA at a competitive disadvantage against larger peers with more sophisticated treasury management capabilities and access to lower-cost funding sources.

Technology, Products, and Strategic Differentiation: Limited Tools for a Complex Problem

First Seacoast's technological capabilities reflect its small scale and community bank focus, centered on basic digital banking platforms rather than proprietary innovation. The bank's strategic differentiation lies not in technology but in its deep local relationships and conservative underwriting standards cultivated over 135 years. This heritage creates a modest moat in deposit gathering and small business lending within its immediate geographic footprint, where personal relationships and local decision-making carry value that larger institutions struggle to replicate.

The core product strategy involves originating adjustable-rate and shorter-duration commercial loans while selling fixed-rate residential mortgages to manage interest rate exposure. This approach theoretically reduces duration risk, but the execution reveals limitations. The bank's $271.1 million residential portfolio declined 1.5% year-to-date, while commercial real estate loans grew only 1.4% to $87.2 million and C&I loans increased 4.1% to $24.7 million. These modest absolute growth figures, set against a $430 million total loan portfolio, indicate that the strategic pivot has yet to materially transform the balance sheet composition or drive meaningful margin expansion.

Management employs interest rate swaps as its primary risk management tool, entering into fair value hedges to convert fixed-rate assets to floating-rate exposures. However, the bank terminated certain hedges in June 2025 and November 2024 because the hedged transactions no longer aligned with its interest rate risk strategy, suggesting either poor forecasting or insufficient swap volume to effectively manage the overall balance sheet risk. The CDARS and ICS programs introduced in late 2023 provide enhanced FDIC insurance solutions, helping retain large depositors but at the cost of increased deposit beta and interest expense sensitivity.

The June 2024 sale-leaseback transaction, which generated a $2.5 million pre-tax gain, exemplifies the bank's limited strategic options. While the deal bolstered short-term profitability and freed capital, it simultaneously increased occupancy expenses through lease obligations with 2.5% annual escalations, creating a permanent drag on earnings that offset the one-time benefit. This trade-off highlights the challenge facing small banks: extracting value from legacy assets while avoiding long-term cost structures that impair future profitability.

Financial Performance & Segment Dynamics: Quarterly Improvement Masks Annual Deterioration

FSEA's financial results present a study in contrasts that underscores the fragility of its turnaround. For the three months ended September 30, 2025, net income reached $390,000, a dramatic improvement from $44,000 in the prior year period, driven by a $465,000 increase in net interest income and $180,000 rise in non-interest income. Net interest margin expanded to 2.32% from 2.08%, reflecting higher yields on interest-earning assets and a 27.3% decrease in borrowing costs due to lower average balances.

However, the nine-month picture reveals the underlying stress: a net loss of $758,000 compared to net income of $895,000 in 2024, representing a $1.7 million negative swing. This deterioration stems primarily from a $2.2 million decrease in non-interest income, which reflects the absence of the prior year's $2.5 million sale-leaseback gain. Excluding this one-time item, the bank's operational performance shows modest improvement, but the comparison exposes the difficulty of generating sustainable earnings growth from core operations.

The composition of earnings highlights structural challenges. Non-interest expense increased $969,000 (8.3%) year-to-date, driven by higher salaries and benefits, equity compensation from December 2024 option grants, and increased occupancy costs from the sale-leaseback. These expense pressures, combined with the bank's small asset base, produced an efficiency ratio that likely exceeds 80%—materially worse than regional peers operating in the 50-60% range. The equity compensation increase, while necessary to retain talent, dilutes shareholders and consumes capital that could otherwise support loan growth.

Balance sheet growth provides mixed signals. Total assets increased 5% to $609.6 million, funded by a $25.8 million (5.7%) deposit growth that included $11.8 million in new brokered deposits. While deposit growth supports lending capacity, the reliance on brokered deposits and time deposits, which carry higher rates and greater interest sensitivity, exacerbates the NPV risk that already exceeds policy limits. The $5.5 million decrease in net loans suggests either weak demand or tightened underwriting standards, neither of which supports the commercial lending growth narrative.

Outlook, Management Guidance, and Execution Risk

Management provides no explicit forward guidance, but strategic actions reveal implicit assumptions about the operating environment. The balance sheet repositioning in November 2023—selling $40.6 million of lower-yielding securities and purchasing higher-yielding alternatives—assumes rates will remain elevated long enough to capture spread improvement. The continued use of interest rate swaps, despite recent terminations, signals confidence in forecasting future rate movements, a historically unreliable assumption for banks of FSEA's size.

The focus on growing core deposits while utilizing FHLB advances and brokered deposits suggests management expects local deposit competition to intensify, requiring multiple funding sources to support loan growth. This strategy acknowledges the bank's limited pricing power in its core markets but also increases funding costs and interest rate sensitivity. The $98.7 million in unused FHLB borrowing capacity and $37.6 million in new FRB borrowing capacity provide liquidity flexibility, yet tapping these lines during stress would likely coincide with higher rates, compressing margins further.

Leadership transitions in May 2025, with James R. Brannen becoming CEO and Richard M. Donovan assuming President and CFO roles, introduce execution risk. New leadership may shift strategic priorities, but the fundamental constraints of scale, geographic concentration, and interest rate risk remain unchanged. The stock repurchase program, with $935,000 in buybacks year-to-date, indicates management believes shares are undervalued, yet this capital allocation may be better deployed in technology investments or balance sheet growth given the bank's small size.

Risks and Asymmetries: Where the Thesis Breaks

The primary risk threatening FSEA's investment thesis is interest rate risk management failure. With NPV sensitivity exceeding policy limits across 200, 300, and 400 basis point scenarios, the bank faces potential regulatory scrutiny and capital impairment if rates rise more than expected. The deposit migration from low-cost to high-cost products accelerates this vulnerability, as management acknowledges that "in a rising interest rate environment, rates on our deposits and borrowings would reprice upwards faster than rates on our long-term loans and investments," compressing spreads and reducing profitability. This structural mismatch could transform modest earnings volatility into material capital erosion.

Scale disadvantage creates a persistent earnings headwind that technology cannot easily overcome. FSEA's cost structure, burdened by legacy branch operations and limited automation, results in efficiency ratios materially worse than regional peers. While larger competitors invest in digital onboarding, AI-driven underwriting, and data analytics, FSEA's smaller technology budget constrains its ability to compete on customer experience or risk management precision. This disadvantage becomes more pronounced as younger, tech-savvy customers gravitate toward digital-first banking solutions offered by both large banks and fintech disruptors.

Geographic concentration in New Hampshire's Seacoast region, while providing local market knowledge, concentrates credit and deposit risk in a single economic area. A regional downturn, whether from defense spending cuts affecting Portsmouth Naval Shipyard or a slowdown in tourism and small business activity, would impact loan quality and deposit growth simultaneously. Unlike diversified regional banks, FSEA lacks geographic offsets to local economic weakness.

Commercial lending growth, the strategic centerpiece for margin improvement, carries its own execution risk. The modest absolute increases in CRE and C&I portfolios suggest either intense competition from larger banks with better pricing power or conservative underwriting that limits growth. If management cannot accelerate commercial loan originations while maintaining credit quality, the net interest margin expansion seen in Q3 may prove temporary, leaving the bank reliant on its lower-yielding residential portfolio and vulnerable to further rate shocks.

Valuation Context: Pricing in Persistent Underperformance

At $12.21 per share, First Seacoast Bancorp trades at 0.84x book value of $14.50 per share, a discount that reflects the market's assessment of its ability to generate adequate returns on equity. With trailing twelve-month ROE of -3.36% and ROA of -0.36%, the valuation discount is justified by fundamental underperformance relative to regional peers. NBT Bancorp (NBTX) trades at 1.25x book with 8.87% ROE, while Webster Financial (WBS) commands 1.15x book with 9.91% ROE, demonstrating the premium assigned to profitable, well-capitalized franchises.

The price-to-sales ratio of 3.94x exceeds peer averages, but this metric is less relevant for a bank where revenue quality matters more than quantity. The negative profit margin of -14.68% and operating margin of -1.73% indicate that FSEA is currently losing money on an annual basis, making traditional earnings multiples meaningless. For small banks in turnaround mode, investors should focus on tangible book value growth, efficiency ratio improvement, and NPV risk management rather than revenue multiples.

The bank's capital position, while meeting regulatory requirements, offers limited cushion for significant loan losses or NPV declines. With $63.2 million in stockholders' equity supporting $609.6 million in assets, the 10.4% leverage ratio provides moderate protection but could be strained if commercial credit quality deteriorates or interest rate risk manifests in capital losses. The $16.1 million in liquid assets at the holding company level provides flexibility for strategic investments or share repurchases, but deploying this capital effectively remains the central challenge.

Conclusion: A Turnaround Story with Steep Odds

First Seacoast Bancorp embodies the classic community bank dilemma: a strong local franchise with deep historical roots confronting structural headwinds that favor scale and technological sophistication. The recent quarterly profit and margin improvement offer a glimmer of hope, but year-to-date losses and breached interest rate risk limits reveal a business model under stress. The strategic pivot toward commercial lending is directionally correct but progressing too slowly to offset the deposit migration and expense pressures that plague small institutions.

For investors, the thesis hinges on two variables: successful navigation of interest rate risk through effective hedging and deposit repricing, and demonstrable progress in commercial loan growth that improves asset mix and margins. The 0.84x book valuation provides downside protection if the bank maintains capital levels, but upside requires execution that has historically proven elusive for banks of this size. Until FSEA proves it can generate consistent profitability and manage NPV within policy limits, the stock will likely continue trading at a discount that reflects the market's skepticism about its ability to thrive as an independent community bank in an increasingly consolidated industry.