Executive Summary / Key Takeaways

• First Seacoast Bancorp, Inc. (NASDAQ:FSEA) is executing a strategic shift towards higher-yielding commercial loans and diversified funding, contributing to a significant reduction in net loss in Q1 2025 compared to the prior year period.
• Improved net interest margin, driven by higher asset yields and a decrease in borrowing costs, alongside increased non-interest income, are key factors in the recent financial performance improvement.
• Balance sheet growth is being fueled by loan originations and purchases, supported by increased FHLB borrowings and strategic use of brokered and reciprocal deposits to enhance funding flexibility.
• Despite positive momentum, the company faces significant interest rate risk, with its Net Portfolio Value (NPV) sensitivity exceeding policy limits in rising rate scenarios, and competitive pressures from larger, more technologically advanced institutions.
• The recent executive leadership transition signals adherence to the bank's succession plan as it continues to pursue its growth and efficiency initiatives in a challenging market.

Setting the Scene: A Community Bank's Strategic Pivot

First Seacoast Bancorp, Inc., the holding company for First Seacoast Bank, operates as a community-focused financial institution serving Strafford and Rockingham Counties in New Hampshire and York County in Southern Maine through five full-service branches. Its core business revolves around attracting deposits from the local populace and deploying those funds into a diversified portfolio of loans, including residential, commercial real estate, multi-family, acquisition/development/land, commercial/industrial, home equity, and consumer loans, supplemented by investments in securities. The Bank also offers wealth management services through its FSB Wealth Management division, providing access to non-FDIC insured investment products via a third-party broker-dealer.

In recent years, FSEA has embarked on a strategic pivot, aiming to enhance profitability and manage interest rate risk by increasing its focus on originating higher-yielding commercial real estate and commercial and industrial loans. This strategy is complemented by efforts to diversify funding sources and maintain a disciplined approach to underwriting. The company operates as a single reportable segment, "Banking Services," reflecting the integrated nature of its operations where lending, deposit gathering, and investment activities are managed collectively to support overall performance.

Within the competitive landscape, FSEA operates alongside larger regional and national banks such as TD Bank (TD), Bank of America (BAC), M&T Bank (MTB), and Citizens Financial Group (CFG), as well as smaller community banks and increasingly, indirect competitors like online banks and fintech firms. While larger rivals benefit from significant scale, extensive branch networks, and substantial investments in technology, FSEA competes primarily on the strength of its community ties, personalized service, and localized market knowledge. This community-centric model fosters higher customer loyalty in its core markets, particularly in wealth management, and can lead to lower customer acquisition costs in certain segments compared to its larger, more digitally focused peers. However, FSEA's smaller scale inherently results in higher operating costs relative to asset size and limits its capacity for large-scale technology investments, creating a vulnerability to competitors who leverage digital platforms for greater efficiency and faster service delivery.

Operational Footprint and Business Model Execution

FSEA's operational model is centered around its five branch locations, serving as key points for deposit gathering and customer relationship management. The emphasis on personal banking remains foundational, attracting a mix of non-interest-bearing and interest-bearing deposits. Concurrently, the Bank's lending teams focus on originating loans across its target categories, with a recent strategic tilt towards commercial lending. The wealth management division, while not holding customer assets on the Bank's balance sheet, contributes non-interest income through fees and commissions, leveraging existing customer relationships.

Recent operational initiatives underscore the company's efforts to optimize its physical footprint and enhance funding capabilities. The sale-leaseback transaction completed in June 2024 involved the sale of four properties, including branches, for $7.5 million in cash. This move generated a pre-tax gain of $2.5 million while ensuring continued operational presence through a 15-year lease agreement with a renewal option and annual rent escalations. This transaction highlights a strategy to unlock capital from real estate assets while maintaining service delivery channels.

Furthermore, recognizing the need for diversified and potentially more stable funding sources, FSEA has actively utilized brokered deposits and reciprocal deposit programs like CDARS and ICS. These programs allow the bank to attract larger, FDIC-insured deposits, which are classified as brokered deposits for regulatory reporting but contribute to the core deposit base on the balance sheet. The Bank has also expanded its borrowing capacity, notably completing the eligibility process for the FRB Borrower-In-Custody of Collateral Program in January 2025, pledging $65.0 million of commercial real estate loans to gain access to a secured credit facility. This complements its existing FHLB borrowing lines, providing significant contingent liquidity.

Financial Performance: A Narrowing Loss

First Seacoast Bancorp reported a net loss of $603,000 for the three months ended March 31, 2025, a significant improvement from the $1.2 million net loss recorded in the same period of 2024. This 47.7% reduction in net loss reflects positive trends in core banking operations, despite ongoing market challenges.

The primary driver of this improvement was a 10.0% increase in net interest and dividend income, rising by $288,000 to $3.2 million. This growth stemmed from a 6.0% increase in total interest and dividend income, which reached $6.4 million. The increase in interest income was supported by both a higher average balance of interest-earning assets ($571.0 million in Q1 2025 vs. $559.1 million in Q1 2024) and an improved weighted average annualized yield on these assets (4.51% vs. 4.34%). Specifically, the loan portfolio yield increased to 4.57% from 4.40%, reflecting the impact of higher market interest rates on new originations and variable-rate loans.

While interest income grew, interest expense also increased by 2.3% to $3.3 million. This was primarily due to a 28.0% surge in interest expense on deposits, reaching $2.6 million. The average balance of interest-bearing deposits increased by $53.6 million, and the weighted average annualized rate paid on these deposits rose to 2.65% from 2.39%, indicative of the competitive environment for deposits. However, this increase was partially offset by a substantial 43.1% decrease in interest expense on borrowings, falling to $654,000, as the company strategically reduced its reliance on higher-cost borrowings, partly by utilizing brokered deposits. The net effect was an expansion of the annualized net interest margin to 2.23% in Q1 2025 from 2.07% in Q1 2024.

Non-interest income also contributed positively, increasing by $54,000, or 18.2%, to $351,000, driven by higher investment and customer service fees. This diversification of revenue streams, though small in absolute terms, provides a valuable supplement to net interest income.

Operating expenses, however, saw an increase. Total non-interest expense rose by $164,000, or 4.1%, to $4.2 million. Key contributors were higher salaries and employee benefits ($118,000 increase), reflecting normal wage increases and increased stock-based compensation expense from recent grants, and a significant increase in occupancy expense ($133,000 increase), primarily attributable to the lease costs associated with the June 2024 sale-leaseback transaction. Data processing costs also increased by $53,000, highlighting the ongoing operational costs of banking technology.

The provision for credit losses remained stable, with a $0 provision recorded in Q1 2025 compared to a $20,000 release in Q1 2024. The allowance for credit losses on loans stood at $3.5 million at March 31, 2025. The company utilizes the CECL methodology, employing a Weighted Average Remaining Maturity Model (WARM) and considering macroeconomic factors, a six-quarter forecast period, and qualitative factors to estimate expected lifetime credit losses. As of March 31, 2025, the company reported no non-performing loans or foreclosed assets, indicating sound asset quality in the current environment, though this is subject to change with economic conditions.

Income tax expense shifted to a benefit of $29,000 in Q1 2025 from an expense of $362,000 in Q1 2024. This change resulted in a significantly lower effective tax rate (4.6% vs. 45.8%), primarily influenced by changes in the deferred tax asset valuation allowance. The company maintains a 100% valuation allowance against its net deferred tax assets ($7.0 million at March 31, 2025), reflecting management's assessment that realization is not more likely than not, a factor that can introduce volatility to the tax line.

Balance Sheet Strength and Funding Strategy

FSEA's balance sheet expanded modestly, with total assets increasing by $11.9 million, or 2.0%, to $592.6 million at March 31, 2025, from $580.8 million at December 31, 2024. This growth was primarily driven by increases in the loan and securities portfolios.

Net loans grew by $9.6 million, or 2.2%, reaching $445.1 million. This growth was a result of both organic originations ($7.8 million net of principal collections) and strategic purchases of commercial loan participations ($1.5 million) and consumer loans secured by manufactured housing ($433,000). The loan portfolio composition reflects the strategic shift, with commercial real estate loans increasing by 4.1% and acquisition, development, and land loans increasing by 16.5% during the quarter.

The securities available-for-sale portfolio also increased by $3.3 million, or 2.7%, to $123.5 million. This increase was due to investment purchases ($6.9 million), partially offset by principal payments ($3.6 million). The portfolio continues to hold significant gross unrealized losses ($10.3 million at March 31, 2025), primarily attributed to noncredit-related factors like changes in market interest rates. Management does not intend to sell these securities and believes recovery is likely as they approach maturity or if rates decline, thus no allowance for credit losses on securities was recorded.

Funding for asset growth came primarily from increased borrowings and a slight shift in deposit composition. Total deposits saw a marginal decrease of $74,000, settling at $454.1 million. However, core deposits (excluding time deposits) increased by $1.1 million, indicating some success in attracting stable funding. Time deposits, including brokered deposits ($62.5 million), remain a significant component. Borrowings from the FHLB increased by $11.1 million to $63.4 million, explicitly supporting investment and loan growth initiatives. The access to substantial unused borrowing capacity at both the FHLB ($88.8 million) and the FRB ($38.5 million) provides crucial liquidity and funding flexibility. The recent purchase of $10.0 million in brokered deposits in April 2025 further underscores the proactive approach to funding growth.

Total stockholders' equity decreased by $824,000 to $61.2 million, primarily due to the net loss for the period and share repurchases ($574,000), partially offset by the recognition of previously unearned compensation. The company remains well-capitalized according to regulatory requirements, providing a solid foundation for continued operations and growth initiatives. The ongoing share repurchase program, with over 278,000 shares remaining authorized as of March 31, 2025, reflects a commitment to returning value to shareholders, although its execution is subject to market conditions and other factors.

Interest Rate Sensitivity and Other Risks

Despite the recent improvement in financial performance, First Seacoast Bancorp remains significantly exposed to interest rate risk. As a bank with longer-duration assets (loans) funded by shorter-duration liabilities (deposits and borrowings), changes in market interest rates can materially impact its net interest margin and the economic value of its equity.

The company's Net Portfolio Value (NPV) simulation analysis highlights this sensitivity. At March 31, 2025, estimated NPV changes in rising rate scenarios exceeded policy limits, with a 200 basis point increase projected to decrease NPV by 20.90% (above the 20.00% limit), a 300 basis point increase by 31.80% (above the 30.00% limit), and a 400 basis point increase by 43.50% (above the 40.00% limit). This adverse sensitivity in rising rate environments is attributed primarily to the ongoing migration of deposits from less interest-sensitive accounts (like NOW and demand deposits) to more interest-sensitive products (money market and time deposits). In such an environment, the cost of funding is expected to rise faster than the yield on assets, compressing the net interest margin.

Conversely, while falling rates could increase the economic value of equity (a 200 basis point decrease was estimated to increase NPV by 9.20%), they also pose reinvestment risk as loans and securities prepay, forcing the company to deploy funds at potentially lower yields.

To mitigate interest rate risk, FSEA employs strategies such as originating adjustable-rate loans, promoting core deposits, selling some fixed-rate residential mortgages, maintaining available-for-sale securities, diversifying the loan portfolio, and utilizing interest rate swaps. However, the NPV analysis indicates these measures have not fully insulated the company from significant rate movements.

Other key risks include credit risk, inherent in the lending business and influenced by economic conditions in its market area; liquidity risk, related to the ability to meet funding obligations; operational and technological risks, including system failures, cybersecurity threats, and the expense of keeping pace with technological changes; and regulatory risk, stemming from compliance requirements and potential changes in banking regulations. The significant valuation allowance on deferred tax assets also represents a risk to future earnings if the company is unable to generate sufficient taxable income to utilize these assets.

Competitive Dynamics and Strategic Outlook

FSEA's competitive positioning is characterized by a focus on its local market and community relationships, which provides a degree of insulation from the broad-based strategies of national banks. Its ability to maintain lower operating costs in certain niche areas, such as per-branch expenses, offers a competitive advantage against larger, more complex institutions. However, this is counterbalanced by significant disadvantages in scale and technological capabilities. Larger competitors benefit from economies of scale that reduce overall operating costs and enable greater investment in digital platforms, leading to more efficient processes (e.g., faster loan approvals, quicker transaction processing) and broader product offerings. FSEA's technological lag increases its operational costs and makes it vulnerable to customer attrition, particularly among younger demographics or those seeking purely digital banking solutions.

The company's strategy to grow higher-yielding commercial loans and diversify funding sources is a direct response to both interest rate risk and competitive pressures. By increasing the proportion of commercial assets, FSEA aims to improve its overall asset yield and net interest margin. The focus on attracting and retaining core deposits, alongside the strategic use of brokered deposits and FHLB/FRB borrowings, is crucial for funding this growth and managing liquidity in a dynamic rate environment.

While specific quantitative guidance figures were not provided in the latest filing, the strategic initiatives outlined – continued loan originations and purchases, investment in securities, and leveraging diversified funding sources – indicate an expectation of continued balance sheet growth. The recent leadership transition, with the CFO assuming the President role, suggests a focus on continuity and financial discipline as the company navigates its strategic objectives.

The outlook for FSEA is tied to its ability to successfully execute its growth strategy while effectively managing interest rate risk and competitive pressures. The improvement in net loss in Q1 2025 is a positive sign, indicating that strategic adjustments are beginning to impact the bottom line. However, the sensitivity to rising interest rates remains a significant challenge that could pressure future profitability if not effectively mitigated. The ability to attract and retain deposits in a competitive market and manage the costs associated with operational efficiency and necessary technological upgrades will be critical determinants of future success.

Conclusion

First Seacoast Bancorp is a community bank actively working to improve its financial performance and strategic positioning in a challenging banking environment. The reduction in net loss in the most recent quarter reflects positive momentum driven by growth in interest income, an expanding net interest margin, and increased non-interest income, partially offset by higher operating expenses. The company's strategic focus on higher-yielding commercial loans and diversified funding sources is central to its efforts to enhance profitability and manage risk.

However, investors must weigh this positive trajectory against the significant interest rate sensitivity inherent in the balance sheet, which poses a material risk in a rising rate environment. Furthermore, the competitive landscape, dominated by larger institutions with superior scale and technological resources, presents ongoing challenges that require FSEA to leverage its community strengths while prudently investing in its operational capabilities. The recent leadership change occurs at a pivotal time as the bank seeks to build upon its recent performance improvements and navigate these complex dynamics. FSEA's story is one of a regional player striving for profitable growth through strategic execution, with success contingent on its ability to manage interest rate volatility and effectively compete in an evolving financial services market.