2019 Annual Report
First
Seacoast
b a n c o r p
You first. 2019 Annual Report
2019 was an eventful year for First Seacoast Bank,
completing a mutual holding company reorganization and
a minority stock offering that raised capital to support our
continued growth and stability for years to come.
First
things
first.
It was a notable year for FSB in
other ways as well. After careful
consideration, (and after decades
as Federal Savings Bank) we
changed our name to First Seacoast
Bank in order to better reflect our
commitment to the people and
places that we serve. New signs
went up at all of our branch offices, as we announced our
new name with a renewed sense of purpose and a robust
advertising campaign. Notably, we also introduced a new
tag line for First Seacoast Bank: You first.
The evolution of our brand identity communicates
our ongoing determination to put our employees, our
customers, our communities, and our shareholders above
all else—with state-of-the-art products and technology;
fair, straightforward pricing; and a commitment to helping
the Seacoast prosper.
In conjunction with our stock offering, we joined the
NASDAQ exchange, which was commemorated by a
special trip to Manhattan to ring the closing bell. The
event showcased our public entity, First Seacoast Bancorp,
and was a positive event for our Board of Directors and
management team.
We have been an independent, community bank since
1890, and that’s not about to change. Now more than
ever, First Seacoast Bank is here and committed to our
communities.
Thank you, as always, to the employees who work together
to make FSB stand apart; to our Board for their invaluable
insight and energy; to our shareholders for their trust and
confidence; and to our customers and communities whose
support makes everything we do possible.
You made 2019 a year to remember.
James R. Brannen, President & CEO
Dana C. Lynch, Board Chair
Our New Brand: Rooted in Lasting Values
First Seacoast Bank made its 2019 debut as the new name
for a Seacoast financial institution that has been serving local
people and businesses since 1890 when it was founded as
Dover Co-Operative Savings and Loan Association. Nearly
65 years later, the name changed
to Dover Federal Savings and Loan
Association and then, in 1983, it became
Federal Savings Bank to reflect growth
throughout the Seacoast region.
Now as First Seacoast Bank, we remain
steadfast in our mission to strengthen
the communities we serve. Here, our
priorities are the people and businesses
of this beautiful place we call home.
We announced our name change with
a new logo, updated signs throughout
our branches, and created a robust
and modern advertising campaign that
included an innovative stop-motion
animation television commercial. We
are pleased to report that the response
from our employees, customers, and communities has been
enormously positive. As First Seacoast Bank, we are proud to
reaffirm our local values that have always contributed to our
success and put you first.
First Seacoast Bancorp: A Capital Infusion
This past summer, First Seacoast Bank formed First Seacoast Bancorp, a mid-tier
stock holding company. Members of Management and the Board of Directors officially
celebrated the formation of First Seacoast Bancorp and trading on NASDAQ under
the trading symbol FSEA by ringing the closing bell at NASDAQ Headquarters in
Manhattan in March of 2020. The capital generated through the stock offering
will allow First Seacoast Bank to continue fulfilling its mission as an independent
community bank for many years to come.
Community First: Supporting the Seacoast
A core value of community banking is supporting the cities and towns where
we work and live. In 2019, First Seacoast Bank contributed nearly $230,000 to
more than 125 nonprofits across the Seacoast region. In July, the First Seacoast
Community Foundation, Inc. was introduced. The Foundation was created
to provide charitable support to 501c3 nonprofit organizations and other
public charities that share First Seacoast Bank’s commitment to making the
Seacoast stronger.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2019
OR
"
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission File Number: 001-38985
First Seacoast Bancorp
(Exact Name of Registrant as Specified in its Charter)
United States of America
(State or other jurisdiction of incorporation or organization)
84-2404519
(I.R.S. Employer Identification Number)
633 Central Avenue, Dover, New Hampshire
(Address of principal executive offices)
03820
(Zip code)
(603) 742-4680
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common stock, par value $0.01 per share
Title of Each Class
FSEA
Trading Symbol(s)
The Nasdaq Stock Market LLC
Name of Each Exchange on Which Registered
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes " No ⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes " No ⌧
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 reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ⌧ No "
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 (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit
such files). Yes ⌧ No "
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
Non-accelerated filer
☐
☒
Emerging growth company ☒
Accelerated filer
☐
Smaller reporting 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 June 30, 2019, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was $-0-.
As of March 27, 2020, there were 6,083,500 outstanding shares of the registrant’s common stock, of which 3,345,925 shares were owned by First
Seacoast Bancorp, MHC.
1.
Portions of the Registrant’s Definitive Proxy Statement relating to the Annual Meeting of Stockholders, scheduled to be held on May 28,
2020, are incorporated by reference into Part III of this report.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
PART I
ITEM 1. Business ............................................................................................................................................................
ITEM 1A.Risk Factors.......................................................................................................................................................
ITEM 1B.Unresolved Staff Comments .............................................................................................................................
ITEM 2. Properties ..........................................................................................................................................................
ITEM 3. Legal Proceedings .............................................................................................................................................
ITEM 4. Mine Safety Disclosures ...................................................................................................................................
..........................................................................................................................................................................
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ...........................................................................................................................................................
ITEM 6. Selected Financial Data.....................................................................................................................................
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ...........................
ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk..........................................................................
ITEM 8. Financial Statements and Supplementary Data.................................................................................................
ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure..........................
ITEM 9A.Controls and Procedures ...................................................................................................................................
ITEM 9B.Other Information .............................................................................................................................................
..........................................................................................................................................................................
ITEM 10. Directors, Executive Officers and Corporate Governance................................................................................
ITEM 11. Executive Compensation...................................................................................................................................
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.........
ITEM 13. Certain Relationships and Related Transactions, and Director Independence .................................................
ITEM 14. Principal Accountant Fees and Services ...........................................................................................................
PART III
PART IV
ITEM 15. Exhibits and Financial Statement Schedules ....................................................................................................
ITEM 16. Form 10-K Summary ........................................................................................................................................
SIGNATURES .....................................................................................................................................................................
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Unless the context requires otherwise, all references to the “Company,” “we,” “us” and “our” refer to First Seacoast
PART I
Bancorp.
Forward-Looking Statements
This report contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements about the Company and its industry involve substantial risks and uncertainties. Statements
other than statements of current or historical fact, including statements regarding the Company’s future financial condition,
results of operations, business plans, liquidity, cash flows, projected costs, and the impact of any laws or regulations
applicable to the Company, are forward-looking statements. Words such as “estimate,” “project,” “believe,” “intend,”
“anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,”
“potential,” “target” and other similar expressions are intended to identify these forward-looking statements. Such statements
are subject to factors that could cause actual results to differ materially from anticipated results. Such factors include, but are
not limited to, the following:
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statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.
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. Accordingly, you should not place undue reliance on such statements. We are
under no duty to and do not take any obligation to update any forward-looking statements after the date of this annual report.
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:
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general economic conditions, either nationally or in our market areas, that are worse than expected;
changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy
of the allowance for loan losses;
our ability to access cost-effective funding;
fluctuations in real estate values and both residential and commercial real estate market conditions;
demand for loans and deposits in our market area;
our ability to implement and change our business strategies;
competition among depository and other financial institutions;
inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking
revenues, the fair value of financial instruments or our level of loan originations, or prepayments on loans we
have made and make;
adverse changes in the securities or secondary mortgage markets;
changes in laws or government regulations or policies affecting financial institutions, including changes in
regulatory fees and capital requirements, including as a result of Basel III;
the impact of the Dodd-Frank Act and implementing regulations;
changes in the quality or composition of our loan or investment portfolios;
technological changes that may be more difficult or expensive than expected;
the inability of third-party providers to perform as expected;
our ability to manage market risk, credit risk and operational risk in the current economic environment;
1
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our ability to enter new markets successfully and capitalize on growth opportunities;
our ability to successfully integrate into our operations any assets, liabilities, customers, systems and
management personnel we may acquire, and our ability to realize related revenue synergies and cost savings
within expected time frames and any goodwill charges related thereto;
changes in consumer spending, borrowing and savings habits;
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial
Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting
Oversight Board;
our ability to retain key employees;
our compensation expense associated with equity allocated or awarded to our employees; and
changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the
results indicated by these forward-looking statements.
ITEM 1.
Business
First Seacoast Bancorp
First Seacoast Bancorp (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is the
savings and loan holding company for First Seacoast Bank (the “Bank”). First Seacoast Bancorp conducts its operations
primarily through its wholly owned subsidiary, First Seacoast Bank, a federally chartered savings bank. At December 31,
2019, First Seacoast Bancorp had total consolidated assets of $409.5 million, loans of $344.9 million, deposits of $281.6
million and stockholders’ equity of $57.1 million.
First Seacoast Bancorp was formed as part of the mutual holding company reorganization of First Seacoast Bank,
which was completed on July 16, 2019. In connection with the reorganization, First Seacoast Bancorp sold 2,676,740 shares
of common stock at a price of $10.00 per share to depositors of First Seacoast Bank for net proceeds of $25.1 million, issued
3,345,925 shares of common stock to First Seacoast Bancorp, MHC and contributed 60,835 shares of common stock and
$150,000 in cash to the First Seacoast Community Foundation, Inc. On July 17, 2019, shares of the Company’s common
stock commenced trading on the NASDAQ Stock Market under the symbol FSEA.
The Company’s executive offices are located at 633 Central Avenue, Dover, New Hampshire 03820, and the telephone
number is (603) 742-4680. Our website address is www.firstseacoastbank.com. Information on our website is not and should
not be considered a part of this annual report. First Seacoast Bancorp is subject to comprehensive regulation and examination
by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).
First Seacoast Bancorp, MHC
First Seacoast Bancorp, MHC was formed as a federal mutual holding company and will, for as long as it is in
existence, own a majority of the outstanding shares of First Seacoast Bancorp’s common stock. At December 31, 2019, 55%
of First Seacoast Bancorp’s outstanding shares are owned by First Seacoast Bancorp, MHC.
First Seacoast Bancorp, MHC’s principal assets are the common stock of First Seacoast Bancorp it received in the
reorganization and offering and $100,000 in cash as its initial capitalization. Presently, it is expected that the only business
activity of First Seacoast Bancorp, MHC will be to own a majority of First Seacoast Bancorp’s common stock. First Seacoast
Bancorp, MHC is authorized, however, to engage in any other business activities that are permissible for mutual holding
companies under federal law, including investing in loans and securities.
First Seacoast Bank
First Seacoast Bank, a federally chartered savings bank headquartered in Dover, New Hampshire, has served residents
of the Seacoast area of New Hampshire since 1890. 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 Federal Home
Loan Bank, 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.
2
Our results of operations are largely dependent on net interest income, which is the difference between the interest
earned on loans and securities and interest paid on deposits and borrowings, and non-interest income largely from its
customer service fees. The results of operations are also affected by the level of operating expenses, the provision for loan
losses, the impact of federal and state income taxes, the relative levels of interest rates and local and national economic
activity.
Investment management services are offered through our wealth management office located in Dover. The assets held
for wealth management customers are not assets of the Bank and, accordingly, are not reflected in the Company’s
consolidated balance sheets.
First Seacoast Bank is active in the communities we serve. The Bank makes contributions to various non-profits and
local organizations, investments in community development lending and investments in low-income housing all of which
strive to improve the communities we serve. In connection with the reorganization and offering, First Seacoast Bancorp
contributed 60,835 shares of common stock and $150,000 in cash to the First Seacoast Community Foundation, Inc., a
charitable foundation dedicated to supporting charitable organizations operating in the Bank’s local community.
First Seacoast Bank is subject to comprehensive regulation and examination by its primary federal regulator, the Office
of the Comptroller of the Currency.
Available Information
The SEC maintains an Internet website at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding issuers that file electronically with the SEC.
Our Internet website is http://www.firstseacoastbank.com. You can obtain on our website, free of charge, copies of our
annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to
those reports, as soon as reasonably practicable after we electronically file such reports or amendments with, or furnish them
to, the SEC. Our Internet website and the information contained therein or connected thereto are not intended to be
incorporated into this Annual Report on Form 10-K.
Market Area
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, located in the southeastern part of the state along New
Hampshire Seacoast. We consider our primary lending market area to be Strafford and Rockingham Counties in New
Hampshire and York County in southern Maine.
The New Hampshire and southern Maine Seacoast region’s economy is fairly diversified, with employment in
education, healthcare, government, services, retail and manufacturing sectors. Our Strafford County branches are located in
the cities of Dover, Durham, Barrington and Rochester. Top employment sectors in Strafford County include healthcare,
government, education, insurance, retail and textile manufacturing. Our Rockingham County branch is located in the city of
Portsmouth. Top employment sectors in Rockingham County include healthcare, government, insurance, and
pharmaceuticals and biotech. Additionally, although we do not have a branch office in York County, Maine, many of our
customers work and reside in York County, which is contiguous to Strafford County. Our Dover headquarters is
conveniently located approximately 65 miles from Boston and less than 50 miles from each of Manchester, New Hampshire
and Portland, Maine.
We view the greater Seacoast region as a primary area for growth, in light of its favorable demographic characteristics,
such as a growing population in some relatively affluent markets. At the same time, the attractive features of the region have
fostered a highly competitive environment for financial service providers.
Competition
The financial services industry is highly competitive. The Company experiences substantial competition with other
commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance
companies, finance companies, money market funds, credit unions and other non-bank financial service providers in
attracting deposits, making loans and attracting wealth management customers. The competing major commercial banks have
greater resources that may provide them a competitive advantage by enabling them to maintain numerous branch offices and
mount extensive advertising campaigns. The increasingly competitive environment is the result of changes in regulation,
changes in technology and product delivery systems, additional financial service providers and the accelerating pace of
consolidation among financial services providers.
3
The financial services industry has become even more competitive as a result of legislative, regulatory, and
technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the
umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities
underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to
entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic
transfer and automatic payment systems.
Some of the Company’s non-banking competitors have fewer regulatory constraints and may have lower cost
structures. In addition, some of the Company’s competitors have assets, capital and lending limits greater than that of the
Company, greater access to capital markets, and offer a broader range of products and services than the Company. These
institutions may have the ability to finance wide-ranging advertising campaigns and may also be able to offer lower rates on
loans and higher rates on deposits than the Company can offer.
Various in-state market competitors and out-of-state banks continue to enter or have announced plans to enter or
expand their presence in the market areas in which the Company currently operates. With the addition of new banking
presences within our market, the Company expects increased competition for loans, deposits and other financial products and
services. Our competition for loans comes primarily from financial institutions in our market area. Our experience in
recent years is that many financial institutions in our market area, especially community banks that are seeking to
significantly expand their commercial loan portfolios and banks located in lower growth regions in New Hampshire and
Maine, have been willing to price commercial loans aggressively in order to gain market share.
The Company will continue to rely upon local promotional activities, personal relationships established by officers,
directors, and employees with their customers, and specialized services tailored to meet the needs of the communities served.
Management believes that it can compete effectively as a result of local market knowledge, local decision making and
awareness of customer needs.
Lending Activities
Historically, our lending activities have emphasized one- to four-family residential real estate loans, and such loans
continue to comprise the largest portion of our loan portfolio. Other areas of lending include commercial real estate loans and
multi-family real estate loans, acquisition, development and land loans, commercial and industrial loans, home equity loans
and lines of credit and consumer loans. Subject to market conditions and our asset-liability analysis, we expect to continue to
increase our focus on commercial real estate and commercial and industrial loans, in an effort to diversify our overall loan
portfolio and increase the overall yield earned on our loans. We compete for loans through offering high quality personalized
service, providing convenience and flexibility, providing timely responses on loan applications and by offering competitive
pricing of loan products.
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5
Loan Portfolio Maturities. The following tables set forth the contractual maturities of our total loan portfolio at
December 31, 2019. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported
as being due in one year or less. The table presents contractual maturities and does not reflect repricing or the effect of
prepayments. Actual maturities may differ.
December 31, 2019
Amounts due in:
One year or less
More than one to five years
More than five years
Total
December 31, 2019
Amounts due in:
One year or less
More than one to five years
More than five years
Total
One- to Four-
Family Residential
Real Estate
Commercial
Real Estate
Acquisition,
Development
and Land
Commercial
$
$
$
$
19
2,149
211,154
213,322
HELOC
217
2,391
7,515
10,123
$
$
$
$
(In thousands)
4,124
11,223
54,847
70,194
$
$
210
1,516
17,118
18,844
Multi-family
Consumer
(In thousands)
112
783
3,993
4,888
$
$
23
919
810
1,752
$
$
$
$
$
$
4,594
12,697
7,385
24,676
Total
9,299
31,678
302,822
343,799
Fixed vs. Adjustable Rate Loans. The following table sets forth our fixed- and adjustable-rate loans at December 31,
2019 that are contractually due after December 31, 2020.
One- to four-family residential real estate
Commercial real estate
Acquisition, development and land
Commercial and industrial
Home equity loans and lines of credit
Multi-family
Consumer
Total loans
December 31, 2019
Fixed
Adjustable
Total
(In thousands)
$
$
196,510 $
25,223
16,443
17,503
625
694
1,675
258,673 $
16,793 $
40,847
2,191
2,579
9,281
4,082
54
75,827 $
213,303
66,070
18,634
20,082
9,906
4,776
1,729
334,500
One- to Four-Family Residential Real Estate Loans. Our one- to four-family residential loan portfolio consists of
mortgage loans that enable borrowers to purchase or refinance existing homes, substantially all of which are collateralized by
the primary residence of the borrower. At December 31, 2019, we had $213.3 million of loans secured by one- to four-family
residential real estate, representing 62.1% of our total loan portfolio. Generally, all of our one- to four-family residential real
estate loans are secured by properties located in the New Hampshire and southern Maine Seacoast region.
Our one- to four-family residential real estate loans have terms of up to 30 years and are generally underwritten
according to Freddie Mac guidelines in amounts up to the maximum conforming loan limits as established by Freddie Mac.
We refer to loans that conform to such guidelines as “conforming loans.” To a lesser extent, we also originate loans above the
conforming limits, which are referred to as “jumbo loans.” We generally underwrite jumbo loans in a manner similar to
conforming loans.
At December 31, 2019, 92.1% of our one- to four-family residential real estate loans were fixed-rate loans. We sell a
portion of fixed-rate conforming loans that we originate on a servicing-retained basis. Secondary market investors that
purchase our loans may include Freddie Mac, the New Hampshire Housing Finance Authority and other investors.
6
At December 31, 2019, 7.9% of our one- to four-family residential real estate loans were adjustable-rate loans. Our
adjustable-rate mortgage loans have initial repricing terms of one, three or five years. Following the initial repricing term,
such loans adjust annually for the balance of the loan term. Adjustable-rate mortgage loans are indexed to the One-Year U.S.
Treasury Constant Maturity rate, plus a margin. The majority of such loans have an annual interest rate adjustment cap of
2.0% and a lifetime adjustment cap ranging from 4.0% to 6.0%. We typically hold our adjustable-rate one- to four-family
residential real estate loans in our portfolio.
Loan-to-value ratios are determined by collateral type and occupancy level. We generally limit the loan-to-value ratios
of our mortgage loans without private mortgage insurance to 80%. Loans where the borrower obtains private mortgage
insurance may be made in excess of this limit, pursuant to requirements set by the insurance provider.
We do not offer “interest only” mortgage loans on permanent one- to four-family residential real estate loans (where
the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer
loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than
the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not have a
“subprime lending” program for one- to four-family residential real estate loans (i.e., loans that generally target borrowers
with weakened credit histories).
Generally, residential mortgage loans that we originate include “due-on-sale” clauses, which give us the right to declare
a loan immediately due and payable if, among other things, the borrower sells or otherwise disposes of the real property
subject to the mortgage and the loan is not repaid. All borrowers are required to obtain title insurance for the benefit of First
Seacoast Bank. We also require appropriate insurance coverage on properties securing real estate loans.
Commercial Real Estate and Multi-Family Real Estate Loans. Consistent with our strategy to diversify our loan
portfolio and increase our yield, we have focused on increasing our origination of commercial real estate loans. At
December 31, 2019, we had $75.1 million in commercial real estate and multi-family real estate loans, representing 21.8% of
our total loan portfolio. Of this aggregate amount, we had $52.6 million in owner-occupied commercial real estate loans,
$17.6 million in non-owner-occupied commercial real estate loans and $4.9 million in multi-family real estate loans.
Our commercial real estate loans are secured by a variety of properties in our primary market area, including retail
spaces, distribution centers, office buildings, manufacturing and warehouse properties, convenience stores and other local
businesses, without any material concentrations in property type. Our multi-family loans are secured by properties consisting
of five or more rental units in our market area, including apartment buildings and student housing.
Commercial real estate and multi-family real estate loans generally have higher balances and entail greater credit risks
compared to one- to four-family residential real estate loans. The repayment of loans secured by income-producing properties
typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part,
on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that
are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of
the property. Additionally, any decline in real estate values may be more pronounced for commercial real estate than
residential properties. If we foreclose on a commercial real estate loan, the marketing and liquidation period to convert the
real estate asset to cash can be a lengthy process with substantial holding costs. In addition, vacancies, deferred maintenance,
repairs and market stigma can result in prospective buyers expecting sale price concessions to offset their real or perceived
economic losses for the time it takes them to return the property to profitability. Depending on the individual circumstances,
initial charge-offs and subsequent losses on commercial real estate loans can be unpredictable and substantial.
Our commercial real estate and multi-family loans are generally originated as 10-year balloon loans, which reprice
after five years and are amortized over 20 years. Interest rates on such loans are generally indexed to the Federal Home Loan
Bank Five-Year Regular Classic Rate, plus a margin. The maximum loan-to-value ratio of our commercial real estate loans is
generally 80% of the lower of purchase price or appraised value of the properties securing the loan and generally requires a
minimum debt-service coverage ratio of 1.2x.
We consider a number of factors in originating commercial real estate loans. In addition to the debt-service coverage
ratio, we evaluate the loan purpose, the quality of collateral, and the borrower’s qualifications, experience, credit history, cash
flows and financial statements, and sources of repayment. Personal guarantees are generally obtained from the principals of
closely-held companies. We gather information on environmental risks associated with commercial properties and also
require appropriate insurance coverage on properties securing real estate loans. In addition, the borrower’s and guarantor’s
financial information is monitored on an ongoing basis by requiring periodic financial statement updates.
7
On a limited basis, we also purchase and participate in commercial real estate loans from other financial institutions.
Such loans are subject to the same underwriting criteria and loan approval requirements applied to loans originated by First
Seacoast Bank.
At December 31, 2019, the average loan balance outstanding in the commercial real estate loans portfolio was
$336,000 and the largest individual commercial real estate loan outstanding was a $4.1 million participation loan secured by
a commercial building. This loan was performing in accordance with its original repayment terms at December 31, 2019.
At December 31, 2019, the average loan balance outstanding in the multi-family real estate loans portfolio was
$326,000 and the largest individual multi-family real estate loan outstanding was a $1.2 million loan secured by a 24-unit
property. This loan was performing in accordance with its original repayment terms at December 31, 2019.
Acquisition, Development and Land Loans. At December 31, 2019, acquisition, development and land loans were
$18.8 million or 5.5% of our total loan portfolio. These loans consist of residential construction loans, commercial real estate
and multi-family construction loans and land loans. At December 31, 2019, the average loan balance outstanding in the
acquisition, development and land loan portfolio was $304,000.
We originate loans to finance the construction or rehabilitation of owner-occupied one- to four-family residential
properties to the prospective homeowners primarily located in our market area. Upon completion of construction, such loans
convert to permanent mortgage loans. At December 31, 2019, residential construction loan balances were $15.1 million, or
4.4% of our total loan portfolio, with an additional $10.0 million available for advance to borrowers. Residential
construction loans are generally structured as interest-only for nine months, with a loan to value ratio generally not exceeding
80% of the appraised value on a completed basis or the cost of completion, whichever is less. However, if private mortgage
insurance is obtained, we will consider a loan-to-value ratio up to 97%. We work with a third-party construction
management firm that reviews each project before we approve the loan and continues to monitor and inspect the project
during the construction phase, as disbursements are made. Once the construction project is satisfactorily completed, generally
within nine months, the loan will convert to a permanent, amortizing mortgage loan for the remaining term of the loan,
generally up to a maximum of 30 years total, or 15 years for manufactured homes. The interest rate may be fixed or
adjustable. At December 31, 2019, our largest individual residential construction loan outstanding was $1.0 million and it
was performing in accordance with its original repayment terms.
We also originate loans to finance the construction of commercial properties, primarily owner-occupied properties
located in our market area. Upon completion of construction, such loans generally convert to permanent commercial
mortgage loans. At December 31, 2019, commercial construction loan balances totaled $3.7 million, or 1.1% of our total loan
portfolio, with an additional $3.6 million available for advance to borrowers. Commercial real estate construction loans are
generally structured as interest-only for up to 18 months, with a loan to value of 80% of the appraised value on a completed
basis or a loan to cost of completion ratio of up to 85%. We also originate commercial constructions loans with an initial
loan-to-value ratio of 90% when coupled with the U.S. Small Business Administration 504 Loan program. During the year
ended December 31, 2019, we originated 2 construction loans secured by owner-occupied properties under the Small
Business Administration 504 Loan program, with aggregate original principal balances of $2.6 million.
We work with a third-party construction management firm that reviews each project before we approve the loan and
continues to monitor and inspect the project during the construction phase, as disbursements are made. Once the construction
project is satisfactorily completed, generally within 18 months, the loan will convert to a permanent, amortizing mortgage
loan for the remaining term of the loan, generally up to a maximum of 20 years total (including the construction phase). The
interest rate may be fixed or adjustable. At December 31, 2019, our largest commercial real estate construction loan had an
outstanding balance of $1.6 million, and it was performing in accordance with its original repayment terms.
Construction loans generally involve greater credit risk than financing improved real estate, because funds are
advanced upon the security of the project, which is of uncertain value before its completion. Risk of loss on a construction
loan also depends upon the accuracy of the initial estimate of the value of the property at completion of construction
compared to the estimated cost (including interest) of construction and other assumptions. Because of the uncertainties
inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental
regulation of real property, it is relatively difficult to accurately evaluate the total funds required to complete a project and the
related loan-to-value ratio. If the estimate of construction cost is inaccurate, we may be required to advance additional funds
beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the
completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of
the construction loan upon the sale of the property. Construction loans also carry the risk that construction will not be
completed on time in accordance with specifications and projected costs.
8
We also originate loans to finance the acquisition and development of land. Land development loans are generally
secured by vacant land located in our primary market and in process of improvement. We generally originate commercial
land development loans with loan-to-value ratios of up to 70% where all approvals and permits for improvements are already
in place, and up to 50% where approvals and permits are not yet in place. The maximum construction term is generally 12
months for residential development properties and 18 months for commercial development properties. At December 31,
2019, our largest land loan had an outstanding balance of $1.3 million, and it was performing in accordance with its original
repayment terms.
Land development loans generally involve greater credit risk than long-term financing on developed real estate. If a
loan is made on property that is not yet approved for the planned development, there is a risk that necessary approvals will
not be granted or will be delayed. Risk of loss on a land development loan also depends upon the accuracy of the initial
estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of
construction and other assumptions. If the estimate of development costs is inaccurate, we may be required to advance
additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the
estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to
assure full repayment of the construction loan upon the sale of the property. Land development loans also carry the risk that
improvements will not be completed on time in accordance with specifications and projected costs. In addition, repayment of
these loans can be dependent on the sale of the property to third parties, and the ultimate sale or rental of the property may
not occur as anticipated.
Commercial and Industrial Loans. At December 31, 2019, we had $24.7 million of commercial and industrial loans,
representing 7.2% of our total loan portfolio. We originate commercial and industrial loans, including equipment loans and
business acquisition loans, and lines of credit to businesses operating in the local market area. Our commercial and industrial
loans are generally used by the borrowers for working capital purposes or for acquiring equipment, inventory or furniture.
Borrowers include professional organizations, family-owned businesses and not-for-profit businesses. These loans are
generally secured by non-real estate business assets, including equipment, inventory and accounts receivable, although we
may support this collateral with liens on real property such as buildings and equipment. We generally require our commercial
business borrowers to maintain their primary deposit accounts with us, which improves our overall interest rate spread and
profitability.
Our commercial and industrial loans include term loans and revolving lines of credit and are made with either variable
or fixed rates of interest. Variable interest rates are indexed to the Prime Rate as published in the Wall Street Journal, plus a
margin. Commercial and industrial loans typically have shorter terms to maturity and higher interest rates than commercial
real estate loans.
When making commercial and industrial loans, we consider the financial history of the borrower, the debt service
capabilities and cash flows of the borrower and other guarantors, and the value of the underlying collateral. We generally
require personal guarantees by the principals, as well as other appropriate guarantors, when personal assets are in joint names
or a principal’s net worth is not sufficient to support the loan. Depending on the collateral, commercial and industrial loans
are made in amounts up to 80% of the value of the collateral securing the loan.
To assist small businesses with their credit needs for working capital, equipment and new real estate construction or
acquisition, we make commercial and industrial loans under the Small Business Administration 7(a) and Express guarantee
programs. Typically, a 7(a) loan carries a 75% guaranty and an Express loan carries a 50% guaranty from the U.S.
Government. At December 31, 2019, we had 6 loans outstanding with an aggregate principal balance of $3.6 million with
Small Business Administration 7(a) guarantees totaling $2.5 million and 8 Small Business Administration Express loans with
an aggregate principal balance of $818,000 with guarantees totaling $440,000.
We intend to expand our commercial and industrial lending activities in order to diversify our loan portfolio, increase
our yield and offer a full range of products to our commercial customers. However, these loans have greater credit risk than
one- to four-family residential real estate loans. Our commercial and industrial loans are made based primarily on historical
and projected cash flows of the borrower, the borrower’s experience and stability, and the value and marketability of the
underlying collateral provided by the borrower. The cash flows of borrowers, however, may not behave as forecasted, and
collateral securing loans may fluctuate in value because of economic or individual performance factors. As a result, the
availability of funds for the repayment of commercial and industrial loans may depend substantially on the success of the
business itself and the general economic environment in our market area. In addition, commercial and industrial loans often
result in larger outstanding balances to single borrowers, or related groups of borrowers, and also generally require
substantially greater evaluation and oversight efforts. Accordingly, financial information is obtained from the borrowers to
evaluate cash flow sufficiency and is periodically updated during the life of the loan.
9
The average loan balance outstanding in the commercial and industrial loans portfolio was $196,000 and the largest
individual commercial and industrial loan outstanding was $2.5 million at December 31, 2019. This loan was performing in
accordance with its original repayment terms at December 31, 2019.
Home Equity Loans and Lines of Credit. We offer home equity loans and lines of credit, which are multi-purpose
loans used to finance various home or personal needs, where a one- to four-family primary or secondary residence serves as
collateral, generally within our primary market area. At December 31, 2019, outstanding balances on home equity loans and
lines of credit totaled $10.1 million, or 2.9% of our total loan portfolio, and the lines of credit had an additional $16.2 million
available to draw.
Home equity loans are originated as fixed-rate term loans. Home equity lines of credit are tied to the Prime Rate as
published in the Wall Street Journal and are offered for terms of up to 25 years, with a 10-year draw period and 15-year
repayment period. Generally, our home equity loans and lines of credit are originated with loan-to-value ratios of up to 80%,
inclusive of existing liens on the property.
Consumer Loans. We offer consumer loans to individuals who reside or work in our market area. At December 31,
2019, consumer loans totaled $1.8 million, or 0.5% of our total loan portfolio, of which $799,000 was unsecured.
Consumer lending has been a minor area of lending diversification for us. Consumer loans generally consist of
installment loans extended directly to the borrower. Consumer loans generally have shorter terms to maturity, which reduces
our exposure to changes in interest rates. In addition, management believes that offering consumer loan products helps to
expand and create stronger ties to our existing customer base by increasing the number of customer relationships and
providing cross-marketing opportunities. It is expected that growth of our consumer loan portfolio will be limited, with such
loans extended primarily to pre-existing First Seacoast Bank customers.
Originations, Sales and Purchases of Loans
Our loan originations are generated by our loan personnel operating at our banking office locations. Residential real
estate loans are generated by our mortgage loan officers through referrals from real estate brokers, builders, walk-in
customers, online applications, participation in local home shows, events with local realtors, contacts in the local community
and referrals. Commercial real estate and commercial and industrial loans are originated through our commercial lenders,
through previous lending relationships, referrals, direct solicitation and participation in industry-specific associations.
Additionally, small business lending relationships are generated through our business development officers. Consumer loans
are generated largely to existing customers and walk-ins. Loan generation is supported by our advertising campaigns.
While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon
relative borrower demand and the pricing levels as set in the local marketplace by competing banks, thrifts, credit unions and
mortgage banking companies. Our volume of real estate loan originations is influenced significantly by market interest rates,
and, accordingly, the volume of our real estate loan originations can vary from period to period.
We consider our balance sheet as well as market conditions on an ongoing basis in making decisions as to whether to
hold one- to four-family residential real estate loans we originate in our portfolio for investment or to sell such loans to
investors, based on profitability and a risk management standpoint. We sell selected conforming, 15-year and 30-year fixed-
rate one- to four-family residential real estate loans that we originate, on a servicing-retained basis, when we are able to, and
strategically retain non-eligible fixed-rate and adjustable-rate one- to four-family residential real estate loans in order to
manage the duration and time to repricing of our loan portfolio. For the years ended December 31, 2019 and 2018, we sold
$7.8 million and $5.7 million, respectively, of one- to four-family residential real estate loans.
In past years, we have purchased one- to four-family jumbo residential loans to supplement our own origination efforts.
We did not purchase any such loans during the year ended December 31, 2019 or December 31, 2018. We purchased $10.9
million of one- to four-family residential real estate loans secured by properties in a contiguous state during the year ended
December 31, 2017. As of December 31, 2019, those loans had an outstanding balance of $8.2 million and were performing
in accordance with their original repayment terms. Occasionally, we may purchase a participation interest in a commercial
real estate loan in which we are not the lead originating lender. At December 31, 2019, we had outstanding participation
interests totaling $12.3 million.
All loan purchases and participations interests are subject to the same underwriting criteria and loan approvals that
apply to loans that we originate for our portfolio. The properties are independently appraised and subject to field inspections
by our loan officers.
10
Loan Approval Procedures and Authority
Our lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures
established by our board of directors and management. Decisions on loan applications are made on the basis of detailed
information submitted by the prospective borrower, credit histories that we obtain, and property valuations. Our board of
directors has established a Loan Officers Review Committee to oversee loan approvals. The voting members of the Loan
Officers Review Committee consist of our President and Chief Executive Officer, Senior Vice President – Senior
Commercial Loan Officer, Vice President – Senior Retail Loan Officer, Vice President – Bank Administration Officer and
Enterprise Risk Management Officer.
The board of directors has granted loan approval authority to certain officers up to prescribed limits, depending on the
seniority of the officer, the type of loan and underlying security. Our President and Chief Executive Officer has aggregate
approval authority of up to $400,000 per relationship. Individual loan officers generally can approve secured commercial
loans of up to $100,000 and residential real estate loans of up to $250,000. Loans in excess of individual officers’ lending
limits generally can be approved by a second loan officer who is a voting member of our Loan Officers Review Committee,
up to additional prescribed limits of $350,000 for secured commercial loans and $500,000 for residential real estate loans.
Loans in excess of such additional limits require approval of the full Loan Officers Review Committee. The Loan Officers
Review Committee generally may approve secured commercial loans of up to $1.0 million regardless of existing non-
commercial loan exposure. Any relationships in excess of $1.0 million must be approved by the board of directors.
From time to time, a loan applicant may not meet one or more of the loan policy or loan program requirements, which
would ordinarily result in a denial of the loan application. A loan officer may seek an exception on behalf of the applicant.
Any loan made with an exception to policy requires one additional level of approval, except that loans requiring the approval
of the Loan Officers Review Committee or the Board of Directors are exempt from the requirement of additional approval.
Loans-to-One Borrower
Pursuant to federal law, the aggregate amount of loans that we are permitted to make to any one borrower or a group of
related borrowers is generally limited to 15% of our unimpaired capital and surplus (25% if the amount in excess of 15% is
secured by “readily marketable collateral” or 30% for certain residential development loans). At December 31, 2019, based
on the 15% limitation, our loans-to-one-borrower limit was approximately $7.4 million. At December 31, 2019, our largest
loan relationship with one borrower was for $4.6 million secured by commercial real estate and equipment, and the
relationship was performing in accordance with its original repayment terms.
Delinquent Loans and Non-Performing Assets
Our collection procedures for residential mortgage loans typically follow Freddie Mac collection guidelines,
particularly the guidelines for residential mortgage loans serviced for others. When a residential real estate or consumer loan
payment becomes more than 15 days past due, a notice is automatically sent to the customer. After 15 days, we will contact
the customer by telephone. Alternating telephone attempts and additional letters continue until a loan becomes 90 days past
due, at which point we would place the loan on non-accrual status and generally refer the loan for foreclosure proceedings,
unless management determines that it is in the best interest of First Seacoast Bank to work further with the borrower to
arrange a workout plan. The foreclosure process generally would begin when a loan becomes 120 days delinquent. We do not
pursue multiple collections processes, such as considering modifications or workouts, while proceeding with foreclosure.
When a commercial loan or commercial real estate loan becomes 10 days past due, we contact the customer by mailing
a late notice. The loan officer assigned to the account may also contact the borrower. If the loan continues to run past due, the
loan officer will continue to contact the borrower to determine the cause of the past due payment(s) and arrange for
payments. If a loan payment becomes 30 days past due, it will be reviewed by the Loan Officers Review Committee to
develop a plan to bring the past due payment(s) current and determine if the likelihood of repayment is in question. The loan
will also be evaluated for a change to the risk rating. If necessary, we will engage an attorney to pursue further collection
efforts.
11
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12
Nonperforming Assets. Non-performing assets include loans that are 90 or more days past due or on non-accrual
status, including troubled debt restructurings on non-accrual status, and real estate and other loan collateral acquired through
foreclosure and repossession. Troubled debt restructurings include loans for which either a portion of interest or principal has
been forgiven or loans modified at interest rates materially less than current market rates.
The following table sets forth information regarding our non-performing assets at the dates indicated. Non-accrual
loans include non-accruing troubled debt restructurings of $95,000 as of December 31, 2015. We did not have any non-
accruing troubled debt restructuring at December 31, 2019, 2018, 2017 or 2016.
Non-accrual loans:
One- to four-family residential real estate
Commercial real estate
Acquisition, development and land
Commercial and industrial
Home equity loans and lines of credit
Multi-family
Consumer
Total non-accrual loans
Accruing loans past due 90 days or more
Troubled debt restructuring
Total non-performing loans
Total real estate owned
Total non-performing assets
2019
2018
2017
2016
2015
(Dollars in thousands)
At December 31,
$
$
$
$
$
$
$
66
—
—
996
—
—
—
1,062
$
$
68
—
—
—
—
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—
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—
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92
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$
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— $
94
90
184
$
$
$
347
—
—
—
—
—
—
347
—
—
347
—
347
Total non-performing loans to total loans
0.31%
0.02%
0.39%
0.03%
0.13%
Total non-performing assets to total assets
0.26%
0.02%
0.33%
0.06%
0.11%
(1) Represents one loan, which was recovered in full during the year ended December 31, 2018.
Interest income that would have been recorded for the year ended December 31, 2019 had non-accruing loans been
current according to their original terms was approximately $29,000. We recognized approximately $36,000 of interest
income for these loans for the year ended December 31, 2019. In addition, no interest income would have been recorded for
the year ended December 31, 2019 had accruing troubled debt restructurings been current according to their original terms.
We did not recognize any interest income for troubled debt restructurings for the year ended December 31, 2019.
Nonperforming Loans. Loans are reviewed on a regular basis. Management determines that a loan is impaired or
nonperforming 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 impaired, the measurement of the loan in the allowance for loan losses
is based on present value of expected future cash flows, except that all collateral-dependent loans are measured for
impairment 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 a reasonable period of time and the ultimate collectability of the total contractual principal and
interest is no longer in doubt.
13
Nonperforming loans were $1.1 million, or 0.31% of total loans, at December 31, 2019, compared to $68,000, or
0.02% of total loans, at December 31, 2018 and $1.2 million, or 0.39% of total loans, at December 31, 2017.
Troubled Debt Restructurings. Loans are considered troubled debt restructurings when a borrower is experiencing
financial difficulties that lead to a restructuring of the loan, and First Seacoast Bank grants a concession to the borrower that
it would not otherwise consider. These concessions include a modification of terms, such as a reduction of the stated interest
rate or loan balance, a reduction of accrued interest, an extension of the maturity date at an interest rate lower than current
market rate for a new loan with similar risk or some combination thereof to facilitate payment. Troubled debt restructurings
are considered impaired loans.
Loans on non-accrual status at the date of modification are initially classified as non-accrual troubled debt
restructurings. Our policy provides that troubled debt restructured loans are returned to accrual status after a period of
satisfactory and reasonable future payment performance under the terms of the restructuring. Satisfactory payment
performance is generally no less than six consecutive months of timely payments. At December 31, 2019, we had no troubled
debt restructurings.
Foreclosed Assets. Foreclosed assets consist of property acquired through formal foreclosure, in-substance foreclosure
or by deed in lieu of foreclosure, and are recorded at the lower of recorded investment or fair value, less estimated costs to
sell. Write-downs from recorded investment to fair value, which are required at the time of foreclosure, are charged to the
allowance for loan losses. We order a new appraisal before commencing foreclosure to determine the current market value of
the property. Any excess of the recorded value of the loan satisfied over the market value of the property is charged against
the allowance for loan losses, or, if the existing allowance is inadequate, charged to expense, in either case during the
applicable period of such determination. After acquisition, all costs incurred in maintaining the property are expensed. Costs
relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value,
less estimated costs to sell. At December 31, 2019, we had no foreclosed assets.
Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity
securities considered by the Office of the Comptroller of the Currency to be of lesser quality, as “substandard,” “doubtful” or
“loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that
the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of
the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make
“collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and
improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured
institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are
designated as “special mention” by our management.
When an insured institution classifies problem assets as either substandard or doubtful, it may establish general
allowances in an amount deemed prudent by management to cover probable accrued losses in the loan portfolio. General
allowances represent loss allowances, which have been established to cover probable accrued losses associated with lending
activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured
institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of
that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the
establishment of additional general or specific loss allowances.
In accordance with our loan policy, we regularly review the problem loans in our portfolio to determine whether any
loans require classification in accordance with applicable regulations. Loans are listed on the “watch list” initially because of
emerging financial weaknesses even though the loan is currently performing as agreed or if the loan possesses weaknesses
although currently performing. If a loan deteriorates in asset quality, the classification is changed to “special mention,”
“substandard,” “doubtful” or “loss” depending on the circumstances and the evaluation. Generally, loans 90 days or more
past due are placed on non-accrual status and classified “substandard.” Management reviews the status of each impaired loan
on our watch list on a quarterly basis.
14
On the basis of this review of our assets, our classified assets (including commercial, residential and consumer loans) at
the dates indicated were as follows:
Substandard assets
Doubtful assets
Loss assets
Total classified assets
Special mention assets
At December 31,
2019
2018
(In thousands)
$
$
$
477 $
—
—
477 $
2,166 $
1,579
—
—
1,579
1,015
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb
probable credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the
collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic conditions. Allowances for impaired loans are generally determined based
on collateral values or the present value of estimated cash flows. Because of uncertainties associated with regional economic
conditions, collateral values and future cash flows on impaired loans, it is reasonably possible that management’s estimate of
probable credit losses inherent in the loan portfolio and the related allowance may change materially in the near-term. The
allowance is increased by a provision for loan losses, which is charged to expense and reduced by full and partial charge-offs,
net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses.
Management’s periodic evaluation of the adequacy of the allowance is based on various factors, including, but not limited to,
management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and
delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools,
the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could
affect potential credit losses.
As an integral part of their examination process, the Office of the Comptroller of the Currency will periodically review
our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. However,
regulatory agencies are not directly involved in the process for establishing the allowance for loan losses as the process is our
responsibility and any increase or decrease in the allowance is the responsibility of management.
15
Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the years
indicated.
Allowance at beginning of the year
Provision for loan losses
Charge-offs:
One- to four-family residential real estate
Commercial real estate
Acquisition, development and land
Commercial and industrial
Home equity loans and lines of credit
Multi-family
Consumer
Total charge-offs
Recoveries:
One- to four-family residential real estate
Commercial real estate
Acquisition, development and land
Commercial and industrial
Home equity loans and lines of credit
Multi-family
Consumer
Total recoveries
Net (charge-offs) recoveries
Allowance at end of year
2019
$
2,806
100
$
—
—
—
(35)
—
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18
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2,875
$
$
$
$
$
$
$
$
$
$
2018
At or for the Years Ended December 31,
2017
(Dollars in thousands)
$
2016
$
2,804
—
2,677
160
2,731
40
2015
$
2,793
(60)
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—
—
1
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2
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—
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$
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$
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$
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Allowance to non-performing loans
270.72% 4,126.47%
233.08% 2,847.87%
787.03%
Allowance to total loans outstanding at the end
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outstanding during the year
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0.87%
0.91%
0.97%
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At December 31, 2019, our allowance for loan losses represented 0.83% of total loans and 270.72% of non-performing
loans, and at December 31, 2018, our allowance for loan losses represented 0.87% of total loans and 4126.47% of non-
performing loans. During the years ended December 31, 2019 and 2018, we had net loan (charge-offs) recoveries of
($31,000) and $2,000, respectively.
Although we believe that we use the best information available to establish the allowance for loan losses, future
adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if
circumstances differ substantially from the assumptions used in making the determinations. Because future events affecting
borrowers and collateral cannot be predicted with certainty, the existing allowance for loan losses may not be adequate and
management may determine that increases in the allowance are necessary if the quality of any portion of our loan portfolio
deteriorates as a result. Furthermore, our regulators, in reviewing our loan portfolio, may require us to increase our allowance
for loan losses. Any material increase in the allowance for loan losses may adversely affect our financial condition and results
of operations. See Note 6 to the notes to our consolidated financial statements included in this annual report beginning on
page 62 for a complete discussion of our allowance for loan losses.
Investment Activities
The goals of our investment policy are to provide and maintain liquidity to meet deposit withdrawal and loan funding
needs, to help mitigate interest rate and market risk, to diversify our assets and to generate a reasonable rate of return on
funds within the context of our interest rate and credit risk objectives. Our board of directors is responsible for adopting and
reviewing annually our investment policy. Our Asset/Liability Management Committee (ALCO) is responsible for
implementing our investment policy. Authority to make investments under the approved investment policy guidelines is
delegated to our President and Chief Executive Officer, Chief Financial Officer and Finance Officer. All investment
transactions are reviewed at the next regularly scheduled meeting of the board of directors. All of our investment securities
are classified as available-for-sale.
We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of
various government-sponsored enterprises and municipal governments, deposits at the Federal Home Loan Bank, certificates
of deposit of federally insured institutions, investment grade corporate bonds and investment grade marketable equity
securities. We also are required to maintain an investment in Federal Home Loan Bank stock. While we have the authority
under applicable law to invest in derivative securities, we had no investments in derivative securities at December 31, 2019.
The following table sets forth the amortized cost and estimated fair value of our available-for-sale securities portfolio at
the dates indicated. At the dates indicated, we did not hold any securities classified as held-to-maturity or as trading
securities.
U.S. Government-sponsored enterprises
obligations
U.S Government agency small business
administration pools guaranteed by the SBA
Collateralized mortgage obligations issued by
the FHLMC
Residential mortgage-backed securities
Municipal bonds
Total
2019
As of December 31,
2018
2017
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
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Amortized
Cost
Estimated
Fair
Value
(In thousands)
$
9,000
$
8,997
$ 24,219
$ 23,727
$ 18,249
$ 17,895
2,760
2,740
—
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—
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$ 40,083
—
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$ 39,443
—
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$ 29,188
—
1,626
9,373
$ 28,894
At December 31, 2019, we had no investments in a single issuer (other than investments in securities issued by the U.S.
Government and government agencies) that had an aggregate book value that exceeded 10% of our consolidated
stockholders’ equity.
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19
U.S. Government-Sponsored Enterprises Obligations. At December 31, 2019, we had government-sponsored
enterprise issued by various U.S. Government agencies totaling $9.0 million, which constituted 20.1% of our securities
portfolio. The Company invests primarily in Federal Farm Credit Bank and Federal Home Loan Bank bonds.
U.S. Government Agency Small Business Administration Pools. At December 31, 2019, we had government-
sponsored small business investment company (“SBIC”) pools issued and guaranteed by the U.S. Small Business
Administration (“SBA”) totaling $2.7 million, which constituted 6.1% of our securities portfolio. An SBIC is a privately
owned and managed investment fund licensed and regulated by the SBA. An SBIC uses its own capital, plus funds borrowed
with an SBA guarantee, to make equity and debt investments in qualifying small businesses.
Municipal Bonds. At December 31, 2019, we had municipal bonds with a fair value of $28.9 million, which
constituted 64.5% of our securities portfolio, with a weighted average maturity of 17 years and 2 months. These securities
often provide slightly higher after-tax yields than U.S. Government and agency securities and residential mortgage-backed
securities, but are not as liquid as other investments, so we typically maintain investments in municipal securities, to the
extent appropriate, for generating returns in our investment portfolio.
U.S. Government-Sponsored Mortgage-Backed Securities. At December 31, 2019, we had government-sponsored
mortgage-backed securities and collateralized mortgage obligations issued by the FHLMC totaling $4.2 million, which
constituted 9.3% of our securities portfolio. Mortgage-backed securities are securities issued in the secondary market that are
collateralized by pools of mortgages. Certain types of mortgage-backed securities are commonly referred to as “pass-
through” certificates because the principal and interest of the underlying loans is “passed through” to investors, net of certain
costs, including servicing and guarantee fees. We invest primarily in mortgage-backed securities backed by one-to-four
family mortgages. All of our mortgage-backed securities are issued by U.S. Government-sponsored enterprises, such as
Fannie Mae and Freddie Mac. Our collateralized mortgage obligations are issued by the FHLMC.
Sources of Funds
General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We
also use borrowings, primarily Federal Home Loan Bank advances and repurchase agreements, to supplement cash flow
needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, we
receive funds from scheduled loan payments, loan and mortgage-backed securities prepayments, maturities and calls of
available-for-sale securities, retained earnings and income on earning assets. While scheduled loan payments and income on
earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by
prevailing interest rates, market conditions and levels of competition.
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 certificates of deposit, for both individuals and businesses.
At December 31, 2019, our core deposits, which are deposits other than certificates of deposit, were $220.6 million,
representing 78.3% of total deposits. As part of our business strategy, we intend to continue our effort to increase our core
deposits while allowing higher-cost certificates of deposit to run off upon maturity. We generally require commercial
business borrowers to maintain their primary deposit accounts with us. At December 31, 2019, our deposits totaled $281.6
million.
Deposit account terms vary according to the minimum balance required, the time period that funds must remain on
deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates
offered by our competition, our liquidity needs, profitability and customer preferences and concerns. We generally review our
deposit pricing on a monthly basis and continually review our deposit mix. Our deposit pricing strategy has generally been to
offer competitive rates, while generally not providing the highest rates in the market. We find it more profitable to
concentrate on specific special rate and term accounts, which allows us to add accounts without impacting our overall
liability costs for existing accounts.
We also rely on customer service, convenience of our branch office locations, advertising and pre-existing relationships
to gather and develop deposit relationships. Developing comprehensive banking relationships is a top priority for us and is a
focus of our commercial lending team and business development officers. In recent years, we have introduced new business
deposit products to appeal to our commercial borrowers. At December 31, 2019, our ratio of commercial deposits to
commercial loans (including commercial real estate loans, acquisition, development and land loans and commercial and
industrial loans) was 51.68%.
20
The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and
competition. The variety of deposit accounts that we offer allows us to be competitive in generating deposits and to respond
with flexibility to changes in our customers’ demands. Our ability to gather deposits is impacted by the competitive market in
which we operate, which includes numerous financial institutions of varying sizes offering a wide range of products. We
believe that deposits are a stable source of funds, but our ability to attract and maintain deposits at favorable rates will be
affected by market conditions, including competition and prevailing interest rates.
The following tables set forth the distribution of total deposit accounts, by account type, at the dates indicated.
2019
Amount
Percent
Average
Rate
At December 31,
2018
Amount
Percent
(Dollars in thousands)
Average
Rate
2017
Amount
Percent
Average
Rate
Non-interest bearing
accounts
Now and demand deposits
Money market deposits
Savings deposits
Certificates of deposit
Total
$ 41,586
73,438
65,611
39,962
61,019
15.58%
28.82% 0.08%
17.02% 0.75%
16.36% 0.05%
22.22% 1.36%
$281,616 100.00% 0.60% $274,446 100.00% 0.72% $249,561 100.00% 0.45%
— $ 38,867
15.40%
24.52% 0.09% 71,933
22.21% 1.35% 42,471
15.05% 0.05% 40,827
22.82% 1.69% 55,463
— $ 42,262
14.76%
26.08% 0.62% 67,318
23.30% 0.85% 60,952
14.19% 0.03% 41,294
21.67% 1.50% 62,620
—
As of December 31, 2019, the aggregate amount of our certificates of deposit in amounts greater than or equal to
$100,000 was $31.8 million. The following table sets forth their maturity as of December 31, 2019.
(In thousands)
Maturity Period:
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Total
$
$
3,782
9,964
13,534
4,558
31,838
The following table sets forth time deposit accounts classified by rate and maturity at December 31, 2019.
Amount Due
One Year
or Less
More
Than One
Year to
Two Years
More
Than Two
More
Years to
Than
Three
Three
Years
Years
(Dollars in thousands)
Percent
of Total
Time
Deposit
Accounts
Total
$
$
9,014
9,706
29,614
48,334
$
$
2,449
4,938
753
8,140
$
$
15
3,459
170
3,644
$
$
— $
901
—
901
$
11,478
19,004
30,537
61,019
18.8%
31.1
50.0
100.0%
0.00 - 1.00%
1.01 - 2.00%
2.01 - 3.00%
Total
The following table sets forth time deposit accounts classified by rate and maturity at December 31, 2018.
0.00 - 1.00%
1.01 - 2.00%
2.01 - 3.00%
Total
One Year
or Less
$
$
13,518
5,930
9,451
28,899
$
$
Amount Due
More
Than One
Year to
Two
Years
More
Than Two
More
Years to
Than
Three
Three
Years
Years
(Dollars in thousands)
Percent
of Total
Time
Deposit
Accounts
Total
1
4,807
434
5,242
$
$
15
3,598
166
3,779
$
$
16,208
18,215
28,197
62,620
25.9%
29.1
45.0
100.0%
$
$
2,674
3,880
18,146
24,700
21
Borrowed Funds. We may obtain advances from the Federal Home Loan Bank upon the security of our capital stock in
the Federal Home Loan Bank and certain of our mortgage loans. Such advances may be made pursuant to several different
credit programs, each of which has its own interest rate and range of maturities. We use such advances to provide short-term
funding as a supplement to our deposits. At December 31, 2019, we had $66.2 million in advances from the Federal Home
Loan Bank and $81.7 million additional borrowing capacity from the Federal Home Loan Bank. We have an overnight line
of credit with the Federal Home Loan Bank that may be drawn up to $3.0 million. We may access additional advances if we
purchase additional Federal Home Loan Bank capital stock. Additionally, at December 31, 2019, we had $5.0 million of
unsecured Fed funds borrowing lines of credit with two correspondent banks. The entire balance of these credit facilities was
available as of December 31, 2019.
The following table sets forth information concerning balances and interest rates on borrowings at the dates and for the
years indicated:
At or For the Year Ended December 31,
2017
2018
2019
Federal Home Loan Bank advances:
Balance outstanding at end of year
Weighted average interest rate at the end of year
Maximum amount of borrowings outstanding at any
month end during the year
Average balance outstanding during the year
Weighted average interest rate during the year
Repurchase Agreements:
Balance outstanding at end of year
Weighted average interest rate at the end of year
Maximum amount of borrowings outstanding at any
month end during the year
Average balance outstanding during the year
Weighted average interest rate during the year
$
$
(Dollars in thousands)
$
75,737
$
66,219
1.75%
2.52%
65,762
1.51%
87,122
66,820
78,462
72,996
67,112
59,574
2.37%
2.02%
1.18%
— $
—
— $
—
6,463
0.14%
—
—
—
6,093
1,971
0.08%
6,463
1,662
0.22%
FSB Wealth Management
FSB Wealth Management is a division of First Seacoast Bank. The division currently consists of two financial advisors
who are located at 629 Central Avenue, Dover, New Hampshire, adjacent to our main office. 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. At December 31, 2019, FSB Wealth Management had approximately $49.3 million in assets under
management.
Personnel
As of December 31, 2019, we had 84 total employees and 80 full-time equivalent employees. Our employees are not
represented by any collective bargaining group. Management believes that we have a good working relationship with our
employees.
Subsidiaries
First Seacoast Bank is the sole wholly owned subsidiary of First Seacoast Bancorp. First Seacoast Bank has one
subsidiary, FSB Service Corporation, Inc., which is inactive.
22
Regulation and Supervision
General
As a federal savings bank, First Seacoast Bank is subject to examination, supervision and regulation, primarily by the
Office of the Comptroller of the Currency, and, secondarily, by the FDIC as deposits insurer. The federal system of
regulation and supervision establishes a comprehensive framework of activities in which First Savings Bank may engage and
is intended primarily for the protection of depositors and the FDIC’s Deposit Insurance Fund. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and
examination policies, including the classification of assets and the establishment of loan loss reserves for regulatory purposes.
First Seacoast Bank is also regulated to a lesser extent by the Board of Governors of the Federal Reserve System, or the
“Federal Reserve Board,” which governs the reserves to be maintained against deposits and other matters. In addition, First
Seacoast Bank is a member of and owns stock in the Federal Home Loan Bank, which is one of the 11 regional banks in the
Federal Home Loan Bank System. First Seacoast Bank’s relationship with its depositors and borrowers is also regulated to a
great extent by federal law and, to a lesser extent, state law, including in matters concerning the ownership of deposit
accounts and the form and content of First Seacoast Bank’s loan documents.
As a savings and loan holding company, First Seacoast Bancorp is subject to examination and supervision by, and is
required to file certain reports with, the Federal Reserve Board. First Seacoast Bancorp is also be subject to the rules and
regulations of the Securities and Exchange Commission under the federal securities laws.
Set forth below are certain material regulatory requirements that are applicable to First Seacoast Bank and First
Seacoast Bancorp. This description of statutes and regulations is not intended to be a complete description of such statutes
and regulations and their effects on First Seacoast Bank and First Seacoast Bancorp. Any change in these laws or regulations,
whether by Congress or the applicable regulatory agencies, could have a material adverse impact on First Seacoast Bancorp,
First Seacoast Bank and their operations.
Federal Banking Regulation
Business Activities. A federal savings association derives its lending and investment powers from the Home Owners’
Loan Act, as amended, and applicable federal regulations. Under these laws and regulations, First Seacoast Bank may invest
in mortgage loans secured by residential and commercial real estate, commercial and industrial and consumer loans, certain
types of debt securities and certain other assets, subject to applicable limits. The Dodd-Frank Act authorized, for the first
time, the payment of interest on commercial checking accounts. First Seacoast Bank may also establish, subject to specified
investment limits, service corporation subsidiaries that may engage in certain activities not otherwise permissible for First
Seacoast Bank, including real estate investment and securities and insurance brokerage.
Examinations and Assessments. First Seacoast Bank is primarily supervised by the Office of the Comptroller of the
Currency. First Seacoast Bank is required to file reports with and is subject to periodic examination by the Office of the
Comptroller of the Currency. First Seacoast Bank is required to pay assessments to the Office of the Comptroller of the
Currency to fund the agency’s operations.
Capital Requirements. Federal regulations require FDIC-insured depository institutions, including federal savings
associations, to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio, a Tier 1
capital to risk-based assets ratio, a total capital to risk-based assets and a Tier 1 capital to total assets leverage ratio. The
existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory
amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the
Dodd-Frank Act.
The capital standards require the maintenance of common equity Tier 1 capital, Tier 1 capital and Total capital to risk-
weighted assets of at least 4.5%, 6% and 8%, respectively. The regulations also establish a minimum required leverage ratio
of at least 4% of Tier 1 capital. Common equity Tier 1 capital is generally defined as common stockholders’ equity and
retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1
capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity
accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier
1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified
requirements and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible
securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised a one-time opt-
out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized
gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised
the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on
available-for-sale-securities). First Seacoast Bank did exercise the opt-out election. Calculation of all types of regulatory
capital is subject to deductions and adjustments specified in the regulations.
23
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, an institution’s
assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests), are
multiplied by a risk weight factor assigned by the regulations based on the risk deemed inherent in the type of asset. Higher
levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned
to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one- to
four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of
150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity
interests, depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and
certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer”
consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum
risk-based capital requirements. The capital conservation buffer requirement was phased in beginning January 1, 2016 at
0.625% of risk-weighted assets and increased each year until fully implemented at 2.5% on January 1, 2019.
Federal legislation required federal banking agencies, including the Office of the Comptroller of the Currency, to
establish for institutions with consolidated total assets of less than $10 billion a "community bank leverage ratio" (“CBLR”).
The CBLR is an alternative framework that can be used to calculate a bank’s capital ratio. Effective January 1, 2020,
qualifying banking organizations may opt in or opt out quarterly of using the community bank leverage framework which
significantly simplifies the calculation of the capital ratio by relying on total average assets and therefore eliminating the need
to calculate risk-based assets. Institutions with a leverage ratio of greater than 9%, consolidated total assets of less than $10
billion and total off-balance sheet exposures of 25% or less of consolidated total assets may opt into the CBLR. At
December 31, 2019, First Seacoast Bank’s capital exceeded all applicable requirements including the applicable capital
conservation buffer.
Loans-to-One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single or related
group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be lent, equal to 10% of
unimpaired capital and surplus, if secured by “readily marketable collateral,” which generally includes certain financial
instruments (but not real estate). As of December 31, 2019, First Seacoast Bank complied with the loans-to-one borrower
limitations.
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards
for all insured depository institutions. These standards relate to, among other things, internal controls, information systems
and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other
operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any
standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard. Failure to implement such a plan can result in further enforcement action, including
the issuance of a cease and desist order or the imposition of civil money penalties.
Prompt Corrective Action. Under the federal Prompt Corrective Action statute, the Office of the Comptroller of the
Currency is required to take supervisory actions against undercapitalized institutions under its jurisdiction, the severity of
which depends upon the institution’s level of capital. An institution that has a total risk-based capital ratio of less than 8.0%,
a Tier 1 risk-based capital ratio of less than 6.0%, a common equity Tier 1 ratio of less than 4.5% or a leverage ratio of less
than 4% is considered to be “undercapitalized.” A savings institution that has total risk-based capital of less than 6.0%, a Tier
1 risk-based capital ratio of less than 4.0%, a common equity Tier 1 ratio of less than 3.0% or a leverage ratio that is less than
3.0% is considered to be “significantly undercapitalized.” A savings institution that has a tangible capital to assets ratio equal
to or less than 2.0% is deemed to be “critically undercapitalized.”
Generally, the Office of the Comptroller of the Currency is required to appoint a receiver or conservator for a federal
savings association that becomes “critically undercapitalized” within specific time frames. The regulations also provide that a
capital restoration plan must be filed with the Office of the Comptroller of the Currency within 45 days of the date that a
federal savings association is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or
“critically undercapitalized.” Any holding company of a federal savings association that is required to submit a capital
restoration plan must guarantee performance under the plan in an amount of up to the lesser of 5.0% of the savings
association’s assets at the time it was deemed to be undercapitalized by the Office of the Comptroller of the Currency or the
amount necessary to restore the savings association to adequately capitalized status. This guarantee remains in place until the
Office of the Comptroller of the Currency notifies the savings association that it has maintained adequately capitalized status
for each of four consecutive calendar quarters. Institutions that are undercapitalized become subject to certain mandatory
measures such as restrictions on capital distributions and asset growth. The Office of the Comptroller of the Currency may
also take any one of a number of discretionary supervisory actions against undercapitalized federal savings associations,
including the issuance of a capital directive and the replacement of senior executive officers and directors.
24
At December 31, 2019, First Seacoast Bank met the criteria for being considered “well capitalized,” which means that
its total risk-based capital ratio exceeded 10%, its Tier 1 risk-based ratio exceeded 8.0%, its common equity Tier 1 ratio
exceeded 6.5% and its leverage ratio exceeded 5.0%.
Qualified Thrift Lender Test. As a federal savings association, First Seacoast Bank must satisfy the qualified thrift
lender, or “QTL,” test. Under the QTL test, First Seacoast Bank must maintain at least 65% of its “portfolio assets” in
“qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities)
in at least nine months of every 12-month period. “Portfolio assets” generally means total assets of a savings association, less
the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets and the value of property
used in the conduct of the savings association’s business. Alternatively, First Seacoast Bank may satisfy the QTL test by
qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code.
A savings association that fails the QTL test must operate under specified restrictions set forth in the Home Owners’
Loan Act. The Dodd-Frank Act made noncompliance with the QTL test subject to agency enforcement action for a violation
of law. At December 31, 2019, First Seacoast Bank satisfied the QTL test.
Capital Distributions. Federal regulations govern capital distributions by a federal savings association, which include
cash dividends, stock repurchases and other transactions charged to the savings association’s capital account. A federal
savings association must file an application with the Office of the Comptroller of the Currency for approval of a capital
distribution if:
•
•
•
•
the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net
income for that year to date plus the savings association’s retained net income for the preceding two years;
the savings association would not be at least adequately capitalized following the distribution;
the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or
the savings association is not eligible for expedited treatment of its filings.
Even if an application is not otherwise required, every savings association that is a subsidiary of a savings and loan
holding company, such as First Seacoast Bank, must file a notice with the Federal Reserve Board at least 30 days before the
board of directors declares a dividend.
An application or notice related to a capital distribution may be disapproved if:
•
•
•
the federal savings association would be undercapitalized following the distribution;
the proposed capital distribution raises safety and soundness concerns; or
the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital
distribution if, after making such distribution, the institution would fail to meet any applicable regulatory capital requirement.
Community Reinvestment Act and Fair Lending Laws. All federal savings associations have a responsibility under the
Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and
moderate-income borrowers. In connection with its examination of a federal savings association, the Office of the
Comptroller of the Currency is required to assess the federal savings association’s record of compliance with the Community
Reinvestment Act. A savings association’s failure to comply with the provisions of the Community Reinvestment Act could,
at a minimum, result in denial of certain corporate applications such as branches or mergers or in restrictions on its activities.
In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending
practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity
Act and the Fair Housing Act could result in enforcement actions by the Office of the Comptroller of the Currency, as well as
other federal regulatory agencies and the Department of Justice.
The Community Reinvestment Act requires all institutions insured by the FDIC to publicly disclose their rating. First
Seacoast Bank received a “Satisfactory” rating in its most recent Community Reinvestment Act federal evaluation.
25
Transactions with Related Parties. A federal savings association’s authority to engage in transactions with its affiliates
is limited by Sections 23A and 23B of the Federal Reserve Act and federal regulation. An affiliate is generally a company
that controls or is under common control with an insured depository institution such as First Seacoast Bank. First Seacoast
Bancorp is an affiliate of First Seacoast Bank because of its control of First Seacoast Bank. In general, certain transactions
between an insured depository institution and its affiliates are subject to quantitative limits and collateral requirements. In
addition, federal regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities
that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a
subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve the
purchase of low-quality assets from an affiliate and be on terms that are as favorable to the institution as comparable
transactions with non-affiliates.
First Seacoast Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to
entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal
Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that
extensions of credit to insiders:
•
•
be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less
stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve
more than the normal risk of repayment or present other unfavorable features; and
not exceed certain limitations on the amount of credit extended to such persons, individually and in the
aggregate, which limits are based, in part, on the amount of First Seacoast Bank’s capital.
In addition, extensions of credit in excess of certain limits must be approved by First Seacoast Bank’s board of
directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.
Enforcement. The Office of the Comptroller of the Currency has primary enforcement responsibility over federal
savings associations and has authority to bring enforcement action against all “institution-affiliated parties,” including
directors, officers, stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on a federal savings association. Formal enforcement action by the Office of the
Comptroller of the Currency may range from the issuance of a capital directive or cease and desist order to removal of
officers and/or directors of the institution to the appointment of a receiver or conservator. Civil penalties cover a wide range
of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case
penalties may be as high as $1.0 million per day. The FDIC also has the authority to terminate deposit insurance or
recommend to the Office of the Comptroller of the Currency that enforcement action be taken with respect to a particular
savings association. If such action is not taken, the FDIC has authority to take the action under specified circumstances.
Insurance of Deposit Accounts. The Deposit Insurance Fund of the FDIC insures deposits at FDIC-insured financial
institutions such as First Seacoast Bank. Deposit accounts in First Seacoast Bank are insured by the FDIC generally up to a
maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement
accounts.
The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund. Assessments for
most institutions are based on financial measures and supervisory ratings derived from statistical modeling estimating the
probability of failure within three years. In conjunction with the Deposit Insurance Fund reserve ratio achieving 1.15%, in
2016, the assessment range (inclusive of possible adjustments) was reduced for most banks and savings associations to a
range of 1.5 basis points to 30 basis points. The FDIC has authority to increase insurance assessments. Any significant
increases would have an adverse effect on the operating expenses and results of operations of First Seacoast Bank. First
Seacoast Bank cannot predict what assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation,
rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead
to termination of our deposit insurance.
In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the
approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO
in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The FICO assessment for the fourth
quarter of 2018 was 0.32 basis points of assets less tangible equity and decreased to 0.14 basis points of assets less tangible
equity for the first quarter of 2019. The bonds issued by the FICO matured during 2019 and the FICO assessment ceased in
mid-2019.
26
Federal Home Loan Bank System. First Seacoast Bank is a member of the Federal Home Loan Bank System, which
consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility
primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the Federal
Home Loan Bank, First Seacoast Bank is required to acquire and hold shares of capital stock in the Federal Home Loan
Bank. As of December 31, 2019, First Seacoast Bank complied with this requirement.
Dodd-Frank Act
The Dodd-Frank Act created the Consumer Financial Protection Bureau, which has broad powers to supervise and
enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide
range of consumer protection laws that apply to all banks and savings institutions such as First Seacoast Bank, including the
authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has
examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks
and savings institutions with $10 billion or less in assets continue to be examined for compliance by their applicable bank
regulators. The new legislation also weakened the federal preemption available for national banks and federal savings
associations and gave state attorneys general the ability to enforce applicable federal consumer protection laws.
In addition to creating the Consumer Financial Protection Bureau, the Dodd-Frank Act, among other things, directed
changes in the way that institutions are assessed for deposit insurance, mandated the imposition of tougher consolidated
capital requirements on holding companies, required the issuance of regulations requiring originators of securitized loans to
retain a percentage of the risk for the transferred loans, imposed regulatory rate-setting for certain debit card interchange fees,
repealed restrictions on the payment of interest on commercial demand deposits and contained a number of reforms related to
mortgage originations.
Many provisions of the Dodd-Frank Act involve delayed effective dates and/or require implementing regulations. The
implementation of the legislation is an ongoing process. The Dodd-Frank Act has resulted in, and may continue to result in,
an increased regulatory burden and increased compliance, operating and interest expense for First Seacoast Bank.
Other Regulations
Interest and other charges collected or contracted for by First Seacoast Bank are subject to state usury laws and federal
laws concerning interest rates. First Seacoast Bank’s operations are also subject to federal laws applicable to credit
transactions, such as the:
•
•
•
•
•
•
•
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and
public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing
needs of the community it serves;
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, color, religion, national origin and
other prohibited factors in extending credit;
Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection
agencies;
Truth in Savings Act, governing disclosures with respect to deposit accounts; and
rules and regulations of the various federal agencies charged with the responsibility of implementing such federal
laws.
The operations of First Seacoast Bank also are subject to the:
•
•
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records
and prescribes procedures for complying with administrative subpoenas of financial records;
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to
and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated
teller machines and other electronic banking services;
27
•
•
•
Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as
digital check images and copies made from that image, the same legal standing as the original paper check;
The USA PATRIOT Act, which requires savings associations to, among other things, establish broadened anti-
money laundering compliance programs and due diligence policies and controls to ensure the detection and
reporting of money laundering. Such required compliance programs are intended to supplement existing
compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of
Foreign Assets Control regulations; and
The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by
financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all
financial institutions offering financial products or services to retail customers to provide such customers with
the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing
of certain personal financial information with unaffiliated third parties.
Holding Company Regulation
General. First Seacoast Bancorp and First Seacoast Bancorp, MHC are savings and loan holding companies within the
meaning of the Home Owners’ Loan Act. As such, First Seacoast Bancorp and First Seacoast Bancorp, MHC are registered
with the Federal Reserve Board and subject to the regulation, examination, supervision and reporting requirements applicable
to savings and loan holding companies. In addition, the Federal Reserve Board has enforcement authority over First Seacoast
Bancorp, First Seacoast Bancorp, MHC and its non-savings institution subsidiaries. Among other things, this authority
permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary
savings institution.
Permissible Activities. Under present law, the business activities of First Seacoast Bancorp and First Seacoast Bancorp,
MHC are generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank
Holding Company Act of 1956, as amended, provided certain conditions are met and financial holding company status is
elected, and for multiple savings and loan holding companies. A financial holding company may engage in activities that are
financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial
activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to
activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to
regulatory approval, and certain additional activities authorized by federal regulations. First Seacoast Bancorp and First
Seacoast Bancorp, MHC have not elected financial holding company status.
Federal law prohibits a savings and loan holding company, including First Seacoast Bancorp and First Seacoast
Bancorp, MHC, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings
association or savings and loan holding company, without prior Federal Reserve Board approval. In evaluating applications
by holding companies to acquire savings institutions, the Federal Reserve Board considers factors such as the financial and
managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the
federal deposit insurance fund, the convenience and needs of the community and competitive factors.
The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and
loan holding company controlling savings institutions in more than one state, subject to two exceptions:
•
•
the approval of interstate supervisory acquisitions by savings and loan holding companies; and
the acquisition of a savings institution in another state if the laws of the state of the target savings institution
specifically permit such acquisition.
Capital. Savings and loan holding companies have historically not been subjected to consolidated regulatory capital
requirements. The Dodd-Frank Act required the Federal Reserve Board to establish for all bank and savings and loan holding
companies, minimum consolidated capital requirements that are as stringent as those required for the insured depository
subsidiaries. Recent federal legislation has expanded the applicability of the exception to holding companies of up to
$3.0 billion of consolidated assets. As a result, savings and loan holding companies with less than $3.0 billion in consolidated
assets, like First Seacoast Bancorp and First Seacoast Bancorp, MHC, are generally not subject to the capital requirements
unless otherwise advised by the Federal Reserve Board.
Source of Strength. The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding
companies. The Federal Reserve Board has issued regulations requiring that all savings and loan holding companies serve as
a source of financial and managerial strength to their subsidiary depository institutions.
28
Dividends and Stock Repurchases. The Federal Reserve Board has issued a policy statement regarding the payment of
dividends by holding companies. In general, the policy provides that dividends should be paid only out of current earnings
and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s
capital needs, asset quality and overall supervisory financial condition. Separate regulatory guidance provides for prior
consultation with Federal Reserve Bank staff concerning dividends in certain circumstances such as where the company’s net
income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend
or the company’s overall rate or earnings retention is inconsistent with the company’s capital needs and overall financial
condition. The ability of a savings and loan holding company to pay dividends may be restricted if a subsidiary savings
association becomes undercapitalized. The regulatory guidance also states that a savings and loan holding company should
inform Federal Reserve Bank supervisory staff before redeeming or repurchasing common stock or perpetual preferred stock
if the savings and loan holding company is experiencing financial weaknesses or the repurchase or redemption would result
in a net reduction, at the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning
of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of First
Seacoast Bancorp to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Waivers of Dividends by First Seacoast Bancorp, MHC. First Seacoast Bancorp may pay dividends on its common
stock to public stockholders. If it does, it is also required to pay dividends to First Seacoast Bancorp, MHC, unless First
Seacoast Bancorp, MHC elects to waive the receipt of dividends. Under the Dodd-Frank Act, First Seacoast Bancorp, MHC
must receive the approval of the Federal Reserve Board before it may waive the receipt of any dividends from First Seacoast
Bancorp. The Federal Reserve Board has issued an interim final rule providing that it will not object to dividend waivers
under certain circumstances, including circumstances where the waiver is not detrimental to the safe and sound operation of
the savings association and a majority of the mutual holding company’s members have approved the waiver of dividends by
the mutual holding company within the previous twelve months. In addition, for a “non-grandfathered” mutual holding
company such as First Seacoast Bancorp, MHC, each officer or director of First Seacoast Bancorp and First Seacoast Bank,
and any tax-qualified stock benefit plan or non-tax-qualified stock benefit plan in which such individual participates that
holds any shares of stock to which the waiver would apply, must waive the right to receive any such dividend declared. In
addition, any dividends waived by First Seacoast Bancorp, MHC must be considered in determining an appropriate exchange
ratio in the event of a conversion of the mutual holding company to stock form.
Acquisition. Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board
if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and
loan holding company. Under certain circumstances, a change of control may occur, and prior notice is required, upon the
acquisition of 10% or more of the company’s outstanding voting stock, unless the Federal Reserve Board has found that the
acquisition will not result in control of the company. A change in control definitively occurs upon the acquisition of 25% or
more of the company’s outstanding voting stock. Under the Change in Bank Control Act, the Federal Reserve Board
generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the
financial and managerial resources of the acquirer and the competitive effects of the acquisition.
Federal Securities Laws
First Seacoast Bancorp’s class of common stock is registered with the Securities and Exchange Commission under the
Securities Exchange Act of 1934. Accordingly, First Seacoast Bancorp is subject to the information, proxy solicitation,
insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
Taxation
First Seacoast Bank, First Seacoast Bancorp, MHC and First Seacoast Bancorp are subject to federal and state income
taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion
of federal and state taxation is intended only to summarize material income tax matters and is not a comprehensive
description of the tax rules applicable to First Seacoast Bancorp, MHC, First Seacoast Bancorp and First Seacoast Bank.
Our federal and state tax returns have not been audited for the past five years.
Federal Taxation
General. First Seacoast Bancorp and First Seacoast Bank are subject to federal income taxation in the same general
manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended
only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to
First Seacoast Bancorp and First Seacoast Bank.
29
Method of Accounting. For federal income tax purposes, First Seacoast Bank currently reports its income and
expenses on the accrual method of accounting and uses a tax year ending December 31 for filing its federal income tax
returns. First Seacoast Bancorp and First Seacoast Bank will file a consolidated federal income tax return.
Net Operating Loss Carryovers. A financial institution may carry net operating losses forward to the succeeding 20
taxable years. At December 31, 2019, First Seacoast Bank had no net operating loss carryovers.
Charitable Contribution Carryovers. A financial institution’s deduction for charitable contributions is limited to 10%
of its federal taxable income with the excess carried forward to the succeeding five taxable years. Any contributions
remaining after the five-year carryover period that has not been deducted is no longer deductible. At December 31, 2019,
First Seacoast Bank had approximately $761,000 of charitable contribution carryovers.
Capital Loss Carryovers. Generally, a financial institution may carry back capital losses to the preceding three taxable
years and forward to the succeeding five taxable years. Any capital loss carryback or carryover is treated as a short-term
capital loss for the year to which it is carried. As such, it is grouped with any other capital losses for the year to which it is
carried and is used to offset any capital gains. Any loss remaining after the five-year carryover period that has not been
deducted is no longer deductible. At December 31, 2019, First Seacoast Bank had no capital loss carryovers.
Corporate Dividends. First Seacoast Bancorp may generally exclude from its income 100% of dividends received from
First Seacoast Bank as a member of the same affiliated group of corporations.
State Taxation
First Seacoast Bank is subject to New Hampshire income tax at the rate of 7.7% on its taxable income, before net
operating loss deductions and special deductions for federal income tax purposes. For this purpose, “taxable income”
generally means federal taxable income, subject to certain adjustments.
ITEM 1A. Risk Factors
Not applicable, as First Seacoast Bancorp is a “smaller reporting company.”
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2.
Properties
As of December 31, 2019, the net book value of our land, building and equipment was $5.3 million. The following
table sets forth information regarding our offices as of December 31, 2019:
Location
Leased or Owned
Year Acquired or
Leased
Net Book Value of
Real Property
(In thousands)
Main Office:
633 Central Avenue
Dover, NH 03820
Branch Offices:
6 Eastern Avenue
Barrington, NH 03825
7A Mill Road
Durham, NH 03824
1650 Woodbury Avenue
Portsmouth, NH 03801
17 Wakefield Street
Rochester, NH 03867
$
$
$
$
$
1,947
1,045
60
1,055
1,231
Owned
1890
1974
1979
1987
2009
Owned
Leased
Owned
Owned
30
We believe that current facilities are adequate to meet our present and foreseeable needs, subject to possible future
expansion.
ITEM 3.
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 December 31, 2019, 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 4. Mine Safety Disclosures
Not applicable.
31
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
The common stock of First Seacoast Bancorp has been listed on The Nasdaq Capital Market under the symbol “FSEA”
since July 17, 2019. As of March 13, 2020, we had 206 stockholders of record (excluding the number of persons or entities
holding stock in street name through various brokerage firms), and 6,083,500 shares of common stock outstanding, of which
3,345,925 shares, or 55%, are owned by First Seacoast Bancorp, MHC.
First Seacoast Bancorp currently does not anticipate paying a dividend to its stockholders. The payment and amount of
any dividend payments will be subject to statutory and regulatory limitations, and will depend upon a number of factors,
including the following: regulatory capital requirements; our financial condition and results of operations; our other uses of
funds for the long-term value of stockholders; tax considerations; the Federal Reserve Board’s current regulations restricting
the waiver of dividends by mutual holding companies and general economic conditions.
The Federal Reserve Board has issued a policy statement providing that dividends should be paid only out of current
earnings and only if our prospective rate of earnings retention is consistent with our capital needs, asset quality and overall
financial condition. Regulatory guidance also provides for prior regulatory consultation with respect to capital distributions
in certain circumstances such as where the holding company’s net income for the past four quarters, net of dividends
previously paid over that period, is insufficient to fully fund the dividend or the holding company’s overall rate or earnings
retention is inconsistent with its capital needs and overall financial condition. In addition, First Seacoast Bank's ability to pay
dividends will be limited if it does not have the capital conservation buffer required by the new capital rules, which may limit
our ability to pay dividends to stockholders. No assurances can be given that any dividends will be paid or that, if paid, will
not be reduced or eliminated in the future. Special cash dividends, stock dividends or returns of capital, to the extent
permitted by regulations and policies of the Federal Reserve Board and the Federal Deposit Insurance Corporation, may be
paid in addition to, or in lieu of, regular cash dividends.
If First Seacoast Bancorp pays dividends to its stockholders, it will likely pay dividends to First Seacoast Bancorp,
MHC. The Federal Reserve Board’s current regulations significantly restrict the ability of mutual holding companies
organized after December 1, 2009 to waive dividends declared by their subsidiaries. Accordingly, we do not currently
anticipate that First Seacoast Bancorp, MHC will waive dividends paid by First Seacoast Bancorp.
There were no sales of unregistered securities or repurchases of shares of common stock during the quarter ended
December 31, 2019.
32
ITEM 6.
Selected Financial Data
The following tables set forth selected historical financial and other data for the Company at the dates and for the
periods indicated. The following information is only a summary and should be read in conjunction with our consolidated
financial statements and the notes thereto beginning on page 45of this annual report. The information at and for the years
ended December 31, 2019 and 2018 is derived in part from the audited consolidated financial included in this annual report.
The information at and for the years ended December 31, 2017, 2016 and 2015 is derived in part from audited consolidated
financial statements that are not included in this annual report.
Selected Financial Condition Data:
Total Assets
Total Loans
Total Deposits
Total Borrowings
Total Stockholders' Equity
Book Value Per Share
Selected Operating Data:
Interest and Dividend Income
Interest Expense
Net Interest and Dividend Income
Provision (Credit) for Loan Losses
Net Interest Income After Provision for Loan Losses
Non-Interest Income
Non-Interest Expense
Income (Loss) Before Income Tax Expense (Benefit)
Income Tax Expense (Benefit)
Net (Loss) Income
Share Data:
Average Shares Outstanding, Basic
Average Shares Outstanding, Diluted
Total Shares Outstanding
Basic Earnings (Loss) Per Share
Diluted Earnings (Loss) Per share
2019
At or For the Year Ended December 31,
2016
2017
2018
(In thousands, except per share data)
2015
$ 409,493
344,855
281,616
66,219
57,066
9.38
$
$ 387,114
321,422
274,446
75,737
32,727
N/A
$ 359,747
307,295
249,561
72,225
31,898
N/A
$ 330,375
275,121
245,216
50,131
30,907
N/A
$ 311,580
264,816
227,539
50,234
30,282
N/A
$
$
$
15,448
3,843
11,605
100
11,505
1,532
13,305
(268)
(189)
(79) $
14,264
3,145
11,119
—
11,119
1,550
11,357
1,312
232
1,080
$
$
12,600
1,820
10,780
160
10,620
1,815
10,822
1,613
701
912
$
$
11,489
1,501
9,988
40
9,948
1,549
10,065
1,432
430
1,002
$
$
11,293
1,069
10,224
(60)
10,284
1,616
10,342
1,558
479
1,079
2,694,561
2,694,561
6,083,500
(0.03)
(0.03)
$
$
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
33
Performance Ratios:
Return on Average Assets (1)
Return on Average Equity (2)
Interest Rate Spread (3)
Net Interest Margin (4)
Non-Interest Expenses to Average Assets
Efficiency Ratio (5)
Average Interest-Earning Assets to Average
Interest-Bearing Liabilities
Average Equity to Average Assets (6)
Capital Ratios (First Seacoast Bank Only):
Total Capital to Risk-Weighted Assets
Tier 1 Capital to Risk-Weighted Assets
Common Equity Tier 1 Capital to Risk-Weighted
Assets
2019
(0.02)%
(0.16)%
2.74%
3.00%
3.33%
101.28%
126.31%
At or For the Year Ended December 31,
2017
2018
2016
0.29%
3.38%
2.88%
3.06%
3.03%
89.64%
121.36%
0.26%
2.88%
3.07%
3.22%
3.13%
85.92%
127.79%
0.32%
3.24%
3.16%
3.31%
3.23%
87.24%
130.09%
2015
0.36%
3.62%
3.39%
3.48%
3.41%
87.36%
125.16%
12.16%
8.53%
9.16%
9.91%
9.84%
18.52%
17.41%
17.41%
14.41%
13.27%
13.27%
14.54%
13.35%
13.35%
15.54%
14.29%
14.29%
15.88%
14.63%
14.63%
Tier 1 Capital to Average Assets
11.41%
8.68%
9.01%
9.77%
9.83%
Asset Quality Ratios:
Allowance for Loan Losses as a Percent of Total Loans
Allowance for Loan Losses as a Percent of
Non-Performing Loans
0.83%
0.87%
270.72% 4,126.47%
0.91%
0.97%
233.08% 2,847.87%
1.03%
787.03%
Net (Charge-Offs) to Average Outstanding Loans
(0.01)%
—
(0.01)%
(0.04)%
—
During the Period
Non-Performing Loans as a Percent of Total Loans
Non-Performing Loans as a Percent of Total Assets
Non-Performing Assets as a Percent of Total Assets
0.31%
0.26%
0.26%
0.02%
0.02%
0.02%
0.39%
0.33%
0.33%
0.03%
0.03%
0.06%
0.13%
0.11%
0.11%
Other Data:
Number of Offices
Number of Full-Time Equivalent Employees
5
80
5
73
5
66
5
69
5
67
(1)
(2)
(3)
(4)
(5)
(6)
Represents net income divided by average total assets.
Represents net income divided by average equity.
Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of
average interest-bearing liabilities.
Represents net interest income divided by average interest-earning assets.
Represents non-interest expense divided by the sum of net interest and dividend income and non-interest income.
Represents average equity divided by average total assets.
34
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reflects our consolidated financial statements and other relevant statistical data and is
intended to enhance your understanding of our financial condition and results of operations. The information in this section
has been derived from the consolidated financial statements, which appear elsewhere in this annual report. Certain prior year
amounts have been reclassified to conform to the current year presentation. You should read the information in this section
in conjunction with the other business and financial information provided in this annual report.
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 Federal Home Loan Bank, 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, and we intend to continue that focus after the reorganization and offering.
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.
COVID-19 Pandemic. In December 2019, a novel strain of coronavirus was reported in Wuhan, China. The World
Health Organization has declared the outbreak to constitute a “Public Health Emergency of International Concern.” The
COVID-19 outbreak is disrupting supply chains and affecting production and sales across a range of industries. The extent of
the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the
duration and spread of the outbreak, impact on our customers, employees and vendors all of which are uncertain and cannot
be predicted. At this point, the extent to which COVID-19 may impact our financial condition or results of operations is
uncertain.
Business Strategy
We believe we enjoy a strong, positive reputation among our customers and in our market area. We believe our 2019
name change to “First Seacoast Bank” will enhance our brand and market visibility and associate us by name with the market
area and communities we serve. As a community-oriented financial institution, we focus on serving the financial needs of
local individuals and businesses by executing a safe and sound, service-oriented business strategy that seeks to produce
earnings that increase over time and can be reinvested in our business and communities.
Our current business strategy consists of the following:
•
•
Grow our balance sheet, leverage existing infrastructure and improve profitability and operating efficiency.
Given our existing infrastructure and capabilities, we believe we are well-positioned to grow without a
proportional increase in overhead expense or operating risk. In recent years, we have assembled an experienced
management team and selectively hired lending, business development and support staff. Our operations benefit
from established marketing, information technology and audit and compliance departments. Additionally, we
have invested in Internet banking capabilities and introduced a mobile banking application. We have also
continued to invest in our existing branch office network and have renovated all branch offices within the past
five years. This investment in infrastructure is reflected in our efficiency ratio of 101.28% for the year ended
December 31, 2019. The stock offering provided us with funds to increase our lending and investment on a
managed basis, which we expect will increase our earnings and improve our operating efficiency.
Grow our loan portfolio and increase commercial real estate and commercial and industrial lending.
Historically, our principal business activity has been the origination of one- to four-family residential mortgage
loans. In recent years we have sought to supplement these originations by focusing on originating higher yielding
commercial real estate loans (including owner-occupied and non-owner-occupied commercial real estate and
multi-family loans), construction loans, commercial and industrial loans and home equity loans and lines of
credit. We intend to remain as a residential mortgage lender in our market area while increasing our focus on
originating commercial real estate and commercial and industrial loans. The capital we raised in the offering
increased our legal lending limits, which enables us to originate larger loans for our portfolio to new and existing
customers and reduced our need to participate with other lenders to originate larger loans.
35
•
•
•
Maintain strong asset quality and manage credit risk. Strong asset quality is a key to the long-term financial
success of any financial institution. We have been successful in maintaining strong asset quality in recent years.
Our ratio of nonperforming assets to total assets was 0.26%, 0.02%, 0.33%, 0.06% and 0.11% at December 31,
2019, 2018, 2017, 2016 and 2015, respectively. We attribute this historical credit quality to a conservative credit
culture and an effective credit risk management environment. We have an experienced team of credit
professionals, well-defined and implemented credit policies and procedures, what we believe to be conservative
loan underwriting criteria and active credit monitoring policies and procedures.
Increase core deposits and reduce reliance on higher cost borrowings. Deposits are our primary source of funds
for lending and investment. Core deposits (which we define as all deposits except for certificates of deposit),
particularly non-interest-bearing demand deposits, represent a low-cost, stable source of funds. Core deposits
were 78.33% of our total deposits at December 31, 2019. However, we also have to rely on higher cost Federal
Home Loan Bank borrowings as a supplemental funding source as indicated by our high loan-to-deposit ratio. At
December 31, 2019, our ratio of net loans to deposits was 121.4%, and our Federal Home Loan Bank borrowings
totaled $66.2 million. We used a portion of the net offering proceeds to repay our Federal Home Loan Bank
borrowings, which we were able to do without incurring prepayment penalties. Additionally, we continue to
focus on expanding core deposits by leveraging our business development officers and commercial lending and
retail relationships.
Grow organically and through opportunistic acquisitions or de novo branching. Our primary intention is to
grow our balance sheet organically, and the capital we raised in the offering which enabled us to increase our
lending and investment capacity. As a local independent bank, we believe we will have opportunities to gain
market share from customer fallout resulting from the consolidation of competing financial institutions in our
market area into larger, out-of-market acquirers. In addition to organic growth, we may also consider expansion
opportunities in our market area or in contiguous markets that we believe would enhance both our franchise
value and stockholder returns. These opportunities include establishing loan production offices, establishing new,
or de novo, branch offices and/or acquiring branch offices and the capital raised in the offering will help us fund
any such opportunities that may arise. We have no current plans or intentions regarding any such expansion
plans.
These strategies were developed to guide our investment of the net proceeds of our initial stock offering. We intend to
continue to pursue this business strategy, subject to changes necessitated by future market conditions, regulatory restrictions
and other factors.
Critical Accounting Policies
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 loan losses and the measurement of the fair
value of financial instruments. A detailed description of these critical accounting policies can be found in Notes 2 and 16,
respectively, to our consolidated financial statements beginning on page 45 of this annual report.
Emerging Growth Company Status
Under the JOBS Act, a company with total annual gross revenues of less than $1.07 billion (adjusted for inflation)
during its most recently completed fiscal year qualifies as an “emerging growth company.” First Seacoast Bancorp qualifies
as an emerging growth company under the JOBS Act.
An “emerging growth company” may choose not to hold non-binding advisory stockholder votes on annual executive
compensation (more frequently referred to as “say-on-pay” votes) or on executive compensation payable in connection with a
merger (more frequently referred to as “say-on-golden parachute” votes). An emerging growth company also is not subject to
the requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting and can
provide scaled disclosure regarding executive compensation; however, First Seacoast Bancorp will also not be subject to the
auditor attestation requirement or additional executive compensation disclosure so long as it remains a “smaller reporting
36
company” under Securities and Exchange Commission regulations (generally less than $250 million of voting and non-voting
equity held by non-affiliates). Finally, an emerging growth company may elect to comply with new or amended accounting
pronouncements in the same manner as a private company, but must make such election when the company is first required
to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company.
The extended transition period is generally one year, although it may vary for any particular accounting pronouncement. The
current expected credit losses accounting standard (CECL) carries an extended transition period of two years. We have opted
to take advantage of the benefits of this extended transition period. Accordingly, our consolidated financial statements may
not be comparable to companies that comply with such new or revised accounting standards.
A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal year of the company
during which it had total annual gross revenues of $1.07 billion or more (adjusted for inflation); (ii) the last day of the fiscal
year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the company
pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which such company has,
during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which such
company is deemed to be a “large accelerated filer” under Securities and Exchange Commission regulations (generally, at
least $700 million of voting and non-voting equity held by non-affiliates).
Comparison of Financial Condition at December 31, 2019 and December 31, 2018
Total Assets. Total assets were $409.5 million as of December 31, 2019, an increase of $22.4 million, or 5.8%, when
compared to total assets of $387.1 million at December 31, 2018. The increase was due primarily to an increase in net loans
and securities available-for-sale, offset by a decrease in interest bearing time deposits with other banks.
Cash and Due From Banks. Cash and due from banks decreased $1.9 million, or 31.9%, to $4.0 million at
December 31, 2019 from $5.9 million at December 31, 2018. This decrease was primarily due to increases in net loans and
securities available-for-sale and a decrease in advances from Federal Home Loan Bank, offset by a net increase in deposits.
Available-for-Sale Securities. Available-for-sale securities increased by approximately $5.3 million, or 13.5%, to $44.8
million at December 31, 2019 from $39.4 million at December 31, 2018. This increase was due to 2019 purchases totaling
$23.4 million and a $1.4 million increase in net unrealized holding gains and losses within the portfolio, offset by proceeds
from principal repayments, maturities, calls and sales totaling $19.4 million.
Net Loans. Net loans increased $23.4 million, or 7.3%, to $342.0 million at December 31, 2019 from $318.6 million at
December 31, 2018. During the year ended December 31, 2019, we originated $120.1 million of loans, including $56.9
million of one- to four-family residential mortgages, $15.7 million of commercial real estate mortgages, $30.2 million of
acquisition, development and land loans, $9.2 million of commercial and industrial loans, $5.2 million of consumer loans and
home equity loans and lines of credit and $2.9 million of multi-family loans. During the year ended December 31, 2019, we
had $96.8 million in loan principal repayments.
The largest increases in our loan portfolio were in the one- to four-family residential mortgage and commercial real
estate mortgage loan portfolios. The increase in these loan portfolios reflects our strategy to grow the balance sheet through
originations of one- to four-family residential mortgage loans while also diversifying into higher yielding adjustable-rate
commercial real estate loans to improve net margins and manage interest rate risk. We continue to sell selected, conforming
15-year and 30-year fixed rate mortgage loans to the secondary market on a servicing retained basis providing us a recurring
source of revenue from loan servicing income and gains on the sale of such loans.
One- to four-family residential mortgage loans increased $11.6 million, or 5.7%, to $213.3 million at December 31,
2019 from $201.8 million at December 31, 2018. Commercial real estate mortgage loans increased $6.3 million, or 9.9%, to
$70.2 million at December 31, 2019 from $63.9 million at December 31, 2018. Acquisition, development and land loans
increased $3.3 million, or 20.9%, to $18.8 million at December 31, 2019 from $15.6 million at December 31, 2018.
Commercial and industrial loans increased $2.7 million, or 12.2%, to $24.7 million at December 31, 2019 from $22.0 million
at December 31, 2018. Home equity loans and lines of credit decreased $1.0 million, or 9.2%, to $10.1 million at
December 31, 2019 from $11.2 million at December 31, 2018. Multi-family loans decreased $40,000, or 0.8%, to $4.9
million at December 31, 2019 from $4.9 million at December 31, 2018. Consumer loans increased by $457,000, or 35.3%, to
$1.8 million at December 31, 2019 from $1.3 million at December 31, 2018.
Deposits. Deposits increased $7.2 million, or 2.6%, to $281.6 million at December 31, 2019 from $274.4 million at
December 31, 2018 primarily as a result of an increase in commercial deposits. Core deposits (defined as all deposits other
than time deposits) increased $8.8 million, or 4.1%, to $220.6 million at December 31, 2019 from $211.8 million at
37
December 31, 2018. The increase in core deposits was due to an increase in NOW accounts and demand deposits of $5.4
million and an increase in money market deposits of $4.7 million, offset by decreases in regular and other savings deposits of
$1.3 million and $676,000 in non-interest bearing accounts. Certificates of deposit decreased $1.6 million, or 2.6%, to $61.0
million at December 31, 2019 from $62.6 million at December 31, 2018. There were no brokered deposits included in
certificates of deposit at December 31, 2019 and 2018.
Advances from Federal Home Loan Bank. Advances from Federal Home Loan Bank decreased $9.5 million, or
12.6%, to $66.2 million at December 31, 2019 from $75.7 million at December 31, 2018. The decrease in advances from
Federal Home Loan Bank was primarily the result of our use of funds received from the stock offering to pay down advances.
Total Stockholders’ Equity. Total stockholders’ equity increased $24.3 million, or 74.4%, to $57.1 million at
December 31, 2019 from $32.7 million at December 31, 2018. This increase was due primarily to $25.1 million in funds
received from the stock offering and other comprehensive income of $986,000 related to net changes in unrealized holding
gains/losses in the available-for-sale securities portfolio offset by a net operating loss of $79,000 for the year ended
December 31, 2019 and $2.4 million for the purchase of 238,473 shares of common stock by the Employee Stock Option
Plan (“ESOP”).
Nonperforming Assets. Non-performing assets include loans that are 90 or more days past due or on non-accrual
status, including troubled debt restructurings on non-accrual status, and real estate and other loan collateral acquired through
foreclosure and repossession. Troubled debt restructurings include loans for which either a portion of interest or principal has
been forgiven or loans modified at interest rates materially less than current market rates.
Management determines that a loan is impaired or nonperforming 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 impaired, the
measurement of the loan in the allowance for loan losses is based on present value of expected future cash flows, except that
all collateral-dependent loans are measured for impairment 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.
Nonperforming loans were $1.1 million and $68,000, or 0.31% and 0.02% of total loans, at December 31, 2019 and
December 31, 2018, respectively. The increase in nonperforming loans was primarily due to a SBA-guaranteed commercial
and industrial loan, which had an outstanding balance of $1.0 million at December 31, 2019, and is secured by all business
assets. The SBA guaranty covers 75% of the loan balance. Although this loan was performing according to its original terms
at December 31, 2019, it was considered nonperforming due to the financial condition and prospects of the borrower. At
December 31, 2019 and 2018 we had no troubled debt restructurings or foreclosed assets.
Comparison of Operating Results for the Years Ended December 31, 2019 and 2018
Net Income. Net loss was $79,000 for the year ended December 31, 2019, compared to net income of $1.1 million for
the year ended December 31, 2018, a decrease of $1.2 million or 107.3%. The decrease was related primarily to the $758,000
establishment of, and contribution to, our new charitable foundation, an increase in salaries and employee benefits of
$865,000 and an increase in marketing expenses of $521,000, primarily related to expenses incurred for the Bank’s name
change and rebranding, partially offset by a $386,000 increase in net interest income after provision for loan losses and a
$421,000 decrease in income taxes during the year ended December 31, 2019.
Interest and Dividend Income. Interest and dividend income increased $1.2 million, or 8.3%, to $15.4 million for the
year ended December 31, 2019 from $14.3 million for the year ended December 31, 2018. This increase was due to a
$972,000, or 7.5%, increase in interest and fees on loans, primarily due to an increase of $18.3 million in the average balance
of the loan portfolio to $333.1 million for the year ended December 31, 2019 from $314.8 million for the year ended
December 31, 2018, and a $212,000 increase in interest and dividend income on investments, or 16.6%, to $1.5 million for
the year ended December 31, 2019 from $1.3 million for the year ended December 31, 2018. The weighted average yield for
38
the loan portfolio increased to 4.19% for the year ended December 31, 2019 from 4.13% for the year ended December 31,
2018. The weighted average yield for the investment portfolio increased to 2.72% for the year ended December 31, 2019
from 2.55% for the year ended December 31, 2018.
Average interest-earning assets increased $24.1 million to $387.3 million for the year ended December 31, 2019 from
$363.2 million for the year ended December 31, 2018. The yield on interest earning-assets increased 6 basis points to 3.99%
for the year ended December 31, 2019 from 3.93% for the year ended December 31, 2018.
Interest Expense. Total interest expense increased $698,000, or 22.2%, to $3.8 million for the year ended
December 31, 2019 from $3.1 million for the year ended December 31, 2018. Interest expense on deposit accounts increased
$566,000, or 33.4%, to $2.3 million for the year ended December 31, 2019 from $1.7 million for the year ended
December 31, 2018. The increase was primarily due to an increase in the average balance of interest-bearing deposits to
$238.1 million for the year ended December 31, 2019 from $224.3 million for the year ended December 31, 2018,
representing an increase of $13.8 million, or 6.15%, and an increase in the weighted average rate paid on deposits to 0.95%
for the year ended December 31, 2019 from 0.75% for the year ended December 31, 2018.
Interest expense on Federal Home Loan Bank advances increased $132,000, or 9.1%, to $1.6 million for the year ended
December 31, 2019 from $1.5 million for the year ended December 31, 2018. The average balance decreased $6.2 million, or
8.46%, to $66.8 million for the year ended December 31, 2019 from $73.0 million for the year ended December 31, 2018.
The decrease in the average balance of Federal Home Loan Bank advances is due primarily to the use of funds received in the
stock offering to paydown advances. The weighted average rate of borrowings increased to 2.37% for the year ended
December 31, 2019 from 1.99% for the year ended December 31, 2018.
Net Interest and Dividend Income. Net interest income increased $486,000, or 4.4%, to $11.6 million for the year
ended December 31, 2019 from $11.1 million for the year ended December 31, 2018. This increase was due to an increase in
the balance of interest-earning assets during the year ended December 31, 2019, partially offset by a decrease in the interest
rate spread to 2.74% for the year ended December 31, 2019 from 2.88% for the year ended December 31, 2018 and a decrease
in the net interest margin to 3.00% for the year ended December 31, 2019 from 3.06% for the year ended December 31, 2018.
The decrease in the interest rate spread and the net interest margin was primarily due to the increase in the average balance of
our interest-bearing liabilities to $306.6 million for the year ended December 31, 2019 from $299.3 million for the year
ended December 31, 2018 and an increase in the weighted average rate paid on interest-bearing liabilities to 1.25% for the
year ended December 31, 2019 from 1.05% for the year ended December 31, 2018. This decrease was partially offset by an
increase in the average balances and yields on interest-bearing assets.
Provision for Loan Losses. Based upon management’s analysis of the allowance for loan losses, we recorded a
$100,000 provision for loan losses for the year ended December 31, 2019 compared to $0 for the year ended December 31,
2018. The increase in the provision for loan losses for the year ended December 31, 2019 was primarily due to an increase in
non-accrual loans to $1.1 million at December 31, 2019 from $68,000 at December 31, 2018 and the growth of the loan
portfolio during 2019.
Non-Interest Income. Non-interest income decreased $18,000, or 1.2%, to $1.5 million for the year ended
December 31, 2019 compared to $1.6 million for the year ended December 31, 2018. The decrease in non-interest income
during the year ended December 31, 2019 was due to a $90,000 decrease in loan servicing fee income (loss), primarily
reflecting a decrease in the fair value of our mortgage servicing intangible asset during the year ended December 31, 2019,
and a $26,000 decrease in customer service fees, partially offset by increases of $56,000 in gain on sale of loans and $50,000
in securities gains (losses), net for the year ended December 31, 2019.
Non-Interest Expense. Non-interest expense increased $1.9 million, or 17.2%, to $13.3 million for the year ended
December 31, 2019 from $11.4 million for the year ended December 31, 2018. The largest increase was related to the
$758,000 one-time contribution to our new charitable foundation. Additionally, salaries and employee benefits increased
$865,000, or 13.5%, and marketing expenses, consisting primarily of nonrecurring marketing expenses related to the Bank’s
name change and rebranding efforts increased $521,000, or 95.1%, partially offset by decreases of $165,000, or 69.3%, in
deposit insurance premiums and $272,000, or 25.4%, in data processing costs. The increase in salaries and employee benefits
during year ended December 31, 2019 was due to filling vacant positions, normal salary increases and the compensation
expense recognized in connection with the ESOP.
Income Taxes. An income tax benefit of $189,000 was recorded for the year ended December 31, 2019 compared to a
provision of $232,000 for the year ended December 31, 2018. The benefit recognized during the year ended December 31,
2019 resulted primarily from the tax benefit recognized for the $758,000 contribution to the charitable foundation. Our
39
effective tax rates for 2019 and 2018 are less than statutory federal and state rates due primarily to tax-exempt income related
to investments in bank owned life insurance and municipal securities, as well as the impact of a state tax credit and a state net
operating loss carryforward.
Average Balance Sheets
The following tables set forth average balance sheets, average yields and costs and certain other information at the date
and for the years 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 deferred fees, discounts and premiums that are amortized or accreted to
interest income or interest expense. Loan balances exclude loans held for sale.
2019
For the Year Ended December 31,
2018
2017
Average
Outstanding
Balance
Interest
Average
Yield/Rate
Average
Outstanding
Balance
Interest
Average
Yield/Rate
Average
Outstanding
Balance
Interest
Average
Yield/Rate
$ 333,106
42,386
11,773
$ 13,960
1,151
337
4.19% $ 314,788
34,405
2.72%
14,021
2.86%
$ 12,988
877
399
4.13% $ 291,218
31,481
2.55%
12,070
2.85%
$ 11,666
687
247
4.01%
2.18%
2.05%
387,265
11,901
$ 399,166
15,448
3.99%
363,214
11,592
$ 374,806
14,264
3.93%
334,769
11,190
$ 345,959
12,600
3.76%
$
115
845
40
1,259
2,259
1,584
—
3,843
$
69,713
61,468
40,315
66,623
238,119
66,820
1,659
306,598
37,918
6,130
350,646
48,520
91
699
38
865
1,693
1,452
—
3,145
$
0.16% $
1.37%
0.10%
1.89%
69,632
56,012
41,553
57,127
0.95%
2.37%
—
1.25%
224,324
72,996
1,971
299,291
39,820
3,729
342,840
31,966
85
316
38
721
1,160
660
—
1,820
$
0.13% $
1.25%
0.09%
1.51%
71,250
42,693
40,546
55,948
0.75%
1.99%
—
1.05%
210,437
59,574
1,662
271,673
38,720
3,886
314,279
31,680
$ 399,166
$ 374,806
$ 345,959
$ 11,605
$ 11,119
$ 10,780
$
80,667
2.74%
3.00%
$
63,923
2.88%
3.06%
$
63,096
0.12%
0.74%
0.09%
1.29%
0.55%
1.11%
—
0.67%
3.09%
3.22%
126.31%
121.36%
123.22%
(Dollars in thousands)
Interest-earning assets:
Loans
Securities
Other
Total interest-earning
assets
Non-interest-earning assets
Total assets
Interest-bearing liabilities:
NOW and demand deposits
Money market deposits
Savings accounts
Certificates of deposit
Total interest-bearing
deposits
Borrowings
Other
Total interest-bearing
liabilities
Non-interest-bearing deposits
Other noninterest-bearing
liabilities
Total liabilities
Total equity
Total liabilities and
equity
Net interest income
Net interest rate spread (1)
Net interest-earning
assets (2)
Net interest margin (3)
Average interest-earning
assets to interest-bearing
liabilities
(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the
weighted average rate of interest-bearing liabilities.
(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.
40
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the years
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.
Year Ended December 31, 2019 vs. 2018
Increase (Decrease) Due
to
Year Ended December 31, 2018 vs. 2017
Increase (Decrease) Due
to
Volume
Rate
Volume
Rate
Total Increase
(Decrease)
Total Increase
(Decrease)
(In thousands)
Interest-earning assets:
Loans
Securities
Other
Total interest-earning assets
Interest-bearing liabilities:
Savings, NOW and money market accounts
Money market deposits
Retail and commercial savings deposits
Certificates of deposit
Total interest-bearing deposits
Borrowings
Total interest-bearing liabilities
Change in net interest income
Management of Market Risk
$
$
765 $
214
(64)
915
—
71
(1)
158
228
(130)
98
817 $
$
207
60
2
269
24
75
3
236
338
262
600
(331) $
$
972
274
(62)
1,184
$
965
68
44
1,077
24
146
2
394
566
132
698
486
$
(2)
120
1
15
134
175
309
768
$
$
357
122
108
587
8
263
(1)
129
399
617
1,016
(429) $
1,322
190
152
1,664
6
383
—
144
533
792
1,325
339
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 try to manage our interest rate risk 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; 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 and 200 basis points from current market rates.
The following table presents the estimated changes in our net portfolio value that would result from changes in market
interest rates as December 31, 2019 and December 31, 2018. All estimated changes presented in the table are within the
policy limits approved by the board of directors.
41
As of December 31, 2019:
Basis Point ("bp") Change in Interest Rates
400 bp
300 bp
200 bp
100 bp
0
(100) bp
As of December 31, 2018:
Basis Point ("bp") Change in Interest Rates
400 bp
300 bp
200 bp
100 bp
0
(100) bp
(200) bp
Net Portfolio Value ("NPV")
Dollar
Dollar
Change
Amount
(Dollars in thousands)
Percent
Change
$ 35,312 $ 15,993
11,614
7,209
2,832
—
1,919
39,691
44,096
48,473
51,305
49,386
(31.2)%
(22.6)
(14.1)
(5.5)
—
(3.7)
Net Portfolio Value ("NPV")
Dollar
Dollar
Change
Amount
(Dollars in thousands)
Percent
Change
$ 25,991 $ 13,510
9,983
6,464
2,862
—
(1,288)
2,754
29,518
33,037
36,639
39,501
40,789
36,747
(34.2)%
(25.3)
(16.4)
(7.2)
—
3.3
(7.0)
NPV as Percent of
Portfolio Value of
Assets
NPV
Ratio
Change
10.0% $
10.9
11.6
12.3
12.6
11.8
(256)
(172)
(95)
(27)
—
(78)
NPV as Percent of
Portfolio Value of
Assets
NPV
Ratio
Change
7.9% $
8.7
9.4
10.1
10.5
10.5
9.2
(257)
(179)
(108)
(42)
—
—
(124)
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 manner in which 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.
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, 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, recession 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 Bank’s economic value of equity analysis as of December 31, 2019 estimated that,
in the event of an instantaneous 200 basis point increase in interest rates, the bank would experience a 14.1% decrease in
economic value of equity. At the same date, our analysis estimated that, in the event of an instantaneous 100 basis point
decrease in interest rates, the Bank would experience a 3.7% decrease in the economic value of equity.
42
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. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations of Federal Savings Bank—
Management of Market Risk.”
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. Our primary sources of funds are deposits, principal and interest payments on loans and securities,
proceeds from the sale of loans and proceeds from maturities of securities. We also rely on borrowings from the Federal
Home Loan Bank as supplemental sources of funds. At December 31, 2019, we had $66.2 million outstanding in advances
from the Federal Home Loan Bank and the ability to borrow an additional $81.7 million. Additionally, at December 31, 2019,
we had an overnight line of credit with the Federal Home Loan Bank 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 December 31, 2019, there were no
outstanding balances under any of these additional credit facilities.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and
loan prepayments are greatly influenced by general 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.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities
and financing activities. Net cash provided (used) by operating activities was $1.1 million and $(672,000) for the year ended
December 31, 2019 and 2018, respectively. Net cash used in investing activities, which consists primarily of disbursements
for loan originations and the purchase of investment securities, offset by principal collections on loans, proceeds from
maturing securities, the sale of securities and pay downs on securities, was $23.1 million and $27.3 million for the year ended
December 31, 2019 and 2018, respectively. Net cash provided by financing activities, consisting of activity in deposit
accounts and Federal Home Loan Bank advances, was $20.2 million and $28.2 million for the year ended December 31, 2019
and 2018, respectively. Net cash provided by financing activities for the year ended December 31, 2019 included
$25.1 million of net proceeds from the sale of common stock.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We
anticipate that we will have sufficient funds to meet our current funding commitments. Based on our current strategy to
increase core deposits and the continued use of Federal Home Loan Bank advances, as well as brokered certificates of deposit
as needed, to fund loan growth. The net proceeds from the stock offering significantly increased our liquidity and capital
resources. Over time, the initial level of liquidity is expected to be reduced as net proceeds from the stock offering are used
for general corporate purposes, including the funding of loans. However, due to the increase in equity resulting from the net
proceeds raised in the stock offering, as well as other factors associated with the stock offering, our return on equity was
adversely affected and could continue to be adversely affected in the future.
First Seacoast Bancorp 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. 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 December 31, 2019, the Company (on an unconsolidated basis) had liquid assets of $10.0 million.
At December 31, 2019, First Seacoast Bank exceeded all of its regulatory capital requirements. See Note 15 of the
notes to our consolidated financial statements of this annual report. Management is not aware of any conditions or events that
would change our category.
43
Off-Balance Sheet Arrangements
As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks,
such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our potential
future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such
commitments are subject to the same credit policies and approval process accorded to loans we make. For additional
information, see Note 15 of the notes to our consolidated financial statements of this annual report.
Recent Accounting Developments
For a discussion of the impact of recent accounting pronouncements, see Note 3 of the notes to our consolidated
financial statements of this annual report.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein have been prepared in accordance with
generally accepted accounting principles in the United States of America, which require the measurement of financial
position and operating results in terms of historical dollars without considering changes in the relative purchasing power of
money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs.
Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As
a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation.
Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The information regarding this Item is contained in Item 7 under the heading “Management of Market Risk.”
44
ITEM 8.
Financial Statements and Supplementary Data
FIRST SEACOAST BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
Cash and due from banks
Interest bearing time deposits with other banks
Securities available-for-sale, at fair value
Federal Home Loan Bank stock
Total Loans
Less allowance for loan losses
Net loans
Land, building and equipment, net
Bank-owned life insurance
Accrued interest receivable
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing deposits
Interest bearing deposits
Total deposits
Advances from Federal Home Loan Bank
Mortgagors’ tax escrow
Deferred compensation liability
Other liabilities
Total liabilities
Stockholders' Equity:
December 31,
2019
December 31,
2018
$
$
$
$
$
$
4,009
2,735
44,785
2,971
344,855
(2,875)
341,980
5,338
4,267
1,235
2,173
409,493
41,586
240,030
281,616
66,219
586
1,607
2,399
352,427
5,889
6,461
39,443
3,718
321,422
(2,806)
318,616
5,581
4,156
1,164
2,086
387,114
42,262
232,184
274,446
75,737
761
1,547
1,896
354,387
Preferred Stock, $.01 par value, 10,000,000 and -0- shares authorized as of
December 31, 2019 and December 31, 2018, respectively; none issued
and outstanding as of December 31, 2019 and December 31, 2018
Common Stock, $.01 par value, 90,000,000 and -0- shares authorized as of
December 31, 2019 and December 31, 2018, respectively; 6,083,500
and -0- shares issued and outstanding as of December 31, 2019 and
December 31, 2018, respectively
Additional paid-in capital
Equity capital
Accumulated other comprehensive income (loss)
Unearned compensation - ESOP 226,549 and -0- shares unallocated at
December 31, 2019 and December 31, 2018, respectively
Total stockholders' equity
Total liabilities and stockholders' equity
—
—
61
25,636
33,113
521
(2,265)
57,066
409,493
$
$
—
—
33,192
(465)
—
32,727
387,114
The accompanying notes are an integral part of these consolidated financial statements.
45
FIRST SEACOAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Interest and dividend income:
Interest and fees on loans
Interest on debt securities:
Taxable
Non-taxable
Total interest on debt securities
Dividends
Total interest and dividend income
Interest expense:
Interest on deposits
Interest on Federal Home Loan Bank advances
Total interest expense
Net interest and dividend income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income:
Customer service fees
Gain on sale of loans
Securities gains (losses), net
Income from bank-owned life insurance
Loan servicing fee income
Investment services fees
Other income
Total non-interest income
Non-interest expense:
Salaries and employee benefits
Director compensation
Occupancy expense
Equipment expense
Marketing
Data processing
Deposit insurance fees
Professional fees and assessments
Debit card fees
Employee travel and education expenses
Charitable Foundation expense
Other expense
Total non-interest expense
(Loss) income before income tax (benefit) expense
Income tax (benefit) expense
Net (loss) income
Earnings (loss) per share:
Basic
Diluted
Weighted Average Shares:
Basic
Diluted
2019
Year Ended December 31,
2018
2017
$
13,960
$
12,988
$
11,666
683
613
1,296
192
15,448
2,259
1,584
3,843
11,605
100
11,505
996
88
49
111
41
193
54
1,532
7,289
294
655
528
1,069
797
73
637
156
238
758
811
13,305
(268)
(189)
(79) $
(0.03)
(0.03)
2,694,561
2,694,561
$
$
$
770
289
1,059
217
14,264
1,693
1,452
3,145
11,119
—
11,119
1,022
32
(1)
119
131
200
47
1,550
6,424
245
705
540
548
1,069
238
539
164
229
—
656
11,357
1,312
232
1,080
N/A
N/A
N/A
N/A
$
484
326
810
124
12,600
1,160
660
1,820
10,780
160
10,620
957
82
178
115
232
146
105
1,815
6,113
226
706
560
477
958
195
506
151
223
—
707
10,822
1,613
701
912
N/A
N/A
N/A
N/A
The accompanying notes are an integral part of these consolidated financial statements.
46
FIRST SEACOAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Net (loss) income
Other comprehensive income (loss), net of income taxes:
Unrealized holding gains (losses) on securities available-for-sale
arising during the period net of income taxes of $355, $(129), and
$56 in 2019, 2018 and 2017, respectively
Reclassification adjustment for gains and losses and net amortization
or accretion on securities available-for-sale included in net income
net of income taxes of $15, $36 and $(4) in 2019, 2018 and 2017,
respectively
Other comprehensive income (loss)
Comprehensive income
2019
Year Ended December 31,
2018
2017
$
(79) $
1,080
$
912
947
(347)
86
39
986
907
$
96
(251)
829
$
(7)
79
991
$
The accompanying notes are an integral part of these consolidated financial statements.
47
FIRST SEACOAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
Balance December 31, 2016
Net income
Tax rate change reclassification
Other comprehensive loss
Balance December 31, 2017
Balance December 31, 2017
Net income
Other comprehensive loss
Balance December 31, 2018
Balance December 31, 2018
Net loss
Other comprehensive income
Issuance of 3,345,925 shares to the
mutual holding company
Issuance of 2,676,740 shares in the
initial public offering, net of
expenses of $1,568
Issuance and contribution of 60,835
shares to the First Seacoast
Community Foundation, Inc.
Purchase of 238,473 shares of common
stock by the ESOP
ESOP shares earned - 11,924 shares
Balance December 31, 2019
Shares of
Common
Stock
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Unearned
Compensation
- ESOP
Total
Equity
Capital
— $
—
—
—
— $
— $
—
—
— $
— $
—
—
— $
—
—
—
— $
— $
—
—
— $
— $
—
—
Equity
Capital
— $ 31,164 $
—
—
—
— $ 32,112 $
912
36
—
— $ 32,112 $
— 1,080
—
—
— $ 33,192 $
— $ 33,192 $
—
—
(79)
—
3,345,925
33
—
2,676,740
27
25,039
60,835
1
608
—
—
—
(257) $
—
(36)
79
(214) $
(214) $
—
(251)
(465) $
(465) $
—
986
—
—
—
— $ 30,907
912
—
—
—
—
79
— $ 31,898
— $ 31,898
1,080
—
—
(251)
— $ 32,727
— $ 32,727
(79)
—
986
—
—
33
— 25,066
—
609
—
—
6,083,500 $
—
—
—
(11)
61 $ 25,636 $ 33,113 $
—
—
—
—
521 $
(2,385)
120
(2,385)
109
(2,265) $ 57,066
The accompanying notes are an integral part of these consolidated financial statements.
48
FIRST SEACOAST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Cash flows from operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided (used) by operating
activities:
2019
Year Ended December 31,
2018
2017
$
(79 )
$
1,080
$
912
ESOP expense
Depreciation
Net amortization of bond premium
Contribution of stock to charitable foundation
Provision for loan losses
Gain on sale of loans
Securities (gains) losses, net
Loss on disposal of property and equipment
Proceeds from loans held for sale
Origination of loans held for sale
Increase in bank-owned life insurance
Increase in deferred fees on loans
Deferred tax benefit
Increase in accrued interest receivable
Decrease (increase) in other assets
Increase (decrease) in deferred compensation liability
Increase (decrease) in other liabilities
Gain on the sale of repossessed assets
Net cash provided (used) by operating activities
Cash flows from investing activities:
Proceeds from sales and maturities of securities available-for-sale
Purchase of securities available-for-sale
Purchase of property and equipment
Purchase of loans
Loan originations and principal collections, net
Recoveries of loans previously charged off
Proceeds from sales of other real estate owned
Net redemption (purchase) of Federal Home Loan Bank stock
Proceeds from sales of interest bearing time deposits with other banks
Purchase of interest bearing time deposits with other banks
Net cash used by investing activities
Cash flows from financing activities:
Net increase in NOW, demand deposits, money market and savings accounts
Net increase in certificates of deposit
(Decrease) Increase in mortgagors’ escrow accounts
Proceeds from sale of common stock, net
Common stock purchased by ESOP
Proceeds from short-term FHLB advances
Proceeds from long-term FHLB advances
Payments on short-term FHLB advances
Payments on long-term FHLB advances
Decrease in repurchase agreements
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 transactions:
Loans transferred to other real estate owned
Noncash activities:
Effect of change in fair value of investments available for sale:
Investment securities available-for-sale
Deferred taxes
Other comprehensive income (loss)
Tax rate change reclassification
109
528
103
609
100
(88 )
(49 )
3
7,911
(7,823 )
(111 )
(190 )
(315 )
(71 )
(141 )
60
503
—
1,059
19,364
(23,405 )
(288)
—
(23,295 )
21
—
747
3,726
—
(23,130 )
8,771
(1,601 )
(175 )
25,099
(2,385 )
216,752
19,050
(245,320 )
—
—
20,191
(1,880 )
5,889
4,009
3,859
85
—
1,354
(368 )
986
—
$
$
$
$
—
539
131
—
—
(32)
1
—
5,661
(5,629)
(119)
(80)
(11)
(86)
(475)
(240)
(1,412)
—
(672)
1,926
(12,953)
(177)
—
(14,044)
—
—
(539)
—
(1,492)
(27,279)
17,728
7,157
(207)
—
—
85,475
—
(63,500)
(12,000)
(6,463)
28,190
239
5,650
5,889
3,102
—
—
(345)
94
(251)
—
$
$
—
560
166
—
160
(82 )
(178 )
—
7,257
(7,175 )
(115 )
(84 )
326
(156 )
(92 )
288
1,637
(61 )
3,363
27,712
(24,194 )
(1,397 )
(10,947 )
(21,242 )
—
217
(842 )
—
(1,243 )
(31,936 )
5,703
(1,358 )
17
—
—
51,500
10,262
(33,800 )
(6,000 )
132
26,456
(2,117 )
7,767
5,650
1,799
603
66
131
(52 )
79
36
The accompanying notes are an integral part of these consolidated financial statements.
49
FIRST SEACOAST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
The Company
The accompanying consolidated financial statements include the accounts of First Seacoast Bancorp (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.
Corporate Structure
The Company is the federally-chartered holding company for the Bank (formerly named Federal Savings Bank).
Effective July 16, 2019, pursuant to a Plan of Reorganization from Mutual Savings Bank to Mutual Holding Company and
Stock Issuance Plan (the “Plan of Reorganization”), the Bank reorganized into the mutual holding company structure and the
Company completed a concurrent stock offering (collectively, the “Reorganization:”). In the stock offering, the Company
sold a total of 2,676,740 shares of common stock, which included 238,473 shares sold to the First Seacoast Bank Employee
Stock Ownership Plan (the “ESOP”), at a price of $10.00 per share. In addition, as part of the Reorganization, the Company
issued 3,345,925 shares of common stock to First Seacoast Bancorp, MHC (the “MHC”), the Bank’s parent mutual holding
company, and 60,835 shares of common stock and $150,000 in cash to First Seacoast Community Foundation, Inc. (the
“Foundation”), a charitable foundation formed in connection with the reorganization and dedicated to supporting charitable
organizations operating in the Bank’s local community. The Company’s common stock began trading on the NASDAQ
Capital Market under the symbol “FSEA” on July 17, 2019. Pursuant to the Plan of Reorganization, the Bank adopted an
employee stock ownership plan (“ESOP”), which purchased 238,473 shares of common stock in the stock offering with the
proceeds of a loan from the Company. As a result of the Reorganization, a total of 6,083,500 shares of common stock of the
Company are issued and outstanding, of which 55% are issued to the MHC, 44% were sold to the Bank’s eligible members,
the ESOP, and certain other persons in the stock offering and 1% were contributed to the Foundation. Expenses incurred
related to the offering were $1.6 million and were deducted from the stock offering proceeds. The Bank offers a full range of
banking and wealth management services to its customers. Banking services, the Company’s only reportable operating
segment, is managed as a single strategic unit.
The Bank focuses on four core services that center around customer needs. The core services include residential
lending, commercial banking, personal banking and wealth management. The Bank offers a full range of commercial and
consumer banking services through its network of five full-service branch locations.
The Bank is engaged principally in the business of attracting deposits from the public and investing those deposits. The
Bank invests those funds in various types of loans, including residential and commercial real estate, 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 and Insurance Corporation (“FDIC”) for the maximum amount permitted by
FDIC regulations.
Investment management services are offered at the Company’s full-service wealth management office in Dover, NH.
The assets held for wealth management customers are not assets of the Company and, accordingly, are not reflected in the
accompanying balance sheets.
2.
Summary of Significant Accounting Policies
Basis of Presentation
The financial statements have been prepared in conformity with U.S. generally accepted accounting principles
(“GAAP”).
50
Use of Estimates
In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates that are particularly susceptible to change relate to the determination of the allowance for loan
losses and the valuation of deferred tax assets.
Consolidated Statements of Cash Flows
For the purpose of reporting cash flows, cash includes cash and due from banks with original maturities of 90 days or
less.
Reclassifications
Certain amounts in the prior year’s financial statements may have been reclassified to conform with the current year’s
presentation.
Securities Available for Sale
Available-for-sale securities consist of debt securities that the Company intends to hold for an indefinite period of time,
but not necessarily to maturity. These assets are carried at fair value. Unrealized holding gains and losses for these assets,
net of related deferred income taxes, are recorded in and reported as accumulated other comprehensive income (loss) within
stockholders’ equity. For any debt security with a fair value less than its amortized cost basis, the Company will determine
whether it has the intent to sell the debt security or whether it is more likely than not it will be required to sell the debt
security before the recovery of its amortized cost basis. If either condition is met, the Company will recognize a full
impairment charge to earnings. For all other debt securities that are considered other-than-temporarily impaired and do not
meet either condition, the credit loss portion of impairment will be recognized in earnings as realized losses. The other-than-
temporary impairment related to all other factors will be recorded in other comprehensive loss.
Gains and losses on the sale of available-for-sale securities are determined using the specific identification method.
Premiums and discounts are recognized in interest income using the interest method. Discounts are recognized over the
period to maturity. Premiums are recognized over the period to call, if applicable. Otherwise, premiums are recognized over
the period to maturity.
Interest Bearing Time Deposits With Other Banks
The Company maintains certificates of deposit with other banks and credit unions, which are fully insured by the FDIC
or National Credit Union Administration (NCUA) at December 31, 2019 and 2018. These balances are carried at cost and
the certificates carry terms of up to four years.
Federal Home Loan Bank Stock
Federal Home Loan Bank (“FHLB”) stock is carried at cost and can only be sold to the FHLB based on its current
redemption policies. The Company reviews its investment in capital stock of the FHLB for impairment based on the ultimate
recoverability of the cost basis in the FHLB stock. Based on the most recent analysis of the FHLB, as of December 31, 2019,
management deems its investment in FHLB stock to not be other-than-temporarily-impaired.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off
generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses,
net deferred loan origination fees/costs on originated loans or unamortized premiums or discounts on purchased loans.
Interest income is accrued on the unpaid principal balance.
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The accrual of interest on loans is discontinued at the time the loan is 90 days past due or determined to be impaired, if
earlier. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual if collection of
principal or interest is considered doubtful. All interest accrued but not collected for such loans is reversed against interest
income. For payments received on such loans, the interest is accounted for on the cash-basis or recorded as a reduction to
loan principal if recovery is not assured, until qualifying for return to accrual. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Cash receipts of interest income on impaired loans are credited to principal to the extent necessary to eliminate doubt
as to the collectability of the net carrying amount of the loan. Some or all of the cash receipts of interest income on impaired
loans is recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible.
When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is
recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest
rate. Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan
are recorded as recoveries of charge-offs until the charge-offs are fully recovered.
Loan Origination Fees and Costs
Loan origination fees and certain direct loan origination costs are deferred and recognized in interest income as an
adjustment to the loan yield over the life of the related loans. The unamortized net deferred fees and costs are included on the
consolidated balance sheets with the related loan balances. The amount charged or credited to income is included with the
related interest income.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan
balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective
as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance
consists of general, allocated and unallocated components, as further described below.
General Component:
The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative
factors stratified by the following loan segments: commercial real estate, multifamily, commercial and industrial, acquisition,
development and land, one to four family residential, home equity loans and lines of credit and consumer. Management uses
a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment.
This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; credit quality trends;
portfolio growth trends and concentrations; effects of changes in risk selection and underwriting standards and other changes
in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and
local economic trends and conditions. There were no changes in the policies or methodology pertaining to the general
component of the allowance for loan losses during both of the years ended December 31, 2019 and 2018.
The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk
characteristics relevant to each portfolio segment are as follows:
Commercial real estate loans – Loans in this segment are primarily income-producing properties throughout the
Bank’s market area. The underlying cash flows generated by the properties are adversely impacted by a downturn in the
economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment.
Management generally obtains rent rolls annually and continually monitors the cash flows of these borrowers.
Multifamily loans – Loans in this segment are primarily income-producing properties throughout the Bank’s market
area. A weakened economy, and resultant decreased consumer and business spending, will have an effect on the credit quality
in this segment.
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Commercial and Industrial loans – Loans in this segment are made to businesses and are generally secured by assets of
the business or real estate. Repayment is expected from the cash flows of the business. A weakened economy, and resultant
decreased consumer and business spending, will have an effect on the credit quality in this segment.
Acquisition, Development and Land loans – Loans in this segment primarily include speculative real estate
development loans for which payment is derived from sale and/or lease up of the property. Credit risk is affected by cost
overruns, time to sell at an adequate price and market conditions.
One to Four Family Residential loans – The Bank generally does not originate or purchase loans with a loan-to-value
ratio greater than 80% and does not originate subprime loans, which are those loans to borrowers with a Fair Isaac
Corporation (FICO) credit score of less than 660. Loans in this segment are generally collateralized by owner-occupied
residential real estate and repayment is primarily dependent on the credit quality of the individual borrower and secondarily,
liquidation of the collateral. The overall health of the economy, including unemployment rates and housing prices, will have
an effect on the credit quality in this segment.
Home Equity Loans and Lines of Credit – All loans in this segment are typically collateralized by a subordinate lien
position on owner-occupied residential real estate and repayment is dependent on the credit quality of the individual
borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the
credit quality of this segment.
Consumer – Loans in this segment include secured and unsecured consumer loans including passbook loans, consumer
lines of credit, overdraft protection and consumer unsecured loans. Repayment is dependent on the credit quality and the cash
flow of the individual borrower.
Allocated Component:
The allocated component relates to loans that are classified as impaired. The Bank assesses non-accrual loans and
certain loans rated substandard or worse for impairment. A loan is considered impaired when, based on current information
and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons
for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest
owed.
The Bank periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is
made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”).
All TDRs are classified as impaired and therefore are subject to a specific review for impairment. There were no TDRs at
December 31, 2019, 2018 and 2017.
Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective
interest rate at the time of impairment or, as a practical expedient, at the loan’s observable market price or the fair value of
the collateral if the loan is collateral-dependent. Generally, impairment on TDRs is measured using the discounted cash flow
method by discounting expected cash flows by the loan’s contractual rate of interest in effect prior to the loan’s modification.
Loans that have been classified as TDRs and which subsequently default are reviewed to determine if the loan should be
deemed collateral dependent. In such an instance, any shortfall between the value of the collateral and the book value of the
loan is determined by measuring the recorded investment in the loan against the fair value of the collateral less costs to sell.
Generally, all other impaired loans are collateral dependent and impairment is measured through the collateral method. All
loans on non-accrual status are considered to be impaired. When the measurement of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through the allowance for loan losses. The Bank charges off the
amount of any confirmed loan loss in the period when the loans, or portion of loans, are deemed uncollectible.
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Unallocated Component:
An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable
losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.
In the ordinary course of business, the Bank enters into commitments to extend credit, commercial letters of credit and
standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or become
payable. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for loan losses.
The reserve for off-balance sheet commitments is included in other liabilities in the balance sheet. At both December 31,
2019 and 2018, the reserve for unfunded loan commitments was $18,000. The related provision for off-balance sheet credit
losses is included in non-interest expense in the consolidated statement of income.
Land, Building and Equipment
Land is stated at cost. Building and equipment are stated at cost, less accumulated depreciation. Depreciation is
computed on the straight-line method over the estimated useful lives of the assets or the lease term for leasehold
improvements unless renewal is reasonably assured. Maintenance and repair costs are included in operating expenses while
major expenditures for improvements are capitalized and depreciated. The cost and related accumulated depreciation of
assets sold, or otherwise disposed of, are removed from the related accounts and any gain or loss is included in earnings.
Bank-owned Life Insurance
Bank-owned life insurance policies are reflected on the consolidated balance sheets at cash surrender value. Changes in
the net cash surrender value of the policies, as well as insurance proceeds received, are reflected in non-interest income on
the consolidated statements of income and are generally not subject to income taxes. The Company reviews the financial
strength of the insurance carriers prior to the purchase of life insurance policies and no less than annually thereafter. A life
insurance policy with any individual carrier is limited to 15% of Tier one capital and the total cash surrender value of life
insurance policies is limited to 25% of Tier one capital at the time of purchase.
Transfers and Servicing of Financial Assets
Transfers of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial
asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed
to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or
exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets.
During the normal course of business, the Company may transfer whole loans or a portion of a financial asset, such as a
participation loan or the government guaranteed portion of a loan. In order to be eligible for sales treatment, the transfer of
the portion of the loan must meet the criteria of a participating interest. If it does not meet the criteria of a participating
interest, the transfer will be accounted for as a secured borrowing. In order to meet the criteria for a participating interest, all
cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, the loan
holders must have no recourse to the transferor other than standard representations and warranties and no loan holder has the
right to pledge or exchange the entire loan.
The Company services mortgage loans for others. Loan servicing fee income is reported in the consolidated statements
of income as loan servicing fee income. The fees are based on a contractual percentage of the outstanding principal and are
recorded as income when earned. Late fees and ancillary fees related to loan servicing are not material.
Mortgage servicing rights (“MSR”) are initially recorded as an asset and measured at fair value when loans are sold to
third parties with servicing rights retained. MSR rights are initially recorded at fair value by using a discounted cash flow
model to calculate the present value of estimated future net servicing income.
The Company’s MSR accounted for under the fair value method are carried on the balance sheet at fair value with
changes in fair value recorded in loan servicing fee income in the period in which the change occurs. Changes in the fair
value of MSR are primarily due to changes in valuation inputs, assumptions and the collection and realization of expected
cash flows.
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Advertising Expense
Advertising costs are expensed as incurred and recorded within marketing expense.
Defined Contribution Plans
During the year ended December 31, 2019, the Company sponsored 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. In prior years, the Company sponsored two 401(k) defined contribution plans which were combined
into one defined contribution plan as of December 31, 2018. The Company also made matching and profit-sharing
contributions to eligible participants in accordance with plan(s) provisions.
Defined Benefit Plan
The Company participates 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 Company’s funding policy is to make an annual contribution determined by the Pentegra DB Plan actuaries that
will not be less than the minimum required contribution nor greater than the maximum federal income tax deductible limit.
Contributions are based on the individual employer’s experience.
Supplemental Executive Retirement Plans
The Company maintains nonqualified supplemental executive benefit agreements with certain directors and its current
and former Presidents and certain officers. The agreements provide supplemental retirement benefits payable in installments
over a period of years upon retirement or death and for the crediting to a liability account a fixed amount of compensation,
which earns interest at a rate determined in the agreement. The Company recognizes the cost of providing these benefits over
the time period the individuals render service through the retirement date. At each measurement date, the aggregate amount
accrued equals the then present value of the benefits expected to be provided to the individual in exchange for the
individual’s service to that date.
Income Taxes
Provisions for income taxes are based on taxes currently payable or refundable and deferred income taxes on temporary
differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Assets and liabilities are established for uncertain tax positions taken or positions expected to be
taken in income tax returns when such positions are judged to not meet the “more-likely-than-not” threshold, based upon the
technical merits of the position. Estimated interest and penalties, if applicable, related to uncertain tax positions are included
as a component of provision for income taxes. The Company has evaluated the positions taken on its tax returns filed and the
potential impact on its tax status as of December 31, 2019. The Company has concluded that no uncertain tax positions exist
at December 31, 2019.
Management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and
any necessary valuation allowance recorded against net deferred tax assets. The process involves summarizing temporary
differences resulting from the different treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities which are included within the consolidated balance sheets. Management then assesses the
likelihood that deferred tax assets will be recovered from future taxable income and, to the extent our management believes
recovery is not likely, a valuation allowance is established. To the extent that we establish or adjust a valuation allowance in
a period, an expense or benefit is recorded within the tax provision in the consolidated statements of income.
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Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income.
Although certain changes in assets and liabilities are reported as a separate component of the stockholders’ equity section of
the consolidated balance sheets, such items, along with net income, are components of comprehensive income. Other
comprehensive income consists of unrealized gains and losses on securities available for sale.
Earnings Per Share
Basic earnings per share represents income available to common stockholders divided by the weighted-average number
of common shares outstanding during the period. Diluted earnings per share is computed in a manner similar to that of basic
earnings per share except that the weighted-average number of common shares outstanding is increased to include the
number of incremental common shares (computed using the treasury method) that would have been outstanding if all
potentially dilutive common stock equivalents were issued during the period. Unallocated ESOP shares are not deemed
outstanding for earnings per share calculations.
Risks and Uncertainties
The Bank and the Bank’s defined benefit pension plan, invest in various investment securities. Investment securities
are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain
investment securities, it is at least reasonably possible that changes in the values of investments will occur in the near term
and that such changes could materially affect the amounts reported in the consolidated balance sheet or statement of income.
3.
Recently Issued and Adopted Accounting Pronouncements
Accounting Standards Adopted in 2019
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. As of December 31, 2019, there is 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: (i) the last day of the fiscal year of the Company during which it had
total annual gross revenues of $1.07 billion (as adjusted for inflation) or more; (ii) the last day of the fiscal year of the
Company following the fifth anniversary of the effective date of the Company’s initial public offering; (iii) the date on which
the Company has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the
date on which the Company is deemed to be a “large accelerated filer” under Securities and Exchange Commission
regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).
In May 2014, the Financial Accounting Standards Board (“FASB”) issued amendments to Accounting Standards
Codification (“ASC”) section 606, “Revenue from Contracts with Customers,” through issuance of Accounting Standards
Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The guidance in this ASU affects any entity that
either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial
assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The
core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient
information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and
cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with
customers, significant judgments and changes in judgments and assets recognized from the costs to obtain or fulfill a
contract. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606).” The
amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for non-public business entities by one year to annual
reporting periods beginning after December 15, 2018.
The Company adopted this ASU as of January 1, 2019 utilizing the modified retrospective approach with no
cumulative effect adjustment to opening equity capital deemed to be necessary. Our revenue is comprised of net interest
income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-
interest income. This ASU did not materially impact the Company’s consolidated financial statements.
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The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from
financial instruments, such as our loans, letters of credit, investment securities, as well as revenue related to our mortgage
servicing activities. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are
presented in our consolidated statements of income as components of non-interest income, are as follows:
•
•
Customer service fees—these represent general service fees for monthly account maintenance and activity- or
transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based
revenue or some other individual attribute-based revenue. Revenue is recognized when our performance
obligation is completed, which is generally monthly for account maintenance services or when a transaction has
been completed (such as a wire transfer, debit card transaction or ATM withdrawal). Payment for such
performance obligations are generally received at the time the performance obligations are satisfied.
Investment service fees—these represent fees for investment advisory services, which are generally based on the
market values of assets under management. Assets under management totaled approximately $49.3 million and
$39.1 million at December 31, 2019 and 2018, respectively. Our wealth management group, FSB Wealth
Management, assists individuals and families in building and preserving their wealth by providing investment
services. The investment management group manages portfolios utilizing a variety of investment products. This
group also provides a full-service brokerage offering equities, mutual funds, life insurance and annuity products.
In January 2016 the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities.” The amendments in this ASU address certain aspects of
recognition, measurement, presentation and disclosure of financial instruments and makes targeted improvements to GAAP
as follows:
1.
2.
3.
4.
5.
6.
7.
Require equity investments (except those accounted for under the equity method of accounting or those that
result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net
income; however, an entity may choose to measure equity investments that do not have readily determinable fair
values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in
orderly transactions for the identical or a similar investment of the same issuer.
Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a
qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an
entity is required to measure the investment at fair value.
Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used
to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on
the balance sheet.
Require public business entities to use the exit price notion when measuring the fair value of financial
instruments for disclosure purposes.
Require an entity to present separately in other comprehensive income the portion of the total change in fair
value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to
measure the liability at fair value in accordance with the fair value option for financial instruments.
Require separate presentation of financial assets and financial liabilities by measurement category and form of
financial assets (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the
financial statements.
Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to
available-for-sale securities in combination with the entity’s other deferred tax assets.
The amendments of this ASU were adopted on January 1, 2019 and did not materially impact the Company’s
consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments.” This ASU provides guidance on the classification of certain cash receipts and cash payments
for presentation in the statement of cash flows and is effective for non-public business entities for fiscal year’s beginning
after December 15, 2018. This ASU was adopted on January 1, 2019 and did not materially impact the Company’s
consolidated financial statements.
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In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” This
ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and
amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as
restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the
beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for non-
public business entities for fiscal year’s beginning after December 15, 2018. This ASU was adopted on January 1, 2019 and
did not materially impact the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This ASU is meant to improve the
presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments in this ASU require
that an employer report the service cost component in the same line item or items as other compensation costs arising from
services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be
presented in the income statement separately. The amendments in the ASU are effective for non-public business entities for
annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15,
2019. Early adoption is permitted. The adoption of this guidance on January 1, 2019 did not have a material impact on the
Company’s consolidated financial statements.
Recent Accounting Pronouncements
In February 2020, the FASB issued ASU 2020-2, “Financial Instruments – Credit Losses (Topic 326) and Leases
(Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC
Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842).” This ASU adds an
SEC paragraph pursuant to the issuance of SEC SAB Topic No. 119 to the FASB Codification Topic 326 and updates the
SEC section of the Codification for the change in the effective dates of Topic 842. This ASU primarily details guidance on
what SEC staff would expect a registrant to perform and document when measuring and recording its allowance for credit
losses for financial assets recorded at amortized cost.
In January 2020, the FASB issued ASU 2020-1, “Investments – Equity Securities (Topic 321), Investments - Equity
Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions Between
Topic 321, Topic 323, and T 815 (A Consensus of the Emerging Issues Task Force),” which clarifies the interaction among
the accounting standards for equity securities, equity method investments and certain derivatives. This ASU becomes
effective for public entities for fiscal years beginning after December 15, 2020 and all other entities for fiscal years beginning
after December 15, 2021. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on
the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income
Taxes.” This ASU simplifies accounting for income taxes by removing specific technical exceptions. The guidance removes
the need for companies to analyze whether (1) the exception to the incremental approach for intra-period tax allocation, (2)
exceptions to accounting for basis differences when there are ownership changes in foreign investments and (3) the exception
in interim period income tax accounting for year-to-date losses that exceed anticipated losses apply in a given period. The
amendments in this ASU are effective for non-public business entities for fiscal years ending after December 15, 2021. Early
adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated
financial statements.
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.
In 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)” and ASU 2017-12, “Targeted Improvements to Accounting for
Hedging Activities,” are deferred to years beginning after December 15, 2020.
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In March 2017, the FASB issued ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20):
Premium Amortization on Purchased Callable Debt Securities”. The amendments in this ASU shorten the amortization
period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be
amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the
discount continues to be amortized to maturity. The amendments are effective for non-public business entities for fiscal years
beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early
adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period,
any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company
chose to adopt this guidance as of December 31, 2017. The adoption of this guidance did not have a material impact on the
Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” Under the new guidance, lessees are required
to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will
be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income
statement. On July 17, 2019 the FASB approved a proposal to delay the implementation of this standard by one year for
smaller reporting companies to years beginning after December 15, 2020. A modified retrospective transition approach is
required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative
period presented in the financial statements, with certain practical expedients available. In July 2018, the FASB issued ASU
2018-10, “Codification Improvements to Topic 842, Leases,” which seeks to clarify ASU 2016-02 with respect to certain
aspects of the update and ASU 2018-11, “Leases (Topic 842) – Targeted Improvements,” which provides transition relief on
comparative reporting upon adoption of the ASU. The Company currently has no leases with terms longer than 12 months.
The Company does not expect these ASUs to have a material impact on the Company’s consolidated financial statements.
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 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 nonpublic business entities and clarifying that operating lease receivables are outside the scope of Accounting
Standards Codification Topic 326. 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. Early adoption is permitted. Upon adoption, however, the Company will apply the standard’s provisions as a
cumulative effect adjustment to equity capital as of the first reporting period in which the guidance is effective. Upon
adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan losses, including
changes in the assumptions and estimates to consider expected credit losses over the life of the loan versus the current
accounting practice that utilizes the incurred loss model. The Company is reviewing the requirements of ASU 2016-13 and is
developing and implementing processes and procedures to ensure it is fully compliant with the amendments at the adoption
date. At this time, the Company anticipates the allowance for loan losses will increase as a result of the implementation of
this ASU; however, until its evaluation is complete, the magnitude of the increase will be unknown.
59
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework –
Changes to the Disclosure Requirements for Fair Value Measurement.” The purpose of this ASU is to improve the
effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information
required by GAAP that is most important to users of each entity’s financial statements. The amendments in this ASU are
effective for all entities for fiscal years beginning after December 15, 2019. Early adoption is permitted upon issuance of this
ASU. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay
adoption of the additional disclosures until their effective date. The amendments removed the disclosure requirements for
transfers between Levels 1 and 2 of the fair value hierarchy, the policy for timing of transfers between levels of the fair value
hierarchy and the valuation processes for Level 3 fair value measurements. Additionally, the amendments modified the
disclosure requirements for investments in certain entities that calculate net asset value and measurement uncertainty. Finally,
the amendments added disclosure requirements for the changes in unrealized gains and losses included in other
comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant
unobservable inputs used to develop Level 3 measurements. The amendments on changes in unrealized gains and losses, the
range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the
narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual
period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods
presented upon their effective date. The adoption of this ASU is not expected to have a material impact on the Company’s
consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits – Defined Benefit Plans –
General (Subtopic 715-20).” The purpose of this ASU is to improve the effectiveness of disclosures in the notes to financial
statements by facilitating clear communication of the information required by GAAP that is most important to users of each
entity’s financial statements. The amendments in this ASU are effective for non-public business entities for fiscal years
ending after December 15, 2021. Early adoption is permitted. The amendments modified the disclosure requirements for
employers that sponsor defined benefit pension or other postretirement plans. The amendments in this ASU should be applied
retrospectively to all periods presented. The adoption of this ASU is not expected to have a material impact on the
Company’s consolidated financial statements.
4.
Interest Bearing Time Deposits With Other Banks
At December 31, 2019, the Company’s certificates of deposit mature as follows:
(Dollars in thousands)
2020
2021
2022
2023
2024
December 31, 2019
$
$
—
249
1,739
747
—
2,735
60
5.
Securities Available-for-Sale
The amortized cost and fair value of securities available-for-sale, and the corresponding amounts of gross unrealized
gains and losses, are as follows as of December 31, 2019 and 2018:
U.S. Government-sponsored enterprises obligations
U.S. Government agency small business administration
pools guaranteed by SBA
Collateralized mortgage obligations issued by the
FHLMC
Residential mortgage backed securities
Municipal bonds
U.S. Government-sponsored enterprises obligations
Residential mortgage backed securities
Municipal bonds
Amortized
Cost
December 31, 2019
Gross
Gross
Unrealized
Unrealized
Gains
Losses
(Dollars in thousands)
Fair
Value
$
9,000
$
11
$
(14) $
8,997
2,760
986
3,186
28,138
44,070
$
$
—
—
4
800
815
$
(20)
2,740
(6)
(2)
(58)
(100) $
980
3,188
28,880
44,785
Amortized
Cost
December 31, 2018
Gross
Gross
Unrealized
Unrealized
Gains
Losses
(Dollars in thousands)
Fair
Value
$
$
24,219
1,375
14,489
40,083
$
$
8
—
39
47
$
$
(500) $
(48)
(139)
(687) $
23,727
1,327
14,389
39,443
The amortized cost and fair values of available-for-sale securities at December 31, 2019 by contractual maturity are
shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
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 and municipal bonds
U.S. Government agency small business pools guaranteed
by SBA
Collateralized mortgage obligations issued by the FHLMC
Residential mortgage-backed securities
Total
December 31, 2019
Amortized
Cost
(Dollars in thousands)
Fair Value
8,000 $
2,840
26,298
37,138
7,987
2,861
27,029
37,877
2,760
2,740
986
3,186
44,070 $
980
3,188
44,785
$
$
61
Sales proceeds and gross realized gains and losses on available for sale securities were as follows for the years ended
December 31:
Sales proceeds
Gross realized gains
Gross realized losses
Net realized gains (losses)
$
$
2019
December 31,
2018
(Dollars in thousands)
1,547 $
6
(7)
(1) $
7,450 $
72
(23)
49 $
2017
24,969
262
(84)
178
The following is a summary of gross unrealized losses and fair value for those investments with unrealized losses,
aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss
position, at December 31, 2019 and 2018.
December 31, 2019
U.S. Government sponsored
enterprises obligations
U.S. Government agency small
business administration pools
guaranteed by SBA
Collateralized mortgage
obligations issued by
the FHLMC
Residential mortgage
backed securities
Municipal bonds
December 31, 2018
U.S. Government sponsored
enterprises obligations
Residential mortgage
backed securities
Municipal bonds
Less than 12 Months
Fair
Value
Unrealized
Losses
Number of
Securities
More than 12 Months
Fair
Value
Number of
Securities
(Dollars in thousands)
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
2 $ 1,995 $
(5)
1 $ 1,991 $
(9) $ 3,986 $
(14)
2
1
2,740
(20)
980
999
4,052
1
8
14 $ 10,766 $
(6)
(2)
(58)
(91)
—
—
—
—
—
2,740
(20)
—
980
(6)
—
—
1 $ 1,991 $
—
—
999
4,052
—
—
(9) $ 12,757 $
(2)
(58)
(100)
4 $ 4,937 $
(32)
15 $ 16,781 $
(468) $ 21,718 $
(500)
1,328
6,013
1
13
18 $ 12,278 $
(48)
(62)
(142)
—
4,051
—
9
24 $ 20,832 $
1,328
10,064
—
(77)
(545) $ 33,110 $
(48)
(139)
(687)
In evaluating whether the investments have suffered an other-than-temporary decline, management evaluated the
amount of the decline compared to cost, the length of time and extent to which fair value has been less than cost, the
underlying creditworthiness of the issuer, the fair values exhibited during the year and estimated future fair values. In
general, management concluded the declines are due to coupon rates compared to market rates and current economic
conditions. The Company does not intend to sell investments with unrealized losses and it is more likely than not that the
Bank will not be required to sell these investments before recovery of their amortized cost basis. Based on evaluations of the
underlying issuers’ financial condition, current trends and economic conditions, management does not believe any securities
suffered an other-than-temporary decline in value as of December 31, 2019.
As of December 31, 2019 and December 31, 2018, there were no holdings that were issued by a single state or political
subdivision which comprised more than 10% of the total fair value of the Bank’s available-for-sale securities.
6.
Loans
The Bank’s lending activities are primarily conducted in and around Dover, New Hampshire and in the areas
surrounding its branches. The Bank 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 loans and lines of credit
and consumer loans. Most loans granted by the Bank are collateralized by real estate. The ability and willingness of real
62
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 December 31:
Commercial real estate (CRE)
Multifamily (MF)
Commercial and industrial (C+I)
Acquisition, development, and land (ADL)
1-4 family residential (RES)
Home equity loans and lines of credit (HELOC)
Consumer (CON)
Total loans
Net deferred loan costs
Allowance for loan losses
Total loans, net
December 31,
December 31,
2018
2019
(Dollars in thousands)
$
$
70,194 $
4,888
24,676
18,844
213,322
10,123
1,752
343,799
1,056
(2,875)
341,980 $
63,853
4,928
21,990
15,580
201,759
11,151
1,295
320,556
866
(2,806)
318,616
Transactions in the Allowance for loan losses (“ALL”) for the years ended December 31, 2019, 2018 and 2017 by
portfolio segment are summarized as follows:
CRE
MF
C+I
ADL
RES
(Dollars in thousands)
Balance, December 31, 2016
Provision for loan losses
Charge-offs
Recoveries
Balance, December 31, 2017
Balance, December 31, 2017
Provision for loan losses
Charge-offs
Recoveries
Balance, December 31, 2018
Balance, December 31, 2018
Provision for loan losses
Charge-offs
Recoveries
Balance at December 31, 2019
$
$
$
424
(57)
—
—
367
$
46
(15)
—
—
31
367
193
—
—
560
560
221
—
—
781
$
31
(9)
—
—
22
22
1
—
—
23
$
$
HELOC
249
$
(179)
—
—
70
70
(1)
—
—
69
69
(17)
—
—
52
$
$
CON
24
(14)
—
1
11
11
(5)
—
1
7
7
27
(17)
1
18
$
Unallocated
244
$
(20)
—
—
224
224
11
—
—
235
235
(232)
—
—
3
$
$
Total
2,677
160
(34)
1
2,804
2,804
—
—
2
2,806
2,806
100
(52)
21
2,875
178
(9)
—
—
169
169
62
—
1
232
232
151
(35)
2
350
$
$
200
137
(34)
—
303
303
(215)
—
—
88
88
57
—
—
145
$
$
1,312
317
—
—
1,629
1,629
(36)
—
—
1,593
1,593
(108)
—
18
1,503
63
As of December 31, 2019 and 2018, information about loans and the ALL by portfolio segment are summarized below:
CRE
MF
C+I
ADL
RES
HELOC
CON
Unallocated
Total
(Dollars in thousands)
December 31, 2019 Loan Balances
Individually evaluated for impairment $
Collectively evaluated for impairment
Total
109
70,085
$ 70,194
$
$
4,888
4,888
996
23,680
$ 24,676
18,844
$ 18,844
— $
$
— $
66
213,256
$ 213,322
$
— $
— $
10,123
$ 10,123
1,752
1,752
$
$
ALL related to the loans
Individually evaluated for impairment $
Collectively evaluated for impairment
Total
$
— $
781
781
$
— $
23
23
$
— $
350
350
$
— $
145
145
$
December 31, 2018 Loan Balances
Individually evaluated for impairment $
Collectively evaluated for impairment
Total
244
63,609
$ 63,853
$
$
— $
$
— $
1,267
20,723
$ 21,990
4,928
4,928
15,580
$ 15,580
68
201,691
$ 201,759
— $
1,503
1,503
$
$
— $
52
52
$
— $
18
18
$
— $
— $
11,151
$ 11,151
1,295
1,295
$
$
— $
1,171
— 342,628
— $343,799
— $
3
3
$
—
2,875
2,875
— $
1,579
— 318,977
— $320,556
ALL related to the loans
Individually evaluated for impairment $
Collectively evaluated for impairment
Total
$
— $
560
560
$
— $
22
22
$
— $
232
232
$
— $
88
88
$
— $
1,593
1,593
$
— $
69
69
$
— $
7
7
$
— $
235
235
$
—
2,806
2,806
The following is an aged analysis of past due loans by portfolio segment as of December 31, 2019:
CRE
MF
C+I
ADL
RES
HELOC
CON
30-59 Days
60-89 Days
90 + Days
Total Past Due
(Dollars in thousands)
Current
Total Loans
Non-Accrual
Loans
$
$
— $
—
—
—
—
—
—
— $
— $
—
—
—
19
—
—
19
$
— $
—
996
—
66
—
—
1,062
$
— $
—
996
—
85
—
—
1,081
$
70,194
4,888
23,680
18,844
213,237
10,123
1,752
342,718
$
$
70,194
4,888
24,676
18,844
213,322
10,123
1,752
343,799
$
$
—
—
996
—
66
—
—
1,062
The following is an aged analysis of past due loans by portfolio segment as of December 31, 2018:
CRE
MF
C+I
ADL
RES
HELOC
CON
30-59 Days
60-89 Days
90 + Days
Total Past Due
(Dollars in thousands)
Current
Total Loans
Non-Accrual
Loans
$
$
93
—
—
—
255
100
—
448
$
$
— $
—
—
—
—
—
—
— $
— $
—
—
—
68
—
—
68
$
93
—
—
—
323
100
—
516
$
$
63,760
4,928
21,990
15,580
201,436
11,051
1,295
320,040
$
$
63,853
4,928
21,990
15,580
201,759
11,151
1,295
320,556
$
$
—
—
—
—
68
—
—
68
There were no loans collateralized by residential real estate property in the process of foreclosure at December 31,
2019 and 2018.
64
The following table provides information on impaired loans as of and for the year ended December 31, 2019, 2018 and
2017:
(Dollars in thousands)
December 31, 2019
With no related allowance recorded:
CRE
MF
C+I
ADL
RES
HELOC
CON
Total impaired loans
December 31, 2018
With no related allowance recorded:
CRE
MF
C+I
ADL
RES
HELOC
CON
Total impaired loans
December 31, 2017
With no related allowance recorded:
CRE
MF
C+I
ADL
RES
HELOC
CON
Total impaired loans
Credit Quality Information
Recorded
Carrying
Value
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
$
$
$
$
$
$
— $
—
996
—
66
—
—
1,062
$
— $
—
1,057
—
66
—
—
1,123
$
— $
—
—
—
68
—
—
68
$
— $
—
—
—
68
—
—
68
$
— $
—
—
1,203
—
—
—
1,203
$
— $
—
—
1,203
—
—
—
1,203
$
— $
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
— $
— $
—
344
—
67
—
—
411
$
112
—
—
470
34
—
—
616
$
$
— $
—
—
407
54
—
—
461
$
—
—
36
—
—
—
—
36
—
—
—
—
3
—
—
3
—
—
—
36
6
—
—
42
The Bank 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 loans and 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.
65
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 Bank formally reviews the ratings on all commercial and industrial,
commercial real estate, acquisition, development and land loans and multifamily loans. On a periodic basis, the Bank 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 and overall credit risk administration.
On a quarterly basis, the Bank formally reviews the ratings on all residential real estate and home equity loans if they
have become delinquent. Criteria used to determine ratings consist of loan-to-value ratios and days delinquent.
The following presents the internal risk rating of loans by portfolio segment as of December 31, 2019:
(Dollars in thousands)
CRE
MF
C+I
ADL
RES
HELOC
CON
Total
$
Pass
70,085
4,888
22,208
18,844
213,256
10,123
1,752
$ 341,156
$
$
Special
Mention
— $
—
2,166
—
—
—
—
2,166
$
Substandard
109
—
302
—
66
—
—
477
$
Total
70,194
4,888
24,676
18,844
213,322
10,123
1,752
$ 343,799
The following presents the internal risk rating of loans by portfolio segment as of December 31, 2018:
(Dollars in thousands)
CRE
MF
C+I
ADL
RES
HELOC
CON
Total
$
Pass
62,873
4,928
20,700
15,580
201,435
11,151
1,295
$ 317,962
$
$
Special
Mention
736
—
23
—
256
—
—
1,015
Substandard
244
$
—
1,267
—
68
—
—
1,579
$
$
Total
63,853
4,928
21,990
15,580
201,759
11,151
1,295
$ 320,556
Certain directors and executive officers of the Bank and companies in which they have significant ownership interests
were customers of the Bank during 2019, 2018 and 2017. For the year ended December 31, 2019, 2018 and 2017, activity in
these loans was as follows:
(Dollars in thousands)
Loans outstanding – beginning of period
Principal payments
Advances
Loans outstanding – end of period
7.
Loan Servicing
2019
December 31,
2018
2017
$
$
4,483
(412)
1,160
5,231
$
$
4,369
(308)
422
4,483
$
$
4,560
(424)
233
4,369
Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal
balances of such loans were $49.3 million and $49.2 million at December 31, 2019 and 2018, respectively. Substantially all
of these loans were originated by the Bank and sold to third parties on a non-recourse basis with servicing rights
retained. These retained servicing rights are recorded as a servicing asset and are initially recorded at fair value (see Note 16
Fair Value of Assets and Liabilities for more information). Changes to the balance of mortgage servicing rights are recorded
in loan servicing fee income in the Company’s consolidated statements of income.
66
The Bank’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 fee income, including late and
ancillary fees, was $41,000, $131,000 and $232,000 for the years ended December 31, 2019, 2018 and 2017, respectively.
Servicing fee income is recorded in loan servicing fee income in the Bank’s consolidated statements of income. The Bank’s
residential mortgage investor loan servicing portfolio is primarily comprised of fixed rate loans concentrated in the Bank’s
market areas.
The following summarizes activity in mortgage servicing rights for the years ended December 31, 2019 and 2018.
(Dollars in thousands)
Balance, beginning of year
Net additions
Change in fair value due to change in assumptions
Balance, end of year
2019
2018
$
$
479 $
61
(143)
397 $
473
47
(41)
479
Fair value at December 31, 2019 was determined using a discount rate of 9.50%, prepayment speed of 13.08% and a
weighted average default rate of 2.48%. Fair value at December 31, 2018 was determined using a discount rate of 9.50%,
prepayment speed of 8.58% and a weighted average default rate of 3.00%. Mortgage servicing rights are included in other
assets on the accompanying consolidated balance sheet.
8.
Land, Buildings and Equipment
Land, building and equipment consisted of the following at December 31, 2019 and 2018:
(Dollars in thousands)
Land
Buildings
Building & leasehold improvements
Furniture, fixtures and equipment
Less accumulated depreciation
December 31,
2019
December 31,
2018
$
$
995 $
3,167
3,812
4,094
12,068
(6,730)
5,338 $
995
3,167
3,786
3,837
11,785
(6,204)
5,581
9.
Deposits
Deposits consisted of the following at December 31, 2019 and 2018:
(Dollars in thousands)
NOW and demand deposits
Money market deposits
Savings deposits
Time deposits of $250,000 and greater
Time deposits less than $250,000
67
$
December 31,
2019
115,024 $
65,611
39,962
13,481
47,538
281,616 $
December 31,
2018
109,580
60,952
41,294
13,325
49,295
274,446
$
At December 31, 2019, the scheduled maturities of time deposits were as follows:
(Dollars in thousands)
2020
2021
2022
2023
2024
Total
48,334
8,140
3,644
462
439
61,019
$
$
There were no brokered deposits included in time deposits at December 31, 2019 and 2018.
10. Borrowings
Federal Home Loan Bank (FHLB)
A summary of borrowings from the FHLB are as follows:
Principal Amounts
December 31, 2019
Maturity Dates
(Dollars in thousands)
$
$
44,907
2,262
18,800
250
66,219
2020
2022
2024
2028
Interest Rates
1.77% to 2.19 % – fixed
0.00% – fixed
0.00% to 1.69% – fixed
0.00% – fixed
Principal Amounts
December 31, 2018
Maturity Dates
(Dollars in thousands)
$
$
73,475
2,262
75,737
2019
2022
Interest Rates
2.54% to 2.68% – fixed
0.00% – fixed
All borrowings from the FHLB are secured by a blanket security agreement on qualified collateral, principally
residential mortgage loans and certain U.S. government sponsored mortgage-backed securities in an aggregate amount equal
to outstanding advances. The Bank’s unused remaining available borrowing capacity at the FHLB was approximately $81.7
million and $72.1 million at December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, the Bank had
sufficient collateral at the FHLB to support its obligations and was in compliance with the FHLB’s collateral pledging
program.
68
Included in the above advances at December 31, 2019 is a $10.0 million long-term advance, with an interest rate of
1.39%, which is callable by the FHLB on March 5, 2020 and quarterly thereafter, a $3.0 million long-term advance, with an
interest rate of 1.69%, which is callable by the FHLB on May 26, 2020, and a $5.0 million long-term advance, with an
interest rate of 1.65%, which is callable by the FHLB on October 28, 2020. December 31, 2019 and 2018 borrowings include
$3.3 million and $2.3 million, respectively, of advances through the FHLB’s Jobs for New England program where certain
qualifying small business loans that create or preserve jobs, expand woman-, Minority-, or veteran-owned businesses, or
otherwise stimulate the economy in New England communities are offered at an interest rate of 0%.
At December 31, 2019, the Bank had an overnight line of credit with the FHLB that may be drawn up to $3.0 million.
Additionally, the Bank had a total of $5.0 million of unsecured Fed Funds borrowing lines of credit with two correspondent
banks. The entire balance of all these credit facilities was available at December 31, 2019.
11.
Income Taxes
The current and deferred components of income tax expense consisted of the following for the years ended
December 31, 2019, 2018 and 2017:
Current
Deferred
Total
Federal
Federal
December 31, 2019
State
December 31, 2018
State
(Dollars in thousands)
$ (24) $ 150 $ 126 $ 202 $ 41 $ 243 $ 332 $ 43 $ 375
— 326
$ (100) $ (89) $ (189) $ 191 $ 41 $ 232 $ 658 $ 43 $ 701
December 31, 2017
State
(11) —
(239)
(315)
Federal
(76)
(11)
326
Total
Total
Total income tax expense is different from the amounts computed by applying the U.S. Federal income tax rates in
effect to income before income taxes. The reasons for these differences are as follows for the years ended December 31,
2019, 2018 and 2017:
Computed “expected” tax expense
State tax, net of federal tax benefit
BOLI income
Valuation allowance
Income on tax exempt securities
Other
Tax Act expense
December 31, 2019
% of
Pretax
Income
Amount
December 31, 2018
% of
Pretax
Amount
Income
(Dollars in thousands)
December 31, 2017
% of
Pretax
Income
Amount
$
$
(56)
(102)
(23)
103
(120)
9
—
(189)
(21.0)% $
(38.1)
(8.6)
38.4
(44.8)
3.4
—
(70.7)% $
276
32
(25)
—
—
(51)
—
232
21.0% $
2.5
(1.9)
—
—
(3.9)
—
17.7% $
548
28
(39)
—
—
(95)
259
701
34.0%
1.8
(2.4)
—
—
(5.9)
16.0
43.5%
69
Components of deferred tax assets and liabilities at December 31, 2019 and 2018 are as follows:
December 31,
December 31,
2019
2018
(Dollars in thousands)
$
Deferred tax assets:
Allowance for loan losses
Available-for-sale securities
Deferred compensation agreements
Contribution carryforward
State tax credit carryforward
Other
Subtotal
Less: valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Depreciation
Available-for-sale securities
Prepaids
Deferred loan origination fees
Mortgage servicing rights
Total deferred tax liabilities
Net deferred tax assets, included in other assets
$
795 $
—
465
206
156
45
1,667
(103)
1,564
(227)
(194)
(24)
(286)
(107)
(838)
726 $
776
174
422
—
—
48
1,420
—
1,420
(258)
—
(16)
(236)
(131)
(641)
779
The calculation of the Company’s charitable contribution carryforward deferred tax asset is based upon a carryforward
of approximately $761,000 of charitable contributions at December 31, 2019. As of December 31, 2019, it has been
determined that it is more likely than not that a portion of the benefit from this charitable contribution carryforward will not
be realized prior to expiration. As a result, a valuation allowance of $103,000 has been provided on this deferred tax asset.
The ultimate realization of this deferred tax asset is dependent upon the generation of future taxable income. The Internal
Revenue Federal Tax Code (the “Code”) limits the charitable contribution deduction in any one year to 10% of taxable
income, computed without regard to charitable contributions, certain special deductions, net operating loss carry backs and
capital loss carry backs. However, the Code allows a corporation to carry forward the excess charitable contributions to each
of the five immediately succeeding years, subject to a 10% limitation in each of those years. Thus, the Company would have
six years in which to utilize the December 31, 2019 charitable contribution carryforward. The valuation allowance for this
net deferred tax asset may be adjusted in the future if estimates of taxable income during the carryforward period are reduced
or increased. All other deferred tax assets as of December 31, 2019 and 2018 have not been reduced by a valuation
allowance because management believes that it is more likely than not that the full amount of these deferred tax assets will be
realized.
As of December 31, 2019 and 2018, New Hampshire state net operating loss carryforwards were $919,000 and
$202,000, respectively, and will expire in 2029 and 2028, respectively. Additionally, the Company has a New Hampshire
Business Enterprise Tax credit carry forward of $126,000 that expires in 2029.
The tax reserve for loan losses at the Company’s base year amounted to approximately $2.3 million. If any portion of
the reserve is used for purposes other than to absorb loan losses, approximately 150% of the amount actually used (limited to
the amount of the reserve) would be subject to taxation in the year in which used. As the Company intends to use the reserve
to only absorb loan losses, a deferred tax liability of approximately $627,000 has not been provided.
The Company does not have any uncertain tax positions at December 31, 2019 or 2018 which require accrual or
disclosure. The Company records interest and penalties as part of income tax expense. No interest or penalties were recorded
for the years ended December 31, 2019, 2018 and 2017.
The Company’s income tax returns are subject to review and examination by federal and state taxing authorities. The
Bank is currently open to audit under the applicable statutes of limitations by the Internal Revenue Service for the years
ended December 31, 2016 through 2019. The years open to examination by state taxing authorities vary by jurisdiction; no
years prior to 2016 are open.
70
On December 22, 2017, the Tax Act was enacted. Among other provisions, the Tax Act reduced the historical
corporate income tax rate to 21% from 35% for tax years beginning after December 31, 2017. The Tax Act required a
revaluation of the Company’s deferred tax assets and liabilities to account for the future impact of lower corporate tax rates
and other provisions of this legislation. As a result of the Company’s revaluation of deferred tax assets and liabilities at
December 31, 2017, the Company recognized an additional one-time income tax expense of approximately $259,000 in 2017.
12. Employee Benefits
Employee Stock Ownership Plan
As part of the stock offering, the Company established 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 employees. Contributions are allocated to eligible participants on the
basis of compensation, subject to federal limits. The Company uses the principal and interest method to determine the release
of shares amount. The number of shares committed to be released per year through 2038 is approximately 12,000.
The ESOP funded its purchase of 238,473 shares through a loan from the Company equal to 100% of the aggregate
purchase price of the common stock. The ESOP trustee will repay the loan principally through the Bank’s contributions to the
ESOP over the remaining loan term of 19.5 years. At December 31, 2019, the remaining principal balance on the ESOP debt
was $2.3 million.
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 year ended December 31, 2019 was
$109,000.
Shares held by the ESOP include the following:
Allocated
Committed to be allocated
Unallocated
Total
December 31,
2019
—
11,924
226,549
238,473
The fair value of unallocated shares was approximately $2.1 million at December 31, 2019.
401(k) Plan
During the year ended December 31, 2019, the Company sponsored 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. In prior years, the Company sponsored two 401(k) defined contribution plans which were combined
into one defined contribution plan as of December 31, 2018. The Company also made matching and profit-sharing
contributions to eligible participants in accordance with plan(s) provisions. The Company’s contributions for the years ended
December 31, 2019, 2018 and 2017 was $174,000, $116,000 and $133,000, respectively.
Pension Plan
The Company participates 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.
71
The funded status (fair value of plan assets divided by funding target) as of July 1, 2019 is as follows:
2019 Valuation Report
92.61% (1)
(1)
Fair value of plan assets reflects any contributions received through June 30, 2019.
Based upon the funded status of the Pentegra DB Plan as of July 1, 2019 no funding improvement plan or rehabilitation
plan has been implemented or is pending as of December 31, 2019. The Bank’s contributions to the Pentegra DB Plan during
the year ended December 31, 2019 totaled $270,000 and were not more than 5% of the total contributions to the Pentegra DB
Plan for the plan year ending June 30, 2018.
Total pension plan expense for the years ended December 31, 2019, 2018 and 2017 was $270,000, $374,000 and
$312,000, respectively, and is included in salaries and employee benefits in the accompanying consolidated financial
statements. The Company did not pay a surcharge to the Pentegra DB Plan in the years ended December 31, 2019, 2018 or
2017.
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. The
Company estimates a contribution amount of approximately $270,000 for the year ended December 31, 2020.
Supplemental Executive Retirement Plans
Salary Continuation Plan
The Company maintains a nonqualified supplemental retirement plan for its current and former President. The plan
provides supplemental retirement benefits payable in installments over a period of years upon retirement or death. The
recorded liability at December 31, 2019 and 2018 relating to this supplemental retirement plan was $590,000 and $565,000,
respectively. The discount rate used to determine the Company’s obligation was 5.00% during both the years ended
December 31, 2019 and 2018. The projected rate of salary increase for its current President was 5% for both the years ended
December 31, 2019 and 2018. For the years ended December 31, 2019, 2018 and 2017, the expense of this salary retirement
plan was $80,000, $95,000 and $215,000, respectively.
The Company maintained a nonqualified supplemental retirement plan for its former President. The plan was
terminated in May 2018 with the balance paid out in full upon the former President’s retirement. For the years ended
December 31, 2019, 2018 and 2017, the expense of this salary retirement plan was $-0-, $25,000 and $53,000, respectively.
Executive Supplemental Retirement Plan
The recorded liability at December 31, 2019 and 2018 relating to the supplemental retirement plan for the Company’s
former President was $171,000 and $207,000, respectively. The discount rate used to determine the Company’s obligation
was 6.25% during the years ended December 31, 2019 and 2018. For the years ended December 31, 2019, 2018 and 2017,
the expense of this supplemental plan was $10,000, $12,000 and $14,000, respectively.
Endorsement Method Split Dollar Plan
The Company has an endorsement method split dollar plan for a former President/Director. The recorded liability at
December 31, 2019 and 2018 relating to this supplemental executive benefit agreement was $33,000 and $58,000,
respectively. For the years ended December 31, 2019, 2018 and 2017, the expense of this supplemental plan was $(26,000),
$(20,000) and $(20,000), respectively.
72
Deferred Directors 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 December 31, 2019 and 2018
relating to this plan was $581,000 and $562,000, respectively. The discount rate used to determine the Company’s obligation
was 6.25% during the years ended December 31, 2019 and 2018. Total supplemental retirement plan expense amounted to
$90,000, $55,000 and $74,000 for the years ended December 31, 2019, 2018 and 2017, respectively.
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. At December 31, 2019, 2018 and 2017, the total deferred director’s
fees amounted to $233,000, $154,000 and $88,000, respectively.
13. Other Comprehensive Income (Loss)
The Company reports certain items as “other comprehensive income (loss)” and reflects total comprehensive income in
the consolidated financial statements for all years containing elements of other comprehensive income (loss).
A summary of the reclassification adjustments out of accumulated other comprehensive (loss) income in 2019, 2018
and 2017 follows:
Reclassification Adjustment
(Gains) losses on securities
available for sale
Tax effect
Net amortization of premium on
securities
Tax effect
Year Ended December 31,
2019
2018
(Dollars in thousands)
2017
Affected Line Item
in Statements of Income
$
$
$
$
(49) $
13
(36) $
103
(28)
75
$
$
1
—
1
131
(36)
95
$
$
$
$
(178) Securities gains (losses), net
Income tax (benefit) expense
71
(107) Net (loss) income
Interest on debt securities
166
(66) Income tax (benefit) expense
100 Net (loss) income
14. Financial Instruments with Off-Balance Sheet Risk, Commitments and Contingencies
The Bank 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 Bank’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 Bank
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.
73
Notional amounts of financial instruments with off-balance sheet credit risk are approximately as follows as of
December 31:
(Dollars in thousands)
Unadvanced portions of loans
Commitments to originate loans
Standby letters of credit
December 31,
2019
December 31,
2018
$
36,111 $
12,625
120
34,396
12,692
278
In the ordinary course of business, the Bank may be subject to various legal proceedings. Management, after
consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings will not be material to the
consolidated balance sheet or consolidated statements of income.
The Bank has obligations under a long-term operating lease related to a branch. This lease expires in June 2020 and
has future lease payments of approximately $16,000. Total lease expense was $31,996 for the years ended December 31,
2019, 2018 and 2017.
The Bank is required to maintain certain reserve balances in the form of cash or deposits with the Federal Reserve
Bank. At December 31, 2019 and 2018, the Bank was in compliance with the required reserve balances of approximately
$2.7 million and $2.0 million, respectively.
15. Regulatory Matters
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 December 31, 2019, 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 December 31, 2019 and 2018, the Bank met all capital adequacy requirements to
which it is subject, including the capital conservation buffer, at those dates.
As fully phased in on January 1, 2019, the Basel Committee on Banking Supervision’s capital guidelines for U.S.
banks (“Basel III Capital Rules”) require the Bank to maintain (i) a minimum ratio of Common Equity Tier 1 capital to risk-
weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum ratio of
Common Equity Tier 1 capital to risk-weighted assets of at least 7.0%), (ii) a minimum ratio of Tier 1 capital to risk-
weighted assets of at least 6.0%, plus the capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio
of 8.5%), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the
capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%) and (iv) a minimum leverage ratio
of 4.0%, calculated as the ratio of Tier 1 capital to average quarterly assets. The capital conservation buffer is designed to
absorb losses during periods of economic stress and effectively increases the minimum required risk-weighted capital ratios.
Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets below the effective minimum will
face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
74
The following table presents actual and required capital ratios as of December 31, 2019 and December 31, 2018 for the
Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required
capital levels as of December 31, 2019 and December 31, 2018 based on the phase-in provisions of the Basel III Capital
Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules became fully phased-
in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended
to reflect the changes under the Basel III Capital Rules.
(Dollars in thousands)
As of December 31, 2019
Total Capital (to risk- weighted assets)
Tier I Capital (to risk- weighted assets)
Tier I Capital (to average assets)
Common Equity Tier 1 (to risk-weighted assets)
(Dollars in thousands)
As of December 31, 2018
Total Capital (to risk-weighted assets)
Tier I Capital (to risk-weighted assets)
Tier I Capital (to average assets)
Common Equity Tier 1 (to risk-weighted assets)
(Dollars in thousands)
As of December 31, 2018
Total Capital (to risk- weighted assets)
Tier I Capital (to risk- weighted assets)
Tier I Capital (to average assets)
Common Equity Tier 1 (to risk-weighted assets)
Actual
Minimum
Capital
Requirement
Minimum Capital
Required For Capital
Adequacy Plus Capital
Conservation Buffer
Fully Phased-In
Amount
Ratio
Amount
Ratio
Amount
Ratio
$ 49,259
46,321
46,321
46,321
18.52% $ 21,278
15,961
17.41
16,236
11.41
11,971
17.41
8.00% $ 27,928
22,611
6.00
16,236
4.00
18,621
4.50
10.50%
8.50
4.00
7.00
Actual
Minimum
Capital
Requirement
Amount
Ratio
Amount
Ratio
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
$ 36,044
33,192
33,192
33,192
14.41% $ 20,011
15,008
13.27
15,296
8.68
11,256
13.27
8.0% $ 25,012
20,009
6.0
19,118
4.0
16,258
4.5
10.0%
8.0
5.0
6.5
Minimum Capital
Required For Capital
Adequacy Plus Capital
Conservation Buffer
Basel III Phase-In
Schedule
Minimum Capital
Required For Capital
Adequacy Plus Capital
Conservation Buffer
Fully Phased-In
Actual
Amount
Ratio
Amount
Ratio
Amount
Ratio
$ 36,044
33,192
33,192
33,192
14.41% $ 24,701
19,698
13.27
15,296
8.68
15,946
13.27
9.875% $ 26,264
21,261
7.875
15,296
4.000
17,509
6.375
10.5%
8.5
4.0
7.0
75
16. Fair Values of Assets and Liabilities
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 herein. 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 of the Company’s financial
assets and financial liabilities carried at fair value for December 31, 2019 and 2018. There were no significant transfers
between levels of the fair value hierarchy during the years ended December 31, 2019 and 2018.
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, 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 7 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.
76
The following table summarizes financial assets measured at fair value on a recurring basis as of December 31, 2019
and 2018, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
December 31, 2019
Mortgage servicing rights
Securities available-for-sale:
U.S. Government-sponsored enterprises obligations
U.S Government agency small business
administration pools guaranteed by the SBA
Collateralized mortgage obligations issued by the
FHLMC
Mortgage-backed securities
Municipal bonds
December 31, 2018
Mortgage servicing rights
Securities available-for-sale:
U.S. Government-sponsored enterprises obligations
Mortgage-backed securities
Municipal bonds
Total
$
397
$
Level 1
Level 2
(Dollars in thousands)
— $
Level 3
— $
397
8,997
2,740
980
3,188
28,880
45,182
Total
$
479
$
23,727
1,327
14,389
39,922
$
$
$
$
—
—
—
—
—
— $
8,997
2,740
980
3,188
28,880
44,785
$
—
—
—
—
397
Level 1
Level 2
(Dollars in thousands)
— $
— $
—
—
—
— $
23,727
1,327
14,389
39,443
$
Level 3
479
—
—
—
479
See Note 7 Loan Servicing for a rollforward of our Level 3 item and related inputs and assumptions used to determine
fair value at December 31, 2019 and 2018.
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 impaired 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 using discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality and are included in Level 3.
77
At December 31, 2019, the Company’s only asset measured at fair value on a nonrecurring basis is a loan identified as
impaired for which a partial write-off has been recorded. This impaired loan is reported at the fair value of the underlying
collateral, less estimated selling costs. The Company classifies impaired loans as Level 3 in the fair value hierarchy.
Collateral values are estimated using Level 2 inputs based upon appraisals of similar properties obtained from a third party,
but can be adjusted and therefore classified as Level 3. There were no impaired loans that were remeasured and reported at
fair value through either a charge off or a specific valuation allowance based upon the fair value of the underlying collateral
at December 31, 2018.
The following summarizes assets measured at fair value on a nonrecurring basis at December 31, 2019 and 2018:
(Dollars in thousands)
December 31, 2019
Impaired Loans
December 31, 2018
Impaired Loans
Fair Value Measurements at Reporting Date Using:
Quoted Prices
in Active
Markets for
Identical
Assets Level 1
Significant
Other
Observable
Inputs Level 2
Significant
Unobservable
Inputs Level 3
Total
996 $
— $
— $
996
— $
— $
— $
—
$
$
The following is a summary of the valuation methodology and unobservable inputs for Level 3 assets measured at fair
value on a nonrecurring basis at December 31, 2019 and 2018:
(Dollars in thousands)
December 31, 2019
Impaired Loans
December 31, 2018
Impaired Loans
Fair Value
Valuation Technique
Unobservable Input
$
996
Market Approach Appraisal of
Collateral
Selling Costs Provision
$ —
NA
NA
Non-Financial Assets and Non-Financial Liabilities: The Company has no non-financial assets or non-financial
liabilities measured at fair value on a recurring basis. Non-financial assets measured at fair value on a non-recurring basis
generally include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value
through a charge-off to the allowance for loan losses and certain foreclosed assets which, subsequent to their initial
recognition, are remeasured at fair value through a write-down included in other non-interest expense. There were no
foreclosed assets at December 31, 2019 or 2018.
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. For December 31, 2019, fair values of loans are estimated on an exit price basis incorporating discounts
for credit, liquidity and marketability factors. This is not comparable with the fair values disclosed for December 31, 2018,
which were based on an entrance price basis.
78
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
December 31 are as follows:
Carrying
Amount
Fair
Value
Level 1
Level 2
Level 3
(Dollars in thousands)
December 31, 2019
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
$
$
4,009
2,735
2,971
4,267
341,980
1,235
$
4,009
2,735
2,971
4,267
336,847
1,235
4,009
—
—
—
—
1,235
$
— $
2,735
2,971
4,267
—
—
—
—
—
—
336,847
—
Financial Liabilities:
Deposits
Advances from Federal Home Loan Bank
Mortgagors’ tax escrow
$ 281,616
66,219
586
$ 281,707
66,060
586
$ 220,596
—
—
December 31, 2018
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
$
$
5,889
6,461
3,718
4,156
318,616
1,164
$
5,889
6,461
3,718
4,156
307,582
1,164
5,889
—
—
—
—
1,164
Financial Liabilities:
Deposits
Advances from Federal Home Loan Bank
Mortgagors’ tax escrow
$ 274,446
75,737
761
$ 258,446
75,541
761
$ 196,481
—
—
$
$
$
$
61,111
66,060
586
—
—
—
— $
6,461
3,718
4,156
—
—
—
—
—
—
307,582
—
$
61,965
75,541
761
—
—
—
79
17. Quarterly Results of Operations (Unaudited)
2019 Quarters
Interest and dividend income
Interest expense
Net interest and dividend income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income (loss) before income tax (benefit) expense
Income tax (benefit) expense
Net income (loss)
Share Data:
Average Shares Outstanding, Basic
Average Shares Outstanding, Diluted
Basic Earnings (Loss) Per Share
Diluted Earnings (Loss) Per share
2018 Quarters
Interest and dividend income
Interest expense
Net interest and dividend income
Provision (credit) for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before provision for income taxes
Provision for income taxes
Net income
Share Data:
Average Shares Outstanding, Basic
Average Shares Outstanding, Diluted
Basic Earnings Per Share
Diluted Earnings Per share
$
$
$
$
$
$
Fourth
Third
Second
First
(In thousands, except per share data)
3,875
856
3,019
75
2,944
427
3,207
164
21
143
5,856,951
5,856,951
0.02
0.02
$
$
$
$
$
3,921
891
3,030
—
3,030
444
4,307
(833)
(220)
(613) $
4,833,426
4,833,426
(0.13)
(0.13)
$
$
3,886
1,067
2,819
25
2,794
358
2,933
219
6
213
N/A
N/A
N/A
N/A
3,766
1,029
2,737
—
2,737
303
2,858
182
4
178
N/A
N/A
N/A
N/A
Fourth
Third
Second
First
(In thousands, except per share data)
3,774
930
2,844
(100)
2,944
436
2,980
400
69
331
$
$
N/A
N/A
N/A
N/A
$
$
3,605
830
2,775
30
2,745
373
2,783
335
62
273
N/A
N/A
N/A
N/A
$
$
3,502
757
2,745
30
2,715
341
2,756
300
46
254
N/A
N/A
N/A
N/A
3,383
628
2,755
40
2,715
400
2,838
277
55
222
N/A
N/A
N/A
N/A
80
18. Condensed Financial Statements of Parent Company
Financial information pertaining to First Seacoast Bancorp only is as follows:
CONDENSED BALANCE SHEET
ASSETS
Cash held at First Seacoast Bank
Investment in First Seacoast Bank
Loan to First Seacoast Bank ESOP
Deferred tax asset
Other assets
Total assets
STOCKHOLDERS’ EQUITY
Stockholders’ equity
Total stockholders’ equity
CONDENSED STATEMENTS OF INCOME
December 31,
2019
(Dollars in thousands)
$
$
$
$
9,965
44,613
2,195
103
190
57,066
57,066
57,066
For the Year Ended
December 31,
2019
(Dollars in thousands)
758
$
(758)
(103)
(655)
576
(79)
Charitable foundation contribution
Loss before income tax benefit and equity in
undistributed net income of First Seacoast Bank
Income tax benefit
Net loss before equity in undistributed net income
of First Seacoast Bank
Equity in undistributed net income of First Seacoast Bank
Net loss
$
81
CONDENSED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash
used by operating activities:
Undistributed net income of First Seacoast Bank
Deferred tax benefit
Contribution of common stock to First Seacoast
Community Foundation, Inc.
Increase in other assets
Net cash used by operating activities
CASH FLOWS FROM BY INVESTING ACTIVITIES:
Capital contribution to First Seacoast Bank
ESOP loan, net of principal payments
Net cash used by investing activities
CASH FLOWS FROM BY FINANCING ACTIVITIES:
Proceeds from the issuance of common stock
Net cash provided by financing activities
Net increase in cash
Cash at beginning of year
Cash at end of year
For the Year Ended
December 31,
2019
(Dollars in thousands)
$
(79)
(576)
(103)
609
(190)
(339)
(12,600)
(2,195)
(14,795)
25,099
25,099
9,965
—
9,965
$
82
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
First Seacoast Bancorp
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of First Seacoast Bancorp and Subsidiaries
(formerly Federal Savings Bank and Subsidiary) (the Company) as of December 31, 2019 and 2018, the related
consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for
each of the years in the three year period ended December 31, 2019 and the related notes to the consolidated
financial statements (collectively, the financial statements). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and
the results of their operations and their cash flows for each of the years in the three year period ended
December 31, 2019, in conformity with accounting principles generally accepted in the United States of
America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s financial statements based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in accordance with U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement, whether due to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our
audits provide a reasonable basis for our opinion.
/s/ Baker Newman & Noyes LLC
We have served as the Company’s auditor since 2011.
Portland, Maine
March 27, 2020
83
ITEM 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and
principal financial officer, First Seacoast Bancorp evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this report. Based upon that evaluation, the principal executive officer and principal financial officer concluded
that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
There were no changes made in our internal controls during the quarter ended December 31, 2019 that have materially
affected, or are reasonably likely to materially affect, First Seacoast Bancorp’s internal control over financial reporting.
This Annual Report does not include a report of management’s assessment regarding internal control over financial
reporting due to a transition period established by rules of the Securities and Exchange Commission for newly public
companies.
ITEM 9B. Other Information
None.
84
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
First Seacoast Bancorp has adopted a Code of Ethics that applies to its principal executive officer, principal financial
officer and principal accounting officer or controller or persons performing similar functions. A copy of the Code of Ethics is
available on the investor relations section of First Seacoast Bancorp’s website at www.firstseacoastbank.com under
“Governance – Governance Documents.”
The information contained under the sections captioned “Business Items to be Voted on by Stockholders – Item 1
Election of Directors,” “Other Information Relating to Directors and Executive Officers” and “Corporate Governance” in
First Seacoast Bancorp’s definitive Proxy Statement for the 2020 Annual Meeting of Stockholders (the “Proxy Statement”) is
incorporated herein by reference.
ITEM 11. Executive Compensation
The information contained under the section captioned “Executive Compensation” and “Directors Compensation” in
the Proxy Statement is incorporated herein by reference.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a)
Securities Authorized for issuance under Stock-Based Compensation Plans
As of December 31, 2019, we did not have any compensation plans (other than our Employee Stock Ownership Plan)
under which equity securities of First Seacoast Bancorp are authorized for issuance.
(b)
Security Ownership of Certain Beneficial Owners
The information required by this item is incorporated herein by reference to the section captioned “Stock Ownership”
in the Proxy Statement.
(c)
Security Ownership of Management
The information required by this item is incorporated herein by reference to the section captioned “Stock Ownership”
in the Proxy Statement.
(d) Changes in Control
Management of First Seacoast Bancorp knows of no arrangements, including any pledge by any person of securities of
First Seacoast Bancorp, the operation of which may at a later date result in a change in control of the registrant.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the sections captioned “Other
Information Relating to Directors and Executive Officers - Transactions with Certain Related Persons” and Corporate
Governance” of the Proxy Statement.
ITEM 14.
Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the section captioned “Business Items to
be Voted on by Stockholders – Item 2 – Ratification of Appointment of Independent Registered Public Accounting Firm” of
the Proxy Statement.
85
ITEM 15. Exhibits and Financial Statement Schedules
PART IV
3.1
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
Charter of First Seacoast Bancorp (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for
the period ended September 30, 2019, as filed with the Securities and Exchange Commission on November 14, 2019)
Bylaws of First Seacoast Bancorp (incorporated by reference to Exhibit 3.2 to the Quarterly Report on Form 10-Q for
the period ended September 30, 2019, as filed with the Securities and Exchange Commission on November 14, 2019)
Form of Common Stock Certificate of First Seacoast Bancorp (incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form 8-A of First Seacoast Bancorp, as filed with the Securities and Exchange
Commission on July 16, 2019)
Description of First Seacoast Bancorp’s Securities Registered Under Section 12 of the Securities Exchange Act of
1934
Employment Agreement between Federal Savings Bank and James R. Brannen (incorporated by reference to Exhibit
10.2 to the Registration Statement on Form S-1 of First Seacoast Bancorp, initially filed with the Securities and
Exchange Commission on March 13, 2019, as amended) †
Employment Agreement between Federal Savings Bank and Richard M. Donovan (incorporated by reference to
Exhibit 10.3 to the Registration Statement on Form S-1 of First Seacoast Bancorp, initially filed with the Securities
and Exchange Commission on March 13, 2019, as amended)†
Salary Continuation Agreement between Federal Savings Bank and James R. Brannen (incorporated by reference to
Exhibit 10.4 to the Registration Statement on Form S-1 of First Seacoast Bancorp, initially filed with the Securities
and Exchange Commission on March 13, 2019, as amended) †
Salary Continuation Agreement between Federal Savings Bank and James O’Neill (incorporated by reference to
Exhibit 10.5 to the Registration Statement on Form S-1 of First Seacoast Bancorp, initially filed with the Securities
and Exchange Commission on March 13, 2019, as amended)†
Supplemental Retiree Medical and Dental Benefits Agreement between Federal Savings Bank and James O’Neill
(incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 of First Seacoast Bancorp,
initially filed with the Securities and Exchange Commission on March 13, 2019, as amended) †
10.6 Directors Deferred Fee Plan (incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-1 of
First Seacoast Bancorp, initially filed with the Securities and Exchange Commission on March 13, 2019, as amended)
†
10.7
10.8
10.9
Supplemental Director Retirement Agreement between Federal Savings Bank and Patricia A. Barbour (incorporated
by reference to Exhibit 10.8 to the Registration Statement on Form S-1 of First Seacoast Bancorp, initially filed with
the Securities and Exchange Commission on March 13, 2019, as amended) †
Supplemental Director Retirement Agreement between Federal Savings Bank and Mark P. Boulanger (incorporated
by reference to Exhibit 10.9 to the Registration Statement on Form S-1 of First Seacoast Bancorp, initially filed with
the Securities and Exchange Commission on March 13, 2019, as amended) †
Supplemental Director Retirement Agreement between Federal Savings Bank and Michael J. Bolduc (incorporated by
reference to Exhibit 10.10 to the Registration Statement on Form S-1 of First Seacoast Bancorp, initially filed with
the Securities and Exchange Commission on March 13, 2019, as amended) †
10.10 Supplemental Director Retirement Agreement between Federal Savings Bank and James Jalbert (incorporated by
reference to Exhibit 10.11 to the Registration Statement on Form S-1 of First Seacoast Bancorp, initially filed with
the Securities and Exchange Commission on March 13, 2019, as amended) †
10.11 Supplemental Director Retirement Agreement between Federal Savings Bank and Thomas J. Jean (incorporated by
reference to Exhibit 10.12 to the Registration Statement on Form S-1 of First Seacoast Bancorp, initially filed with
the Securities and Exchange Commission on March 13, 2019, as amended) †
10.12 Supplemental Director Retirement Agreement between Federal Savings Bank and Erica A. Johnson (incorporated by
reference to Exhibit 10.13 to the Registration Statement on Form S-1 of First Seacoast Bancorp, initially filed with
the Securities and Exchange Commission on March 13, 2019, as amended) †
86
10.13 Supplemental Director Retirement Agreement between Federal Savings Bank and Paula J. Reid (incorporated by
reference to Exhibit 10.14 to the Registration Statement on Form S-1 of First Seacoast Bancorp, initially filed with
the Securities and Exchange Commission on March 13, 2019, as amended) †
10.14 Supplemental Director Retirement Agreement between Federal Savings Bank and Janet Sylvester (incorporated by
reference to Exhibit 10.15 to the Registration Statement on Form S-1 of First Seacoast Bancorp, initially filed with
the Securities and Exchange Commission on March 13, 2019, as amended) †
10.15 Amended and Restated Director Fee Continuation Agreement between Federal Savings Bank and Dana C. Lynch
(incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-1 of First Seacoast Bancorp,
initially filed with the Securities and Exchange Commission on March 13, 2019, as amended) †
10.16 Amended and Restated Director Fee Continuation Agreement between Federal Savings Bank and James H. Schulte
(incorporated by reference to Exhibit 10.17 to the Registration Statement on Form S-1 of First Seacoast Bancorp,
initially filed with the Securities and Exchange Commission on March 13, 2019, as amended) †
21
23
Subsidiaries of Registrant
Consent of Baker Newman & Noyes LLC
31.1 Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Senior Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
The following materials from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2019, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii)
Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’
Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.
†
Management contract or compensation plan or arrangement.
ITEM 16.
Form 10-K Summary
Not applicable.
87
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: March 27, 2020
FIRST SEACOAST BANCORP
By:
/s/ James R. Brannen
James R. Brannen
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
Title
/s/ James R. Brannen
James R. Brannen
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date
March 27, 2020
March 27, 2020
/s/ Richard M. Donovan
Richard M. Donovan
/s/ Dana C. Lynch
Dana C. Lynch
/s/ Thomas J. Jean
Thomas J. Jean
/s/ Patricia A. Barbour
Patricia A. Barbour
/s/ Michael J. Bolduc
Michael J. Bolduc
/s/ Mark P. Boulanger
Mark P. Boulanger
/s/ James Jalbert
James Jalbert
/s/ Eric A. Johnson
Erica A. Johnson
/s/ Janet Sylvester
Janet Sylvester
/s/ Paula J. Williamson-Reid
Paula J. Williamson-Reid
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
Chairman of the Board
March 27, 2020
Vice Chairman of the Board
March 27, 2020
March 27, 2020
March 27, 2020
March 27, 2020
March 27, 2020
March 27, 2020
March 27, 2020
March 27, 2020
Director
Director
Director
Director
Director
Director
Director
88
Our Vision
Foster the relationships we have built since 1890
while embracing innovation to become the leading
community financial institution in the Seacoast region.
Officers
James R. Brannen
President & Chief Executive Officer
Stephanie Morneau
Vice President, Retail Loan Production Officer
Richard M. Donovan
Senior Vice President, Chief Financial Officer
Thomas M. Wilhelm
Vice President, Loan Operations Manager
Timothy F. Dargan
Senior Vice President, Senior Commercial
Jennifer Watson
Assistant Vice President,
Loan Officer
Loan Operations Supervisor
Jean Tremblay
Vice President, Senior Retail Loan Officer
Cheryl Thompson
Assistant Vice President,
Brad Barbin
Vice President, Chief Information Officer
James C. McKenna
Vice President, Financial Advisor
John E. Swenson
Vice President, Bank Administration &
Risk Management Officer
Barbara Graziano
Vice President, Internal Audit,
Compliance & BSA Officer
Sharon A. Zacharias
Vice President, Human Resources Director
Tiffany Melanson
Vice President, Marketing & Public Relations
Chantal Upton
Vice President, Sales & Training
David Darvish
Vice President, Finance Officer
William Sawyer
Vice President, Special Assets Manager
Paul A. Bergeron
Vice President, Commercial Loan Officer
Priscilla W. MacInnis
Vice President, Commercial Loan Officer
Business Development Officer
Valerie Dyer
Assistant Vice President,
Business Development Officer
Brian Bjorkman
Assistant Vice President, Controller
Janet Wyman
Assistant Vice President,
Deposit Operations Manager
Eric Cournoyer
Lead Mortgage Loan Officer
Coralie O’Brien
Mortgage Loan Officer
Cindy Ward
Mortgage Loan Officer
Susan L. Brown
Corporate Clerk
Sharla Rollins
Assistant Vice President,
Branch Administrator &
Rochester Branch Manager
Kristin Garside
Dover Branch Manager
Gina DeNuzzio
Durham Branch Manager
Pamela J. Bishop
Vice President, Commercial Loan Officer
Katie Buote
Barrington Branch Manager
John Crisp
Vice President, Commercial Portfolio Manager
Norlaila K. Miller
Portsmouth Branch Manager
Board of Directors
Dana C. Lynch, Chairman
TJ Jean, Vice Chairman
Patricia Barbour
Michael J. Bolduc
Mark Boulanger
James R. Brannen
James Jalbert
Erica Johnson
Janet Sylvester
Paula Williamson-Reid
Dover 633 Central Avenue, Dover, NH 03820 603-742-4680
Durham 7A Mill Road, Durham, NH 03824 603-868-1111
Barrington 6 Eastern Avenue, Barrington, NH 03825 603-664-9327
Portsmouth 1650 Woodbury Avenue, Portsmouth, NH 03801 603-431-2212
Rochester 17 Wakefield Street, Rochester, NH 03867 603-332-3740
firstseacoastbank.com