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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

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 No.    001-38985    

 

First Seacoast Bancorp

(Exact Name of Registrant as Specified in Its Charter)

 

 

United States of America

 

84-2404519

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

633 Central Avenue, Dover, New Hampshire

 

03820

(Address of Principal Executive Offices)

 

(Zip Code)

 

(603) 742-4680

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:  

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common stock, $0.01 par value per share

 

FSEA

 

The Nasdaq Stock Market, LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.    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 during the preceding 12 months (or for 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

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   YES     NO  

6,029,153 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding as of May 3, 2021, of which 3,345,925 shares were owned by First Seacoast Bancorp, MHC.

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

2

Item 1.

Consolidated Financial Statements

2

 

Consolidated Balance Sheets at March 31, 2021 (unaudited) and December 31, 2020

2

 

Consolidated Statements of Income for the Three Months Ended March 31, 2021 and 2020 (unaudited)

3

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2021 and 2020 (unaudited)

4

 

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2021 and 2020 (unaudited)

5

 

Consolidated Statements of Cash Flows for the three Months Ended March 31, 2021 and 2020 (unaudited)

6

 

Notes to Consolidated Financial Statements (unaudited)

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4.

Controls and Procedures

39

PART II.

OTHER INFORMATION

41

Item 1.

Legal Proceedings

41

Item 1A.

Risk Factors

41

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 3.

Defaults Upon Senior Securities

41

Item 4.

Mine Safety Disclosures

41

Item 5.

Other Information

41

Item 6.

Exhibits

42

 

Signatures

43

 

 

1


 

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements.

FIRST SEACOAST BANCORP AND SUBSIDIARIES

CONSOLIDATED Balance Sheets

 

(Dollars in thousands)

 

(Unaudited)

March 31,

2021

 

 

December 31,

2020

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

22,674

 

 

$

5,996

 

Interest bearing time deposits with other banks

 

 

2,488

 

 

 

2,488

 

Securities available-for-sale, at fair value

 

 

53,616

 

 

 

55,470

 

Federal Home Loan Bank stock

 

 

1,868

 

 

 

1,796

 

Loans

 

 

374,798

 

 

 

368,142

 

Less allowance for loan losses

 

 

(3,404

)

 

 

(3,342

)

Net loans

 

 

371,394

 

 

 

364,800

 

Land, building and equipment, net

 

 

4,948

 

 

 

5,078

 

Bank-owned life insurance

 

 

4,376

 

 

 

4,356

 

Accrued interest receivable

 

 

1,351

 

 

 

1,412

 

Other assets

 

 

2,074

 

 

 

1,666

 

Total assets

 

$

464,789

 

 

$

443,062

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

$

70,485

 

 

$

64,571

 

Interest bearing deposits

 

 

291,014

 

 

 

262,810

 

Total deposits

 

 

361,499

 

 

 

327,381

 

Advances from Federal Home Loan Bank

 

 

29,032

 

 

 

34,127

 

Advances from Federal Reserve Bank

 

 

9,438

 

 

 

18,195

 

Mortgagors’ tax escrow

 

 

2,045

 

 

 

1,420

 

Deferred compensation liability

 

 

1,581

 

 

 

1,667

 

Other liabilities

 

 

2,178

 

 

 

1,411

 

Total liabilities

 

 

405,773

 

 

 

384,201

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Preferred Stock, $.01 par value, 10,000,000 shares authorized

   as of March 31, 2021 and December 31, 2020; none issued

   and outstanding as of March 31, 2021 and December 31, 2020

 

 

 

 

 

 

Common Stock, $.01 par value, 90,000,000 shares authorized as of

   March 31, 2021 and December 31, 2020; 6,083,500

   shares issued and 6,033,767 shares outstanding at March 31, 2021

   and 6,058,024 shares issued and outstanding as of December 31, 2020,

   respectively

 

 

60

 

 

 

61

 

Additional paid-in capital

 

 

25,604

 

 

 

25,606

 

Equity capital

 

 

35,100

 

 

 

34,192

 

Accumulated other comprehensive income

 

 

833

 

 

 

1,381

 

Treasury stock, at cost: 49,733 and 25,476 shares outstanding as

   of March 31, 2021 and December 31, 2020, respectively

 

 

(465

)

 

 

(233

)

Unearned compensation - ESOP 211,644 and 214,625 shares

   unallocated at March 31, 2021 and December 31, 2020,

   respectively

 

 

(2,116

)

 

 

(2,146

)

Total stockholders' equity

 

 

59,016

 

 

 

58,861

 

Total liabilities and stockholders' equity

 

$

464,789

 

 

$

443,062

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

2


FIRST SEACOAST BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

Three Months Ended

March 31,

 

(Dollars in thousands, except per share data)

 

2021

 

 

2020

 

Interest and dividend income:

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

3,668

 

 

$

3,609

 

Interest on debt securities:

 

 

 

 

 

 

 

 

Taxable

 

 

42

 

 

 

87

 

Non-taxable

 

 

222

 

 

 

190

 

Total interest on debt securities

 

 

264

 

 

 

277

 

Dividends

 

 

 

 

 

42

 

Total interest and dividend income

 

 

3,932

 

 

 

3,928

 

Interest expense:

 

 

 

 

 

 

 

 

Interest on deposits

 

 

179

 

 

 

514

 

Interest on borrowings

 

 

86

 

 

 

276

 

Total interest expense

 

 

265

 

 

 

790

 

Net interest and dividend income

 

 

3,667

 

 

 

3,138

 

Provision for loan losses

 

 

60

 

 

 

115

 

Net interest and dividend income after provision for loan losses

 

 

3,607

 

 

 

3,023

 

Noninterest income:

 

 

 

 

 

 

 

 

Customer service fees

 

 

233

 

 

 

232

 

Gain on sale of loans

 

 

40

 

 

 

52

 

Securities gains, net

 

 

203

 

 

 

114

 

Income from bank-owned life insurance

 

 

20

 

 

 

4

 

Loan servicing income (loss)

 

 

83

 

 

 

(25

)

Investment services fees

 

 

55

 

 

 

47

 

Other income

 

 

15

 

 

 

15

 

Total noninterest income

 

 

649

 

 

 

439

 

Noninterest expense:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

1,866

 

 

 

1,990

 

Director compensation

 

 

62

 

 

 

58

 

Occupancy expense

 

 

167

 

 

 

153

 

Equipment expense

 

 

141

 

 

 

144

 

Marketing

 

 

60

 

 

 

91

 

Data processing

 

 

319

 

 

 

267

 

Deposit insurance fees

 

 

30

 

 

 

30

 

Professional fees and assessments

 

 

205

 

 

 

196

 

Debit card fees

 

 

42

 

 

 

49

 

Employee travel and education expenses

 

 

16

 

 

 

32

 

Other expense

 

 

184

 

 

 

172

 

Total noninterest expense

 

 

3,092

 

 

 

3,182

 

Income before income tax expense

 

 

1,164

 

 

 

280

 

Income tax expense

 

 

256

 

 

 

23

 

Net income

 

$

908

 

 

$

257

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.16

 

 

$

0.04

 

Diluted

 

$

0.16

 

 

$

0.04

 

 

 

 

 

 

 

 

 

 

Weighted Average Shares:

 

 

 

 

 

 

 

 

Basic

 

 

5,837,665

 

 

 

5,859,932

 

Diluted

 

 

5,837,665

 

 

 

5,859,932

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

3


FIRST SEACOAST BANCORP AND SUBSIDIARIES

CONSOLIDATED Statements of COMPREHENSIVE INCOME (UNAUDITED)

 

 

 

Three Months Ended

March 31,

 

(Dollars in thousands)

 

2021

 

 

2020

 

Net income

 

$

908

 

 

$

257

 

Other comprehensive income (loss), net of income taxes:

 

 

 

 

 

 

 

 

       Unrealized holding gains (losses) on securities available-for-sale

 

 

 

 

 

 

 

 

            Unrealized holding (losses) gains on securities available-for-sale arising during

                     the period net of income taxes of $(252) and $94, respectively

 

 

(678

)

 

 

253

 

            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 $(17) and $(18), respectively

 

 

(46

)

 

 

(48

)

                              Total unrealized (loss) gain on securities

 

 

(724

)

 

 

205

 

       Derivatives:

 

 

 

 

 

 

 

 

            Change in interest rate swaps net of income taxes of $64 and $-0- respectively

 

 

172

 

 

 

 

            Reclassification adjustment for net interest expense on swaps included in

                     net income net of income taxes of $1 and $-0-, respectively

 

 

4

 

 

 

 

                              Total change in interest rate swaps

 

 

176

 

 

 

 

Other comprehensive income (loss)

 

 

(548

)

 

 

205

 

Comprehensive income

 

$

360

 

 

$

462

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4


 

 

FIRST SEACOAST BANCORP AND SUBSIDIARIES

CONSOLIDATED Statements of Changes in STOCKHOLDERS’ EQUITY (UNAUDITED)

 

(Dollars in thousands)

 

Shares of

Common

Stock

 

 

Common

Stock

 

 

Additional

Paid-in Capital

 

 

Equity

Capital

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Treasury

Stock

 

 

Unearned

Compensation

- ESOP

 

 

Total

Equity

Capital

 

Balance December 31, 2019

 

 

6,083,500

 

 

$

61

 

 

$

25,636

 

 

$

33,113

 

 

$

521

 

 

$

 

 

$

(2,265

)

 

$

57,066

 

Net income

 

 

 

 

 

 

 

 

 

 

 

257

 

 

 

 

 

 

 

 

 

 

 

 

257

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

205

 

 

 

 

 

 

 

 

 

205

 

ESOP shares earned - 2,981 shares

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

29

 

 

 

26

 

Balance March 31, 2020

 

$

6,083,500

 

 

$

61

 

 

$

25,633

 

 

$

33,370

 

 

$

726

 

 

$

 

 

$

(2,236

)

 

$

57,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2020

 

 

6,058,024

 

 

$

61

 

 

$

25,606

 

 

$

34,192

 

 

$

1,381

 

 

$

(233

)

 

$

(2,146

)

 

$

58,861

 

Net income

 

 

 

 

 

 

 

 

 

 

 

908

 

 

 

 

 

 

 

 

 

 

 

 

908

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(548

)

 

 

 

 

 

 

 

 

(548

)

Treasury stock activity

 

 

(24,257

)

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

(232

)

 

 

 

 

 

(233

)

ESOP shares earned - 2,981 shares

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

30

 

 

 

28

 

Balance March 31, 2021

 

 

6,033,767

 

 

$

60

 

 

$

25,604

 

 

$

35,100

 

 

$

833

 

 

$

(465

)

 

$

(2,116

)

 

$

59,016

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

5


 

 

FIRST SEACOAST BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

Three Months Ended

March 31,

 

(Dollars in thousands)

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

908

 

 

$

257

 

Adjustments to reconcile net income to net cash provided by (used) by operating activities:

 

 

 

 

 

 

 

 

ESOP expense

 

 

28

 

 

 

26

 

Depreciation

 

 

141

 

 

 

144

 

Net amortization of bond premium

 

 

140

 

 

 

48

 

Provision for loan losses

 

 

60

 

 

 

115

 

Gain on sale of loans

 

 

(40

)

 

 

(52

)

Securities (gains), net

 

 

(203

)

 

 

(114

)

Proceeds from loans sold

 

 

1,325

 

 

 

3,966

 

Origination of loans sold

 

 

(1,285

)

 

 

(3,914

)

Increase in bank-owned life insurance

 

 

(20

)

 

 

(5

)

Increase in deferred fees on loans

 

 

(231

)

 

 

(15

)

Deferred tax expense

 

 

123

 

 

 

32

 

Decrease (increase) in accrued interest receivable

 

 

61

 

 

 

(4

)

(Increase) decrease in other assets

 

 

(328

)

 

 

290

 

Decrease in deferred compensation liability

 

 

(86

)

 

 

(81

)

Increase (decrease) in other liabilities

 

 

1,009

 

 

 

(765

)

Net cash provided by (used) in operating activities

 

 

1,602

 

 

 

(72

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from sales, maturities and principal payments received from securities available-for-sale

 

 

9,746

 

 

 

15,731

 

Purchase of securities available-for-sale

 

 

(8,822

)

 

 

(14,103

)

Purchase of property and equipment

 

 

(11

)

 

 

(239

)

Loan purchases

 

 

(2,444

)

 

 

 

Loan originations and principal collections, net

 

 

(3,981

)

 

 

(4,311

)

Recoveries of loans previously charged off

 

 

2

 

 

 

 

Net purchase of Federal Home Loan Bank stock

 

 

(72

)

 

 

(73

)

Proceeds from sales of interest bearing time deposits with other banks

 

 

 

 

 

247

 

Net cash used by investing activities

 

 

(5,582

)

 

 

(2,748

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net increase in NOW, demand deposits, money market and savings accounts

 

 

21,949

 

 

 

1,069

 

Net increase in certificates of deposit

 

 

12,169

 

 

 

40

 

Increase in mortgagors’ escrow accounts

 

 

625

 

 

 

1,304

 

Treasury stock purchases

 

 

(233

)

 

 

 

Proceeds from short-term FHLB advances

 

 

5,000

 

 

 

10,680

 

Proceeds from long-term FHLB advances

 

 

 

 

 

20,000

 

Payments on short-term FHLB advances

 

 

(10,095

)

 

 

(29,907

)

Payments on short-term FRB advances

 

 

(8,757

)

 

 

 

Net cash provided by financing activities

 

 

20,658

 

 

 

3,186

 

Net change in cash and cash equivalents

 

 

16,678

 

 

 

366

 

Cash and cash equivalents at beginning of period

 

 

5,996

 

 

 

4,009

 

Cash and cash equivalents at end of period

 

$

22,674

 

 

$

4,375

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash activities:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

279

 

 

$

776

 

Cash paid for income taxes

 

 

3

 

 

 

2

 

Noncash activities:

 

 

 

 

 

 

 

 

Effect of change in fair value of securities available for sale:

 

 

 

 

 

 

 

 

Investment securities available-for-sale

 

 

(993

)

 

 

281

 

Deferred taxes

 

 

269

 

 

 

(76

)

Other comprehensive (loss) income

 

 

(724

)

 

 

205

 

Effect of change in fair value of interest rate swaps:

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

241

 

 

 

 

Deferred taxes

 

 

(65

)

 

 

 

Other comprehensive income

 

 

176

 

 

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.  

6


 

FIRST SEACOAST BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.

Summary of Significant Accounting Policies

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.

Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company were prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim consolidated financial information, general practices within the banking industry and with instructions for Form 10-Q and Regulation S-X.  Accordingly, these interim financial statements do not include all the information or footnotes required by GAAP for annual financial statements. However, in the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of these consolidated financial statements have been included. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results which may be expected for the entire year. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 26, 2021.

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.

The Bank offers a full range of banking and wealth management services to its customers. 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. Investment management services are offered at the Company’s full-service

wealth management office in Dover, New Hampshire. The assets held for wealth management customers are not assets of the

Company and, accordingly, are not reflected in the accompanying balance sheets. Assets under management totaled

approximately $61.0 million and $58.4 million at March 31, 2021 and December 31, 2020, respectively.

The Bank is engaged principally in the business of attracting deposits from the public and investing those funds in various types of loans, including residential and commercial real estate, 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.

 

Banking services, the Company’s only reportable operating segment, is managed as a single strategic unit.

  

7


 

 

Recently Adopted Accounting Standards

As an “emerging growth company,” as defined in Title 1 of Jumpstart Our Business Startups (JOBS) Act, the Company has elected to use the extended transition period to delay adoption of new or reissued accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. As a result, the Company’s consolidated financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards without an extended transition period. As of March 31, 2021, there was no significant difference in the comparability of the Company’s consolidated financial statements as a result of this extended transition period except for the accounting treatment for measuring and recording the Company’s allowance for loan losses. The Company measures and records an allowance for loan losses based upon the incurred loss model while other public companies may be required to calculate their allowance for loan losses based upon the current expected credit loss (“CECL”) model. The CECL approach requires an estimate of the loan loss expected over the life of the loan, while the incurred loss approach delays the recognition of a loan loss until it is probable a loss event has incurred. 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; (which will be December 31, 2024 for the Company) (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 August 2017, the FASB issued Accounting Standards Update (ASU) 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.”  The amendments in ASU 2017-12 apply to any entity that elects to apply hedge accounting in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The main changes introduced by ASU 2017-12 eliminate the requirement to separately measure and report hedge ineffectiveness; and requires companies to present all of the elements of hedge accounting that affect earnings in the same income statement line as the hedged item. The standard also permits hedge accounting for strategies for which hedge accounting was not historically permitted and includes new alternatives for measuring the hedged item for fair value hedges of interest rate risk. Furthermore, the standard eases the requirements for effectiveness testing, hedge documentation, applying the critical terms match method, and introduces new alternatives that will permit companies to reduce the risk of material error corrections if they misapply the shortcut method. The adoption of this ASU on January 1, 2021 did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements Yet to Be Adopted

The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have an immaterial impact on the Company’s consolidated financial statements.

In January 2021, the FASB issued ASU 2021-1, “Reference Rate Reform (Topic 848) (Scope),” which clarifies certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting applied to derivatives that are affected by the discounting transition.  This ASU becomes effective immediately for all entities on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2020, the FASB issued ASU No. 2020-05, “Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities,” as a limited deferral of the effective dates, for one year, of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” and ASU No. 2016-02, “Leases (Topic 842),” to provide immediate, near-term relief for certain entities for whom these ASU’s are either currently or imminently effective as a result of COVID-19. The Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” as of January 1, 2019. The Company does not expect the adoption of ASU No. 2016-02, “Leases (Topic 842),” to have a material impact on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848),” which provides optional guidance to ease the potential burden in accounting due to reference rate reform. The guidance in this update provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may

8


 

be applied prospectively to contract modifications made, and hedging relationships entered into, on or before December 31, 2022. The Company is currently evaluating its contracts and the optional expedients provided by the new standard.

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 smaller reporting companies 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 November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” to increase stakeholder awareness of the improvements made to the various amendments to Topic 326 and to clarify certain areas of guidance as companies transition to the new standard. Also, during November 2019, the FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” finalizing various effective date deferrals for private companies, not-for-profit organizations and certain smaller reporting companies applying the credit losses (CECL), leases and hedging standards. The effective date for ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” is deferred to years beginning after December 15, 2022. The effective date for ASU 2016-02, “Leases (Topic 842)” is deferred to fiscal years beginning after December 15, 2021.

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

9


 

result of the implementation of this ASU; however, until its evaluation is complete, the magnitude of the increase will be unknown.

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 smaller reporting companies 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.

2.

Cash and Due From Banks

At March 31, 2021 and December 31, 2020, cash and due from banks totaled $22.7 million and $6.0 million, respectively. The Company pledged cash collateral to derivative counterparties totaling $525,000 at March 31, 2021 and December 31, 2020. See Note 12 for a discussion of the Company’s derivative and hedging activities.

3.

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 March 31, 2021 and December 31, 2020:

 

 

 

March 31, 2021

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

 

(Dollars in thousands)

 

U.S. Government-sponsored enterprises obligations

 

$

1,979

 

 

$

 

 

$

(90

)

 

$

1,889

 

U.S. Government agency small business

   administration pools guaranteed by SBA

 

 

2,194

 

 

 

27

 

 

 

 

 

 

2,221

 

Collateralized mortgage obligations issued by

   the FHLMC and FNMA

 

 

1,330

 

 

 

7

 

 

 

(3

)

 

 

1,334

 

Residential mortgage backed securities

 

 

10,732

 

 

 

45

 

 

 

(268

)

 

 

10,509

 

Municipal bonds

 

 

36,343

 

 

 

1,457

 

 

 

(137

)

 

 

37,663

 

 

 

$

52,578

 

 

$

1,536

 

 

$

(498

)

 

$

53,616

 

10


 

 

 

 

 

December 31, 2020

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

 

(Dollars in thousands)

 

U.S. Government-sponsored enterprises obligations

 

$

997

 

 

$

 

 

$

(24

)

 

$

973

 

U.S. Government agency small business

   administration pools guaranteed by SBA

 

 

2,399

 

 

 

71

 

 

 

 

 

 

2,470

 

Collateralized mortgage obligations issued by

   the FHLMC

 

 

938

 

 

 

11

 

 

 

 

 

 

949

 

Residential mortgage backed securities

 

 

5,100

 

 

 

49

 

 

 

(13

)

 

 

5,136

 

Municipal bonds

 

 

44,005

 

 

 

1,944

 

 

 

(7

)

 

 

45,942

 

 

 

$

53,439

 

 

$

2,075

 

 

$

(44

)

 

$

55,470

 

 

The amortized cost and fair values of available-for-sale securities at March 31, 2021 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.

 

 

 

Amortized

Cost

 

 

Fair Value

 

 

 

(Dollars in thousands)

 

March 31, 2021

 

 

 

 

 

 

 

 

Due after one year through five years

 

$

 

 

$

 

Due after five years through ten years

 

 

2,316

 

 

 

2,236

 

Due after ten years

 

 

36,006

 

 

 

37,316

 

U.S. Government-sponsored enterprises obligations and

   municipal bonds

 

$

38,322

 

 

$

39,552

 

U.S. Government agency small business pools guaranteed

   by SBA

 

 

2,194

 

 

 

2,221

 

Collateralized mortgage obligations issued by the FHLMC

   and FNMA

 

 

1,330

 

 

 

1,334

 

Residential mortgage backed securities

 

 

10,732

 

 

 

10,509

 

Total

 

$

52,578

 

 

$

53,616

 

 

11


 

 

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 March 31, 2021 and December 31, 2020:

 

 

 

Less than 12 Months

 

 

More than 12 Months

 

 

Total

 

 

 

Number of

Securities

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Number of

Securities

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

 

(Dollars in thousands)

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored

   enterprises obligations

 

 

3

 

 

$

1,889

 

 

$

(90

)

 

 

 

 

$

 

 

$

 

 

$

1,889

 

 

$

(90

)

U.S. Government agency small business

   administration pools guaranteed by SBA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations issued by

   the FHLMC and FNMA

 

 

1

 

 

 

476

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

476

 

 

 

(3

)

Residential mortgage

   backed securities

 

 

7

 

 

 

8,663

 

 

 

(268

)

 

 

 

 

 

 

 

 

 

 

 

8,663

 

 

 

(268

)

Municipal bonds

 

 

12

 

 

 

7,992

 

 

 

(130

)

 

 

4

 

 

 

1,313

 

 

 

(7

)

 

 

9,305

 

 

 

(137

)

 

 

 

23

 

 

$

19,020

 

 

$

(491

)

 

 

4

 

 

$

1,313

 

 

$

(7

)

 

$

20,333

 

 

$

(498

)

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored

   enterprises obligations

 

 

2

 

 

$

973

 

 

$

(24

)

 

 

 

 

$

 

 

$

 

 

$

973

 

 

$

(24

)

U.S. Government agency small business

   administration pools guaranteed by SBA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations issued

   by the FHLMC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

   backed securities

 

 

1

 

 

 

3,102

 

 

 

(13

)

 

 

 

 

 

 

 

 

 

 

 

3,102

 

 

 

(13

)

Municipal bonds

 

 

4

 

 

 

2,381

 

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

2,381

 

 

 

(7

)

 

 

 

7

 

 

$

6,456

 

 

$

(44

)

 

 

 

 

$

 

 

$

 

 

$

6,456

 

 

$

(44

)

 

In evaluating whether 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 as it is more likely than not that the Company 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 March 31, 2021 or December 31, 2020.

Proceeds from sales, maturities, principal payments received and gross realized gains and losses on available for sale securities were as follows for the three months ended:

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

 

 

(Dollars in thousands)

 

Proceeds from sales, maturities and principal payments

     received on securities available-for-sale

 

$

9,746

 

 

$

15,731

 

Gross realized gains

 

 

203

 

 

 

118

 

Gross realized losses

 

 

 

 

 

(4

)

Net realized gains

 

$

203

 

 

$

114

 

 

As of March 31, 2021 or December 31, 2020, 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 Company’s available-for-sale securities.

12


 

4.

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 line of credit loans and consumer loans. Most loans are collateralized by real estate. The ability and willingness of real estate, commercial and construction loan borrowers to honor their repayment commitments is generally dependent on the health of the real estate sector in the borrowers’ geographic area and the general economy.

In December 2019, a novel strain of coronavirus (“COVID-19”) was reported and in March 2020, the COVID-19 outbreak was declared a pandemic. On March 27, 2020, the Small Business Administration (“SBA”) established a loan program in response to the COVID-19 pandemic, the Paycheck Protection Program (“PPP”), which was added to the SBA’s 7(a) loan program by of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) (such loans, “PPP loans”). The PPP, a nearly $350 billion program, was designed to aid small- and medium-sized businesses through federally guaranteed SBA loans distributed through banks. On December 27, 2020, the 2021 Consolidated Appropriations Act was signed, which extended relief provisions contained in the CARES act to the earlier of 60 days after the national emergency termination date or January 1, 2022. This legislation also included a $900 billion relief package and the extension of certain relief provisions from the March 2020 CARES Act that were set to expire at the end of 2020, including the extension of the eviction moratorium and $286 billion of additional PPP funds. The Consolidated Appropriations Act also continued to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a troubled debt restructuring (“TDR”) and suspend any determination of a loan modified as a result of the effects of the COVID–19 pandemic as being a TDR, including impairment for accounting purposes. During the three months ended March 31, 2021 and the year ended December 31, 2020 the Bank originated 113 and 286 PPP loans, respectively, with aggregate outstanding principal balances of $11.9 million and $33.0 million, respectively. As of March 31, 2021 and December 31, 2020, total PPP loan principal balances of $23.0 million and $21.2 million, respectively, and were included in commercial and industrial loans (C+I).

Loans consisted of the following at March 31, 2021 and December 31, 2020:

 

 

 

March 31,

2021

 

 

December 31,

2020

 

 

 

(Dollars in thousands)

 

Commercial real estate (CRE)

 

$

72,992

 

 

$

66,166

 

Multifamily (MF)

 

 

5,965

 

 

 

6,619

 

Commercial and industrial (C+I)

 

 

42,251

 

 

 

45,262

 

Acquisition, development, and land (ADL)

 

 

31,674

 

 

 

23,145

 

1-4 family residential (RES)

 

 

209,798

 

 

 

213,718

 

Home equity line of credit (HELOC)

 

 

8,399

 

 

 

9,583

 

Consumer (CON)

 

 

2,783

 

 

 

2,944

 

Total loans

 

 

373,862

 

 

 

367,437

 

Net deferred loan costs

 

 

936

 

 

 

705

 

Allowance for loan losses

 

 

(3,404

)

 

 

(3,342

)

Total loans, net

 

$

371,394

 

 

$

364,800

 

 

Changes in the allowance for loan losses (“ALL”) for the three months ended March 31, 2021 and 2020 by portfolio segment are summarized as follows:

 

(Dollars in thousands)

 

CRE

 

 

MF

 

 

C+I

 

 

ADL

 

 

RES

 

 

HELOC

 

 

CON

 

 

Unallocated

 

 

Total

 

Balance, December 31, 2020

 

$

753

 

 

$

60

 

 

$

267

 

 

$

174

 

 

$

1,656

 

 

$

78

 

 

$

52

 

 

$

302

 

 

$

3,342

 

Provision for loan losses

 

 

160

 

 

 

(21

)

 

 

(62

)

 

 

122

 

 

 

(97

)

 

 

(11

)

 

 

(3

)

 

 

(28

)

 

 

60

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

2

 

Balance, March 31, 2021

 

$

913

 

 

$

39

 

 

$

206

 

 

$

296

 

 

$

1,559

 

 

$

67

 

 

$

50

 

 

$

274

 

 

$

3,404

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

$

781

 

 

$

23

 

 

$

350

 

 

$

145

 

 

$

1,503

 

 

$

52

 

 

$

18

 

 

$

3

 

 

$

2,875

 

Provision for loan losses

 

 

(4

)

 

 

25

 

 

 

(63

)

 

 

(10

)

 

 

140

 

 

 

27

 

 

 

2

 

 

 

(2

)

 

 

115

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19

 

Balance, March 31, 2020

 

$

796

 

 

$

48

 

 

$

287

 

 

$

135

 

 

$

1,643

 

 

$

79

 

 

$

20

 

 

$

1

 

 

$

3,009

 

 

13


 

 

As of March 31, 2021 and December 31, 2020, information about loans and the ALL by portfolio segment are summarized below:

 

(Dollars in thousands)

 

CRE

 

 

MF

 

 

C+I

 

 

ADL

 

 

RES

 

 

HELOC

 

 

CON

 

 

Unallocated

 

 

Total

 

March 31, 2021 Loan Balances

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

343

 

 

$

 

 

$

36

 

 

$

 

 

$

62

 

 

$

 

 

$

 

 

$

 

 

$

441

 

Collectively evaluated for impairment

 

 

72,649

 

 

 

5,965

 

 

 

42,215

 

 

 

31,674

 

 

 

209,736

 

 

 

8,399

 

 

 

2,783

 

 

 

 

 

 

373,421

 

Total

 

$

72,992

 

 

$

5,965

 

 

$

42,251

 

 

$

31,674

 

 

$

209,798

 

 

$

8,399

 

 

$

2,783

 

 

$

 

 

$

373,862

 

ALL related to the loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Collectively evaluated for impairment

 

 

913

 

 

 

39

 

 

 

206

 

 

 

296

 

 

 

1,559

 

 

 

67

 

 

 

50

 

 

 

274

 

 

 

3,404

 

Total

 

$

913

 

 

$

39

 

 

$

206

 

 

$

296

 

 

$

1,559

 

 

$

67

 

 

$

50

 

 

$

274

 

 

$

3,404

 

December 31, 2020 Loan Balances

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

117

 

 

$

 

 

$

822

 

 

$

 

 

$

62

 

 

$

 

 

$

 

 

$

 

 

$

1,001

 

Collectively evaluated for impairment

 

 

66,049

 

 

 

6,619

 

 

 

44,440

 

 

 

23,145

 

 

 

213,656

 

 

 

9,583

 

 

 

2,944

 

 

 

 

 

 

366,436

 

Total

 

$

66,166

 

 

$

6,619

 

 

$

45,262

 

 

$

23,145

 

 

$

213,718

 

 

$

9,583

 

 

$

2,944

 

 

$

 

 

$

367,437

 

ALL related to the loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Collectively evaluated for impairment

 

 

753

 

 

 

60

 

 

 

267

 

 

 

174

 

 

 

1,656

 

 

 

78

 

 

 

52

 

 

 

302

 

 

 

3,342

 

Total

 

$

753

 

 

$

60

 

 

$

267

 

 

$

174

 

 

$

1,656

 

 

$

78

 

 

$

52

 

 

$

302

 

 

$

3,342

 

 

The following is an aged analysis of past due loans by portfolio segment as of March 31, 2021: 

 

(Dollars in thousands)

 

30-59 Days

 

 

60-89 Days

 

 

90 + Days

 

 

Total Past Due

 

 

Current

 

 

Total Loans

 

 

Non-Accrual

Loans

 

CRE

 

$

 

 

$

 

 

$

 

 

$

 

 

$

72,992

 

 

$

72,992

 

 

$

 

MF

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,965

 

 

 

5,965

 

 

 

 

C+I

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42,251

 

 

 

42,251

 

 

 

 

ADL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31,674

 

 

 

31,674

 

 

 

 

RES

 

 

 

 

 

 

 

 

62

 

 

 

62

 

 

 

209,736

 

 

 

209,798

 

 

 

62

 

HELOC

 

 

123

 

 

 

 

 

 

 

 

 

123

 

 

 

8,276

 

 

 

8,399

 

 

 

 

CON

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,783

 

 

 

2,783

 

 

 

 

 

 

$

123

 

 

$

 

 

$

62

 

 

$

185

 

 

$

373,677

 

 

$

373,862

 

 

$

62

 

 

The following is an aged analysis of past due loans by portfolio segment as of December 31, 2020:

 

(Dollars in thousands)

 

30-59 Days

 

 

60-89 Days

 

 

90 + Days

 

 

Total Past Due

 

 

Current

 

 

Total Loans

 

 

Non-Accrual

Loans

 

CRE

 

$

 

 

$

 

 

$

 

 

$

 

 

$

66,166

 

 

$

66,166

 

 

$

 

MF

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,619

 

 

 

6,619

 

 

 

 

C+I

 

 

 

 

 

 

 

 

822

 

 

 

822

 

 

 

44,440

 

 

 

45,262

 

 

 

822

 

ADL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23,145

 

 

 

23,145

 

 

 

 

RES

 

 

42

 

 

 

 

 

 

62

 

 

 

104

 

 

 

213,614

 

 

 

213,718

 

 

 

62

 

HELOC

 

 

143

 

 

 

 

 

 

 

 

 

143

 

 

 

9,440

 

 

 

9,583

 

 

 

 

CON

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,944

 

 

 

2,944

 

 

 

 

 

 

$

185

 

 

$

 

 

$

884

 

 

$

1,069

 

 

$

366,368

 

 

$

367,437

 

 

$

884

 

 

There were no loans collateralized by residential real estate property in the process of foreclosure at March 31, 2021 or December 31, 2020.

14


 

The following table provides information on impaired loans as of March 31, 2021 and December 31, 2020:

 

(Dollars in thousands)

 

Recorded

Carrying

Value

 

 

Unpaid

Principal

Balance

 

 

Related

Allowance

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

MF

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C+I

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ADL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RES

 

 

62

 

 

 

62

 

 

 

 

 

 

62

 

 

 

 

HELOC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CON

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans

 

$

62

 

 

$

62

 

 

$

 

 

$

62

 

 

$

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRE

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

MF

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C+I

 

 

822

 

 

 

938

 

 

 

 

 

 

909

 

 

 

 

ADL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RES

 

 

62

 

 

 

62

 

 

 

 

 

 

64

 

 

 

5

 

HELOC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CON

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans

 

$

884

 

 

$

1,000

 

 

$

 

 

$

973

 

 

$

5

 

 

Credit Quality Information

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 line of credit and consumer loans are considered “pass” rated loans until they become delinquent. Once delinquent, loans can be rated an 8, 9 or 10 as applicable.

Loans rated 1 through 6: Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 7: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 8: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Bank will sustain some loss if the weakness is not corrected.

Loans rated 9: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 10: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted and should be charged off.

On an annual basis, or more often if needed, the Bank formally reviews the ratings on its commercial and industrial, commercial real estate 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 its applicable residential real estate and home equity loans if they have become classified as non-accrual. Criteria used to determine ratings consist of loan-to-value ratios and days delinquent.

15


 

The following presents the internal risk rating of loans by portfolio segment as of March 31, 2021:

 

(Dollars in thousands)

 

Pass

 

 

Special

Mention

 

 

Substandard

 

 

Total

 

CRE

 

$

69,900

 

 

$

2,749

 

 

$

343

 

 

$

72,992

 

MF

 

 

5,965

 

 

 

 

 

 

 

 

 

5,965

 

C+I

 

 

41,063

 

 

 

1,152

 

 

 

36

 

 

 

42,251

 

ADL

 

 

31,674

 

 

 

 

 

 

 

 

 

31,674

 

RES

 

 

209,736

 

 

 

 

 

 

62

 

 

 

209,798

 

HELOC

 

 

8,399

 

 

 

 

 

 

 

 

 

8,399

 

CON

 

 

2,783

 

 

 

 

 

 

 

 

 

2,783

 

Total

 

$

369,520

 

 

$

3,901

 

 

$

441

 

 

$

373,862

 

 

The following presents the internal risk rating of loans by portfolio segment as of December 31, 2020:

 

(Dollars in thousands)

 

Pass

 

 

Special

Mention

 

 

Substandard

 

 

Total

 

CRE

 

$

63,191

 

 

$

2,858

 

 

$

117

 

 

$

66,166

 

MF

 

 

6,619

 

 

 

 

 

 

 

 

 

6,619

 

C+I

 

 

41,021

 

 

 

4,083

 

 

 

158

 

 

 

45,262

 

ADL

 

 

23,145

 

 

 

 

 

 

 

 

 

23,145

 

RES

 

 

213,656

 

 

 

 

 

 

62

 

 

 

213,718

 

HELOC

 

 

9,583

 

 

 

 

 

 

 

 

 

9,583

 

CON

 

 

2,944

 

 

 

 

 

 

 

 

 

2,944

 

Total

 

$

360,159

 

 

$

6,941

 

 

$

337

 

 

$

367,437

 

 

In response to the COVID-19 pandemic, the Bank has implemented a short-term loan modification program to provide temporary payment relief to certain of our borrowers who meet the program's qualifications. In April 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency, issued an interagency statement titled “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus,” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors (ASC 310-40),” a restructuring of debt constitutes a troubled debt restructuring, or TDR, if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The regulatory agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to the COVID-19 pandemic to borrowers who were current prior to any relief, are not to be considered TDRs. These include short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms or other delays in payment that are insignificant.

 

Additionally, Section 4013 of the CARES Act that became law on March 27, 2020 further provided banks with the option to elect either or both of the following, from March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 pandemic declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates (extended to January 1, 2022 by the 2021 Consolidated Appropriations Act):

 

 

(i)

to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and/or

 

 

(ii)

to suspend any determination of a loan modified as a result of the effects of the COVID–19 pandemic as being a TDR, including impairment for accounting purposes.

 

If a bank elects a suspension noted above, the suspension (i) will be effective for the term of the loan modification, but solely with respect to any modification, including a forbearance arrangement, an interest rate modification, a repayment plan, and any other similar arrangement that defers or delays the payment of principal or interest, that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019 and (ii) will not apply to any adverse impact on the credit

16


 

of a borrower that is not related to the COVID–19 pandemic. The Company has applied this guidance to qualifying loan modifications.

 

The program has been offered to both retail and commercial borrowers. The majority of short-term loan modifications for retail loan borrowers consist of deferred payments (which may include principal, interest, and escrow), which are capitalized to the loan balance and recovered through the re-amortization of the monthly payment at the end of the deferral period. For commercial loan borrowers, the majority of short-term modifications consist of allowing the borrower to make interest-only payments with the deferred principal to be due at maturity or repaid as the monthly payment is re-amortized at the next interest reset date as is applicable to the individual loan structure. Alternatively, commercial loan borrowers may defer their full monthly payment similar to the retail loan program outlined above. All loans modified under these programs are maintained on full accrual status during the deferral period.

As of March 31, 2021, temporary payment relief continued for 4 loans with aggregate outstanding principal balances of $3.2 million and consists of 1 CRE loan with an aggregate outstanding principal balance of $2.7 million and 3 RES loans with aggregate outstanding principal balances of $446,000. Under the applicable regulatory guidance, none of these loans were considered troubled debt restructurings as of March 31, 2021.

Certain directors and executive officers of the Company and companies in which they have significant ownership interests were customers of the Bank. Loans outstanding to these persons and entities at March 31, 2021 and December 31, 2020 were $5.2 million and $5.3 million, respectively.

 

5.

Loan Servicing

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of such loans were $43.8 million and $45.8 million at March 31, 2021 and December 31, 2020, 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 13, Fair Value of Assets and Liabilities, for more information). Changes to the balance of mortgage servicing rights are recorded in loan servicing income (loss) in the Company’s consolidated statements of income.

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 income (loss), including late and ancillary fees, was $83,000 and ($25,000) for the three months ended March 31, 2021 and 2020, respectively. 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 three months ended March 31, 2021 and 2020:

 

(Dollars in thousands)

 

2021

 

 

2020

 

Balance, December 31,

 

$

273

 

 

$

397

 

Additions

 

 

13

 

 

 

43

 

Payoffs

 

 

(14

)

 

 

(26

)

Change in fair value due to change in assumptions

 

 

57

 

 

 

(72

)

Balance, March 31,

 

$

329

 

 

$

342

 

 

17


 

 

6.

Deposits

Deposits consisted of the following at March 31, 2021 and December 31, 2020:

 

(Dollars in thousands)

 

March 31,

2021

 

 

December 31,

2020

 

NOW and demand deposits

 

$

174,585

 

 

$

161,336

 

Money market deposits

 

 

73,662

 

 

 

69,320

 

Savings deposits

 

 

52,415

 

 

 

48,057

 

Time deposits of $250,000 and greater

 

 

8,226

 

 

 

10,119

 

Time deposits less than $250,000

 

 

52,611

 

 

 

38,549

 

 

 

$

361,499

 

 

$

327,381

 

 

At March 31, 2021, the scheduled maturities of time deposits were as follows (in thousands):

 

2021

 

$

43,438

 

2022

 

 

12,013

 

2023

 

 

2,123

 

2024

 

 

672

 

2025

 

 

1,645

 

2026

 

 

946

 

 

 

$

60,837

 

 

There were $15.0 million and $-0- of brokered deposits included in time deposits at March 31, 2021 and December 31, 2020, respectively.

7.

Borrowings

Federal Home Loan Bank (FHLB)

A summary of borrowings from the FHLB is as follows:

 

 

 

 

 

March 31, 2021

 

 

 

Principal Amounts

 

 

Maturity Dates

 

 

Interest Rates

 

 

 

 

(Dollars in thousands)

 

 

 

$

5,000

 

 

 

2021

 

 

0.37% – fixed

 

2,262

 

 

 

2022

 

 

0.00% – fixed

 

10,800

 

 

 

2024

 

 

0.00% to 1.39% – fixed

 

10,520

 

 

 

2025

 

 

0.00% to 1.35% – fixed

 

250

 

 

 

2028

 

 

0.00% – fixed

 

200

 

 

 

2030

 

 

0.00% – fixed

$

29,032

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

Principal Amounts

 

 

Maturity Dates

 

 

Interest Rates

 

 

 

 

(Dollars in thousands)

 

 

 

$

10,095

 

 

 

2021

 

 

0.39% (fixed) to 0.42% (variable)

 

2,262

 

 

 

2022

 

 

0.00% – fixed

 

10,800

 

 

 

2024

 

 

0.00% to 1.39% – fixed

 

10,520

 

 

 

2025

 

 

0.00% to 1.35% – fixed

 

250

 

 

 

2028

 

 

0.00% – fixed

 

200

 

 

 

2030

 

 

0.00% – fixed

$

34,127

 

 

 

 

 

 

 

 

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 $103.2 million and $112.6 million at March 31, 2021 and December 31, 2020, respectively. At March 31, 2021 and December 31, 2020, the Bank

18


 

had sufficient collateral at the FHLB to support its obligations and was in compliance with the FHLB’s collateral pledging program.

 

Included in the above advances at March 31, 2021 and December 31, 2020 is a $10.0 million long-term advance, with an interest rate of 1.39%, which is callable by the FHLB on June 5, 2021 and quarterly thereafter, and a $10.0 million long-term advance, with an interest rate of 1.35%, which is callable by the FHLB on May 10, 2021 and quarterly thereafter. At March 31, 2021 and December 31, 2020 borrowings include $4.0 million 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 March 31, 2021, 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 March 31, 2021.

Federal Reserve Bank of Boston (“FRB”)

The Bank has established a Paycheck Protection Program Liquidity Facility (“PPPLF”). The PPPLF allowed us to request advances from the FRB. Under the PPPLF, advances are secured by pledges of PPP loans. The interest rate applicable to any advance made under the PPPLF is 35 basis points. As of March 31, 2021, $9.4 million of PPPLF advances are outstanding and collateralized by 47 PPP loans. As of December 31, 2020, $18.2 million of PPPLF advances were outstanding and collateralized by 110 PPP loans. Maturities of PPPLF advances are tied to the maturity of the underlying PPP loan and will be accelerated if the PPP loan is sold or forgiven.

8.

Employee Benefits

Employee Stock Ownership Plan

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 based on compensation, subject to federal limits.  The number of shares committed to be released per year through 2038 is 11,924.

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 that matures on December 31, 2038. At March 31, 2021 and December 31, 2020, the remaining principal balance on the ESOP debt was $2.2 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 three months ended March 31, 2021 and 2020 was $28,000 and $26,000, respectively.  

 

 

 

March 31, 2021

 

 

 

 

December 31, 2020

 

Shares held by the ESOP include the following:

 

 

 

 

 

 

 

 

 

 

Allocated

 

 

23,848

 

 

 

 

 

11,924

 

Committed to be allocated

 

 

2,981

 

 

 

 

 

11,924

 

Unallocated

 

 

211,644

 

 

 

 

 

214,625

 

Total

 

 

238,473

 

 

 

 

 

238,473

 

 

The fair value of unallocated shares was approximately $2.1 million and $1.9 million at March 31, 2021 and December 31, 2020, respectively.

401(k) Plan

The Company sponsors a 401(k) defined contribution plan for substantially all employees pursuant to which employees of the Company could elect to make contributions to the plan subject to Internal Revenue Service limits. The Company made matching

19


 

and profit-sharing contributions to eligible participants in accordance with plan provisions. The Company’s contributions for the three months ended March 31, 2021 and 2020 were $50,000.

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.

The funded status (fair value of plan assets divided by funding target) as of July 1, 2020 is as follows:

 

2020 Valuation Report

 

 

90.76

%

(1)

 

 

 

 

 

 

 

 

(1)

Fair value of plan assets reflects any contributions received through June 30, 2020.

Based upon the funded status of the Pentegra DB Plan as of July 1, 2020, no funding improvement plan or rehabilitation plan has been implemented or is pending as of March 31, 2021.

Total pension plan expense for the three months ended March 31, 2021 and 2020 was $90,000 and $99,000, respectively, and is included in salaries and employee benefits expense in the accompanying consolidated financial statements. The Company did not pay a surcharge to the Pentegra DB Plan during the three months ended March 31, 2021.

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 $360,000 for the fiscal year ending December 31, 2021.

Supplemental Executive Retirement Plans

Salary Continuation Plan

The Company maintains a nonqualified supplemental retirement plan for its current President 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 March 31, 2021 and December 31, 2020 relating to this supplemental retirement plan was $615,000 and $607,000, respectively. The discount rate used to determine the Company’s obligation was 5.00%. The projected rate of salary increase for its current President was 3%. The expense of this salary retirement plan was $21,000 and $25,000 for the three months ended March 31, 2021 and 2020, respectively.

Executive Supplemental Retirement Plan

The recorded liability at March 31, 2021 and December 31, 2020 relating to the supplemental retirement plan for the Bank’s former President was $85,000 and $132,000, respectively. The discount rate used to determine the Company’s obligation was 6.25% at March 31, 2021 and December 31, 2020. The expense of this salary retirement plan was $1,000 and $2,000 for the three months ended March 31, 2021 and 2020, respectively.

Endorsement Method Split Dollar Plan

The Company has an endorsement method split dollar plan for a former President/Director. The recorded liability at March 31, 2021 and December 31, 2020 relating to this supplemental executive benefit agreement was $34,000. The expense of this supplemental plan was $-0- for the three months ended March 31, 2021 and 2020.

Directors Deferred Supplemental Retirement Plan

The Company has a supplemental retirement plan for eligible directors that provides for monthly benefits based upon years of service to the Company, subject to certain limitations as set forth in the agreements. The present value of these future payments

20


 

is being accrued over the estimated period of service. The estimated liability at March 31, 2021 and December 31, 2020 relating to this plan was $516,000 and $573,000, respectively. The discount rate used to determine the Company’s obligation was 6.25% at March 31, 2021 and December 31, 2020. Total supplemental retirement plan expense amounted to $17,000 and $10,000 for the three months ended March 31, 2021 and 2020, 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 March 31, 2021 and December 31, 2020, the total deferred director’s fees amounted to $332,000 and $321,000, respectively.

9.

Other Comprehensive Income

The Company reports certain items as “other comprehensive income” (“OCI”) and reflects total comprehensive income in the consolidated financial statements for all periods containing elements of other comprehensive income. The following table presents a reconciliation of the changes in the components of other comprehensive income (loss) for the dates indicated, including the amount of income tax expense allocated to each component of other comprehensive income (loss):

(Dollars in thousands)

 

Three Months Ended March 31, 2021

 

 

Three Months Ended March 31, 2020

 

 

Affected Line Item in

Statements of Income

Gains on securities available for sale

 

$

(203

)

 

$

(114

)

 

Securities (gains), net

Tax effect

 

 

55

 

 

 

31

 

 

Income tax expense

 

 

 

(148

)

 

 

(83

)

 

Net income

Net amortization of premium on securities

 

 

140

 

 

 

48

 

 

Interest on debt securities

Tax effect

 

 

(38

)

 

 

(13

)

 

Income tax expense

 

 

 

102

 

 

 

35

 

 

Net income

Net interest expense on swaps

 

 

5

 

 

 

 

 

Interest expense on borrowings

Tax effect

 

 

(1

)

 

 

 

 

Income tax expense

 

 

 

4

 

 

 

 

 

Net income

Total reclassification adjustments

 

$

(42

)

 

$

(48

)

 

 

The following tables present the changes in each component of OCI for the periods indicated:

(Dollars in thousands)

 

Net Unrealized Gains

(Losses) on AFS

Securities(1)

 

 

Net Unrealized Gains (Losses) on Cash Flow

Hedges(1)

 

 

OCI(1)

 

Balance at December 31, 2020

 

$

1,481

 

 

$

(100

)

 

$

1,381

 

Other comprehensive income (loss) before

      reclassification

 

 

(678

)

 

 

172

 

 

 

(506

)

      Amounts reclassified from OCI

 

 

(46

)

 

 

4

 

 

 

(42

)

Other comprehensive income (loss)

 

 

(724

)

 

 

176

 

 

 

(548

)

Balance at March 31, 2021

 

$

757

 

 

$

76

 

 

$

833

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

$

521

 

 

$

 

 

$

521

 

Other comprehensive income before

      reclassification

 

 

253

 

 

 

 

 

 

253

 

      Amounts reclassified from OCI

 

 

(48

)

 

 

 

 

 

(48

)

Other comprehensive income

 

 

205

 

 

 

 

 

 

205

 

Balance at March 31, 2020

 

$

726

 

 

$

 

 

$

726

 

          (1) All amounts are net of tax

 

10.

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 March 31, 2021, 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

21


 

that, as of March 31, 2021 and December 31, 2020, the Bank met all capital adequacy requirements to which it is subject, including the capital conservation buffer, at those dates.

The following table presents actual and required capital ratios as of March 31, 2021 and December 31, 2020 for the Bank under the Basel Committee on Banking Supervisions capital guidelines for U.S. banks (“Basel III Capital Rules”) as fully phased-in on January 1, 2019. 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.

 

 

 

 

 

 

 

 

 

 

 

Minimum

Capital

 

 

Minimum Capital

Required For Capital

Adequacy Plus

Capital Conservation

Buffer

 

 

 

Actual

 

 

Requirement

 

 

Fully Phased-In

 

(Dollars in thousands)

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to risk-weighted assets)

 

$

51,520

 

 

 

17.90

%

 

$

23,026

 

 

 

8.00

%

 

$

30,221

 

 

 

10.50

%

Tier 1 Capital (to risk-weighted assets)

 

 

48,069

 

 

 

16.70

 

 

 

17,270

 

 

 

6.00

 

 

 

24,466

 

 

 

8.50

 

Tier 1 Capital (to average assets)

 

 

48,069

 

 

 

10.87

 

 

 

17,689

 

 

 

4.00

 

 

 

17,689

 

 

 

4.00

 

Common Equity Tier 1 (to risk-weighted assets)

 

 

48,069

 

 

 

16.70

 

 

 

12,953

 

 

 

4.50

 

 

 

20,149

 

 

 

7.00

 

 

 

 

 

 

 

 

 

 

 

 

Minimum

Capital

 

 

Minimum Capital

Required For Capital

Adequacy Plus Capital

Conservation Buffer

 

 

 

Actual

 

 

Requirement

 

 

Fully Phased-In

 

(Dollars in thousands)

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to risk-weighted assets)

 

$

50,612

 

 

 

17.92

%

 

$

22,593

 

 

 

8.00

%

 

$

29,653

 

 

 

10.50

%

Tier 1 Capital (to risk-weighted assets)

 

 

47,222

 

 

 

16.72

 

 

 

16,945

 

 

 

6.00

 

 

 

24,005

 

 

 

8.50

 

Tier 1 Capital (to average assets)

 

 

47,222

 

 

 

10.59

 

 

 

17,836

 

 

 

4.00

 

 

 

17,836

 

 

 

4.00

 

Common Equity Tier 1 (to risk-weighted assets)

 

 

47,222

 

 

 

16.72

 

 

 

12,709

 

 

 

4.50

 

 

 

19,769

 

 

 

7.00

 

 

 

11.

Common Stock Repurchases

 

On September 23, 2020, the board of directors of the Company authorized the repurchase of up to 136,879 shares of the Company’s outstanding common stock, which equals approximately 2.3% of all shares currently outstanding and approximately 5.0% of the then outstanding shares owned by stockholders other than the MHC. As of March 31, 2021, the Company had repurchased 49,733 shares. The Company holds repurchased shares in its treasury.

 

The Company’s repurchases of its common stock made during the quarter ended March 31, 2021 are set forth in the table below:

Period

 

Total Number of Shares Purchased

 

 

Average Price Paid per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

Maximum Number of Shares that may Yet Be Purchased Under the Plans or Programs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2021 - January 31, 2021

 

 

5,594

 

 

$

8.95

 

 

 

5,594

 

 

 

105,809

 

February 1, 2021 - February 28, 2021

 

 

3,029

 

 

 

9.01

 

 

 

3,029

 

 

 

102,780

 

March 1, 2021 - March 31, 2021

 

 

15,634

 

 

 

9.87

 

 

 

15,634

 

 

 

87,146

 

       Total

 

 

24,257

 

 

 

 

 

 

 

24,257

 

 

 

 

 

 

12.

Derivatives and Hedging Activities

 

Derivatives are recognized as either assets or liabilities on the balance sheet and are measured at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and resulting designation. The Company utilizes interest rate swap agreements as part of its asset liability management strategy. Interest rate swaps involve the exchange of interest payments at specified intervals between two parties without the exchange of any underlying principal. These

22


 

derivative instruments are designated as cash flow hedges with changes in the fair value of the derivative recorded in other comprehensive income (loss) and recognized in earnings when the hedged transaction affects earnings. The hedges were determined to be effective and the Company expects the hedges to remain effective during the remaining terms of the swaps.

 

During April 2020, the Company entered into two $5 million notional interest rate swaps that have been designated as cash flow hedges on 90-day advances from FHLB. One agreement is currently active and the other is a forward swap with a start date of April 13, 2021. The purpose of these cash flow hedges is to reduce potential interest rate risk by swapping a variable rate borrowing to a fixed rate. Management deemed it prudent to limit the variability of these interest payments by entering into these interest rate swap agreements. These agreements provide for the Company to receive payments at a variable rate determined by a specific index (three-month LIBOR) in exchange for making payments at a fixed rate. Publication of LIBOR is expected to cease in June of 2023. The swap agreements allow for substitution of an alternative reference rate such as the secured overnight financing rate (“SOFR”) at that time.

 

The changes in the fair value of interest rate swaps are reported in other comprehensive income (loss) and are subsequently reclassified into interest expense in the period that the hedged transactions affect earnings. During the next twelve

months, the Company estimates that an additional $25,000 will be reclassified as an increase to interest expense. For the three months ended March 31, 2021, the change in fair value for these derivative instruments was $241,000. At March 31, 2021 and December 31, 2020, the fair value of interest rate swap derivatives resulted in an asset of $104,000 and a liability of $137,000, respectively, and is recorded in other assets and other liabilities, respectively.

 

The following table summarizes the Company’s derivatives associated with its interest rate risk management activities:

 

 

 

 

 

 

 

 

 

 

 

March 31, 2021

 

(Dollars in thousands)

 

Start Date

 

Maturity Date

 

Rate

 

 

Notional

 

 

Assets

 

 

Liabilities

 

Debt Hedging

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swap 2020

 

4/13/2020

 

4/13/2025

 

0.68%

 

 

$

5,000

 

 

$

24

 

 

$

 

Interest Rate Swap 2021

 

4/13/2021

 

4/13/2026

 

0.74%

 

 

$

5,000

 

 

$

80

 

 

$

 

Total Hedging

   Instruments

 

 

 

 

 

 

 

 

 

$

10,000

 

 

$

104

 

 

$

 

Hedged Items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variability in cash flows

   related to 90-day FHLB

   advances

 

 

 

 

 

 

 

 

 

N/A

 

 

$

 

 

$

5,000

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

(Dollars in thousands)

 

Start Date

 

Maturity Date

 

Rate

 

 

Notional

 

 

Assets

 

 

Liabilities

 

Debt Hedging

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swap 2020

 

4/13/2020

 

4/13/2025

 

0.68%

 

 

$

5,000

 

 

$

 

 

$

68

 

Interest Rate Swap 2021

 

4/13/2021

 

4/13/2026

 

0.74%

 

 

$

5,000

 

 

$

 

 

$

69

 

Total Hedging

   Instruments

 

 

 

 

 

 

 

 

 

$

10,000

 

 

$

 

 

$

137

 

Hedged Items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variability in cash flows

   related to 90-day FHLB

   advances

 

 

 

 

 

 

 

 

 

N/A

 

 

$

 

 

$

5,000

 

23


 

 

The following table summarizes the effect of cash flow hedge accounting on the consolidated statements of income for the three months ended March 31, 2021 and 2020:

 

 

Location and Amount of Gain or Loss Recognized in Income on Cash Flow Hedging Relationships

 

2021

 

 

2020

(Dollars in thousands)

Interest

Income

(Expense)

 

 

Other

Income

(Expense)

 

 

Interest

Income

(Expense)

 

Other

Income

(Expense)

The effects of cash flow hedging:

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on cash flow hedging

         relationships:

 

 

 

 

 

 

 

 

 

 

 

     Amount reclassified from AOCI into

         income

$

(5

)

 

$

 

 

N/A

 

N/A

 

The credit risk associated with these interest rate swaps is the risk of default by the counterparty. To minimize this risk, the Company only enters into interest rate swaps agreements with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and, therefore, are not a measure of the potential loss exposure. Risk management results for the three months ended March 31, 2021, related to the balance sheet hedging of $5.0 million of 90 day FHLB advances, included in borrowings, indicate that the hedge was 100% effective and there was no component of the derivative instruments’ unrealized gain or loss which was excluded from the assessment of hedge effectiveness. The Company’s arrangement with its counterparty requires it to post cash or other assets as collateral for its interest rate swap contracts in a net liability position based on their aggregate fair value and the Company’s credit rating. At March 31, 2021 and December 31, 2020, the Company posted $525,000 of cash to the counterparty as collateral on its interest rate swap contracts which was presented within cash and due from banks on the consolidated balance sheets.

13.

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.

24


 

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 the Company’s financial assets and financial liabilities carried at fair value at March 31, 2021 and December 31, 2020.

Financial Assets and Financial Liabilities: Financial assets and financial liabilities measured at fair value on a recurring basis include the following:

Securities Available-for-Sale: The Company’s investment in U.S. Government-sponsored entities bonds, U.S Government agency small business administration pools guaranteed by the SBA, collateralized mortgage obligations issued by the FHLMC, residential mortgage-backed securities and other municipal bonds is generally classified within Level 2 of the fair value hierarchy. For these securities, the Company obtains fair value measurements from independent pricing services. The fair value measurements consider observable data that may include reported trades, dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

Mortgage Servicing Rights: Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes interest rate, prepayment speed and default rate assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data (see Note 5 Loan Servicing for more information). These assumptions are inherently sensitive to change as these unobservable inputs are not based on quoted prices in active markets or otherwise observable.

Derivative Instruments and Hedges: The valuation of these instruments is determined using the discounted cash flow method on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.

The following table summarizes financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(Dollars in thousands)

 

March 31, 2021

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored enterprises obligations

 

$

1,889

 

 

$

 

 

$

1,889

 

 

$

 

U.S Government agency small business administration

   pools guaranteed by the SBA

 

 

2,221

 

 

 

 

 

 

2,221

 

 

 

 

Collateralized mortgage obligations issued by

   the FHLMC and FNMA

 

 

1,334

 

 

 

 

 

 

1,334

 

 

 

 

Residential mortgage backed securities

 

 

10,509

 

 

 

 

 

 

10,509

 

 

 

 

Municipal bonds

 

 

37,663

 

 

 

 

 

 

37,663

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

 

329

 

 

 

 

 

 

 

 

 

329

 

Derivatives

 

 

104

 

 

 

 

 

 

104

 

 

 

 

25


 

 

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(Dollars in thousands)

 

December 31, 2020

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored enterprises obligations

 

$

973

 

 

$

 

 

$

973

 

 

$

 

U.S Government agency small business administration

   pools guaranteed by the SBA

 

 

2,470

 

 

 

 

 

 

2,470

 

 

 

 

Collateralized mortgage obligations issued by

   the FHLMC

 

 

949

 

 

 

 

 

 

949

 

 

 

 

Residential mortgage backed securities

 

 

5,136

 

 

 

 

 

 

5,136

 

 

 

 

Municipal bonds

 

 

45,942

 

 

 

 

 

 

45,942

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

 

273

 

 

 

 

 

 

 

 

 

273

 

Other Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

 

137

 

 

 

 

 

 

137

 

 

 

 

 

For the three months ended March 31, 2021 and 2020, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:

 

(Dollars in thousands)

 

Mortgage Servicing Rights (1)

 

     Balance as of January 1, 2021

 

$

273

 

         Included in net income

 

 

56

 

    Balance as of March 31, 2021

 

$

329

 

Total unrealized net gains (losses)

included in net income related to

assets still held as of March 31, 2021

 

$

 

 

 

 

 

 

     Balance as of January 1, 2020

 

$

397

 

         Included in net income

 

 

(55

)

     Balance as of March 31, 2020

 

$

342

 

Total unrealized net gains (losses)

included in net income related to

assets still held as of March 31, 2020

 

$

 

 

(1)

Realized and unrealized gains and losses related to mortgage servicing rights are reported as a component of loan servicing income (loss) in the Company’s consolidated statements of income.

 

  

For Level 3 assets measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows:

 

 

March 31, 2021

 

(Dollars in thousands)

 

Valuation Technique

 

Description

 

Range

 

Weighted Average (1)

 

 

Fair Value

 

Mortgage Servicing Rights

 

Discounted Cash Flow

 

Prepayment Rate

 

7.43% - 23.10%

 

15.00%

 

 

$

329

 

 

 

 

 

Discount Rate

 

9.00% - 9.00%

 

9.00%

 

 

 

 

 

 

 

 

 

Delinquency Rate

 

3.81% - 4.79%

 

4.00%

 

 

 

 

 

 

 

 

 

Default Rate

 

0.08% - 0.14%

 

0.13%

 

 

 

 

 

 

 

 

December 31, 2020

 

(Dollars in thousands)

 

Valuation Technique

 

Description

 

Range

 

Weighted Average (1)

 

 

Fair Value

 

Mortgage Servicing Rights

 

Discounted Cash Flow

 

Prepayment Rate

 

14.05% - 29.77%

 

20.97%

 

 

$

273

 

 

 

 

 

Discount Rate

 

9.00% - 9.00%

 

9.00%

 

 

 

 

 

 

 

 

 

Delinquency Rate

 

3.91% - 5.13%

 

4.12%

 

 

 

 

 

 

 

 

 

Default Rate

 

0.08% - 0.14%

 

0.13%

 

 

 

 

 

 

(1)

Unobservable inputs for mortgage servicing rights were weighted by loan amount.

 

26


 

 

The significant unobservable inputs used in the fair value measurement of the Company’s mortgage servicing rights are the weighted-average prepayment rate, weighted-average discount rate, weighted average delinquency rate and weighted-average default rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement.  Although the prepayment rate and the discount rate are not directly interrelated, they generally move in opposite directions of each other.

 

The Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. Observable and unobservable inputs are entered into this model as prescribed by an independent third party to arrive at an estimated fair value. See Note 5, Loan Servicing, for a rollforward of our Level 3 item and related inputs and assumptions used to determine fair value at March 31, 2021.

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 non-recurring fair value measurement adjustments have generally been classified as Level 3.

Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3. Financial assets measured at fair value on a non-recurring basis during the reported periods also include loans held for sale. Residential mortgage loans held for sale are recorded at the lower of cost or fair value and are therefore measured at fair value on a non-recurring basis. The fair values for loans held for sale are estimated based on commitments in effect from investors or prevailing market prices for loans with similar terms to borrowers of similar credit quality and are included in Level 3. At March 31, 2021 and December 31, 2020 there were no assets measured at fair value on a non-recurring basis.

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 March 31, 2021 or December 31, 2020.

ASC Topic 825,“Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. ASU 2016-01 requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The exit price notion is a market-based measurement of fair value that is represented by the price to sell an asset or transfer a liability in the principal market (or most advantageous market in the absence of a principal market) on the measurement date. At March 31, 2021 and December 31, 2020, fair values of loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.

27


 

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 March 31, 2021 and December 31, 2020 are as follows:

 

(Dollars in thousands)

 

Carrying

Amount

 

 

Fair

Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

22,674

 

 

$

22,674

 

 

$

22,674

 

 

$

 

 

$

 

Interest-bearing time deposits with other banks

 

 

2,488

 

 

 

2,488

 

 

 

 

 

 

2,488

 

 

 

 

Federal Home Loan Bank stock

 

 

1,868

 

 

 

1,868

 

 

 

 

 

 

1,868

 

 

 

 

Bank-owned life insurance

 

 

4,376

 

 

 

4,376

 

 

 

 

 

 

4,376

 

 

 

 

Loans, net

 

 

371,394

 

 

 

371,128

 

 

 

 

 

 

 

 

 

371,128

 

Accrued interest receivable

 

 

1,351

 

 

 

1,351

 

 

 

1,351

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

361,499

 

 

$

361,693

 

 

$

300,662

 

 

$

61,031

 

 

$

 

Advances from Federal Home Loan Bank

 

 

29,032

 

 

 

29,570

 

 

 

 

 

 

29,570

 

 

 

 

Advances from Federal Reserve Bank

 

 

9,438

 

 

 

9,441

 

 

 

 

 

 

9,441

 

 

 

 

Mortgagors’ tax escrow

 

 

2,045

 

 

 

2,045

 

 

 

 

 

 

2,045

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

5,996

 

 

$

5,996

 

 

$

5,996

 

 

$

 

 

$

 

Interest-bearing time deposits with other banks

 

 

2,488

 

 

 

2,488

 

 

 

 

 

 

2,488

 

 

 

 

Federal Home Loan Bank stock

 

 

1,796

 

 

 

1,796

 

 

 

 

 

 

1,796

 

 

 

 

Bank-owned life insurance

 

 

4,356

 

 

 

4,356

 

 

 

 

 

 

4,356

 

 

 

 

Loans, net

 

 

364,800

 

 

 

365,116

 

 

 

 

 

 

 

 

 

365,116

 

Accrued interest receivable

 

 

1,412

 

 

 

1,412

 

 

 

1,412

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

327,381

 

 

$

327,696

 

 

$

278,713

 

 

$

48,983

 

 

$

 

Advances from Federal Home Loan Bank

 

 

34,127

 

 

 

34,832

 

 

 

 

 

 

34,832

 

 

 

 

Advances from Federal Reserve Bank

 

 

18,195

 

 

 

18,199

 

 

 

 

 

 

18,199

 

 

 

 

Mortgagors’ tax escrow

 

 

1,420

 

 

 

1,420

 

 

 

 

 

 

1,420

 

 

 

 

 

14.

Subsequent Events

On April 13, 2021, the Company borrowed $5.0 million in 3-month fixed rate advances from the FHLB that will be renewed on a quarterly basis and remain outstanding until April 13, 2026. The renewal date will be on the 13th day of every January, April, July and October, and the interest rate on these quarterly advances is also expected to move closely with changes in the 3-month LIBOR. The Company’s hedging objective is to convert these floating interest payments to a fixed rate on the FHLB advances from July 13, 2021 until April 13, 2026. The Company will meet this objective using a 5-year interest rate swap with a notional amount of $5 million to pay interest at a fixed rate of 0.74% and receive interest at a variable rate equal to the 3-month LIBOR rate. Since the rate paid on the FHLB advances is expected to move closely with changes in the 3-month LIBOR, the Company anticipates that the changes in derivative cash flows will be effective in hedging the changes in FHLB debt cash flows.

From April 1, 2021 through May 3, 2021, the Company purchased an additional 4,614 shares of common stock pursuant to its repurchase plan at an average cost of $9.91 per share.

                           

 

28


 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the Company’s consolidated financial condition at March 31, 2021 and consolidated results of operations for the three months ended March 31, 2021 and 2020 and should be read in conjunction with our unaudited consolidated financial statements and accompanying notes presented elsewhere in this report, and it should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed on March 26, 2021 with the Securities and Exchange Commission. Certain prior year amounts have been reclassified to conform to the current year presentation.

Overview

Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations and borrowings from the FHLB, in one- to four-family residential real estate loans, commercial real estate and multi-family loans, acquisition, development and land loans, commercial and industrial loans, home equity loans and lines of credit and consumer loans.  In recent years, we have increased our focus, consistent with what we believe to be conservative underwriting standards, on originating higher yielding commercial real estate and commercial and industrial loans.

We conduct our operations from four full-service banking offices in Strafford County, New Hampshire and one full-service banking office in Rockingham County, New Hampshire. We consider our primary lending market area to be Strafford and Rockingham Counties in New Hampshire and York County in southern Maine.

COVID-19 Pandemic

In March 2020, the outbreak of the COVID-19 pandemic was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. Governmental responses to the pandemic have included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.

We have taken deliberate actions to ensure that we have the balance sheet strength to serve our customers and communities, including increases in liquidity and reserves supported by a strong capital position. Our business and consumer customers are experiencing varying degrees of financial distress. In order to protect the health of our customers and employees, and to comply with applicable government directives, we have modified our business practices, including restricting employee travel, directing employees to work from home insofar as is possible and implementing our business continuity plans and protocols to the extent necessary.

On March 27, 2020, the CARES Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act includes the PPP, a nearly $350 billion program designed to aid small- and medium-sized businesses through federally guaranteed SBA loans distributed through banks. These loans are intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. On December 27, 2020, the 2021 Consolidated Appropriations Act was signed, which extended relief to the earlier of 60 days after the national emergency termination date or January 1, 2022. This legislation included a $900 billion relief package and the extension of certain relief provisions from the March 2020 CARES Act that were set to expire at the end of 2020, including the extension of the eviction moratorium and $286 billion of additional PPP funds. During the three months ended March 31, 2021 and the year ended December 31, 2020 the Bank originated 113 and 286 PPP loans, respectively, with aggregate outstanding principal balances of $11.9 million and $33.0 million, respectively. As of March 31, 2021 and December 31, 2020, total PPP loan principal balances of $23.0 million and $21.2 million, respectively, and were included in commercial and industrial loans (C+I).

In response to the COVID-19 pandemic, we have also implemented a short-term loan modification program to provide temporary payment relief to certain borrowers who meet the program's qualifications. In April 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency, issued an interagency statement titled Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus, that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, Receivables – Troubled Debt Restructurings by Creditors (ASC 310-40), a restructuring of debt constitutes a troubled debt restructuring, or TDR, if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would

29


 

not otherwise consider.  The regulatory agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to the COVID-19 pandemic to borrowers who were current prior to any relief are not to be considered TDRs. These include short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms or other delays in payment that are insignificant.

Additionally, Section 4013 of the CARES Act that became law on March 27, 2020 further provided banks with the option to elect either or both of the following, from March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 pandemic declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates:

 

(i)

to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR; and/or

 

(ii)

to suspend any determination of a loan modified as a result of the effects of the COVID–19 pandemic as being a TDR, including impairment for accounting purposes.

The 2021 Consolidated Appropriations Act continued to suspend the requirements under GAAP for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR and suspend any determination of a loan modified as a result of the effects of the COVID–19 pandemic as being a TDR, including impairment for accounting purposes.

If a bank elects a suspension noted above, the suspension (i) will be effective for the term of the loan modification, but solely with respect to any modification, including a forbearance arrangement, an interest rate modification, a repayment plan and any other similar arrangement that defers or delays the payment of principal or interest, that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019 and (ii) will not apply to any adverse impact on the credit of a borrower that is not related to the COVID–19 pandemic. The Company has applied this guidance to qualifying loan modifications.

The short-term loan modification program has been offered to both retail and commercial borrowers. The majority of short-term loan modifications for retail loan borrowers consist of deferred payments (which may include principal, interest and escrow), which are capitalized to the loan balance and recovered through the re-amortization of the monthly payment at the end of the deferral period. For commercial loan borrowers, the majority of short-term modifications consist of allowing the borrower to make interest-only payments with the deferred principal to be due at maturity or repaid as the monthly payment is re-amortized at the next interest reset date as is applicable to the individual loan structure.  Alternatively, commercial loan borrowers may defer their full monthly payment similar to the retail loan program outlined above. All loans modified under these programs are maintained on full accrual status during the deferral period.

As of March 31, 2021, temporary payment relief continued for 4 loans with aggregate outstanding principal balances of $3.2 million and consists of 1 commercial loan with an aggregate outstanding principal balance of $2.7 million and 3 residential loans with aggregate outstanding principal balances of $446,000. Under the applicable regulatory guidance, none of these loans were considered troubled debt restructurings as of March 31, 2021. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES and Consolidated Appropriations Acts; however, the extent to which the COVID-19 pandemic will impact our operations and financial results during the remainder of 2021 and beyond is highly uncertain.

 

Cautionary Note Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning.  These forward-looking statements include, but are not limited to:

 

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.

30


 

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:

 

general economic conditions, either nationally or in our market areas, that are worse than expected;

 

the COVID-19 pandemic is adversely affecting us and our customers, employees and third-party service providers. It is not possible to accurately predict the extent, severity or duration of the pandemic on us and on our customers, employees and third-party service providers;

 

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 increase the level of defaults, losses and 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;

 

our ability to enter new markets successfully and capitalize on growth opportunities;

 

system failures or breaches of our network security;

 

electronic fraudulent activity within the financial services industry;

 

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 other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

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

31


 

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 Note 2 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Comparison of Financial Condition at March 31, 2021 (unaudited) and December 31, 2020

Total Assets. Total assets were $464.8 million as of March 31, 2021, an increase of $21.7 million, or 4.9%, when compared to total assets of $443.1 million at December 31, 2020. The increase was due primarily to a $16.7 million increase in cash and due from banks and a $6.6 million increase in net loans, offset by a $1.9 million decrease in the available for sale securities portfolio.

Cash and Due From Banks. Cash and due from banks increased $16.7 million, or 278.2%, to $22.7 million at March 31, 2021 from $6.0 million at December 31, 2020. This increase primarily resulted from a $34.1 million increase in deposits, offset by net loan originations and principal payments of $4.0 million and a $13.9 million decrease in borrowings during the three months ended March 31, 2021.  

Available-for-Sale Securities. Available-for-sale securities decreased by $1.9 million, or 3.3%, to $53.6 million at March 31, 2021 from $55.5 million at December 31, 2020. This decrease was primarily due to net sales of available-for-sale securities totaling $924,000 and a $993,000 decrease in net unrealized gains and losses within the portfolio during the three months ended March 31, 2021.

Net Loans. Net loans increased $6.6 million, or 1.8%, to $371.4 million at March 31, 2021 from $364.8 million at December 31, 2020. During the three months ended March 31, 2021, we originated $44.8 million of loans (including $8.7 million of PPP loans classified as commercial and industrial loans). We also purchased $2.4 million of one- to four-family residential mortgage loans collateralized by properties located in the greater Boston market during the three months ended March 31, 2021. Net deferred loan costs increased $231,000, or 32.8%, to $936,000 at March 31, 2021 from $705,000 at December 31, 2020 primarily due to deferred costs on one- to four-family residential mortgage loans offset by fees received from the SBA for processing PPP loans.

One- to four-family residential mortgage loans decreased $3.9 million, or 1.8%, to $209.8 million at March 31, 2021 from $213.7 million at December 31, 2020. Multi-family loans decreased $654,000, or 9.9%, to $6.0 million at March 31, 2021 from $6.6 million at December 31, 2020. Acquisition, development and land loans increased $8.5 million, or 36.9%, to $31.7 million at March 31, 2021 from $23.1 million at December 31, 2020. Home equity loans and lines of credit decreased $1.2 million, or 12.4%, to $8.4 million at March 31, 2021 from $9.6 million at December 31, 2020. Consumer loans decreased $161,000, or 5.5%, to $2.8 million at March 31, 2021 from $2.9 million at December 31, 2020. Commercial real estate mortgage loans increased $6.8 million, or 10.3%, to $73.0 million at March 31, 2021 from $66.2 million at December 31, 2020. Commercial and industrial loans decreased $3.0 million, or 6.7%, to $42.3 million at March 31, 2021 from $45.3 million at December 31, 2020.

Our strategy to grow the balance sheet continues to be through originations of one- to four-family residential mortgage loans, while also diversifying into higher yielding commercial real estate mortgage loans and commercial and industrial loans to improve net margins and manage interest rate risk. We also continue to sell selected, conforming 15-year and 30-year fixed rate residential 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.

 

Our allowance for loan losses increased $62,000 to $3.4 million at March 31, 2021 from $3.3 million at December 31, 2020. The Company measures and records its allowance for loan losses based upon an incurred loss model. Under this approach, loan loss is recognized when it is probable that a loss event was incurred. This approach also considers qualitative adjustments to the quantitative baseline determined by the model. The Company considers the impact of current environmental factors at the measurement date that did not exist over the period from which historical experience was used. Relevant factors include, but are not limited to, concentrations of credit risk (geographic, large borrower and industry), economic trends and conditions, changes in underwriting standards, experience and depth of lending staff, trends in delinquencies and the level of criticized loans. Given the many economic uncertainties regarding the COVID-19 pandemic, the Company continued to maintain relevant adjustments made in prior periods to its qualitative factors in the measurement of its allowance for loan losses at March 31, 2021 that balanced the need to recognize an allowance during this unprecedented economic situation while adhering to an incurred loss recognition and measurement principle which prohibits the recognition of future or lifetime losses.  

32


 

The Company has limited or no direct exposure to industries expected to be hardest hit by the COVID-19 pandemic, including oil and gas/energy, credit cards, airlines, cruise ships, arts/entertainment/recreation, casinos and shopping malls. As of March 31, 2021, our exposure to the transportation and hospitality/restaurant industries amounted to less than 5% of our gross loan portfolio.   

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.

Deposits increased $34.1 million, or 10.4%, to $361.5 million at March 31, 2021 from $327.4 million at December 31, 2020 primarily as a result of an increase in NOW and demand deposits and time deposits. Core deposits (defined as deposits other than time deposits) increased $21.9 million, or 7.9%, to $300.7 million at March 31, 2021 from $278.7 million at December 31, 2020. The increase was due to an increase of $10.5 million in commercial deposits and an $11.4 million increase in retail deposits. As of March 31, 2021 savings deposits increased $4.4 million, money market deposits increased $4.3 million, NOW and demand deposit accounts increased $13.2 million and time deposits increased $12.2 million. There were $15.0 million and $-0- of brokered deposits included in time deposits at March 31, 2021 and December 31, 2020, respectively.

Borrowings. Total borrowings decreased $13.9 million, or 26.5%, to $38.5 million at March 31, 2021 from $52.3 million at December 31, 2020. Advances from the FHLB decreased $5.1 million, or 14.9%, to $29.0 million at March 31, 2021 from $34.1 million at December 31, 2020. Advances from the FRB decreased $8.8 million, or 48.1%, to $9.4 million at March 31, 2021 from $18.2 million at December 31, 2020. The decrease in total borrowings is due to the maturity of short-term FHLB advances and the repayment of advances from the FRB under the PPPLF program.

Total Stockholders’ Equity. Total stockholders’ equity increased $155,000, or 0.3%, to $59.0 million at March 31, 2021 from $58.9 million at December 31, 2020. This increase was due primarily to net income of $908,000, offset by the repurchase of $232,000 of the Company’s common stock at cost and an other comprehensive loss of $548,000 related to net changes in the fair value of available-for-sale securities and interest rate swap contracts for the three months ended March 31, 2021.

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 $62,000 and $884,000, or 0.02% and 0.24% of total loans, at March 31, 2021 and December 31, 2020, respectively.  At March 31, 2021 and December 31, 2020, we had no troubled debt restructurings or foreclosed assets. At December 31, 2020, nonperforming loans consisted primarily of an SBA-guaranteed commercial and industrial loan, which had an outstanding balance of $822,000 and was secured by all business assets and personal real estate holdings of the guarantors. The SBA guaranteed 75% of this loan balance. Although this loan was performing according to its original terms at December 31, 2020, it was considered nonperforming due to the financial condition and prospects of the borrower. This loan was repaid during the three months ended March 31, 2021 with proceeds from the sale of certain personal real estate holdings of the guarantors.

Comparison of Operating Results for the Three Months Ended March 31, 2021 and 2020

Net Income. Net income was $908,000 for the three months ended March 31, 2021, compared to net income of $257,000 for the three months ended March 31, 2020, an increase of $651,000, or 253.3%. The increase was due primarily to an increase in net interest and dividend income after provision for loan losses of $584,000, an increase in noninterest income of $210,000 and a decrease in noninterest expenses of $90,000, offset by an increase in income tax expense of $233,000 during the three months ended March 31, 2021.

33


 

Interest and Dividend Income. Interest and dividend income increased $4,000, or 0.1%, to $3.9 million for the three months ended March 31, 2021 and 2020. This increase was due to a $59,000, or 1.6%, increase in interest and fees on loans, offset by a $55,000 decrease in interest and dividend income on investments, or 17.2%, to $264,000 for the three months ended March 31, 2021 from $319,000 for the three months ended March 31, 2020. Interest and fees on loans for the three months ended March 31, 2021 and 2020 included $420,000 and $-0- of interest and fees earned on PPP loans, respectively. The weighted average annualized yield for the loan portfolio decreased 20 basis points, or 4.8%, to 3.98% for the three months ended March 31, 2021 from 4.18% for the three months ended March 31, 2020 primarily as a result of a decrease in market interest rates and an increase in the average balance of low-yield PPP loans. The weighted average annualized yield for the investment portfolio decreased to 1.89% for the three months ended March 31, 2021 from 2.59% for the three months ended March 31, 2020 due primarily to the reinvestment of proceeds from sales and maturities into lower yielding investments as a result of a decrease in market interest rates.

Average interest-earning assets increased $50.8 million, to $445.7 million for the three months ended March 31, 2021 from $394.9 million for the three months ended March 31, 2020. The annualized yield on interest earning-assets decreased 45 basis points to 3.53% for the three months ended March 31, 2021 from 3.98% for the three months ended March 31, 2020 primarily as a result of a decrease in market interest rates and an increase in the average balance of low-yield PPP loans.

Interest Expense. Total interest expense decreased $525,000, or 66.5%, to $265,000 for the three months ended March 31, 2021 from $790,000 for the three months ended March 31, 2020. Interest expense on deposits decreased $335,000, or 65.2%, to $179,000 for the three months ended March 31, 2021 from $514,000 for the three months ended March 31, 2020 due to a decrease in deposit rates partially offset by an increase in interest-bearing deposit balances. The average balance of interest-bearing deposits increased $45.4 million, or 19.2%, to $282.4 million for the three months ended March 31, 2021 from $236.9 million for the three months ended March 31, 2020 primarily as a result of an increase in the average balance of commercial deposits due, in part, to the deposit of PPP loan proceeds. The weighted average annualized rate of interest-bearing deposits decreased to 0.25% for the three months ended March 31, 2021 from 0.87% for the three months ended March 31, 2020 primarily due to a decrease in market interest rates.  

Interest expense on borrowings consists of interest on advances from the FHLB and the FRB. Interest expense on borrowings decreased $190,000, or 68.8%, to $86,000 for the three months ended March 31, 2021 from $276,000 for the three months ended March 31, 2020 primarily due to the retirement of $18 million of long-term borrowings from the FHLB in advance of their scheduled maturities during 2020, a decrease in market interest rates and low interest-bearing PPPLF advances. The interest rates on the retired borrowings were well above current market rates and were scheduled to mature in 2024 and 2025. We were able to retire these borrowings without incurring prepayment penalties. The rate paid on PPPLF advances is 35 basis points. The average balance of borrowings decreased $21.9 million, or 33.1%, to $44.3 million for the three months ended March 31, 2021 from $66.2 million for the three months ended March 31, 2020. The weighted average annualized rate paid on borrowings decreased to 0.78% for the three months ended March 31, 2021 from 1.67% for the three months ended March 31, 2020 primarily due to a decrease in market interest rates and low interest-bearing PPPLF advances.

Net Interest and Dividend Income. Net interest and dividend income increased $529,000, or 16.9%, to $3.7 million for the three months ended March 31, 2021 from $3.1 million for the three months ended March 31, 2020. This increase was due to a $50.8 million, or 12.9%, increase in the balance of interest-earning assets offset by a $23.7 million, or 7.8%, increase in average interest-bearing liabilities during the three months ended March 31, 2021. Annualized net interest margin increased to 3.29% for the three months ended March 31, 2021 from 3.18% for the three months ended March 31, 2020.

Provision for Loan Losses. Based on management’s analysis of the allowance for loan losses, a $60,000 provision for loan losses was recorded for the three months ended March 31, 2021 compared to $115,000 for the three months ended March 31, 2020. The provision for loan losses for the three months ended March 31, 2021 was based primarily on adjustments to our qualitative factors reflecting economic uncertainties as a result of COVID-19.

Non-Interest Income. Non-interest income increased $210,000, or 47.8%, to $649,000 for the three months ended March 31, 2021 compared to $439,000 for the three months ended March 31, 2020. The increase in non-interest income during the three months ended March 31, 2021 was due primarily to a $89,000 increase in securities gains and a $108,000 increase in loan servicing income (loss), reflecting an increase in the fair value of our mortgage servicing intangible asset during the three months ended March 31, 2021 .

Non-Interest Expense. Non-interest expense decreased $90,000, or 2.8%, to $3.1 million for the three months ended March 31, 2021 from $3.2 million for the three months ended March 31, 2020. The decrease to non-interest expense was primarily due to decreased salaries and employee benefits of $124,000, or 6.2%, decreased marketing expenses of $31,000, or 34.1%, offset by a $52,000, or 19.5%, increase in data processing expenses. The decrease in salaries and benefits during the three months ended March 31, 2021 was due to the elimination of certain positions and early retirements offset by normal salary increases.

34


 

Income Taxes. Income tax expense of $256,000 was recorded for the three months ended March 31, 2021 compared to $23,000 for the three months ended March 31, 2020. The effective tax rate was 22.0% and 8.2% for the three months ended March 31, 2021 and 2020, respectively. The increase in income tax expense was due primarily to the increase in income before income tax expense. Income before income tax expense increased $884,000, or 315.7%, to $1.2 million for the three months ended March 31, 2021 from $280,000 for the three months ended March 31, 2020. The increase in the effective tax rate for the three months ended March 31, 2021 as compared to the prior period was primarily due to a lack of a state net operating loss carryforward in the current period versus the prior period.


35


 

 

Average Balance Sheets

The following tables set forth average balance sheets, average yields and costs and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial.  All average balances are daily average balances. Non-accrual loans are included in the computation of average balances only. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or interest expense.

 

 

 

For the Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

Average

Outstanding

Balance

 

 

Interest

 

 

Average

Yield/Rate

 

 

Average

Outstanding

Balance

 

 

Interest

 

 

Average

Yield/Rate

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

368,845

 

 

$

3,668

 

 

 

3.98

%

 

$

345,416

 

 

$

3,609

 

 

 

4.18

%

Securities

 

 

52,031

 

 

 

246

 

 

 

1.89

%

 

 

38,467

 

 

 

249

 

 

 

2.59

%

Other

 

 

24,776

 

 

 

18

 

 

 

0.29

%

 

 

11,009

 

 

 

70

 

 

 

2.54

%

Total interest-earning assets

 

 

445,652

 

 

 

3,932

 

 

 

3.53

%

 

 

394,892

 

 

 

3,928

 

 

 

3.98

%

Non-interest-earning assets

 

 

11,506

 

 

 

 

 

 

 

 

 

 

 

11,909

 

 

 

 

 

 

 

 

 

Total assets

 

$

457,158

 

 

 

 

 

 

 

 

 

 

$

406,801

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW and demand deposits

 

$

100,315

 

 

$

35

 

 

 

0.14

%

 

$

71,817

 

 

$

43

 

 

 

0.24

%

Money market deposits

 

 

71,625

 

 

 

28

 

 

 

0.16

%

 

 

64,370

 

 

 

186

 

 

 

1.16

%

Savings accounts

 

 

51,019

 

 

 

8

 

 

 

0.06

%

 

 

40,108

 

 

 

6

 

 

 

0.06

%

Certificates of deposit

 

 

59,392

 

 

 

108

 

 

 

0.73

%

 

 

60,612

 

 

 

279

 

 

 

1.84

%

Total interest-bearing deposits

 

 

282,351

 

 

 

179

 

 

 

0.25

%

 

 

236,907

 

 

 

514

 

 

 

0.87

%

Borrowings

 

 

44,298

 

 

 

86

 

 

 

0.78

%

 

 

66,214

 

 

 

276

 

 

 

1.67

%

Other

 

 

1,590

 

 

 

 

 

 

 

 

 

1,434

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

 

328,239

 

 

 

265

 

 

 

0.32

%

 

 

304,555

 

 

 

790

 

 

 

1.04

%

Non-interest-bearing deposits

 

 

66,179

 

 

 

 

 

 

 

 

 

 

 

40,961

 

 

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

3,735

 

 

 

 

 

 

 

 

 

 

 

3,588

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

398,153

 

 

 

 

 

 

 

 

 

 

 

349,104

 

 

 

 

 

 

 

 

 

Total equity

 

 

59,005

 

 

 

 

 

 

 

 

 

 

 

57,697

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

457,158

 

 

 

 

 

 

 

 

 

 

$

406,801

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

3,667

 

 

 

 

 

 

 

 

 

 

$

3,138

 

 

 

 

 

Net interest rate spread (1)

 

 

 

 

 

 

 

 

 

 

3.21

%

 

 

 

 

 

 

 

 

 

 

2.94

%

Net interest-earning assets (2)

 

$

117,413

 

 

 

 

 

 

 

 

 

 

$

90,337

 

 

 

 

 

 

 

 

 

Net interest margin (3)

 

 

 

 

 

 

 

 

 

 

3.29

%

 

 

 

 

 

 

 

 

 

 

3.18

%

Average interest-earning assets to interest-bearing liabilities

 

 

135.77

%

 

 

 

 

 

 

 

 

 

 

129.66

%

 

 

 

 

 

 

 

 

 

(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.

36


 

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.

 

 

 

Three Months Ended March 31, 2021 vs. 2020

 

 

 

Increase (Decrease) Due to Change in

 

 

 

Volume

 

 

Rate

 

 

Total

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

238

 

 

$

(179

)

 

$

59

 

Securities

 

 

74

 

 

 

(77

)

 

 

(3

)

Other

 

 

42

 

 

 

(94

)

 

 

(52

)

Total interest-earning assets

 

 

354

 

 

 

(350

)

 

 

4

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW and money market accounts

 

 

14

 

 

 

(22

)

 

 

(8

)

Money market Deposits

 

 

19

 

 

 

(177

)

 

 

(158

)

Retail and commercial savings deposits

 

 

2

 

 

 

 

 

 

2

 

Certificates of deposit

 

 

(6

)

 

 

(165

)

 

 

(171

)

Total interest-bearing deposits

 

 

29

 

 

 

(364

)

 

 

(335

)

Borrowings

 

 

(73

)

 

 

(117

)

 

 

(190

)

Total interest-bearing liabilities

 

 

(44

)

 

 

(481

)

 

 

(525

)

Change in net interest income

 

$

398

 

 

$

131

 

 

$

529

 

 

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 FHLB as supplemental sources of funds. At March 31, 2021 and December 31, 2020, we had $29.0 million and $34.1 million outstanding in advances from the FHLB, respectively, and the ability to borrow an additional $103.2 million and $112.6 million, respectively. At March 31, 2021 and December 31, 2020, we also had $9.4 million and $18.2 million of PPPLF advances secured by pledges of PPP loans from the FRB, respectively. Additionally, at March 31, 2021 and December 31, 2020, we had an overnight line of credit with the FHLB for up to $3.0 million and unsecured Fed Funds borrowing lines of credit with two correspondent banks for up to $5.0 million. At March 31, 2021 and December 31, 2020, 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 by (used in) operating activities was $1.6 million and ($72,000) for the three months ended March 31, 2021 and 2020, respectively. Net cash used by investing activities, which consists primarily of disbursements for loan originations, net of principal collections, and the purchase of securities available for sale, offset by proceeds from the sale and maturity of securities available for sale, was $5.6 million and $2.7 million for the three months ended March 31, 2021 and 2020, respectively. Net cash provided by financing activities, consisting of activity in deposit accounts and Federal Home Loan Bank and Federal Reserve Bank advances, was $20.7 million and $3.2 million for the three months ended March 31, 2021 and 2020, respectively.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position daily. We anticipate that we will have sufficient funds to meet our current funding commitments. COVID-19 has adversely impacted our business and that of many of our customers, and the ultimate impact will depend on future developments, which are highly uncertain, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic. Our current strategy is to increase core deposits and utilize FHLB advances, as well as brokered certificates of deposit as needed, to fund loan growth.

37


 

The net proceeds from the 2019 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 for the three months ended March 31, 2021 and 2020 was adversely affected.

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 March 31, 2021, the Company (on an unconsolidated basis) had liquid assets of $9.9 million. On September 23, 2020, the board of directors of the Company authorized the repurchase of up to 136,879 shares of the Company’s outstanding common stock, which equals approximately 2.3% of all shares currently outstanding and approximately 5.0% of the then outstanding shares owned by stockholders other than the MHC. See Note 11 of the unaudited consolidated financial statements appearing under Item 1 of this quarterly report. As of March 31, 2021, the had Company had repurchased 49,733 shares of its common stock at a weighted average share price of $9.35 per share.

At March 31, 2021, the Company exceeded all its regulatory capital requirements. See Note 10 of the unaudited consolidated financial statements appearing under Item 1 of this quarterly report. Management is not aware of any conditions or events that would change our category.

 

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.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

General.  Most of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage our exposure to changes in market interest rates. Accordingly, the board of directors established a management-level Asset/Liability Management Committee (the “ALCO”), which takes responsibility for overseeing the asset/liability management process and related procedures. The ALCO meets on at least a quarterly basis and reviews asset/liability strategies, liquidity positions, alternative funding sources, interest rate risk measurement reports, capital levels and economic trends at both national and local levels. Our interest rate risk position is also monitored quarterly by the board of directors.

We 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; utilizing interest rate swaps; and strengthening our capital position. By following these strategies, we believe that we are better positioned to react to changes in market interest rates.

Net Portfolio Value Simulation.  We analyze our sensitivity to changes in interest rates through a net portfolio value of equity (“NPV”) model. NPV represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities adjusted for the value of off-balance sheet contracts. The NPV ratio represents the dollar amount of our NPV divided by the present value of our total assets for a given interest rate scenario. NPV attempts to quantify our economic value using a discounted cash flow methodology while the NPV ratio reflects that value as a form of capital ratio. We estimate what our NPV would be at a specific date. We then calculate what the NPV would be at the same date throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve. We currently calculate NPV under the assumptions that interest rates increase 100, 200, 300 and 400 basis points from current market rates and that interest rates decrease 100 basis points from current market rates.

38


 

The following table presents the estimated changes in our net portfolio value that would result from changes in market interest rates as of March 31, 2021.

 

 

 

Net Portfolio Value (“NPV”)

 

NPV as Percent of Portfolio

Value of Assets

 

Basis Point (“bp”) Change in Interest Rates

 

Dollar

Amount

 

 

Dollar

Change

 

 

Percent

Change

 

NPV Ratio

 

 

Change

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

400 bp

 

$

47,459

 

 

$

(6,535

)

 

 

(12.1

)%

 

 

 

11.7

%

 

$

13

 

300 bp

 

 

49,995

 

 

 

(3,999

)

 

 

(7.4

)

 

 

 

11.9

 

 

 

34

 

200 bp

 

 

52,355

 

 

 

(1,639

)

 

 

(3.0

)

 

 

 

12.0

 

 

 

47

 

100 bp

 

 

54,497

 

 

 

503

 

 

 

0.9

 

 

 

 

12.0

 

 

 

51

 

0

 

 

53,994

 

 

 

 

 

 

 

 

 

 

11.5

 

 

 

 

(100) bp

 

 

44,913

 

 

 

(9,081

)

 

 

(16.8

)

 

 

 

9.4

 

 

 

(210

)

The NPV ratio in the -100 bp change in interest rates scenario was -16.8% at March 31, 2021 versus a policy limit of -10.0%.  An extremely low interest rate environment may artificially reduce the calculated inherent value of the Bank’s non-maturity deposits, which can inordinately impact the sensitivity of the NPV ratio resulting in a mathematical aberration.  

 

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the way actual yields and costs respond to changes in market interest rates. The above table assumes that the composition of our interest-sensitive assets and liabilities existing at the date indicated remains constant uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our NPV and will differ from actual results.

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, and instability in financial markets, among other factors beyond our control, may affect interest rates.

In a rising interest rate environment, we would expect that the rates on our deposits and borrowings would reprice upwards faster than the rates on our long-term loans and investments, which would be expected to compress our interest rate spread and have a negative effect on our profitability. Furthermore, increases in interest rates may adversely affect the ability of our borrowers to make loan repayments on adjustable-rate loans, as the interest owed on such loans would increase as interest rates increase. Conversely, decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such loan or securities proceeds into lower-yielding assets, which might also negatively impact our income. If interest rates rise, we expect that our economic value of equity would decrease. Economic value of equity represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities. The Company’s economic value of equity analysis as of March 31, 2021 estimated that, in the event of an instantaneous 200 basis point increase in interest rates, the Company would experience a 3.0% 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 Company would experience a 16.8% decrease in the economic value of equity. As noted above, we believe this decrease is a mathematical aberration due to the current extremely low interest rate environment.

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.

Item 4.

Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures. As of March 31, 2021, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, the Company’s Chief Executive Officer and

39


 

Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2021 for recording, processing, summarizing, and reporting the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in SEC rules and forms.

The effectiveness of a system of disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Due to such inherent limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.

Changes in Internal Controls over Financial Reporting. During the quarter ended March 31, 2021, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

40


 

 

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

We are not involved in any pending legal proceedings as a plaintiff or a defendant other than routine legal proceedings occurring in the ordinary course of business. At March 31, 2021, we were not involved in any legal proceedings the outcome of which we believe would be material to our consolidated financial condition or results of operations.

Item 1A.

Risk Factors

 

Not applicable, as First Seacoast Bancorp is a “smaller reporting company.”

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table summarizes the Company’s repurchases of its outstanding shares of common stock during the quarter ended March 31, 2021.

 

Period

 

Total Number of Shares Purchased

 

 

Average Price Paid per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

Maximum Number of Shares that may Yet Be Purchased Under the Plans or Programs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2021 - January 31, 2021

 

 

5,594

 

 

$

8.95

 

 

 

5,594

 

 

 

105,809

 

February 1, 2021 - February 28, 2021

 

 

3,029

 

 

 

9.01

 

 

 

3,029

 

 

 

102,780

 

March 1, 2021 - March 31, 2021

 

 

15,634

 

 

 

9.87

 

 

 

15,634

 

 

 

87,146

 

       Total

 

 

24,257

 

 

 

 

 

 

 

24,257

 

 

 

 

 

There were no sales of unregistered securities during the three months ended March 31, 2021.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

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Item 6.

Exhibits

 

Exhibit

Number

 

Description

 

 

 

31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101

 

The following materials for the quarter ended March 31, 2021, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Equity Capital, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements

 

42


 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

FIRST SEACOAST BANCORP

 

 

 

 

 

 

Date:  May 14, 2021

 

/s/ James R. Brannen

 

 

James R. Brannen

 

 

President and Chief Executive Officer

 

 

 

 

 

 

Date:  May 14, 2021

 

/s/ Richard M. Donovan

 

 

Richard M. Donovan

 

 

Senior Vice President and Chief Financial Officer

 

 

43