10-Q: First Seacoast Bancorp Reports Q2 Loss Amid Strategy Shift

First Seacoast Bancorp reported a net loss for Q2 2025, primarily due to the absence of a significant one-time gain from the prior year, while increasing assets and improving net interest margin.

Summary

• Reported a net loss of $545,000 for the three months ended June 30, 2025, a significant decrease from net income of $2.0 million in the same period of 2024.
• Recorded a net loss of $1.1 million for the six months ended June 30, 2025, compared to net income of $851,000 for the corresponding period in 2024.
• Total assets increased by $24.1 million, or 4.1%, reaching $604.8 million as of June 30, 2025, primarily driven by a $24.1 million increase in securities available-for-sale.
• Net interest and dividend income increased by $404,000, or 13.4%, to $3.4 million for Q2 2025, and by $692,000, or 11.7%, to $6.6 million for the six months ended June 30, 2025.
• The annualized net interest margin improved to 2.35% for Q2 2025 from 2.14% in Q2 2024, and to 2.29% year-to-date from 2.11% in the prior year.
• Total deposits grew by $18.1 million, or 4.0%, to $472.3 million, largely due to a $26.7 million increase in time deposits, including brokered deposits used to fund investment purchases.
• Total stockholders' equity decreased by $1.2 million, or 2.0%, to $60.8 million, influenced by the net loss and common stock repurchases.
• Non-performing loans, while remaining very low, increased to $14,000 at June 30, 2025, from zero at December 31, 2024.
• The company repurchased 23,940 shares of common stock during Q2 2025 at an average price of $10.99 per share, with 254,598 shares remaining under the current authorization.

Sentiment

Score: 4

Explanation: While core net interest income and margin improved, the overall financial performance was significantly impacted by the absence of a prior-year one-time gain, resulting in a net loss. The increase in non-interest expenses and the exceeding of interest rate risk policy limits for rising rates indicate challenges. Strong capital ratios are a positive, but the overall profitability trend is concerning without the one-off gains.

Positives

• Net interest and dividend income increased by 13.4% for the quarter and 11.7% year-to-date, indicating stronger core banking operations.
• Net interest margin improved to 2.35% for the quarter and 2.29% year-to-date, reflecting effective interest rate management.
• Total assets grew by 4.1% to $604.8 million, supported by strategic investment purchases.
• Deposits increased by 4.0% to $472.3 million, demonstrating continued funding strength.
• The Bank remains "well-capitalized" with all regulatory capital ratios significantly exceeding minimum requirements (e.g., Total Capital Ratio of 15.23% vs. 10.00% required).
• The percentage of uninsured deposits decreased from 24.7% at December 31, 2024, to 21.7% at June 30, 2025, indicating a slight improvement in deposit stability.

Negatives

• Reported a net loss of $545,000 for Q2 2025 and $1.1 million year-to-date, a significant decline from prior year's net income.
• Non-interest income decreased substantially by $2.4 million (84.4%) for the quarter due to the absence of a one-time $2.5 million gain on sale of land and buildings from the prior year.
• Non-interest expenses increased by $537,000 (14.0%) for the quarter and $701,000 (9.0%) year-to-date, driven by higher salaries, equity compensation, occupancy, and data processing costs.
• A provision for credit losses of $47,000 was recorded for the quarter and year-to-date, compared to a release in the prior year periods.
• Total stockholders' equity decreased by 2.0% due to the net loss and common stock repurchases.
• Non-performing loans, while low, increased from zero to $14,000.
• The company's Net Portfolio Value (NPV) sensitivity to rising interest rates exceeded policy limits for +100bp, +200bp, +300bp, and +400bp scenarios, indicating higher interest rate risk.

Risks

• Significant exposure to interest rate risk, with estimated decreases in Net Portfolio Value (NPV) exceeding policy limits for rising interest rate scenarios (+100bp, +200bp, +300bp, +400bp changes), which could negatively impact economic value of equity.
• Reliance on brokered deposits to fund growth, which can be more sensitive to interest rate changes and market conditions, potentially increasing funding costs.
• The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income, and a 100% valuation allowance has been applied, indicating uncertainty regarding their future benefit.
• Interest rate risk modeling techniques and assumptions may not fully predict or capture the impact of actual interest rate changes on the balance sheet or projected operating results.
• General economic conditions, fluctuations in real estate values, and demand for loans and deposits in market areas could adversely affect financial performance.
• Competition among depository and other financial institutions, changes in laws or government regulations, and technological changes pose ongoing operational and financial risks.

Future Outlook

The company's strategy continues to focus on growing the balance sheet through loan originations and commercial loan participations, oneto four-family residential mortgage loans, and consumer loans secured by manufactured housing properties. There is also a strategic emphasis on diversifying into higher-yielding commercial real estate and commercial and industrial loans to improve net interest margin and manage interest rate risk. The company plans to continue selling selected conforming fixed-rate residential mortgage loans to the secondary market on a servicing-retained basis when market conditions allow. Management is committed to maintaining a strong liquidity position and anticipates sufficient funds to meet current funding commitments, with a strategy to increase core deposits and utilize FHLB advances and brokered deposits to fund loan growth.

Management Comments

• 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 oneto 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.
• Our strategy to grow the balance sheet continues to be through originations and, to a lesser extent, purchases of commercial loan participations, oneto four-family residential mortgage loans and consumer loans secured by manufactured housing properties, while also diversifying into higher yielding commercial real estate mortgage loans and commercial and industrial loans to improve net interest margin and manage interest rate risk.
• We also continue to sell selected, conforming 15-year and 30-year residential fixed rate mortgage loans to the secondary market on a servicing retained basis as market conditions allow, providing us a recurring source of revenue from loan servicing income and gains on the sale of such loans.
• Management believes that, as of June 30, 2025 and December 31, 2024, the Bank met all capital adequacy requirements to which it was subject, including the capital conservation buffer, at those dates.
• Management is not aware of any conditions or events that would change First Seacoast Bank's categorization as well-capitalized.
• Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings will not be material to the consolidated balance sheet or consolidated statements of (loss) income.

Industry Context

The banking industry is currently navigating a dynamic interest rate environment. First Seacoast Bancorp's strategy to increase higher-yielding commercial real estate and commercial and industrial loans, alongside selling fixed-rate residential mortgages, aligns with broader industry efforts to optimize net interest margins in a rising rate climate. The increased reliance on brokered deposits and FHLB advances for funding reflects a common industry trend where traditional core deposit growth may be challenging, leading banks to seek alternative, often more expensive, funding sources. The reported net loss, while primarily due to the absence of a one-time gain, highlights the pressure on non-interest income streams for community banks that may not have diverse fee-generating businesses. The exceeding of NPV policy limits for rising rates indicates a common challenge for banks with asset-sensitive balance sheets in a period of potential rate volatility.

Comparison to Industry Standards

• The net interest margin of 2.35% for Q2 2025, while an improvement for the company, is generally below the average for U.S. community banks, which often range from 3.0% to 4.0%, suggesting room for further optimization or indicating a more conservative asset mix.
• The increase in non-performing loans from zero to $14,000, while still very low, warrants monitoring as it could signal early credit quality shifts, though it remains significantly below industry averages for non-performing assets as a percentage of total loans.
• The company's capital ratios (e.g., Total Capital Ratio of 15.23%) are robust and well above the "well-capitalized" thresholds, indicating strong financial resilience compared to regulatory benchmarks and many peers.
• The significant interest rate risk exposure, with NPV changes exceeding policy limits for rising rates, suggests a higher sensitivity to interest rate fluctuations compared to peers with more balanced asset-liability management or more sophisticated hedging strategies. For example, larger regional banks often maintain tighter interest rate risk limits and more diversified hedging portfolios.
• The use of brokered deposits to fund asset growth is a common practice, but a higher reliance on such funding (as indicated by the increase in time deposits) can be more expensive and less stable than traditional core deposits, potentially impacting future profitability and liquidity compared to banks with stronger organic deposit growth.

Management Changes

Corporate Governance

Legal Proceedings

• No pending legal proceedings that are believed to have a material adverse effect on financial condition, results of operations, or cash flows.

Related Party Transactions

• Loans outstanding to directors and executive officers and entities in which they have significant ownership interests totaled $3.9 million at June 30, 2025, down from $4.3 million at December 31, 2024.
• Deposits from related parties totaled $10.4 million at June 30, 2025, down from $11.6 million at December 31, 2024.

Stakeholder Impact

• Shareholders: Experienced a net loss for the quarter and year-to-date, leading to a decrease in stockholders' equity. The ongoing stock repurchase program could provide some support to share price by reducing outstanding shares.
• Employees: Normal salary increases and equity compensation expenses were noted, indicating continued investment in employee benefits.
• Customers: The bank continues to offer a full range of banking and investment management services, and deposit growth indicates continued customer engagement.
• Creditors: The bank maintains strong regulatory capital ratios, providing a solid buffer for creditors. Increased borrowings from FHLB indicate reliance on wholesale funding.

Next Steps

• Continue to grow the balance sheet through loan originations and commercial loan participations.
• Further diversify into higher-yielding commercial real estate and commercial and industrial loans.
• Continue to sell selected, conforming 15-year and 30-year residential fixed rate mortgage loans to the secondary market.
• Increase core deposits and utilize FHLB advances and brokered deposits to fund loan growth.
• Monitor and implement strategies to mitigate negative impacts from interest rate movements.
• Evaluate the effect of ASU 2024-03 (Expense Disaggregation Disclosures) on future disclosures.
• Evaluate the effect of ASU 2023-09 (Income Taxes) on future disclosures.

Key Dates

Recommendation

The company reported a net loss for the quarter and year-to-date, primarily due to the absence of a significant one-time gain from the prior year, which is a negative. However, core banking operations showed improvement with increased net interest income and an expanded net interest margin. The bank maintains strong capital ratios, indicating financial stability. The significant exposure to interest rate risk, with NPV changes exceeding policy limits for rising rates, is a concern that could impact future profitability. The ongoing stock repurchase program may offer some support to the share price. Given the mixed results—improved core performance offset by a net loss and interest rate sensitivity—a 'hold' recommendation is appropriate, suggesting investors monitor the company's ability to sustain margin improvement and manage interest rate risk in the current economic climate.

Keywords

Banking, Financial Services, SEC Filing, 10-Q, Quarterly Report, Net Loss, Net Interest Margin, Deposits, Loans, Interest Rate Risk, Capital Ratios, Stock Repurchase, New Hampshire, Maine, Community Bank