FIRT SEAC 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 atSeptember 30, 2021 and consolidated results of operations for the three and nine months endedSeptember 30, 2021 and 2020. It should be read in conjunction with our unaudited consolidated financial statements and accompanying notes presented elsewhere in this report and with the Company's audited consolidated financial statements and accompanying notes presented in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , filed onMarch 26, 2021 with theSecurities 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 inStrafford County, New Hampshire and one full-service banking office inRockingham County, New Hampshire . We consider our primary lending market area to beStrafford andRockingham Counties inNew Hampshire andYork County inSouthern Maine .
COVID-19 Pandemic
InMarch 2020 , the outbreak of COVID-19 was recognized as a pandemic by theWorld 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 inthe 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 thatFederal 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. Some of our business and consumer customers are still 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. OnMarch 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. OnDecember 27, 2020 , the 2021 Consolidated Appropriations Act was signed, which extended relief to the earlier of 60 days after the national emergency termination date orJanuary 1, 2022 . This legislation included a$900 billion relief package and the extension of certain relief provisions from theMarch 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 nine months endedSeptember 30, 2021 and the year endedDecember 31, 2020 , the Bank originated 134 and 286 PPP loans, respectively, with aggregate outstanding principal balances of$13.1 million and$33.0 million , respectively. As ofSeptember 30, 2021 andDecember 31, 2020 , total PPP loan principal balances of$9.4 million and$21.2 million , respectively, and are included in commercial and industrial loans (C+I). In response to the COVID-19 pandemic, we implemented a short-term loan modification program to provide temporary payment relief to certain borrowerswho meet the program's qualifications. InApril 2020 , various regulatory agencies, including theBoard of Governors of theFederal Reserve System and theOffice 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 borrowerswho 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 32 -------------------------------------------------------------------------------- response to the COVID-19 pandemic to borrowerswho 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 onMarch 27, 2020 , further provides banks with the option to elect either or both of the following, fromMarch 1, 2020 until the earlier ofDecember 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 ofthe United States under the National Emergencies Act (50 U.S.C.1601 et seq.) terminates:
(iii) to suspend the requirements under
related to the COVID-19 pandemic that would otherwise be categorized as
a TDR; and/or
(iv) to suspend any determination of a loan modified as a result of theeffects of the COVID-19 pandemic as being a TDR, including impairment for
accounting purposes.
The 2021 Consolidated Appropriations Act also continued to suspend the
requirements under
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 ofDecember 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 was offered to both retail and commercial borrowers. The majority of short-term loan modifications for retail loan borrowers consisted 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 consisted 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 could 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 ofSeptember 30, 2021 , there were no loans with outstanding modifications for temporary payment relief. 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.
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 extent, severity or duration of the COVID-19 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;
33
--------------------------------------------------------------------------------• 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 thelevel 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 and insurance premiums;
• 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 inthe United States of America . The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations. Our critical accounting policies involve the calculation of the allowance for loan losses and the measurement of the fair value of financial instruments. A detailed description of these critical accounting policies can be found in Note 2 of the Company's consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . 34 --------------------------------------------------------------------------------
Comparison of Financial Condition at
Total Assets. Total assets were$493.7 million as ofSeptember 30, 2021 , an increase of$50.6 million , or 11.4%, compared to total assets of$443.1 million atDecember 31, 2020 . The increase was due primarily to a$4.6 million increase in net loans, a$24.7 million increase in cash and due from banks and a$22.1 million increase in securities available-for-sale. Cash and Due From Banks. Cash and due from banks increased$24.7 million , or 411.9%, to$30.7 million atSeptember 30, 2021 from$6.0 million atDecember 31, 2020 . This increase primarily resulted from a$61.7 million increase in deposits offset by a$13.3 million decrease in borrowings, a$4.6 million increase in net loans and a$22.1 million increase in securities available-for-sale for the nine months endedSeptember 30, 2021 .Available-for-Sale Securities . Available-for-sale securities increased by$22.1 million , or 39.8%, to$77.5 million atSeptember 30, 2021 from$55.5 million atDecember 31, 2020 . This increase was primarily due to net investments purchases of$23.5 million offset by a$1.5 million decrease in net unrealized gains within the portfolio during the nine months endedSeptember 30, 2021 . Net Loans. Net loans increased$4.6 million , or 1.3%, to$369.4 million atSeptember 30, 2021 from$364.8 million atDecember 31, 2020 . During the nine months endedSeptember 30, 2021 , we originated$102.5 million of loans (including$13.1 million of PPP loans, which are classified as commercial and industrial loans). We also purchased$10.7 million of one- to four-family residential mortgage loans collateralized by properties located in the greaterBoston market during the nine months endedSeptember 30, 2021 . We also purchased$1.6 million of consumer loans collateralized by manufactured housing units located in our market area during the nine months endedSeptember 30, 2021 . Net deferred loan costs increased$687,000 , or 97.4%, to$1.4 million atSeptember 30, 2021 from$705,000 atDecember 31, 2020 primarily due to deferred costs on one- to four-family residential mortgage loans partially offset by fees received from the SBA for processing PPP loans. One- to four-family residential mortgage loans increased$14.5 million , or 6.8%, to$228.2 million atSeptember 30, 2021 from$213.7 million atDecember 31, 2020 . Commercial real estate mortgage loans increased$276,000 , or 0.4%, to$66.4 million atSeptember 30, 2021 from$66.2 million atDecember 31, 2020 . Multi-family loans increased$3.1 million , or 47.0%, to$9.7 million atSeptember 30, 2021 from$6.6 million atDecember 31, 2020 . Commercial and industrial loans, due primarily to the forgiveness of PPP loans, decreased$14.9 million , or 32.9%, to$30.4 million atSeptember 30, 2021 from$45.3 million atDecember 31, 2020 . Acquisition, development, and land loans increased$2.0 million , or 8.5%, to$25.1 million atSeptember 30, 2021 from$23.1 million atDecember 31, 2020 . Home equity loans and lines of credit decreased$2.2 million , or 23.5%, to$7.3 million atSeptember 30, 2021 from$9.6 million atDecember 31, 2020 . Consumer loans increased$1.4 million , or 48.8%, to$4.4 million atSeptember 30, 2021 from$2.9 million atDecember 31, 2020 . Our strategy to grow the balance sheet continues to be through originations and, to a lesser extent, purchases 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 residential fixed rate mortgage loans to the secondary market on a servicing retained basis, providing us a recurring source of revenue from loan servicing income and gains on the sale of such loans. Our allowance for loan losses increased$186,000 to$3.5 million atSeptember 30, 2021 from$3.3 million atDecember 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 atSeptember 30, 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. The Company has limited or no direct exposure to industries that have been 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 ofSeptember 30, 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. 35 -------------------------------------------------------------------------------- Deposits increased$61.7 million , or 18.9%, to$389.1 million atSeptember 30, 2021 from$327.4 million atDecember 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$53.1 million , or 19.0%, to$331.8 million atSeptember 30, 2021 from$278.7 million atDecember 31, 2020 . The increase was due to an increase of$33.2 million in commercial deposits and a$28.5 million increase in retail deposits. As ofSeptember 30, 2021 , savings deposits increased$9.2 million , money market deposits increased$4.9 million , NOW and demand deposit accounts increased$39.0 million and time deposits increased$8.6 million . There were$15.0 million and$-0 - of brokered deposits included in time deposits atSeptember 30, 2021 andDecember 31, 2020 , respectively. Borrowings. Total borrowings decreased$13.3 million , or 25.4%, to$39.0 million atSeptember 30, 2021 from$52.3 million atDecember 31, 2020 . Advances from FHLB increased$4.9 million , or 14.4%, to$39.0 million atSeptember 30, 2021 from$34.1 million atDecember 31, 2020 . Advances from the FRB decreased$18.2 million , or 100.0%, to$0 atSeptember 30, 2021 from$18.2 million atDecember 31, 2020 . Total Stockholders' Equity. Total stockholders' equity increased$935,000 , or 1.6%, to$59.8 million atSeptember 30, 2021 from$58.9 million atDecember 31, 2020 . This increase was due primarily to net income of$2.2 million , offset by the repurchase of$438,000 of the Company's common stock at cost and an other comprehensive loss of$917,000 related to net changes in the fair value of available-for-sale securities and interest rate swap contracts for the nine months endedSeptember 30, 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$-0 - and$884,000 , or 0.00% and 0.24% of total loans, atSeptember 30, 2021 andDecember 31, 2020 , respectively. AtSeptember 30, 2021 andDecember 31, 2020 , we had no troubled debt restructurings or foreclosed assets. AtDecember 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 atDecember 31, 2020 , it was considered nonperforming due to the financial condition and prospects of the borrower. This loan was repaid in full during the nine months endedSeptember 30, 2021 with proceeds from the sale of certain personal real estate holdings of the guarantors.
Comparison of Operating Results for the Three Months Ended
Net Income. Net income was$463,000 for the three months endedSeptember 30, 2021 , compared to net income of$392,000 for the three months endedSeptember 30, 2020 , an increase of$71,000 , or 18.1%. The increase was due to a$234,000 increase in net interest and dividend income after provision for loan losses, offset by a decrease in noninterest income of$34,000 , an increase in noninterest expense of$74,000 and an increase in income tax expense of$55,000 during the three months endedSeptember 30, 2021 . Interest and Dividend Income. Interest and dividend income decreased$85,000 , or 2.2%, to$3.9 million for the three months endedSeptember 30, 2021 and 2020. This decrease was due to a$121,000 decrease in interest and fees on loans. Interest and fees on loans for the three months endedSeptember 30, 2021 and 2020 included$263,000 and$248,000 of interest and fees earned on PPP loans, respectively. Average interest-earning assets increased$20.6 million , to$478.7 million for the three months endedSeptember 30, 2021 from$458.0 million for the three months endedSeptember 30, 2020 . The annualized yield on interest earning-assets decreased 22 basis 36
-------------------------------------------------------------------------------- points to 3.23% for the three months endedSeptember 30, 2021 from 3.45% for the three months endedSeptember 30, 2020 . Average loan balances decreased$7.1 million , to$373.4 million for the three months endedSeptember 30, 2021 from$380.5 million for the three months endedSeptember 30, 2020 . The weighted average annualized yield for the loan portfolio decreased 6 basis points to 3.75% for the three months endedSeptember 30, 2021 from 3.81% for the three months endedSeptember 30, 2020 primarily as a result of a decrease in market interest rates and low- yielding PPP loans. The weighted average annualized yield for the investment portfolio decreased to 1.83% for the three months endedSeptember 30, 2021 from 2.21% for the three months endedSeptember 30, 2020 . Interest Expense. Total interest expense decreased$269,000 , or 53.4%, to$235,000 for the three months endedSeptember 30, 2021 from$504,000 for the three months endedSeptember 30, 2020 . Interest expense on deposits decreased$194,000 , or 58.8% to$136,000 for the three months endedSeptember 30, 2021 from$330,000 for the three months endedSeptember 30, 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 to$295.7 million for the three months endedSeptember 30, 2021 from$273.5 million for the three months endedSeptember 30, 2020 , an increase of$22.1 million , or 8.1%, 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 0.18% for the three months endedSeptember 30, 2021 from 0.48% for the three months endedSeptember 30, 2020 primarily as a result of 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$75,000 , or 43.1% to$99,000 for the three months endedSeptember 30, 2021 from$174,000 for the three months endedSeptember 30, 2020 , primarily due to the retirement of$18 million of long-term borrowings from the FHLB in advance of their scheduled maturities during the fourth quarter of 2020. The interest rates on the borrowings retired during the fourth quarter of 2020 were 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 average balance of borrowings decreased$32.2 million , or 44.6%, to$40.0 million for the three months endedSeptember 30, 2021 from$72.3 million for the three months endedSeptember 30, 2020 . The weighted average annualized rate of borrowings increased to 0.99% for the three months endedSeptember 30, 2021 from 0.96% for the three months endedSeptember 30, 2020 primarily due to the repayment of low interest-bearing PPPLF advances in full during the three months endedSeptember 30, 2021 . Net Interest and Dividend Income. Net interest and dividend income increased$184,000 , or 5.3%, to$3.6 million for the three months endedSeptember 30, 2021 from$3.4 million for the three months endedSeptember 30, 2020 . This increase was due to an$20.6 million , or 4.5%, increase in the balance of interest-earning assets offset by an increase of$10.0 million , or 2.9%, in interest-bearing liabilities during the three months endedSeptember 30, 2021 . Annualized net interest margin increased to 3.03% for the three months endedSeptember 30, 2021 from 3.01% for the three months endedSeptember 30, 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 endedSeptember 30, 2021 , compared to$110,000 for the three months endedSeptember 30, 2020 . The provision for loan losses for the three months endedSeptember 30, 2021 and 2020 was based primarily on adjustments in 2020 to our qualitative factors reflecting economic uncertainties as a result of COVID-19. Non-Interest Income. Non-interest income decreased$34,000 , or 7.3%, to$431,000 for the three months endedSeptember 30, 2021 compared to$465,000 for the three months endedSeptember 30, 2020 . The decrease in non-interest income during the three months endedSeptember 30, 2021 was due primarily to a$70,000 decrease in gain on sale of loans and a$14,000 decrease in customer service fees, offset by a$19,000 increase in investment services fees and a$26,000 increase to loan servicing income, reflecting an increase in the fair value of our mortgage servicing intangible asset during the three months endedSeptember 30, 2021 . Non-Interest Expense. Non-interest expense increased$74,000 , or 2.2%, to$3.4 million for the three months endedSeptember 30, 2021 from$3.3 million for the three months endedSeptember 30, 2020 . The increase was primarily due to a$54,000 , or 2.7%, increase in salaries and employee benefits, a$48,000 , or 16.2%, increase in data processing, partially offset by a$13,000 , or 13.3%, decrease in marketing and an$11,000 , or 19.3%, decrease in debit card fees. The increase in salary and employee benefits during the three months endedSeptember 30, 2021 , was primarily due to normal salary increases offset by the elimination of certain positions and early retirements. Income Taxes. Income tax expense of$137,000 was recorded for the three months endedSeptember 30, 2021 compared to$82,000 for the three months endedSeptember 30, 2020 . The effective tax rate was 22.8% and 17.3% for the three months endedSeptember 30, 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$126,000 , or 26.6%, to$600,000 for the three months endedSeptember 30, 2021 from$474,000 for the three months endedSeptember 30, 2020 . The increase in the effective tax rate for the three 37
--------------------------------------------------------------------------------
months ended
38
--------------------------------------------------------------------------------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
2021 2020
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Loans $ 373,438 $ 3,503 3.75 % $ 380,533 $ 3,624 3.81 %
Securities 72,014 330 1.83 % 50,935 281 2.21 %
Other 33,206 27 0.33 % 26,542 40 0.60 %
Total interest-earning assets 478,658 3,860 3.23 % 458,010 3,945 3.45 %
Non-interest-earning assets 11,734 11,456
Total assets $ 490,392 $ 469,466
Interest-bearing liabilities:
NOW and demand deposits $ 107,973 $ 33 0.12 % $ 90,700 $ 55 0.24 %
Money market deposits 73,939 28 0.15 % 79,786 85 0.43 %
Savings accounts 56,196 9 0.06 % 47,874 8 0.07 %
Certificates of deposit 57,542 66 0.46 % 55,184 182 1.32 %
Total interest-bearing deposits 295,650 136 0.18 % 273,544 330 0.48 %
Borrowings 40,047 99 0.99 % 72,257 174 0.96 %
Other 1,626 - - 1,519 - -
Total interest-bearing liabilities 337,323 235 0.28 % 347,320 504 0.58 %
Non-interest-bearing deposits 88,618 58,987
Other noninterest-bearing
liabilities 3,965 4,308
Total liabilities 429,906 410,615
Total stockholders' equity 60,486 58,851
Total liabilities and
stockholders' equity $ 490,392 $ 469,466
Net interest income $ 3,625 $ 3,441
Net interest rate spread (1) 2.95 % 2.86 %
Net interest-earning assets (2) $ 141,335 $ 110,690
Net interest margin (3) 3.03 % 3.01 %
Average interest-earning assets to
interest-bearing liabilities 141.90 % 131.87 %
(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.
39
--------------------------------------------------------------------------------
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
Increase (Decrease) Due to Change in
Volume Rate Total
(Dollars in thousands)
Interest-earning assets:
Loans $ (67 ) $ (54 ) $ (121 )
Securities 102 (53 ) 49
Other 8 (21 ) (13 )
Total interest-earning assets 43 (128 ) (85 )
Interest-bearing liabilities:
NOW and demand deposits 9 (31 ) (22 )
Money market deposits (6 ) (51 ) (57 )
Savings accounts 1 - 1
Certificates of deposit 7 (123 ) (116 )
Total interest-bearing deposits 11 (205 ) (194 )
Borrowings (80 ) 5 (75 )
Total interest-bearing liabilities (69 ) (200 ) (269 )
Change in net interest income $ 112 $ 72 $ 184
Comparison of Operating Results for the Nine Months Ended
Net Income. Net income was$2.2 million for the nine months endedSeptember 30, 2021 , compared to$1.2 million for the nine months endedSeptember 30, 2020 , an increase of$1.0 million , or 86.8%. The increase was due to a$1.3 million increase in net interest and dividend income after provision for loan losses and an increase in noninterest income of$245,000 offset by an increase in noninterest expenses of$99,000 and an increase in income tax expense of$438,000 during the nine months endedSeptember 30, 2021 . Interest and Dividend Income. Interest and dividend income decreased$130,000 , or 1.1%, to$11.7 million for the nine months endedSeptember 30, 2021 from$11.8 million for the nine months endedSeptember 30, 2020 . The decrease was due primarily to a$111,000 , or 1.0%, decrease in interest and fees on loans. Interest and fees on loans for the nine months endedSeptember 30, 2021 and 2020 included$972,000 and$445,000 of interest and fees earned on PPP loans, respectively. Average interest-earning assets increased$27.6 million , to$462.4 million for the nine months endedSeptember 30, 2021 from$434.8 million for the nine months endedSeptember 30, 2020 . The annualized yield on interest earning-assets decreased 25 basis points to 3.37% for the nine months endedSeptember 30, 2021 from 3.62% for the nine months endedSeptember 30, 2020 . The weighted average annualized yield for the loan portfolio decreased 10 basis points to 3.84% for the nine months endedSeptember 30, 2021 from 3.94% for the nine months endedSeptember 30, 2020 primarily as a result of a decrease in market interest rates and low- yielding PPP loans. The weighted average annualized yield for the investment portfolio decreased to 1.87% for the nine months endedSeptember 30, 2021 from 2.39% for the nine months endedSeptember 30, 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. Interest Expense. Total interest expense decreased$1.2 million , or 61.8%, to$747,000 for the nine months endedSeptember 30, 2021 from$2.0 million for the nine months endedSeptember 30, 2020 . Interest expense on deposits decreased$800,000 for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 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$33.1 million , or 12.8%, to$291.1 million for the nine months endedSeptember 30, 2021 from$258.1 million for the nine months endedSeptember 30, 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 on deposits decreased to 0.21% for the nine months endedSeptember 30, 2021 from 0.65% for the nine months endedSeptember 30, 2020 primarily as a result a decrease in market interest rates. 40 -------------------------------------------------------------------------------- Interest expense on borrowings decreased$406,000 , or 58.9%, to$283,000 for the nine months endedSeptember 30, 2021 from$689,000 for the nine months endedSeptember 30, 2020 primarily due to the retirement of$18 million of long-term borrowings from the FHLB in advance of their scheduled maturities during the fourth quarter of 2020. The average balance of borrowings decreased$30.5 million , or 41.7%, to$42.5 million for the nine months endedSeptember 30, 2021 from$73.0 million for the nine months endedSeptember 30, 2020 . The weighted average annualized rate of borrowings decreased to 0.89% for the nine months endedSeptember 30, 2021 from 1.26% for the nine months endedSeptember 30, 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$1.1 million , or 10.9%, to$10.9 million for the nine months endedSeptember 30, 2021 from$9.9 million for the nine months endedSeptember 30, 2020 . This increase was primarily due to a$27.6 million , or 6.4%, increase in the balance of interest-earning assets offset by an increase of$3.2 million , or 1.0%, in interest-bearing liabilities during the nine months endedSeptember 30, 2021 . Annualized net interest margin increased to 3.15% for the nine months endedSeptember 30, 2021 from 3.02% for the nine months endedSeptember 30, 2020 . Provision for Loan Losses. Based on management's analysis of the allowance for loan losses, an$145,000 provision for loan losses was recorded for the nine months endedSeptember 30, 2021 , compared to$385,000 for the nine months endedSeptember 30, 2020 . The provision for loan losses recorded for the nine months endedSeptember 30, 2021 and 2020 was based primarily on adjustments to our qualitative factors for economic uncertainties as a result of COVID-19. Non-Interest Income. Non-interest income increased$245,000 , or 15.7%, to$1.8 million for the nine months endedSeptember 30, 2021 compared to$1.6 million for the nine months endedSeptember 30, 2020 . The increase in non-interest income during the nine months endedSeptember 30, 2021 was due primarily to a$244,000 increase in securities gains, net, a$117,000 increase in loan servicing income, reflecting an increase in the fair value of our mortgage servicing intangible asset, a$38,000 increase in investment services fees and an$18,000 increase in customer service fees, offset by a$200,000 decrease in gain on sale of loans during the nine months endedSeptember 30, 2021 . Non-Interest Expense. Non-interest expense increased$99,000 , or 1.0%, to$9.8 million for the nine months endedSeptember 30, 2021 compared to$9.7 million for the nine months endedSeptember 30, 2020 . The increase in non-interest expense during the nine months endedSeptember 30, 2021 was primarily due to a$160,000 , or 18.7%, increase in data processing, an$82,000 , or 12.6%, increase in professional fees and assessments and a$30,000 , or 11.7%, increase in marketing, partially offset by a decrease in salaries and employee benefits of$147,000 , or 2.5%. The decrease in salaries and employee benefits during the nine months endedSeptember 30, 2021 was due to the elimination of certain positions and early retirements, offset by normal salary increases. Income Taxes. An income tax expense of$566,000 was recorded for the nine months endedSeptember 30, 2021 compared to$128,000 for the nine months endedSeptember 30, 2020 . The effective tax rate was 20.4% and 9.8% for the nine months endedSeptember 30, 2021 and 2020, respectively. Income before income tax expense increased$1.5 million , or 111.8%, to$2.8 million for the nine months endedSeptember 30, 2021 from$1.3 million for the nine months endedSeptember 30, 2020 . The increase in the effective tax rate for the nine months endedSeptember 30, 2021 as compared to the prior period was primarily due to a lack of state net operating loss carry forward in the current period as it was utilized in 2020. 41
--------------------------------------------------------------------------------
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 Nine Months Ended September 30,
2021 2020
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Loans $ 372,257 $ 10,728 3.84 % $ 367,015 $ 10,839 3.94 %
Securities 62,655 878 1.87 % 44,676 800 2.39 %
Other 27,515 67 0.32 % 23,113 164 0.95 %
Total interest-earning assets 462,427 11,673 3.37 % 434,804 11,803 3.62 %
Non-interest-earning assets 11,855 11,975
Total assets $ 474,282 $ 446,779
Interest-bearing liabilities:
NOW and demand deposits $ 105,714 $ 101 0.13 % $ 82,295 $ 152 0.25 %
Money market deposits 73,241 83 0.15 % 72,911 381 0.70 %
Savings accounts 53,449 25 0.06 % 44,455 22 0.07 %
Certificates of deposit 58,744 255 0.58 % 58,411 709 1.62 %
Total interest-bearing deposits 291,148 464 0.21 % 258,072 1,264 0.65 %
Borrowings 42,508 283 0.89 % 72,967 689 1.26 %
Other 2,226 - - 1,614 - -
Total interest-bearing
liabilities 335,882 747 0.30 % 332,653 1,953 0.78 %
Non-interest-bearing deposits 74,837 52,080
Other noninterest-bearing
liabilities 3,800 3,860
Total liabilities 414,519 388,593
Total stockholders' equity 59,763 58,186
Total liabilities and
stockholders' equity $ 474,282 $ 446,779
Net interest income $ 10,926 $ 9,850
Net interest rate spread (1) 3.07 % 2.84 %
Net interest-earning assets (2) $ 126,545 $ 102,151
Net interest margin (3) 3.15 % 3.02 %
Average interest-earning assets
to
interest-bearing liabilities 137.68 % 130.71 %
(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.
42
--------------------------------------------------------------------------------
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.
Nine Months Ended September 30, 2021 vs. 2020
Increase (Decrease) Due to Change in
Volume Rate Total
(Dollars in thousands)
Interest-earning assets:
Loans $ 153 $ (264 ) $ (111 )
Securities 276 (198 ) 78
Other 27 (124 ) (97 )
Total interest-earning assets 456 (586 ) (130 )
Interest-bearing liabilities:
NOW and demand deposits 36 (87 ) (51 )
Money market deposits 2 (300 ) (298 )
Savings accounts 4 (1 ) 3
Certificates of deposit 4 (458 ) (454 )
Total interest-bearing deposits 46 (846 ) (800 )
Borrowings (238 ) (168 ) (406 )
Total interest-bearing liabilities (192 ) (1,014 ) (1,206 )
Change in net interest income $ 648 $ 428 $ 1,076
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. AtSeptember 30, 2021 andDecember 31, 2020 , we had$39.0 million and$34.1 million outstanding in advances from the FHLB, respectively, and the ability to borrow an additional$97.0 million and$112.6 million , respectively. AtSeptember 30, 2021 andDecember 31, 2020 , we also had$-0 - and$18.2 million of PPPLF advances secured by pledges of PPP loans from the FRB, respectively. Additionally, atSeptember 30, 2021 andDecember 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 . AtSeptember 30, 2021 andDecember 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 operating activities was$2.7 million and$3.0 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Net cash used by investing activities, which consists primarily of disbursements for loan originations and purchases, 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$26.6 million and$45.3 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Net cash provided by financing activities, consisting of activity in deposit accounts and FHLB and FRB advances, was$48.6 million and$65.5 million for the nine months endedSeptember 30, 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 impacted our business and that of many of our customers, and the ultimate impact will depend on future developments, which remain uncertain, including the scope and duration of the pandemic and actions taken by governmental authorities in response to it. Our current strategy to increase core deposits and the continued use of FHLB advances, as well as brokered certificates of deposit as needed, to fund loan growth. 43
-------------------------------------------------------------------------------- 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 nine months endedSeptember 30, 2021 was adversely affected.First Seacoast Bancorp is a separate legal entity fromFirst Seacoast Bank and must provide for its own liquidity to pay its operating expenses and other financial obligations and to fund repurchases of shares of common stock. 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. AtSeptember 30, 2021 , the Company (on an unconsolidated basis) had liquid assets of$9.7 million . OnSeptember 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 currently 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 for a discussion of the Company's common stock repurchases. As ofSeptember 30, 2021 , the Company had repurchased 70,941 shares of its common stock at a weighted average share price of$9.45 per share. AtSeptember 30, 2021 ,First Seacoast Bank 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 changeFirst Seacoast Bank's categorization as well-capitalized.
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.
© Edgar Online, source
