First Seacoast Bancorp - Quarter Report: 2022 March (Form 10-Q)

March 31, 2022

Operating Leases

Balance Sheet Location

(Dollars in thousands)

Right-of-use asset

Other Assets

Net lease liability

Other Liabilities

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, 2022

☐	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 ☒

6,065,999 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding as of May 3, 2022, 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, 2022 (unaudited) and December 31, 2021	2
	Consolidated Statements of Income for the Three Months Ended March 31, 2022 and 2021 (unaudited)	3
	Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2022 and 2021 (unaudited)	4
	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021 (unaudited)	5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	39
PART II.	OTHER INFORMATION	40
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	41
	Signatures	42

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements.

FIRST SEACOAST BANCORP AND SUBSIDIARIES

CONSOLIDATED Balance Sheets

(Dollars in thousands)	(Unaudited) March 31, 2022			December 31, 2021
ASSETS
Cash and due from banks	$	5,493		$	6,638
Interest bearing time deposits with other banks		1,245			1,245
Securities available-for-sale, at fair value		98,490			91,365
Federal Home Loan Bank stock		2,410			1,688
Total Loans		379,823			376,641
Less allowance for loan losses		(3,642	)		(3,590	)
Net loans		376,181			373,051
Land, building and equipment, net		4,490			4,566
Bank-owned life insurance		4,481			4,461
Accrued interest receivable		1,568			1,499
Other assets		5,394			2,561
Total assets	$	499,752		$	487,074
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing deposits	$	92,660		$	98,624
Interest bearing deposits		296,109			294,619
Total deposits		388,769			393,243
Advances from Federal Home Loan Bank		49,700			29,462
Mortgagors’ tax escrow		1,898			652
Deferred compensation liability		1,650			1,729
Other liabilities		1,736			1,520
Total liabilities		443,753			426,606
Stockholders' Equity:
Preferred Stock, $.01 par value, 10,000,000 shares authorized, none issued		—			—
Common Stock, $.01 par value, 90,000,000 shares authorized; 6,201,770 issued and 6,099,834 shares outstanding at March 31, 2022; and 6,201,770 shares issued and 6,123,337 outstanding as of December 31, 2021, respectively		62			62
Additional paid-in capital		26,784			26,783
Retained earnings		37,205			36,813
Accumulated other comprehensive (loss) income		(4,022	)		721
Treasury stock, at cost: 101,936 and 78,433 shares outstanding as of March 31, 2022 and December 31, 2021, respectively		(996	)		(748	)
Unearned stock compensation		(3,034	)		(3,163	)
Total stockholders' equity		55,999			60,468
Total liabilities and stockholders' equity	$	499,752		$	487,074

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

FIRST SEACOAST BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended March 31,
(Dollars in thousands, except per share data)	2022		2021
Interest and dividend income:
Interest and fees on loans	$	3,441	$	3,668
Interest on debt securities:
Taxable		196		42
Non-taxable		264		222
Total interest on debt securities		460		264
Dividends		14		—
Total interest and dividend income		3,915		3,932
Interest expense:
Interest on deposits		128		179
Interest on borrowings		51		86
Total interest expense		179		265
Net interest and dividend income		3,736		3,667
Provision for loan losses		60		60
Net interest and dividend income after provision for loan losses		3,676		3,607
Non-interest income:
Customer service fees		217		233
Gain on sale of loans		2		40
Securities gains, net		52		203
Income from bank-owned life insurance		20		20
Loan servicing fee income		52		83
Investment services fees		89		55
Other income		10		15
Total non-interest income		442		649
Non-interest expense:
Salaries and employee benefits		2,264		1,866
Director compensation		68		62
Occupancy expense		204		167
Equipment expense		127		141
Marketing		49		60
Data processing		357		319
Deposit insurance fees		45		30
Professional fees and assessments		223		205
Debit card fees		38		42
Employee travel and education expenses		24		16
Other expense		269		184
Total non-interest expense		3,668		3,092
Income before income tax expense		450		1,164
Income tax expense		58		256
Net income	$	392	$	908

Earnings per share:
Basic	$	0.07	$	0.16
Diluted	$	0.07	$	0.16

Weighted Average Shares:
Basic		5,790,634		5,837,665
Diluted		5,804,676		5,837,665

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

FIRST SEACOAST BANCORP AND SUBSIDIARIES

CONSOLIDATED Statements of COMPREHENSIVE (Loss) INCOME (UNAUDITED)

	Three Months Ended March 31,
(Dollars in thousands)	2022			2021
Net income	$	392		$	908
Other comprehensive loss, net of income taxes:
Securities available-for-sale
Unrealized holding losses on securities available-for-sale arising during the period, net of income taxes of $(1,929) and $(252), respectively		(5,195	)		(678	)
Reclassification adjustment for securities gains, net and net amortization of bond premiums included in net income, net of income taxes of $50 and $(17), respectively		135			(46	)
Total unrealized loss on securities available-for-sale		(5,060	)		(724	)
Derivatives:
Change in interest rate swaps, net of income taxes of $115 and $64, respectively		308			172
Reclassification adjustment for net interest expense on swaps included in net income, net of income taxes of $3 and $1, respectively		9			4
Total change in interest rate swaps		317			176
Other comprehensive loss		(4,743	)		(548	)
Comprehensive (loss) income	$	(4,351	)	$	360

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

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			Retained Earnings		Accumulated Other Comprehensive (Loss) Income			Treasury Stock			Unearned Stock Compensation			Total Stockholders' Equity
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

Balance December 31, 2021		6,123,337		$	62		$	26,783		$	36,813	$	721		$	(748	)	$	(3,163	)	$	60,468
Net income		—			—			—			392		—			—			—			392
Other comprehensive loss		—			—			—			—		(4,743	)		—			—			(4,743	)
Treasury stock activity		(23,503	)		—			—			—		—			(248	)		—			(248	)
Amortization of unearned stock compensation		—			—			—			—		—			—			99			99
ESOP shares earned - 2,981 shares		—			—			1			—		—			—			30			31
Balance March 31, 2022		6,099,834		$	62		$	26,784		$	37,205	$	(4,022	)	$	(996	)	$	(3,034	)	$	55,999

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

FIRST SEACOAST BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Three Months Ended March 31,
(Dollars in thousands)	2022			2021
Cash flows from operating activities:
Net income	$	392		$	908
Adjustments to reconcile net income to net cash provided by operating activities:
ESOP expense		31			28
Stock based compensation		99			—
Depreciation and amortization		136			141
Net amortization of bond premium		237			140
Provision for loan losses		60			60
Gain on sale of loans		(2	)		(40	)
Securities gains, net		(52	)		(203	)
Proceeds from loans sold		497			1,325
Origination of loans sold		(495	)		(1,285	)
Increase in bank-owned life insurance		(20	)		(20	)
Increase in deferred fees on loans		(164	)		(231	)
Deferred tax expense		27			123
(Increase) decrease in accrued interest receivable		(69	)		61
Increase in other assets		(608	)		(328	)
Decrease in deferred compensation liability		(79	)		(86	)
Increase in other liabilities		151			1,009
Net cash provided by operating activities		141			1,602
Cash flows from investing activities:
Proceeds from sales, maturities and principal payments received on securities available-for-sale		1,796			9,746
Purchase of securities available-for-sale		(16,045	)		(8,822	)
Purchase of property and equipment		(51	)		(11	)
Loan purchases		(1,630	)		(2,444	)
Loan originations and principal collections, net		(1,388	)		(3,981	)
Net loan (charge offs) recoveries		(8	)		2
Net purchase of Federal Home Loan Bank stock		(722	)		(72	)
Net cash used by investing activities		(18,048	)		(5,582	)
Cash flows from financing activities:
Net (decrease) increase in NOW, demand deposits, money market and savings accounts		(2,887	)		21,949
Net (decrease) increase in time deposits		(1,587	)		12,169
Increase in mortgagors’ escrow accounts		1,246			625
Treasury stock purchases		(248	)		(233	)
Proceeds from short-term FHLB advances		92,813			5,000
Payments on short-term FHLB advances		(70,313	)		(10,095	)
Payments on long-term FHLB advances		(2,262	)		—
Payments on short-term FRB advances		—			(8,757	)
Net cash provided by financing activities		16,762			20,658
Net change in cash and cash equivalents		(1,145	)		16,678
Cash and cash equivalents at beginning of period		6,638			5,996
Cash and cash equivalents at end of period	$	5,493		$	22,674

Supplemental disclosure of cash flow information:
Cash activities:
Cash paid for interest	$	174		$	279
Cash paid for income taxes		—			3
Noncash activities:
Effect of change in fair value of securities available-for-sale:
Securities available-for-sale		(6,939	)		(993	)
Deferred taxes		1,879			269
Other comprehensive loss		(5,060	)		(724	)
Effect of change in fair value of interest rate swaps:
Interest rate swaps		435			241
Deferred taxes		(118	)		(65	)
Other comprehensive income		317			176
Effect of the adoption of ASU 2016-02:
Other assets		65			—
Other liabilities		65			—

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

FIRST SEACOAST BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.	Summary of Significant Accounting Policies

The accompanying unaudited 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 (“U.S. 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 U.S. 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, 2021, as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 25, 2022.

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 Bank reorganized into the mutual holding company structure, and the Company completed a concurrent stock offering.

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.

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 loans, 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 Insurance Corporation (“FDIC”) for the maximum amount permitted by law.

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

Investment management services are offered through FSB Wealth Management. FSB Wealth management is a division of First Seacoast Bank. The division currently consists of two financial advisors who are located in Dover, New Hampshire. FSB wealth Management provides access to non-FDIC insured products that include retirement planning, portfolio management, investment and insurance strategies, business retirement plans and college planning to individuals throughout our primary market area. These investments and service are offered through a third-party registered broker-dealer and investment advisor. FSB Wealth Management receives fees from advisory services and commissions on individual investment and insurance products purchased by clients. The assets held for wealth management customers are not assets of the Company and, accordingly, are not reflected in the Company’s consolidated balance sheets.

On August 17, 2021, the Bank entered into a definitive agreement with an investment advisory and wealth management firm (the “seller”) to purchase certain of its client accounts and client relationships for a purchase price of $347,000 (included in other assets at March 31, 2022 and December 31, 2021 net of accumulated amortization), of which $172,000 was paid at closing. Each client account has been assigned a value, and as each client transfers to the Bank, 85% of this value will be paid to the seller. By May 31, 2022, or upon mutual agreement that the transition of client accounts is complete, whichever is earlier, the balance of the purchase price will be paid to the seller. As of March 31, 2022, approximately $23.5 million of purchased client accounts are included in total assets under management. Assets under management totaled approximately $90.9 million and $88.0 million at March 31, 2022 and December 31, 2021, respectively. The client accounts purchased are recorded as a customer list intangible asset. Identifiable intangible assets that are subject to amortization will be reviewed for impairment, at least annually, based on their fair value. Any impairment will be recognized as a charge to earnings and the adjusted carrying amount of the intangible asset will become its new accounting basis. The remaining useful life of the intangible asset will also be evaluated each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. The Company is amortizing the customer list intangible on a straight-line basis over a ten year period. During the three months ended March 31, 2022 and 2021, $9,000 and $-0- of amortization expense was recorded in other expense, respectively.

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, 2022, 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. As a smaller reporting company the planned implementation of the CECL model is January 1, 2023. 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 occurred. 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 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 Topic 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 became 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 was permitted. The adoption of this ASU did not 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 was permitted. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. In particular, this guidance requires a lessee of operating or finance leases to recognize on the statement of condition a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. However, for leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. Under previous U.S. GAAP, a lessee was not required to recognize lease assets and lease liabilities arising from operating leases on the statement of condition. Initially, the FASB approved a proposal to delay the implementation of this standard by one year for smaller reporting companies to years beginning after December 15, 2020. On June 30, 2020, the FASB further delayed the implementation of this standard by one year for smaller reporting companies to years beginning after December 15, 2021. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,” which clarifies ASU 2016-02 with respect to certain aspects of the update and ASU 2018-11, “Targeted Improvements,” to allow an optional transition method in which the provisions of Topic 842 would be applied upon the adoption date and would not have to be retroactively applied to the earliest reporting period presented in the consolidated financial statements. Using the optional transition method discussed above, the Company adopted the new lease guidance on January 1, 2022 and recorded a right-of- use asset of $65,000 in other assets and a corresponding net lease liability in other liabilities at March 31, 2022.

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 March 2022, the FASB issued ASU 2022-2, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures,” which eliminates the troubled debt restructuring (“TDR”) accounting model for creditors that have adopted Topic 326, “Financial Instruments – Credit Losses.” All other creditors must continue to apply the TDR accounting model until they adopt ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Due to the removal of the TDR accounting model, all loan modifications now will be accounted for under the general loan modification guidance in Subtopic 310-20. In addition, on a prospective basis, entities will be subject to new disclosure requirements covering modifications of receivables to borrowers experiencing financial difficulty. Public business entities within the scope of the Topic 326 vintage disclosure requirements also will be required to prospectively disclose current-period gross write-off information by vintage (that is, year of origination). This ASU becomes effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The adoption of this ASU is not expected to have a material 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 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 U.S. 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 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 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),” was 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.

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. 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.	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, 2022 and December 31, 2021:

	March 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
U.S. Government-sponsored enterprises obligations	$	6,573	$	—	$	(486	)	$	6,087
U.S. Government agency small business administration pools guaranteed by SBA		7,593		—		(321	)		7,272
Collateralized mortgage obligations issued by the FHLMC, FNMA and GNMA		4,227		—		(280	)		3,947
Residential mortgage-backed securities		25,779		—		(2,159	)		23,620
Municipal bonds		56,403		180		(2,941	)		53,642
Corporate subordinated debt		4,066		—		(144	)		3,922
	$	104,641	$	180	$	(6,331	)	$	98,490

	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
U.S. Government-sponsored enterprises obligations	$	6,098	$	—	$	(127	)	$	5,971
U.S. Government agency small business administration pools guaranteed by SBA		5,059		22		(36	)		5,045
Collateralized mortgage obligations issued by the FHLMC, FNMA and GNMA		3,400		1		(69	)		3,332
Residential mortgage-backed securities		23,784		32		(484	)		23,332
Municipal bonds		49,164		1,501		(52	)		50,613
Corporate subordinated debt		3,072		—		—			3,072
	$	90,577	$	1,556	$	(768	)	$	91,365

The amortized cost and fair values of available-for-sale securities at March 31, 2022 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, 2022
Due in one year or less	$	—	$	—
Due after one year through five years		—		—
due after five years through ten years		11,600		10,976
Due after ten years		55,442		52,675
Total U.S. Government-sponsored enterprises obligations, municipal bonds and corporate subordinated debt		67,042		63,651
U.S. Government agency small business pools guaranteed by SBA⁽¹⁾		7,593		7,272
Collateralized mortgage obligations issued by the FHLMC, FNMA and GNMA⁽¹⁾		4,227		3,947
Residential mortgage-backed securities⁽¹⁾		25,779		23,620
Total	$	104,641	$	98,490

(1) Actual maturities for these debt securities are dependent upon the interest rate environment and prepayments on the underlying loans.

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, 2022 and December 31, 2021:

	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, 2022
U.S. Government sponsored enterprises obligations		7	$	4,301	$	(290	)		3	$	1,786	$	(196	)	$	6,087	$	(486	)
U.S. Government agency small business administration pools guaranteed by SBA		7		6,264		(321	)		—		—		—			6,264		(321	)
Collateralized mortgage obligations issued by the FHLMC, FNMA and GNMA		5		3,606		(253	)		1		287		(27	)		3,893		(280	)
Residential mortgage-backed securities		23		17,150		(1,426	)		6		6,470		(733	)		23,620		(2,159	)
Municipal bonds		63		43,337		(2,895	)		1		538		(46	)		43,875		(2,941	)
Corporate subordinated debt		3		3,922		(144	)		—		—		—			3,922		(144	)
		108	$	78,580	$	(5,329	)		11	$	9,081	$	(1,002	)	$	87,661	$	(6,331	)
December 31, 2021
U.S. Government sponsored enterprises obligations		7	$	5,022	$	(80	)		2	$	949	$	(47	)	$	5,971	$	(127	)
U.S. Government agency small business administration pools guaranteed by SBA		3		2,988		(36	)		—		—		—			2,988		(36	)
Collateralized mortgage obligations issued by the FHLMC, FNMA and GNMA		4		2,779		(69	)		—		—		—			2,779		(69	)
Residential mortgage-backed securities		22		19,541		(399	)		1		2,304		(85	)		21,845		(484	)
Municipal bonds		7		6,494		(49	)		1		584		(3	)		7,078		(52	)
		43	$	36,824	$	(633	)		4	$	3,837	$	(135	)	$	40,661	$	(768	)

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, 2022.

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,
	2022		2021
	(Dollars in thousands)
Proceeds from sales, maturities and principal payments received on securities available-for-sale	$	1,796	$	9,746
Gross realized gains		52		203
Gross realized losses		—		—
Net realized gains	$	52	$	203

At March 31, 2022 there were no holdings of securities of any issuer, other than the SBA, FHLMC and FNMA, whose aggregate carrying value exceeded 10% of stockholders’ equity. At December 31, 2021 there were no holdings of securities of any issuer, other than the FHLMC and FNMA whose aggregate carrying value exceeded 10% of stockholders’ equity.

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, one- to four-family residential loans, home equity loans and lines of credit and consumer loans. Most loans originated by the bank 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 response to the COVID-19 pandemic, the Small Business Administration (“SBA”) established the Paycheck Protection Program (“PPP”), which was designed to aid small- and medium-sized businesses through federally guaranteed SBA loans (“PPP loans”) distributed through banks. PPP loans are fully guaranteed as to principal and interest by the SBA. During the year ended December 31, 2021, the Bank originated 134 PPP loans with aggregate outstanding principal balances of $13.1 million. As of March 31, 2022 and December 31, 2021, total PPP loan principal balances were $3.2 million and $5.5 million, respectively, and are included in commercial and industrial loans (C+I).

Loans consisted of the following at March 31, 2022 and December 31, 2021:

	March 31, 2022			December 31, 2021
	(Dollars in thousands)
Commercial real estate (CRE)	$	76,397		$	72,057
Multifamily (MF)		8,900			8,998
Commercial and industrial (C+I)		28,459			26,851
Acquisition, development, and land (ADL)		17,423			21,365
1-4 family residential (RES)		235,273			234,199
Home equity loans and lines of credit (HELOC)		6,569			6,947
Consumer (CON)		4,988			4,574
Total loans		378,009			374,991
Net deferred loan costs		1,814			1,650
Allowance for loan losses		(3,642	)		(3,590	)
Net loans	$	376,181		$	373,051

Transactions in the allowance for loan losses (“ALL”) for the three months ended March 31, 2022 and 2021 by portfolio segment are summarized as follows:

(Dollars in thousands)	CRE		MF			C+I			ADL			RES			HELOC			CON			Unallocated			Total
Balance, December 31, 2021	$	833	$	80		$	194		$	178		$	2,139		$	63		$	75		$	28		$	3,590
Provision for loan losses		61		(2	)		24			(62	)		49			(1	)		19			(28	)		60
Charge-offs		—		—			—			—			—			—			(9	)		—			(9	)
Recoveries		—		—			—			—			—			—			1			—			1
Balance, March 31, 2022	$	894	$	78		$	218		$	116		$	2,188		$	62		$	86		$	—		$	3,642

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

As of March 31, 2022 and December 31, 2021, information about loans and the ALL by portfolio segment are summarized as follows:

(Dollars in thousands)	CRE		MF		C+I		ADL		RES		HELOC		CON		Unallocated		Total
March 31, 2022 Loan Balances
Individually evaluated for impairment	$	101	$	—	$	25	$	—	$	680	$	115	$	—	$	—	$	921
Collectively evaluated for impairment		76,296		8,900		28,434		17,423		234,593		6,454		4,988		—		377,088
Total	$	76,397	$	8,900	$	28,459	$	17,423	$	235,273	$	6,569	$	4,988	$	—	$	378,009
ALL related to the loans
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		894		78		218		116		2,188		62		86		—		3,642
Total	$	894	$	78	$	218	$	116	$	2,188	$	62	$	86	$	—	$	3,642
December 31, 2021 Loan Balances
Individually evaluated for impairment	$	104	$	—	$	28	$	—	$	722	$	115	$	—	$	—	$	969
Collectively evaluated for impairment		71,953		8,998		26,823		21,365		233,477		6,832		4,574		—		374,022
Total	$	72,057	$	8,998	$	26,851	$	21,365	$	234,199	$	6,947	$	4,574	$	—	$	374,991
ALL related to the loans
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		833		80		194		178		2,139		63		75		28		3,590
Total	$	833	$	80	$	194	$	178	$	2,139	$	63	$	75	$	28	$	3,590

The following is an aged analysis of past due loans by portfolio segment as of March 31, 2022:

(Dollars in thousands)	30-59 Days		60-89 Days		90 + Days		Total Past Due		Current		Total Loans		Non-Accrual Loans
CRE	$	—	$	—	$	—	$	—	$	76,397	$	76,397	$	—
MF		—		—		—		—		8,900		8,900		—
C+I		—		—		—		—		28,459		28,459		—
ADL		—		—		—		—		17,423		17,423		—
RES		—		—		487		487		234,786		235,273		680
HELOC		122		16		115		253		6,316		6,569		115
CON		—		—		—		—		4,988		4,988		—
	$	122	$	16	$	602	$	740	$	377,269	$	378,009	$	795

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

(Dollars in thousands)	30-59 Days		60-89 Days		90 + Days		Total Past Due		Current		Total Loans		Non-Accrual Loans
CRE	$	—	$	—	$	—	$	—	$	72,057	$	72,057	$	—
MF		—		—		—		—		8,998		8,998		—
C+I		—		—		—		—		26,851		26,851		—
ADL		—		—		—		—		21,365		21,365		—
RES		—		487		235		722		233,477		234,199		722
HELOC		117		129		—		246		6,701		6,947		115
CON		6		—		—		6		4,568		4,574		—
	$	123	$	616	$	235	$	974	$	374,017	$	374,991	$	837

There were no loans collateralized by residential real estate property in the process of foreclosure at March 31, 2022 or December 31, 2021.

The following table provides information on impaired loans:

	As of March 31, 2022						At March 31, 2022
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
CRE	$	—	$	—	$	—	$	—	$	—
MF		—		—		—		—		—
C+I		—		—		—		—		—
ADL		—		—		—		—		—
RES		680		680		—		701		1
HELOC		115		115		—		115		—
CON		—		—		—		—		—
Total impaired loans	$	795	$	795	$	—	$	816	$	1
.
	As of December 31, 2021						At March 31, 2021
With no related allowance recorded:
CRE	$	—	$	—	$	—	$	—	$	—
MF		—		—		—		—		—
C+I		—		—		—		—		—
ADL		—		—		—		—		—
RES		722		722		—		62		—
HELOC		115		115		—		—		—
CON		—		—		—		—		—
Total impaired loans	$	837	$	837	$	—	$	62	$	—

During 2021, one loan was determined to be a troubled debt restructuring (“TDR”). At December 31, 2021, this loan had a balance of $195,000 which was determined through a calculation of the present value of estimated future cashflows. At March 31, 2022, the balance of this TDR was approximately $194,000. The modification agreement defers delinquent interest and escrow payments to the end of the loan. The allowance for loan losses included a specific reserve for this TDR of $-0- at March 31, 2022 and December 31, 2021. At March 31, 2021, there were no loans modified as TDRs.

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. These loans are individually evaluated for impairment on a quarterly basis, or more often if needed.

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.

The following presents the internal risk rating of loans by portfolio segment as of March 31, 2022:

(Dollars in thousands)	Pass		Special Mention		Substandard		Total
CRE	$	73,619	$	2,677	$	101	$	76,397
MF		8,900		—		—		8,900
C+I		28,434		—		25		28,459
ADL		17,423		—		—		17,423
RES		234,593		—		680		235,273
HELOC		6,454		—		115		6,569
CON		4,988		—		—		4,988
Total	$	374,411	$	2,677	$	921	$	378,009

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

(Dollars in thousands)	Pass		Special Mention		Substandard		Total
CRE	$	69,252	$	2,701	$	104	$	72,057
MF		8,998		—		—		8,998
C+I		26,823		—		28		26,851
ADL		21,365		—		—		21,365
RES		233,477		—		722		234,199
HELOC		6,832		—		115		6,947
CON		4,574		—		—		4,574
Total	$	371,321	$	2,701	$	969	$	374,991

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, 2022 and December 31, 2021 were $4.7 million and $4.8 million, respectively.

4.	Loan Servicing

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of such loans were $38.4 million and $40.6 million at March 31, 2022 and December 31, 2021, 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 14, Fair Value of Assets and Liabilities, for more information). Changes to the balance of mortgage servicing rights are recorded in loan servicing fee income in the Company’s consolidated statements of income.

The Bank’s mortgage servicing activities include: collecting principal, interest and escrow payments from borrowers; making tax and insurance payments on behalf of borrowers; monitoring delinquencies and executing foreclosure proceedings; and accounting for and remitting principal and interest payments to investors. Loan servicing fee income, including late and ancillary fees, was $52,000 and $83,000 for the three months ended March 31, 2022 and 2021, respectively. Servicing fee income is recorded in loan servicing fee income in the Company’s consolidated statements of income. The Bank’s residential mortgage investor loan servicing portfolio is primarily comprised of fixed rate loans secured by properties located in the Bank’s market area.

The following summarizes activity in mortgage servicing rights for the three months ended March 31, 2022 and 2021:

(Dollars in thousands)	2022			2021
Balance, December 31,	$	322		$	273
Additions		5			13
Payoffs		(16	)		(14	)
Change in fair value due to change in assumptions		39			57
Balance, March 31,	$	350		$	329

Deposits

Deposits consisted of the following at March 31, 2022 and December 31, 2021:

(Dollars in thousands)	March 31, 2022		December 31, 2021
NOW and demand deposits	$	205,807	$	206,235
Money market deposits		68,024		71,317
Savings deposits		58,199		57,365
Time deposits of $250,000 and greater		6,132		6,281
Time deposits less than $250,000		50,607		52,045
	$	388,769	$	393,243

At March 31, 2022, the scheduled maturities of time deposits were as follows (in thousands):

2022	$	22,904
2023		15,672
2024		7,092
2025		7,225
2026		3,804
2027		42
	$	56,739

The total includes $18.1 million of brokered time deposits which were bifurcated into amounts below the FDIC insurance limit at March 31, 2022 and December 31, 2021, respectively.

6.	Borrowings

Federal Home Loan Bank (FHLB)

A summary of borrowings from the FHLB is as follows:

		March 31, 2022
Principal Amounts		Maturity Dates		Interest Rates
		(Dollars in thousands)
$	32,500		2022	0.38% to 0.53% – fixed
	15,000		2023	0.44% to 0.45% – fixed
	800		2024	0.00% – fixed
	520		2025	0.00% – fixed
	250		2028	0.00% – fixed
	200		2030	0.00% – fixed
	430		2031	0.00% – fixed
$	49,700

		December 31, 2021
Principal Amounts		Maturity Dates		Interest Rates
		(Dollars in thousands)
$	12,262		2022	0.00% to 0.31%– fixed
	15,000		2023	0.44% to 0.45%– fixed
	800		2024	0.00% – fixed
	520		2025	0.00% – fixed
	250		2028	0.00% – fixed
	200		2030	0.00% – fixed
	430		2031	0.00% – fixed
$	29,462

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 $91.4 million and $109.7 million at March 31, 2022 and December 31, 2021, respectively. At March 31, 2022 and December 31, 2021, the Bank had sufficient collateral at the FHLB to support its obligations and was in compliance with the FHLB’s collateral pledging program.

At March 31, 2022 and December 31, 2021, borrowings include $2.2 million and $4.5 million, respectively, of advances through the FHLB’s Jobs for New England program where certain qualifying small business loans that create or preserve jobs, expand woman-, minority- or veteran- owned businesses or otherwise stimulate the economy in New England communities are offered at an interest rate of 0%.

At March 31, 2022 and December 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, 2022 and December 31, 2021.

7.	Employee Benefits

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 also makes matching and profit-sharing contributions to eligible participants in accordance with plan provisions. The Company’s contributions for the three months ended March 31, 2022 and 2021 were $54,000 and $50,000, respectively.

Pension Plan

The Company participates in the Pentegra Defined Benefit Plan for Financial Institutions (The Pentegra DB Plan), a tax-qualified defined benefit pension plan. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and as

a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan. The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413 (c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan, contributions made by a participating employer may be used to provide benefits to participants of other participating employers.

The funded status (fair value of plan assets divided by funding target) as of July 1, 2021 is as follows:

2021 Valuation Report			104.99	%	⁽¹⁾

⁽¹⁾

Fair value of plan assets reflects any contributions received through June 30, 2021.

Based upon the funded status of the Pentegra DB Plan as of July 1, 2021, no funding improvement plan or rehabilitation plan has been implemented or is pending as of March 31, 2022.

Total pension plan expense for the three months ended March 31, 2022 and 2021 was $50,000 and $90,000, 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, 2022.

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 $200,000 for the fiscal year ending December 31, 2022.

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, 2022 and December 31, 2021 relating to this supplemental retirement plan was $640,000 and $634,000, 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 for the three months ended March 31, 2022 and 2021.

Executive Supplemental Retirement Plan

The recorded liability at March 31, 2022 and December 31, 2021 relating to the supplemental retirement plan for the Bank’s former President was $44,000 and $90,000, respectively. The discount rate used to determine the Company’s obligation was 6.25% at March 31, 2022 and December 31, 2021. The expense of this salary retirement plan was $1,000 for the three months ended March 31, 2022 and 2021.

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, 2022 and December 31, 2021 relating to this supplemental executive benefit agreement was $35,000. The expense of this supplemental plan was $-0- for the three months ended March 31, 2022 and 2021.

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 is being accrued over the estimated period of service. The estimated liability at March 31, 2022 and December 31, 2021 relating to this plan was $508,000 and $550,000, respectively. The discount rate used to determine the Company’s obligation was 6.25% at March 31, 2022 and December 31, 2021. Total supplemental retirement plan expense amounted to $19,000 and $17,000 for the three months ended March 31, 2022 and 2021, respectively. The Company enacted a “hard freeze” for this supplemental retirement plan as of January 1, 2022. On February 10, 2022, the Bank and the non-employee members of the board of directors of the Bank entered into amendments to the Supplemental Director Retirement Agreements (the “Agreements”) previously

entered into by the Bank and the directors. The amendments eliminate the formula for determining the normal annual retirement benefit (previously “70% of Final Base Fee”) and replaces it with a fixed annual benefit of $20,000. The amendments also eliminate the formula for determining the benefit payable on a change in control (previously tied to the normal annual retirement formula with certain imputed increases in the Base Fee) and replacing it with a fixed amount equal to the present value of $200,000. The effect of the amendments is to eliminate the variable and increasing costs associated with the Agreements. Instead, since the normal annual retirement benefit will be a fixed amount, the future costs associated with the Agreements is now more predictable. It is the intention of the Bank that no new directors of the Bank would enter into similar agreements.

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, 2022 and December 31, 2021, the total deferred director’s fees amounted to $424,000 and $420,000, respectively.

8.	Stock Based Compensation

Employee Stock Ownership Plan

The Company maintains the First Seacoast Bank Employee Stock Ownership Plan (“ESOP”) to provide eligible employees of the Company the opportunity to own Company stock. The ESOP is a tax-qualified retirement plan for the benefit of Company employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal limits. The 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 is repaying 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, 2022 and December 31, 2021, the remaining principal balance on the ESOP debt was $2.1 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, 2022 and 2021 was $31,000 and $28,000, respectively. At March 31, 2022 and December 31, 2021, total unearned compensation for the ESOP was $2.0 million.

	March 31, 2022		December 31, 2021
Shares held by the ESOP include the following:
Allocated		35,772		23,848
Committed to be allocated		2,981		11,924
Unallocated		199,720		202,701
Total		238,473		238,473

The fair value of unallocated shares was approximately $2.1 million and $2.2 million at March 31, 2022 and December 31, 2021, respectively.

Equity Incentive Plan

Effective May 27, 2021, the Company adopted the First Seacoast Bancorp 2021 Equity Incentive Plan (the “2021 Plan”). The Company’s stockholders approved the 2021 plan on that date. The 2021 Plan provides for the granting of incentive and non-statutory stock options to purchase shares of common stock and the granting of shares of restricted stock awards and restricted stock units.

The 2021 Plan authorizes the issuance or delivery to participants of up to 417,327 shares of common stock. Of this number, the maximum number of shares of common stock that may be issued pursuant to the exercise of stock options is 298,091 shares and the maximum number of shares of common stock that may be issued as restricted stock awards or restricted stock units is 119,236 shares. The exercise price of stock options may not be less than the fair market value on the date the stock option is granted. Further, stock options may not be granted with a term that is longer than 10 years.

As of March 31, 2022, no stock options have been granted. On November 18, 2021, 118,270 restricted stock awards were granted to directors and certain members of management at $9.99 per share. The total fair value related to the November 18, 2021 grant was $1.2 million. Restricted stock awards time-vest over a three year period and have been fair valued as of the date of grant. The holders of restricted stock awards participate fully in the rewards of stock ownership of the Company, including voting rights when granted and dividend rights when vested. A summary of non-vested restricted shares outstanding as of March 31, 2022 and changes during the three months ended is presented below:

	March 31, 2022
	Number of Shares		Weighted Average Grant Value
Restricted stock:
Non-vested at beginning of period		118,270	$	9.99
Granted		—		—
Vested		—		—
Forfeited		—		—
Non-vested at end of period		118,270	$	9.99

For the three months ended March 31, 2022, the expense recognized for this equity incentive plan was $99,000 which provided a tax benefit of $27,000. At March 31, 2022 and December 31, 2021, total unrecognized compensation expense for this equity incentive plan was $1.0 million and $1.1 million, respectively, with a 2.6 and 2.9 year weighted average future recognition period, respectively.

Leases

The Company is obligated under various lease agreements for its branch office and certain equipment. These agreements are accounted for as operating leases and their terms expire between 2022 and 2025 and, in some instances, contain options to renew for periods up to four years. The Company has no financing leases.

The Company adopted ASU 2016-02 – Leases (Topic 842) – on January 1, 2022 and began recognizing its operating leases on its consolidated balance sheet by recording a net lease liability, representing the Company’s legal obligation to make these lease payments, and a Right-Of-Use (“ROU”) asset, representing the Company’s legal right to use the leased assets. The Company, by policy, does not include renewal options for leases as part of its ROU asset and lease liabilities unless they are deemed reasonably certain to exercise. The Company does not have any sub-lease agreements.

The following table summarizes information related to the Company’s right-of-use asset and net lease liability:

The Company determines whether a contract contains a lease based on whether a contract, or a part of a contract, conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The discount rate is either implicit in the lease or, when a rate cannot be readily determined, the Company’s incremental borrowing rate is used. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term.

The components of operating lease cost and other related information are as follows:

	The three months ended March 31, 2022
	(Dollars in thousands)
Operating lease cost	$	12
Short-term lease cost		—
Variable lease cost (Cost excluded from lease payments)		—
Sublease income		—
Total operating lease cost		12
Other Information:
Cash paid for amounts included in the measurement of lease liabilities - operating cash flows from operating leases		12
Operating lease - operating cash flows (liability reduction)	$	—
Weighted average lease term	2.0 years
Weighted average discount rate		2.46	%

The total minimum lease payments due in future periods for lease agreements in effect at March 31, 2022 were as follows:

The three months ended March 31, 2022	Future Minimum Lease Payments
	(Dollars in thousands)
Remainder of 2022	$	37
2023		16
2024		10
2025		4
2026		—
Thereafter		—
Total minimum lease payments		67
Less: interest		(2	)
Total lease liability		65

One of the Company’s lease agreements contain clauses calling for escalation of minimum lease payments contingent on increases in LIBOR, or a similar replacement index, and the consumer price index.

10.	Other Comprehensive Income

The Company reports certain items as “other comprehensive income” (“AOCI”) and reflects total accumulated other comprehensive income in the consolidated financial statements for all periods containing elements of other comprehensive income or loss. The following table presents a reconciliation of the changes in the components of other comprehensive income

or loss for the dates indicated, including the amount of income tax expense or benefit allocated to each component of other comprehensive income or loss:

	Three Months Ended March 31,
Reclassification Adjustments	2022			2021			Affected Line Item in Consolidated Statements of Income
	(Dollars in thousands)
Gains on sale of securities available-for-sale	$	(52	)	$	(203	)	Securities gains, net
Tax effect		14			55		Income tax expense
		(38	)		(148	)	Net income
Net amortization of bond premiums		237			140		Interest on debt securities
Tax effect		(64	)		(38	)	Income tax expense
		173			102		Net income
Net interest expense on swaps		12			5		Interest on borrowings
Tax effect		(3	)		(1	)	Income tax expense
		9			4		Net income
Total reclassification adjustments	$	144		$	(42	)

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

(Dollars in thousands)	Net Unrealized Gains (Losses) on AFS Securities⁽¹⁾			Net Unrealized Gains (Losses) on Cash Flow Hedges⁽¹⁾			AOCI⁽¹⁾
Balance at December 31, 2021	$	575		$	146		$	721
Other comprehensive (loss) income before reclassification		(5,195	)		308			(4,887	)
Amounts reclassified from AOCI		135			9			144
Other comprehensive (loss) income		(5,060	)		317			(4,743	)
Balance at March 31, 2022	$	(4,485	)	$	463		$	(4,022	)

Balance at December 31, 2020	$	1,481		$	(100	)	$	1,381
Other comprehensive (loss) income before reclassification		(678	)		172			(506	)
Amounts reclassified from AOCI		(46	)		4			(42	)
Other comprehensive (loss) income		(724	)		176			(548	)
Balance at March 31, 2021	$	757		$	76		$	833

(1) All amounts are net of tax.

11.	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, 2022, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank, as well capitalized under the regulatory framework, for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum capital amounts and ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category. Management believes that, as of March 31, 2022 and December 31, 2021, 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, 2022 and December 31, 2021 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 to be Well					Minimum Capital Required For Capital Adequacy Plus Capital Conservation Buffer
	Actual					Requirement					Capitalized					Fully Phased-In
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2022
Total Capital (to risk-weighted assets)	$	53,699		17.30	%	$	24,836		8.00	%	$	31,045		10.00	%	$	32,598		10.50	%
Tier 1 Capital (to risk-weighted assets)		50,004		16.11			18,627		6.00			24,836		8.00			26,388		8.50
Tier 1 Capital (to average assets)		50,004		10.11			19,779		4.00			24,723		5.00			19,779		4.00
Common Equity Tier 1 (to risk-weighted assets)		50,004		16.11			13,970		4.50			20,179		6.50			21,732		7.00

						Minimum Capital					Minimum Capital Required to be Well					Minimum Capital Required For Capital Adequacy Plus Capital Conservation Buffer
	Actual					Requirement					Capitalized					Fully Phased-In
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2021
Total Capital (to risk-weighted assets)	$	52,798		17.87	%	$	23,641		8.00	%	$	29,546		10.00	%	$	31,029		10.50	%
Tier 1 Capital (to risk-weighted assets)		49,151		16.63			17,731		6.00			23,644		8.00			25,119		8.50
Tier 1 Capital (to average assets)		49,151		9.92			19,811		4.00			24,774		5.00			19,811		4.00
Common Equity Tier 1 (to risk-weighted assets)		49,151		16.63			13,298		4.50			19,211		6.50			20,686		7.00

12.	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 2.2% of all shares then outstanding and approximately 5.0% of the then outstanding shares owned by stockholders other than the MHC. The Company holds repurchased shares in its treasury. As of March 31, 2022 and December 31, 2021, the Company had repurchased 101,936 and 78,433 shares of its common stock, respectively.

The Company’s repurchases of its common stock made during the quarter ended March 31, 2022 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, 2022 - January 31, 2022		15,999	$	10.66		15,999		42,447
February 1, 2022 - February 28, 2022		1,595		10.41		1,595		40,852
March 1, 2022 - March 31, 2022		5,909		10.36		5,909		34,943
Total		23,503				23,503

13.	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 derivative instruments are designated as cash flow hedges with changes in the fair value of the derivative recorded in accumulated other comprehensive (loss) income 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.

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. 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 (loss) income 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 $60,000 will be reclassified as an increase to interest expense. For the three months ended March 31, 2022 and 2021, the change in fair value for these derivative instruments was $435,000 and $241,000, respectively. At March 31, 2022 and December 31, 2021, the fair value of interest rate swap derivatives resulted in an asset of $635,000 and $200,000, respectively, and is recorded in other assets.

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

				March 31, 2022
(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	$	283	$	—
Interest Rate Swap 2021	4/13/2021	4/13/2026	0.74%		5,000		352		—
Total Hedging Instruments				$	10,000	$	635	$	—
Hedged Items:
Variability in cash flows related to 90-day FHLB advances				N/A		$	—	$	10,000

				December 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	$	85	$	—
Interest Rate Swap 2021	4/13/2021	4/13/2026	0.74%		5,000		115		—
Total Hedging Instruments				$	10,000	$	200	$	—
Hedged Items:
Variability in cash flows related to 90-day FHLB advances				N/A		$	—	$	10,000

The following table summarizes the effect of cash flow hedge accounting on the consolidated statements of income for the three months ended March 31, 2022 and 2021:

	Location and Amount of Loss Recognized in Consolidated Statements of Income
	2022					2021
(Dollars in thousands)	Interest Income (Expense)			Other Income (Expense)		Interest Income (Expense)			Other Income (Expense)
The effect of cash flow hedge accounting:
Amount reclassified from AOCI into expense	$	(12	)	$	—	$	(5	)	$	—

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, 2022, related to the balance sheet hedging of $10.0 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 which was excluded from the assessment of hedge effectiveness. At March 31, 2022 and December 31, 2021, the Company posted $526,000, 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.

14.	Fair Values of Assets and Liabilities

Determination of Fair Value

The fair value of an asset or liability is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from one level to another. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various assets and liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value of cash flows or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability and reliability of the assumptions used to determine fair value.

Level 1 - Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 - Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 - Level 3 inputs are unobservable inputs for the asset or liability.

For assets and liabilities, fair value is based upon the lowest level of observable input that is significant to the fair value measurement.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that primarily use, as inputs, observable market-based parameters. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth below. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all the Company’s financial assets and financial liabilities carried at fair value at March 31, 2022 and December 31, 2021.

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, FNMA and GNMA residential mortgage-backed securities, other municipal bonds and corporate subordinated debt is generally classified within Level 2 of the fair value hierarchy. For these securities, the Company obtains fair value measurements from independent pricing services or uses fair value measurements considering observable market data. 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 4 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, 2022 and December 31, 2021, 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, 2022
Securities available-for-sale:
U.S. Government-sponsored enterprises obligations	$	6,087	$	—	$	6,087	$	—
U.S Government agency small business administration pools guaranteed by the SBA		7,272		—		7,272		—
Collateralized mortgage obligations issued by the FHLMC, FNMA and GNMA		3,947		—		3,947		—
Residential mortgage-backed-securities		23,620		—		23,620		—
Municipal bonds		53,642		—		53,642		—
Corporate subordinated debt		3,922		—		3,922		—
Other assets:
Mortgage servicing rights		350		—		—		350
Derivatives		635		—		635		—

	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
December 31, 2021
Securities available-for-sale:
U.S. Government-sponsored enterprises obligations	$	5,971	$	—	$	5,971	$	—
U.S Government agency small business administration pools guaranteed by the SBA		5,045		—		5,045		—
Collateralized mortgage obligations issued by the FHLMC, FNMA and GNMA		3,332		—		3,332		—
Residential mortgage-backed-securities		23,332		—		23,332		—
Municipal bonds		50,613		—		50,613		—
Corporate subordinated debt		3,072		—		3,072		—
Other assets:
Mortgage servicing rights		322		—		—		322
Derivatives		200		—		200		—

For the three months ended March 31, 2022 and 2021, 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, 2022	$	322
Included in net income		28
Balance as of March 31, 2022	$	350
Total unrealized net gains (losses) included in net income related to assets still held as of March 31, 2022	$	—

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	$	—

(1)

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

For Level 3 assets measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021, the significant unobservable inputs used in the fair value measurements were as follows:

	March 31, 2022
(Dollars in thousands)	Valuation Technique	Description	Range	Weighted Average⁽¹⁾	Fair Value
Mortgage Servicing Rights	Discounted Cash Flow	Prepayment Rate	6.81% - 24.78%	10.10%	$	350
		Discount Rate	9.00% - 9.00%	9.00%
		Delinquency Rate	2.73% - 3.61%	2.88%
		Default Rate	0.08% - 0.14%	0.13%

	December 31, 2021
(Dollars in thousands)	Valuation Technique	Description	Range	Weighted Average⁽¹⁾	Fair Value
Mortgage Servicing Rights	Discounted Cash Flow	Prepayment Rate	6.63% - 25.56%	13.39%	$	322
		Discount Rate	9.00% - 9.00%	9.00%
		Delinquency Rate	2.82% - 3.63%	2.96%
		Default Rate	0.08% - 0.14%	0.13%

(1)

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

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 4, Loan Servicing, for a rollforward of our Level 3 item and related inputs and assumptions used to determine fair value at March 31, 2022.

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, 2022 and December 31, 2021 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, 2022 or December 31, 2021.

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, 2022 and December 31, 2021, fair values of loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.

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, 2022 and December 31, 2021 are as follows:

(Dollars in thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
March 31, 2022
Financial Assets:
Cash and due from banks	$	5,493	$	5,493	$	5,493	$	—	$	—
Interest-bearing time deposits with other banks		1,245		1,245		—		1,245		—
Federal Home Loan Bank stock		2,410		2,410		—		2,410		—
Bank-owned life insurance		4,481		4,481		—		4,481		—
Loans, net		376,181		361,941		—		—		361,941
Accrued interest receivable		1,568		1,568		1,568		—		—
Financial Liabilities:
Deposits	$	388,769	$	387,605	$	332,029	$	55,576	$	—
Advances from Federal Home Loan Bank		49,700		48,581		—		48,581		—
Mortgagors’ tax escrow		1,898		1,898		—		1,898		—
December 31, 2021
Financial Assets:
Cash and due from banks	$	6,638	$	6,638	$	6,638	$	—	$	—
Interest-bearing time deposits with other banks		1,245		1,245		—		1,245		—
Federal Home Loan Bank stock		1,688		1,688		—		1,688		—
Bank-owned life insurance		4,461		4,461		—		4,461		—
Loans, net		373,051		371,587		—		—		371,587
Accrued interest receivable		1,499		1,499		1,499		—		—
Financial Liabilities:
Deposits	$	393,243	$	393,145	$	334,917	$	58,228	$	—
Advances from Federal Home Loan Bank		29,462		29,063		—		29,063		—
Mortgagors’ tax escrow		652		652		—		652		—

15.	Subsequent Events

From April 1, 2022 through May 3, 2022, the Company purchased an additional 33,835 shares of common stock pursuant to its repurchase plan at an average price of $10.74 per share.

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, 2022 and consolidated results of operations for the three months ended March 31, 2022 and 2021 and 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 ended December 31, 2021, filed on March 25, 2022 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

On March 11, 2020, the world health organization declared the outbreak of COVID-19 a global pandemic. Since then, the COVID-19 pandemic has continued to evolve and mutate, including through its variants, and has adversely affected, and may continue to adversely affect, local, national and global economic activity. Actions taken to help mitigate the spread of COVID-19 include restrictions on travel, localized quarantines and government-mandated closures of certain businesses. While certain of these restrictions have been loosened, the same or new restrictions may be implemented again. Although vaccines for COVID-19 have largely been made available in the U.S., the ultimate efficacy of the vaccines will depend on various factors including, the number of people who receive the vaccines as well as the vaccines’ effectiveness against contracting and spreading COVID-19 and any of its existing or new variants. While management has taken measures to mitigate the impact of the pandemic on the Company, such as temporary branch closures, transitioning to a more remote work environment and participation in government stimulus programs, the long-term impact to the Company remains uncertain. We continue to monitor the impact of COVID-19 closely; however, the extent to which the COVID-19 pandemic will impact our operations and financial results during the remainder of 2022 and beyond is 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;

•

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, 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 and Use of Critical Accounting Estimates

The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with generally accepted accounting principles used in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on

historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

Our critical accounting policies involve the calculation of the allowance for loan losses and the measurement of the fair value of financial instruments. A detailed description of these critical accounting policies can be found in Note 2 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Comparison of Financial Condition at March 31, 2022 (unaudited) and December 31, 2021

Total Assets. Total assets were $499.8 million as of March 31, 2022, an increase of $12.7 million, or 2.6%, when compared to total assets of $487.1 million at December 31, 2021. The increase was due primarily to a $3.1 million increase in net loans and a $7.1 million increase in the available-for-sale securities portfolio partially offset by a $1.1 million decrease in cash and due from banks.

Cash and Due From Banks. Cash and due from banks decreased $1.1 million, or 17.2%, to $5.5 million at March 31, 2022 from $6.6 million at December 31, 2021. This decrease was due primarily to the purchase of $16.0 million of securities available-for-sale, $1.4 million of net loan originations and principal payments and a $3.2 million decrease in deposits and escrow balances, offset by a $20.2 million increase in advances from Federal Home Loan Bank during three months ended March 31, 2022.

Available-for-Sale Securities. Available-for-sale securities increased by $7.1 million, or 7.8%, to $98.5 million at March 31, 2022 from $91.4 million at December 31, 2021. This increase was due primarily to purchases of available-for-sale securities totaling $16.0 million, offset by $1.8 million of principal payments received and proceeds from sales and a $6.9 million increase in net unrealized losses within the portfolio during the three months ended March 31, 2022, as a result of the increase in market interest rates during the quarter ended March 31, 2022.

Net Loans. Net loans increased $3.1 million, or 0.8%, to $376.2 million at March 31, 2022 from $373.1 million at December 31, 2021. During the three months ended March 31, 2022, we originated $22.3 million of loans. We also purchased $1.3 million of one- to four-family residential mortgage loans and $346,000 of consumer loans secured by manufactured housing properties. As of March 31, 2022 and December 31, 2021, the portfolio of purchased loans had outstanding principal balances of $30.5 million and $29.7 million, respectively, and were performing in accordance with their original repayment terms. Net deferred loan costs increased $164,000, or 9.9%, to $1.8 million at March 31, 2022 from $1.7 million at December 31, 2021 due primarily to the increase in deferred costs on consumer loans and the net decrease in unearned fees received from the SBA for processing PPP loans. SBA fee and interest income recognized during the three months ended March 31, 2022 and 2021 was $114,000 and $420,000, respectively, and is included in interest and fees on loans.

One- to four-family residential mortgage loans increased $1.1 million, or 0.5%, to $235.3 million at March 31, 2022 from $234.2 million at December 31, 2021. Multi-family loans decreased $98,000, or 1.1%, to $8.9 million at March 31, 2022 from $9.0 million at December 31, 2021. Acquisition, development and land loans decreased $3.9 million, or 18.5%, to $17.4 million at March 31, 2022 from $21.4 million at December 31, 2021. Home equity loans and lines of credit decreased $378,000, or 5.4%, to $6.6 million at March 31, 2022 from $6.9 million at December 31, 2021. Consumer loans increased $414,000, or 9.1%, to $5.0 million at March 31, 2022 from $4.6 million at December 31, 2021. Commercial real estate mortgage loans increased $4.3 million, or 6.0%, to $76.4 million at March 31, 2022 from $72.1 million at December 31, 2021. Commercial and industrial loans increased $1.6 million, or 6.0%, to $28.5 million at March 31, 2022 from $26.9 million at December 31, 2021. The increase in commercial and industrial loans was net of $2.3 million of PPP loan forgiveness during the three months ended March 31, 2022.

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 was $3.6 million at March 31, 2022 and December 31, 2021. 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. The Company made relevant adjustments to its qualitative factors in the measurement of its allowance for loan losses at March 31, 2022 and December 31, 2021 that balanced the need to recognize an

allowance during the period 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 significantly impacted by the COVID-19 pandemic, including oil and gas/energy, credit cards, airlines, cruise ships, arts/entertainment/recreation, casinos and shopping malls. Our exposure to the transportation and hospitality/restaurant industries amounted to less than 5% of our gross loan portfolio at March 31, 2022 and December 31, 2021.

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 time deposits, for both individuals and businesses.

Deposits decreased $4.5 million, or 1.1%, to $388.8 million at March 31, 2022 from $393.2 million at December 31, 2021 primarily as a result of a $4.9 million decrease in commercial deposits and partially offset by a $457,000 increase in retail deposits. Core deposits (defined as deposits other than time deposits) decreased $2.9 million, or 0.9%, to $332.0 million at March 31, 2022 from $334.9 million at December 31, 2021. As of March 31, 2022, savings deposits increased $834,000, money market deposits decreased $3.3 million, NOW and demand deposit accounts decreased $428,000 and time deposits decreased $1.6 million. There were $18.1 million of brokered deposits included in time deposits at March 31, 2022 and December 31, 2021.

Borrowings. Advances from the Federal Home Loan Bank increased $20.2 million, or 68.7%, to $49.7 million at March 31, 2022 from $29.5 million at December 31, 2021 in support of the Company’s investment and loan growth initiatives.

Total Stockholders’ Equity. Total stockholders’ equity decreased $4.5 million, or 7.4%, to $56.0 million at March 31, 2022 from $60.5 million at December 31, 2021. This decrease was due primarily to an other comprehensive loss of $4.7 million related to net changes in unrealized holding losses in the available-for-sale securities portfolio and changes in the fair value of interest rate swap derivatives, as a result of an increase in market interest rates during the quarter ended March 31, 2022, and treasury stock purchases of $248,000, partially offset by the recognition of $130,000 of previously unearned compensation and net income of $392,000 for the three months ended March 31, 2022.

Non-performing Assets. Non-performing assets include loans that are 90 or more days past due or on non-accrual status, including TDRs on non-accrual status, and real estate and other loan collateral acquired through foreclosure and repossession. TDRs 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 non-performing 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.

Non-performing loans were $795,000 and $837,000, or 0.21% and 0.22% of total loans, at March 31, 2022 and December 31, 2021, respectively. At March 31, 2022 and December 31, 2021, non-performing loans consisted primarily of a residential mortgage loan and a HELOC to deceased borrowers which had outstanding balances totaling $602,000. The property, securing both credit facilities, has an estimated market value of approximately $1.2 million. Additionally, a $195,000 non-performing residential mortgage loan was repurchased from an investor and restructured in 2021. The outstanding balance of this TDR was approximately $194,000 and $195,000 at March 31, 2022 and December 31, 2021, respectively. At March 31, 2022 and December 31, 2021, we had no foreclosed assets.

Comparison of Operating Results for the Three Months Ended March 31, 2022 and 2021

Net Income. Net income was $392,000 for the three months ended March 31, 2022, compared to net income of $908,000 for the three months ended March 31, 2021, a decrease of $516,000, or 56.8%. The decrease was due primarily to an increase in non-interest expenses of $576,000 and a decrease in non-interest income of $207,000, offset by a decrease in income tax expense of $198,000 and an increase in net interest and dividend income after provision for loan losses of $69,000 during the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

Interest and Dividend Income. Interest and dividend income decreased $17,000, or 0.4%, to $3.9 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. This decrease was due to a $227,000, or 6.2%, decrease in interest and fees on loans, offset by a $210,000, or 79.5%, increase in interest and dividend income on investments for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. Interest and fees on loans for the three months ended March 31, 2022 and 2021 included $114,000 and $420,000 of interest and fees earned on PPP loans, respectively.

Average interest-earning assets increased $36.6 million, to $482.3 million for the three months ended March 31, 2022 from $445.7 million for the three months ended March 31, 2021. The weighted average annualized yield on interest earning-assets decreased 28 basis points, or 7.9%, to 3.25%, for the three months ended March 31, 2022 from 3.53% for the three months ended March 31, 2021. The weighted average annualized yield for the loan portfolio decreased 33 basis points, or 8.1%, to 3.65% for the three months ended March 31, 2022 from 3.98% for the three months ended March 31, 2021. The weighted average annualized yield for all other interest-earning assets increased to 1.80% for the three months ended March 31, 2022 from 1.37% for the three months ended March 31, 2021 due primarily to the investment in higher-yielding taxable debt securities.

Interest Expense. Total interest expense decreased $86,000, or 32.5%, to $179,000 for the three months ended March 31, 2022, from $265,000 for the three months ended March 31, 2021. Interest expense on deposit accounts decreased $51,000, or 28.5%, to $128,000 for the three months ended March 31, 2022 from $179,000 for the three months ended March 31, 2021. The average balance of interest-bearing deposits increased $11.2 million, or 4.0%, to $293.5 million for the three months ended March 31, 2022 from $282.4 million for the three months ended March 31, 2021 primarily as a result of an increase in the average balances of NOW and demand deposits and savings deposits. The weighted average annualized rate of interest-bearing deposits decreased to 0.17% for the three months ended March 31, 2022 from 0.25% for the three months ended March 31, 2021 due to a decrease in market interest rates offset by an increase in average interest-bearing deposit balances.

Interest expense on borrowings decreased $35,000, or 40.7%, to $51,000 for the three months ended March 31, 2022 from $86,000 for the three months ended March 31, 2021 primarily due to the retirement of $20.0 million of long-term borrowings from the FHLB in advance of their scheduled maturities in late 2021. The interest rates on the retired borrowings were above 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 $4.0 million, or 9.1%, to $40.3 million for the three months ended March 31, 2022 from $44.3 million for the three months ended March 31, 2021. The weighted average annualized rate of borrowings decreased to 0.51% for the three months ended March 31, 2022 from 0.78% for the three months ended March 31, 2021 due primarily to a decrease in the interest expense associated with the retired borrowings offset by the interest expense associated with replacement long-term borrowings from the FHLB.

Net Interest and Dividend Income. Net interest and dividend income increased $69,000, or 1.9%, to $3.7 million for the three months ended March 31, 2022. This increase was due to a $36.6 million, or 8.2%, increase in the average balance of interest-earning assets offset by a $7.1 million, or 2.2%, increase in the balance of average interest-bearing liabilities during the three months ended March 31, 2022. Annualized net interest margin decreased to 3.10% for the three months ended March 31, 2022 from 3.29% for the three months ended March 31, 2021.

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, 2022 and 2021.

Non-Interest Income. Non-interest income decreased $207,000, or 31.9%, to $442,000 for the three months ended March 31, 2022 compared to $649,000 for the three months ended March 31, 2021. The decrease in non-interest income during the three months ended March 31, 2022 was due primarily to a $151,000 decrease in securities gains, net, a $38,000 decrease in gain on sale of loans and a $31,000 decrease in loan servicing fee income, reflecting less of an increase in the fair value of our mortgage servicing intangible asset during the three months ended March 31, 2022 versus the three months ended March 31, 2021, offset by a $34,000 increase in investment service fees.

Non-Interest Expense. Non-interest expense increased $576,000, or 18.6%, to $3.7 million for the three months ended March 31, 2022 from $3.1 million for the three months ended March 31, 2021. The increase in non-interest expense was due primarily

to increased salaries and employee benefits expense of $398,000, or 21.3%, an increase in data processing expense of $38,000, or 11.9%, and a $37,000, of 22.2% increase in occupancy expense. The increase in salaries and benefits during the three months ended March 31, 2022 was due to filling certain open positions and associated recruitment fees, normal salary increases and the recognition of previously unearned compensation associated with the restricted stock awards granted in 2021.

Income Taxes. Income tax expense decreased $198,000 or 77.3%, to $58,000 for the three months ended March 31, 2022 from $256,000 for the three months ended March 31, 2021. The effective tax rate was 12.9% and 22.0% for the three months ended March 31, 2022 and 2021, respectively. The decrease in income tax expense was due primarily to the decrease in income before income tax expense. Income before income tax expense decreased $714,000, or 61.3%, to $450,000 for the three months ended March 31, 2022 from $1.2 million for the three months ended March 31, 2021. The decrease in the effective tax rate for the three months ended March 31, 2022 as compared to the prior period was due primarily to the amount of non-taxable income as a percentage of income before income tax expense for the three months ended March 31, 2022 as compared to the prior period.

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 net deferred fee income and discounts and premiums that are amortized or accreted to interest income or interest expense. Average loan balances exclude loans held for sale, if applicable. The following tables include no out-of-period items or adjustments.

	For the Three Months Ended March 31,
	2022								2021
	Average Outstanding Balance			Interest		Average Yield/Rate			Average Outstanding Balance			Interest		Average Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Loans ⁽⁴⁾	$	376,690		$	3,441		3.65	%	$	368,845		$	3,668		3.98	%
Taxable debt securities		49,042			187		1.53	%		15,340			24		0.63	%
Non-taxable debt securities		46,944			264		2.25	%		36,691			222		2.42	%
Interest-bearing deposits with other banks		7,503			9		0.48	%		22,911			18		0.31	%
Federal Home Loan Bank stock		2,118			14		2.64	%		1,865			—		0.00	%
Total interest-earning assets		482,297			3,915		3.25	%		445,652			3,932		3.53	%
Non-interest-earning assets		12,877								11,506
Total assets	$	495,174							$	457,158
Interest-bearing liabilities:
NOW and demand deposits	$	108,302		$	24		0.09	%	$	100,315		$	35		0.14	%
Money market deposits		70,223			19		0.11	%		71,625			28		0.16	%
Savings deposits		57,780			6		0.04	%		51,019			8		0.06	%
Time deposits		57,243			79		0.55	%		59,392			108		0.73	%
Total interest-bearing deposits		293,548			128		0.17	%		282,351			179		0.25	%
Borrowings		40,274			51		0.51	%		44,298			86		0.78	%
Other		1,484			—		—			1,590			—		—
Total interest-bearing liabilities		335,306			179		0.21	%		328,239			265		0.32	%
Non-interest-bearing deposits		96,800								66,179
Other non-interest-bearing liabilities		3,785								3,735
Total liabilities		435,891								398,153
Total stockholders' equity		59,283								59,005
Total liabilities and stockholders' equity	$	495,174							$	457,158
Net interest income				$	3,736							$	3,667
Net interest rate spread ⁽¹⁾							3.03	%							3.21	%
Net interest-earning assets ⁽²⁾	$	146,991							$	117,413
Net interest margin ⁽³⁾							3.10	%							3.29	%
Average interest-earning assets to interest-bearing liabilities		143.84	%							135.77	%

(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.

(4)	Net deferred fee income included in loan interest totaled $14,000 and $264,000 for the three months ended March 31, 2022 and 2021, respectively.

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the periods 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, 2022 vs. 2021
	Increase (Decrease) Due to Change in
	Volume			Rate			Total
(Dollars in thousands)
Interest-earning assets:
Loans	$	77		$	(304	)	$	(227	)
Taxable debt securities		99			64			163
Non-taxable debt securities		59			(17	)		42
Interest-bearing deposits with other banks		(16	)		7			(9	)
Federal Home Loan Bank stock		—			14			14
Total interest-earning assets		219			(236	)		(17	)
Interest-bearing liabilities:
NOW and demand deposits		3			(14	)		(11	)
Money market deposits		(1	)		(8	)		(9	)
Savings deposits		1			(3	)		(2	)
Time deposits		(4	)		(25	)		(29	)
Total interest-bearing deposits		(1	)		(50	)		(51	)
Borrowings		(7	)		(28	)		(35	)
Total interest-bearing liabilities		(8	)		(78	)		(86	)
Change in net interest income	$	227		$	(158	)	$	69

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 sales and maturities of securities. We also rely on borrowings from the FHLB as supplemental sources of funds. At March 31, 2022 and December 31, 2021, we had $49.7 million and $29.5 million outstanding in advances from the FHLB, respectively, and the ability to borrow an additional $91.3 million and $109.7 million, respectively. Additionally, at March 31, 2022 and December 31, 2021, 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, 2022 and December 31, 2021, 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 $141,000 and $1.6 million for the three months ended March 31, 2022 and 2021, respectively. Net cash used by investing activities, which consists primarily of disbursements for loan originations and purchases, and the purchase of securities available-for-sale, offset by principal collections on loans, proceeds from the sale, maturity and principal payments received on securities available-for-sale, was $18.0 million and $5.6 million for the three months ended March 31, 2022 and 2021, respectively. Net cash provided by financing activities, consisting primarily of activity in deposit accounts and Federal Home Loan Bank advances, was $16.8 million and $20.7 million for the three months ended March 31, 2022 and 2021, 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. We have no material commitments for capital expenditures as of

March 31, 2022. 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 is to increase core deposits and utilize FHLB advances, as well as brokered deposits to fund loan growth.

First Seacoast Bancorp is a separate legal entity from First Seacoast Bank and must provide for its own liquidity to fund repurchases of its outstanding common stock and 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, 2022, the Company (on an unconsolidated basis) had liquid assets of $9.5 million. As of March 31, 2022, the Company repurchased 101,936 shares of its common stock at a weighted average price of $9.77 per share.

At March 31, 2022, First Seacoast Bank exceeded all its regulatory capital requirements. See Note 11 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 First Seacoast Bank’s categorization as well-capitalized.

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 manage our interest rate risk in an effort 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.

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, 2022.

	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	$	51,648	$	(11,294	)		(17.9	)%		12.6	%	$	(27	)
300 bp		54,898		(8,044	)		(12.8	)		12.8			(4	)
200 bp		58,065		(4,877	)		(7.7	)		13.0			11
100 bp		61,552		(1,390	)		(2.2	)		13.1			27
0		62,942		—			—			12.9			—
(100) bp		61,306		(1,636	)		(2.6	)		12.0			(82	)

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

Economic Value of Equity. Like most financial institutions, our profitability depends to a large extent upon our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowed funds. Accordingly, our results of operations depend largely on movements in market interest rates and our ability to manage our interest-rate sensitive assets and liabilities in response to these movements. Factors such as inflation and instability in financial markets, among other factors beyond our control, may affect interest rates.

In a rising interest rate environment, we would expect that the rates on our deposits and borrowings would reprice upwards faster than the rates on our long-term loans and investments, which would be expected to compress our interest rate spread and have a negative effect on our profitability. Furthermore, increases in interest rates may adversely affect the ability of our borrowers to make loan repayments on adjustable-rate loans, as the interest owed on such loans would increase as interest rates increase. Conversely, decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such loan or securities proceeds into lower-yielding assets, which might also negatively impact our income. If interest rates rise, we expect that our economic value of equity would decrease. Economic value of equity represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities. The Bank’s economic value of equity analysis as of March 31, 2022 estimated that, in the event of an instantaneous 200 basis point increase in interest rates, the Bank would experience a 7.7% decrease in economic value of equity. At the same date, our analysis estimated that, in the event of an instantaneous 100 basis point decrease in interest rates, the Bank would experience a 2.6% decrease in the economic value of equity.

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, 2022, the Company conducted 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 Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2022 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, 2022, 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.

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, 2022, 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

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 2.2% of all shares then outstanding and approximately 5.0% of the then outstanding shares owned by stockholders other than the MHC. The Company holds repurchased shares in its treasury. As of March 31, 2022 and December 31 2021, the Company had repurchased 101,936 and 78,433 shares of its common stock, respectively

The following table summarizes the Company’s repurchases of its outstanding shares of common stock during the quarter ended March 31, 2022.

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, 2022 - January 31, 2022		15,999	$	10.66		15,999		42,447
February 1, 2022 - February 28, 2022		1,595		10.41		1,595		40,852
March 1, 2022 - March 31, 2022		5,909		10.36		5,909		34,943
Total		23,503				23,503

There were no sales of unregistered securities during the three months ended March 31, 2022.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

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, 2022, formatted in Inline 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

104		Cover Page Interactive Data Files (embedded within Inline XBRL document)

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 13, 2022		/s/ James R. Brannen
		James R. Brannen
		President and Chief Executive Officer


Date: May 13, 2022		/s/ Richard M. Donovan
		Richard M. Donovan
		Senior Vice President and Chief Financial Officer