FIRST SEACOAST BANCORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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 September 30, 2022 and consolidated results of operations
for the three and nine months ended September 30, 2022 and 2021. It should be
read in conjunction with our unaudited consolidated financial statements and
accompanying notes presented elsewhere in this report and with the Company's
audited consolidated financial statements and accompanying notes presented in
the Company's Annual Report on Form 10-K for the fiscal year 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;

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demand for loans and deposits in our market area;

our ability to implement and change our business strategies;

competition among depository and other financial institutions;

inflation and changes in the interest rate environment that reduce our margins
and yields, our mortgage banking revenues, the fair value of financial
instruments or our level of loan originations or increase the level of defaults,
losses and prepayments on loans we have made and make;

adverse changes in the securities or secondary mortgage markets;

changes in laws or government regulations or policies affecting financial
institutions, including changes in regulatory fees and capital requirements 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 consolidated financial statements contained in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Comparison of Financial Condition at September 30, 2022 (unaudited) and December
31, 2021


Total Assets. Total assets were $523.8 million as of September 30, 2022, an
increase of $36.7 million, or 7.5%, compared to total assets of $487.1 million
at December 31, 2021. The increase was due primarily to a $19.1 million increase
in net loans, a $9.4 million increase in securities available-for-sale and a
$6.7 million increase in other assets which resulted from an increase in a
deferred tax benefit related to the increase in our net unrealized losses within
the available-for-sale securities portfolio.

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Cash and Due From Banks. Cash and due from banks increased $211,000, or 3.2%, to
$6.8 million at September 30, 2022 from $6.6 million at December 31, 2021. This
increase primarily resulted from a $53.4 million increase in borrowings offset
by a $6.5 million decrease in total deposits, a $19.1 million increase in net
loans and a $9.4 million increase in securities available-for-sale ($28.8
million net of increase in net unrealized losses) during the nine months ended
September 30, 2022.

Available-for-Sale Securities. Available-for-sale securities increased by $9.4
million, or 10.3%, to $100.8 million at September 30, 2022 from $91.4 million at
December 31, 2021. This increase was primarily due to net investments purchases
of $33.6 million offset by $4.1 million of proceeds from sales, maturities and
principal received and a $19.4 million increase in net unrealized losses within
the portfolio during the nine months ended September 30, 2022.

Net Loans. Net loans increased $19.1 million, or 5.1%, to $392.2 million at
September 30, 2022 from $373.1 million at December 31, 2021. During the nine
months ended September 30, 2022, we originated $72.3 million of loans. We also
purchased $1.3 million of one- to four-family residential mortgage loans and
$1.7 million of consumer loans secured by manufactured housing properties. As of
September 30, 2022 and December 31, 2021, the portfolio of purchased loans had
outstanding principal balances of $31.2 million and $29.7 million, respectively,
and were performing in accordance with their original repayment terms. Net
deferred loan costs increased $601,000, or 36.4%, to $2.3 million at September
30, 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 and nine months ended September 30, 2022 was $7,000 and
$233,000, respectively, as compared to $263,000 and $972,000 during the three
and nine months ended September 30, 2021, respectively. SBA fee and interest
income is included in interest and fees on loans.

One- to four-family residential mortgage loans increased $11.9 million, or 5.1%,
to $246.1 million at September 30, 2022 from $234.2 million at December 31,
2021. Commercial real estate mortgage loans increased $5.9 million, or 8.2%, to
$78.0 million at September 30, 2022 from $72.1 million at December 31, 2021.
Multi-family loans decreased $434,000, or 4.8%, to $8.6 million at September 30,
2022 from $9.0 million at December 31, 2021. Commercial and industrial loans
decreased $1.8 million (net of $5.5 million of PPP loan forgiveness), or 6.6%,
to $25.1 million at September 30, 2022 from $26.9 million at December 31, 2021.
Acquisition, development, and land loans decreased $1.4 million, or 6.4%, to
$20.0 million at September 30, 2022 from $21.4 million at December 31, 2021.
Home equity loans and lines of credit increased $2.4 million, or 35.0%, to $9.4
million at September 30, 2022 from $6.9 million at December 31, 2021. Consumer
loans increased $1.9 million, or 41.5%, to $6.5 million at September 30, 2022
from $4.6 million at December 31, 2021.

Our strategy to grow the balance sheet continues to be through originations and,
to a lesser extent, purchases of one- to four-family residential mortgage loans
and consumer loans secured by manufactured housing properties, while also
diversifying into higher yielding commercial real estate mortgage loans and
commercial and industrial loans to improve net margins and manage interest rate
risk. We also continue to sell selected, conforming 15-year and 30-year
residential fixed rate mortgage loans to the secondary market on a servicing
retained basis, providing us a recurring source of revenue from loan servicing
income and gains on the sale of such loans.

Our allowance for loan losses was $3.6 million at September 30, 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 September 30, 2022 and December
31, 2021 that balanced the need to consider the recognition of a provision
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,
hotels/motels, casinos and shopping malls. Our exposure to the transportation
and hospitality/restaurant industries amounted to less than 5% of our gross loan
portfolio at September 30, 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 $6.5 million, or 1.7%, to $386.7 million at September 30,
2022 from $393.2 million at December 31, 2021 primarily as a result of a $4.5
million decrease in commercial deposits and a $2.0 million decrease in retail
deposits. Core deposits (defined as deposits other than time deposits) decreased
$0.6 million, or 0.2%, to $334.3 million at September 30, 2022 from $334.9
million at December 31, 2021. As of September 30, 2022, savings deposits
increased $4.1 million, money market deposits decreased

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$7.3 million, NOW and demand deposit accounts increased $2.6 million and time
deposits decreased $5.9 million. There were $18.1 of brokered deposits included
in time deposits at September 30, 2022 and December 31, 2021.

Borrowings. Total borrowings increased $53.4 million, or 181.4%, to $82.9
million
at September 30, 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 $12.8 million,
or 21.1%, to $47.7 million at September 30, 2022 from $60.5 million at December
31, 2021. This decrease was due primarily to an other comprehensive loss of
$13.5 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 nine months ended September 30, 2022, and treasury stock
purchases of $623,000, partially offset by the recognition of $385,000 of
previously unearned compensation and net income of $1.0 million for the nine
months ended September 30, 2022.

Non-performing Assets. Non-performing assets include loans that are 90 or more
days past due or on non-accrual status, including troubled debt restructurings
on non-accrual status, and real estate and other loan collateral acquired
through foreclosure and repossession. Troubled debt restructurings include loans
for which either a portion of interest or principal has been forgiven or loans
modified at interest rates materially less than current market rates.

Management determines that a loan is impaired or 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 $5,000 and $837,000 at September 30, 2022 and December
31, 2021, respectively. At December 31, 2021, non-performing loans consisted
primarily of a residential mortgage loan and HELOC to deceased borrowers and a
$195,000 non-performing residential mortgage loan that was repurchased from an
investor and restructured in 2021. The property securing both credit facilities
was sold in July 2022 and all outstanding loan balances were paid. The
non-performing residential mortgage loan that was repurchased from an investor
and restructured in 2021 was returned to performing status during June 2022. The
outstanding balance of this now accruing TDR was approximately $190,000 and
$195,000 at September 30, 2022 and December 31, 2021, respectively. At September
30, 2022 and December 31, 2021, we had no foreclosed assets.

Comparison of Operating Results for the Three Months Ended September 30, 2022
and September 30, 2021


Net Income. Net income was $468,000 for the three months ended September 30,
2022, compared to net income of $463,000 for the three months ended September
30, 2021, an increase of $5,000, or 1.1%. The increase was due primarily to an
increase in net interest and dividend income after provision for loan losses of
$285,000 and a decrease in income tax expense of $98,000, offset by an increase
in non-interest expenses of $312,000 and a decrease in non-interest income of
$66,000 during the three months ended September 30, 2022 compared to the three
months ended September 30, 2021.

Interest and Dividend Income. Total interest and dividend income increased
$357,000, or 9.2%, to $4.2 million for the three months ended September 30, 2022
compared to $3.9 million for the three months ended September 30, 2021. This
increase was due to a $317,000 increase in interest and dividend income on
investments and a $40,000 increase in interest and fees on loans. Interest and
fees on loans for the three months ended September 30, 2022 and 2021 included
$7,000 and $263,000 of interest and fees earned on PPP loans, respectively.

Average interest-earning assets increased $25.4 million, to $504.1 million for
the three months ended September 30, 2022 from $478.7 million for the three
months ended September 30, 2021. The weighted average annualized yield on
interest earning-assets increased to 3.35% for the three months ended September
30, 2022 from 3.23% for the three months ended September 30, 2021. The weighted
average annualized yield for the loan portfolio decreased to 3.66% for the three
months ended September 30, 2022 from 3.75% for the three months ended September
30, 2021 due primarily to the decrease in interest and fees earned on PPP loans.

The weighted average annualized yield for all other interest-earning assets
increased to 2.31% for the three months ended September 30, 2022 from 1.36% for
the three months ended September 30, 2021 due primarily to the investment in
higher-yielding taxable and non-taxable debt securities.

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Interest Expense. Total interest expense increased $192,000, or 81.7%, to
$427,000 for the three months ended September 30, 2022 from $235,000 for the
three months ended September 30, 2021. Interest expense on deposits increased
$15,000, or 11.0%, to $151,000 for the three months ended September 30, 2022
from $136,000 for the three months ended September 30, 2021. The average balance
of interest-bearing deposits increased $3.9 million, or 1.3%, to $299.6 million
for the three months ended September 30, 2022 from $295.7 million for the three
months ended September 30, 2021 primarily as a result of an increase in the
average balance of savings and NOW and demand deposits offset by a decrease in
the average balances of money market and time deposits. The weighted average
annualized rate of interest-bearing deposits increased to 0.20% for the three
months ended September 30, 2022 from 0.18% for the three months ended September
30, 2021 primarily as a result of an increase in market interest rates.

Interest expense on borrowings increased $177,000, or 178.8%, to $276,000 for
the three months ended September 30, 2022 from $99,000 for the three months
ended September 30, 2021 primarily due to an increase in the average balance of
borrowings and market interest rates partially offset by 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
then current market rates and were scheduled to mature in 2024 and 2025. We were
able to retire these borrowings without incurring prepayment penalties. The
average balance of borrowings increased $32.0 million, or 80.0%, to $72.1
million for the three months ended September 30, 2022 from $40.0 million for the
three months ended September 30, 2021. The weighted average annualized rate of
borrowings increased to 1.53% for the three months ended September 30, 2022 from
0.99% for the three months ended September 30, 2021 due primarily to an increase
in market interest rates.

Net Interest and Dividend Income. Net interest and dividend income increased
$165,000, or 4.6%,to $3.8 million for the three months ended September 30, 2022
from $3.6 million for the three months ended September 30, 2021. This increase
was due to a $25.4 million, or 5.3%, increase in the average balance of
interest-earning assets, consisting primarily of increases in the average
balances of loans and debt securities, offset by an increase of $36.0 million,
or 10.7%, in the average balance of interest-bearing liabilities, consisting
primarily of an increase in the average balance of borrowings, during the three
months ended September 30, 2022. Annualized net interest margin decreased to
3.01% for the three months ended September 30, 2022 from 3.03% for the three
months ended September 30, 2021 due primarily to a decrease in the average yield
on loans and an increase in the average rate of borrowings offset by an increase
in the average yield on debt securities.

Provision for Loan Losses. Based on management's analysis of the allowance for
loan losses, a $60,000 benefit to provision for loan losses was recorded for the
three months ended September 30, 2022, compared to a $60,000 expense for the
three months ended September 30, 2021.

Non-Interest Income. Non-interest income decreased $66,000, or 15.3%, to
$365,000 for the three months ended September 30, 2022 compared to $431,000 for
the three months ended September 30, 2021. The decrease in non-interest income
during the three months ended September 30, 2022 was due primarily to a $25,000
decrease in gain on sale of loans, a $25,000 decrease in customer service fees
and a $11,000 decrease in loan servicing income during the three months ended
September 30, 2022, offset by a $14,000 increase in investment services fees.

Non-Interest Expense. Non-interest expense increased $312,000, or 9.2%, to $3.7
million for the three months ended September 30, 2022 from $3.4 million for the
three months ended September 30, 2021. The increase was primarily due to a
$155,000, or 7.5% , increase in salaries and employee benefits, a $52,000, or
61.2%, increase in marketing, a $43,000, or 31.6%, increase in occupancy expense
and a $49,000, or 129.0%, increase in employee travel and education expenses.
The increase in salaries and employee benefits during the three months ended
September 30, 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 $98,000, or 71.5%, to $39,000 for the
three months ended September 30, 2022 from $137,000 for the three months ended
September 30, 2021. The effective tax rate was 7.7% and 22.8% for the three
months ended September 30, 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 $93,000, or 15.5%, to
$507,000 for the three months ended September 30, 2022 from $600,000 for the
three months ended September 30, 2021. The decrease in the effective tax rate
for the three months ended September 30, 2022 as compared to the three months
ended September 30, 2021 was due primarily to the amount of non-taxable income
as a percentage of income before income tax expense for the three months ended
September 30, 2022 as compared to the three months ended September 30, 2021.

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Average Balance Sheets


The following table sets 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, 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 table
includes no out-of-period items or adjustments.

                                                         For the Three Months Ended September 30,
                                                   2022                                             2021
                                  Average                                          Average
                                Outstanding                       Average        Outstanding                       Average
                                  Balance         Interest      Yield/Rate         Balance         Interest      Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Loans (4)                      $     387,604     $    3,543            3.66 %   $     373,438     $    3,503            3.75 %
Taxable debt securities               55,966            271            1.94 %          33,698            114            1.35 %
Non-taxable debt securities           50,726            342            2.70 %          38,316            216            2.25 %
Interest-bearing deposits
with other banks                       6,802             24            1.41 %          31,184             19            0.24 %
Federal Home Loan Bank stock           2,982             37            4.96 %           2,022              8            1.58 %
Total interest-earning
assets                               504,080          4,217            3.35 %         478,658          3,860            3.23 %
Non-interest-earning assets           16,539                                           11,734
Total assets                   $     520,619                                    $     490,392
Interest-bearing
liabilities:
NOW and demand deposits        $     116,690     $       43            0.15 %   $     107,973     $       33            0.12 %
Money market deposits                 65,596             31            0.19 %          73,939             28            0.15 %
Savings accounts                      63,526              8            0.05 %          56,196              9            0.06 %
Time deposits                         53,760             69            0.51 %          57,542             66            0.46 %
Total interest-bearing
deposits                             299,572            151            0.20 %         295,650            136            0.18 %
Borrowings                            72,079            276            1.53 %          40,047             99            0.99 %
Other                                  1,642              -               -             1,626              -               -
Total interest-bearing
liabilities                          373,293            427            0.46 %         337,323            235            0.28 %
Non-interest-bearing
deposits                              90,645                                           88,618
Other noninterest-bearing
liabilities                            4,029                                            3,965
Total liabilities                    467,967                                          429,906
Total stockholders' equity            52,652                                           60,486
Total liabilities and
stockholders' equity           $     520,619                                    $     490,392
Net interest income                              $    3,790                                       $    3,625
Net interest rate spread (1)                                           2.89 %                                           2.95 %
Net interest-earning assets
(2)                            $     130,787                                    $     141,335
Net interest margin (3)                                                3.01 %                                           3.03 %
Average interest-earning
assets to interest-bearing
liabilities                           135.04 %                                         141.90 %




(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 (expense) income included in loan interest totaled $(118,000)
and $64,000 for the three months ended September 30, 2022 and 2021,
respectively.

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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 

September 30, 2022 vs. 2021

                                                              Increase 

(Decrease) Due to Change in

                                                       Volume                 Rate                  Total
(Dollars in thousands)
Interest-earning assets:
Loans                                               $         131         $         (91 )       $          40
Taxable debt securities                                        95                    62                   157
Non-taxable debt securities                                    79                    47                   126
Interest-bearing deposits with other banks                    (25 )                  30                     5
Federal Home Loan Bank stock                                    5                    24                    29
Total interest-earning assets                                 285                    72                   357
Interest-bearing liabilities:
NOW and demand deposits                                         3                     7                    10
Money market deposits                                          (3 )                   6                     3
Savings accounts                                                1                    (2 )                  (1 )
Time deposits                                                  (5 )                   8                     3
Total interest-bearing deposits                                (4 )                  19                    15
Borrowings                                                    105                    72                   177
Total interest-bearing liabilities                            101                    91                   192
Change in net interest income                       $         184         $         (19 )       $         165



Comparison of Operating Results for the Nine Months Ended September 30, 2022 and
2021


Net Income. Net income was $1.0 million for the nine months ended September 30,
2022, compared to $2.2 million for the nine months ended September 30, 2021, a
decrease of $1.2 million, or 52.8%. The decrease was due primarily to an
increase in non-interest expenses of $1.5 million and a decrease in non-interest
income of $605,000, offset by an increase in net interest and dividend income
after provision for loan losses of $540,000 and a decrease in income tax expense
of $403,000 during the nine months ended September 30, 2022 compared to the nine
months ended September 30, 2021.

Interest and Dividend Income. Interest and dividend income increased $466,000,
or 4.0%, to $12.1 million for the nine months ended September 30, 2022 from
$11.7 million for the nine months ended September 30, 2021. The increase was due
primarily to a $767,000, or 81.2%, increase in interest and dividend income on
investments offset by a $301,000, or 2.8%, decrease in interest and fees on
loans. Interest and fees on loans for the nine months ended September 30, 2022
and 2021 included $233,000 and $972,000 of interest and fees earned on PPP
loans, respectively.

Average interest-earning assets increased $29.3 million, to $491.7 million for
the nine months ended September 30, 2022 from $462.4 million for the nine months
ended September 30, 2021. The annualized yield on interest earning-assets
decreased 8 basis points to 3.29% for the nine months ended September 30, 2022
from 3.37% for the nine months ended September 30, 2021. The weighted average
annualized yield for the loan portfolio decreased to 3.64% for the nine months
ended September 30, 2022 from 3.84% for the nine months ended September 30, 2021
due primarily to the decrease in interest and fees earned on PPP loans. The
weighted average annualized yield for all other interest-earning assets
increased to 2.07% for the nine months ended September 30, 2022 from 1.40% for
the nine months ended September 30, 2021 due primarily to the investment in
higher-yielding taxable and non-taxable debt securities.

Interest Expense. Total interest expense increased $71,000, or 9.5%, to $818,000
for the nine months ended September 30, 2022 from $747,000 for the nine months
ended September 30, 2021. Interest expense on deposits decreased $64,000 for the
nine months ended September 30, 2022 compared to the nine months ended September
30, 2021. The average balance of interest-bearing deposits increased $5.6
million, or 1.9%, to $296.7 million for the nine months ended September 30, 2022
from $291.1 million for the nine months ended September 30, 2021 primarily as a
result of an increase in the average balance of NOW and demand and savings
deposits offset by a decrease in the average balances of money market and time
deposits. The weighted average annualized rate of interest-bearing deposits
decreased to 0.18% for the nine months ended September 30, 2022 from 0.21% for
the nine months ended September 30, 2021 due primarily to the maturity of higher
cost time deposits.

                                       40
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Interest expense on borrowings increased $135,000, or 47.7%, to $418,000 for the
nine months ended September 30, 2022 from $283,000 for the nine months ended
September 30, 2021 primarily due to an increase in the average balance of
borrowings and market interest rates partially offset by the retirement of $20.0
million of long-term borrowings from the FHLB in advance of their scheduled
maturities in late 2021. The average balance of borrowings increased $12.9
million, or 30.3%, to $55.4 million for the nine months ended September 30, 2022
from $42.5 million for the nine months ended September 30, 2021. The weighted
average annualized rate of borrowings increased to 1.01% for the nine months
ended September 30, 2022 from 0.89% for the nine months ended September 30, 2021
due primarily to an increase in market interest rates.

Net Interest and Dividend Income. Net interest and dividend income increased
$395,000, or 3.6%, to $11.3 million for the nine months ended September 30, 2022
from $10.9 million for the nine months ended September 30, 2021. This increase
was primarily due to a $29.3 million, or 6.3%, increase in the average balance
of interest-earning assets, consisting primarily of increases in the average
balances of loans and debt securities, offset by an increase of $18.0 million,
or 5.4%, in the average balance of interest-bearing liabilities, consisting
primarily of an increase in the average balance of borrowings, during the nine
months ended September 30, 2022. Annualized net interest margin decreased to
3.07% for the nine months ended September 30, 2022 from 3.15% for the nine
months ended September 30, 2021 due primarily to a decrease in the average yield
on loans offset by an increase in the average yield on debt securities.

Provision for Loan Losses. Based on management's analysis of the allowance for
loan losses, no provision for loan losses was recorded for the nine months ended
September 30, 2022, compared to $145,000 for the nine months ended September 30,
2021.

Non-Interest Income. Non-interest income decreased $605,000, or 33.4%, to $1.2
million for the nine months ended September 30, 2022 compared to $1.8 million
for the nine months ended September 30, 2021. The decrease in non-interest
income during the nine months ended September 30, 2022 was due primarily to a
$483,000 decrease in securities gains, net, a $111,000 decrease in gain on sale
of loans and a $52,000 decrease in customer service fees offset by a $72,000
increase in investment services fees.

Non-Interest Expense. Non-interest expense increased $1.5 million, or 15.3%, to
$11.3 million for the nine months ended September 30, 2022 compared to $9.8
million for the nine months ended September 30, 2021. The increase in
non-interest expense was due primarily to a $1.1 million, or 18.6%, increase in
salaries and employee benefits expense. The increase in salaries and benefits
during the nine months ended September 30, 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 $403,000, or 71.2%, to $163,000 for
the nine months ended September 30, 2022 from $566,000 for the nine months ended
September 30, 2021. The effective tax rate was 13.5% and 20.4% for the nine
months ended September 30, 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 $1.6 million, or 56.6%, to
$1.2 million for the nine months ended September 30, 2022 from $2.8 million for
the nine months ended September 30, 2021. The decrease in the effective tax rate
for the nine months ended September 30, 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 nine months ended September 30, 2022 as
compared to the prior period offset by an increase in the valuation allowance
related to a charitable contribution carryforward during the nine months ended
September 30, 2022 as it was determined that it is more likely than not that the
benefit from the charitable contribution carryforward will not be realized prior
to expiration due to a decrease in our forecasted taxable income during the
remaining carryforward period.

                                       41
--------------------------------------------------------------------------------

Average Balance Sheets


The following table sets 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, 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 table
includes no out-of-period items or adjustments.

                                                         For the Nine Months Ended September 30,
                                                   2022                                            2021
                                  Average                                          Average
                                Outstanding                       Average        Outstanding                      Average
                                  Balance         Interest      Yield/Rate         Balance        Interest      Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Loans (4)                      $     381,466     $   10,427            3.64 %   $     372,257     $  10,728            3.84 %
Taxable debt securities               52,915            706            1.78 %          25,066           219            1.16 %
Non-taxable debt securities           48,298            900            2.48 %          37,589           659            2.34 %
Interest-bearing deposits
with other banks                       6,535             46            0.93 %          25,560            57            0.30 %
Federal Home Loan Bank stock           2,483             60            3.22 %           1,955            10            0.68 %
Total interest-earning
assets                               491,697         12,139            3.29 %         462,427        11,673            3.37 %
Non-interest-earning assets           14,946                                           11,855
Total assets                   $     506,643                                    $     474,282
Interest-bearing
liabilities:
NOW and demand deposits        $     111,978     $       75            0.09 %   $     105,714     $     101            0.13 %
Money market deposits                 67,407             86            0.17 %          73,241            83            0.15 %
Savings accounts                      61,510             21            0.05 %          53,449            25            0.06 %
Time deposits                         55,813            218            0.52 %          58,744           255            0.58 %
Total interest-bearing
deposits                             296,708            400            0.18 %         291,148           464            0.21 %
Borrowings                            55,404            418            1.01 %          42,508           283            0.89 %
Other                                  1,747              -               -             2,226             -               -
Total interest-bearing
liabilities                          353,859            818            0.31 %         335,882           747            0.30 %
Non-interest-bearing
deposits                              93,617                                           74,837
Other noninterest-bearing
liabilities                            3,807                                            3,800
Total liabilities                    451,283                                          414,519
Total stockholders' equity            55,360                                           59,763
Total liabilities and
stockholders' equity           $     506,643                                    $     474,282
Net interest income                              $   11,321                                       $  10,926
Net interest rate spread (1)                                           2.98 %                                          3.07 %
Net interest-earning assets
(2)                            $     137,838                                    $     126,545
Net interest margin (3)                                                3.07 %                                          3.15 %
Average interest-earning
assets to
  interest-bearing
liabilities                           138.95 %                                         137.68 %




(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 (expense) income included in loan interest totaled $(71,000)
and $466,000 for the nine months ended September 30, 2022 and 2021,
respectively.

                                       42
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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.

                                                          Nine Months Ended 

September 30, 2022 vs. 2021

                                                               Increase 

(Decrease) Due to Change in

                                                       Volume                 Rate                  Total
(Dollars in thousands)
Interest-earning assets:
Loans                                               $        261         $         (562 )       $         (301 )
Taxable debt securities                                      330                    157                    487
Non-taxable debt securities                                  197                     44                    241
Interest-bearing deposits with other banks                   (65 )                   54                    (11 )
Federal Home Loan Bank stock                                   3                     47                     50
Total interest-earning assets                                726                   (260 )                  466
Interest-bearing liabilities:
NOW and demand deposits                                        6                    (32 )                  (26 )
Money market deposits                                         (7 )                   10                      3
Savings accounts                                               4                     (8 )                   (4 )
Time deposits                                                (13 )                  (24 )                  (37 )
Total interest-bearing deposits                              (10 )                  (54 )                  (64 )
Borrowings                                                    94                     41                    135
Total interest-bearing liabilities                            84                    (13 )                   71
Change in net interest income                       $        642         $         (247 )       $          395

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 September 30, 2022
and December 31, 2021, we had $82.9 million and $29.5 million outstanding in
advances from the FHLB, respectively, and the ability to borrow an additional
$48.0 million and $109.7 million, respectively. Additionally, at September 30,
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 September 30, 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 $1.8 million and $2.7 million for the nine
months ended September 30, 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 on securities available-for-sale, was $49.4 million and $26.6
million for the nine months ended September 30, 2022 and 2021, respectively. Net
cash provided by financing activities, consisting primarily of activity in
deposit accounts and FHLB advances, was $47.7 million and $48.6 million for the
nine months ended September 30, 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 September 30, 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.

                                       43

——————————————————————————–



First Seacoast Bancorp is a separate legal entity from First Seacoast Bank and
must provide for its own liquidity to pay its operating expenses and other
financial obligations and to fund repurchases of shares of common stock. The
Company's primary source of income is dividends received from the Bank. The
amount of dividends that the Bank may declare and pay to the Company is governed
by applicable bank regulations. At September 30, 2022, the Company (on an
unconsolidated basis) had liquid assets of $9.2 million. As of September 30,
2022, the Company repurchased 136,879 shares of its common stock at an average
price of $10.01 per share.

At September 30, 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.

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