First Seacoast Bancorp (FSEA): Attractive Valuation And Upside

Background

Our favorite sector is the community bank & thrift space. This segment often provides uniquely attractive risk-reward opportunities, specifically, equities with inexpensive valuations paired with catalysts to increase shareholder value.

The ideal candidate is a bank trading below tangible book value, with a healthy credit portfolio and overcapitalized balance sheet.

Our newest idea is First Seacoast Bancorp, Inc (FSEA).

Introduction

First Seacoast Bancorp is the holding company for First Seacoast Bank. Founded in 1890, the bank is headquartered in Dover, New Hampshire, and maintains four additional branch offices, as illustrated below.

FSEA operates the traditional community bank business model – attracting retail deposits from the general public (with a focus on the local area) and using those funds to originate loans secured by residential and nonresidential real estate.

With approximately $550 million in assets, FSEA maintains an overcapitalized balance sheet (equity to assets of 13%) and attractive credit metrics.

At $10.28 per share, the stock trades at only 72% of tangible book value (a proxy for liquidation value).

Why the Valuation Disconnect?

About four weeks ago, on January 19, FSEA announced the completion of its mutual to stock transition.

First Seacoast Bancorp, Inc. (Nasdaq: FSEA), the new holding company for First Seacoast Bank, announced that the conversion of First Seacoast Bancorp, MHC from mutual to stock form and the related stock offering by First Seacoast Bancorp, Inc. closed following the close of business today. First Seacoast Bancorp, Inc.’s common stock is expected to begin trading on the Nasdaq Capital Market under the trading symbol “FSEA” on January 20, 2023.

As a result of the subscription offering, the community offering and the syndicated community offering, First Seacoast Bancorp, Inc. sold a total of 2,805,000 shares of its common stock at a price of $10.00 per share, which includes 224,400 shares sold to First Seacoast Bank’s Employee Stock Ownership Plan.

As part of the conversion transaction, each outstanding share of First Seacoast Bancorp common stock owned by the public stockholders of First Seacoast Bancorp (stockholders other than First Seacoast Bancorp, MHC) as of the closing date was converted into shares of First Seacoast Bancorp, Inc. common stock based on an exchange ratio of 0.8358 shares of First Seacoast Bancorp, Inc. common stock for each share of First Seacoast Bancorp common stock. Cash was issued in lieu of a fractional share of First Seacoast Bancorp, Inc. common stock based on the offering price of $10.00 per share.

Upon the completion of the conversion transaction, First Seacoast Bancorp, Inc. has approximately 5,077,492 shares of common stock outstanding before adjustment for fractional shares.

Given the relatively small market cap and recent transformation, FSEA is flying under the radar. In addition, the company has not yet provided fourth quarter earnings. The lack of reporting post-transaction hinders the stock’s ability to screen accurately on several of the popular websites.

Our Thesis: Catalysts, Valuation & Risks

Releasing fourth quarter results (with the updated balance sheet and share count) will at least put FSEA on the map.

More importantly, as mentioned above, FSEA is wildly overcapitalized. And the substantial liquidity is key to driving shareholder value as it provides the wherewithal to ramp loan growth, pay dividends, and repurchase shares.

Medium Term Perspective

Over the next 12-18 months, we expect the company to begin repurchasing shares. Trading below tangible book value, every share repurchased will be immediately accretive.

Subsequently, as the gap between the stock price and tangible book value closes, the bank is likely to issue a modest, recurring, quarterly dividend, attracting a whole new group of income-hungry investors.

The combination of dividends, buybacks, and moderate loan growth has the potential to provide a total return of 20-30% over the next 24 months.

Longer Term Perspective

With a 3-5 year investment horizon, the return potential looks even better.

Although by no means a guarantee, we expect FSEA to follow the game plan of so many other shareholder-friendly, demutualized banks. After flexing the balance sheet (conservatively growing organically while distributing a modest dividend and consistently repurchasing shares below tangible book value), the bank will become a takeover candidate. As a reminder, demutualized banks must wait three years after the conversion date to sell the business.

At that point, in January 2026, FSEA will be eligible to be acquired, a fairly typical outcome for demutualized banks. For an acquirer, FSEA offers a quality portfolio and an attractive footprint in New Hampshire’s southeastern market.

Historically, the average thrift is acquired at 120%-140% of tangible book value.

To be conservative, we typically model an exit multiple of 120% of tangible book value. In this case, we have targeted a tangible book value of ~$15 per share in December 2026, indicating an acquisition price of ~$19.50 per share or a ~90% return over the next ~4 years.

Primary Risks

Potential risks to our thesis include, but are not limited to:

• Quality of the loan portfolio deteriorates. As a small thrift, FSEA is significantly exposed to the economic conditions within its regional footprint.
• Leadership changes course and elects to hold excess capital versus returning to shareholders via dividends and buybacks.
• Material change in the local competitive environment could slow growth or reduce profitability.

Conclusion

Despite a strong capital position and attractive credit metrics, FSEA trades at just 72% of tangible book value.

We believe management will continue to follow the proven, shareholder-friendly “thrift game plan” which includes conservative organic growth, dividends, prudent buybacks, and ultimately a sale.

Although there are no guarantees in the equity market, we view FSEA as a low risk holding, which conservatively offers total return potential of ~90% over the next 4-5 years.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.