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, 2021 and consolidated results of operations for
the three months ended March 31, 2021 and 2020 and should be read in conjunction
with our unaudited consolidated financial statements and accompanying notes
presented elsewhere in this report, and it should be read in conjunction with
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2020, filed on March 26, 2021 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



In March 2020, the outbreak of the COVID-19 pandemic was recognized as a
pandemic by the World Health Organization. The spread of COVID-19 has created a
global public health crisis that has resulted in unprecedented uncertainty,
volatility and disruption in financial markets and in governmental, commercial
and consumer activity in the United States and globally, including the markets
that we serve. Governmental responses to the pandemic have included orders
closing businesses not deemed essential and directing individuals to restrict
their movements, observe social distancing and shelter in place. These actions,
together with responses to the pandemic by businesses and individuals, have
resulted in rapid decreases in commercial and consumer activity, temporary
closures of many businesses that have led to a loss of revenues and a rapid
increase in unemployment, material decreases in oil and gas prices and in
business valuations, disrupted global supply chains, market downturns and
volatility, changes in consumer behavior related to pandemic fears, related
emergency response legislation and an expectation that Federal Reserve policy
will maintain a low interest rate environment for the foreseeable future.

We have taken deliberate actions to ensure that we have the balance sheet
strength to serve our customers and communities, including increases in
liquidity and reserves supported by a strong capital position. Our business and
consumer customers are experiencing varying degrees of financial distress. In
order to protect the health of our customers and employees, and to comply with
applicable government directives, we have modified our business practices,
including restricting employee travel, directing employees to work from home
insofar as is possible and implementing our business continuity plans and
protocols to the extent necessary.

On March 27, 2020, the CARES Act was signed into law. It contains substantial
tax and spending provisions intended to address the impact of the COVID-19
pandemic. The CARES Act includes the PPP, a nearly $350 billion program designed
to aid small- and medium-sized businesses through federally guaranteed SBA loans
distributed through banks. These loans are intended to guarantee eight weeks of
payroll and other costs to help those businesses remain viable and allow their
workers to pay their bills. On December 27, 2020, the 2021 Consolidated
Appropriations Act was signed, which extended relief to the earlier of 60 days
after the national emergency termination date or January 1, 2022. This
legislation included a $900 billion relief package and the extension of certain
relief provisions from the March 2020 CARES Act that were set to expire at the
end of 2020, including the extension of the eviction moratorium and $286 billion
of additional PPP funds. During the three months ended March 31, 2021 and the
year ended December 31, 2020 the Bank originated 113 and 286 PPP loans,
respectively, with aggregate outstanding principal balances of $11.9 million and
$33.0 million, respectively. As of March 31, 2021 and December 31, 2020, total
PPP loan principal balances of $23.0 million and $21.2 million, respectively,
and were included in commercial and industrial loans (C+I).

In response to the COVID-19 pandemic, we have also implemented a short-term loan
modification program to provide temporary payment relief to certain borrowers
who meet the program's qualifications. In April 2020, various regulatory
agencies, including the Board of Governors of the Federal Reserve System and the
Office of the Comptroller of the Currency, issued an interagency statement
titled Interagency Statement on Loan Modifications and Reporting for Financial
Institutions Working with Customers Affected by the Coronavirus, that encourages
financial institutions to work prudently with borrowers who are or may be unable
to meet their contractual payment obligations due to the effects of the COVID-19
pandemic. The interagency statement was effective immediately and impacted
accounting for loan modifications. Under Accounting Standards Codification
310-40, Receivables - Troubled Debt Restructurings by Creditors (ASC 310-40), a
restructuring of debt constitutes a troubled debt restructuring, or TDR, if the
creditor, for economic or legal reasons related to the debtor's financial
difficulties, grants a concession to the debtor that it would

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not otherwise consider. The regulatory agencies confirmed with the staff of the
FASB that short-term modifications made on a good faith basis in response to the
COVID-19 pandemic to borrowers who were current prior to any relief are not to
be considered TDRs. These include short-term modifications such as payment
deferrals, fee waivers, extensions of repayment terms or other delays in payment
that are insignificant.

Additionally, Section 4013 of the CARES Act that became law on March 27, 2020
further provided banks with the option to elect either or both of the following,
from March 1, 2020 until the earlier of December 31, 2020 or the date that is 60
days after the date on which the national emergency concerning the COVID-19
pandemic declared by the President of the United States under the National
Emergencies Act (50 U.S.C. 1601 et seq.) terminates:

(i) to suspend the requirements under GAAP for loan modifications related to

the COVID-19 pandemic that would otherwise be categorized as a TDR; and/or

(ii) to suspend any determination of a loan modified as a result of the

effects of the COVID-19 pandemic as being a TDR, including impairment for

accounting purposes.




The 2021 Consolidated Appropriations Act continued to suspend the requirements
under GAAP for loan modifications related to the COVID-19 pandemic that would
otherwise be categorized as a TDR and suspend any determination of a loan
modified as a result of the effects of the COVID-19 pandemic as being a TDR,
including impairment for accounting purposes.

If a bank elects a suspension noted above, the suspension (i) will be effective
for the term of the loan modification, but solely with respect to any
modification, including a forbearance arrangement, an interest rate
modification, a repayment plan and any other similar arrangement that defers or
delays the payment of principal or interest, that occurs during the applicable
period for a loan that was not more than 30 days past due as of December 31,
2019 and (ii) will not apply to any adverse impact on the credit of a borrower
that is not related to the COVID-19 pandemic. The Company has applied this
guidance to qualifying loan modifications.

The short-term loan modification program has been offered to both retail and
commercial borrowers. The majority of short-term loan modifications for retail
loan borrowers consist of deferred payments (which may include principal,
interest and escrow), which are capitalized to the loan balance and recovered
through the re-amortization of the monthly payment at the end of the deferral
period. For commercial loan borrowers, the majority of short-term modifications
consist of allowing the borrower to make interest-only payments with the
deferred principal to be due at maturity or repaid as the monthly payment is
re-amortized at the next interest reset date as is applicable to the individual
loan structure. Alternatively, commercial loan borrowers may defer their full
monthly payment similar to the retail loan program outlined above. All loans
modified under these programs are maintained on full accrual status during the
deferral period.

As of March 31, 2021, temporary payment relief continued for 4 loans with
aggregate outstanding principal balances of $3.2 million and consists of 1
commercial loan with an aggregate outstanding principal balance of $2.7 million
and 3 residential loans with aggregate outstanding principal balances of
$446,000. Under the applicable regulatory guidance, none of these loans were
considered troubled debt restructurings as of March 31, 2021. We continue to
monitor the impact of COVID-19 closely, as well as any effects that may result
from the CARES and Consolidated Appropriations Acts; however, the extent to
which the COVID-19 pandemic will impact our operations and financial results
during the remainder of 2021 and beyond is highly uncertain.

Cautionary Note Regarding Forward-Looking Statements



This quarterly report contains forward-looking statements, which can be
identified by the use of words such as "estimate," "project," "believe,"
"intend," "anticipate," "plan," "seek," "expect," "will," "may" and words of
similar meaning. These forward-looking statements include, but are not limited
to:

• statements of our goals, intentions and expectations;

• statements regarding our business plans, prospects, growth and operating

strategies;

• statements regarding the quality of our loan and investment portfolios; and

• estimates of our risks and future costs and benefits.




These forward-looking statements are based on current beliefs and expectations
of our management and are inherently subject to significant business, economic
and competitive uncertainties and contingencies, many of which are beyond our
control. In addition, these forward-looking statements are subject to
assumptions with respect to future business strategies and decisions that are
subject to change.

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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 COVID-19 pandemic is adversely affecting us and our customers,


        employees and third-party service providers. It is not possible to
        accurately predict the extent, severity or duration of the 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 and capital
        requirements, including as a result of Basel III;


  • the impact of the Dodd-Frank Act and implementing regulations;

• changes in the quality or composition of our loan or investment portfolios;

• technological changes that may be more difficult or expensive than expected;




  • the inability of third-party providers to perform as expected;

• our ability to manage market risk, credit risk and operational risk in the

current economic environment;

• our ability to enter new markets successfully and capitalize on growth


        opportunities;


  • system failures or breaches of our network security;

• electronic fraudulent activity within the financial services industry;

• our ability to successfully integrate into our operations any assets,

liabilities, customers, systems and management personnel we may acquire

and our ability to realize related revenue synergies and cost savings

within expected time frames and any goodwill charges related thereto;




  • changes in consumer spending, borrowing and savings habits;

• changes in accounting policies and practices, as may be adopted by the


        bank regulatory agencies, the Financial Accounting Standards Board, the
        Securities and Exchange Commission or the Public Company Accounting
        Oversight Board;


  • our ability to retain key employees;

• our compensation expense associated with equity allocated or awarded to

our employees; and

• changes in the financial condition, results of operations or future

prospects of issuers of securities that we own.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Critical Accounting Policies

The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with generally accepted accounting principles used in the United States of America. The


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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, 2020.

Comparison of Financial Condition at March 31, 2021 (unaudited) and December 31, 2020



Total Assets. Total assets were $464.8 million as of March 31, 2021, an increase
of $21.7 million, or 4.9%, when compared to total assets of $443.1 million at
December 31, 2020. The increase was due primarily to a $16.7 million increase in
cash and due from banks and a $6.6 million increase in net loans, offset by a
$1.9 million decrease in the available for sale securities portfolio.

Cash and Due From Banks. Cash and due from banks increased $16.7 million, or
278.2%, to $22.7 million at March 31, 2021 from $6.0 million at December 31,
2020. This increase primarily resulted from a $34.1 million increase in
deposits, offset by net loan originations and principal payments of $4.0 million
and a $13.9 million decrease in borrowings during the three months ended
March 31, 2021.

Available-for-Sale Securities. Available-for-sale securities decreased by $1.9
million, or 3.3%, to $53.6 million at March 31, 2021 from $55.5 million at
December 31, 2020. This decrease was primarily due to net sales of
available-for-sale securities totaling $924,000 and a $993,000 decrease in net
unrealized gains and losses within the portfolio during the three months ended
March 31, 2021.

Net Loans. Net loans increased $6.6 million, or 1.8%, to $371.4 million at
March 31, 2021 from $364.8 million at December 31, 2020. During the three months
ended March 31, 2021, we originated $44.8 million of loans (including $8.7
million of PPP loans classified as commercial and industrial loans). We also
purchased $2.4 million of one- to four-family residential mortgage loans
collateralized by properties located in the greater Boston market during the
three months ended March 31, 2021. Net deferred loan costs increased $231,000,
or 32.8%, to $936,000 at March 31, 2021 from $705,000 at December 31, 2020
primarily due to deferred costs on one- to four-family residential mortgage
loans offset by fees received from the SBA for processing PPP loans.

One- to four-family residential mortgage loans decreased $3.9 million, or 1.8%,
to $209.8 million at March 31, 2021 from $213.7 million at December 31, 2020.
Multi-family loans decreased $654,000, or 9.9%, to $6.0 million at March 31,
2021 from $6.6 million at December 31, 2020. Acquisition, development and land
loans increased $8.5 million, or 36.9%, to $31.7 million at March 31, 2021 from
$23.1 million at December 31, 2020. Home equity loans and lines of credit
decreased $1.2 million, or 12.4%, to $8.4 million at March 31, 2021 from $9.6
million at December 31, 2020. Consumer loans decreased $161,000, or 5.5%, to
$2.8 million at March 31, 2021 from $2.9 million at December 31, 2020.
Commercial real estate mortgage loans increased $6.8 million, or 10.3%, to $73.0
million at March 31, 2021 from $66.2 million at December 31, 2020. Commercial
and industrial loans decreased $3.0 million, or 6.7%, to $42.3 million at
March 31, 2021 from $45.3 million at December 31, 2020.

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 increased $62,000 to $3.4 million at March 31,
2021 from $3.3 million at December 31, 2020. The Company measures and records
its allowance for loan losses based upon an incurred loss model. Under this
approach, loan loss is recognized when it is probable that a loss event was
incurred. This approach also considers qualitative adjustments to the
quantitative baseline determined by the model. The Company considers the impact
of current environmental factors at the measurement date that did not exist over
the period from which historical experience was used. Relevant factors include,
but are not limited to, concentrations of credit risk (geographic, large
borrower and industry), economic trends and conditions, changes in underwriting
standards, experience and depth of lending staff, trends in delinquencies and
the level of criticized loans. Given the many economic uncertainties regarding
the COVID-19 pandemic, the Company continued to maintain relevant adjustments
made in prior periods to its qualitative factors in the measurement of its
allowance for loan losses at March 31, 2021 that balanced the need to recognize
an allowance during this unprecedented economic situation while adhering to an
incurred loss recognition and measurement principle which prohibits the
recognition of future or lifetime losses.

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The Company has limited or no direct exposure to industries expected to be
hardest hit by the COVID-19 pandemic, including oil and gas/energy, credit
cards, airlines, cruise ships, arts/entertainment/recreation, casinos and
shopping malls. As of March 31, 2021, our exposure to the transportation and
hospitality/restaurant industries amounted to less than 5% of our gross loan
portfolio.

Deposits. Our deposits are generated primarily from residents within our primary
market area. We offer a selection of deposit accounts, including
non-interest-bearing and interest-bearing checking accounts, savings accounts,
money market accounts and certificates of deposit, for both individuals and
businesses.

Deposits increased $34.1 million, or 10.4%, to $361.5 million at March 31, 2021
from $327.4 million at December 31, 2020 primarily as a result of an increase in
NOW and demand deposits and time deposits. Core deposits (defined as deposits
other than time deposits) increased $21.9 million, or 7.9%, to $300.7 million at
March 31, 2021 from $278.7 million at December 31, 2020. The increase was due to
an increase of $10.5 million in commercial deposits and an $11.4 million
increase in retail deposits. As of March 31, 2021 savings deposits increased
$4.4 million, money market deposits increased $4.3 million, NOW and demand
deposit accounts increased $13.2 million and time deposits increased $12.2
million. There were $15.0 million and $-0- of brokered deposits included in time
deposits at March 31, 2021 and December 31, 2020, respectively.

Borrowings. Total borrowings decreased $13.9 million, or 26.5%, to $38.5 million
at March 31, 2021 from $52.3 million at December 31, 2020. Advances from the
FHLB decreased $5.1 million, or 14.9%, to $29.0 million at March 31, 2021 from
$34.1 million at December 31, 2020. Advances from the FRB decreased $8.8
million, or 48.1%, to $9.4 million at March 31, 2021 from $18.2 million at
December 31, 2020. The decrease in total borrowings is due to the maturity of
short-term FHLB advances and the repayment of advances from the FRB under the
PPPLF program.

Total Stockholders' Equity. Total stockholders' equity increased $155,000, or
0.3%, to $59.0 million at March 31, 2021 from $58.9 million at December 31,
2020. This increase was due primarily to net income of $908,000, offset by the
repurchase of $232,000 of the Company's common stock at cost and an other
comprehensive loss of $548,000 related to net changes in the fair value of
available-for-sale securities and interest rate swap contracts for the three
months ended March 31, 2021.

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

Management determines that a loan is impaired or nonperforming when it is
probable at least a portion of the loan will not be collected in accordance with
the original terms due to a deterioration in the financial condition of the
borrower or the value of the underlying collateral if the loan is collateral
dependent. When a loan is determined to be impaired, the measurement of the loan
in the allowance for loan losses is based on present value of expected future
cash flows, except that all collateral-dependent loans are measured for
impairment based on the fair value of the collateral. Non-accrual loans are
loans for which collectability is questionable and, therefore, interest on such
loans will no longer be recognized on an accrual basis.

We generally cease accruing interest on our loans when contractual payments of
principal or interest have become 90 days past due or management has serious
doubts about further collectability of principal or interest, even though the
loan is currently performing. Interest received on non-accrual loans generally
is applied against principal or applied to interest on a cash basis. Generally,
loans are restored to accrual status when the obligation is brought current, has
performed in accordance with the contractual terms for at least six consecutive
months and the ultimate collectability of the total contractual principal and
interest is no longer in doubt.

Nonperforming loans were $62,000 and $884,000, or 0.02% and 0.24% of total
loans, at March 31, 2021 and December 31, 2020, respectively. At March 31, 2021
and December 31, 2020, we had no troubled debt restructurings or foreclosed
assets. At December 31, 2020, nonperforming loans consisted primarily of an
SBA-guaranteed commercial and industrial loan, which had an outstanding balance
of $822,000 and was secured by all business assets and personal real estate
holdings of the guarantors. The SBA guaranteed 75% of this loan balance.
Although this loan was performing according to its original terms at December
31, 2020, it was considered nonperforming due to the financial condition and
prospects of the borrower. This loan was repaid during the three months ended
March 31, 2021 with proceeds from the sale of certain personal real estate
holdings of the guarantors.

Comparison of Operating Results for the Three Months Ended March 31, 2021 and 2020



Net Income. Net income was $908,000 for the three months ended March 31, 2021,
compared to net income of $257,000 for the three months ended March 31, 2020, an
increase of $651,000, or 253.3%. The increase was due primarily to an increase
in net interest and dividend income after provision for loan losses of $584,000,
an increase in noninterest income of $210,000 and a decrease in noninterest
expenses of $90,000, offset by an increase in income tax expense of $233,000
during the three months ended March 31, 2021.

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Interest and Dividend Income. Interest and dividend income increased $4,000, or
0.1%, to $3.9 million for the three months ended March 31, 2021 and 2020. This
increase was due to a $59,000, or 1.6%, increase in interest and fees on loans,
offset by a $55,000 decrease in interest and dividend income on investments, or
17.2%, to $264,000 for the three months ended March 31, 2021 from $319,000 for
the three months ended March 31, 2020. Interest and fees on loans for the three
months ended March 31, 2021 and 2020 included $420,000 and $-0- of interest and
fees earned on PPP loans, respectively. The weighted average annualized yield
for the loan portfolio decreased 20 basis points, or 4.8%, to 3.98% for the
three months ended March 31, 2021 from 4.18% for the three months ended
March 31, 2020 primarily as a result of a decrease in market interest rates and
an increase in the average balance of low-yield PPP loans. The weighted average
annualized yield for the investment portfolio decreased to 1.89% for the three
months ended March 31, 2021 from 2.59% for the three months ended March 31, 2020
due primarily to the reinvestment of proceeds from sales and maturities into
lower yielding investments as a result of a decrease in market interest rates.

Average interest-earning assets increased $50.8 million, to $445.7 million for
the three months ended March 31, 2021 from $394.9 million for the three months
ended March 31, 2020. The annualized yield on interest earning-assets decreased
45 basis points to 3.53% for the three months ended March 31, 2021 from 3.98%
for the three months ended March 31, 2020 primarily as a result of a decrease in
market interest rates and an increase in the average balance of low-yield PPP
loans.

Interest Expense. Total interest expense decreased $525,000, or 66.5%, to
$265,000 for the three months ended March 31, 2021 from $790,000 for the three
months ended March 31, 2020. Interest expense on deposits decreased $335,000, or
65.2%, to $179,000 for the three months ended March 31, 2021 from $514,000 for
the three months ended March 31, 2020 due to a decrease in deposit rates
partially offset by an increase in interest-bearing deposit balances. The
average balance of interest-bearing deposits increased $45.4 million, or 19.2%,
to $282.4 million for the three months ended March 31, 2021 from $236.9 million
for the three months ended March 31, 2020 primarily as a result of an increase
in the average balance of commercial deposits due, in part, to the deposit of
PPP loan proceeds. The weighted average annualized rate of interest-bearing
deposits decreased to 0.25% for the three months ended March 31, 2021 from 0.87%
for the three months ended March 31, 2020 primarily due to a decrease in market
interest rates.

Interest expense on borrowings consists of interest on advances from the FHLB
and the FRB. Interest expense on borrowings decreased $190,000, or 68.8%, to
$86,000 for the three months ended March 31, 2021 from $276,000 for the three
months ended March 31, 2020 primarily due to the retirement of $18 million of
long-term borrowings from the FHLB in advance of their scheduled maturities
during 2020, a decrease in market interest rates and low interest-bearing PPPLF
advances. The interest rates on the retired borrowings were well above current
market rates and were scheduled to mature in 2024 and 2025. We were able to
retire these borrowings without incurring prepayment penalties. The rate paid on
PPPLF advances is 35 basis points. The average balance of borrowings decreased
$21.9 million, or 33.1%, to $44.3 million for the three months ended March 31,
2021 from $66.2 million for the three months ended March 31, 2020. The weighted
average annualized rate paid on borrowings decreased to 0.78% for the three
months ended March 31, 2021 from 1.67% for the three months ended March 31, 2020
primarily due to a decrease in market interest rates and low interest-bearing
PPPLF advances.

Net Interest and Dividend Income. Net interest and dividend income increased
$529,000, or 16.9%, to $3.7 million for the three months ended March 31, 2021
from $3.1 million for the three months ended March 31, 2020. This increase was
due to a $50.8 million, or 12.9%, increase in the balance of interest-earning
assets offset by a $23.7 million, or 7.8%, increase in average interest-bearing
liabilities during the three months ended March 31, 2021. Annualized net
interest margin increased to 3.29% for the three months ended March 31, 2021
from 3.18% for the three months ended March 31, 2020.

Provision for Loan Losses. Based on management's analysis of the allowance for
loan losses, a $60,000 provision for loan losses was recorded for the three
months ended March 31, 2021 compared to $115,000 for the three months ended
March 31, 2020. The provision for loan losses for the three months ended
March 31, 2021 was based primarily on adjustments to our qualitative factors
reflecting economic uncertainties as a result of COVID-19.

Non-Interest Income. Non-interest income increased $210,000, or 47.8%, to
$649,000 for the three months ended March 31, 2021 compared to $439,000 for the
three months ended March 31, 2020. The increase in non-interest income during
the three months ended March 31, 2021 was due primarily to a $89,000 increase in
securities gains and a $108,000 increase in loan servicing income (loss),
reflecting an increase in the fair value of our mortgage servicing intangible
asset during the three months ended March 31, 2021 .

Non-Interest Expense. Non-interest expense decreased $90,000, or 2.8%, to $3.1
million for the three months ended March 31, 2021 from $3.2 million for the
three months ended March 31, 2020. The decrease to non-interest expense was
primarily due to decreased salaries and employee benefits of $124,000, or 6.2%,
decreased marketing expenses of $31,000, or 34.1%, offset by a $52,000, or
19.5%, increase in data processing expenses. The decrease in salaries and
benefits during the three months ended March 31, 2021 was due to the elimination
of certain positions and early retirements offset by normal salary increases.

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Income Taxes. Income tax expense of $256,000 was recorded for the three months
ended March 31, 2021 compared to $23,000 for the three months ended March 31,
2020. The effective tax rate was 22.0% and 8.2% for the three months ended
March 31, 2021 and 2020, respectively. The increase in income tax expense was
due primarily to the increase in income before income tax expense. Income before
income tax expense increased $884,000, or 315.7%, to $1.2 million for the three
months ended March 31, 2021 from $280,000 for the three months ended March 31,
2020. The increase in the effective tax rate for the three months ended March
31, 2021 as compared to the prior period was primarily due to a lack of a state
net operating loss carryforward in the current period versus the prior period.


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Average Balance Sheets

The following tables set forth average balance sheets, average yields and costs
and certain other information at and for the periods indicated. No
tax-equivalent yield adjustments have been made, as the effects would be
immaterial. All average balances are daily average balances. Non-accrual loans
are included in the computation of average balances only. The yields set forth
below include the effect of deferred fees, discounts and premiums that are
amortized or accreted to interest income or interest expense.

For the Three Months Ended March 31,


                                                                     2021                                             2020
                                                    Average                                          Average
                                                  Outstanding                       Average        Outstanding                       Average
                                                    Balance         Interest      Yield/Rate         Balance         Interest      Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Loans                                            $     368,845     $    3,668            3.98 %   $     345,416     $    3,609            4.18 %
Securities                                              52,031            246            1.89 %          38,467            249            2.59 %
Other                                                   24,776             18            0.29 %          11,009             70            2.54 %
Total interest-earning assets                          445,652          3,932            3.53 %         394,892          3,928            3.98 %
Non-interest-earning assets                             11,506                                           11,909
Total assets                                     $     457,158                                    $     406,801
Interest-bearing liabilities:
NOW and demand deposits                          $     100,315     $       35            0.14 %   $      71,817     $       43            0.24 %
Money market deposits                                   71,625             28            0.16 %          64,370            186            1.16 %
Savings accounts                                        51,019              8            0.06 %          40,108              6            0.06 %
Certificates of deposit                                 59,392            108            0.73 %          60,612            279            1.84 %
Total interest-bearing deposits                        282,351            179            0.25 %         236,907            514            0.87 %
Borrowings                                              44,298             86            0.78 %          66,214            276            1.67 %
Other                                                    1,590              -               -             1,434              -               -
Total interest-bearing liabilities                     328,239            265            0.32 %         304,555            790            1.04 %
Non-interest-bearing deposits                           66,179                                           40,961
Other noninterest-bearing liabilities                    3,735                                            3,588
Total liabilities                                      398,153                                          349,104
Total equity                                            59,005                                           57,697
Total liabilities and equity                     $     457,158                                    $     406,801
Net interest income                                                $    3,667                                       $    3,138
Net interest rate spread (1)                                                             3.21 %                                           2.94 %
Net interest-earning assets (2)                  $     117,413                                    $      90,337
Net interest margin (3)                                                                  3.29 %                                           3.18 %
Average interest-earning assets to
interest-bearing liabilities                            135.77 %                                         129.66 %

(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.


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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 years indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior
volume). The volume column shows the effects attributable to changes in volume
(changes in volume multiplied by prior rate). The total column represents the
sum of the prior columns. For purposes of this table, changes attributable to
both rate and volume, which cannot be segregated, have been allocated
proportionately based on the changes due to rate and the changes due to volume.



                                                          Three Months

Ended March 31, 2021 vs. 2020


                                                             Increase

(Decrease) Due to Change in


                                                      Volume                 Rate                 Total
(Dollars in thousands)
Interest-earning assets:
Loans                                               $       238         $         (179 )       $        59
Securities                                                   74                    (77 )                (3 )
Other                                                        42                    (94 )               (52 )
Total interest-earning assets                               354                   (350 )                 4
Interest-bearing liabilities:
Savings, NOW and money market accounts                       14                    (22 )                (8 )
Money market Deposits                                        19                   (177 )              (158 )
Retail and commercial savings deposits                        2                      -                   2
Certificates of deposit                                      (6 )                 (165 )              (171 )
Total interest-bearing deposits                              29                   (364 )              (335 )
Borrowings                                                  (73 )                 (117 )              (190 )
Total interest-bearing liabilities                          (44 )                 (481 )              (525 )
Change in net interest income                       $       398         $          131         $       529

Liquidity and Capital Resources



Liquidity describes our ability to meet the financial obligations that arise in
the ordinary course of business. Liquidity is primarily needed to meet the
borrowing and deposit withdrawal requirements of our customers and to fund
current and planned expenditures. Our primary sources of funds are deposits,
principal and interest payments on loans and securities, proceeds from the sale
of loans and proceeds from maturities of securities. We also rely on borrowings
from the FHLB as supplemental sources of funds. At March 31, 2021 and
December 31, 2020, we had $29.0 million and $34.1 million outstanding in
advances from the FHLB, respectively, and the ability to borrow an additional
$103.2 million and $112.6 million, respectively. At March 31, 2021 and December
31, 2020, we also had $9.4 million and $18.2 million of PPPLF advances secured
by pledges of PPP loans from the FRB, respectively. Additionally, at March 31,
2021 and December 31, 2020, we had an overnight line of credit with the FHLB for
up to $3.0 million and unsecured Fed Funds borrowing lines of credit with two
correspondent banks for up to $5.0 million. At March 31, 2021 and December 31,
2020, there were no outstanding balances under any of these additional credit
facilities.

While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. Our
most liquid assets are cash and cash equivalents and available-for-sale
investment securities. The levels of these assets are dependent on our
operating, financing, lending and investing activities during any given period.

Our cash flows are comprised of three primary classifications: cash flows from
operating activities, investing activities, and financing activities. Net cash
provided by (used in) operating activities was $1.6 million and ($72,000) for
the three months ended March 31, 2021 and 2020, respectively. Net cash used by
investing activities, which consists primarily of disbursements for loan
originations, net of principal collections, and the purchase of securities
available for sale, offset by proceeds from the sale and maturity of securities
available for sale, was $5.6 million and $2.7 million for the three months ended
March 31, 2021 and 2020, respectively. Net cash provided by financing
activities, consisting of activity in deposit accounts and Federal Home Loan
Bank and Federal Reserve Bank advances, was $20.7 million and $3.2 million for
the three months ended March 31, 2021 and 2020, respectively.

We are committed to maintaining a strong liquidity position. We monitor our
liquidity position daily. We anticipate that we will have sufficient funds to
meet our current funding commitments. COVID-19 has adversely impacted our
business and that of many of our customers, and the ultimate impact will depend
on future developments, which are highly uncertain, including the scope and
duration of the pandemic and actions taken by governmental authorities in
response to the pandemic. Our current strategy is to increase core deposits and
utilize FHLB advances, as well as brokered certificates of deposit as needed, to
fund loan growth.

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The net proceeds from the 2019 stock offering significantly increased our
liquidity and capital resources. Over time, the initial level of liquidity is
expected to be reduced as net proceeds from the stock offering are used for
general corporate purposes, including the funding of loans. However, due to the
increase in equity resulting from the net proceeds raised in the stock offering,
as well as other factors associated with the stock offering, our return on
equity for the three months ended March 31, 2021 and 2020 was adversely
affected.

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. 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,
2021, the Company (on an unconsolidated basis) had liquid assets of $9.9
million. 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 2.3% of all shares currently outstanding and
approximately 5.0% of the then outstanding shares owned by stockholders other
than the MHC. See Note 11 of the unaudited consolidated financial statements
appearing under Item 1 of this quarterly report. As of March 31, 2021, the had
Company had repurchased 49,733 shares of its common stock at a weighted average
share price of $9.35 per share.

At March 31, 2021, the Company exceeded all its regulatory capital requirements.
See Note 10 of the unaudited consolidated financial statements appearing under
Item 1 of this quarterly report. Management is not aware of any conditions or
events that would change our category.

Off-Balance Sheet Arrangements



As a financial services provider, we routinely are a party to various financial
instruments with off-balance-sheet risks, such as commitments to extend credit
and unused lines of credit. While these contractual obligations represent our
potential future cash requirements, a significant portion of commitments to
extend credit may expire without being drawn upon. Such commitments are subject
to the same credit policies and approval process accorded to loans we make.

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