NSTS Bancorp, Inc. — 2022 Form 10-K Summary
Business context and reporting period
Reports the fiscal year ended December 31, 2022, compared with 2021. NSTS Bancorp completed its mutual-to-stock conversion and initial public offering on January 18, 2022; its shares began trading on Nasdaq the next day. Because the holding company did not exist in its current form before the conversion, pre-conversion financial information relates to the predecessor organizations, limiting comparability.
The company is the holding company for North Shore Trust and Savings, a community thrift serving Lake County, Illinois, and surrounding areas. Its business primarily funds residential mortgage lending and investment securities.
Financial results and position
| Metric | 2022 | 2021 |
|---|---|---|
| Total assets, year-end | $264.2 million | $340.9 million |
| Net loans, year-end | $103.4 million | $96.5 million |
| Available-for-sale securities, year-end fair value | $121.2 million | $101.0 million |
| Deposits, year-end | $178.7 million | $285.6 million |
| Net interest income | $5.6 million | $4.1 million |
| Net interest margin | 2.15% | 1.75% |
| Net income (loss) | $27,000 | $(55,000) |
| Net cash from operating activities | $3.0 million | $1.5 million |
| Net cash used in investing activities | $(44.5) million | $(11.8) million |
| Net cash from (used in) financing activities | $(67.0) million | $100.1 million |
Net interest income rose 36.6%, principally as conversion funds were invested in higher-yielding securities while deposit costs remained low. Noninterest expense increased 23.2% to $6.9 million, including higher compensation and public-company professional fees. The $503,000 Employee Retention Credit recorded in 2022 was a one-time benefit; it helped offset the increase in expenses and is included in other noninterest income. Basic and diluted earnings per share were $0.01.
Year-end equity was $80.5 million, or 30.5% of assets. The Bank reported a 24.81% Tier 1 capital-to-average-assets ratio, above the 9% community bank leverage threshold. No borrowings were outstanding at year-end; available borrowing capacity included approximately $68.6 million from the FHLB and an undrawn $10 million federal funds line. The Bank reported liquidity levels it considered adequate.
Material changes and asset quality
- Assets fell 22.5% and deposits fell 37.4%, largely reflecting conversion-related refunds and transfers, removal of the predecessor holding company’s deposit in consolidation, withdrawals of offering-related deposits, and customers moving funds to higher-yielding accounts. Cash and cash equivalents declined to $13.1 million from $121.6 million.
- Securities increased by $20.2 million to $121.2 million. Their net unrealized loss reached $15.6 million, primarily attributed by management to rising interest rates. The loss was recorded in other comprehensive income, not earnings; the Bank stated it intended and was able to hold the securities for the foreseeable future.
- Loans grew 7.0% to $103.4 million, supported in part by a $5.3 million purchase of nine residential mortgage loans. One- to four-family mortgages represented 92.8% of gross loans.
- The allowance for loan losses declined to $624,000, or 0.61% of loans, after a $230,000 reversal of provision; the Bank also recorded $75,000 of net recoveries. Nonperforming loans were $154,000, or 0.15% of loans. There were $188,000 of substandard loans and $43,000 designated special mention.
Outlook, risks and unusual items
- Management expects expenses to rise with public-company costs, employee stock ownership plan costs, potential stock-based benefit plans, staffing additions, and planned loan-production office expansion. No specific earnings or revenue guidance was provided.
- Management expected adoption of CECL on January 1, 2023 to reduce opening equity by an estimated $250,000–$300,000 after tax, equivalent to a 9–12 basis-point reduction in the tangible common equity ratio. The filing says the model assumptions were still being finalized.
- Interest-rate exposure is material: modeled net interest income for the following 12 months would decline 10.3% under an immediate, sustained 300-basis-point rate increase. Management cautioned that interest-rate models rely on assumptions and are not precise forecasts.
- Deposit competition and retention are key liquidity risks. $30.6 million of time deposits were scheduled to mature in 2023; failure to retain a substantial portion could require higher deposit rates or additional borrowing. 24.4% of deposits exceeded the FDIC insurance limit at year-end.
- Other risks include local real estate and economic conditions, higher borrower payments on adjustable-rate loans, securities valuation and prepayment risk, and regulatory, cybersecurity, operational and third-party risks. Commercial real estate and multifamily lending carries greater credit risk, though none of those loans was delinquent over 30 days or on nonaccrual at year-end.
- The company reported no material legal proceedings. Its independent auditor issued an unqualified opinion on the financial statements; the auditor was not engaged to opine on internal control effectiveness. Management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- How much of the reported $27,000 profit depended on the one-time $503,000 Employee Retention Credit and the $230,000 loan-loss provision reversal.
- The cause, duration and potential consequences of the $15.6 million unrealized securities loss, including whether liquidity needs could require securities sales.
- Deposit trends after year-end, retention of 2023 time-deposit maturities, and the company’s ability to compete on deposit pricing without materially increasing funding costs.
- The final CECL adoption adjustment and its effect on equity, capital ratios and future provision expense.
- Loan performance, including the residential concentration, the nonaccrual loans and restructured loans, and the purchased loan pool’s subsequent performance.
- Whether stated growth plans and potential new offices can produce sustainable earnings while noninterest expenses increase.