NSTS Bancorp, Inc. — Q3 2023 Form 10-Q
Business context and reporting period
For the quarter and nine months ended September 30, 2023. NSTS Bancorp is the holding company for North Shore Trust and Savings, a community bank focused mainly on residential mortgage lending and deposits in the Chicago-area suburbs. During Q3, the Bank opened loan production offices in Aurora and Plainfield and added the Oak Leaf Community Mortgage team.
Financial performance and condition
- Q3 results: Net interest income was $1.516 million, up $20,000 year over year. Net loss was $232,000, versus net income of $118,000; diluted loss per share was $0.05. The loss reflected higher interest expense, credit-loss provision and noninterest expense.
- Nine-month results: Net interest income increased to $4.732 million from $3.916 million. Net loss was $188,000, compared with a $12,000 loss in 2022. Noninterest income fell $618,000, while noninterest expense rose $253,000.
- Margins: Q3 net interest margin was 2.59%, versus 2.36%; nine-month margin was 2.67%, versus 1.97%. For Q3, the interest rate spread was 2.24%, compared with 2.22%.
- Income and expenses: Q3 interest income rose to $1.939 million from $1.688 million, while interest expense rose to $423,000 from $192,000. Q3 noninterest income was $150,000 versus $185,000; noninterest expense was $1.953 million versus $1.678 million. Nine-month noninterest income was $444,000 versus $1.062 million.
- Balance sheet at September 30: Assets were $251.8 million, down from $264.2 million at December 31, 2022. Loans, net, were $106.8 million, up from $103.4 million. Deposits were $165.3 million, down 7.5% from $178.7 million. Stockholders’ equity was $77.2 million, down from $80.5 million.
- Securities and credit: Available-for-sale securities were $109.5 million, with $18.2 million of gross unrealized losses, or 14.3% of portfolio book value. Management attributed the losses mainly to market rates and reported no identified credit losses. The loan allowance was $1.061 million, or 0.99% of loans. Nonperforming loans totaled $203,000; there were no charge-offs in the reported periods.
- Cash flow and liquidity: For the nine months, operating cash flow was $363,000, investing cash flow was positive $7.366 million, and financing cash flow was negative $10.187 million. Cash and cash equivalents were $10.689 million. The Bank had $5.0 million of FHLB advances outstanding, $64.3 million of additional FHLB borrowing capacity, and an undrawn $10.0 million federal funds line.
- Capital: The Bank was categorized as well capitalized. Its Tier 1 capital-to-average-assets ratio was 25.81%, versus 24.81% at year-end 2022.
Material changes versus prior periods
- Deposit outflows, primarily from money market and savings accounts, reduced deposits by $13.4 million since year-end. Q3 promotional certificates of deposit contributed to a $6.4 million increase in time deposits from June 30.
- Funding costs rose: Q3 cost of interest-bearing deposits was 0.94%, versus 0.44% a year earlier. The Bank also borrowed $5.0 million from FHLB Chicago at 4.78% for 24 months.
- Loans grew $3.5 million since year-end. The portfolio remains concentrated in one- to four-family residential loans.
- Equity declined partly because of securities-related accumulated other comprehensive loss and $1.4 million of share repurchases. The company repurchased 152,681 shares through September 30; it reported that all shares remaining under the program had been repurchased by October 30.
Outlook, risks, contingencies and unusual items
- Management expects higher loan yields in Q4 2023 and into 2024 following new originations and the Oak Leaf team expansion. It also anticipates higher salaries and benefit costs from the added mortgage staff. No formal earnings or revenue guidance was provided.
- Time deposits of $39.5 million mature within 12 months. Management expects to retain a significant portion, but warned that lower retention could require additional borrowing or higher deposit rates, increasing interest expense.
- The Bank adopted CECL on January 1, 2023, recording a $279,000 reduction to retained earnings, including a $384,000 increase in the loan allowance and a $5,000 allowance for off-balance-sheet exposures. Subsequent credit-loss provisions were $50,000 in Q3 and $52,000 for the nine months.
- Management estimated a 2023 taxable net loss and recorded a $505,000 valuation allowance against the $843,000 deferred tax asset associated with $4.0 million of federal net operating losses. It cited cumulative taxable losses as significant negative evidence.
- Prior-year nine-month noninterest income included a $502,000 Employee Retention Credit, contributing to the year-over-year decline. The 2023 Equity Incentive Plan contributed $170,000 of Q3 compensation expense; future expense disclosed for outstanding options and restricted shares was $1.6 million each over weighted average periods of 4.7 years.
- Management stated it had no material legal proceedings and did not expect ordinary-course commitments or litigation to materially affect financial condition. Forward-looking risks include interest-rate changes, deposit competition and liquidity, credit quality, real-estate values, economic conditions, and execution and costs of growth initiatives.
Most important facts for investors to verify
- Whether deposits stabilize and the Bank retains maturing time deposits without materially increasing funding costs.
- Whether loan growth and improved yields from the expanded mortgage operation offset added compensation and other operating costs.
- Whether securities unrealized losses remain manageable and management’s stated ability and intent to hold securities until recovery remain unchanged.
- Whether the $1.061 million loan allowance and the $505,000 tax valuation allowance remain appropriate as economic conditions and taxable income expectations evolve.
- The effects of share repurchases, outstanding equity awards and future compensation expense on per-share results and ownership dilution.