NSTS Bancorp, Inc. — 2023 Form 10-K
Business context and period. Annual report for the fiscal year ended December 31, 2023; balance-sheet comparisons are with December 31, 2022. NSTS is the holding company for North Shore Trust and Savings, a community thrift serving the Chicago-area market. Its principal business is gathering deposits and originating residential mortgage loans. Residential loans were 92.0% of the $120.8 million loan portfolio at year-end.
Financial performance and condition
- Earnings: Net loss was $4.0 million, or $0.79 per diluted share, versus net income of $27,000, or $0.01 per share, in 2022. The 2023 loss included a $1.8 million realized loss on securities sales and $1.0 million income tax expense, including a significant deferred-tax valuation allowance.
- Interest income and margins: Net interest income increased 11.4% to $6.2 million from $5.6 million. Net interest margin rose to 2.64% from 2.15%, and the interest-rate spread to 2.33% from 2.01%. Interest income was $7.7 million; interest expense increased to $1.5 million from $764,000 as deposit and borrowing costs rose.
- Expenses and credit provision: Noninterest expense increased 14.2% to $7.9 million, including $519,000 of stock-based compensation. The provision for credit losses was $176,000, compared with a $230,000 reversal in 2022.
- Assets and funding: Total assets declined to $256.8 million from $264.2 million. Cash and cash equivalents rose to $31.4 million from $13.1 million; net loans grew to $120.6 million from $103.4 million; and available-for-sale securities fell to $82.1 million from $121.2 million. Deposits decreased 5.5% to $168.8 million. Year-end equity was $77.5 million, down from $80.5 million.
- Securities and debt: The available-for-sale portfolio had $11.5 million of net unrealized losses at year-end. Outstanding borrowings were $5.0 million, a FHLB advance at 4.78% due in June 2025; the $10.0 million Federal Reserve Bank borrowing taken in November was repaid in December.
- Cash flow and liquidity: Operating cash flow was $431,000, versus $3.0 million in 2022; investing activities provided $25.0 million, versus $44.5 million used; financing activities used $7.1 million, versus $67.0 million used. An additional $72.2 million of FHLB borrowing capacity and an undrawn $10.0 million federal funds line were reported. Time deposits totaling $46.6 million mature in 2024.
- Capital and asset quality: The Bank’s community bank leverage ratio was 24.72%, well above its 9% threshold. Nonaccrual loans were $200,000, or 0.17% of loans; there were no loan charge-offs in 2023. The allowance for credit losses was $1.18 million, or 0.97% of loans.
Material changes versus 2022
- Management sold about $30.3 million of lower-yielding securities in the fourth quarter, recognizing a $1.794 million loss. Proceeds were used to repay $10.0 million of Federal Reserve borrowing, with the remainder directed to cash, short-term investments, loan growth and working capital.
- Loans grew by $17.3 million net, while deposits fell by $9.9 million. The deposit mix shifted: core deposits were 60.2% of deposits at year-end, versus 69.0% in 2022; time deposits increased to $67.3 million from $55.4 million.
- The Bank adopted CECL on January 1, 2023, increasing the opening loan allowance by $384,000 and reducing retained earnings by approximately $279,000, net of tax.
- Noninterest income moved from $1.2 million to a loss of $1.15 million, chiefly reflecting the securities-sale loss. 2022 included approximately $503,000 of Employee Retention Credit income. Salaries and benefits rose, reflecting the equity incentive plan, compensation increases and the hiring of a 10-person mortgage team.
Outlook, commentary and risks
- Management said the securities repositioning is intended to improve earnings beginning in 2024; no quantitative earnings or margin guidance was provided. Proceeds were also intended to support residential loan growth. The company expects higher mortgage-loan sales in 2024, which it said may increase noninterest income.
- The Oak Leaf Community Mortgage team expanded the Bank’s Chicagoland lending footprint. In the fourth quarter, the Bank originated $16.4 million of portfolio loans at a weighted-average rate of 7.50%. Management expects additional employee costs in 2024.
- Management warned that many higher-priced time deposits were attracted through growth pricing and may not be retained at maturity. If outflows occur, the Bank may need to use FHLB advances or raise deposit rates, increasing funding costs.
- Interest-rate sensitivity models estimate that an immediate, sustained 300-basis-point rate increase would reduce projected 12-month net interest income by 3.8% and net portfolio value by 19.2%. Management cautioned that these models rely on assumptions and are not precise forecasts.
- Other key risks include rate-driven pressure on securities values and margins, deposit competition and liquidity, local real estate and borrower credit conditions, and cybersecurity and third-party technology risks. The $11.5 million securities unrealized loss was attributed primarily to market rates; management said it had the intent and ability to hold the securities and did not intend to sell additional securities in a loss position.
- A $2.1 million federal deferred-tax valuation allowance and a $532,000 state valuation allowance were recorded amid cumulative taxable losses. Federal net operating losses were $5.0 million, including $1.3 million subject to expiration in 2027; state net operating losses begin expiring in 2024.
- The Company completed a repurchase of 269,898 shares for approximately $2.4 million in 2023 and authorized a further program for up to 265,763 shares through December 31, 2024. It said it does not currently intend to pay cash dividends.
- The auditor issued an unmodified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor was not engaged to attest to internal control effectiveness. Management reported no material legal proceedings.
Important facts for investors to verify
- Whether the securities repositioning and higher-yield loan growth improve recurring earnings enough to offset deposit repricing, added staffing costs and the 2023 realized loss.
- Retention and replacement cost of the $46.6 million of time deposits maturing in 2024, including the effect of uninsured deposits, which were $34.3 million at year-end.
- Whether the $11.5 million unrealized securities loss, management’s ability to hold the portfolio, and the Bank’s liquidity assumptions remain appropriate as rates and deposit flows change.
- Trends in the $200,000 of nonaccrual loans, the $1.18 million credit-loss allowance under CECL, and the concentration of loans in residential real estate.
- Whether future taxable income supports use of deferred tax assets and net operating losses, and whether further valuation-allowance changes affect reported earnings.
- Execution and share-count impact of the new repurchase authorization, equity awards and remaining stock-based compensation expense.