NSTS Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
For the quarter and nine months ended September 30, 2021. NSTS Bancorp was formed in September 2021 for a planned mutual-to-stock conversion. At September 30, it had no assets, liabilities, or operating business; the financial statements cover North Shore MHC, NSTS Financial Corporation, and North Shore Trust and Savings (the Bank). The Bank serves Lake County, Illinois, and nearby communities, with a focus on residential mortgages and deposits.
Key financial metrics
| Metric | Q3 2021 / September 30, 2021 | Comparable period / December 31, 2020 |
|---|---|---|
| Net income | $17,000 for Q3; $2,000 year to date | $25,000 for Q3 2020; $199,000 year-to-date loss in 2020 |
| Net interest income | $976,000 Q3; $3.057 million year to date | $1.044 million Q3 2020; $3.482 million year to date |
| Net interest margin | 1.73% Q3; 1.82% year to date | 1.85% Q3 2020; 2.08% year to date |
| Total assets | $259.9 million | $242.2 million |
| Loans, net | $96.2 million | $98.5 million |
| Deposits | $205.1 million | $186.4 million |
| Cash and cash equivalents | $42.7 million | $31.9 million |
| Available-for-sale securities | $97.0 million | $81.6 million |
| FHLB advances | $5.0 million | $4.0 million |
| Members’ equity | $45.9 million | $46.7 million |
For the nine months, operating cash flow was $277,000, investing cash outflow was $8.5 million, and financing cash inflow was $19.1 million. Management reported liquid assets of $163.3 million, equal to 62.83% of assets. The Bank’s Tier 1 leverage ratio was 18.33%; it was categorized as well capitalized under the applicable regulatory framework.
Material changes versus prior periods
- Year-to-date net income improved from a $199,000 loss to $2,000, while net interest income fell by $425,000 and the net interest margin declined 26 basis points. Management attributed margin pressure mainly to lower yields in the low-rate environment; reduced funding costs only partly offset the decline.
- Deposits grew 10.04% from year-end 2020, including approximately 450 new accounts with $16.1 million in balances, which management linked to publicity around the proposed conversion. Assets grew as deposits increased and cash was invested in securities.
- Net loans declined 2.34%, reflecting PPP loan forgiveness and $3.8 million of commercial and multifamily loan prepayments. The allowance for loan losses fell to $783,000 from $870,000; year-to-date provision was $5,000 versus $310,000 in 2020, while net charge-offs were $92,000.
- Q3 noninterest income declined to $373,000 from $424,000, principally because fewer mortgage loans were sold; this was partly offset by a $131,000 securities-sale gain. Year-to-date noninterest income increased to $971,000 from $928,000, including that securities gain.
- Year-to-date noninterest expense fell to $4.269 million from $4.626 million, mainly due to lower salaries and benefits as average full-time-equivalent staffing fell from 40 to 35. Data-processing expense increased.
- Unrealized securities losses reduced other comprehensive income by $779,000 after tax year to date, contributing to the decline in equity.
Outlook, risks, contingencies, and unusual items
- No specific earnings, revenue, or margin guidance is provided. Management cautioned that results for the interim period are not necessarily indicative of full-year results and said margin could remain under pressure from lower asset yields and competition for quality loans.
- The conversion plan was adopted and the registration statement became effective November 10, 2021. Management expected public-company, employee stock ownership plan, possible stock-benefit-plan, staffing, and growth-strategy costs to increase after conversion. The filing does not quantify those expected costs.
- COVID-19 remains a risk to borrowers and local economic conditions. The Bank had granted deferrals on 50 loans totaling $9.7 million; two loans totaling $127,000 remained deferred at September 30. PPP loans outstanding and awaiting forgiveness totaled approximately $71,000.
- Credit quality indicators included $148,000 of nonperforming loans and $118,000 of other real estate owned. Management cited local economic conditions, collateral values, loan collectability, and regulatory review as uncertainties affecting loss estimates.
- Interest-rate, liquidity, funding, real-estate, competition, cybersecurity, regulatory, and operational risks are discussed. Management said interest-rate simulation and economic-value-of-equity models were within policy limits and liquidity was sufficient. Ordinary-course litigation and other commitments were not expected by management to have a material adverse effect; loan-origination commitments were $5.695 million.
- The Bank’s $5 million non-interest-bearing FHLB advance is collateralized by loans and matures May 21, 2022. The filing says CECL is expected to be effective for the Bank in January 2023; management was still evaluating its impact.
Important facts for investors to verify
- Confirm the conversion and offering’s completion, share issuance, and post-conversion capital structure; the filing states no NSTS Bancorp common shares were outstanding as of December 23, 2021.
- Assess whether deposit growth is sustainable and how conversion-related deposits affect funding costs and liquidity.
- Monitor net interest margin, loan growth, mortgage-sale volumes, and the expected increase in operating and compensation expenses after conversion.
- Review loan delinquencies, remaining deferrals, charge-offs, OREO, and the adequacy of the allowance as economic conditions change.
- Verify the filing’s cover-page response indicating the registrant had not filed all required reports during the preceding 12 months, and clarify the reporting entity: the statements are for the predecessor banking organizations, not the newly formed NSTS Bancorp.