NSTS Bancorp, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet figures are compared with December 31, 2022. Unless noted otherwise, amounts are in millions of dollars. The Bank serves Lake County, Illinois and nearby communities, primarily taking deposits and making residential mortgage loans. Q1 2022 comparisons include the January 2022 conversion and stock offering, which affect comparability.
Financial performance and condition
| Metric | Q1 2023 / Mar. 31, 2023 | Comparable figure |
|---|---|---|
| Interest income | $1.858 million | $1.295 million in Q1 2022 |
| Net interest income | $1.637 million | $1.104 million in Q1 2022 |
| Net interest margin | 2.75% | 1.57% in Q1 2022 |
| Net income (loss) | $170,000; diluted EPS $0.03 | Loss of $279,000; diluted EPS $(0.07) in Q1 2022 |
| Noninterest income / expense | $147,000 / $1.670 million | $188,000 / $1.647 million in Q1 2022 |
| Operating cash flow | $263,000 | $1.663 million in Q1 2022 |
| Total assets | $259.560 million | $264.206 million at Dec. 31, 2022 |
| Loans, net | $103.543 million | $103.359 million at Dec. 31, 2022 |
| Deposits | $172.252 million | $178.714 million at Dec. 31, 2022 |
| Stockholders’ equity | $82.069 million | $80.542 million at Dec. 31, 2022 |
- Profitability and drivers: The company moved to net income from a loss, primarily as higher loan and securities interest income more than offset increased deposit costs and lower noninterest income. Interest expense on deposits was $221,000, versus $191,000. Noninterest expense rose $23,000; salary and employee benefits were the largest expense.
- Cash flow and liquidity: Cash and equivalents declined to $9.855 million from $13.147 million, principally amid deposit outflows. Investing activities provided $2.362 million and financing activities used $5.917 million. The Bank reported no borrowings outstanding; available capacity included approximately $69.8 million from the FHLB and a $10 million BMO Harris federal funds line.
- Credit and capital: The loan ACL was $979,000, or 0.95% of loans; the company recorded a $28,000 reversal of provision in Q1. Nonaccrual loans were $148,000, with no loans 90 days past due and accruing. The Bank reported a 25.26% Tier 1 leverage ratio and was categorized as well capitalized.
Material changes and unusual items
- The company adopted CECL on January 1, 2023, recording a $279,000 reduction to retained earnings, net of tax. The adoption increased the loan allowance by $384,000 and the off-balance-sheet allowance by $5,000. Q1 2023 credit-loss results therefore use the new methodology; prior-year figures use the prior standard.
- Deposits fell $6.462 million, mainly in money-market and time deposits, as customers moved funds in response to competing rates and some maturing time deposits were not renewed. Deposits exceeding the $250,000 FDIC insurance limit totaled $38.4 million, or 22.3% of deposits.
- Available-for-sale securities were $121.127 million at fair value. Gross unrealized losses were $13.410 million, while accumulated other comprehensive loss improved by $1.581 million during the quarter. Management attributed the unrealized losses largely to market rates and said it intended and was able to hold the securities; it reported no securities with credit losses.
- On March 28, 2023, the Board authorized repurchases of approximately 5.05% of outstanding common stock; none had been repurchased by quarter-end.
Outlook, commentary and risks
- No quantified earnings or financial guidance was provided. Management said it expected sufficient funds for current commitments and anticipated retaining a significant portion of the $29.3 million in time deposits maturing within 12 months. If retention is lower, it may use FHLB funding or raise deposit rates, increasing interest expense.
- Management cited slower loan originations amid higher market rates and expects additional compensation expense if proposed stock-based benefit plans are approved. It continues to monitor liquidity daily.
- Key risks include deposit competition and outflows, interest-rate changes affecting funding costs, margins and securities values, local real estate and economic conditions, and uncertainty in CECL estimates. Management reported a partial $150,000 valuation allowance for federal NOLs and a full $371,000 allowance for state NOLs; realizability of deferred tax assets could change.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Deposit trends, uninsured deposit concentration, and retention of upcoming time-deposit maturities.
- Changes in net interest margin and deposit pricing as rates and competition evolve.
- CECL assumptions, allowance adequacy, and developments in past-due or nonaccrual loans.
- Fair-value changes in the securities portfolio and whether unrealized losses remain recoverable without sale.
- Deferred-tax-asset realizability, any stock-benefit-plan approvals, and execution of the authorized repurchase program.