NSTS Bancorp, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. NSTS Bancorp completed its mutual-to-stock conversion and offering on January 18, 2022, becoming the holding company for North Shore Trust and Savings. Accordingly, 2021 operating results and December 2021 balances relate to the predecessor organization; balance-sheet comparisons also reflect conversion-related transactions.
Financial performance and position
- Results: Net loss was $279,000, or $0.07 per share, versus a predecessor net loss of $81,000 in Q1 2021. Net interest income was $1.104 million; noninterest income was $188,000; and noninterest expense was $1.647 million. No loan-loss provision was recorded.
- Interest performance: Net interest margin was 1.57%, down from 1.89% a year earlier; interest-rate spread declined to 1.42% from 1.77%. Average earning-asset yield fell 50 basis points to 1.84%, while the cost of interest-bearing liabilities fell 15 basis points to 0.42%.
- Cash flow: Operating activities provided $1.663 million; investing activities used $19.926 million; financing activities used $51.796 million. Cash and cash equivalents decreased $70.059 million to $51.552 million.
- Balance sheet and liquidity: Total assets were $284.911 million, including $113.456 million in available-for-sale securities and $97.345 million in net loans. Deposits were $188.152 million. The Bank had $5.0 million of zero-interest FHLB advances due May 2022 and approximately $57 million of additional borrowing capacity.
- Capital and credit: The Bank’s Tier 1 leverage ratio was 21.74%, and it was categorized as well capitalized. Allowance for loan losses was $785,000, or 0.80% of loans. Nonaccrual loans were $219,000, equal to 0.22% of loans; there were no charge-offs.
Material changes and unusual items
- The offering sold 5.29 million shares at $10 each for $52.9 million gross proceeds; net proceeds were $49.44 million. The company also issued 107,959 shares and contributed $150,000 cash to its charitable foundation. Equity rose to $86.625 million, including $4.275 million of unallocated ESOP shares.
- Assets declined 16.4% and deposits declined 34.1% from December 31, 2021. Management attributed the reductions largely to refunds of excess offering subscriptions, withdrawal of offering-related deposits, and conversion-related consolidation effects. The predecessor company had held an approximately $87.3 million deposit at the Bank that is eliminated in consolidation after conversion.
- Available-for-sale securities increased $12.5 million as cash was invested in securities. Their fair value was $113.456 million against amortized cost of $119.812 million. The quarter’s after-tax unrealized securities loss was $4.463 million, reflected in accumulated other comprehensive loss; management attributed the declines primarily to market volatility and said it intended and was able to hold the securities.
- Noninterest income fell 41.8%, mainly because mortgage-loan sales declined to $3.7 million from $9.1 million and gains on sales fell to $31,000 from $164,000. Noninterest expense rose 8.6%, including higher compensation and public-company professional costs; management said the latter were expected to recur. ESOP expense was $54,000.
Outlook, risks, and contingencies
- No quantified earnings or growth guidance was provided. Management said it expected sufficient funds for current commitments and anticipated retaining a significant portion of the $34.7 million in time deposits maturing within one year. Lower retention could require higher deposit pricing or additional FHLB borrowing, increasing funding costs.
- Key stated risks include changing interest rates, securities-market declines, local economic and real-estate conditions, loan quality, deposit retention and funding access, competition, operational and technology risks, and COVID-19 effects. Management reported all 50 COVID-related modified loans, totaling $9.7 million, had returned to repayment, and all PPP loans had been forgiven.
- CECL credit-loss accounting was scheduled to become effective for the Bank in January 2023; management was evaluating its impact, which could be material. Commitments included $3.751 million in unused credit lines and $97,000 in loan-origination commitments. Management did not expect ordinary-course litigation or other contingencies to have a material adverse effect.
Important facts for investors to verify
- How conversion-related deposit movements and the predecessor-to-holding-company presentation affect comparisons, including the unusually large reported deposit and cash declines.
- Whether the lower net interest margin and reduced mortgage-sale income persist as rates, loan originations, and funding costs change.
- The duration and potential recovery of unrealized losses in the securities portfolio, and any effects on capital or liquidity if securities must be sold.
- Retention of near-term time-deposit maturities and repayment or refinancing of the $5.0 million FHLB advance due in May 2022.
- Future credit quality, allowance adequacy, and the eventual CECL adoption impact; also note that the filing reports no quantified earnings guidance.