NSTS Bancorp, Inc. — Q2 2023 Form 10-Q
Business context and period. NSTS Bancorp is the holding company for North Shore Trust and Savings, a community bank serving Lake County, Illinois and nearby areas. The bank focuses on residential mortgage lending, deposits and investment securities. This unaudited filing covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are with December 31, 2022. Dollars below are in thousands unless stated otherwise.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $1,579 | $1,316 | $3,216 | $2,420 |
| Net interest margin | 2.69% | 2.02% | 2.72% | 1.79% |
| Provision for credit losses | $30 | $(16) reversal | $2 | $(16) reversal |
| Noninterest income | $147 | $689 | $294 | $877 |
| Noninterest expense | $1,787 | $1,832 | $3,457 | $3,479 |
| Net income (loss) | $(126) | $149 | $44 | $(130) |
| Basic and diluted EPS | $(0.03) | $0.03 | $0.01 | $(0.03) |
- Balance sheet at June 30: Total assets were $256,855, down $7,351 from year-end 2022. Loans, net, were $104,767, up $1,408; available-for-sale securities were $116,694, down $4,511.
- Deposits and borrowing: Deposits fell $11,471 (6.4%) to $167,243. The bank had $5,000 of FHLB borrowings, a 24-month advance at 4.78% due June 20, 2025. It reported additional FHLB borrowing capacity of approximately $62,800 and an undrawn $10,000 federal funds line.
- Liquidity and cash flow: Cash and cash equivalents were $11,256, down $1,891 from year-end. For the first half, operating cash flow was $136; investing activities provided $5,080; financing activities used $7,107.
- Credit and capital: The loan allowance was $1,010, or 0.96% of loans, versus $624 and 0.61% at year-end; there were no first-half loan charge-offs. Nonaccrual loans were $147, with no loans 90+ days past due and accruing. The bank reported a 25.62% Tier 1 leverage ratio and was categorized as well capitalized.
- Equity: Stockholders’ equity was $80,082, down $460. Accumulated other comprehensive loss was $10,831. The company repurchased 74,295 shares for $649 at an average $8.73 per share.
Material changes versus comparable periods
- Q2 net loss replaced prior-year net income, chiefly because 2022 included a one-time $502 Employee Retention Credit (ERC) in other noninterest income. First-half noninterest income also declined, from $877 to $294. Mortgage loan-sale gains fell to $9 for the first half from $69, as higher rates slowed originations.
- Net interest income and margin improved in both the quarter and first half as yields on loans and securities rose following reinvestment of conversion-offering proceeds. Deposit costs also increased: the reported cost of interest-bearing liabilities rose to 0.69% in Q2 from 0.43% a year earlier, and to 0.62% for the first half from 0.42%.
- Deposits declined amid customers moving funds to higher-yielding alternatives and time deposits not renewing. Of total deposits, $34,500, or 20.6%, exceeded the FDIC insurance limit.
- Effective January 1, 2023, the company adopted CECL, reducing retained earnings by approximately $279 and increasing the loan allowance by $384 and the off-balance-sheet allowance by $5 at adoption.
Outlook, risks and unusual items
- Management said it monitors liquidity daily and expects sufficient funding for current commitments. It expects a significant portion of the $31,077 in time deposits maturing within one year to be retained; otherwise, it may borrow more or raise deposit rates, increasing funding costs. No specific earnings or revenue guidance was provided.
- The securities portfolio had $15,152 of gross unrealized losses at June 30, versus $15,566 at year-end, and fair value of $116,694 versus amortized cost of $131,844. Management attributed losses primarily to market rates and spreads, said it intended and was able to hold the securities, and reported no securities with credit losses.
- Management estimated a taxable net loss for 2023 and recorded a $250 valuation allowance on federal net operating loss deferred tax assets, citing cumulative taxable losses over the three-year period. Federal NOLs were estimated at $2,400.
- Key stated risks include changing interest rates, deposit outflows and funding costs, economic and real-estate conditions, credit-loss estimates, competition, liquidity, and operational and technology dependencies. Ordinary-course legal matters were not expected by management to have a material adverse effect; no material legal proceedings were reported.
- The company adopted a 2023 equity plan and granted 465,500 stock options and 187,200 restricted shares in June. Expected future compensation expense at quarter-end was $1,600 for options and $1,700 for restricted shares, each over a weighted-average five-year period.
Important facts for investors to verify
- Whether deposit outflows continue and how much of the $31,077 of near-term time-deposit maturities renews, including the effect on funding costs and liquidity.
- How net interest margin responds to further rate changes and deposit repricing, and whether asset yields keep pace with funding costs.
- Whether the $1,010 loan allowance remains adequate under CECL as economic conditions, collateral values and portfolio composition change.
- How the securities portfolio’s unrealized losses and interest-rate exposure evolve, and whether management’s ability and intent to hold securities remain unchanged.
- The effect of the $250 tax valuation allowance, continued near-term losses or profitability, and equity-plan compensation and potential dilution.
- The repurchase program’s completion: it authorized up to 269,898 shares through September 29, 2023, with 195,603 shares remaining at June 30.