NSTS Bancorp, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. NSTS Bancorp became the Bank’s holding company on January 18, 2022; prior-period results relate to the predecessor organization, and the company had no shares outstanding in 2021. Dollar amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Interest income | $1.507 | $1.249 | $2.802 | $2.572 |
| Net interest income | $1.316 | $1.012 | $2.420 | $2.081 |
| Net interest margin | 2.02% | 1.81% | 1.79% | 1.86% |
| Noninterest income | $0.689 | $0.275 | $0.877 | $0.598 |
| Noninterest expense | $1.832 | $1.396 | $3.479 | $2.913 |
| Net income (loss) | $0.149 | $0.067 | $(0.130) | $(0.014) |
| EPS | $0.03 | Not applicable | $(0.03) | Not applicable |
Q2 earnings improved year over year, while the six-month net loss widened. The $503,000 Employee Retention Credit (ERC) recognized in Q2 materially boosted noninterest income; it offsets compensation expense incurred in 2021. Excluding this item, the filing does not provide a separately stated adjusted earnings measure. Net interest income increased, but the first-half margin narrowed as yields on earning assets declined overall. Higher compensation, public-company professional fees, and other expenses also weighed on results.
Financial position, cash flow and liquidity
- Assets and funding at June 30: Total assets were $274.2 million, deposits $186.3 million, and stockholders’ equity $83.5 million. Cash and cash equivalents were $32.8 million; available-for-sale securities were $121.2 million; net loans were $95.4 million.
- Changes since December 31, 2021: Deposits fell $99.3 million and total assets fell $66.6 million, mainly reflecting stock-offering oversubscription refunds, conversion-related movements, and withdrawals of offering-related deposits. Equity increased $38.3 million, principally from the stock offering, partly offset by unrealized securities losses.
- Debt and liquidity: The Bank repaid its $5.0 million FHLB advance in May and had no borrowings outstanding at quarter-end. It reported borrowing capacity of approximately $61.8 million from the FHLB. Management said liquidity was adequate and monitored daily.
- Six-month cash flows: Operating activities provided $1.7 million; investing activities used $31.3 million, largely for securities purchases; financing activities used $59.2 million, reflecting deposit outflows and the ESOP loan, partly offset by $49.4 million of net stock-offering proceeds. Cash declined $88.8 million to $32.8 million.
- Capital: The Bank’s Tier 1 leverage ratio was 23.26% at June 30, versus the 9% community-bank leverage ratio threshold for 2022; regulators most recently categorized it as well capitalized.
Material changes, risks and outlook
- The $503,000 ERC was recorded in Q2 as other noninterest income, and the related receivable is included in other assets. Management could not estimate when the refund would be received and expects no further ERC claims.
- Unrealized losses on available-for-sale securities rose substantially amid market-rate changes: gross unrealized losses were $11.006 million at June 30, compared with $1.147 million at year-end. The six-month after-tax other comprehensive loss was $7.774 million. Management attributed the declines primarily to market volatility, stated the securities were high credit quality, and said it intended and was able to hold them for the foreseeable future.
- Loans were $95.3 million, down 1.2% from year-end. The allowance for loan losses was $769,000, or 0.81% of loans. Nonperforming loans totaled $163,000; $123,000 was over 90 days past due and accruing. Management recorded a $16,000 provision reversal for the first half.
- Time deposits totaling $34.2 million mature within 12 months. Management expected significant retention based on experience and pricing, but said nonrenewals could require higher deposit rates or FHLB borrowing, increasing funding costs.
- Interest-rate, credit, real-estate-market, deposit-retention, competition, economic, operational and regulatory risks are discussed. The Bank expects CECL, effective January 2023, to change credit-loss accounting; its impact was still under evaluation and could not yet be clearly quantified.
- No earnings guidance was provided. Management expects some public-company and growth-related expense increases to recur. It reported effective disclosure controls and no material control changes during the quarter. Management said ordinary-course litigation and other commitments were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether and when the $503,000 ERC receivable is collected, and how much of reported earnings it represents.
- How available-for-sale securities’ unrealized losses and interest-rate movements affect equity, liquidity and future income.
- Deposit retention and repricing as $34.2 million of time deposits mature within a year, including any impact on funding costs.
- Credit quality trends, especially past-due and impaired residential loans, and the allowance’s adequacy as CECL adoption approaches.
- The sustainability of earnings given the first-half loss, conversion-related comparability, and recurring public-company, staffing and ESOP costs.