NSTS Bancorp, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023. NSTS is the holding company for North Shore Trust and Savings, a community bank serving the Chicago area, focused primarily on residential mortgage lending and deposits. Amounts below are in U.S. dollars.
Financial performance
- Net loss: $246,000, or $0.05 per diluted share, versus net income of $170,000, or $0.03 per share, in Q1 2023.
- Interest income and expense: Interest income rose 29% to $2.405 million; interest expense increased to $700,000 from $221,000. Net interest income was $1.705 million, up $68,000 year over year.
- Margins: Net interest margin increased to 2.82% from 2.75%, while the interest-rate spread narrowed to 2.31% from 2.57%. Average earning-asset yield rose to 3.98% from 3.12%; average interest-bearing-liability cost rose to 1.67% from 0.55%.
- Other income and costs: Noninterest income increased to $312,000 from $147,000, chiefly from mortgage-loan sale gains. Noninterest expense grew to $2.264 million from $1.670 million, including salaries and benefits of $1.374 million versus $928,000.
- Credit provision: The company recorded a $1,000 reversal of provision for credit losses, compared with a $28,000 reversal in Q1 2023.
- Cash flow: Operating activities provided $92,000; investing activities used $5.040 million, principally reflecting loan growth; financing activities provided $9.920 million, primarily from deposit growth. Cash and cash equivalents ended at $36.360 million, up $4.972 million during the quarter.
Financial position, funding and credit
- Total assets were $265.6 million, up $8.8 million from year-end. Net loans increased $5.2 million to $125.8 million; loans held for sale rose to $1.3 million.
- Deposits increased $9.2 million to $178.0 million, primarily from time deposits and promotional CD rates. Time deposits totaling $52.0 million mature within 12 months.
- Borrowings remained $5.0 million, an FHLB advance carrying a 4.8% rate. The company reported about $72.9 million of additional FHLB borrowing capacity and an undrawn $10 million federal funds line.
- Stockholders’ equity was $77.0 million, down $583,000. The bank’s Tier 1 leverage ratio was 24.25%, above the 9% well-capitalized threshold; management reported the Bank remained well capitalized.
- The loan allowance was $1.177 million, or 0.93% of total loans, versus 0.97% at year-end. Nonaccrual loans were $237,000, all 1–4 family residential; there were no loans 90 or more days past due and accruing. No charge-offs or recoveries occurred during the quarter.
Material changes, outlook and risks
- The move to a quarterly net loss reflected the $594,000 increase in noninterest expense, mainly higher staffing costs following expansion of the Oak Leaf Community Mortgage team and $162,000 of equity-plan compensation expense. Higher net interest income and mortgage-sale gains partly offset costs.
- Management said it intends to increase loan sales through local community-bank and secondary-market channels during 2024. The filing provides no earnings, margin or other quantified full-year guidance; management cautions that interim results are not necessarily indicative of full-year results.
- The available-for-sale securities portfolio had $12.3 million of gross unrealized losses at quarter-end, equal to 13.5% of its amortized cost. Management attributed the losses primarily to market rates and said it did not currently intend to sell securities in a loss position, while noting it may consider future portfolio repositioning. No securities were identified as having credit losses.
- Management maintained a full valuation allowance against federal net operating losses and net deferred tax assets, citing cumulative taxable losses over the three-year period ended March 31, 2024. No income tax benefit was recorded in Q1 2024.
- Liquidity risks include deposit competition and retention: management said a substantial loss of maturing time deposits could require higher deposit rates or additional FHLB advances, increasing funding expense. Other identified risks include interest-rate and real-estate market changes, credit quality, loan demand, competition, cybersecurity and technology disruptions, and regulatory changes.
- Total commitments to originate loans and extend credit were $12.9 million. Management said ordinary-course legal matters are not expected to have a material adverse effect; no material legal proceedings were reported. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether higher deposit costs continue to outpace asset-yield gains, and the resulting direction of net interest margin and spread.
- Deposit retention and repricing as $52.0 million of time deposits mature within one year; monitor use of FHLB capacity and other funding.
- Progress and profitability of expanded mortgage origination and loan-sale activity, including whether gains are sustainable.
- Developments in the $12.3 million unrealized securities loss position, portfolio repositioning decisions and effects on equity.
- Loan growth, delinquency and nonaccrual trends, construction exposure, and adequacy of the credit-loss allowance.
- Future operating expenses, including staffing and equity compensation, and the evidence supporting realization of deferred tax assets.