NSTS Bancorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. Unless noted, dollar amounts are in thousands. NSTS completed its conversion and stock offering on January 18, 2022, so prior-period comparisons are between the predecessor organization and the newly public holding company and are not fully like-for-like.
Business context and financial performance
NSTS is the holding company for North Shore Trust and Savings, a community bank serving Lake County, Illinois and nearby areas. The Bank focuses primarily on residential mortgage lending and also offers other real-estate and consumer loans, deposit products, and investment services.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Interest income | $1,688 | $1,201 | $4,490 | $3,773 |
| Net interest income | $1,496 | $976 | $3,916 | $3,057 |
| Net interest margin | 2.36% | 1.73% | 1.97% | 1.82% |
| Noninterest income | $185 | $373 | $1,062 | $971 |
| Noninterest expense | $1,678 | $1,356 | $5,157 | $4,269 |
| Net income (loss) | $118 | $16 | $(12) | $2 |
| Basic and diluted EPS | $0.02 | Not applicable | $(0.00) | Not applicable |
Quarterly net interest income rose as yields increased, particularly on securities and bank deposits. Nine-month net interest income also grew, while the nine-month net loss reflected higher operating costs. Noninterest expense rose 24.5% in the quarter and 20.8% for the nine months, including higher staffing, ESOP, and public-company costs. Noninterest income included a $503 employee retention credit recorded in Q2; the Bank cannot estimate when it will collect the refund.
Financial condition, cash flow, and liquidity
- Assets and funding: Total assets were $268.2 million, down 21.3% from December 31, 2021. Deposits were $183.5 million, down 35.8%; management attributed much of the decrease to conversion-related stock-offering refunds, the elimination on consolidation of a company deposit, and withdrawals of offering-related deposits. Cash and equivalents fell to $18.1 million from $121.6 million.
- Portfolio and equity: Available-for-sale securities were $125.3 million, up from $101.0 million, while net loans were $97.7 million, up 1.3%. Stockholders’ equity was $79.2 million, versus $45.2 million at year-end, reflecting offering proceeds and other conversion effects, partly offset by securities-related accumulated other comprehensive losses.
- Securities valuation: Available-for-sale securities had $142.6 million amortized cost and $125.3 million fair value at quarter-end, with $17.3 million in gross unrealized losses. Nine-month other comprehensive loss, net of tax, was $12.3 million. Management attributed the unrealized losses primarily to market-rate volatility and said it intended and was able to hold the securities for the foreseeable future.
- Cash flow: For the nine months, operating activities provided $3.4 million; investing activities used $44.4 million, primarily for securities purchases; and financing activities used $62.5 million. Cash and equivalents declined by $103.5 million to $18.1 million.
- Debt and liquidity: The Bank repaid its $5.0 million, noninterest-bearing FHLB advance and had no borrowings outstanding at September 30. It reported approximately $63.7 million of available FHLB borrowing capacity. Time deposits of $31.7 million mature within 12 months; management expects a significant portion to renew but notes that lower retention could require borrowing or higher deposit rates.
- Capital: The Bank was reported well capitalized, with a Tier 1 leverage ratio of 23.78%, compared with 16.11% at December 31, 2021. The filing does not provide a company-wide regulatory capital ratio.
Material changes, risks, and outlook
- The allowance for loan losses was $685, down from $779 at year-end. The Bank recorded a $100 nine-month reversal of provision, citing improved economic indicators and reduced COVID-related uncertainty. There were no charge-offs in the first nine months of 2022, compared with $92 of net charge-offs in the prior-year period.
- Nonaccrual loans rose to $159 from $102 at year-end; nonperforming loans were 0.17% of total loans. One-to-four-family residential loans account for most of the loan portfolio. Management said all COVID-related loan modifications had returned to repayment and all PPP loans had been forgiven.
- Management expects higher noninterest costs associated with operating as a public company to recur and anticipates additional expense as the business grows and stock benefit plans are implemented. The filing provides no specific earnings, revenue, or margin guidance.
- Key disclosed risks include interest-rate and securities-market changes, deposit retention and funding costs, local economic and real-estate conditions, credit losses, competition, technology and third-party service risks, and regulatory or accounting changes. Management said ordinary-course litigation and other commitments were not expected to have a material adverse effect. Unused lines of credit and loan-origination commitments totaled $3.3 million.
- CECL was scheduled to become effective for the Bank in January 2023. Management was evaluating its impact and said it could materially change credit-loss accounting; the filing does not provide an estimated adoption amount.
- Management concluded disclosure controls were effective as of September 30, 2022, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the $31.7 million in time deposits maturing within a year is retained, and whether deposit pricing or FHLB borrowing needs rise.
- The drivers and potential duration of the $17.3 million gross unrealized securities loss, and any effect of future sales or rate changes on capital and liquidity.
- Whether the reduced loan-loss allowance remains adequate as nonaccrual loans have increased, and how CECL adoption changes the allowance.
- Collection timing and ultimate receipt of the $503 employee retention credit receivable.
- The recurring level of public-company, staffing, ESOP, and other expenses, and the comparability of 2022 results with predecessor-period figures.