NSTS Bancorp, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are with 2020. The filing was signed March 22, 2022. Although NSTS Bancorp, Inc. is the registrant, its audited 2021 financial statements cover North Shore MHC and its subsidiaries, including North Shore Trust and Savings (the Bank). At year-end, NSTS Bancorp had not completed its conversion or conducted substantive business.
Business context and conversion
The Bank is a community thrift serving Lake County, Illinois and nearby areas. It principally gathers deposits and originates residential mortgage loans, while also investing in securities and making commercial real estate and multi-family loans. At December 31, 2021, one- to four-family residential mortgages were 91.2% of gross loans.
The conversion and stock offering closed January 18, 2022. NSTS Bancorp sold 5.29 million shares at $10 per share for approximately $52.9 million in gross proceeds, and issued 107,959 shares and $150,000 cash to its charitable foundation. Trading began on Nasdaq under NSTS on January 19. The $87.3 million of potential-investor funds held at the Bank at December 31, 2021 is a pre-completion balance and should not be confused with the offering’s reported gross proceeds.
Financial and operating results
| Metric | 2021 | 2020 |
|---|---|---|
| Total assets at year-end | $340.9 million | $242.2 million |
| Net loans at year-end | $96.5 million | $98.5 million |
| Available-for-sale securities at year-end | $101.0 million | $81.6 million |
| Deposits at year-end | $285.6 million | $186.4 million |
| FHLB advances at year-end | $5.0 million | $4.0 million |
| Total equity at year-end | $45.2 million | $46.7 million |
| Interest income | $5.04 million | $6.02 million |
| Net interest income | $4.10 million | $4.54 million |
| Net interest margin | 1.75% | 2.02% |
| Noninterest income | $1.21 million | $1.59 million |
| Noninterest expense | $5.60 million | $6.28 million |
| Net loss | $55,000 | $112,000 |
| Operating cash flow | $1.45 million | $(620,000) |
Net interest margin and spread fell as yields on earning assets declined more than funding costs. The loan yield was 3.63%, down from 4.05%; the average cost of interest-bearing liabilities declined to 0.52% from 0.83%. The net loss narrowed mainly because of a $487,000 year-over-year improvement in loan-loss provisioning and lower operating expense, partly offset by lower net interest and noninterest income and a smaller tax benefit.
Cash and cash equivalents rose to $121.6 million from $31.9 million, largely reflecting conversion-related funds and deposit growth. Investing activities used $11.8 million; financing activities provided $100.1 million, principally from the $99.2 million increase in deposits. Equity declined partly because after-tax unrealized losses on available-for-sale securities reduced accumulated other comprehensive income by $1.5 million. Year-end equity/assets was 13.3%.
Credit, liquidity and capital
- Nonperforming loans were $143,000, or 0.15% of loans, versus $355,000, or 0.36%, in 2020. The allowance was $779,000, or 0.81% of loans, versus $870,000, or 0.88%.
- The 2021 allowance included a $23,000 reversal of provision; net charge-offs were $68,000, including a $99,000 unsecured consumer loan charge-off partly offset by recoveries. Management cited improving economic conditions but noted the allowance depends on estimates and could require future additions.
- Deposits included $42.5 million of uninsured deposits. Core deposits were 74.5% of deposits. Time deposits of $39.9 million were scheduled to mature within one year.
- The Bank had $5.0 million of FHLB advances at 0% interest, due May 2022, and reported capacity for approximately $55.8 million of additional FHLB borrowing. It also reported $4.2 million of total loan and credit-line commitments.
- The Bank elected the community bank leverage ratio framework and reported a 16.11% Tier 1 leverage ratio at December 31, 2021, above the applicable 8.5% threshold. It was categorized as well-capitalized.
Outlook, risks and unusual items
- Management expects expenses to rise as a newly public company, including costs related to the employee stock ownership plan, potential stock-based benefit plans, staffing and possible additional loan-production offices. It also plans to moderately expand commercial real estate and multi-family lending. No specific earnings or revenue guidance was provided.
- The company did not intend to pay cash dividends at the time of filing; any future distributions are subject to regulatory and financial constraints.
- Interest-rate risk is material. The Bank’s model estimated 12-month net interest income of $7.1 million under an immediate, sustained 300-basis-point rate increase, 51.9% above the static case. Management cautioned that modeling assumptions limit the precision of these estimates.
- COVID-19 relief included 50 loan modifications totaling $9.7 million; all were back in repayment at year-end. The Bank reported $1.3 million in PPP loans, all forgiven by the SBA.
- Available-for-sale securities had $1.15 million of gross unrealized losses at year-end, attributed primarily to market volatility; management said it intended and was able to hold the securities for the foreseeable future. CECL was expected to take effect for the Bank in January 2023, with impact still under evaluation.
- Management reported no material pending legal proceedings and no material subsequent events other than completion of the conversion. The financial statements received an unqualified audit opinion; the filing did not include an auditor attestation on internal control over financial reporting.
Investor verification priorities
- Verify post-conversion net proceeds, use of proceeds, resulting capital and share count; the year-end investor-funds balance and January offering figures describe different stages.
- Assess whether deposit growth excluding conversion-related funds is sustainable, and monitor uninsured deposits and upcoming time-deposit maturities.
- Review the securities portfolio’s rate sensitivity and unrealized losses, and test the assumptions behind the modeled benefit from rising rates.
- Track credit quality, the consumer charge-off, allowance adequacy and the eventual effect of CECL adoption.
- Confirm the cost and dilution implications of the ESOP and any stock-based benefit plans, alongside management’s expansion plans.