Company History and Business Overview
NSTS Bancorp, Inc. (NASDAQ:NSTS) is a community bank serving the northern suburbs of Chicago, Illinois. With over a century of history, the company has established deep roots in its local market and a strong reputation for serving the banking needs of its customers. Despite the challenging economic environment in recent years, NSTS Bancorp has navigated these uncertainties and continues to focus on prudent growth and risk management.
NSTS Bancorp, Inc. was formed in 2021 to serve as the stock holding company for North Shore Trust and Savings, a federally-chartered stock savings institution that was established in 1921 as North Shore Building and Loan. In 2022, NSTS Bancorp, Inc. became the holding company for North Shore Trust and Savings when the bank converted to the stock holding company form of organization. This conversion allowed NSTS Bancorp to offer its shares publicly on the Nasdaq Capital Market under the trading symbol NSTS.
The bank operates primarily out of three branch locations in the northern suburbs of Chicago, Illinois, and has expanded its reach with three loan production offices in the broader Chicagoland area. In 2023, the bank faced a setback when one of its branch locations was damaged in an accident, requiring significant capital improvements. Despite this challenge, the company has continued to focus on its core mission of providing high-quality banking services to its local market.
The bank's principal business activities consist of originating loans, primarily for one- to four-family residential properties, as well as multi-family and non-owner occupied commercial real estate loans. To complement its branch network, the bank established a loan production office in Chicago, Illinois in 2016 to expand its geographic reach. In 2023, the bank further expanded its lending capabilities by adding two additional loan production offices in Aurora and Plainfield, Illinois.
NSTS Bancorp attracts retail deposits from the general public in its market area and also invests in investment securities. The company's revenues are derived primarily from interest on loans, noninterest income from the sale of one- to four-family residential mortgage loans in the secondary market, and interest on investments.
Financial Performance and Trends
Over the past three years, NSTS Bancorp has navigated a challenging economic environment marked by the COVID-19 pandemic, rising interest rates, and economic uncertainty. Despite these headwinds, the company has demonstrated resilience in its financial performance.
For the fiscal year ended December 31, 2023, NSTS Bancorp reported net income of -$3.957 million, with annual revenue of $4.95 million and annual operating cash flow of $431,000. The company's annual free cash flow was -$85,000. While the company's financial results have been impacted by the economic environment, management has remained focused on prudent risk management and maintaining a strong capital position.
In the latest quarter ended September 30, 2024, NSTS Bancorp reported a net loss of $171,000, compared to a net loss of $232,000 in the same period the prior year. The improvement in net loss was primarily attributable to an increase in noninterest income specifically related to the gain on loans held for sale and an increase in net interest income driven by increased interest income on loans and interest income on funds held at the Federal Reserve Bank of Chicago.
The company's revenue increased significantly, growing 37% year-over-year from $1.94 million in Q3 2023 to $2.66 million in Q3 2024. This growth was driven by higher yields on loans and interest-bearing deposits. Operating cash flow also saw a substantial increase, rising 166% from $607,000 in Q3 2023 to $1.614 million in Q3 2024, reflecting the increase in net interest income. Free cash flow improved significantly, increasing from $269,900 in Q3 2023 to $1.562 million in Q3 2024, also due to the increase in net interest income.
Liquidity and Capital Adequacy
NSTS Bancorp maintains a strong liquidity position, with cash and cash equivalents of $34.59 million as of September 30, 2024. The company also has the capacity to borrow an additional $78.06 million from the Federal Home Loan Bank of Chicago, as well as a $10 million unsecured federal funds line of credit, to meet any funding needs.
The bank's capital ratios remain well above regulatory requirements, with a Tier 1 capital to average assets ratio of 23.96% as of September 30, 2024. This solid capital position provides the bank with the flexibility to weather economic uncertainties and pursue strategic initiatives. The company's debt-to-equity ratio stood at 0.39 as of September 30, 2024, indicating a conservative capital structure.
Lending Segment
Lending is the primary driver of NSTS Bancorp's business and revenue. As of September 30, 2024, the Bank's total loan portfolio, net of unearned income, stood at $134.40 million, an increase of $13.62 million or 11.30% from December 31, 2023. The growth in the loan portfolio was primarily driven by an increase in one- to four-family residential mortgage loans, which grew by $13.97 million or 12.57% during the period.
The Bank originates several types of loans, including:
- One- to four-family residential mortgage loans: This segment makes up the largest portion of the Bank's loan portfolio, accounting for $125.05 million or 93.02% of total loans as of September 30, 2024. The average yield on these loans was 5.31% for the three months ended September 30, 2024, up from 4.06% for the same period in 2023, reflecting the rise in market interest rates. - Multi-family loans: The multi-family loan portfolio totaled $3.54 million as of September 30, 2024, an increase of $430,000 or 13.83% from the prior year-end. - Commercial loans: The commercial loan portfolio stood at $4.15 million as of September 30, 2024, an increase of $320,000 or 8.36% from December 31, 2023. - Construction loans: The construction loan portfolio decreased by $1.13 million or 44.98% to $1.38 million as of September 30, 2024, as the Bank focused more on originating one- to four-family residential mortgages. - Consumer loans: The consumer loan portfolio, which is a relatively small portion of the Bank's overall loan portfolio, increased by $27,000 or 10.89% to $275,000 as of September 30, 2024.
The increase in the loan portfolio, coupled with a 125 basis point increase in the average yield on loans, contributed to a $590,000 or 12.51% increase in net interest income for the nine months ended September 30, 2024 compared to the same period in 2023. However, the Bank also recorded a higher provision for credit losses of $142,000 during the nine-month period in 2024, up from $52,000 in the prior year period, in anticipation of potential future credit deterioration.
Deposit Segment
Deposits are another critical component of NSTS Bancorp's operations, serving as the primary funding source for the Bank's lending and investment activities. Total deposits increased by $11.06 million or 6.55% to $179.89 million as of September 30, 2024, compared to $168.83 million at December 31, 2023.
The growth in deposits was driven by a $10.38 million or 18.08% increase in time deposits, which reached $67.71 million as of September 30, 2024. This increase was partly offset by a $2.15 million or 6.70% decline in money market accounts and a $1.55 million or 3.71% decrease in savings accounts during the same period. Noninterest-bearing demand deposits also decreased by $1.82 million or 14.65% to $10.60 million.
The shift towards higher-cost time deposits, coupled with a 99 basis point increase in the average cost of interest-bearing deposits, contributed to a 99 basis point increase in the Bank's total cost of deposits to 1.71% for the nine months ended September 30, 2024, compared to 0.72% for the same period in 2023. This increase in funding costs put pressure on the Bank's net interest margin, which declined from 2.67% for the nine months ended September 30, 2023, to 2.90% for the same period in 2024.
Investment Securities Segment
NSTS Bancorp's investment securities portfolio, which is classified as available-for-sale, decreased by $6.90 million or 8.41% to $75.24 million as of September 30, 2024, compared to $82.14 million at December 31, 2023. The decrease was primarily due to $4.30 million in maturities and calls, as well as $4.15 million in principal repayments on mortgage-backed securities, partially offset by a $2.00 million decrease in the unrealized loss position on the portfolio.
The investment securities portfolio is primarily composed of U.S. government agency obligations, municipal obligations, mortgage-backed residential obligations, and collateralized mortgage obligations. The average yield on the securities portfolio decreased from 2.51% for the nine months ended September 30, 2023, to 2.35% for the same period in 2024, reflecting the higher interest rate environment and its impact on the portfolio.
Risks and Challenges
Like any financial institution, NSTS Bancorp faces a variety of risks and challenges that could impact its financial performance and growth prospects. These include interest rate risk, credit risk, operational risk, and regulatory risk, among others.
The company's heavy concentration in one- to four-family residential lending exposes it to risks associated with the local real estate market. Additionally, the bank's reliance on deposit funding makes it susceptible to changes in customer behavior and competition for deposits.
Regulatory changes, such as those related to capital requirements and lending standards, could also have a significant impact on the bank's operations and profitability. NSTS Bancorp must continually monitor and adapt to the evolving regulatory landscape to ensure compliance and maintain a strong competitive position.
Outlook and Conclusion
Despite the challenges facing the banking industry, NSTS Bancorp has demonstrated its ability to navigate economic uncertainties and maintain a strong financial position. The company's focus on prudent risk management, coupled with its deep community roots and expanding lending capabilities, position it well for future growth and profitability.
NSTS Bancorp's diversified business model, with lending, deposits, and investment securities as its primary operating segments, has enabled the company to navigate the challenging interest rate environment and continue to grow its balance sheet and earnings. The Bank's focus on relationship-based community banking, coupled with its expanding mortgage lending operations, has positioned it well to capitalize on opportunities in its local markets.
As NSTS Bancorp continues to execute on its strategic initiatives, investors will be closely watching the company's ability to manage its loan portfolio, control costs, and capitalize on opportunities in its local market. With a solid capital base and a commitment to serving its customers, NSTS Bancorp appears well-equipped to weather the current economic environment and deliver long-term value for its shareholders.