NSTS Bancorp Announces Balance Sheet Repositioning

Rhea-AI Summary

NSTS Bancorp, Inc. (NSTS) executed a balance sheet repositioning strategy, selling $30.5 million in lower yielding investment securities to improve earnings and provide liquidity. The sale resulted in an after-tax loss of $1.8 million but is expected to have a neutral impact on consolidated stockholders' equity.

Insights

Financial Analyst

The recent balance sheet repositioning by NSTS Bancorp, involving the sale of $30.5 million in lower-yielding securities, indicates a strategic move to optimize its investment portfolio. By selling these securities at a loss and repaying higher-rate debt, the Bank is effectively reducing its interest expense. The strategy to reinvest the proceeds into higher-yielding short-term U.S. Treasury notes and support residential loan growth could potentially enhance future earnings.

However, the after-tax loss of $1.8 million and the additional $1.1 million valuation allowance on its deferred tax asset reflect the Bank's assessment of its future taxable income capabilities. This action suggests that NSTS Bancorp is recalibrating its tax position in light of recent performance, particularly the cumulative taxable loss over the past three years. Stakeholders should consider the potential for improved net interest margins against the immediate financial statement impacts.

Industry Analyst

Within the banking industry, maintaining strong liquidity and capitalization ratios is crucial. NSTS Bancorp's assertion of remaining well-capitalized post-repositioning, with a tangible common equity ratio above 10%, is significant. This ratio is a measure of a bank's financial strength from a shareholder's perspective. The company's unused $64.3 million line of credit with the Federal Home Loan Bank Chicago further supports its liquidity position.

The neutral impact on stockholders' equity and tangible book value per share, despite the loss from the sale of securities, indicates that this repositioning is not expected to dilute shareholder value. However, investors should monitor the Bank's future earnings to assess the efficacy of this strategy, particularly in an environment where interest rates and investment yields are subject to fluctuation.

Tax Analyst

The decision to recognize an additional valuation allowance on deferred tax assets is a conservative accounting measure that reflects management's estimation of the realizability of these assets. Deferred tax assets are recognized for temporary differences that will result in deductible amounts in future years and a valuation allowance is used when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

This move, influenced by the cumulative taxable loss, signals to investors that NSTS Bancorp is taking a cautious approach to its tax strategy. The implications of this decision on the Bank's financial health will be more evident in the long-term as it adjusts to the changing fiscal landscape and seeks to return to profitability.

WAUKEGAN, Ill., Dec. 22, 2023 (GLOBE NEWSWIRE) -- NSTS Bancorp, Inc. (NASDAQ: NSTS) (the “Company” or “NSTS Bancorp”), the stock holding company of North Shore Trust and Savings, announced today the execution of a balance sheet repositioning strategy related to its available-for-sale investment securities portfolio.

In December 2023, the Bank sold $30.5 million in book value of lower yielding available-for-sale investment securities, generating an after-tax loss of approximately $1.8 million. The securities sold are comprised primarily of U.S. Treasury notes, agency, mortgage-backed securities, and collateralized mortgage obligations with an average yield of 2.83% and an average duration of 2.75 years and represented approximately 25.0% of the Bank’s securities portfolio.

The sale of these securities is designed to seek to improve the Bank’s earnings going forward, beginning in fiscal year 2024, and to provide liquidity to deleverage its balance sheet. Proceeds from the sale will be used to repay approximately $10.0 million in existing debt with a current rate of 5.31%, with the remainder to be re-deployed into cash and short-term U.S. Treasury notes with an average expected yield in excess of 5.0% and to fund additional residential loan growth and general working capital at the Bank.

After the repositioning, both the Bank and the Company remain well-capitalized under applicable regulatory capital standards, and the Company continues to maintain a tangible common equity ratio in excess of 10.0% and strong liquidity, including an unused $64.3 million line of credit with the Federal Home Loan Bank Chicago. The loss on the sale of securities is expected to have a neutral impact on the Company's consolidated stockholders' equity and tangible book value per share.

The Company is also announcing today that it expects to recognize an additional valuation allowance of approximately $1.1 million during the fourth quarter of 2023 on the remaining portion of its deferred tax asset as the Company believes these are more likely than not to not be realized. During 2023, management assessed the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing portion of the deferred tax assets. A significant piece of objective negative evidence evaluated is the cumulative taxable loss incurred over the three-year period ended December 31, 2023. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth.

About NSTS Bancorp, Inc. and North Shore Trust and Savings

NSTS Bancorp, Inc. is the stock holding company of North Shore Trust and Savings. As of September 30, 2023, NSTS Bancorp, Inc. had approximately $252 million in assets and operates from its headquarters and main banking office in Waukegan, Illinois, as well as two additional full-service branch offices located in Waukegan and Lindenhurst, Illinois, respectively. For over 100 years, North Shore Trust and Savings has served the local communities where it operates and has deep and longstanding relationships with its businesses and retail customers as well as local municipalities.

Forward-Looking Statements

Certain statements contained herein are considered forward-looking statements within the meaning of the federal securities laws and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which are based on certain current assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions.

Any forward-looking statement speaks only as of the date on which it is made. Forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future events, business strategies and decisions that are subject to change. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Except as required by applicable law or regulation, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

FAQ

What did NSTS Bancorp, Inc. (NSTS) announce?

NSTS Bancorp, Inc. (NSTS) announced the execution of a balance sheet repositioning strategy related to its available-for-sale investment securities portfolio.

How much did the Bank sell in lower yielding investment securities?

The Bank sold $30.5 million in book value of lower yielding available-for-sale investment securities.

What was the after-tax loss from the sale of securities?

The after-tax loss from the sale of securities was approximately $1.8 million.

What is the impact of the sale on the Company's consolidated stockholders' equity and tangible book value per share?

The sale of securities is expected to have a neutral impact on the Company's consolidated stockholders' equity and tangible book value per share.

How will the proceeds from the sale be used?

The proceeds from the sale will be used to repay approximately $10.0 million in existing debt with a current rate of 5.31%, with the remainder to be re-deployed into cash and short-term U.S. Treasury notes and to fund additional residential loan growth and general working capital at the Bank.