I apologize in advance, this one might only have a limited audience, it is a small and illiquid community bank in my backyard, maybe there are others in a similar position near you.
NSTS Bancorp (NSTS) (~$60MM market capitalization) is the holding company for a three branch community bank, North Shore Trust & Savings, located in Waukegan, IL with $282MM of assets. Like many other thrifts, NSTS has a fairly simple business model, they take in deposits from the local community and primarily (~90% of the loan book) make 1-4 family residential mortgages in the area. The bank is significantly overcapitalized (Tier 1 capital ratio is 23.11%) due to their demutualization in January 2022 and three years later, still struggles to turn a profit. The assets are pretty clean, the entire securities portfolio is accounted for as available for sale (held on the balance sheet at fair value) and the loan book has minimal credit issues, but the tangible book value would take a $1.30/share haircut if the loans were held at fair value. Normally, this wouldn’t be of particular interest, but a few things make this a likely sale candidate in the relatively near future:
- Thrift conversions need to wait out a three year cooling off period as a public company before they can be acquired. NSTS passed that mark this past January. Given the increased deal activity where we see credit unions acquire thrift style banks, it would make sense for a similar transaction to happen here with NSTS. The hit rate of conversions being acquired in years 3-5 is pretty high.
- In this year’s proxy statement, the following proposal was made by a shareholder, usually in these situations the company will defend themselves and recommend that shareholders vote no, but NSTS was surprisingly indifferent and almost went as far as agreeing with the shareholder despite some accusatory statements towards the board and management. The annual meeting was yesterday, I’m eagerly awaiting the results to be posted on Edgar.
PROPOSAL III – CONSIDERATION OF NON-BINDING STOCKHOLDER PROPOSAL RECOMMENDING THE SALE OR MERGER OF THE COMPANY
“RESOLVED, that the Stockholders of NSTS Bancorp, Inc. recommend that the Board of Directors engage in an investment banking firm experienced in community bank mergers and acquisitions to guide the Company in promptly taking the reasonable and customary steps to merge or sell NSTS Bancorp, Inc on the best terms available so as to maximize stockholder value.
Supporting Statement
NSTS does not have the size and scale to compete effectively in the 21st century financial world. In fact, a CEO of another Illinois thrift recently stated to me in conversation about the future of micro-cap community banks: “We are all dinosaurs!” Since the IPO in November 2021, NSTS has traded at a significant discount to tangible book value per share. The shareholder proponent believes that NSTS is worth close to or above TBVPS in a sale or merger, and that such sale or merger process to be undertaken is consistent with the Board of Directors Fiduciary duty to all shareholders.
The board of directors can recommend the highest and best offer by “running” the M+A process with their investment banker, and the shareholders will have the final vote on the best offer available.
Since the IPO, this BOD and management have purchased very few shares in the open market. Their economic interests are not well aligned with the shareholders as they will earn board and management fees, salaries, accumulate “freebie” shares, and vest in the ESOP plan over time. They get paid to wait. Meanwhile, the stockholders earn an inadequate return on their equity of less than the risk free rate on T bills, CDs, or money market funds of around 5% at this time of writing. For these and other reasons not included here, this shareholder asks that you vote FOR this proposal.”
Board of Directors Statement
The Board, together with Company management, regularly reviews and assesses the Company’s performance, future growth prospects, business plans, competitive position, and overall strategic direction. In connection with strategic planning and consideration of strategic alternatives, the Board has from time to time engaged investment banking firms and financial advisors. As a result, the Board currently receives, and will continue to receive, investment banking advice and information on such factors. As part of this ongoing review process, the Board evaluates and considers a variety of potential strategic alternatives available, including pursuing potential strategic transactions with third parties, with the goal of maximizing stockholder value consistent with the requirements of Delaware law and its fiduciary duties.
However, the Board is not recommending a vote for or against Proposal III. Rather, the Board will consider the voting results on Proposal III in its ongoing discussions and considerations, together with any additional stockholder input received in connection with the Annual Meeting and through stockholder engagement. Stockholders should note that this proposal is advisory in nature only and support of this proposal would not, by itself, result in the merger or sale of the Company as contemplated by the proposal, and would not require any action by the Company.
- Share repurchases have stopped for no particular reason, indicating they might be going ahead with a sale process. Typically these thrift conversions will buyback shares because they’re overcapitalized and usually trade at a discount to book (NSTS trades for ~80% of book). NSTS was a pretty consistent buyer of their own shares for most of 2024, but stopped in December and haven’t restarted.
This is a little bit more “reading the tea leaves” than I like, especially compared to the broken biotech basket, but the signs certainly point to the pressure being ratcheted up on NSTS to sell the bank. What could it fetch in a sale? I think at least TBV would be the floor, or ~$15/share, maybe more if it is bought by a credit union, it trades for $11.88 as of today.