NSTS Bancorp: Post 3-Year Thrift Conversion, Possible Sale

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.

Disclosure: I own shares of NSTS

Kronos Bio: Tang Buyout w/ Curious CVR Consideration

Kronos Bio (KRON) ($45MM market cap) was historically focused on cancer and autoimmune disease treatments, late last year, the company discontinued development of their lead asset, istisociclib, due to safety issues and announced a plan to explore strategic alternatives.  At the time, I was nervous about their large operating lease obligation and ended up passing on adding it to my busted biotech basket as there was no shortage of cleaner opportunities at the time.

On May 1st, Kevin Tang's liquidation vehicle, Concentra Biosciences, entered into an agreement to buy KRON for $0.57/share in cash plus a CVR, the CVR is structured differently than many of Tang's recent deals where the CVR is mostly just IP dispositions, here the CVR is composed of a series of potential payouts:

(i) 50% of the net proceeds in the case of a disposition of the Company’s product candidates known as KB-9558 and KB-7898 that occurs within 2 years following closing; (ii) 100% of the net proceeds in the case of a disposition of the Company’s product candidates known as KB-0742, lanraplenib and entospletinib that occurs prior to closing; (iii) 100% of cost savings realized prior to closing; (iv) 80% of cost savings realized between the merger closing date and the second (2^nd) anniversary of the merger closing date; and (v) 50% of cost savings realized between the second (2^nd) anniversary of the merger closing date and the third (3^rd) anniversary of the merger closing date, each pursuant to the contingent value rights agreement (the “CVR Agreement”).

Payouts (i) and (ii) are hard to predict and likely of minimal value, the legacy IP assets in (ii) need to be sold (but not closed) prior to the merger closing and (i) is their pre-clinical assets, who knows how much these are worth but the two year clock is pretty gameable, any value there likely accrues to Tang.

Payouts (iv) and (v) relate primarily to cost savings, subleasing or an early exit to their operating lease for a 40+k sq ft facility located in Cambridge, MA.  The lease ends in February 2031 and it has approximately $30MM remaining, given the long time frame, Tang could potential game this one by back weighting any lease amendment/termination to give him the best payout and avoid paying CVR holders.

Payout (iii) is where the potential cash is for CVR holders, it will be paid no later than 60 days following the merger closing, the savings calculation is as follows:

“Additional Closing Net Cash Proceeds” means 100% of the amount by which the Closing Net Cash as finally determined pursuant to Section 2.01(d) of the Merger Agreement exceeds $40,000,000, adjusted for any claims that arise prior to 30 days following the Merger Closing Date that are not accounted for in such Closing Net Cash. 

“Closing Net Cash” means, without duplication, (i) the Company’s cash and cash equivalents, restricted cash, and investments as of the Cash Determination Time, determined in accordance with GAAP, applied on a basis consistent with the Company’s application thereof in the Company’s consolidated financial statements, minus (ii) Indebtedness of the Company as of the Cash Determination Time, minus (iii) the Transaction Expenses, minus (iv) the Estimated Costs Post-Merger Closing, minus (v) $400,000 for the CVR Expense Cap under the CVR Agreement.

The curious part of this transaction is the $40MM threshold, why is it so low when the NCAV as of 3/31/25 is $73.5MM?  CVRs are intended to bridge the gap between buyers and sellers on how much an asset is worth, here the asset is primarily cash which should have minimal uncertainty given the quick merger close (a tender offer is required to be launched by 5/15/25).  What would Tang be protecting himself against with such a low closing cash number?  Istisociclib did have safety issues, but no legal proceedings have been disclosed that meet a reporting threshold.

Below is my attempt at a back of the envelope calculation of the Additional Closing Net Cash Proceeds value, shares trade for $0.72/share today, implying a $0.15/CVR value:

The "Estimated Costs Post-Merger Closing" is where some potential games could be played:

“Estimated Costs Post-Merger Closing” means all costs that the Surviving Corporation would incur post-Merger Closing, including costs associated with: (i) CMC Activities; (ii) clinical activities; (iii) remaining lease-related obligations (including rent, common area maintenance, property taxes and insurance); and (iv) an aggregate of $250,000 for any legal Proceedings and settlements.

While the development pipeline is paused, potentially an argument could be made that spending some money to advance KB-9558 and KB-7898 could be worthwhile to CVR holders as they'd get paid 50% of any disposition proceeds?  I don't see it, but doesn't mean management might not have an agreement with Tang to include some spend in that bucket.  In the latest 10-Q, all their R&D costs sounded like legacy expenses, not ongoing expenses:

Research and development expenses were $2.1 million for the three months ended March 31, 2025, compared to $14.2 million for the three months ended March 31, 2024. The decrease of $12.1 million was primarily attributable to a $6.0 million reduction in consulting and other outside research expenses, a $4.2 million decrease in personnel-related costs and a $1.9 million decrease in facilities, depreciation and other costs. These decreases were primarily related to the discontinuation of the istisociclib clinical trial in November 2024, reduced headcount in our research and development organization following the restructuring activities and reclassification of lease costs to general and administrative expenses. Research and development expenses for the three months ended March 31, 2025 were related to performance obligations under the Transition Agreement and continued wind down of research and development activities.

I sort of expect to be screwed here, just not quite sure how, but the opportunity for a quick buck is too tempting, I added a small position.

Disclosure: I own shares of KRON

Repare Therapeutics: Broken Biotech, Hidden Strategic Alternatives

Repare Therapeutics (RPTX) ($60MM market cap) is a clinical-stage oncology company which through a series of press releases this year announced a 75% reduction-in-force, reprioritization of their pipeline, a plan to pursue partnerships for their most advanced assets, CEO resigned (with the CFO taking over), CMO exited and most recently the out licensing of their discovery platform.  

While they haven't formally ceased development efforts and raised the white flag, that's essentially where they're at now.  Repare might be a bit of a hidden strategic alternatives name, they haven't announced a process cleanly in one press release.  In their 3/3 press release disclosing their year-end results, they included the line:

Exploring partnerships across portfolio, including for Lunre+Camo

In their 3/31 press release announcing the resignation of their CEO and founder, the language changed to:

The Company is also exploring strategic alternatives and partnerships across its portfolio, including for lunresertib and camonsertib.

Then its tweaked slightly again in their 5/1 press release announcing the sale of their discovery platform:

“We look forward to reporting initial data from our two ongoing Phase 1 clinical trials in the second half of 2025, and continue to evaluate partnering and strategic alternatives across our portfolio assets.”

It's possible that I'm reading too much into that strategic alternatives language and that it's only directly tied to the pursuing partnerships objective, but this biotech trades at a significant discount to my estimate of a liquidation value with no value assigned to their IP (which they've used puffy language like "progress is particularly promising" and "potentially best in class" in prior statements).

So we've got a caretaker CEO, skeleton staff, strategic alternatives / partnership discussions, sold discovery platform, it seems to me that this one is for sale.  BVF Partners is the anchor investor here with a 24% stake.  I bought a few shares and added it to my broken biotech basket.

Disclosure: I own shares of RPTX