NSTS Bancorp, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Note 3 - Loans and Allowance for Credit Losses

Note 3 - Loans and Allowance for Credit Losses

6 Months Ended

Jun. 30, 2024

Notes to Financial Statements

Allowance for Credit Losses [Text Block]

Note 3: Loans and allowance for credit losses

A summary of loans by major category as of June 30, 2024 and December 31, 2023 is as follows:

	*June 30, 2024*			*December 31, 2023*
	(Dollars in thousands)
First mortgage loans
1-4 family residential	$	122,812		$	111,081
Multi-family		3,051			3,111
Commercial		4,149			3,835
Construction		1,318			2,508
Total first mortgage loans		131,330			120,535
Consumer loans		234			248
Total loans		131,564			120,783
Net deferred loan costs		741			1,016
Allowance for credit losses on loans		(1,267	)		(1,176	)
Total loans, net	$	131,038		$	120,623

First mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balance of these loans totaled $15.6 million and $13.2 million at June 30, 2024 and December 31, 2023, respectively. Custodial escrow balances maintained in connection with the loans serviced were $267,000 and $231,000 at June 30, 2024 and December 31, 2023, respectively.

The accrued interest receivable for loans, net, was $533,000 and $392,000 for June 30, 2024 and December 31, 2023, respectively

In the normal course of business, loans are made by the Bank to directors and officers of the Company and the Bank (related parties). The terms of these loans, including interest rate and collateral, are similar to those prevailing for comparable transactions with other customers and do not involve more than a normal risk of collectability. At June 30, 2024 and December 31, 2023, such borrowers were indebted to the Bank in the aggregate amount of $532,000 and $550,000, respectively.

The following tables present the activity in the allowance for credit losses ("ACL") for the three and six months ended June 30, 2024 and 2023:

	*June 30, 2024*
	*1-4 family*
	*residential*		*Multi-family*		*Commercial*		*Construction*		*Consumer*			*Total*
	(Dollars in thousands)
Three months ended
Beginning balance	$	1,091	$	36	$	37	$	11	$	2		$	1,177
Charge-offs		—		—		—		—		—			—
Recoveries		—		—		—		—		—			—
Net recoveries (charge-offs)		—		—		—		—		—			—
Provision for (release of ) credit losses		74		—		4		13		(1	)		90
Ending balance	$	1,165	$	36	$	41	$	24	$	1		$	1,267

	*June 30, 2024*
	*1-4 family*
	*residential*		*Multi-family*			*Commercial*		*Construction*		*Consumer*		*Total*
	(Dollars in thousands)
Six months ended
Beginning balance	$	1,094	$	40		$	37	$	4	$	1	$	1,176
Charge-offs		—		—			—		—		—		—
Recoveries		—		—			—		—		—		—
Net recoveries (charge-offs)		—		—			—		—		—		—
Provision for (release of ) credit losses		71		(4	)		4		20		—		91
Ending balance	$	1,165	$	36		$	41	$	24	$	1	$	1,267

	*June 30, 2023*
	*1-4 family*
	*residential*		*Multi-family*		*Commercial*			*Construction*		*Consumer*		*Total*
	(Dollars in thousands)
Three months ended
Beginning balance	$	890	$	41	$	46		$	—	$	2	$	979
Charge-offs		—		—		—			—		—		—
Recoveries		—		—		—			—		—		—
Net recoveries (charge-offs)		—		—		—			—		—		—
Provision for (release of ) credit losses		38		—		(7	)		—		—		31
Ending balance	$	928	$	41	$	39		$	—	$	2	$	1,010

	*June 30, 2023*
	*1-4 family*
	*residential*		*Multi-family*			*Commercial*			*Construction*		*Consumer*			*Total*
	(Dollars in thousands)
Six months ended
Beginning balance	$	581	$	19		$	19		$	—	$	5		$	624
Cumulative effect of change in accounting principle		335		23			29			—		(3	)		384
Charge-offs		—		—			—			—		—			—
Recoveries		—		—			—			—		—			—
Net recoveries (charge-offs)		—		—			—			—		—			—
Provision for (release of ) credit losses		12		(1	)		(9	)		—		—			2
Ending balance	$	928	$	41		$	39		$	—	$	2		$	1,010

The ACL on loans excludes $45,000 of allowance for off-balance sheet exposures as of June 30, 2024 recorded within Other Liabilities. The provision for credit losses excludes $33,000 and $31,000 for the three and six months ended June 30, 2024, respectively.

As of June 30, 2024, there were no collateral dependent loans. As of December 31, 2023, collateral dependent loans totaled $200,000 in the one to four-family residential loan segment. These loans are collateralized by residential real estate and have no ACL as of December 31, 2023. There were no other collateral dependent loans as of December 31, 2023.

The Bank evaluates collectability based on payment activity and other factors. The Bank uses a graded loan rating system as a means of identifying potential problem loans, as follows:

Pass

Loans in these categories are performing as expected with low to average risk.

Special Mention

Loans in this category are internally designated by management as “watch loans.” These loans are starting to show signs of potential weakness and are closely monitored by management.

Substandard

Loans in this category are internally designated by management as “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the paying capacity of the obligors or the current net worth of the collateral pledged. Substandard loans present a distinct possibility that the Bank will sustain losses if such weaknesses are not corrected.

Doubtful

Loans classified as doubtful have all the weaknesses inherent in those designated as “substandard” with the added characteristic that the weaknesses may make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

On an annual basis, or more often if needed, the Bank formally reviews the ratings on commercial loans. In addition, the Bank performs an independent review of a significant portion of the commercial loan portfolio. Management uses the results of the independent review as part of its annual review process.

The following tables present the credit risk profile of the Company's loan portfolio based on risk rating category and year of origination as of June 30, 2024 and December 31, 2023.

	*As of June 30, 2024*
	*Term loans amortized cost basis by origination year*
	*2024*		*2023*		*2022*		*2021*		*Prior*		*Revolving loans amortized cost basis*		*Revolving loans converted to term loans amortized cost basis*		*Total*
	(Dollars in thousands)
1-4 family residential
Pass	$	15,477	$	22,513	$	18,385	$	18,489	$	45,650	$	2,298	$	—		122,812
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total 1-4 family residential		15,477		22,513		18,385		18,489		45,650		2,298		—		122,812
Current year-to-date gross write-offs		—		—		—		—		—		—		—		—
Multi-family
Pass		—		—		—		234		2,817		—		—		3,051
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total multi-family		—		—		—		234		2,817		—		—		3,051
Current year-to-date gross write-offs		—		—		—		—		—		—		—		—
Commercial
Pass		65		181		—		98		3,233		572		—		4,149
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total commercial		65		181		—		98		3,233		572		—		4,149
Current year-to-date gross write-offs		—		—		—		—		—		—		—		—
Construction
Pass		851		467		—		—		—		—		—		1,318
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total construction		851		467		—		—		—		—		—		1,318
Current year-to-date gross write-offs		—		—		—		—		—		—		—		—
Consumer
Pass		47		92		70		23		2		—		—		234
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total consumer		47		92		70		23		2		—		—		234
Current year-to-date gross write-offs		—		—		—		—		—		—		—		—
Total	$	16,440	$	23,253	$	18,455	$	18,844	$	51,702	$	2,870	$	—	$	131,564

	*As of December 31, 2023*
	*Term loans amortized cost basis by origination year*
	*2023*		*2022*		*2021*		*Prior*		*Revolving loans amortized cost basis*		*Revolving loans converted to term loans amortized cost basis*		*Total*
	(Dollars in thousands)
1-4 family residential
Pass	$	23,395	$	18,950	$	19,605	$	47,517	$	1,414	$	—	$	110,881
Special Mention		—		—		—		—		—		—		—
Substandard		—		—		—		200		—		—		200
Total 1-4 family residential		23,395		18,950		19,605		47,717		1,414		—		111,081
Current year-to-date gross write-offs		—		—		—		—		—		—		—
Multi-family
Pass		—		—		239		2,872		—		—		3,111
Special Mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total multi-family		—		—		239		2,872		—		—		3,111
Current year-to-date gross write-offs		—		—		—		—		—		—		—
Commercial
Pass		186		—		100		3,399		150		—		3,835
Special Mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total commercial		186		—		100		3,399		150		—		3,835
Current year-to-date gross write-offs		—		—		—		—		—		—		—
Construction
Pass		2,508		—		—		—		—		—		2,508
Special Mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total construction		2,508		—		—		—		—		—		2,508
Current year-to-date gross write-offs		—		—		—		—		—		—		—
Consumer
Pass		122		95		28		3		—		—		248
Special Mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total consumer		122		95		28		3		—		—		248
Current year-to-date gross write-offs		—		—		—		—		—		—		—
Total	$	26,211	$	19,045	$	19,972	$	53,991	$	1,564	$	—	$	120,783

The aging of the Bank’s loan portfolio as of June 30, 2024 and December 31, 2023, is as follows:

	*31-89 Days Past Due and Accruing*		*Greater than 90 Days Past Due and Accruing*		*Non-Accrual*		*Total Past Due and Non-Accrual*		*Current*		*Total Loan Balance*
	(Dollars in thousands)
June 30, 2024
1-4 family residential	$	97	$	—	$	—	$	97	$	122,715	$	122,812
Multi-family		—		—		—		—		3,051		3,051
Commercial		—		—		—		—		4,149		4,149
Construction		—		—		—		—		1,318		1,318
Consumer		—		—		—		—		234		234
Total	$	97	$	—	$	—	$	97	$	131,467	$	131,564

December 31, 2023
1-4 family residential	$	131	$	—	$	200	$	331	$	110,750	$	111,081
Multi-family		—		—		—	$	—		3,111	$	3,111
Commercial		—		—		—	$	—		3,835	$	3,835
Construction		—		—		—	$	—		2,508	$	2,508
Consumer		—		—		—	$	—		248	$	248
Total	$	131	$	—	$	200	$	331	$	120,452	$	120,783

The following table presents the amortized cost basis of loans on nonaccrual status recorded at June 30, 2024 and December 31, 2023. There was no interest recognized on non-accrual loans for the six months ended June 30, 2024.

	*June 30, 2024*				*December 31, 2023*
	*Nonaccrual with no Allowance for Credit Losses*		*Nonaccrual*		*Nonaccrual with no Allowance for Credit Losses*		*Nonaccrual*
	(Dollars in thousands)
First mortgage loans
1-4 family residential	$	—	$	—	$	200	$	200
Multi-family		—		—		—		—
Commercial		—		—		—		—
Construction		—		—		—		—
Consumer loans		—		—		—		—
Total loans	$	—	$	—	$	200	$	200

The Bank may modify loans to borrowers experiencing financial difficulty by providing modifications to repayment terms; more specifically, modifications to loan interest rates. Management performs an analysis at the time of loan modification. Any reserve required is recorded through a provision to the allowance for credit losses on loans. There were no modifications on loans to borrowers experiencing financial difficulty during the six months ended June 30, 2024 and 2023.