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

9 Months Ended

Sep. 30, 2023

Notes to Financial Statements

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 3: Loans and allowance for credit losses

A summary of loans by major category as of September 30, 2023 and December 31, 2022 is as follows:

	*September 30, 2023*			*December 31, 2022*
	(Dollars in thousands)
First mortgage loans
1-4 family residential	$	97,934		$	95,584
Multi-family		3,142			3,237
Commercial		3,738			3,921
Construction		1,762			—
Total first mortgage loans		106,576			102,742
Consumer loans		265			249
Total loans		106,841			102,991
Net deferred loan costs		1,030			992
Allowance for credit losses on loans		(1,061	)		(624	)
Total loans, net	$	106,810		$	103,359

First mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balance of these loans totaled $12.8 million and $13.7 million at September 30, 2023 and December 31, 2022, respectively. Custodial escrow balances maintained in connection with the loans serviced were $150,000 and $231,000 at September 30, 2023 and December 31, 2022, 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 September 30, 2023 and December 31, 2022, such borrowers were indebted to the Bank in the aggregate amount of $522,000 and $597,000, respectively.

The following tables present the activity in the allowance for credit losses and allowance for loan losses for the three and nine months ended September 30, 2023 and 2022:

	*September 30, 2023*
	*1-4 family*
	*residential*		*Multi-family*			*Commercial*			*Construction*		*Consumer*		*Total*
	(Dollars in thousands)
Three months ended
Beginning balance	$	928	$	41		$	39		$	—	$	2	$	1,010
Charge-offs		—		—			—			—		—		—
Recoveries		—		—			—			—		—		—
Net recoveries (charge-offs)		—		—			—			—		—		—
Provision for (release of) credit losses		56		(2	)		(3	)		—		—		51
Ending balance	$	984	$	39		$	36		$	—	$	2	$	1,061

	*September 30, 2023*
	*1-4 family*
	*residential*		*Multi-family*			*Commercial*			*Construction*		*Consumer*			*Total*
	(Dollars in thousands)
Nine 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		68		(3	)		(12	)		—		—			53
Ending balance	$	984	$	39		$	36		$	—	$	2		$	1,061

	September 30, 2022
	1-4 family
	residential			Multi-family			Commercial			Construction		Consumer		Total
	(Dollars in thousands)
Three months ended
Beginning balance	$	713		$	26		$	26		$	—	$	4	$	769
Charge-offs		—			—			—			—		—		—
Recoveries		—			—			—			—		—		—
Net recoveries (charge-offs)		—			—			—			—		—		—
(Release of) provision for loan losses		(79	)		(2	)		(4	)		—		1		(84	)
Ending balance	$	634		$	24		$	22		$	—	$	5	$	685

	*September 30, 2022*
	*1-4 family*
	*residential*			*Multi-family*			*Commercial*			*Construction*		*Consumer*			*Total*
	(Dollars in thousands)
Nine months ended
Beginning balance	$	675		$	69		$	25		$	—	$	10		$	779
Charge-offs		—			—			—			—		—			—
Recoveries		6			—			—			—		—			6
Net recoveries (charge-offs)		6			—			—			—		—			6
(Release of) loan losses		(47	)		(45	)		(3	)		—		(5	)		(100	)
Ending balance	$	634		$	24		$	22		$	—	$	5		$	685

The ACL on loans excludes $4,000 of allowance for off-balance sheet exposures as of September 30, 2023 recorded within Other Liabilities.

As of September 30, 2023, collateral dependent loans totaled $139,000 in the 1-4 family residential loan segment. These loans are collateralized by residential real estate and have no ACL as of September 30, 2023. There were no other collateral dependent loans as of September 30, 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 September 30, 2023 and the risk rating category and class of loan as of December 31, 2022.

	*As of September 30, 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	$	8,623	$	19,539	$	19,824	$	48,518	$	1,291	$	—	$	97,795
Special Mention		—		—		—		—		—		—		—
Substandard		—		—		—		139		—		—		139
Total 1-4 family residential		8,623		19,539		19,824		48,657		1,291		—		97,934
Current year-to-date gross write-offs		—		—		—		—		—		—		—
Multi-family
Pass		—		—		241		2,901		—		—		3,142
Special Mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total multi-family		—		—		241		2,901		—		—		3,142
Current year-to-date gross write-offs		—		—		—		—		—		—		—
Commercial
Pass		46		—		101		3,441		150		—		3,738
Special Mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total commercial		46		—		101		3,441		150		—		3,738
Current year-to-date gross write-offs		—		—		—		—		—		—		—
Construction
Pass		1,762		—		—		—		—		—		1,762
Special Mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total construction		1,762		—		—		—		—		—		1,762
Current year-to-date gross write-offs		—		—		—		—		—		—		—
Consumer
Pass		129		102		31		3		—		—		265
Special Mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total consumer		129		102		31		3		—		—		265
Current year-to-date gross write-offs		—		—		—		—		—		—		—
Total	$	10,560	$	19,641	$	20,197	$	55,002	$	1,441	$	—	$	106,841

	*Pass*		*Special Mention*		*Substandard*		*Doubtful*		*Total loans*
	(Dollars in thousands)
December 31, 2022
1-4 family residential	$	95,353	$	43	$	188	$	—	$	95,584
Multi-family		3,237		—		—		—		3,237
Commercial		3,921		—		—		—		3,921
Consumer		249		—		—		—		249
Total	$	102,760	$	43	$	188	$	—	$	102,991

The aging of the Bank’s loan portfolio as of September 30, 2023 and December 31, 2022, 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)
September 30, 2023
1-4 family residential	$	—	$	—	$	139	$	139	$	97,795	$	97,934
Multi-family		—		—		—		—		3,142		3,142
Commercial		—		64		—		64		3,674		3,738
Construction		—		—		—		—		1,762		1,762
Consumer		—		—		—		—		265		265
Total	$	—	$	64	$	139	$	203	$	106,638	$	106,841

December 31, 2022
1-4 family residential	$	28	$	—	$	154	$	182	$	95,402	$	95,584
Multi-family		—		—		—		—		3,237		3,237
Commercial		—		—		—		—		3,921		3,921
Consumer		—		—		—		—		249		249
Total	$	28	$	—	$	154	$	182	$	102,809	$	102,991

The following table presents the amortized cost basis of loans on nonaccrual status recorded at September 30, 2023 and December 31, 2022.

	*September 30, 2023*				*December 31, 2022*
	*Nonaccrual with no Allowance for Credit Losses*		*Nonaccrual*		*Nonaccrual*
	(Dollars in thousands)
First mortgage loans
1-4 family residential	$	139	$	139	$	154
Multi-family		—		—		—
Commercial		—		—		—
Construction		—		—		—
Consumer loans		—		—		—
Total loans	$	139	$	139	$	154

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.

As of January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructuring and Vintage Disclosures, see Note 1. There were no modifications on loans to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2023. There were no new troubled debt restructurings during the three and nine months ended September 30, 2022.