NSTS Bancorp Inc

Previous wording

This section is intended to assist in the understanding of our financial performance through a discussion of our financial condition as of June 30, 2024 and as compared to our financial condition as of December 31, 2023, and our results of operations for the three and six months ended June 30, 2024 and 2023. This section should be read in conjunction with the unaudited interim consolidated financial statements and notes thereto appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Current wording

This section is intended to assist in the understanding of our financial performance through a discussion of our financial condition as of September 30, 2024 and as compared to our financial condition as of December 31, 2023, and our results of operations for the three and nine months ended September 30, 2024 and 2023. This section should be read in conjunction with the unaudited interim consolidated financial statements and notes thereto appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Previous wording

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated unaudited interim financial statements for the three and six months ended June 30, 2024 and 2023, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results could differ from these estimates.

Current wording

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated unaudited interim financial statements for the three and nine months ended September 30, 2024 and 2023, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results could differ from these estimates.

Previous wording

COMPARISON OF OPERATING RESULTS FOR THE Three and** Six MONTHS ENDED June 30, 2024 and 2023**

Current wording

COMPARISON OF OPERATING RESULTS FOR THE Three and** Nine MONTHS ENDED September 30, 2024 and 2023**

Previous wording

General. For the three months ended June 30, 2024, we had a net loss of $326,000, compared to a net loss of $126,000 for the three months ended June 30, 2023. For the six months ended June 30, 2024, we had a net loss of $572,000, compared to net income of $44,000 for the six months ended June 30, 2023. The decrease in net income, for both the three- and six-month periods is primarily attributable to an increase in noninterest expenses related to the continued investment in people and processes with the expansion of the mortgage lending team, Oak Leaf Community Mortgage. This increase is partially offset by an increase in noninterest income specifically related to the gain on loans held for sale and an increase in net interest income driven by increased interest income on loans and interest income on funds held at the Federal Reserve Bank of Chicago.

Current wording

General. For the three months ended September 30, 2024, we had a net loss of $171,000, compared to a net loss of $232,000 for the three months ended September 30, 2023. For the nine months ended September 30, 2024, we had a net loss of $743,000, compared to a net loss of $188,000 for the nine months ended September 30, 2023. The decrease in net loss for the three-month period is primarily attributable to an increase in noninterest income, specifically related to the gain on sale of mortgages. The increase in net loss, for the nine-month period is primarily attributable to an increase in noninterest expenses related to the continued investment in people and processes with the expansion of the mortgage lending team, Oak Leaf Community Mortgage. This increase is partially offset by an increase in noninterest income specifically related to the gain on loans held for sale and an increase in net interest income driven by increased interest income on loans and interest income on funds held at the Federal Reserve Bank of Chicago.

Previous wording

***Net Interest Income.***Net interest income increased $208,000, to $1.8 million for the three months ended June 30, 2024 compared to $1.6 million for the three months ended June 30, 2023. Our interest rate spread decreased to 2.36% for the three months ended June 30, 2024 from 2.46 % for the same period ended June 30, 2023. Our net interest margin increased to 2.92% for the three months ended June 30, 2024 compared to 2.69% for the three months ended June 30, 2023. The decrease in interest rate spread is driven by an increased average balance of higher earning interest-bearing liabilities, specifically interest-bearing deposits, as a percentage of total assets. The increase in the interest margin is driven by an increase in yields earned on loans and interest-bearing deposits in other banks.

Current wording

***Net Interest Income.***Net interest income increased $314,000, to $1.8 million for the three months ended September 30, 2024 compared to $1.5 million for the three months ended September 30, 2023. Our interest rate spread increased to 2.39% for the three months ended September 30, 2024 from 2.24% for the same period ended September 30, 2023. Our net interest margin increased to 2.96% for the three months ended September 30, 2024 compared to 2.59% for the three months ended September 30, 2023. These increases are driven by an increase in yields earned on loans and interest-bearing deposits in other banks.

Previous wording

Average interest-earning assets of $245.1 million in the second quarter 2024 increased $10.1 million compared to $235.0 million for the second quarter 2023. The increase in average earning assets was driven by an increase in loans and interest-bearing deposits at other banks, funded by an increase in average deposit balances during the period. The average outstanding balance of loans, net, increased to $134.7 million for the three-month period ended June 30, 2024, an increase of $29.8 million from $105.0 million for the three months ended June 30, 2023. Additionally, the average yield earned on those loans outstanding increased 122 basis points to 5.11% for the three months ended June 30, 2024. This increase is a result of an overall increase in market rates on mortgage loans originated during 2024, as well as increased loan demand for specialty portfolio products which are originated at higher interest rates and with additional origination fees.

Current wording

Average interest-earning assets of $247.1 million in the third quarter 2024 increased $12.8 million compared to $234.3 million for the third quarter 2023. The increase in average earning assets was driven by an increase in loans and interest-bearing deposits at other banks, funded by an increase in average deposit balances during the period. The average outstanding balance of loans, net, increased to $135.3 million for the three-month period ended September 30, 2024, an increase of $29.1 million from $106.2 million for the three months ended September 30, 2023. Additionally, the average yield earned on those loans outstanding increased 125 basis points to 5.31% for the three months ended September 30, 2024. This increase is a result of an overall increase in market rates on mortgage loans originated during 2024, as well as increased loan demand for specialty portfolio products which are originated at higher interest rates and with additional origination fees.

Previous wording

The cost of interest-bearing liabilities increased 113 basis points for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The net increase in our funding costs was primarily due to an increase in rates offered on time deposit accounts to remain competitive with the local market.

Current wording

The cost of interest-bearing deposits increased 89 basis points for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The net increase in our funding costs was primarily due to an increase in rates offered on time deposit accounts to remain competitive with the local market.

Previous wording

Net interest income increased $276,000, to $3.5 million for the six months ended June 30, 2024 compared to $3.2 million for the six months ended June 30, 2023. Our interest rate spread decreased to 2.33% for the six months ended June 30, 2024 from 2.51% for the same period ended June 30, 2023. Our net interest margin increased to 2.87% for the six months ended June 30, 2024 compared to 2.72% for the six months ended June 30, 2023. The decrease in interest rate spread is driven by an increased average balance of higher earning interest-bearing liabilities, specifically interest-bearing deposits, as a percentage of total assets. The increase in the interest margin is driven by an increase in yields earned on loans and interest-bearing deposits in other banks.

Current wording

Net interest income increased $591,000, to $5.3 million for the nine months ended September 30, 2024 compared to $4.7 million for the nine months ended September 30, 2023. Our interest rate spread decreased to 2.35% for the nine months ended September 30, 2024 from 2.42% for the same period ended September 30, 2023. Our net interest margin increased to 2.90% for the nine months ended September 30, 2024 compared to 2.67% for the nine months ended September 30, 2023. The decrease in interest rate spread is driven by an increased average balance of higher earning interest-bearing liabilities, specifically interest-bearing deposits, as a percentage of total assets. The increase in the interest margin is driven by an increase in yields earned on loans and interest-bearing deposits in other banks.

Previous wording

Average interest-earning assets of $243.4 million for the six months ended June 30, 2024 increased $6.7 million compared to $236.7 million for the same period ending June 30, 2023. The increase in average earning assets was driven by an increase in loans and interest-bearing deposits at other banks, funded by an increase in average deposit balances during the period and reduction in investment securities. The average outstanding balance of loans, net increased to $130.0 million for the six-month period ended June 30, 2024, an increase of $25.5 million from $104.5 million for the six months ended June 30, 2023. Additionally, the average yield earned on those loans outstanding increased 101 basis points to 4.92% for the six months ended June 30, 2024. This increase is a result of an overall increase in market rates on mortgage loans originated during 2024, as well as an increased loan demand for specialty portfolio products which are originated at higher interest rates and with additional origination fees.

Current wording

Average interest-earning assets of $244.6 million for the nine months ended September 30, 2024 increased $8.8 million compared to $235.9 million for the same period ending September 30, 2023. The increase in average earning assets was driven by an increase in loans and interest-bearing deposits at other banks, funded by an increase in average deposit balances during the period and reduction in investment securities. The average outstanding balance of loans, net increased to $131.8 million for the nine-month period ended September 30, 2024, an increase of $26.7 million from $105.1 million for the nine months ended September 30, 2023. Additionally, the average yield earned on those loans outstanding increased 109 basis points to 5.05% for the nine months ended September 30, 2024. This increase is a result of an overall increase in market rates on mortgage loans originated during 2024, as well as an increased loan demand for specialty portfolio products which are originated at higher interest rates and with additional origination fees.

Previous wording

The cost of interest-bearing liabilities increased 113 basis points for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The net increase in our funding costs was primarily due to an increase in rates offered on time deposit accounts to remain competitive with the local market.

Current wording

The cost of interest-bearing deposits increased 99 basis points for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The net increase in our funding costs was primarily due to an increase in rates offered on time deposit accounts to remain competitive with the local market.

Previous wording

Provision for Credit Losses. For the three months ended June 30, 2024 and 2023, a provision for credit losses was recorded based on the current allowance for credit loss ("ACL") assessment. During the three months ended June 30, 2024, we recorded a provision for credit losses of $123,000, comprised of $90,000 in provision for credit losses to loans and $33,000 in provision for credit losses related to unfunded commitments, including loans committed for origination. During the three months ended June 30, 2023, we recorded a provision for credit losses of $30,000, comprised of $31,000 in provision for credit losses on loans and a $1,000 reversal of provision of credit losses related to unfunded commitments. During the six months ended June 30, 2024, we recorded a provision for credit losses of $122,000, comprised of $91,000 provision for credit losses on loans and $31,000 provision for credit losses related to unfunded commitments. During the six months ended June 30, 2023, we recorded a provision for credit losses of $2,000, comprised of $3,000 provision for credit losses on loans and a $1,000 reversal of provision of credit losses related to unfunded commitments.

Current wording

Provision for Credit Losses. For the three months ended September 30, 2024 and 2023, a provision for credit losses was recorded based on the current allowance for credit loss ("ACL") assessment. During the three months ended September 30, 2024, we recorded a provision for credit losses of $20,000, comprised of $4,000 in provision for credit losses to loans and $16,000 in provision for credit losses related to unfunded commitments, including loans committed for origination. During the three months ended September 30, 2023, we recorded a provision for credit losses of $50,000, comprised of $51,000 in provision for credit losses on loans and a $1,000 reversal of provision of credit losses related to unfunded commitments. During the nine months ended September 30, 2024, we recorded a provision for credit losses of $142,000, comprised of $95,000 provision for credit losses on loans and $47,000 provision for credit losses related to unfunded commitments. During the nine months ended September 30, 2023, we recorded a provision for credit losses of $52,000, comprised of $53,000 provision for credit losses on loans and a $1,000 reversal of provision of credit losses related to unfunded commitments.

Previous wording

For the three months ended June 30, 2024 compared to the three months ended June 30, 2023, noninterest income increased $354,000 to $501,000 from $147,000. For the six months ended June 30, 2024 compared to the same period ended June 30, 2023, noninterest income increased $519,000 from $294,000 to $813,000. In each case, the increases were driven by an increase in the gain on sale of mortgage loans and an increase in other noninterest income. Other noninterest income increased as a result of insurance recovery funds received, totaling $70,000, due to damage from an accident that occurred at one of the branches. Management anticipates the costs associated with the capital improvements will exceed that of the funds received as additional necessary upgrades will be made concurrently.

Current wording

For the three months ended September 30, 2024 compared to the three months ended September 30, 2023, noninterest income increased $273,000 to $423,000 from $150,000. For the nine months ended September 30, 2024 compared to the same period ended September 30, 2023, noninterest income increased $792,000 from $444,000 to $1.2 million. In each case, the increases were driven by an increase in the gain on sale of mortgage loans and an increase in other noninterest income. Other noninterest income for the nine months ended September 30, 2024, increased as a result of insurance recovery funds received, totaling $70,000, due to damage from an accident that occurred at one of the branches. Management anticipates the costs associated with the capital improvements will exceed that of the funds received as additional necessary upgrades will be made concurrently.

Previous wording

Gain on sale of mortgages increased $269,000, from $2,000 to $271,000 for the three months ended June 30, 2024 compared to 2023. Gain on sale of mortgage loans increased $414,000, from $13,000 to $427,000 for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The increases in gain on sale of mortgages were primarily the result of an overall increase in total mortgage loans originated during the period. During the six months ended June 30, 2024, we sold 72 loans totaling $19.5 million for a gain on sale of $427,000. Included in the number and amount of loans sold during the period were loans sold that were originated as held for investment, but subsequently sold to local community banks, totaling $2.5 million, for a total gain on sale of $79,000. Management continues to look for opportunities and markets to sell loans as we continue to see increased loan production compared to prior years.

Current wording

Gain on sale of mortgages increased $268,000 for the three months ended September 30, 2024 compared to 2023. Gain on sale of mortgage loans increased $682,000, from $13,000 to $695,000 for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The increases in gain on sale of mortgages were primarily the result of an overall increase in total mortgage loans originated during the period. During the nine months ended September 30, 2024, we sold 125 loans totaling $33.3 million for a gain on sale of $695,000. Included in the number and amount of loans sold during the period were loans sold that were originated as held for investment, but subsequently sold to local community banks, totaling $2.5 million, for a total gain on sale of $79,000. Management continues to look for opportunities and markets to sell loans as we continue to see increased loan production compared to prior years.

Previous wording

During the first half of 2024, Management heavily invested in the implementation and growth of Oak Leaf Community Mortgage, resulting in elevated noninterest expenditures. Noninterest expenses increased $705,000 for the three months ended June 30, 2024, compared to the same period ended June 30, 2023. Noninterest expenses increased $1.3 million for the six months ended June 30, 2024, compared to the same period ended June 30, 2023. For both the three- and six-month periods, the increase in noninterest expenses was primarily driven by increases in salaries and employee benefits. The average number of employees increased to 48 for the six months ended June 30, 2024 compared to 37 for the six months ended June 30, 2023. The increase in headcount is based on the addition of the Oak Leaf Community Mortgage team brought on during the fourth quarter of 2023 as well as additional hires during 2024 to supplement the lending team as operations continue to expand. Additionally, the Company implemented the 2023 Equity Incentive Plan on June 15, 2023, and began recognizing expenses associated with this plan in June 2023, as such expenses were higher for the periods ended 2024 compared to 2023. Marketing and advertising costs increased during 2024 as a result of an increased focus on lending operations and related marketing to our new lending area, Will County, Illinois. Data processing expenses increased as we have continued to invest in systems and processes to improve the lending experience for our customers as well as implement efficiencies within our internal processes. Additionally, certain data processing expenses are based on per employee costs, which increased due to an increase in headcount. Professional service expenditures increased during the periods as a result of increased auditing expenses resulting from expanded operations. Loan expenses increased as a result of an increase in loan originations during the periods. Equipment and occupancy costs increased as a result of two additional loan production office rental agreements in place during 2024 that were not in place during the first half of 2023. Management intends to continue to invest in the people and processes in place to achieve efficiencies as loan production continues to grow.

Current wording

Noninterest expenses increased $451,000 for the three months ended September 30, 2024, compared to the same period ended September 30, 2023. Noninterest expenses increased $1.8 million for the nine months ended September 30, 2024, compared to the same period ended September 30, 2023. For both the three- and nine-month periods, the increase in noninterest expenses was primarily driven by increases in salaries and employee benefits. The average number of employees increased to 49 for the nine months ended September 30, 2024 compared to 37 for the nine months ended September 30, 2023. The increase in headcount is based on the addition of the Oak Leaf Community Mortgage team brought on during the fourth quarter of 2023 as well as additional hires during 2024 to supplement the lending team as operations continue to expand. Additionally, the Company implemented the 2023 Equity Incentive Plan on June 15, 2023, and began recognizing expenses associated with this plan in June 2023, as such expenses were higher for the periods ended 2024 compared to 2023. Marketing and advertising costs increased during 2024 as a result of an increased focus on lending operations and related marketing to our new lending area, Will County, Illinois. Data processing expenses increased as we have continued to invest in systems and processes to improve the lending experience for our customers as well as implement efficiencies within our internal processes. Additionally, certain data processing expenses are based on per employee costs, which increased due to an increase in headcount. Loan expenses increased as a result of an increase in loan originations during the periods. Equipment and occupancy costs increased as a result of two additional loan production office rental agreements in place during 2024 that were not in place during the first nine months of 2023. Management intends to continue to invest in the people and processes in place to achieve efficiencies as loan production continues to grow.

Previous wording

***Provision for Income Tax Expense (Benefit).***There was no provision for income tax expense recorded during the three and six months ended June 30, 2024. Management estimates a taxable net loss for the year ended December 31, 2024 due to non-taxable income, such as income on tax exempt municipal securities and BOLI.

Current wording

***Provision for Income Tax Expense (Benefit).***There was no provision for income tax expense recorded during the three and nine months ended September 30, 2024. Management estimates a taxable net loss for the year ended December 31, 2024 due to non-taxable income, such as income on tax exempt municipal securities and BOLI.

Previous wording

Total Assets*.*Total assets increased $9.1 million to $265.9 million as of June 30, 2024 compared to $256.8 million at December 31, 2023. The increase was driven by an increase in loans, net, funded by an increase in time deposits and a reduction in securities available for sale due to maturities and principal payments of securities.

Current wording

Total Assets*.*Total assets increased $11.7 million to $268.4 million as of September 30, 2024 compared to $256.8 million at December 31, 2023. The increase was driven by an increase in loans, net, funded by an increase in time deposits and a reduction in securities available for sale due to maturities and principal payments of securities.

Previous wording

Cash and cash equivalents. Cash and cash equivalents increased $1.0 million to $32.4 million as of June 30, 2024, from $31.4 million at December 31, 2023. The increase in cash was driven by an increase in time deposits during the same period and principal payments received on securities available for sale. Currently, the Bank holds a majority of the cash on hand at the Federal Reserve Bank of Chicago, earning 5.40%, to keep the funds available for increasing loan demand. Management continues to actively monitor our liquidity position on a daily basis and maintain levels of liquid assets deemed adequate.

Current wording

Cash and cash equivalents. Cash and cash equivalents increased $3.2 million to $34.6 million as of September 30, 2024, from $31.4 million at December 31, 2023. The increase in cash was driven by an increase in time deposits during the same period and principal payments received on securities available for sale. Currently, the Bank holds a majority of the cash on hand at the Federal Reserve Bank of Chicago, earning 4.90%, to keep the funds available for increasing loan demand. Management continues to actively monitor our liquidity position on a daily basis and maintain levels of liquid assets deemed adequate.

Previous wording

Time deposits with other financial institutions. Time deposits with other financial institutions decreased $1.0 million to $1.0 million as of June 30, 2024, from $2.0 million at December 31, 2023. The decrease in time deposits with other financial institutions was driven by maturities during the year to date. Management has been reinvesting the matured funds into lending activities, increasing the average yield on assets for the six months ended June 30, 2024 to 4.08% compared to 3.13% for the same period ending June 30, 2023.

Current wording

Time deposits with other financial institutions. Time deposits with other financial institutions decreased $500,000 to $1.5 million as of September 30, 2024, from $2.0 million at December 31, 2023. The decrease in time deposits with other financial institutions was driven by maturities during the year to date. Management has been reinvesting the matured funds into lending activities, increasing the average yield on assets for the nine months ended September 30, 2024 to 4.16% compared to 3.19% for the same period ending September 30, 2023.

Previous wording

Securities Available for Sale. Securities available-for-sale decreased to $75.3 million as of June 30, 2024, compared to $82.1 million at December 31, 2023. There were no purchases or sales of securities available-for-sale during the six months ended June 30, 2024. During the six months ended June 30, 2024, the Bank received principal payments of $2.8 million, had maturities of $2.8 million, had net premium amortization and discount accretion of $263,000 and had an increase in the unrealized loss on the portfolio of $991,000. Additionally, the securities portfolio has one security that matures on July 1, 2024, totaling $1.5 million.

Current wording

Securities Available for Sale. Securities available-for-sale decreased to $75.2 million as of September 30, 2024, compared to $82.1 million at December 31, 2023. There were no purchases or sales of securities available-for-sale during the nine months ended September 30, 2024. During the nine months ended September 30, 2024, the Bank received principal payments of $4.2 million, had maturities of $4.3 million, had net premium amortization and discount accretion of $393,000 and had a decrease in the unrealized loss on the portfolio of $2.0 million.

Previous wording

As of June 30, 2024, the securities available for sale portfolio included an unrealized loss position of $12.5 million, or 14.2% of the total book value of the portfolio. Management monitors the portfolio for credit losses and believes that the decline in value does not presently represent realized losses and is due to market volatility and increased market interest rates. While the Bank does not currently intend to sell securities in a loss position, management may consider the opportunity to reposition the investment securities portfolio in the future.

Current wording

As of September 30, 2024, the securities available for sale portfolio included an unrealized loss position of $9.6 million, or 11.3% of the total book value of the portfolio. Management monitors the portfolio for credit losses and believes that the decline in value does not presently represent realized losses and is due to market volatility and increased market interest rates. While the Bank does not currently intend to sell securities in a loss position, management may consider the opportunity to reposition the investment securities portfolio in the future.

Previous wording

***Loans held for sale.***Our loans held for sale increased $4.8 million to $5.2 million at June 30, 2024 compared to $380,000 at December 31, 2023. With the addition of Oak Leaf Community Mortgage during the late third and early fourth quarters of 2023, and the related increase in loan originations, management has increased the proportion of loan originations held for sale to the secondary market. Additionally, the increase in loans held for sale as of June 30, 2024, compared to December 31, 2023, is partially driven by the timing of loan closings, with $1.5 million in loans held for sale funding on the last business day of June 2024.

Current wording

***Loans held for sale.***Our loans held for sale increased $2.7 million to $3.1 million at September 30, 2024 compared to $380,000 at December 31, 2023. With the addition of Oak Leaf Community Mortgage during the late third and early fourth quarters of 2023, and the related increase in loan originations, management has increased the proportion of loan originations held for sale to the secondary market. During the nine months ended September 30, 2024, the Bank originated $33.6 million in loans held for sale.

Previous wording

Loans, net. Our loans, net, increased by $10.4 million to $131.0 million at June 30, 2024 compared to $120.6 million at December 31, 2023. The Bank originated $27.6 million in loans to be held in the portfolio during the six months ended June 30, 2024. In an effort to continue to grow loan originations, the Bank hired three additional mortgage loan originators during the second quarter of 2024. The Bank sold $2.5 million in loans that were originally held in the portfolio to local community banks. The Bank saw an increase in loan principal payments and payoffs during the six months ended June 30, 2024, totaling $14.6 million, as a result of a new loan product introduced with the addition of Oak Leaf Community Mortgage. The Buy Now, Sell Later loan product is an often short term loan that allows borrowers to consolidate the purchase of a new property with their current mortgage. With an average life of less than 12 months, the loan is paid down upon the sale of the original home and the funds for the new property are usually refinanced to a conventional mortgage product. During the six months ended June 30, 2024, the Bank originated $7.0 million in Buy Now, Sell Later Loans, and has a total outstanding loan balance of $2.1 million as of June 30, 2024.

Current wording

Loans, net. Our loans, net, increased by $13.2 million to $133.8 million at September 30, 2024 compared to $120.6 million at December 31, 2023. The Bank originated $38.6 million in loans to be held in the portfolio during the nine months ended September 30, 2024 and had loan principal payments and payoffs of $22.8 million. The Bank continues to focus lending efforts on one- to four-family residential properties, which has seen the largest increase in balances during the nine months ended September 30, 2024. Additionally, the balance of construction loans has decreased from December 31, 2023 to September 30, 2024, however, the current available balance on construction loans is $3.4 million as of September 30, 2024 and is expected to be drawn upon within the next 12 months. In an effort to continue to grow loan originations, the Bank hired three additional mortgage loan originators during the nine months ended September 30, 2024. The Bank sold $2.5 million in loans that were originally held in the portfolio to local community banks.

Previous wording

As of June 30, 2024, the allowance for credit losses (“ACL”) which includes the allowance for credit losses on loans, and the allowance for credit losses on off-balance sheet exposures (recorded in Other Liabilities), totaled $1.3 million, an increase of $123,000 compared to December 31, 2023. The increase in the ACL is driven by an increase in the portfolio loan balances. As of June 30, 2024, there were no loans individually assessed and no loans were rated substandard or watch. As of June 30, 2024, the Bank has no non-accrual loans and one loan past due greater than 30 days. The Bank actively monitors the loan portfolio for signs of weakening credit quality, noting as of June 30, 2024 the portfolio remains of high quality with limited credit concerns. Additionally, there is no longer an individual assessment on the large construction loan as that loan converted to a conventional residential mortgage during the three months ended June 30, 2024. No specific reserve was previously required on this loan. As of June 30, 2024, the balance of unfunded commitments increased as a result of an increase in the HELOCs originated during the first half of 2024 and not yet drawn upon as well as in loans committed for origination.

Current wording

As of September 30, 2024, the allowance for credit losses (“ACL”) which includes the allowance for credit losses on loans, and the allowance for credit losses on off-balance sheet exposures (recorded in Other Liabilities), totaled $1.3 million, an increase of $95,000 compared to December 31, 2023. The increase in the ACL is driven by an increase in the portfolio loan balances. As of September 30, 2024, there were no loans individually assessed and no loans were rated substandard or watch. As of September 30, 2024, the Bank has no non-accrual loans and two loan past due greater than 30 days. The Bank actively monitors the loan portfolio for signs of weakening credit quality, noting as of September 30, 2024 the portfolio remains of high quality with limited credit concerns. As of September 30, 2024, the balance of unfunded commitments increased as a result of an increase in the HELOCs and construction loans originated during the first nine months of 2024 and not yet drawn upon as well as in loans committed for origination.

Previous wording

Deposits. Total deposits increased $9.0 million to $177.8 million at June 30, 2024 compared to $168.8 million at December 31, 2023. The increase in deposits is primarily within the time deposit accounts as the Bank continued to offer a competitive CD special during the six months ended June 30, 2024. There are $54.2 million in time deposits scheduled to mature in the 12 months ending June 30, 2025. Of these scheduled maturities, $36.0 million have interest rates of 5.0% or greater. Based on current offering rates in our market area and our current deposit pricing strategy, as well as our strong historical deposit retention, management anticipates that a significant portion of maturing time deposits will be retained. Management continues to actively monitor the deposit balances and interest rates offered to maintain an adequate level of liquidity.

Current wording

Deposits. Total deposits increased $11.1 million to $179.9 million at September 30, 2024 compared to $168.8 million at December 31, 2023. The increase in deposits is primarily within the time deposit accounts as the Bank continued to offer a competitive CD special during the nine months ended September 30, 2024. Based on current offering rates in our market area and our current deposit pricing strategy, as well as our strong historical deposit retention, management anticipates that a significant portion of maturing time deposits will be retained. Management continues to actively monitor the deposit balances and interest rates offered to maintain an adequate level of liquidity.

Previous wording

Total Equity. Total equity decreased $1.0 million to $76.5 million at June 30, 2024 primarily due to an increase in the unrealized loss position on the securities available-for-sale portfolio. The increase in the unrealized loss position of $709,000, net of the related tax effect, is due to changes in market interest rates. Additionally, the Bank began repurchasing treasury stock during the second quarter 2024, resulting in an additional $190,000 of treasury stock as of June 30, 2024, compared to December 31, 2023.

Current wording

Total Equity. Total equity increased $891,000 to $78.4 million at September 30, 2024. The increase is primarily due to a decrease in the unrealized loss position on the securities available-for-sale portfolio. The decrease in the unrealized loss position of $1.4 million, net of the related tax effect, is due to changes in market interest rates. Additionally, the Bank began repurchasing treasury stock during the second quarter 2024, resulting in an additional $411,000 of treasury stock as of September 30, 2024, compared to December 31, 2023.

Previous wording

The allowance for credit losses on loans as a percentage of total loans as of June 30, 2024 was 0.96%. The allowance for loan losses as a percentage of total loans at December 31, 2023 was 0.97%.

Current wording

The allowance for credit losses on loans as a percentage of total loans as of September 30, 2024 was 0.95%. The allowance for loan losses as a percentage of total loans at December 31, 2023 was 0.97%.

Previous wording

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities. We also have the ability to borrow from the FHLB of Chicago and a $10.0 million unsecured Fed Funds line of credit with BMO Harris Bank. At June 30, 2024, we had one outstanding advance from the FHLB of Chicago totaling $5.0 million and had the capacity to borrow approximately $79.2 million additional from the FHLB of Chicago. Additionally, we had no outstanding balance under our $10.0 million federal funds line of credit with BMO Harris Bank.

Current wording

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities. We also have the ability to borrow from the FHLB of Chicago and a $10.0 million unsecured Fed Funds line of credit with BMO Harris Bank. At September 30, 2024, we had one outstanding advance from the FHLB of Chicago totaling $5.0 million and had the capacity to borrow approximately $78.1 million additional from the FHLB of Chicago. Additionally, we had no outstanding balance under our $10.0 million federal funds line of credit with BMO Harris Bank.

Previous wording

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash (used in) provided by operating activities was $(1.5) million and $136,000 for the six months ended June 30, 2024 and 2023, respectively. Net cash (used in) provided by investing activities, which consists primarily of net change in loans receivable and net change in investment securities, was $(6.6) million and $5.1 million for the six months ended June 30, 2024 and 2023, respectively, with the increase in cash used in 2024 driven by the increase in the portfolio loans. Net cash provided by (used in) financing activities, consisting primarily of the activity in deposit accounts was $9.2 million and $(7.1) million for the six months ended June 30, 2024 and 2023, respectively.

Current wording

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $74,000 and $363,000 for the nine months ended September 30, 2024 and 2023, respectively. Net cash (used in) provided by investing activities, which consists primarily of net change in loans receivable and net change in investment securities, was $(7.0) million and $7.4 million for the nine months ended September 30, 2024 and 2023, respectively, with the increase in cash used in 2024 driven by the increase in the portfolio loans. Net cash provided by (used in) financing activities, consisting primarily of the activity in deposit accounts was $10.2 million and $(10.2) million for the nine months ended September 30, 2024 and 2023, respectively.

Previous wording

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Time deposits that are scheduled to mature in less than one year from June 30, 2024, totaled $54.2 million. Based on our deposit retention experience and current pricing strategy we anticipate that a significant portion of maturing time deposits will be retained. However, if a substantial portion of these deposits is not retained, we may utilize FHLB of Chicago advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

Current wording

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Time deposits that are scheduled to mature in less than one year from September 30, 2024, totaled $54.0 million. Based on our deposit retention experience and current pricing strategy we anticipate that a significant portion of maturing time deposits will be retained. However, if a substantial portion of these deposits is not retained, we may utilize FHLB of Chicago advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

Previous wording

As of June 30, 2024, the Bank was well capitalized under the regulatory framework for prompt corrective action. During the year ended December 31, 2020, the Bank elected to begin using the CBLR. Under CBLR, if a qualifying depository institution or depository institution holding company elects to use such measure, such institution or holding company will be considered well capitalized if its ratio of Tier 1 capital to average total consolidated assets (i.e., leverage ratio) exceeds 9%, subject to a limited two quarter grace period, during which the leverage ratio cannot go 100 basis points below the then applicable threshold, and will not be required to calculate and report risk-based capital ratios. North Shore Trust and Savings’ Tier 1 capital to Average Assets was 24.00% and 24.72% at June 30, 2024 and December 31, 2023, respectively.

Current wording

As of September 30, 2024, the Bank was well capitalized under the regulatory framework for prompt corrective action. During the year ended December 31, 2020, the Bank elected to begin using the CBLR. Under CBLR, if a qualifying depository institution or depository institution holding company elects to use such measure, such institution or holding company will be considered well capitalized if its ratio of Tier 1 capital to average total consolidated assets (i.e., leverage ratio) exceeds 9%, subject to a limited two quarter grace period, during which the leverage ratio cannot go 100 basis points below the then applicable threshold, and will not be required to calculate and report risk-based capital ratios. North Shore Trust and Savings’ Tier 1 capital to Average Assets was 23.96% and 24.72% at September 30, 2024 and December 31, 2023, respectively.

Previous wording

Off-Balance Sheet Arrangements*.* At June 30, 2024, we had $9.0 million of outstanding commitments to originate loans. Our total letters and lines of credit and unused lines of credit totaled $6.5 million at June 30, 2024.

Current wording

Off-Balance Sheet Arrangements*.* At September 30, 2024, we had $2.5 million of outstanding commitments to originate loans. Our total letters and lines of credit and unused lines of credit totaled $8.2 million at September 30, 2024.