10-Q: NSTS Bancorp Reports Q3 2025 Net Income Amidst Loan Growth

NSTS Bancorp, Inc. reported net income of $65,000 for the third quarter of 2025, a significant improvement from a net loss in the prior year, driven by increased interest and noninterest income.

Summary

• NSTS Bancorp, Inc. recorded net income of $65,000 for the three months ended September 30, 2025, a notable improvement from a net loss of $(171,000) for the same period in 2024.
• For the nine months ended September 30, 2025, the company reported a net loss of $(521,000), which is an improvement compared to a net loss of $(743,000) for the nine months ended September 30, 2024.
• Net interest income increased by $116,000 to $1.9 million for the third quarter of 2025 and by $262,000 to $5.6 million for the nine months ended September 30, 2025.
• The interest rate spread improved to 2.48% in Q3 2025 from 2.39% in Q3 2024, and the net interest margin increased to 3.08% from 2.96% over the same quarterly periods.
• A reversal of provision for credit losses of $(50,000) was recorded for Q3 2025, including a $99,000 recovery on a previously charged-off loan, compared to a provision of $20,000 in Q3 2024.
• Noninterest income rose by $141,000 to $564,000 in Q3 2025, primarily due to a higher gain on the sale of mortgage loans ($393,000 from 66 loans totaling $19.4 million).
• Total assets decreased by $8.9 million to $269.8 million as of September 30, 2025, from $278.7 million at December 31, 2024.
• Cash and cash equivalents decreased by $19.4 million to $34.1 million, partly due to the repayment of a $5.0 million FHLB advance and purchases of securities.
• Loans, net, increased by $2.5 million to $132.9 million, reflecting $26.1 million in new portfolio loan originations during the nine months ended September 30, 2025.
• Total deposits decreased by $4.1 million to $186.1 million, with a shift from savings and money market accounts into time deposits.
• Total equity increased by $2.4 million to $78.9 million, mainly driven by a decrease in the unrealized loss position on securities available-for-sale.
• The allowance for credit losses on loans (ACL) totaled $1.3 million, with the ACL as a percentage of loans, net of unearned income, increasing to 0.94% from 0.92% due to a shift in portfolio mix towards higher-risk construction loans.
• Nonaccrual loans increased to $285,000 (two loans) as of September 30, 2025, from $0 at December 31, 2024.
• The Bank remains well capitalized with a Tier 1 capital to Average Assets ratio of 24.11% as of September 30, 2025, significantly above the 9% regulatory threshold.

Sentiment

Score: 7

Explanation: The company demonstrated a return to profitability in the third quarter and improved its year-to-date net loss, driven by strong loan origination and a reversal of credit loss provisions. Capital ratios remain robust, indicating financial stability. However, a decrease in total assets and deposits, along with persistent unrealized losses on securities, temper the overall positive sentiment.

Positives

• Achieved net income of $65,000 for Q3 2025, reversing a net loss of $(171,000) in Q3 2024.
• Improved the year-to-date net loss to $(521,000) for 9M 2025 from $(743,000) for 9M 2024.
• Net interest income increased for both the three-month ($116,000 increase) and nine-month ($262,000 increase) periods.
• Interest rate spread and net interest margin improved in Q3 2025, reaching 2.48% and 3.08% respectively.
• Recorded a reversal of provision for credit losses of $(50,000) in Q3 2025 and $(30,000) for 9M 2025, including a $99,000 recovery from a previously charged-off loan.
• Noninterest income significantly increased, driven by higher gains on mortgage loan sales (up $125,000 in Q3 and $394,000 in 9M).
• Loan originations for sale increased substantially, with 66 loans totaling $19.4 million sold in Q3 2025 compared to 53 loans totaling $13.8 million in Q3 2024.
• Loans, net, grew by $2.5 million to $132.9 million, indicating portfolio expansion.
• Total equity increased by $2.4 million to $78.9 million, primarily due to a reduction in unrealized losses on securities available-for-sale.
• The Bank maintains a strong capital position, categorized as 'well capitalized' with a Tier 1 capital to Average Assets ratio of 24.11%, well above the 9% regulatory requirement.
• Management is actively hiring additional mortgage loan originators to support continued loan growth.

Negatives

• The company still reported a net loss of $(521,000) for the nine months ended September 30, 2025.
• Total assets decreased by $8.9 million to $269.8 million as of September 30, 2025.
• Cash and cash equivalents experienced a significant decrease of $19.4 million.
• Total deposits decreased by $4.1 million, indicating some deposit outflows, although some shifted to higher-cost time deposits.
• Interest rate spread and net interest margin decreased for the nine months ended September 30, 2025, to 2.29% and 2.89% respectively.
• The securities available-for-sale portfolio continues to hold an unrealized loss position of $8.7 million, representing 9.9% of its book value.
• Nonaccrual loans increased to $285,000 as of September 30, 2025, from $0 at December 31, 2024.
• Noninterest expenses increased for both the three-month ($91,000 increase) and nine-month ($609,000 increase) periods, driven by salaries, data processing, loan expenses, and deposit expenses, including $40,000 in ATM robbery losses.
• No provision for income tax expense was recorded due to an estimated taxable net loss for the year, and a valuation allowance is maintained against federal net operating losses and net deferred tax assets.

Risks

• General economic conditions, nationally or in market areas, may differ from expectations.
• Changes in the level and direction of loan delinquencies and charge-offs, and changes in estimates of the adequacy of the allowance for credit losses.
• Fluctuations in real estate values and both residential and commercial real estate market conditions.
• Inflation and changes in the interest rate environment could reduce margins and yields, decrease the fair value of financial instruments, lower loan origination levels, or increase defaults, losses, and prepayments on loans.
• Challenges in managing liquidity and accessing cost-effective funding, including significant fluctuations in deposit accounts.
• Major catastrophes such as natural disasters, and their related disruption to economic activity and financial markets.
• Data processing and other technological changes may be more difficult or expensive than expected.
• Success or consummation of new business initiatives may be more difficult or expensive than expected.
• Interruptions involving information technology and communications systems of service providers.
• Breaches or failures of information security controls or cyber-related incidents.
• Demand for loans and deposits in the market area.
• Ability to continue to implement business strategies effectively.
• Competition among depository and other financial institutions.
• Adverse changes in the securities markets.
• Changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements.
• Ability to manage market risk, credit risk, and operational risk in current economic conditions.
• Ability to enter new markets successfully and capitalize on growth opportunities.
• Ability to successfully integrate any acquired assets, liabilities, customers, systems, and management personnel.
• Changes in consumer spending, borrowing, and savings habits.
• Changes in accounting policies and practices.
• Ability to hire and retain key employees and reliance on executive officers.
• Compensation expense associated with equity allocated or awarded to employees.
• Failure to exceed the leverage ratio thresholds required under CBLR in the future could necessitate a return to risk-based capital ratio thresholds.

Future Outlook

Management expects noninterest expenses to increase as the company grows and expands its operations. The company will continue to assess and evaluate the estimated future credit loss impact of current market conditions, which is highly dependent on credit quality, macroeconomic forecasts, and the composition of its loan and available-for-sale securities portfolios. Management anticipates having sufficient funds to meet current funding commitments and expects to retain a significant portion of maturing time deposits. The company does not expect the adoption of new accounting standards ASU 2023-09 (Income Tax Disclosures) or ASU 2024-03 (Expense Disaggregation Disclosures) to have a material impact on its annual financial statements.

Management Comments

• "Management continues to look for opportunities and markets to sell loans as we continue to see increased loan production compared to prior years."
• "In an effort to continue to grow loan originations, the Bank has hired additional mortgage loan originators during the nine months ended September 30, 2025 and continues to look to hire additional loan officers."
• "Management monitors the portfolio for credit losses and believes that the decline in value [of securities available for sale] 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."
• "Management continues to actively monitor our liquidity position on a daily basis and maintain levels of liquid assets deemed adequate."
• "Management continues to actively monitor the deposit balances and interest rates offered to maintain an adequate level of liquidity."
• "The Bank actively monitors the loan portfolio for signs of weakening credit quality, noting as of September 30, 2025 the portfolio remains of high quality with limited credit concerns."
• "Management estimates a taxable net loss for the year ended December 31, 2025 due to non-taxable income, such as income on tax exempt municipal securities and BOLI."
• "On the basis of this evaluation, as of September 30, 2025, management maintained the valuation allowance against the federal net operating losses and net deferred tax assets to recognize only the portion of the deferred tax asset that is more likely than not to be realized."

Industry Context

The banking industry is currently navigating an environment of increased market interest rates, which has led to higher yields on mortgage loans and increased funding costs for deposits. The shift from lower-cost savings/money market accounts to higher-cost time deposits reflects competitive pressures in attracting and retaining customer funds. The increase in loan originations for sale and portfolio growth indicates a robust demand for mortgage products in the Chicagoland area, where the company operates. The unrealized losses on securities available for sale are a common industry-wide issue due to rising interest rates impacting fixed-income portfolios.

Comparison to Industry Standards

• NA

Legal Proceedings

• Not presently involved in any legal proceedings of a material nature.
• Subject to various legal actions arising in the normal course of business, but management expects ultimate resolution not to have a material adverse effect on financial position or results of operations.

Related Party Transactions

• Loans made to directors and officers (related parties) totaled $570,000 at September 30, 2025, and $587,000 at December 31, 2024. Terms are similar to those for other customers and do not involve more than normal risk.
• Deposit accounts held by directors and executive officers (related parties) totaled $1.2 million at September 30, 2025, and $1.1 million at December 31, 2024. Terms are similar to those for other customers and do not involve more than normal risk.

Stakeholder Impact

• Shareholders: Improved quarterly net income and increased total equity could be positive. However, a year-to-date net loss and unrealized losses on securities may temper enthusiasm.
• Employees: Increased average number of employees (to 50 in Q3 2025 from 49 in Q3 2024, and to 52 in 9M 2025 from 49 in 9M 2024) and ongoing hiring of loan officers indicate growth and job opportunities. Stock-based compensation plans are in place.
• Customers: Increased loan originations and a variety of financial services offered (1-4 family mortgage loans, savings, CDs) indicate continued service. Higher rates on time deposits may benefit some depositors.
• Creditors: Repayment of FHLB advance strengthens the balance sheet by reducing borrowings. Strong capital ratios (24.11% Tier 1 capital) provide assurance of financial health.
• Suppliers: Increased data processing expenses suggest continued or expanded reliance on technology service providers.

Next Steps

• Continue to assess and evaluate the estimated future credit loss impact of current market conditions.
• Monitor liquidity position daily and maintain adequate levels.
• Actively monitor deposit balances and interest rates offered to maintain adequate liquidity.
• Continue to look for opportunities and markets to sell loans.
• Continue efforts to grow loan originations, including hiring additional loan officers.
• Management may consider repositioning the investment securities portfolio in the future.
• Adopt ASU 2023-09 for annual periods beginning after December 15, 2024.
• Assess ASU 2024-03 and its impact on consolidated financial statements and disclosures, with adoption for fiscal years beginning after December 15, 2026.

Key Dates

Recommendation

While NSTS Bancorp, Inc. showed a positive shift to net income in Q3 2025 and improved its year-to-date loss, the overall financial picture remains mixed. The growth in net interest income and loan originations is encouraging, and the bank maintains strong capital ratios. However, the decline in total assets and deposits, coupled with persistent unrealized losses in the securities portfolio and increased noninterest expenses, suggests ongoing challenges. The company is still operating at a net loss for the nine-month period. A "hold" recommendation is appropriate as the company demonstrates signs of recovery and strategic growth initiatives, but faces headwinds that warrant continued monitoring before a more bullish stance can be taken.

Keywords

Banking, Financial Services, Mortgage Loans, Deposits, Net Interest Income, Credit Losses, SEC Filing, 10-Q, Community Bank, Illinois, Financial Performance, Loan Origination, Capital Ratios, Liquidity, Unrealized Losses