NSTS

Business Context and Reporting Period

Company: NSTS Bancorp, Inc. (NSTS), a Delaware corporation and savings and loan holding company for North Shore Trust and Savings (the "Bank").
Reporting Period: Fiscal year ended December 31, 2025.
Business Overview: NSTS operates as a community-oriented savings institution headquartered in Waukegan, Illinois, serving Lake County, Illinois, and adjacent communities. The Bank focuses primarily on originating one- to four-family residential mortgage loans, commercial real estate loans, and multi-family residential loans. It operates three full-service branch offices and three loan production offices in the Chicagoland area.
Regulatory Status: The Bank is regulated by the Office of the Comptroller of the Currency (OCC) and is a member of the Federal Home Loan Bank (FHLB) of Chicago. NSTS is classified as a "smaller reporting company" and an "emerging growth company."

Key Financial Metrics

Material Changes vs. Prior Period

• Asset Base Contraction: Total assets decreased by $12.1 million (4.3%) primarily due to a reduction in cash and cash equivalents ($19.5 million decrease) and a slight decline in net loans ($1.8 million decrease). The cash reduction was driven by lower deposit balances and purchases of securities.
• Deposit Outflow: Total deposits declined by $8.7 million (4.6%). This was attributed to maturities of time deposits that did not renew at offered rates, increased competition from credit unions, and the movement of funds from a large estate account.
• Improved Profitability: The net loss narrowed significantly from $0.8 million in 2024 to $0.4 million in 2025. This improvement was driven by a $0.4 million increase in net interest income, a $0.3 million increase in noninterest income (primarily gains on mortgage sales), and a reversal of the provision for credit losses of $0.2 million.
• Investment Portfolio: Securities available-for-sale increased by $7.5 million to $78.7 million. The portfolio held a net unrealized loss of $8.1 million, a decrease from the prior year's unrealized loss position, contributing to an increase in equity via Other Comprehensive Income.
• Expense Growth: Noninterest expenses increased by $0.6 million (6.1%), largely due to higher salaries and employee benefits (driven by a 4% salary increase and higher health insurance/401k costs) and increased data processing costs.
• Debt Repayment: The Bank fully repaid a $5.0 million FHLB advance in June 2025, resulting in zero outstanding borrowings at year-end.

Guidance, Outlook, and Risks

Management Commentary:

• Liquidity: Management maintains adequate liquidity levels, holding the majority of cash at the Federal Reserve Bank of Chicago. They anticipate that while some maturing time deposits may not renew, a significant portion will be retained.
• Asset Quality: The loan portfolio remains of high quality. Non-performing assets increased slightly to $0.3 million (two substandard residential loans), but there were no charge-offs in 2025. The ACL was reduced due to high credit quality and stable economic factors.
• Interest Rate Risk: The Bank is asset-sensitive. Modeling indicates that a 300 basis point increase in interest rates would increase Net Interest Income by 0.8% over the next 12 months, while a 300 basis point decrease would reduce it by 9.9%.

Risks and Contingencies:

• Interest Rate Sensitivity: Rising rates could increase funding costs if deposit retention weakens, while falling rates could compress margins given the fixed-rate nature of the loan portfolio.
• Deposit Competition: The Bank faces significant competition for deposits, particularly from credit unions offering specials on time deposits.
• Cybersecurity: As a financial institution, NSTS faces risks from cyber-attacks and data breaches, though no material incidents were reported.
• Regulatory Changes: Potential changes in CRA regulations, small business lending rules (Section 1071), and interchange fee caps could impact operations and compliance costs.
• Tax Position: The Bank recorded a valuation allowance of $3.2 million against deferred tax assets due to cumulative taxable losses, resulting in no income tax expense for the year.

Investor Verification Checklist

• Deposit Retention Rates: Verify the actual renewal rate of the $64.3 million in time deposits maturing in 2026 to assess future funding stability.
• Non-Performing Loan Trends: Monitor the two substandard residential loans ($284,000) to ensure they do not deteriorate into charge-offs.
• Unrealized Losses on Securities: Review the $8.1 million unrealized loss on the investment portfolio to confirm management's intent and ability to hold these securities to maturity.
• Expense Ratios: Track the efficiency ratio and specifically the trajectory of salary and benefit expenses, which rose 5.5% year-over-year.
• Regulatory Capital: Confirm continued compliance with the Community Bank Leverage Ratio (CBLR) framework, currently at 24.32% (well above the 9% threshold).