10-Q 1 nsts20230930_10q.htm FORM 10-Q nsts20230930_10q.htm
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Table of Contents

 



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2023

 

Or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 001-41232

 

NSTS BANCORP, INC.

(Exact name of the registrant as specified in its charter)

   

Delaware

 

87-2522769

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification Number)

   

700 S. Lewis Ave. Waukegan, Illinois

 

60085

(Address of principal executive offices)

 

(Zip Code)

(847) 336-4430

(Registrants telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

NSTS

NASDAQ Capital Market

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☒ No

 

As of November 6, 2023, the Registrant had 5,585,159 shares issued and 5,315,261 shares of its common stock outstanding.

 



 

 

 

NSTS Bancorp, Inc.

 

Form 10Q

 

Index

 

PART I.

FINANCIAL INFORMATION

4

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

4
 

CONSOLIDATED BALANCE SHEETS

4
 

CONSOLIDATED STATEMENTS OF OPERATIONS

5
 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

6
 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

7
 

CONSOLIDATED STATEMENTS OF CASH FLOWS

9
 

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

10

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

29

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

41

ITEM 4.

CONTROLS AND PROCEDURES

42
     

PART II.

OTHER INFORMATION

42

ITEM 1.

LEGAL PROCEEDINGS

42

ITEM 1A.

RISK FACTORS

42

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

42

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

42

ITEM 4.

MINE SAFETY DISCLOSURES

42

ITEM 5.

OTHER INFORMATION

42

ITEM 6.

EXHIBITS

43

SIGNATURES

44
 

 

 

Explanatory Note

 

NSTS Bancorp, Inc. was formed to serve as the stock holding company for North Shore Trust and Savings (the “Bank”) in connection with the conversion of North Shore Trust and Savings, NSTS Financial Corporation and North Shore MHC, into the stock form of organization, which was completed on January 18, 2022. Accordingly, certain financial statements and other financial information at or prior to January 18, 2022, contained in this Form 10-Q relate solely to the consolidated financial results of North Shore MHC and its consolidated subsidiaries, NSTS Financial Corporation and North Shore Trust and Savings. See also NSTS Bancorp, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2022. 

 

 

Part I. Financial Information

Item 1. Consolidated Financial Statements

 

NSTS BANCORP, INC.

Consolidated Balance Sheets

 

  

September 30, 2023

     
  

(unaudited)

  

December 31, 2022

 
  

(Dollars in thousands)

 

Assets:

        

Cash and due from banks

 $1,174  $1,583 

Interest-bearing bank deposits

  9,515   11,564 

Cash and cash equivalents

  10,689   13,147 

Time deposits with other financial institutions

  1,742   4,477 

Securities available for sale

  109,526   121,205 

Federal Home Loan Bank stock (FHLB)

  550   550 

Loans held for sale

  177    

Loans, net of unearned income

  107,871   103,983 

Allowance for credit losses on loans

  (1,061)  (624)

Loans, net

  106,810   103,359 

Premises and equipment, net

  4,921   5,035 

Accrued interest receivable

  805   852 

Bank-owned life insurance (BOLI)

  9,390   9,249 

Other assets

  7,176   6,332 

Total assets

 $251,786  $264,206 

Liabilities:

        

Deposits:

        

Noninterest bearing

 $12,261  $12,977 

Interest-bearing

        

Demand and NOW checking

  15,234   18,659 

Money market

  33,788   42,624 

Savings

  43,486   49,068 

Time deposits over $250,000

  8,959   8,801 

Other time deposits

  51,602   46,585 

Total deposits

  165,330   178,714 

Escrow deposits

  805   1,253 

Other borrowings

  5,000    

Accrued expenses and other liabilities

  3,490   3,697 

Total liabilities

 $174,625  $183,664 

Stockholders' equity:

        

Common Stock ($0.01 par value; 10,000,000 shares authorized; 5,585,159 and 5,397,959 shares issued and 5,432,478 and 5,397,959 shares outstanding at September 30, 2023 and December 31, 2022, respectively)

  56   54 

Treasury Stock (152,681 shares at September 30, 2023)

  (1,355)   

Additional paid-in capital

  50,606   50,420 

Retained earnings

  44,824   45,291 

Unallocated common shares held by ESOP

  (3,936)  (4,098)

Accumulated other comprehensive loss, net

  (13,034)  (11,125)

Total stockholders' equity

  77,161   80,542 

Total liabilities and stockholders' equity

 $251,786  $264,206 

 

See accompanying notes to consolidated unaudited financial statements

 

 

 

NSTS BANCORP, INC.

Consolidated Statements of Operations (unaudited)

 

  

For the three months ended

  

For the nine months ended

 
  

September 30,

  

September 30,

 
  

2023

  

2022

  

2023

  

2022

 
  

(Dollars in thousands)

 

Interest income:

                

Loans, including fees

 $1,079  $877  $3,119  $2,603 

Securities

                

Taxable

  

633

   578   1,923   1,340 

Tax-exempt

  100   104   302   298 

Federal funds sold and other

  99   111   210   213 

Time deposits with other financial institutions

  21   14   75   25 

FHLB Stock

  7   4   16   11 

Total interest income

  

1,939

   1,688   5,645   4,490 

Interest expense:

                

Deposits

  362   192   845   574 

Other borrowings

  61      68    

Total interest expense

  423   192   913   574 

Net interest income

  1,516   1,496   4,732   3,916 

Provision for (reversal of) credit losses

  50   (84)  52   (100)

Net interest income after provision for credit losses

  1,466   1,580   4,680   4,016 

Noninterest income:

                

Gain on sale of mortgage loans

     30   9   99 

Rental income on office building

  16   16   48   37 

Service charges on deposits

  70   75   203   222 

Increase in cash surrender value of BOLI

  49   45   141   132 

Other non-interest income

  15   19   43   572 

Total noninterest income

  150   185   444   1,062 

Noninterest expense:

                

Salaries and employee benefits

  1,162   938   3,095   2,842 

Equipment and occupancy

  166   154   499   496 

Data processing

  159   159   481   461 

Professional services

  150   141   394   411 

Advertising

  14   29   65   67 

Supervisory fees and assessments

  49   33   123   111 

Loan expenses

  25   16   69   65 

Deposit expenses

  56   61   163   149 

Director fees

  56   59   168   172 

Other non-interest expense

  116   88   353   383 

Total noninterest expense

  1,953   1,678   5,410   5,157 

(Loss) income before income taxes

  (337)  87   (286)  (79)

Income tax benefit

  (105)  (31)  (98)  (67)

Net (loss) income

 $(232) $118  $(188) $(12)

Basic and diluted (loss) earnings per share

 $(0.05) $0.02  $(0.04) $(0.00)

Weighted average shares outstanding

  5,093,587   4,971,930   5,020,262   4,644,521 

 

See accompanying notes to consolidated unaudited financial statements

 

 

NSTS BANCORP, INC.

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

 

 

  

For the three months ended September 30,

 
  

2023

  

2022

 
  

(Dollars in thousands)

 

Net (loss) income

 $(232) $118 

Unrealized net holding loss on securities

        

Unrealized net holding loss on securities arising during period, net of realized gains on sales of $0 in the three months ended September 30, 2023 and 2022

  (3,081)  (6,321)

Tax effect

  878   1,802 

Other comprehensive loss, net of taxes

  (2,203)  (4,519)

Comprehensive loss

 $(2,435) $(4,401)

 

  

For the nine months ended September 30,

 
  

2023

  

2022

 
  

(Dollars in thousands)

 

Net loss

 $(188) $(12)

Unrealized net loss on securities

        

Unrealized net holding loss on securities arising during period, net of realized gains on sales of $0 in the nine months ended September 30, 2023 and 2022

  (2,671)  (17,195)

Tax effect

  

762

   4,902 

Other comprehensive loss, net of taxes

  (1,909)  (12,293)

Comprehensive loss

 $(2,097) $(12,305)

See accompanying notes to consolidated unaudited financial statements

 

 

NSTS BANCORP, INC.

Consolidated Statements of Stockholders Equity (unaudited)

 

                      

Accumulated

         
                      

other

  

Unallocated

     
  

Common

  

Common

  

Treasury

  

Additional

  

Retained

  

comprehensive

  

Common Shares

     
  

Shares

  

Stock

  

Stock

  

Paid-In Capital

  

earnings

  

loss

  

Held by ESOP

  

Total

 
      

(Dollars in thousands)

 
      

Quarter ended September 30, 2022

 

Balance at June 30, 2022

  5,397,959  $54  $  $50,411  $45,134  $(7,855) $(4,232) $83,512 

Net income

              118         118 

ESOP shares committed to be released

           5         43   48 

Change in net unrealized loss on securities available for sale, net

                 (4,519)     (4,519)

Balance at September 30, 2022

  5,397,959  $54     $50,416  $45,252  $(12,374) $(4,189) $79,159 
      

Quarter ended September 30, 2023

 

Balance at June 30, 2023

  5,510,864  $56  $(649) $50,440  $45,056  $(10,831) $(3,990) $80,082 

Net loss

              (232)        (232)

ESOP shares committed to be released

           (4)        54   50 

Purchase of treasury stock from stock repurchase program

  (78,386)     (706)              (706)

Compensation cost for stock options and restricted stock

           170            170 

Change in net unrealized loss on securities available for sale, net

                 (2,203)     (2,203)

Balance at September 30, 2023

  5,432,478  $56  $(1,355) $50,606  $44,824  $(13,034) $(3,936) $77,161 

 

 

                      

Accumulated

         
                      

other

  

Unallocated

     
  

Common

  

Common

  

Treasury

  

Additional

  

Retained

  

comprehensive

  

Common Shares

     
  

Shares

  

Stock

  

Stock

  

Paid-In Capital

  

earnings

  

loss

  

Held by ESOP

  

Total

 
      

(Dollars in thousands)

 
      

Nine months ended September 30, 2022

 

Balance at December 31, 2021

    $  $  $  $45,264  $(81) $  $45,183 

Net loss

              (12)        (12)

Proceeds of stock offering and issuance of common shares (net of issuance costs of $2.5 million)

  5,290,000   53      49,387            49,440 

Issuance of common shares donated to the NSTS Charitable Foundation

  107,959   1      1,008            1,009 

Purchase of common shares by the ESOP (431,836 shares)

                    (4,319)  (4,319)

ESOP shares committed to be released

           21         130   151 

Change in net unrealized loss on securities available for sale, net

                 (12,293)     (12,293)

Balance at September 30, 2022

  5,397,959  $54     $50,416  $45,252  $(12,374) $(4,189) $79,159 
      

Nine months ended September 30, 2023

 

Balance at December 31, 2022

  5,397,959  $54  $  $50,420  $45,291  $(11,125) $(4,098) $80,542 

Cumulative impact of ASU 2016-13

              (279)        (279)

Net loss

              (188)        (188)

ESOP shares committed to be released

           (10)        162   152 

Purchase of treasury stock from stock repurchase program

  

(152,681

)     (1,355)              (1,355)

Compensation cost for stock options and restricted stock

           198            198 

Issuance of common shares for the restricted stock plan

  187,200   2      (2)            

Change in net unrealized loss on securities available for sale, net

                 (1,909)     (1,909)

Balance at September 30, 2023

  5,432,478  $56  $(1,355) $50,606  $44,824  $(13,034) $(3,936) $77,161 

See accompanying notes to consolidated unaudited financial statements

 

 

 

NSTS BANCORP, INC.

Consolidated Statements of Cash Flows (unaudited)

 

  

For the nine months ended September 30,

 
  

2023

  

2022

 
  

(Dollars in thousands)

 

Cash flows from operating activities:

        

Net loss

 $(188) $(12)

Adjustments to reconcile net loss to net cash provided by operating activities:

        

Depreciation

  193   200 

Securities amortization and accretion, net

  412   803 

Loans originated for sale

  (880)  (7,457)

Proceeds from sales of loans held for sale

  712   7,556 

Gain on sale of mortgage loans

  (9)  (99)

Provision for (reversal of) credit losses

  52   (100)

Earnings on bank owned life insurance

  (141)  (132)

Issuance of common shares donated to North Shore Trust and Savings Charitable Foundation

     1,009 

ESOP expense

  152   151 

Stock based compensation

  198    

Net change in accrued interest receivable and other assets

  74   524 

Net change in accrued expenses and other liabilities

  (212)  999 

Net cash provided by operating activities

  363   3,442 

Cash flows from investing activities:

        

Net change in portfolio loans

  (3,887)  (1,112)

Principal repayments on mortgage-backed securities

  6,517   13,853 

Purchases of securities available for sale

     (57,473)

Maturities and calls of securities available for sale

  2,080   1,305 

Net change in time deposits with other financial institutions, net

  2,735   (750)

Purchases of premises and equipment, net

  (79)  (214)

Net cash provided by (used in) investing activities

  7,366   (44,391)

Cash flows from financing activities:

        

Net change in deposits

  (13,384)  (102,160)

Net change in escrow deposits

  (448)  (506)

Repayment of FHLB Advance

     (5,000)

Proceeds from FHLB Advance

  5,000    

Proceeds from issuance of common stock, net of costs

     49,440 

Purchase of treasury shares (152,681 shares)

  (1,355)   

Loan to ESOP

     (4,319)

Net cash used in financing activities

  (10,187)  (62,545)

Net change in cash and cash equivalents

  (2,458)  (103,494)

Cash and cash equivalents at beginning of period

  13,147   121,611 

Cash and cash equivalents at end of period

 $10,689  $18,117 

Supplemental disclosures of cash flow information:

        

Cash paid during the period for Interest

 $879  $580 

 

See accompanying notes to consolidated unaudited financial statements

 

Notes to the Unaudited Consolidated Financial Statements

 

 

Note 1: Summary of Significant Accounting Policies

 

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and conform to practices within the banking industry. Except as set forth below in this Note 1, the accounting policies followed in the preparation of the interim consolidated financial statements are consistent with those used in the preparation of the annual financial statements. The interim consolidated financial statements reflect all normal and recurring adjustments that are necessary, in the opinion of management, for fair statement of results for the interim periods presented. Results for the three and nine month periods ended September 30, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

 

Nature of Operations

 

NSTS Bancorp, Inc. (“NSTS” or the “Company”, “we” or “our”) was formed to serve as the stock holding company for North Shore Trust and Savings (the “Bank”) in connection with the conversion of North Shore Trust and Savings, NSTS Financial Corporation and North Shore MHC, into the stock form of organization, which was completed on January 18, 2022. Accordingly, certain financial statements and other financial information at or prior to January 18, 2022, contained in this Form 10-Q relate solely to the consolidated financial results of North Shore MHC and its consolidated subsidiaries, NSTS Financial Corporation and North Shore Trust and Savings.

 

NSTS Bancorp, Inc. completed its stock offering on January 18, 2022. The Company sold 5,290,000 shares of common stock at $10.00 per share in its subscription offering for gross proceeds of approximately $53.0 million. In connection with the subscription offering, NSTS Bancorp, Inc. also issued 107,959 shares of common stock and $150,000 in cash to NSTS Charitable Foundation. Shares of NSTS Bancorp, Inc. stock began trading on January 19, 2022 on the Nasdaq Capital Market under the trading symbol "NSTS."

 

The Bank operates primarily in the northern suburbs of Chicago, Illinois. During the third quarter of 2023, we established two additional loan production offices in Aurora and Plainfield, Illinois to expand our loan originations within the Chicagoland area. The lending teams operating in the Aurora and Plainfield, Illinois loan production offices originate as Oak Leaf Community Mortgage, a division of North Shore Trust and Savings, which will complement the existing loan production office in Chicago. The Bank offers a variety of financial services to customers in our surrounding community. Financial services consist primarily of 1-4 family mortgage loans, savings accounts, and certificate of deposit accounts. There are no significant concentrations of loans to any one industry or customer. The Bank’s exposure to credit risk is significantly affected by changes in the economy in the Bank’s market area.

 

Basis of Presentation

 

The accompanying unaudited Consolidated Financial Statements were prepared in accordance with GAAP and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with NSTS Bancorp, Inc.’s Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The unaudited Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may vary from those estimates. Material estimates that could significantly change in the near-term include the adequacy of the allowance for credit losses, determination of the valuation allowance on deferred tax assets and the valuation of investment securities and the related tax effect. The results of operations for the three and nine months ended September 30, 2023, are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2023. Certain amounts in prior year financial statements have been reclassified to conform to the current presentation. Subsequent events have been evaluated through the date of issuance of the unaudited Consolidated Financial Statements. No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures.

 

With the exception of the following new significant accounting and reporting policies, the Company has not changed its significant accounting and reporting policies from those disclosed in the Company’s Form 10-K for the year ended December 31, 2022.

 

Stock Based Compensation

 

The Company maintains an equity incentive plan under which restricted stock and stock options may be granted to employees and directors, see Note 12.

 

The Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards in accordance with ASC 718, “Compensation-Stock Compensation”. The Company estimates the per share fair value of option grants on the date of grant using the Black-Scholes option pricing model using assumptions for the expected dividend yield, expected stock price volatility, risk-free interest rate and expected option term. These assumptions are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. The Black-Scholes option pricing model also contains certain inherent limitations when applied to options that are not traded on public markets.

 

The per share fair value of options is highly sensitive to changes in assumptions. In general, the per share fair value of options will move in the same direction as changes in the expected stock price volatility, risk-free interest rate and expected option term, and in the opposite direction as changes in the expected dividend yield. For example, the per share fair value of options will generally increase as expected stock price volatility increases, risk-free interest rate increases, expected option term increases and expected dividend yield decreases. The use of different assumptions or different option pricing models could result in materially different per share fair values of options.

 

The Company recognizes compensation expense for the fair values of these awards, which have graded vesting, on a straight-line basis over the requisite service period of the awards. The Company’s accounting policy is to recognize forfeitures as they occur. Forfeited shares are added back to the pool of shares available for future grants.

 

Treasury Stock

 

Treasury stock acquired is recorded at cost and is carried as a reduction of stockholders’ equity in the Consolidated Balance Sheets.  Treasury stock issued is valued based on the “last in, first out” inventory method.  The difference between the consideration received upon issuance and the carrying value is charged or credited to additional paid-in capital.

 

10

 

Accounting Developments

 

In June 2016, the FASB issued ASU No. 2016-13,Financial Instruments  Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” also known as Current Expected Credit Losses, or CECL.  ASU 2016-13 was issued to provide financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date to enhance the decision making process.  The CECL model utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities, and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. For available for-sale securities where fair value is less than cost, credit-related impairment, if any, will be recognized in an allowance for credit losses and adjusted each period for changes in expected credit risk. This model replaces the multiple existing impairment models, which generally require that a loss be incurred before it is recognized.

 

We adopted ASU 2016-13 using the current expected credit loss (“CECL”) methodology for financial assets measured at amortized cost, effective January 1, 2023. Results for the periods beginning after January 1, 2023 are presented under ASU 2016-13, while prior period amounts are reported in accordance with the previously applicable accounting standards. The Company recorded a reduction to retained earnings of approximately $279,000 upon adoption of ASU 2016-13. The transition adjustment included an increase to the allowance for credit losses on loans of $384,000 and an increase to the allowance for credit losses on off-balance sheet credit exposure of approximately $5,000. The transition adjustment included a corresponding increase in deferred tax assets.

 

The following table illustrates the impact of ASU 2016-13 adoption:

 

 

  

Allowance for credit losses as reported under ASU 2016-13

  

Allowance pre-ASU 2016-13 Adoption

  

Impact on Allowance of ASU 2016-13 Adoption

 

Assets:

 (Dollars in thousands) 

First mortgage loans

            

1-4 family residential

 $916  $581  $335 

Multi-family

  42   19   23 

Commercial

  48   19   29 

Consumer loans

  2   5   (3)

Allowance for credit losses for all loans

 $1,008  $624  $384 

Liabilities:

            

Allowance for credit losses on off-balance sheet exposures

 $5  $  $5 

 

In March 2022, FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments in this update eliminate the accounting guidance and related disclosures for TDRs by creditors in Subtopic 310-40, ReceivablesTroubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty and requiring an entity to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial InstrumentsCredit LossesMeasured at Amortized Cost. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and are applied prospectively, except with respect to the recognition and measurement of TDRs, where an entity has the option to apply a modified retrospective transition method. Early adoption of the amendments in this update is permitted. An entity may elect to early adopt the amendments regarding TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. 

 

11

 

Allowance for Credit Losses

 

The allowance for credit losses (“ACL”) is an estimate of the expected credit losses on the loans held for investment, unfunded loan commitments, and available-for-sale debt securities portfolios.

 

Allowance for Credit Losses on Loans

 

The ACL is calculated according to GAAP standards and is maintained by management at a level believed adequate to absorb estimated credit losses that are expected to occur within the existing loan portfolio through their contractual terms.  The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans.  Determination of the ACL is inherently subjective in nature since it requires significant estimates and management judgment, and includes a level of imprecision given the difficulty of identifying and assessing the factors impacting loan repayment and estimating the timing and amount of losses.  While management utilizes its best judgment and information available, the ultimate adequacy of the ACL is dependent upon a variety of factors beyond the Company’s direct control, including, but not limited to, the performance of the loan portfolio, consideration of current economic trends, changes in interest rates and property values, estimated losses on pools of homogeneous loans based on an analysis that uses historical loss experience for prior periods that are determined to have like characteristics with the current period such as pre-recessionary, recessionary, or recovery periods, portfolio growth and concentration risk, management and staffing changes, the interpretation of loan risk classifications by regulatory authorities and other credit market factors.  While each component of the ACL is determined separately, the entire balance is available for the entire loan portfolio.

 

The ACL methodology consists of measuring loans on a collective (pool) basis when similar risk characteristics exist.  The Company has identified five loan portfolios and measures the ACL using the Scaled CECL Allowance for Losses Estimator (“SCALE”) method. The loan portfolios are 1-4 family residential real estate, commercial real estate, multi-family real estate, construction and consumer. The SCALE method uses publicly available data from Schedule RI-C of the Call Report to derive the initial proxy expected lifetime loss rates. These proxy expected lifetime loss rates are then adjusted for bank-specific facts and circumstances to arrive at the final ACL estimate that adequately reflects the Company’s loss history and credit risk within our portfolio.

 

The qualitative factors applied to each loan portfolio consist of the impact of other internal and external qualitative and credit market factors as assessed by management through a detailed loan review, ACL analysis and credit discussions.  These internal and external qualitative and credit market factors include:

 

 

 

changes in lending policies and procedures, including changes in underwriting standards and collections, charge-offs and recovery practices;

 

 

changes in international, national, regionally and local conditions (specific factors which impact portfolios or discrepancies with national economic factors which are utilized within the economic forecast);

 

 

changes in the experience, depth and ability of lending management;

 

 

changes in the volume and severity of past due loans and other similar loan conditions;

 

 

changes in the nature and volume of the loan portfolio and terms of loans;

 

 

the existence and effect of any concentrations of credit and changes in the levels of such concentrations;

 

 

effects of other external factors, such as competition, legal or regulatory factors, on the level of estimated credit losses;

 

 

changes in the quality of our loan review functions; and

 

 

changes in the value of underlying collateral for collateral dependent loans.

 

The impact of the above listed internal and external qualitative and credit market risk factors is assessed within predetermined ranges to adjust the ACL totals calculated.

 

In addition to the pooled analysis performed for the majority of our loan and commitment balances, we also review those loans that have collateral dependency or nonperforming status which requires a specific review of that loan, per our individually analyzed CECL calculations.  

 

Loans are charged off against the ACL when management believes the uncollectibility of a loan balance is confirmed, while recoveries of amounts previously charged-off are credited to the ACL.  Approved releases from previously established ACL reserves authorized under our ACL methodology also reduce the ACL.  Additions to the ACL are established through the provision for credit losses on loans, which is charged to expense.

 

The Company’s ACL methodology is intended to reflect all loan portfolio risk, but management recognizes the inability to accurately depict all future credit losses in a current ACL estimate, as the impact of various factors cannot be fully known.  Accrued interest receivable on loans is excluded from the amortized cost basis of financing receivables for the purpose of determining the allowance for credit losses.  All calculations conform to GAAP.

 

12

 

Allowance for Credit Losses on Unfunded Loan Commitments

 

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk by a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company.  The ACL related to off-balance sheet credit exposures, which is within other liabilities on the Company’s balance sheet, is estimated at each balance sheet date under the CECL model, and is adjusted as determined necessary through the provision for credit losses on the income statement.  The estimate for ACL on unfunded loan commitments includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. 

 

Allowance for Credit Losses on Securities Available-for-Sale

 

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will sell, the security before recovery of its amortized cost basis.  If either of the aforementioned criteria exists, the Company will record an ACL related to securities available-for-sale with an offsetting entry to the provision for credit losses on securities on the income statement.  If either of these criteria does not exist, the Company will evaluate the securities individually to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors, such as market interest rate fluctuations. 

 

In evaluating securities available-for sale for potential impairment, the Company considers many factors, including the financial condition and near-term prospects of the issuer, which for debt securities considers external credit ratings and recent downgrades; and its ability and intent to hold the security for a period of time sufficient for a recovery in value.  The Company also considers the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies. The amount of the impairment related to other factors is recognized in other comprehensive income (loss).

 

Accrued interest receivable on securities available-for-sale is excluded from the amortized cost basis of those securities for the purpose of determining the allowance for credit losses.  All calculations conform to GAAP.  

 

 

13

 
 

Note 2: Securities

 

The amortized cost and estimated fair value of debt securities at September 30, 2023 and December 31, 2022, by contractual maturity, are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties, therefore, these securities have been included in the below table based on average remaining life.

 

              

Mortgage-backed

  

Collateralized

     
  

U.S. Treasury Notes

  

U.S. government

  

Municipal

  

residential

  

mortgage

  

Total available-for-

 

September 30, 2023

     

agency obligations

  

obligations

  

obligations

  

obligations

  

sale

 
  

(Dollars in thousands)

 

1 year or less

 $3,941  $  $1,285  $  $  $5,226 

1 to 5 years

  1,925   14,748   4,177   10,883   22,513   54,246 

5 to 10 years

     5,100   3,180   19,281   8,846   36,407 

After 10 years

        9,496   795   3,356   13,647 

Fair value

  5,866   19,848   18,138   30,959   34,715   109,526 

Gross unrealized gains

                  

Gross unrealized losses

  (112)  (2,015)  (3,834)  (6,530)  (5,740)  (18,231)

Amortized cost

 $5,978  $21,863  $21,972  $37,489  $40,455  $127,757 

 

              

Mortgage-backed

  

Collateralized

     
  

U.S. Treasury Notes

  

U.S. government

  

Municipal

  

residential

  

mortgage

  

Total available-for-

 

December 31, 2022

     

agency obligations

  

obligations

  

obligations

  

obligations

  

sale

 
  

(Dollars in thousands)

 

1 year or less

 $2,433  $1,007  $528  $  $  $3,968 

1 to 5 years

  4,855   11,511   5,394   20,033   22,809   64,602 

5 to 10 years

     8,872   2,655   15,046   11,848   38,421 

After 10 years

        11,060   659   2,495   14,214 

Fair value

  7,288   21,390   19,637   35,738   37,152   121,205 

Gross unrealized gains

        6         6 

Gross unrealized losses

  (155)  (1,870)  (2,972)  (5,464)  (5,105)  (15,566)

Amortized cost

 $7,443  $23,260  $22,603  $41,202  $42,257  $136,765 

 

As of September 30, 2023, and December 31, 2022, no securities were pledged to secure public deposits or for other purposes as required or permitted by law.

 

Information pertaining to securities with gross unrealized losses at September 30, 2023 and December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is as follows:

 

  

Less than 12 Months

  

12 Months or Longer

  

Total

 
  

(Dollars in thousands)

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 

September 30, 2023

                        

U.S. Treasury Notes

 $  $  $5,866  $112  $5,866  $112 

U.S. government agency obligations

  3,657   67   16,191   1,948   19,848   2,015 

Municipal obligations

  3,104   155   15,034   3,679   18,138   3,834 

Mortgage-backed residential obligations

        30,959   6,530   30,959   6,530 

Collateralized mortgage obligations

  593   26   34,122   5,714   34,715   5,740 

Total

 $7,354  $248  $102,172  $17,983  $109,526  $18,231 

December 31, 2022

                        

U.S. Treasury Notes

 $7,288  $155  $  $  $7,288  $155 

U.S. government agency obligations

  17,274   1,296   4,116   574   21,390   1,870 

Municipal obligations

  16,823   2,349   2,037   623   18,860   2,972 

Mortgage-backed residential obligations

  14,365   1,618   21,373   3,846   35,738   5,464 

Collateralized mortgage obligations

  21,449   2,014   15,703   3,091   37,152   5,105 

Total

 $77,199  $7,432  $43,229  $8,134  $120,428  $15,566 

 

14

 

At September 30, 2023 and December 31, 2022, certain investment securities were in unrealized loss positions. There were no securities with identified credit losses at September 30, 2023 and December 31, 2022, respectively. Unrealized losses have not been recognized into income because, based on management's evaluation, the decline in fair value is largely due to increased market rates, temporary market conditions and trading spreads, and, as such, are considered to be temporary by the Bank. In addition, management has the intent and ability to hold the securities until they mature or they recover their carrying values. 

 

All U.S. Treasuries, U.S. government agency obligations, mortgage-based residential obligations and collateralized mortgage obligations are agency-issued or government-sponsored enterprise issued. Agency-issued securities are generally guaranteed by a U.S. government agency, such as the Government National Mortgage Association. Government-sponsored enterprises, such as the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, or the Small Business Administration, have either a direct or implied guarantee by the U.S. government. 

 

The Bank holds two classifications of municipal bonds, general obligation bonds and revenue bonds. General obligation bonds are backed by the general revenue of the issuing municipality, while revenue bonds are supported by a specific revenue source. All general obligation and revenue bonds have a bond rating of investment grade by Standard and Poor's or Moody's Investor Services or are not rated. There have been no declines in investment grades on bonds in a loss position and as of September 30, 2023, all municipal bonds are paying as agreed. 

 

There were no sales of securities available-for-sale during the three and nine months ended September 30, 2023 and 2022. 

 

 

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