Executive Summary / Key Takeaways

• NSTS Bancorp, Inc. operates as a well-capitalized community bank focused on relationship-based banking in the Chicago suburbs and surrounding areas, leveraging a century-long history and expanding loan production offices.
• The company reported a net loss of $328,000 for Q1 2025, an increase from the prior year, primarily driven by higher operating expenses, despite growth in net interest income and noninterest income.
• Increased loan yields and higher mortgage origination/sale volumes contributed positively, but rising funding costs and increased staffing/loan-related expenses pressured profitability.
• NSTS maintains a robust capital position with a Tier 1 Leverage Ratio of 23.11% and significant liquidity access, providing a strong buffer against economic uncertainty and competitive pressures.
• Key factors for investors to monitor include the execution of loan growth strategies via LPOs, management of funding costs in a competitive deposit environment, expense control, and the ability to leverage capital strength to navigate market dynamics.

A Century of Roots, A Strategy for Growth

NSTS Bancorp, Inc., the holding company for North Shore Trust and Savings, traces its origins back to 1921. For over a century, North Shore Trust and Savings has served the banking needs of communities in Lake County, Illinois, and adjacent areas, building deep, multi-generational customer relationships. This history underpins its core identity as a community-focused financial institution. The conversion to a stock holding company structure in January 2022 marked a new chapter, positioning the company for potential strategic flexibility while retaining its foundational commitment to local markets.

The Bank's business model is centered on attracting deposits from the general public and deploying those funds primarily into originating one- to four-family residential mortgage loans and purchasing investments. It also maintains holdings in commercial real estate and multi-family residential loans. While its traditional footprint is rooted in its three full-service branches in the northern Chicago suburbs, NSTS has strategically expanded its reach through loan production offices (LPOs). An LPO was established in Chicago in 2016, followed by two more in Aurora and Plainfield, Illinois, in 2023. These offices, operating under the "Oak Leaf Community Mortgage" brand, are designed to tap into the lending potential of more densely populated metropolitan areas within the greater Chicagoland region and into Kenosha County, Wisconsin, aiming to drive loan origination growth beyond the immediate branch network.

In the competitive landscape of Illinois banking, NSTS operates as a niche player with an estimated 1-2% aggregate market share in retail banking. It competes directly with larger regional banks like Wintrust Financial Corporation (WTFC) and Old National Bancorp (ONB), as well as national giants such as JPMorgan Chase & Co. (JPM), and indirectly with fintech firms. While competitors like JPM and WTFC leverage significant scale, extensive branch networks, and advanced digital platforms for faster, more efficient processing and broader market capture, NSTS differentiates itself through its deep community ties and a relationship-based banking approach. However, this smaller scale and reliance on traditional banking infrastructure can translate to higher operating costs per unit and slower adoption of digital innovations compared to larger, more technologically advanced rivals. For instance, competitors with sophisticated digital tools can process transactions and loan applications significantly faster and at lower costs, posing a challenge to NSTS's operational efficiency and potentially limiting its ability to attract digitally-native customers.

Recent Performance: Navigating Costs Amidst Revenue Growth

For the three months ended March 31, 2025, NSTS Bancorp reported a net loss of $328,000, an increase from the $246,000 net loss recorded in the same period of 2024. This widened loss was primarily a result of a notable increase in noninterest expenses, which outpaced the growth in both net interest income and noninterest income.

Net interest income saw a positive uptick, increasing by $126,000 to $1.831 million in Q1 2025, compared to $1.705 million in Q1 2024. This improvement was driven by an increase in average interest-earning assets, particularly in loans and interest-bearing deposits held at other banks. The average outstanding balance of loans, net, grew by $8.6 million to $133.9 million. Crucially, the average yield earned on these loans increased by 67 basis points to 5.38%. Management attributed this yield expansion to the impact of higher market rates on mortgage loans originated in 2024 that remain in the portfolio, as well as increased demand for specialty portfolio products carrying higher interest rates and additional origination fees. However, the benefit of higher asset yields was partially offset by a 33 basis point increase in the cost of interest-bearing liabilities, primarily due to competitive pressures necessitating higher rates on time deposit accounts, with the average yield on time deposits reaching 3.48% in Q1 2025. This dynamic led to a slight decrease in the interest rate spread, although the net interest margin remained stable at 2.82%.

Noninterest income also contributed positively, increasing by $22,000 to $334,000. This rise was largely attributable to a $33,000 increase in the gain on sale of mortgage loans. The company sold 31 loans totaling $9.9 million in Q1 2025, generating a gain of $189,000, compared to selling 26 loans totaling $6.3 million for a gain of $156,000 in Q1 2024. This reflects management's focus on increasing loan production and leveraging opportunities in the secondary market.

The primary driver behind the increased net loss was a significant rise in noninterest expenses, which climbed by $266,000 to $2.530 million. This increase was mainly concentrated in salaries and employee benefits, reflecting an increase in average headcount to 52 employees in Q1 2025 from 46 in Q1 2024, as the company added staff to support its expanding lending operations. Loan expenses also increased, tied to higher origination volumes and a provision for recourse reserves related to the increased volume of loans sold.

From an asset quality perspective, the portfolio remained relatively stable and was noted by management as being of high quality with limited credit concerns as of March 31, 2025. The allowance for credit losses on loans decreased slightly to $1.156 million from $1.201 million at December 31, 2024, resulting in a reversal of provision for credit losses of $37,000 for the quarter. This decrease was attributed to a reduction in proxy rates and positive macroeconomic factors such as lower inflation and stable unemployment. Nonaccrual loans totaled $263,000 at March 31, 2025, representing one loan that moved to non-accrual status during the period, compared to none at December 31, 2024.

Financial Condition and Capital Strength

The balance sheet saw modest growth, with total assets increasing by $4.0 million to $282.7 million at March 31, 2025, from $278.7 million at December 31, 2024. This increase was primarily fueled by a $4.0 million rise in cash and cash equivalents, which reached $57.5 million. The surge in cash was largely due to a significant deposit received into a customer account during the quarter. Management is actively working to retain these funds and is holding a majority of the cash at the Federal Reserve Bank of Chicago, earning 4.40%, to maintain liquidity for increasing loan demand.

The securities available-for-sale portfolio decreased slightly to $70.3 million, primarily due to principal payments and maturities. The portfolio continues to carry an unrealized loss position, totaling $10.5 million or 13% of the book value at March 31, 2025. Management believes these losses are temporary, driven by market volatility and increased interest rates, and has the intent and ability to hold these securities until maturity or recovery. While not currently planning sales, management may consider repositioning the portfolio in the future.

Loans held for sale increased to $2.6 million due to the timing of originations and sales, with a significant portion originated near quarter-end and sold shortly thereafter. The net loan portfolio balance remained relatively stable at $130.2 million, as new originations held in portfolio were offset by principal payments and payoffs. The company's efforts to boost originations are ongoing, including the hiring of additional mortgage loan originators in Q1 and early Q2 2025.

Total deposits grew by $3.5 million to $193.7 million, largely reflecting the impact of the single large deposit received. Managing deposit costs and retention remains a key focus in the current competitive rate environment. The Bank has $65.2 million in time deposits scheduled to mature within the next 12 months, and while a significant portion is anticipated to be retained, potential non-retention could necessitate utilizing borrowings or raising rates, impacting interest expense.

NSTS maintains a very strong capital position. As of March 31, 2025, the Bank was categorized as well capitalized under regulatory frameworks, electing to use the Community Bank Leverage Ratio (CBLR). Its Tier 1 Capital to Average Assets ratio stood at a robust 23.11%, significantly exceeding the 9% requirement for well-capitalized status under CBLR. This high level of capital provides a substantial buffer against potential credit or market risks and supports future growth initiatives. The company also has access to significant additional borrowing capacity from the FHLB ($74.1 million) and an unused federal funds line of credit ($10 million), further bolstering its liquidity profile.

Strategic Outlook and Key Considerations

NSTS's strategic focus remains on leveraging its community presence and expanding its lending capacity, particularly in the residential mortgage sector, through its LPO network and the addition of lending personnel. Management estimates a taxable net loss for the full year ending December 31, 2025, influenced by factors including non-taxable income and the cumulative taxable losses over the past three years, which have led to a full valuation allowance against federal net operating losses and deferred tax assets. The ability to generate sufficient future taxable income to utilize these assets remains a factor to watch.

The outlook for credit losses will continue to be assessed based on macroeconomic conditions and portfolio performance. While current credit quality is deemed strong, the impact of potential economic shifts remains a consideration. Management's continued emphasis on originating loans for sale in the secondary market suggests a strategy to generate noninterest income and manage balance sheet size and interest rate risk, contingent on favorable market conditions for loan sales.

Key risks for investors include the sensitivity to interest rate changes, which can impact net interest margin and the value of the securities portfolio. The competitive environment for deposits could continue to pressure funding costs. While credit quality is currently strong, a downturn in the regional economy could affect loan performance. Operational risks, including dependence on key employees and potential disruptions to technology systems, are also factors. The ability to successfully integrate new lending staff and effectively manage the expanded LPO operations will be critical to realizing growth objectives.

Compared to larger, more technologically advanced peers, NSTS faces challenges related to scale and operational efficiency. While its strong capital position provides a significant advantage in terms of stability and risk management – its 30% TCE ratio offers greater resilience than many competitors – it lags in areas like digital innovation speed and cost-effectiveness per transaction. This competitive dynamic means NSTS must effectively leverage its relationship-based model and capital strength to offset potential disadvantages in technology and scale.

Conclusion

NSTS Bancorp presents an investment profile rooted in a long-standing community banking franchise, characterized by a conservative approach and exceptional capital strength. While the company faced profitability challenges in Q1 2025, primarily due to increased operating expenses, it demonstrated positive trends in net interest income and noninterest income driven by higher loan yields and increased mortgage activity.

The core investment thesis hinges on NSTS's ability to translate its strategic initiatives, particularly the expansion of its lending footprint through LPOs and new hires, into sustainable loan growth and improved profitability. Its robust capital position provides a solid foundation and flexibility in navigating potential economic headwinds or competitive pressures. However, investors should closely monitor the company's ability to manage funding costs in a competitive deposit market, control operating expenses as it expands, and potentially address the operational efficiency gap relative to larger, more technologically advanced competitors. The estimated taxable net loss for 2025 and the realization of deferred tax assets are also important financial considerations. Ultimately, NSTS's story is one of a well-capitalized local institution seeking to grow its lending business while maintaining its core identity, balancing the opportunities for expansion with the inherent challenges of operating in a dynamic financial services landscape.