NSTS Bancorp, Inc. 10-K

Item 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   NSTS Bancorp, Inc.'s common stock is listed on the Nasdaq Capital Market, under the symbol “NSTS”. As of March 15, 2022, there were 5,397,959 shares of our common stock issued and outstanding, which were held by approximately 280 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms). Our common stock began trading on the Nasdaq Capital Market on January 19, 2022, with an initial share price of $10.00 per share.   We do not currently intend to pay cash dividends to our stockholders, and no assurances can be given that any such dividends will be paid in the future. The payment and amount of any dividends will be subject to statutory and regulatory limitations, and will depend upon a number of factors, including the following: regulatory capital requirements; our financial condition and results of operations; our other uses of funds for the long-term value of stockholders; tax considerations; and general economic conditions.   We are subject to state law limitations and federal bank regulatory policy on the payment of dividends. Delaware law generally limits dividends to be paid out of capital surplus or, if there is no surplus, out of net profits from the fiscal year in which the dividend is declared, and the preceding fiscal year, subject to certain limitations.   Additionally, Federal Reserve policy could restrict future dividends on our common stock, depending on our earnings and capital position and likely needs. See “Supervision and Regulation – Federal Banking Regulations - Capital Distributions” and "Supervision and Regulation - Holding Company Regulations".    There were no unregistered sales of NSTS Bancorp, Inc.'s common stock during the year ended December 31, 2021. Additionally, there were no repurchases of shares of NSTS Bancorp, Inc.’s common stock during the year-ended December 31, 2021.   26 Table of Contents   Item 6. [Reserved]     Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations   This discussion and analysis reflects the consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of the financial condition and results of operations of North Shore MHC, NSTS Financial Corporation and North Shore Trust and Savings for the years ended December 31, 2021 and 2020. The purpose of this discussion is to provide information about our financial condition and results of operations which is not otherwise apparent from the consolidated financial statements. You should read the information in this section in conjunction with the other business and financial information provided in this annual report.   Overview   North Shore Trust and Savings is a community-oriented savings institution headquartered in Waukegan, Illinois. We operate as a traditional thrift relying on the origination of long-term one- to four-family residential mortgage loans secured by property in Lake County, Illinois and surrounding communities. We also originate multi-family and commercial real estate loans and, to a lesser extent, construction, home equity, and consumer loans. We currently operate three full-service banking offices in Lake County, Illinois and one loan production office in Chicago. Our primary sources of funds consist of attracting deposits from the general public and using those funds along with funds from the FHLB of Chicago and other sources to originate loans to our customers and invest in securities. As of December 31, 2021, we had total assets of $340.9 million, including $96.5 million in net loans and $101.0 million of securities available for sale, total deposits of $285.6 million and total equity of $45.2 million. For the year ended December 31, 2021, we had a net loss of $55,000 compared to a net loss of $112,000 for the year ended December 31, 2020.   Our results of operations depend, to a large extent, on net interest income, which is the difference between the income earned on our loan and investment portfolios and interest expense on deposits and borrowings. Our net interest income is largely determined by our net interest spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities, and the relative amounts of interest-earning assets and interest-bearing liabilities. Results of operations are also affected by our provisions for loan losses, fee income and other noninterest income and noninterest expense. Noninterest expense principally consists of compensation, office occupancy and equipment expense, data processing, advertising and business promotion and other expenses. After the conversion, we expect that our noninterest expenses will increase as we grow and expand our operations. In addition, our compensation expense will increase due to the new stock benefit plans we intend to implement. Our results of operations and financial condition are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, the impact of the COVID-19 pandemic, changes in accounting guidance, government policies and actions of regulatory authorities.   27 Table of Contents   Critical Accounting Policies   In reviewing and understanding financial information for North Shore MHC, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. These policies are described in Note 1 of the notes to our consolidated financial statements beginning on page  40  of this filing. Our accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The JOBS Act of 2012 contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.   The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.   Allowance for Loan Losses . We have identified the evaluation of the allowance for loan losses as a critical accounting policy where amounts are sensitive to material variation. The allowance for loan losses represents management’s estimate for probable losses that are inherent in our loan portfolio but which have not yet been realized as of the date of our balance sheet. It is established through a provision for loan losses charged to earnings. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that management believes will cover known and inherent losses in the loan portfolio based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impacted loans, value of collateral, estimated losses on our commercial and residential loan portfolios, and general amounts for historical loss experience. All of these estimates may be susceptible to significant changes as more information becomes available.   While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. Historically, our estimates of the allowance for loan loss have not required significant adjustments from management’s initial estimates. In addition, the OCC as an integral part of their examination processes periodically reviews our allowance for loan losses. The OCC may require the recognition of adjustments to the allowance for loan losses based on its judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.   COVID-19   In light of the recent events surrounding the COVID-19 pandemic, we are continually assessing the effects of the pandemic on our employees, customers and communities. In March 2020, the CARES Act was enacted. The CARES Act contains many provisions related to banking, lending, mortgage forbearance and taxation. We have been working diligently to help support our customers through the PPP, loan modifications and loan deferrals. As of December 31, 2021, we had funded 40 SBA PPP loans totaling $1.3 million to existing customers and key prospects located primarily in our markets. As of December 31, 2021, all PPP loans were forgiven by the SBA. In addition, during the years ended December 31, 2021 and 2020, we granted loan modifications under the CARES Act generally in the form of three-month deferrals of principal payments and a three-month extension of the maturity date. We handle loan modification requests on a case-by-case basis considering the effects of the COVID-19 pandemic and the related economic slowdown on our customers and their current and projected cash flows through the terms of their respective loans. We believe the customer interaction during this time provides us with an opportunity to broaden and deepen our customer relationships while benefiting the local communities we serve. In total we modified 50 loans with principal balances totaling $9.7 million. As of December 31, 2021, all COVID-19 loan modifications have returned to repayment.    28 Table of Contents   Comparison of Financial Condition at December 31, 2021 and December 31, 2020       At December 31,       2021     2020       (Dollars in thousands)   Selected Consolidated Financial Condition Data:                 Total assets   $ 340,869     $ 242,219   Cash and cash equivalents     121,611       31,868   Securities available for sale     100,950       81,620   FHLB of Chicago stock     550       512   Loans receivable, net     96,534       98,455   Total deposits     285,621       186,404   FHLB of Chicago advances     5,000       4,000   Total equity   $ 45,183     $ 46,725     Total Assets . Total assets increased $98.7 million, or 40.8%, to $340.9 million at December 31, 2021 compared to $242.2 million at December 31, 2020. The increase is a direct result of an increase in cash and cash equivalents that was funded by deposit growth due to funds received in anticipation of the Plan of Conversion. The increase was partially offset by a decrease in loans, net.    Cash and cash equivalents.  The funds received as part of the conversion were primarily held in cash and cash equivalents at December 31, 2021, which increased $89.7 million, or 281.2%, to $121.6 million at December 31, 2021 , compared to $31.9 million at December 31, 2020.   Securities Available for Sale . Prior to the influx of funds during December 2021 and during the year ended December 31, 2021, the Bank made an effort to reduce the cash and cash equivalents balance by investing in higher yielding assets. As a result of these efforts, securities available for sale increased $19.4 million, or 23.8%, to $101.0 million at December 31, 2021 compared to $81.6 million at December 31, 2020.  Our investment securities portfolio primarily consisted of debt obligations issued by the U.S. government and government agencies and government sponsored mortgage-backed securities.   Time deposits with other financial institutions. As time deposits with other financial institutions matured, management utilized those funds to purchase securities available for sale with greater yields. As such, time deposits with other financial institutions decreased $8.9 million, or 71.8%, to $3.5 million at December 31, 2021 compared to $12.4 million at December 31, 2020.   Loans held for sale . Our loans held for sale decreased $1.9 million, or 95.0%, to $104,000 at December 31, 2021 compared to $2.0 million at December 31, 2020. During the year ended December 31, 2021, management increased the portion of loans originated for the portfolio as opposed to the loans originated for sale. We consider our balance sheet as well as market conditions on an ongoing basis in making decisions as to whether to hold loans we originate for investment or to sell such loans choosing the strategy that we believe is most advantageous to us from a profitability and risk management standpoint at that time.   Loans, net . Our loans, net, decreased by $2.0 million, or 2.0%, to $96.5 million at December 31, 2021 compared to $98.5 million at December 31, 2020. During the year ended December 31, 2021, our total loan originations of loans held for investment of $25.9 million was offset by loan principal repayments of $27.8 million and a transfer of loans held for investment to other real estate owned of $172,000. The primary decrease in loans, net was a decrease in multi-family residential loans of $2.2 million, or 38.6%, to $3.5 million at December 31, 2021 compared to $5.7 million at December 31, 2020. Additionally, commercial loans decreased $739,000, or 13.9%, to $4.6 million at December 31, 2021 compared to $5.3 million at December 31, 2020 as a result of forgiveness of PPP loans during 2021. The decrease was partially offset by an increase in one- to four- family first residential mortgage loans of $830,000, or 0.9%, to $88.0 million at December 31, 2021 compared to $87.2 million at December 31, 2020. At December 31, 2021, the allowance for loan losses was $779,000, a decrease of $91,000 compared to December 31, 2020, primarily due to a decrease in non-performing assets and general economic improvements during 2021. Non-performing loans were $102,000 at December 31, 2021 compared to $280,000 at December 31, 2020. The decrease of $178,000 was the result of two non-accrual loans being moved to OREO, and later sold during the year, and payments made on non-accrual loans. Our non-performing loans to total loans decrease to 0.15% at December 31, 2021 compared to 0.36% at December 31, 2020.   Bank-owned life insurance. Total BOLI increased by $181,000, or 2.0%, to $9.1 million at December 31, 2021 compared to $8.9 million at December 31, 2020. BOLI provides us with a funding offset for our employee benefit plans and obligations. BOLI also provides a source of noninterest income that generally is non-taxable.   Deposits . Our total deposits were $285.6 million at December 31, 2021, an increase of $99.2 million, or 53.2%, from $186.4 million at December 31, 2020. The increase in deposits was driven by an influx of funds as part of the Plan of Conversion. Excluding deposits received in connection with the conversion and related stock offering, deposits increased $12.0 million, or 6.4%. Our core deposits, which we consider to be all deposits except time deposit accounts, amounted to $212.7 million on December 31, 2021, an increase of $94.2 million, or 79.5% from $118.5 million as of December 31, 2020. Total time deposit accounts increased $5.0 million, or 7.4%, to $72.9 million at December 31, 2021 from $67.9 million at December 31, 2020.    29 Table of Contents   Other Borrowings . Our borrowings, which consist of FHLB of Chicago advances, amounted to $5.0 million at December 31, 2021, compared to $4.0 million at December 31, 2020. In 2020, the FHLB of Chicago offered member banks an interest free one-year advance of $4.0 million due to COVID-19. The FHLB advance was paid off in May 2021. In 2021, the FHLB of Chicago offered member banks an interest free one-year advance of $5.0 million due to COVID-19 that we used to fund loans and purchase securities available for sale in an effort to generate a better interest rate spread.   Total Equity . Total equity decreased $1.5 million, or 3.2%, to $45.2 million at December 31, 2021, from $46.7 million at December 31, 2020. The decrease is primarily the result of a decrease in tax effected net unrealized gain (loss) on securities available for sale of $1.5 million, or 107.1%, to $(81,000) at December 31, 2021, from $1.4 million at December 31, 2020, and by a net loss for the year ended December 31, 2021 of $55,000. At December 31, 2021, our ratio of total equity to total assets was 13.3%.   Average Balances, Net Interest Income, and Yields Earned and Rates Paid . The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. All average balances are based on daily balances. The table also reflects the yields on North Shore Trust and Savings’ interest-earning assets and costs of interest-bearing liabilities for the periods shown.       At or For the Year Ended December 31,       2021     2020       Average Outstanding Balance     Interest     Average Yield/ Rate     Average Outstanding Balance     Interest     Average Yield/ Rate       (Dollars in thousands)   Interest-earning assets:                                                 Loans   $ 98,409     $ 3,569       3.63 %   $ 100,907     $ 4,086       4.05 % Federal funds sold and interest-bearing deposits in other banks     33,384       35       0.10 %     34,929       128       0.37 % Time deposits with other financial institutions     6,889       66       0.96 %     17,941       379       2.11 % Securities available for sale     94,289       1,355       1.44 %     69,687       1,417       2.03 % FHLB of Chicago stock (1)     540       13       2.41 %     512       13       2.54 % Total interest-earning assets   $ 233,511     $ 5,038       2.16 %   $ 223,976     $ 6,023       2.69 % Noninterest-earning assets     16,159                       16,004                   Total assets   $ 249,670                     $ 239,980                   Interest-bearing liabilities:                                                 Interest-bearing demand   $ 17,738     $ 8       0.05 %   $ 14,461     $ 12       0.08 % Money market     46,985       96       0.20 %     51,278       242       0.47 % Savings     45,609       68       0.15 %     40,638       97       0.24 % Time deposits     67,253       768       1.14 %     70,188       1,137       1.62 % Total interest-bearing deposits   $ 177,585     $ 940       0.53 %   $ 176,565     $ 1,488       0.84 % Other borrowings (2)     4,616       —       0.00 %     2,448       —       0.00 % Total interest-bearing liabilities   $ 182,201     $ 940       0.52 %   $ 179,013     $ 1,488       0.83 % Noninterest-bearing liabilities     21,417                       14,927                   Total liabilities   $ 203,618                     $ 193,940                   Equity     46,052                       46,040                   Total liabilities and equity   $ 249,670                     $ 239,980                   Net interest income (1)           $ 4,098                     $ 4,535           Interest rate spread (3)                     1.64 %                     1.86 % Net interest-earning assets (4)   $ 51,310                     $ 44,963                   Net interest margin (5)                     1.75 %                     2.02 % Average interest-earning assets to average-interest bearing liabilities     128.16 %                     125.12 %                   (1) Includes dividend income from the FHLB of Chicago stock which is included in “Other Income” in the December 31, 2020 financial statements. (2) Other borrowing consists of 0% interest rate FHLB of Chicago advances. (3) Equals the difference between the yield on average earning-assets and the cost of average interest-bearing liabilities. (4) Equals total interest-earning assets less total interest-bearing liabilities. (5) Equals net interest income divided by average interest-earning assets.   30 Table of Contents   Rate/Volume Analysis . The following table shows the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate, which is the change in rate multiplied by prior year volume, and (2) changes in volume, which is the change in volume multiplied by prior year rate. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.       Years Ended December 31, 2021 vs. 2020                       Total       Increase (Decrease) Due to     Increase       Volume     Rate     (Decrease)       (Dollars in thousands)   Interest-earning assets:                         Loans   $ (248 )   $ (269 )   $ (517 ) Federal funds sold and interest-bearing deposits in other banks     (5 )     (88 )     (93 ) Time deposits in other banks     (166 )     (147 )     (313 ) Investment securities     420       (482 )     (62 ) FHLB of Chicago stock (1)     —       —       —   Total interest-earning assets   $ 1     $ (986 )   $ (985 ) Interest-bearing liabilities:                         Interest-bearing demand   $ 2     $ (6 )   $ (4 ) Money market     (19 )     (127 )     (146 ) Savings     11       (40 )     (29 ) Time deposit     (46 )     (323 )     (369 ) Total interest-bearing liabilities   $ (52 )   $ (496 )   $ (548 ) Change in net interest income   $ 53     $ (490 )   $ (437 )   (1) Includes dividend income from the FHLB of Chicago stock which is included in “Other Income” in the December 31, 2020 financial statements.   Comparison of Operating Results for the Years Ended December 31, 2021 and 2020   General. For the year ended December 31, 2021, we had a net loss of $55,000, compared to a net loss of $112,000 for the year ended December 31, 2020. The decrease in the net loss in 2021 compared to 2020 was primarily driven by a decrease in the provision for loan losses and non-interest expense. These decreases were partially offset by a decrease in net interest income and a decrease in non-interest income, as well a reduction in the income tax benefit.    Net Interest Income. Net interest income decreased $437,000, or 9.7%, to $4.1 million for the year ended December 31, 2021 compared to $4.5 million for the year ended December 31, 2020. Our interest rate spread decreased to 1.64% for the year ended December 31, 2021 from 1.86% for the year ended December 31, 2020, and our net interest margin decreased to 1.75% for the year ended December 31, 2021 from 2.02% for the year ended December 31, 2020. The decrease in interest rate spread and net interest margin was primarily the result of a continuing low interest rate environment which reduced the average yields earned on our interest-earning assets in an amount which more than offset the reduction in the average cost of our interest-bearing liabilities. As the low interest rate environment continued into 2021, higher yielding assets, such as securities available for sale, saw an increase in prepayments. The funds were reinvested in securities available for sale at the current interest rate.    Average interest-earning assets of $233.5 million in 2021 were $9.5 million, or 4.3% higher than 2020. The increase in average earning assets was driven by a $24.6 million, or 35.3%, increase in securities available for sale, as a result of the decision to invest available cash in securities available for sale to achieve a higher yield. This increase was offset by a decrease in time deposits in other banks of $11.1 million, or 61.6%, as management invested the maturing time deposits in other banks in higher yielding securities available for sale. The average outstanding balance of loans decreased $2.5 million, or 2.5%, in 2021, resulting in a decrease of interest earned of $517,000, or 12.7%. The decrease in loans primarily came from the multi-family loans, which are generally higher yielding loans, as compared to one- to four-family residential mortgage loans. The average yield on loans decreased 42 basis points in 2021, to 3.63%, compared to 2020.    Average interest-bearing liabilities increased $3.2 million, or 1.8%, to $182.2 million for the year ended December 31, 2021 compared to $179.0 million for the year ended December 31, 2020. Average yield on interest-bearing liabilities decreased 31 basis points, to 0.52% for the year ended December 31, 2021. On average, interest-bearing deposits increased $1.0 million, or 0.6%, primarily driven by increases in lower cost deposits, such as demand and savings accounts, offset by decreases in higher cost deposits such as money market and time deposit accounts. The average balance of other borrowings increased $2.2 million, or 88.6%, which consists of one FHLB advance at a 0.0% interest rate.  31 Table of Contents     (Reversal of) Provision for Loan Losses.  The allowance for loan losses is established through a provision for loan losses charged to earnings as losses are estimated to have occurred in our loan portfolio.  Loan losses are charged against the allowance when management believes the collectability of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.   The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral, and prevailing economic conditions.  The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.   A loan is considered impaired when, based on current information or events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.  When a loan is impaired, the measurement of such impairment is based upon the fair value of the collateral of the loan.  If the fair value of the collateral is less than the recorded investment in the loan, we will recognize the impairment by creating a valuation allowance with a corresponding charge against earnings.   An allowance is also established for uncollectible interest on loans classified as substandard.  The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received.  When, in management’s judgment, the borrower’s ability to make interest and principal payments is back to normal, the loan is returned to accrual status.   During the year ended December 31, 2021, a reversal of the provision for loan losses of $23,000 was recorded, compared to a provision for loan losses of $464,000 during the year ended December 31, 2020. Our recorded net charge-offs were $68,000 for the year ended December 31, 2021 compared to net recoveries of $17,000 for the year ended December 31, 2020. We recorded a reversal of the provision during the year ended December 31, 2021 due to a reduction in average loan balances during the period and general overall improvements to the economy. Our evaluation of the allowance for loan losses continued to give particular consideration to the continuing economic impact of the COVID-19 pandemic. To account for these uncertainties and losses which have been incurred, but not yet identified, we continued to include general reserves of $140,000 within the allowance for loan losses as of December 31, 2021.    The establishment of the allowance for loan losses is significantly affected by uncertainties and management judgment and there is a likelihood that different amounts would be reported under different conditions or assumptions.  Various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses.  Such agencies may require us to make additional provisions for estimated loan losses based upon judgments different from those of management.   32 Table of Contents   Noninterest Income . The following table shows the components of noninterest income for the periods presented.       For the Year Ended December 31,       2021     2020       (Dollars in thousands)   Noninterest income:                 Gain on sale of mortgage loans   $ 410     $ 788   Gain on sale of securities     131       59   Rental income on office building     42       42   Service charges on deposits     289       255   Increase in cash surrender value of BOLI     181       183   Other     156       264   Total noninterest income   $ 1,209     $ 1,591     Noninterest income decreased $382,000, or 24.0%, to $1.2 million for the year ended December 31, 2021, compared to $1.6 million for the year ended December 31, 2020. The decrease in noninterest income is primarily driven by a decrease in the gain on sale of mortgage loans. During 2021, the Bank sold $21.2 million loans, for a net gain on sale of $410,000, compared to loan sales of $36.5 million and a net gain on sale of $788,000 during 2020. The decrease was partially offset by an increase in gain on sale of investments. During 2021, the Bank sold $6.6 million of securities available for sale, for a net gain on sale of $131,000, compared to $12.1 million in sales of securities available for sale, for a net gain on sale of $59,000 during 2022.     Noninterest Expense . The following table shows the components of noninterest expense for the periods presented.       For the year ended December 31,       2021     2020       (Dollars in thousands)   Noninterest expense:                 Salaries and employee benefits   $ 3,352     $ 3,691   Equipment and occupancy     665       689   Data processing     613       565   Professional services     139       484   Advertising     71       68   Supervisory fees and assessments     126       117   Loan expenses     129       141   Deposit expenses     183       155   Other     321       367   Total noninterest expense   $ 5,599     $ 6,277     Noninterest expense decreased $678,000, or 10.8%, to $5.6 million for the year ended December 31, 2021, compared to $6.3 million for the year ended December 31, 2020. The decrease in noninterest expense is driven by a decrease in salaries and employee benefits costs, which decreased $339,000, or 9.2%. The decrease in salaries and employee benefits costs was driven by a decrease in the number of full-time equivalent employees. The average number of full-time equivalent employees throughout the year ended December 31, 2021 and 2020 was 35 and 39, respectively.  Professional services expenses decreased $345,000 or 71.3%, to $139,000 for the year ended December 31, 2021, compared to $484,000 for the year ended December 31, 2020. The decrease in professional services is due to certain costs associated with benefit plan restructuring and other one-time fees expensed in 2020 that are not expected to recur in future periods.   33 Table of Contents   We expect noninterest expense to increase because of costs associated with operating as a newly public company, including the increased compensation expenses associated with the purchase of shares of common stock by our employee stock ownership plan and the possible implementation of stock-based benefit plans, if approved by our stockholders. In addition, we will incur increased noninterest expense related to the implementation of our business strategy related to planned additions to our employee base and potential new loan production office openings.   Provision for Income Tax Benefit. Income tax benefit decreased $289,000, or 57.5%, to $214,000 for the year ended December 31, 2021 compared to $503,000 for the year ended December 31, 2020. During 2020, the CARES Act provides that companies are able to carry back current year losses up to five years, resulting in a decrease in the income tax benefit of $112,000 at December 31, 2021.    Exposure to Changes in Interest Rates   Our ability to maintain net interest income depends upon our ability to earn a higher yield on interest-earning assets than the rates we pay on deposits and borrowings. Our interest-earning assets consist primarily of securities available-for-sale and long-term residential and commercial mortgage loans, which have fixed rates of interest. Consequently, our ability to maintain a positive spread between the interest earned on assets and the interest paid on deposits and borrowings can be adversely affected when market rates of interest rise.   Net Portfolio Value Analysis . Our interest rate sensitivity is monitored by management through the use of models which generate estimates of the change in its NPV over a range of interest rate scenarios. NPV represents the market value of portfolio equity, which is different from book value, and is equal to the market value of assets minus the market value of liabilities (that is, the difference between incoming and outgoing discounted cash flows of assets and liabilities) with adjustments made for off-balance sheet items. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The OCC provides a quarterly report on the potential impact of interest rate changes upon the market value of portfolio equity. Management reviews the quarterly reports from the OCC, which show the impact of changing interest rates on net portfolio value. The following table sets forth our NPV as of December 31, 2021 and reflects the changes to NPV as a result of immediate and sustained changes in interest rates as indicated.   Change in Interest           NPV as % of   Rates In Basis Points     Net Portfolio Value     Portfolio Value of Assets   (Rate Shock)     Amount     $ Change     % Change     NPV Ratio     Change   (Dollars in thousands)   300bp     $ 57,543     $ 3,062       5.6 %     18.2 %     13.5 % 200       58,003       3,522       6.5 %     17.9 %     11.5 % 100       57,311       2,830       5.2 %     17.2 %     7.5 % Static       54,481       —       —       16.0 %     —   -100       50,564       (3,917 )     (7.2 )%     14.7 %     (8.6 )% -200       53,185       (1,296 )     (2.4 )%     15.3 %     (4.6 )%   Net Interest Income Analysis . In addition to modeling changes in NPV, we also analyze potential changes to net interest income (“NII”) for a 12-month period under rising and falling interest rate scenarios. The following table shows our NII model as of December 31, 2021.   Change in Interest                           Rates in Basis Points     Net Interest                   (Rate Shock)     Income     $ Change     % Change   (Dollars in thousands)   300bp     $ 7,085     $ 2,420       51.9 % 200       6,431       1,766       37.9 % 100       5,641       976       20.9 % Static       4,665       —       0.0 % -100       4,180       (485 )     (10.4 )% -200       4,057       (608 )     (13.0 )%   The table above indicates that as of December 31, 2021, in the event of an immediate and sustained 300 basis point increase in interest rates, our net interest income for the twelve months ending December 31, 2022 would be expected to increase by $2.4 million, or 51.9% to $7.1 million.   Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The above table assumes that the composition of our interest sensitive assets and liabilities existing at the date indicated remains constant uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our NPV and will differ from actual results.   34 Table of Contents   Liquidity and Capital Resources   North Shore Trust and Savings maintains levels of liquid assets deemed adequate by management. We adjust our liquidity levels to fund deposit outflows, repay our borrowings, and to fund loan commitments. We also adjust liquidity, as appropriate, to meet asset and liability management objectives.   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. At December 31, 2021, we had $5.0 million outstanding in advances from the FHLB of Chicago and had the capacity to borrow approximately an additional $55.8 million from the FHLB of Chicago.   While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.   Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by (used in) operating activities was $1.5 million and $(620,000) for the year ended December 31, 2021 and 2020, respectively. Net cash used in investing activities, which consists primarily of net change in loans receivable and net change in investment securities, was $11.9 million and $5.9 million for the years ended December 31, 2021 and 2020, respectively. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and FHLB of Chicago advances, was $100.1 million and $6.0 million for the years ended December 31, 2021 and 2020, respectively.   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 December 31, 2021, totaled $39.9 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.    As of December 31, 2021, North Shore Trust and Savings was well capitalized under the regulatory framework for prompt corrective action. During the year ended December 31, 2020, North Shore Trust and Savings 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% in 2020 and 8.5% in 2021, 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 16.11% and 18.41% at December 31, 2021 and 2020, respectively.    Off-Balance Sheet Arrangements . At December 31, 2021, we had $219,000 of outstanding commitments to originate loans. Our total letters and lines of credit and unused lines of credit totaled $4.0 million at December 31, 2021.    Commitments . The following table summarizes our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and undisbursed construction loans at December 31, 2021.       Total Amounts Committed at     Amount of Commitment Expiration – Per Period       December 31, 2021     To 1 Year     1-3 Years     4-5 Years     After 5 Years       (Dollars in thousands)   Unused line of credit   $ 4,001     $ 527     $ 926     $ 966     $ 1,582   Commitments to originate loans     219       219       —       —       —   Total commitments   $ 4,220     $ 746     $ 926     $ 966     $ 1,582     35 Table of Contents   Contractual Cash Obligations . The following table summarizes our contractual cash obligations at December 31, 2021.       Total at     Payments Due By Period       December 31, 2021     To 1 Year     1-3 Years     4-5 Years     After 5 Years       (Dollars in thousands)   Time deposits   $ 72,874     $ 39,927     $ 24,545     $ 8,402     $ —   Other borrowings     5,000       5,000       —       —       —   Total contractual obligations   $ 77,874     $ 44,927     $ 24,545     $ 8,402     $ —     Impact of Inflation and Changing Prices   The financial statements and related financial data presented herein regarding North Shore Trust and Savings have been prepared in accordance with accounting principles generally accepted in the United States of America, which generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of our assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on North Shore Trust and Savings’ performance than does the effect of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates.   Current Accounting Developments   The following ASU has been issued by the FASB but is not yet effective.   The FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326) . The ASU introduces a new credit loss model, the current expected credit loss model ("CECL"), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk.   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.   The CECL model represents a significant change from existing practice and may result in material changes to the Bank’s accounting for financial instruments. The Bank is evaluating the effect ASU 2016-13 will have on its consolidated financial statements and related disclosures. The impact of the ASU will depend upon the state of the economy, and the nature of the Bank’s portfolios at the date of adoption. The new standard is effective January 2023 for emerging growth companies.     Item 7A. Quantitative and Qualitative Disclosures About Market Risk   For information regarding market risk, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.