What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2023-03-30 compared with 2022-03-22 · 135 added, 127 removed, 242 unchanged (52% of the section changed)

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As of March 27, 2023, 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.

Our common stock began trading on the Nasdaq Capital Market on January 19, 2022, with an initial 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.

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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.

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 NSTS Bancorp, Inc. and North Shore Trust and Savings for the years ended December 31, 2022 and 2021.

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.

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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.

As of December 31, 2022, we had total assets of $264.2 million, including $103.4 million in net loans and $121.2 million of securities available for sale, total deposits of $178.7 million and total equity of $80.5 million.

For the year ended December 31, 2022, we had a net income of $27,000 compared to a net loss of $55,000 for the year ended December 31, 2021.

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.

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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.

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.

Our results of operations and financial condition are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, changes in accounting guidance, government policies and actions of regulatory authorities.

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.

In reviewing and understanding financial information for NSTS Bancorp, Inc., 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 47 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.

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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.

Employee Retention Credit.

 Under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020 and the subsequent extension of the CARES Act, the Bank was eligible for a refundable employee retention credit subject to certain criteria.

The Bank qualified for the tax credit for the quarters ended June 30, 2021 and September 30, 2021 under the CARES Act.

The Bank utilized the gross receipts method of calculating eligibility.

Based on the eligibility, the tax credit is equal to 70% of qualified wages paid to employees during a quarter, and the limit on qualified wages per employee is $10,000 of qualified wages per quarter.

The Employee Retention Credit of $503,000 was recorded during the second quarter of 2022, when the Bank determined it was eligible.

The credit is recorded as other non-interest income and offsets $503,000 of salaries and employee benefits expense previously recorded during 2021.

Subsequent to December 31, 2022, the Bank has received $259,000 of the Employee Retention Credit, which represents the tax credit for the quarter ended June 30, 2021.

The Bank cannot reasonably estimate when it will receive the remaining refunds.

A receivable is recorded in other assets on the consolidated balance sheets to reflect the remaining amount of the credit yet to be received.

The CARES Act and related Employee Retention Credit was terminated as of September 30, 2021, and therefore the Company does not expect to file for any additional refunds.

Allowance for Loan Losses .

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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.

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. 

Comparison of Financial Condition at December 31, 2022 and December 31, 2021

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Securities available for sale

FHLB of Chicago stock

Loans receivable, net

Federal Home Loan Bank stock

Total deposits

FHLB of Chicago advances

Other borrowings

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. 

Total assets decreased $76.7 million, or 22.5%, to $264.2 million at December 31, 2022 compared to $340.9 million at December 31, 2021.

The decrease is a direct result of a decrease in cash and cash equivalents as a result of refunds issued due to the oversubscription of stock purchases related to the stock offering and conversion. 

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.

The funds received as part of the conversion were primarily held in cash and cash equivalents at December 31, 2021, and excess funds were disbursed during the first quarter of 2022.

The disbursement resulted in a decrease in cash and cash equivalents during the period.

Additionally, management continued to deploy the remaining funds from the stock offering primarily in securities available for sale, resulting in a further decrease to the balance of cash and cash equivalents as of December 31, 2022 compared to December 31, 2021.

The Bank monitors our liquidity position on a daily basis and continues to maintain levels of liquid assets deemed adequate by management. 

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.

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.

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. 

Securities available for sale increased $20.2 million, or 20.0%, to $121.2 million at December 31, 2022 compared to $101.0 million at December 31, 2021.

This increase was the result of management's efforts to reduce the cash and cash equivalents balance by investing in higher yielding assets.

During the year ended December 31, 2022, the Bank purchased $59.5 million in securities available for sale, which was partially offset by principal repayments and maturities of $22.9 million, an increase in the unrealized loss on available for sale securities of $15.4 million, due to increases in market interest rates, and amortization and accretion of premiums and discounts of $958,000.

During the year ended December 31, 2022, the Bank purchased U.S.

Treasury Notes of $12.3 million, resulting in a slight adjustment to the mix of the securities available-for-sale as well as reducing the duration of the portfolio while maintaining a higher yielding portfolio. 

Our loans, net, increased by $6.8 million, or 7.0%, to $103.4 million at December 31, 2022 compared to $96.5 million at December 31, 2021.

The increase in loans was primarily driven by the purchase of a loan pool consisting of 9 loans totaling $5.3 million.

The loan pool was purchased with a $113,000 premium that is amortized over the life of the loans.

The loans included in the loan pool followed the same underwriting standards required for loans originated by the Bank and are 1-4 family residential mortgages located in Cook County.

Additionally, this pool has a weighted average coupon of 4.13%, with adjustable rates set to adjust in 3-7 years.

The Bank originated $16.5 million in loans for the portfolio during the year, offset by loan repayments of $15.3 million. 

At December 31, 2022, the allowance for loan losses was $624,000, a decrease of $155,000 compared to December 31, 2021, primarily due to a decrease in specific reserves on troubled debt restructurings as a result of payoffs, and general economic improvements during 2022.

During the year ending December 31, 2022, six impaired loans, totaling $302,000 as of December 31, 2021, with a combined specific reserve of $29,000 as of December 31, 2021 paid off in full.

The rolling average unemployment rate in Kenosha/Lake Counties continues to decline, resulting in a reduction to qualitative adjustments in the allowance for loan losses.

Additionally, the Bank has reduced its qualitative adjustment due to reduced COVID-19 uncertainties.

The Bank has not experienced losses specific to COVID-19 during the pandemic.

Non-performing loans, consisting of 2 loans, were $154,000 at December 31, 2022 compared to $143,000 at December 31, 2021. 

Our total deposits were $178.7 million at December 31, 2022, a decrease of $106.9 million, or 37.4%, from $285.6 million at December 31, 2021.

The decrease in deposits was primarily the result of refunds issued due to the oversubscription of stock purchases related to the stock offering and a capital infusion into the Bank in the amount of half the net proceeds received as part of the conversion.

As of December 31, 2021, prior to the conversion, the Company held a deposit account at the Bank of approximately $87.3 million.

Subsequent to the conversion, the balance of the deposit account held at the Bank is eliminated during consolidation.

Additionally, prior to September 30, 2021, the Bank received an increase in funds within the deposit accounts as individuals opened accounts to receive priority in purchasing stock as part of the offering.

Subsequent to the conversion, approximately $10.0 million in funds remaining in those accounts were withdrawn by depositors.

A majority of these funds were held in short-term time deposits and were subject to interest penalties upon withdrawal.

Additionally, during the fourth quarter, deposits continued to decrease as a result of various large customers moving money to high yielding accounts outside the Bank.

Management continues to actively monitor the deposit balances and interest rates offered to maintain an adequate level of liquidity. 

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.

During the year ended December 31, 2022, the Bank repaid the 0% interest FHLB Advance of $5.0 million, resulting in no Other Borrowings as of December 31, 2022. 

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%.

Total equity increased $35.3 million, or 78.1%, to $80.5 million at December 31, 2022, from $45.2 million at December 31, 2021.

The increase in total equity is the result of the net proceeds of the conversion stock offering, less unallocated shares of the ESOP, offset by the increase in the unrealized loss on securities available for sale. At December 31, 2022, our ratio of total equity to total assets was 30.5%.

Average Balances, Net Interest Income, and Yields Earned and Rates Paid .

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Interest-earning assets:

Federal funds sold and interest-bearing deposits in other banks

Interest-bearing bank deposits

Time deposits with other financial institutions

Securities available for sale

FHLB of Chicago stock (1)

Federal Home Loan Bank stock

Total interest-earning assets

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Average interest-earning assets to average-interest bearing liabilities

Includes dividend income from the FHLB of Chicago stock which is included in “Other Income”

in the December 31, 2020 financial statements.

Other borrowing consists of 0% interest rate FHLB of Chicago advances.

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Change in net interest income

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, 2022 and 2021

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. 

For the year ended December 31, 2022, we had net income of $27,000, compared to a net loss of $55,000 for the year ended December 31, 2021.

The increase in net income is primarily the result of an increase in interest income on securities available-for-sale, a decrease in interest expense on deposits, recognition of the Employee Retention Credit and a higher reversal of the provision for loan losses, offset by an increase in noninterest expense.

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. 

(Reversal of) Provision for Loan Losses. 

Net interest income increased $1.5 million, or 36.6%, to $5.6 million for the year ended December 31, 2022 compared to $4.1 million for the year ended December 31, 2021.

Our interest rate spread increased to 2.01% for the year ended December 31, 2022 from 1.64% for the year ended December 31, 2021, and our net interest margin increased to 2.15% for the year ended December 31, 2022 from 1.75% for the year ended December 31, 2021. The increase in interest rate spread and net interest margin was primarily the result of the deployment of funds from the conversion into higher yielding assets, such as securities available-for-sale, while maintaining deposit rates.

Average interest-earning assets of $259.2 million in 2022 increased $25.7 million compared to 2021.

The increase in average earning assets was driven by the funds received as part of the conversion.

With the additional funds we had a $24.7 million, or 26.2%, increase in average securities available for sale, as a result of the decision to invest available cash in securities available for sale to achieve a higher yield.

The average outstanding balance of loans decreased $695,000, or 0.7%, in 2022; however, due to higher interest rates earned on the loan portfolio of 7 basis points, interest earned increased $49,000, or 1.4%.

Notwithstanding a general increase in market interest rates during 2022, the cost of interest-bearing liabilities decreased 8 basis points for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The net decrease in our funding costs was primarily driven by a decrease in the average yield of time deposits.

During the first quarter of 2022, subsequent to the conversion closing, certain customers withdrew their funds held in time deposits prior to the maturity of these deposits.

Upon the withdrawal of these funds, the customers were charged an interest penalty which resulted in a lower overall funding cost during the quarter.

During the fourth quarter of 2022, management increased interest rates on premium money market accounts and new time deposits to stay competitive with rates offered in our market area. 

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. 

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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. 

During the year ended December 31, 2022, a reversal of the provision for loan losses of $230,000 was recorded due to a decrease in specific reserves on troubled debt restructurings as a result of payoffs and general economic improvements during 2022.

The rolling average unemployment rate in Kenosha/Lake Counties continues to decline.

Additionally, the Bank has reduced its qualitative adjustment due to reduced COVID-19 uncertainties.

The Bank has not experienced losses specific to COVID-19 during the pandemic.

Additionally, we recorded net recoveries of $75,000 for the year ended December 31, 2022 compared to net charge-offs of $68,000 for the year ended 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. 

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Total noninterest income

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 income stayed flat at $1.2 million for the years ended December 31, 2022 and 2021.

During the year ended December 31, 2022, the Bank recognized a one time Employee Retention Credit of $503,000.

The Employee Retention Credit was recorded during the second quarter of 2022, when management determined the Bank was eligible.

The credit is recorded as other non-interest income and offsets $503,000 of salaries and employee benefits expense previously recorded during 2021.

The CARES Act and related Employee Retention Credit was terminated as of September 30, 2021, and therefore the Company does not expect to file for any additional refunds.

This increase in other non-interest income was offset by a decrease in gain on sale of securities and gain on sale of loans.

During the year ended December 31, 2022, the Bank did not sell any securities available for sale, primarily as a result of the unrealized loss position of the securities. Management does not currently intend to sell securities in an unrealized loss position.

Additionally, during 2022, we sold $8.6 million in loans compared to $21.2 million during 2021.

The decrease in the sale of mortgage loans was partially due to the decision to originate a higher percentage of loans for the portfolio, as well as an overall decrease in total loans originated during 2022.

Noninterest Expense .

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Deposit expenses

Director fees

Total noninterest expense

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.

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.

Noninterest expense increased $1.3 million, or 23.2%, to $6.9 million for the year ended December 31, 2022, compared to $5.6 million for the year ended December 31, 2021.

The primary drivers for the increase in noninterest expense are salaries and employee benefits and professional services expenses.

Salaries and employee benefits increased $705,000 as a result of a continued investment in our employees, including an increase in average headcount from 35 employees during 2021 to 37 employees during 2022 primarily in management roles, $246,000 in expenses related to the Employee Stock Ownership Plan, annual raises and merit increases.

Professional service fees increased $361,000 to $500,000 during the year ended December 31, 2022.

This increase is the result of additional expenses associated with being a public company and are expected to reoccur in future periods.

Other noninterest expense increased $190,000 during the year ended December 31, 2022 primarily due to additional expenses associated with the filing for the Employee Retention Credit.

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 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. 

Provision for Income Tax Expense (Benefit). 

During the year ended December 31, 2022, the Bank recorded income tax expense of $146,000, consisting of $133,000 current tax benefit, $64,000 deferred tax expense and $215,000 change in valuation allowance.

Federal net operating losses as of December 31, 2022 and 2021 are $1.7 million and $1.5 million, respectively, and do not expire.

During 2022, management assessed the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets.

A significant piece of objective negative evidence evaluated is the cumulative taxable loss incurred over the three-year period ended December 31, 2022.

Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.

On the basis of this evaluation, as of December 31, 2022, a valuation allowance of $150,000 on federal net operating losses has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized.

The amount of the deferred tax asset considered realizable, however, could be adjusted, and an additional valuation allowance recorded, if estimates of future taxable income during the carryforward period are reduced or if objective negative evidence in the form of cumulative losses is present and additional weight cannot be given to subjective evidence such as our projections for growth.

NOL carryforwards for state income tax purposes were approximately $3.9 million and $3.2 million at December 31, 2022 and 2021, respectively, and will begin expiring in 2023.

Due to the uncertainty that the Bank will be able to generate future state taxable income sufficient to utilize the net operating loss carryforwards, a full valuation allowance of $371,000 has been recorded on the related deferred tax asset.

There were no uncertain tax positions outstanding as of December 31, 2022 and 2021.

As of December 31, 2022, tax years remaining open for State of Illinois and Wisconsin were 2018 through 2021.

Federal tax years that remained open were 2019 through 2021.

As of December 31, 2022, there were also no unrecognized tax benefits that are expected to significantly increase or decrease within the next twelve months.

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.

Our interest-earning assets consist primarily of securities available-for-sale and long-term residential and commercial mortgage loans, which generally 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 will be adversely affected as market rates of interest continue to 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.

Our interest rate sensitivity is monitored by management through the use of models which generate estimates of the change in its net portfolio value ("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.

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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.

The following table sets forth our NPV as of December 31, 2022 and reflects the changes to NPV as a result of immediate and sustained changes in interest rates as indicated.

Change in Interest

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(Dollars in thousands)

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.

The table above indicates that as of December 31, 2022, 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, 2023 would be expected to decrease by $736,000, or 10.3% to $6.4 million.

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements.

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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.

Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from the sale and maturities of securities.

We also have the ability to borrow from the FHLB of Chicago and a $10.0 million unsecured Fed Funds facility with BMO Harris Bank.

At December 31, 2022, we had no outstanding advances from the FHLB of Chicago and had the capacity to borrow approximately $68.6 million from the FHLB of Chicago.

Additionally, we had no outstanding balance with BMO Harris Bank.

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.

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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.

Net cash provided by operating activities was $3.0 million and $1.5 million for the year ended December 31, 2022 and 2021, respectively.

Net cash used in investing activities, which consists primarily of net change in loans receivable and net change in investment securities, was $44.5 million and $11.8 million for the years ended December 31, 2022 and 2021, respectively.

Net cash (used in) provided by financing activities, consisting primarily of the activity in deposit accounts, proceeds from the issuance of common stock and FHLB of Chicago advances, was $(67.0) million and $100.1 million for the years ended December 31, 2022 and 2021, respectively.

We are committed to maintaining a strong liquidity position.

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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.

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 8% in 2020, 8.5% in 2021 and 9% in 2022, 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. 

Tier 1 capital to Average Assets was 24.81% and 16.11% at December 31, 2022 and 2021, respectively. 

Off-Balance Sheet Arrangements .

At December 31, 2022, we had $793,000 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. 

Our total letters and lines of credit and unused lines of credit totaled $2.9 million at December 31, 2022. 

Commitments .

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Time deposits

Other borrowings

Total contractual obligations

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.

The financial statements and related financial data presented herein 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.

As a result, interest rates generally have a more significant impact on our 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.

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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 CECL model represents a significant change from existing practice and may result in material changes to our accounting for financial instruments.

We are evaluating the effect ASU 2016-13 will have on our consolidated financial statements and related disclosures.

The impact of the ASU will depend upon the state of the economy, and the nature of our loan portfolio at the date of adoption.

The new standard is effective January 1, 2023 for emerging growth companies.

Management has developed a CECL allowance model which calculates reserves over the life of the loan and is largely driven by peer data adjusted for portfolio characteristics unique to us.

Management will periodically refine the model as needed.

We expect to incur a $250,000 to $300,000 after-tax charge, during the first quarter of 2023 as a result of the adoption of CECL, which will decrease the opening stockholders’

equity balance as of January 1, 2023.

The total estimated impact equates to a 9 to 12 basis point decrease to the tangible common equity ratio.

Management is in the process of finalizing the review of the most recent model run and finalizing assumptions including qualitative adjustments and economic forecasts.

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”.

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Exposure to Changes in Interest Rates”.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity