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 25, 2024, there were 5,585,159 shares of our common stock issued and 5,315,261 shares outstanding, which were held by approximately 229 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 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". Is suer Purchases of Securities On March 29, 2023, the Company adopted a program to repurchase up to 269,898 shares, or 5%, of its then outstanding common stock. The original program expired on September 29, 2023 and was extended with a new expiration date of September 30, 2024, unless terminated earlier. As of October 30, 2023, the Company had completed the share repurchase program, repurchasing a total of 269,898 shares for approximately $2.4 million at an average cost of $8.82 per share. Effective December 21, 2023, the Company's Board of Directors authorized a new share repurchase program that authorizes the Company to repurchase up to an aggregate of 265,763 shares, or 5%, of its then outstanding common stock. The program will be in effect until December 31, 2024, unless earlier terminated. Under the new share repurchase program, the Company is authorized to repurchase shares from time to time in the open market or negotiated transactions at prevailing market rates, or by other means in accordance with federal securities laws. In connection with the share repurchase program, the Company intends to implement a trading plan intended to satisfy the affirmative defense conditions of Rule 10b5-1 under the Securities Exchange Act. The trading plan will allow the Company to repurchase shares of its common stock at times when it otherwise might have been prevented from doing so under insider trading laws by requiring that an agent selected by the Company repurchase shares of common stock on the Company's behalf on pre-determined terms. The following table sets forth information about the Company's purchases of its common stock during the three months ended December 31, 2023. There were no repurchases during the months ended November 30, 2023 and December 31, 2023. (a) (b) (c) (d) Period Total number of Shares Purchased (1) Average Price Paid Per Share Total Number of Shares Purchased As part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet to be Purchased Under the Plans or Programs (1) October 1 - October 31, 2023 117,217 $ 8.75 117,217 — Total 117,217 $ 8.75 117,217 — (1) On March 29, 2023, the Company adopted a program to repurchase up to 269,898 shares, or 5%, of its then outstanding common stock. The original program expired on September 29, 2023 and was extended with a new expiration date of September 30, 2024, unless terminated earlier. As of October 30, 2023, the Company had repurchased all of the shares remaining available to be repurchased pursuant to the terms of the then existing stock repurchase program. There were no unregistered sales of NSTS Bancorp, Inc.'s common stock during the year ended December 31, 2023 . 29 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 NSTS Bancorp, Inc. and North Shore Trust and Savings for the years ended December 31, 2023 and 2022 . 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 three loan production offices in Chicago, Plainfield and Aurora, Illinois. 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, 2023 , we had total assets of $256.8 million, including $120.6 million in net loans and $82.1 million of securities available for sale, total deposits of $168.8 million and total equity of $77.5 million. For the year ended December 31, 2023, we had a net loss of $4.0 million compared to net income of $27,000 for the year ended December 31, 2022 . 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 credit 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. We expect that our noninterest expenses will increase as we grow and expand our operations. 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. 30 Table of Contents Critical Accounting Policies 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 included within 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. 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 Credit Losses . Determining the allowance for loan and lease losses has historically been identified as a critical accounting policy. On January 1, 2023, we adopted the new CECL accounting methodology which requires entities to estimate and recognize an allowance for lifetime expected credit losses for loans and other financial assets measured at amortized cost. Previously, an allowance for loan and lease losses was recognized based on probable incurred losses. The accounting estimates relating to the allowance for credit losses is also a “critical accounting policy” as: ● changes in the provision for credit losses can materially affect our financial results; ● estimates relating to the allowance for credit losses require us to project future borrower performance, including cash flows, delinquencies and charge-offs, along with, when applicable, collateral values, based on a reasonable and supportable forecast period utilizing forward-looking economic scenarios in order to estimate probability of default and loss given default; ● the allowance for credit losses is influenced by factors outside of our control such as industry and business trends, geopolitical events and the effects of laws and regulations as well as economic conditions such as trends in housing prices, interest rates, GDP, inflation, energy prices and unemployment; and ● considerable judgment is required to determine whether the models used to generate the allowance for credit losses produce an estimate that is sufficient to encompass the current view of lifetime expected credit losses. Because our estimates of the allowance for credit losses involve judgment and are influenced by factors outside our control, there is uncertainty inherent in these estimates. Our estimate of lifetime expected credit losses is inherently uncertain because it is highly sensitive to changes in economic conditions and other factors outside of our control. Changes in such estimates could significantly impact our allowance and provision for credit losses. See Note 1 – Basis of Presentation and Changes in Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report for a discussion of our allowance for credit losses. 31 Table of Contents Comparison of Financial Condition at December 31, 2023 and December 31, 2022 At December 31, 2023 2022 (Dollars in thousands) Selected Consolidated Financial Condition Data: Total assets $ 256,776 $ 264,206 Cash and cash equivalents 31,388 13,147 Securities available for sale 82,135 121,205 Federal Home Loan Bank stock 550 550 Loans, net 120,623 103,359 Total deposits 168,826 178,714 Other borrowings 5,000 — Total equity $ 77,545 $ 80,542 General. During the first half of the year ended December 31, 2023, deposit balances decreased as a result of various large customers moving money to higher yielding accounts outside the Bank. During the second half of the year ended December 31, 2023, the Bank offered highly competitive special CDs for terms of 13 and 30 months. With the introduction of this offer, deposit balances stabilized. As a result of the overall decrease in deposits, the Bank borrowed $5.0 million from the FHLB Chicago in June, 2023 and an additional $10.0 million from the Federal Reserve Bank in November, 2023. Additionally, with the continued rise of market interest rates, the unrealized losses on the securities available-for-sale portfolio increased during 2023. During the fourth quarter, management repositioned the balance sheet by selling $30.3 million in securities for a recognized loss of $1.8 million. A portion of the funds received from the sale was used to pay down a portion of the borrowings entered into during 2023 with the remaining held primarily in cash as of December 31, 2023. During 2023, the Board approved a stock buyback program totaling 5% of the then outstanding shares. This program was completed during the fourth quarter of 2023. A second stock buyback program was approved during the fourth quarter, allowing for an additional 5% of the then outstanding shares to be repurchased. This program is expected to be completed during 2024. Total Assets . Total assets decreased $7.4 million to $256.8 million as of December 31, 2023 compared to $264.2 million at December 31, 2022. The decrease in total assets was driven by a decrease in deposits during the year. The decrease in deposits resulted in an overall reduction to cash throughout the year prior to the balance sheet repositioning. Subsequent to the balance sheet repositioning, cash and cash equivalents increased while securities available-for-sale decreased. Cash and cash equivalents. Cash and cash equivalents increased $18.3 million to $31.4 million as of December 31, 2023 from $13.1 million at December 31, 2022. The increase in cash was the result of the balance sheet repositioning described above, which resulted in proceeds of approximately $28.5 million. A portion of the proceeds was used to repay $10.0 million in borrowings from the Federal Reserve Bank. Additionally, during December 2023, the Bank invested approximately $750,000 in time deposits with other financial institutions. The remaining proceeds remain in an interest-bearing deposit account with the Federal Reserve Bank. Management continues to actively monitor our liquidity position on a daily basis and maintain levels of liquid assets deemed adequate. Time deposits with other financial institutions. Time deposits with other financial institutions decreased $2.5 million to $2.0 million as of December 31, 2023, compared to $4.5 million at December 31, 2022. The decrease is due to maturities within the portfolio. Management has redeployed the maturing time deposits to higher yielding loan originations. With a portion of the proceeds of the securities sale, management invested approximately $750,000 in time deposits with other financial institutions, with maturities of six months and a weighted average rate of 5.65%. Securities Available for Sale . Securities available-for-sale decreased to $82.1 million as of December 31, 2023, compared to $121.2 million at December 31, 2022. In the fourth quarter of 2023, the Bank sold securities with a fair value of approximately $30.3 million. During the year ended December 31, 2023, the Bank received principal and interest payments of $8.2 million, had calls and maturities of $4.1 million, had net premium amortization and discount accretion of $538,000 and had a decrease in the unrealized loss on the portfolio of $4.1 million. There were no purchases of securities available-for-sale during the year ended December 31, 2023. As of December 31, 2023, the securities available for sale portfolio included an unrealized loss position of $11.5 million, or 12.3% of the total book value of the portfolio. Management monitors the portfolio for credit losses and believes that the decline in value does not presently represent realized losses and is due to market volatility and increased market interest rates. While the Bank did sell securities for a loss in 2023, it does not currently intend to sell additional securities in a loss position and has the ability to hold securities through maturity with sufficient liquidity and available borrowing sources. Loans, net . Our loans, net, increased by $17.3 million to $120.6 million at December 31, 2023 compared to $103.3 million at December 31, 2022. The Bank originated $29.4 million in loans to be held in the portfolio during the year ended December 31, 2023. Additionally, during the year ended December 31, 2023, loan principal payments and paydowns totaled $11.2 million. During the year ended December 31, 2023, the Bank expanded the residential mortgage lending department with the hire of the Oak Leaf Community Mortgage team. The team consists of two senior mortgage loan originators and an additional support staff of eight. Oak Leaf Community Mortgage focuses on one to four-family residential lending within the expanded Chicagoland area. During the fourth quarter of 2023, with the addition of the Oak Leaf Community Mortgage team, the Bank originated $16.4 million in loans to be held in the portfolio with a weighted average rate of 7.50%. As of December 31, 2023, the allowance for credit losses (“ACL”) which includes the allowance for credit losses on loans, and the allowance for credit losses on off-balance sheet exposures, totaled $1.2 million, an increase of $176,000 from the date of adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) . As of December 31, 2023, there were three loans rated substandard or watch which were individually assessed, totaling $200,000, of which none had specific reserves. Additionally, the Bank individually assessed the largest loan in the residential construction loan portfolio, noting no specific reserve was required as of December 31, 2023. Deposits . Total deposits decreased $9.9 million to $168.8 million at December 31, 2023 compared to $178.7 million at December 31, 2022, representing a decrease of 5.5%. During the first half of 2023, deposits decreased as a result of various large customers moving money to higher yielding accounts outside the Bank. The decrease in deposits was primarily out of money market and savings accounts. During the second half of 2023, time deposits increased $13.1 million to $67.3 million as of December 31, 2023 compared to $54.2 million as of June 30, 2023, as a result of special CD offers. Management continues to actively monitor the deposit balances and interest rates offered to maintain an adequate level of liquidity. 32 Table of Contents Other borrowings. During the year ended December 31, 2023, the Bank borrowed $5.0 million from the FHLB Chicago with a term of 24 months at 4.78%. Additionally, the Bank borrowed $10.0 million from the Federal Reserve Bank as part of the Bank Term Funding Program during the fourth quarter of 2023 with a term of 12 months at 5.31%. The Bank repaid the $10.0 million to the Federal Reserve Bank during the fourth quarter with a portion of the proceeds from the securities sales. Total Equity . Total equity decreased $3.0 million to $77.5 million at December 31, 2023 primarily due to the net loss of $4.0 million for the year ended December 31, 2023 and the repurchase of outstanding shares. This decrease was partially offset by a decrease in the unrealized loss position on the securities available-for-sale portfolio. The decrease in the unrealized loss position of $2.9 million is due to changes in market interest rates and the result of the recognized losses in conjunction with the balance sheet reposition transaction described above. Additionally, during 2023, the Bank began repurchasing outstanding shares as part of the Board approved share repurchase program. As of December 31, 2023, the Bank completed the repurchase program and repurchased 269,898 shares, for a total value of $2.4 million. The Board approved a second share repurchase program during December 2023, that expires on December 31, 2024. 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, 2023 2022 Average Outstanding Balance Interest Average Yield/ Rate Average Outstanding Balance Interest Average Yield/ Rate (Dollars in thousands) Interest-earning assets: Loans $ 107,438 $ 4,360 4.06 % $ 97,714 $ 3,618 3.70 % Interest-bearing bank deposits 9,805 348 3.55 % 38,061 259 0.68 % Time deposits with other financial institutions 2,736 94 3.44 % 3,926 41 1.04 % Securities available for sale 114,744 2,902 2.53 % 118,988 2,415 2.03 % Federal Home Loan Bank stock 550 24 4.36 % 550 15 2.73 % Total interest-earning assets $ 235,273 $ 7,728 3.28 % $ 259,239 $ 6,348 2.45 % Noninterest-earning assets 21,550 21,010 Total assets $ 256,823 $ 280,249 Interest-bearing liabilities: Interest-bearing demand $ 16,714 $ 9 0.05 % $ 17,817 $ 9 0.05 % Money market 36,875 226 0.61 % 45,328 96 0.21 % Savings 45,696 68 0.15 % 48,787 73 0.15 % Time deposits 56,573 1,033 1.83 % 61,414 586 0.95 % Total interest-bearing deposits $ 155,858 $ 1,336 0.86 % $ 173,346 $ 764 0.44 % Other borrowings 3,461 172 4.97 % 1,945 — 0.00 % Total interest-bearing liabilities $ 159,319 $ 1,508 0.95 % $ 175,291 $ 764 0.44 % Noninterest-bearing liabilities 17,896 23,038 Total liabilities $ 177,215 $ 198,329 Equity 79,608 81,920 Total liabilities and equity $ 256,823 $ 280,249 Net interest income $ 6,220 $ 5,584 Interest rate spread (1) 2.33 % 2.01 % Net interest-earning assets (2) 75,954 83,948 Net interest margin (3) 2.64 % 2.15 % Average interest-earning assets to average-interest bearing liabilities 147.67 % 147.89 % (1) Equals the difference between the yield on average earning-assets and the cost of average interest-bearing liabilities. (2) Equals total interest-earning assets less total interest-bearing liabilities. (3) Equals net interest income divided by average interest-earning assets. 33 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, 2023 vs. 2022 Total Increase (Decrease) Due to Increase Volume Rate (Decrease) (Dollars in thousands) Interest-earning assets: Loans $ 378 $ 364 $ 742 Federal funds sold and interest-bearing deposits in other banks (314 ) 403 89 Time deposits in other banks (16 ) 69 53 Investment securities (89 ) 576 487 FHLB of Chicago stock — 9 9 Total interest-earning assets $ (41 ) $ 1,421 $ 1,380 Interest-bearing liabilities: Interest-bearing demand $ (1 ) $ 1 $ — Money market (21 ) 151 130 Savings (5 ) — (5 ) Time deposit (50 ) 497 447 Total interest-bearing deposits $ (77 ) $ 649 $ 572 Other borrowings — 172 172 Total interest-bearing liabilities $ (77 ) $ 821 $ 744 Change in net interest income $ 36 $ 600 $ 636 Comparison of Operating Results for the Years Ended December 31, 2023 and 2022 General. During the year ended December 31, 2023, the Federal Reserve Board increased the federal funds rate 100 basis points, continuing the increases that occurred during the year ended December 31, 2022. These increases drove market rates for bonds, loans and deposits to rise. As a result of these increases, management saw increased cost of funds and an increase in the unrealized loss on securities available-for-sale. As market rates for loans continued to rise, the originations of loans slowed. During the loan origination slow down, the Bank decided to expand our mortgage lending department by hiring a mortgage lending team, operating as Oak Leaf Community Mortgage, powered by North Shore Trust and Savings. This mortgage lending team offers a variety of different products including higher yielding loans with additional upfront fees. During the year ended December 31, 2023 the Bank approved the 2023 Equity Incentive Plan to attract and retain employees. During the fourth quarter, management repositioned the balance sheet by selling approximately $30.3 million in book value of available-for-sale investment securities with an average yield of 2.83%. The sale of these securities is designed to seek to improve the Bank’s earnings going forward, beginning in fiscal year 2024, and to provide liquidity to deleverage its balance sheet. Proceeds from the sale were used to repay $10.0 million in existing debt with a current rate of 5.31%, with the remainder deployed into cash and short-term U.S. Treasury notes with an average expected yield in excess of 5.0% and to fund additional residential loan growth and general working capital at the Bank. For the year ended December 31, 2023, we had a net loss of $4.0 million, compared to net income of $27,000 for the year ended December 31, 2022. The increase in net loss is primarily the result of the balance sheet repositioning, which resulted in a loss on sale of securities of $1.8 million and the tax expense related to the addition to the valuation allowance on the remaining portion of the deferred tax asset of $1.0 million. Additionally, the Bank recorded a higher provision for credit losses during the year ended 2023 compared to the year ended 2022. Net Interest Income. Net interest income increased $636,000, or 11.4%, to $6.2 million for the year ended December 31, 2023 compared to $5.6 million for the year ended December 31, 2022. Our interest rate spread increased to 2.33% for the year ended December 31, 2023 from 2.01% for the same period ending December 31, 2022. Our net interest margin increased to 2.64% for the year ended December 31, 2023 from 2.15% for the same period ended December 31, 2022. Average interest-earning assets of $235.3 million for the year ended December 31, 2023 reflect a decrease of $24.0 million compared to 2022. The decrease in average earning assets was driven by the refunds issued on the stock oversubscription in the prior year. The average outstanding balance of loans, net increased to $107.4 million, an increase of $9.7 million for the year ended December 31, 2023. Additionally, the average yield earned on those loans outstanding increased 36 basis points to 4.06% for the year ended December 31, 2023, which is the result of new originations made at higher market rates. Additionally, interest earned on securities available-for-sale increased $487,000 on a lower average balance of securities available-for-sale of $114.7 million, resulting in a higher average yield on securities of 2.53%. The lower average balance of securities is driven by a higher average unrealized loss on the available-for-sale investment securities as well as paydowns of the portfolio throughout the year. The increased yield on securities available-for-sale was the result of an overall increase in market rates available at the time of purchase throughout 2022. The cost of interest-bearing deposits increased 42 basis points, to 0.86%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The net increase in our funding costs for 2023 was primarily due to a CD special offered during 2023 to attract and retain customers, as well as an increase in rates offered on money market accounts, which were increased in the fourth quarter of 2022 and the first quarter of 2023 to remain competitive with the local market and to seek to retain deposits. During 2023, the Bank borrowed $5.0 million from the FHLB Chicago at a rate of 4.78%, which matures in June 2025. Additionally, in November 2023, the Bank borrowed $10.0 million from the Federal Reserve Bank of Chicago through the Bank Term Funding Program at 5.31%. During December 2023, the Bank repaid the Bank Term Funding Program borrowing with a portion of the proceeds received from the securities sale. Interest expense on other borrowings totaled $172,000 for the year ended December 31, 2023. 34 Table of Contents Provision for (Reversal of) Credit Losses. The allowance for credit losses, including the allowance for credit losses on loans, allowance for credit losses on off-balance sheet liabilities and the allowance for credit losses on available-for-sale securities, is established through a provision for credit losses charged to earnings. Credit losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. On January 1, 2023, we adopted ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326). As a result of the adoption of this new standard, we recorded a reduction to retained earnings of approximately $279,000, which was net of the $110,000 deferred tax asset impact stemming from adoption. For the year ended December 31, 2023, a provision for credit losses was recorded based on the current allowance for credit loss ("ACL") assessment. The increase in ACL was not considered part of the ASU 2016-13 adoption, as these changes in the assessment of the ACL occurred after the January 1, 2023 adoption. We recorded a provision for credit losses of $176,000 during the year ended December 31, 2023, comprised of $168,000 in provision of credit losses to loans and $8,000 in provision of credit losses related to unfunded commitments. The increase in the ACL is driven by an increase in loan balances throughout the year. We will continue to assess and evaluate the estimated future credit loss impact of current market conditions in subsequent reporting periods, which will be highly dependent on credit quality, macroeconomic forecasts and conditions, as well as the composition of our loan and available-for-sale securities portfolios. 35 Table of Contents Noninterest Income . The following table shows the components of noninterest income for the periods presented. For the Year Ended December 31, 2023 2022 (Dollars in thousands) Noninterest income: Gain on sale of mortgage loans $ 32 $ 106 Loss on sale of securities (1,794 ) — Rental income on office building 64 53 Service charges on deposits 270 291 Increase in cash surrender value of BOLI 192 178 Other 86 608 Total noninterest income $ (1,150 ) $ 1,236 Noninterest income decreased $2.4 million for the year ended December 31, 2023 compared 2022. During 2023, the Bank sold approximately $30.3 million in book value of lower yielding available-for-sale investment securities, generating a loss of $1.8 million. Additionally, the gain on sale of mortgage loans decreased $74,000, or 69.8%, to $32,000 for the year ended December 31, 2023 compared to $106,000 for the year ended December 31, 2022. The decrease in gain on sale of mortgages was due to a reduction in the number of loans sold, which was a strategic decision to grow the loan portfolio. With the addition of Oak Leaf Community Mortgage, the Bank anticipates selling a higher percentage of the total loans originated during 2024, resulting in higher non-interest income. Other non-interest income in 2022 included the Employee Retention Credit of $502,000. Noninterest Expense . The following table shows the components of noninterest expense for the periods presented. For the year ended December 31, 2023 2022 (Dollars in thousands) Noninterest expense: Salaries and employee benefits $ 4,554 $ 3,846 Equipment and occupancy 739 658 Data processing 684 632 Professional services 601 500 Advertising 104 90 Supervisory fees and assessments 140 142 Loan expenses 117 86 Deposit expenses 217 203 Director fees 216 223 Other 480 497 Total noninterest expense $ 7,852 $ 6,877 Noninterest expense increased $975,000 for the year ended December 31, 2023 to $7.9 million compared to $6.9 million for 2022. The increase is primarily driven by an increase in salaries and employee benefits and professional services expenses. Salaries and employee benefits increased 18.4% primarily as a result of the introduction of the 2023 Equity Incentive Plan on June 15, 2023, as well as merit increases to employees and health insurance premiums. During the year ended December 31, 2023, the 2023 Equity Incentive Plan expense totaled $519,000. During the year ended December 31, 2023, as part of the strategic growth initiatives, the Bank hired a mortgage lending team of 10 individuals, operating as Oak Leaf Community Mortgage, powered by North Shore Trust and Savings. These additional employees joined the Bank between September 11, 2023 and October 2, 2023. Additional expenses related to salaries and benefits for these employees is anticipated during 2024. Professional services expenses increased $101,000 for the year ended December 31, 2023 to $601,000 compared to $500,000 for the year ended December 31, 2022 due to an increase in legal fees and other costs associated with the implementation of the 2023 Equity Incentive Plan. Equipment and occupancy expenses increased due to necessary repairs to our buildings and parking lots. Data processing expenses increased due to the addition of new employees and their related technology onboarding during the year. 36 Table of Contents Provision for Income Tax Expense. During the year ended December 31, 2023, the Bank recorded income tax expense of $1.0 million, consisting of $9,000 current tax expense, $2.1 million change in valuation allowance and $1.2 million deferred tax benefit. Federal net operating losses as of December 31, 2023 are $5.0 million, of which $1.3 million is subject to expire in 2027, the remainder does not expire. During the year ended December 31, 2023, management assessed the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing net operating losses. A significant piece of objective negative evidence evaluated is the cumulative taxable loss incurred over the four-year period ended December 31, 2023. 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, 2023, a full valuation allowance of $2.1 million, against the net deferred tax assets has been recorded. Additionally, 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 $532,000 has been recorded on the related deferred tax asset. There were no uncertain tax positions outstanding as of December 31, 2023 and 2022 . As of December 31, 2023 , tax years remaining open for State of Illinois and Wisconsin were 2019 through 2022. Federal tax years that remained open were 2020 through 2022. As of December 31, 2023 , 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 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 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. 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, 2023 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 $ 58,780 $ (13,947 ) (19.2 )% 26.4 % (3.1 )% 200 63,144 (9,583 ) (13.2 )% 27.5 % (2.0 )% 100 67,743 (4,984 ) (6.9 )% 28.5 % (1.0 )% Static 72,727 — — 29.5 % — -100 75,239 2,512 3.5 % 29.6 % 0.1 % -200 77,083 4,356 6.0 % 29.4 % (0.1 )% 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, 2023 . Change in Interest Rates in Basis Points Net Interest (Rate Shock) Income $ Change % Change (Dollars in thousands) 300bp $ 5,985 $ (239 ) (3.8 )% 200 6,169 (55 ) (0.9 )% 100 6,251 27 0.4 % Static 6,224 — 0.0 % -100 6,025 (199 ) (3.2 )% -200 5,833 (391 ) (6.3 )% The table above indicates that as of December 31, 2023 , 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, 2024 would be expected to decrease by $239,000, or 3.8% to $6.0 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. 37 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 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. The Bank is eligible to borrow up to a total of $72.2 million and $68.6 million at December 31, 2023 and 2022 , respectively, which would be collateralized by $102.6 million and $86.6 million of first mortgage loans under a blanket lien arrangement at December 31, 2023 and 2022 , respectively. 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. 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 operating activities was $431,000 and $3.0 million for the years ended December 31, 2023 and 2022 , respectively. Net cash provided by or (used in) investing activities, which consists primarily of net change in loans receivable and net change in investment securities, was $25.0 million and $(44.5) million for the years ended December 31, 2023 and 2022 , respectively. Net cash used in financing activities, consisting primarily of the activity in deposit accounts, proceeds from the issuance of common stock and FHLB of Chicago advances, was $7.1 million and $67.0 million for the years ended December 31, 2023 and 2022 , 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, 2023 , totaled $46.6 million. While we historically have experienced strong deposit retention, many of the new time deposits were brought in with a growth pricing strategy. As such, we expect a decrease in the time deposits as these mature during 2024. 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, 2023 , 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 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 24.72% and 24.81% at December 31, 2023 and 2022 , respectively. Off-Balance Sheet Arrangements . At December 31, 2023 , we had $3.8 million of outstanding commitments to originate loans. Our total letters and lines of credit and unused lines of credit totaled $4.1 million at December 31, 2023 . 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, 2023 . Total Amounts Committed at Amount of Commitment Expiration – Per Period December 31, 2023 To 1 Year 1-3 Years 4-5 Years After 5 Years (Dollars in thousands) Unused line of credit $ 4,050 $ 561 $ 927 $ 247 $ 2,315 Commitments to originate loans 3,770 3,770 — — — Total commitments $ 7,820 $ 4,331 $ 927 $ 247 $ 2,315 38 Table of Contents Contractual Cash Obligations . The following table summarizes our contractual cash obligations at December 31, 2023 . Total at Payments Due By Period December 31, 2023 To 1 Year 1-3 Years 4-5 Years After 5 Years (Dollars in thousands) Time deposits $ 67,255 $ 46,637 $ 13,945 $ 6,673 $ — Other borrowings 5,000 — 5,000 — — Total contractual obligations $ 72,255 $ 46,637 $ 18,945 $ 6,673 $ — Impact of Inflation and Changing Prices 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 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. Current Accounting Developments In June 2016, the FASB issued ASU No. 2016-13, “ Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ,” also known as Current Expected Credit Losses, or CECL. ASU 2016-13 was issued to provide financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date to enhance the decision making process. The CECL model utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities, and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. For available for-sale securities where fair value is less than cost, credit-related impairment, if any, will be recognized in an allowance for credit losses and adjusted each period for changes in expected credit risk. This model replaces the multiple existing impairment models, which generally require that a loss be incurred before it is recognized. We adopted ASU 2016-13 using the current expected credit loss (“CECL”) methodology for financial assets measured at amortized cost, effective January 1, 2023. Results for the periods beginning after January 1, 2023 are presented under ASU 2016-13, while prior period amounts are reported in accordance with the previously applicable accounting standards. The Company recorded a reduction to retained earnings of approximately $279,000 upon adoption of ASU 2016-13. The transition adjustment included an increase to the allowance for credit losses on loans of $384,000 and an increase to the allowance for credit losses on off-balance sheet credit exposure of approximately $5,000. The transition adjustment included a corresponding increase in deferred tax assets. The following table illustrates the impact of ASU 2016-13 adoption: Allowance for credit losses as reported under ASU 2016-13 Allowance pre-ASU 2016-13 Adoption Impact on Allowance of ASU 2016-13 Adoption Assets: (Dollars in thousands) First mortgage loans 1-4 family residential $ 916 $ 581 $ 335 Multi-family 42 19 23 Commercial 48 19 29 Consumer loans 2 5 (3 ) Allowance for credit losses for all loans $ 1,008 $ 624 $ 384 Liabilities: Allowance for credit losses on off-balance sheet exposures $ 5 $ — $ 5 In March 2022, FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures . The amendments in this update eliminate the accounting guidance and related disclosures for TDRs by creditors in Subtopic 310-40, Receivables — Troubled Debt Restructurings by Creditors , while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty and requiring an entity to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments — Credit Losses — Measured at Amortized Cost . The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and are applied prospectively, except with respect to the recognition and measurement of TDRs, where an entity has the option to apply a modified retrospective transition method. Early adoption of the amendments in this update is permitted. An entity may elect to early adopt the amendments regarding TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. As of January 1, 2023, we adopted ASU No. 2022-02, which superseded the current disclosure requirements for TDRs. 39 Table of Contents 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 - Exposure to Changes in Interest Rates”.