NSTS BANCORP, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

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This discussion and analysis reflects the consolidated financial statements and
other relevant statistical data, and is intended to enhance your understanding
of the financial condition and results of operations of North Shore MHC, NSTS
Financial Corporation and North Shore Trust and Savings for the years ended
December 31, 2021 and 2020. The purpose of this discussion is to provide
information about our financial condition and results of operations which is not
otherwise apparent from the consolidated financial statements. You should read
the information in this section in conjunction with the other business and
financial information provided in this annual report.



Overview



North Shore Trust and Savings is a community-oriented savings institution
headquartered in Waukegan, Illinois. We operate as a traditional thrift relying
on the origination of long-term one- to four-family residential mortgage loans
secured by property in Lake County, Illinois and surrounding communities. We
also originate multi-family and commercial real estate loans and, to a lesser
extent, construction, home equity, and consumer loans. We currently operate
three full-service banking offices in Lake County, Illinois and one loan
production office in Chicago. Our primary sources of funds consist of attracting
deposits from the general public and using those funds along with funds from the
FHLB of Chicago and other sources to originate loans to our customers and invest
in securities. As of December 31, 2021, we had total assets of $340.9 million,
including $96.5 million in net loans and $101.0 million of securities available
for sale, total deposits of $285.6 million and total equity of $45.2 million.
For the year ended December 31, 2021, we had a net loss of $55,000 compared to a
net loss of $112,000 for the year ended December 31, 2020.



Our results of operations depend, to a large extent, on net interest income,
which is the difference between the income earned on our loan and investment
portfolios and interest expense on deposits and borrowings. Our net interest
income is largely determined by our net interest spread, which is the difference
between the average yield earned on interest-earning assets and the average rate
paid on interest-bearing liabilities, and the relative amounts of
interest-earning assets and interest-bearing liabilities. Results of operations
are also affected by our provisions for loan losses, fee income and other
noninterest income and noninterest expense. Noninterest expense principally
consists of compensation, office occupancy and equipment expense, data
processing, advertising and business promotion and other expenses. After the
conversion, we expect that our noninterest expenses will increase as we grow and
expand our operations. In addition, our compensation expense will increase due
to the new stock benefit plans we intend to implement. Our results of operations
and financial condition are also significantly affected by general economic and
competitive conditions, particularly changes in interest rates, the impact of
the COVID-19 pandemic, changes in accounting guidance, government policies and
actions of regulatory authorities.



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Critical Accounting Policies



In reviewing and understanding financial information for North Shore MHC, you
are encouraged to read and understand the significant accounting policies used
in preparing our financial statements. These policies are described in Note 1 of
the notes to our consolidated financial statements beginning on page   40   of
this filing. Our accounting and financial reporting policies conform to
accounting principles generally accepted in the United States of America and to
general practices within the banking industry. Accordingly, the financial
statements require certain estimates, judgments, and assumptions, which are
believed to be reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of income and expenses
during the periods presented. The JOBS Act of 2012 contains provisions that,
among other things, reduce certain reporting requirements for qualifying public
companies. As an "emerging growth company" we may delay adoption of new or
revised accounting pronouncements applicable to public companies until such
pronouncements are made applicable to private companies. We intend to take
advantage of the benefits of this extended transition period. Accordingly, our
financial statements may not be comparable to companies that comply with such
new or revised accounting standards.



The following accounting policies comprise those that management believes are
the most critical to aid in fully understanding and evaluating our reported
financial results. These policies require numerous estimates or economic
assumptions that may prove inaccurate or may be subject to variations which may
significantly affect our reported results and financial condition for the period
or in future periods.



Allowance for Loan Losses. We have identified the evaluation of the allowance
for loan losses as a critical accounting policy where amounts are sensitive to
material variation. The allowance for loan losses represents management's
estimate for probable losses that are inherent in our loan portfolio but which
have not yet been realized as of the date of our balance sheet. It is
established through a provision for loan losses charged to earnings. Loans are
charged against the allowance for loan losses when management believes that the
collectability of the principal is unlikely. Subsequent recoveries are added to
the allowance. The allowance is an amount that management believes will cover
known and inherent losses in the loan portfolio based on evaluations of the
collectability of loans. The evaluations take into consideration such factors as
changes in the types and amount of loans in the loan portfolio, historical loss
experience, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral, estimated losses relating to
specifically identified loans, and current economic conditions. This evaluation
is inherently subjective as it requires material estimates including, among
others, exposure at default, the amount and timing of expected future cash flows
on impacted loans, value of collateral, estimated losses on our commercial and
residential loan portfolios, and general amounts for historical loss experience.
All of these estimates may be susceptible to significant changes as more
information becomes available.



While management uses the best information available to make loan loss allowance
evaluations, adjustments to the allowance may be necessary based on changes in
economic and other conditions or changes in accounting guidance. Historically,
our estimates of the allowance for loan loss have not required significant
adjustments from management's initial estimates. In addition, the OCC as an
integral part of their examination processes periodically reviews our allowance
for loan losses. The OCC may require the recognition of adjustments to the
allowance for loan losses based on its judgment of information available to them
at the time of their examinations. To the extent that actual outcomes differ
from management's estimates, additional provisions to the allowance for loan
losses may be required that would adversely impact earnings in future periods.



COVID-19



In light of the recent events surrounding the COVID-19 pandemic, we are
continually assessing the effects of the pandemic on our employees, customers
and communities. In March 2020, the CARES Act was enacted. The CARES Act
contains many provisions related to banking, lending, mortgage forbearance and
taxation. We have been working diligently to help support our customers through
the PPP, loan modifications and loan deferrals. As of December 31, 2021, we had
funded 40 SBA PPP loans totaling $1.3 million to existing customers and key
prospects located primarily in our markets. As of December 31, 2021, all PPP
loans were forgiven by the SBA. In addition, during the years ended December 31,
2021 and 2020, we granted loan modifications under the CARES Act generally in
the form of three-month deferrals of principal payments and a three-month
extension of the maturity date. We handle loan modification requests on a
case-by-case basis considering the effects of the COVID-19 pandemic and the
related economic slowdown on our customers and their current and projected cash
flows through the terms of their respective loans. We believe the customer
interaction during this time provides us with an opportunity to broaden and
deepen our customer relationships while benefiting the local communities we
serve. In total we modified 50 loans with principal balances totaling $9.7
million. As of December 31, 2021, all COVID-19 loan modifications have returned
to repayment.



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Comparison of Financial Condition at December 31, 2021 and December 31, 2020



                                                        At December 31,
                                                      2021            2020
                                                    (Dollars in thousands)
Selected Consolidated Financial Condition Data:
Total assets                                      $    340,869      $ 242,219
Cash and cash equivalents                              121,611         31,868
Securities available for sale                          100,950         81,620
FHLB of Chicago stock                                      550            512
Loans receivable, net                                   96,534         98,455
Total deposits                                         285,621        186,404
FHLB of Chicago advances                                 5,000          4,000
Total equity                                      $     45,183      $  46,725




Total Assets. Total assets increased $98.7 million, or 40.8%, to $340.9 million
at December 31, 2021 compared to $242.2 million at December 31, 2020. The
increase is a direct result of an increase in cash and cash equivalents that was
funded by deposit growth due to funds received in anticipation of the Plan of
Conversion. The increase was partially offset by a decrease in loans, net.



Cash and cash equivalents. The funds received as part of the conversion were
primarily held in cash and cash equivalents at December 31, 2021, which
increased $89.7 million, or 281.2%, to $121.6 million at December 31, 2021 ,
compared to $31.9 million at December 31, 2020.



Securities Available for Sale. Prior to the influx of funds during December 2021
and during the year ended December 31, 2021, the Bank made an effort to reduce
the cash and cash equivalents balance by investing in higher yielding assets. As
a result of these efforts, securities available for sale increased $19.4
million, or 23.8%, to $101.0 million at December 31, 2021 compared to $81.6
million at December 31, 2020.  Our investment securities portfolio primarily
consisted of debt obligations issued by the U.S. government and government
agencies and government sponsored mortgage-backed securities.



Time deposits with other financial institutions. As time deposits with other
financial institutions matured, management utilized those funds to purchase
securities available for sale with greater yields. As such, time deposits with
other financial institutions decreased $8.9 million, or 71.8%, to $3.5 million
at December 31, 2021 compared to $12.4 million at December 31, 2020.



Loans held for sale. Our loans held for sale decreased $1.9 million, or 95.0%,
to $104,000 at December 31, 2021 compared to $2.0 million at December 31, 2020.
During the year ended December 31, 2021, management increased the portion of
loans originated for the portfolio as opposed to the loans originated for sale.
We consider our balance sheet as well as market conditions on an ongoing basis
in making decisions as to whether to hold loans we originate for investment or
to sell such loans choosing the strategy that we believe is most advantageous to
us from a profitability and risk management standpoint at that time.



Loans, net. Our loans, net, decreased by $2.0 million, or 2.0%, to $96.5 million
at December 31, 2021 compared to $98.5 million at December 31, 2020. During the
year ended December 31, 2021, our total loan originations of loans held for
investment of $25.9 million was offset by loan principal repayments of $27.8
million and a transfer of loans held for investment to other real estate owned
of $172,000. The primary decrease in loans, net was a decrease in multi-family
residential loans of $2.2 million, or 38.6%, to $3.5 million at December 31,
2021 compared to $5.7 million at December 31, 2020. Additionally, commercial
loans decreased $739,000, or 13.9%, to $4.6 million at December 31, 2021
compared to $5.3 million at December 31, 2020 as a result of forgiveness of PPP
loans during 2021. The decrease was partially offset by an increase in one- to
four- family first residential mortgage loans of $830,000, or 0.9%, to $88.0
million at December 31, 2021 compared to $87.2 million at December 31, 2020. At
December 31, 2021, the allowance for loan losses was $779,000, a decrease of
$91,000 compared to December 31, 2020, primarily due to a decrease in
non-performing assets and general economic improvements during 2021.
Non-performing loans were $102,000 at December 31, 2021 compared to $280,000 at
December 31, 2020. The decrease of $178,000 was the result of two non-accrual
loans being moved to OREO, and later sold during the year, and payments made on
non-accrual loans. Our non-performing loans to total loans decrease to 0.15% at
December 31, 2021 compared to 0.36% at December 31, 2020.



Bank-owned life insurance. Total BOLI increased by $181,000, or 2.0%, to $9.1
million at December 31, 2021 compared to $8.9 million at December 31, 2020. BOLI
provides us with a funding offset for our employee benefit plans and
obligations. BOLI also provides a source of noninterest income that generally is
non-taxable.



Deposits. Our total deposits were $285.6 million at December 31, 2021, an
increase of $99.2 million, or 53.2%, from $186.4 million at December 31, 2020.
The increase in deposits was driven by an influx of funds as part of the Plan of
Conversion. Excluding deposits received in connection with the conversion and
related stock offering, deposits increased $12.0 million, or 6.4%. Our core
deposits, which we consider to be all deposits except time deposit accounts,
amounted to $212.7 million on December 31, 2021, an increase of $94.2 million,
or 79.5% from $118.5 million as of December 31, 2020. Total time deposit
accounts increased $5.0 million, or 7.4%, to $72.9 million at December 31, 2021
from $67.9 million at December 31, 2020.



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Other Borrowings. Our borrowings, which consist of FHLB of Chicago advances,
amounted to $5.0 million at December 31, 2021, compared to $4.0 million at
December 31, 2020. In 2020, the FHLB of Chicago offered member banks an interest
free one-year advance of $4.0 million due to COVID-19. The FHLB advance was paid
off in May 2021. In 2021, the FHLB of Chicago offered member banks an interest
free one-year advance of $5.0 million due to COVID-19 that we used to fund loans
and purchase securities available for sale in an effort to generate a better
interest rate spread.



Total Equity. Total equity decreased $1.5 million, or 3.2%, to $45.2 million at
December 31, 2021, from $46.7 million at December 31, 2020. The decrease is
primarily the result of a decrease in tax effected net unrealized gain (loss) on
securities available for sale of $1.5 million, or 107.1%, to $(81,000) at
December 31, 2021, from $1.4 million at December 31, 2020, and by a net loss for
the year ended December 31, 2021 of $55,000. At December 31, 2021, our ratio of
total equity to total assets was 13.3%.



Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The
following table shows for the periods indicated the total dollar amount of
interest from average interest-earning assets and the resulting yields, as well
as the interest expense on average interest-bearing liabilities, expressed both
in dollars and rates, and the net interest margin. All average balances are
based on daily balances. The table also reflects the yields on North Shore Trust
and Savings' interest-earning assets and costs of interest-bearing liabilities
for the periods shown.



                                                            At or For the Year Ended December 31,
                                                 2021                                                  2020
                               Average                                               Average
                             Outstanding                          Average          Outstanding                          Average
                               Balance          Interest        Yield/ Rate          Balance          Interest        Yield/ Rate
                                                                   (Dollars in thousands)
Interest-earning assets:
Loans                      $        98,409     $     3,569              3.63 %   $       100,907     $     4,086              4.05 %
Federal funds sold and
interest-bearing
deposits in other banks             33,384              35              0.10 %            34,929             128              0.37 %
Time deposits with other
financial institutions               6,889              66              0.96 %            17,941             379              2.11 %
Securities available for
sale                                94,289           1,355              1.44 %            69,687           1,417              2.03 %
FHLB of Chicago stock(1)               540              13              2.41 %               512              13              2.54 %
Total interest-earning
assets                     $       233,511     $     5,038              2.16 %   $       223,976     $     6,023              2.69 %
Noninterest-earning
assets                              16,159                                                16,004
Total assets               $       249,670                                       $       239,980
Interest-bearing
liabilities:
Interest-bearing demand    $        17,738     $         8              0.05 %   $        14,461     $        12              0.08 %
Money market                        46,985              96              0.20 %            51,278             242              0.47 %
Savings                             45,609              68              0.15 %            40,638              97              0.24 %
Time deposits                       67,253             768              1.14 %            70,188           1,137              1.62 %
Total interest-bearing
deposits                   $       177,585     $       940              0.53 %   $       176,565     $     1,488              0.84 %
Other borrowings(2)                  4,616               -              0.00 %             2,448               -              0.00 %
Total interest-bearing
liabilities                $       182,201     $       940              0.52 %   $       179,013     $     1,488              0.83 %

Not bearing interest

liabilities                         21,417                                                14,927
Total liabilities          $       203,618                                       $       193,940
Equity                              46,052                                                46,040
Total liabilities and
equity                     $       249,670                                       $       239,980
Net interest income(1)                         $     4,098                                           $     4,535
Interest rate spread(3)                                                 1.64 %                                                1.86 %
Net interest-earning
assets(4)                  $        51,310                                       $        44,963
Net interest margin(5)                                                  1.75 %                                                2.02 %
Average interest-earning
assets to
average-interest bearing
liabilities                         128.16 %                                              125.12 %



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(1) Includes FHLB dividend income from Chicago stock which is included in

“Other income” in the December 31, 2020 Financial state.

(2) Other borrowings consist of 0% FHLB rates of Chicago advances.

(3) Equal to the difference between the return on average productive assets and the

cost of average interest-bearing liabilities.

(4) Equals total interest-bearing assets minus total interest-bearing liabilities.

(5) Equals net interest income divided by average interest-earning assets.

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Rate/Volume Analysis. The following table shows the extent to which changes in
interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities affected our interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in rate, which is the change in rate multiplied by prior year
volume, and (2) changes in volume, which is the change in volume multiplied by
prior year rate. The combined effect of changes in both rate and volume has been
allocated proportionately to the change due to rate and the change due to
volume.



                                                      Years Ended December 31, 2021 vs. 2020
                                                                                          Total
                                                  Increase (Decrease) Due to            Increase
                                                  Volume               Rate            (Decrease)
                                                              (Dollars in thousands)
Interest-earning assets:
Loans                                          $        (248 )     $       (269 )     $        (517 )
Federal funds sold and interest-bearing
deposits in other banks                                   (5 )              (88 )               (93 )
Time deposits in other banks                            (166 )             (147 )              (313 )
Investment securities                                    420               (482 )               (62 )
FHLB of Chicago stock(1)                                   -                  -                   -
Total interest-earning assets                  $           1       $       (986 )     $        (985 )
Interest-bearing liabilities:
Interest-bearing demand                        $           2       $         (6 )     $          (4 )
Money market                                             (19 )             (127 )              (146 )
Savings                                                   11                (40 )               (29 )
Time deposit                                             (46 )             (323 )              (369 )
Total interest-bearing liabilities             $         (52 )     $       (496 )     $        (548 )
Change in net interest income                  $          53       $       (490 )     $        (437 )



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(1) Includes FHLB dividend income from Chicago stock which is included in

    "Other Income" in the December 31, 2020 financial statements.



Comparison of operating results for the years ended December 31, 2021 and 2020




General. For the year ended December 31, 2021, we had a net loss of $55,000,
compared to a net loss of $112,000 for the year ended December 31, 2020. The
decrease in the net loss in 2021 compared to 2020 was primarily driven by a
decrease in the provision for loan losses and non-interest expense. These
decreases were partially offset by a decrease in net interest income and a
decrease in non-interest income, as well a reduction in the income tax benefit.



Net Interest Income. Net interest income decreased $437,000, or 9.7%, to
$4.1 million for the year ended December 31, 2021 compared to $4.5 million for
the year ended December 31, 2020. Our interest rate spread decreased to 1.64%
for the year ended December 31, 2021 from 1.86% for the year ended December 31,
2020, and our net interest margin decreased to 1.75% for the year ended December
31, 2021 from 2.02% for the year ended December 31, 2020. The decrease in
interest rate spread and net interest margin was primarily the result of a
continuing low interest rate environment which reduced the average yields earned
on our interest-earning assets in an amount which more than offset the reduction
in the average cost of our interest-bearing liabilities. As the low interest
rate environment continued into 2021, higher yielding assets, such as securities
available for sale, saw an increase in prepayments. The funds were reinvested in
securities available for sale at the current interest rate.



Average interest-earning assets of $233.5 million in 2021 were $9.5 million, or
4.3% higher than 2020. The increase in average earning assets was driven by a
$24.6 million, or 35.3%, increase in securities available for sale, as a result
of the decision to invest available cash in securities available for sale to
achieve a higher yield. This increase was offset by a decrease in time deposits
in other banks of $11.1 million, or 61.6%, as management invested the maturing
time deposits in other banks in higher yielding securities available for sale.
The average outstanding balance of loans decreased $2.5 million, or 2.5%, in
2021, resulting in a decrease of interest earned of $517,000, or 12.7%. The
decrease in loans primarily came from the multi-family loans, which are
generally higher yielding loans, as compared to one- to four-family residential
mortgage loans. The average yield on loans decreased 42 basis points in 2021, to
3.63%, compared to 2020.



Average interest-bearing liabilities increased $3.2 million, or 1.8%, to $182.2
million for the year ended December 31, 2021 compared to $179.0 million for the
year ended December 31, 2020. Average yield on interest-bearing liabilities
decreased 31 basis points, to 0.52% for the year ended December 31, 2021. On
average, interest-bearing deposits increased $1.0 million, or 0.6%, primarily
driven by increases in lower cost deposits, such as demand and savings accounts,
offset by decreases in higher cost deposits such as money market and time
deposit accounts. The average balance of other borrowings increased $2.2
million, or 88.6%, which consists of one FHLB advance at a 0.0% interest rate.

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(Reversal of) Provision for Loan Losses. The allowance for loan losses is
established through a provision for loan losses charged to earnings as losses
are estimated to have occurred in our loan portfolio.  Loan losses are charged
against the allowance when management believes the collectability of a loan
balance is confirmed.  Subsequent recoveries, if any, are credited to the
allowance.



The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectability of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of the underlying collateral, and prevailing economic conditions.  The
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.



A loan is considered impaired when, based on current information or events, it
is probable that we will be unable to collect the scheduled payments of
principal and interest when due according to the contractual terms of the loan
agreement.  When a loan is impaired, the measurement of such impairment is based
upon the fair value of the collateral of the loan.  If the fair value of the
collateral is less than the recorded investment in the loan, we will recognize
the impairment by creating a valuation allowance with a corresponding charge
against earnings.



An allowance is also established for uncollectible interest on loans classified
as substandard.  The allowance is established by a charge to interest income
equal to all interest previously accrued, and income is subsequently recognized
only to the extent that cash payments are received.  When, in management's
judgment, the borrower's ability to make interest and principal payments is back
to normal, the loan is returned to accrual status.



During the year ended December 31, 2021, a reversal of the provision for loan
losses of $23,000 was recorded, compared to a provision for loan losses of
$464,000 during the year ended December 31, 2020. Our recorded net charge-offs
were $68,000 for the year ended December 31, 2021 compared to net recoveries of
$17,000 for the year ended December 31, 2020. We recorded a reversal of the
provision during the year ended December 31, 2021 due to a reduction in average
loan balances during the period and general overall improvements to the economy.
Our evaluation of the allowance for loan losses continued to give particular
consideration to the continuing economic impact of the COVID-19 pandemic. To
account for these uncertainties and losses which have been incurred, but not yet
identified, we continued to include general reserves of $140,000 within the
allowance for loan losses as of December 31, 2021.



The establishment of the allowance for loan losses is significantly affected by
uncertainties and management judgment and there is a likelihood that different
amounts would be reported under different conditions or assumptions.  Various
regulatory agencies, as an integral part of their examination process,
periodically review our allowance for loan losses.  Such agencies may require us
to make additional provisions for estimated loan losses based upon judgments
different from those of management.



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Non-interest income. The following table presents the components of non-interest revenue for the periods presented.



                                                For the Year Ended December 31,
                                                 2021                     2020
                                                    (Dollars in thousands)
Noninterest income:
Gain on sale of mortgage loans             $            410         $       

788

Gain on sale of securities                              131                 

59

Rental income on office building                         42                 

42

Service charges on deposits                             289                 

255

Increase in cash surrender value of BOLI                181                      183
Other                                                   156                      264
Total noninterest income                   $          1,209         $          1,591




Noninterest income decreased $382,000, or 24.0%, to $1.2 million for the year
ended December 31, 2021, compared to $1.6 million for the year ended December
31, 2020. The decrease in noninterest income is primarily driven by a decrease
in the gain on sale of mortgage loans. During 2021, the Bank sold $21.2 million
loans, for a net gain on sale of $410,000, compared to loan sales of $36.5
million and a net gain on sale of $788,000 during 2020. The decrease was
partially offset by an increase in gain on sale of investments. During 2021, the
Bank sold $6.6 million of securities available for sale, for a net gain on sale
of $131,000, compared to $12.1 million in sales of securities available for
sale, for a net gain on sale of $59,000 during 2022.



Non-interest expenses. The following table presents the components of non-interest expenses for the periods presented.



                                        For the year ended December 31,
                                         2021                     2020
                                            (Dollars in thousands)
Noninterest expense:
Salaries and employee benefits     $          3,352         $          3,691
Equipment and occupancy                         665                      689
Data processing                                 613                      565
Professional services                           139                      484
Advertising                                      71                       68
Supervisory fees and assessments                126                      117
Loan expenses                                   129                      141
Deposit expenses                                183                      155
Other                                           321                      367
Total noninterest expense          $          5,599         $          6,277




Noninterest expense decreased $678,000, or 10.8%, to $5.6 million for the year
ended December 31, 2021, compared to $6.3 million for the year ended December
31, 2020. The decrease in noninterest expense is driven by a decrease in
salaries and employee benefits costs, which decreased $339,000, or 9.2%. The
decrease in salaries and employee benefits costs was driven by a decrease in the
number of full-time equivalent employees. The average number of full-time
equivalent employees throughout the year ended December 31, 2021 and 2020 was 35
and 39, respectively.  Professional services expenses decreased $345,000 or
71.3%, to $139,000 for the year ended December 31, 2021, compared to $484,000
for the year ended December 31, 2020. The decrease in professional services is
due to certain costs associated with benefit plan restructuring and other
one-time fees expensed in 2020 that are not expected to recur in future periods.



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We expect noninterest expense to increase because of costs associated with
operating as a newly public company, including the increased compensation
expenses associated with the purchase of shares of common stock by our employee
stock ownership plan and the possible implementation of stock-based benefit
plans, if approved by our stockholders. In addition, we will incur increased
noninterest expense related to the implementation of our business strategy
related to planned additions to our employee base and potential new loan
production office openings.



Provision for Income Tax Benefit. Income tax benefit decreased $289,000, or
57.5%, to $214,000 for the year ended December 31, 2021 compared to $503,000 for
the year ended December 31, 2020. During 2020, the CARES Act provides that
companies are able to carry back current year losses up to five years, resulting
in a decrease in the income tax benefit of $112,000 at December 31, 2021.



Exposure to changes in interest rates




Our ability to maintain net interest income depends upon our ability to earn a
higher yield on interest-earning assets than the rates we pay on deposits and
borrowings. Our interest-earning assets consist primarily of securities
available-for-sale and long-term residential and commercial mortgage loans,
which have fixed rates of interest. Consequently, our ability to maintain a
positive spread between the interest earned on assets and the interest paid on
deposits and borrowings can be adversely affected when market rates of interest
rise.



Net Portfolio Value Analysis. Our interest rate sensitivity is monitored by
management through the use of models which generate estimates of the change in
its NPV over a range of interest rate scenarios. NPV represents the market value
of portfolio equity, which is different from book value, and is equal to the
market value of assets minus the market value of liabilities (that is, the
difference between incoming and outgoing discounted cash flows of assets and
liabilities) with adjustments made for off-balance sheet items. The NPV ratio,
under any interest rate scenario, is defined as the NPV in that scenario divided
by the market value of assets in the same scenario. The OCC provides a quarterly
report on the potential impact of interest rate changes upon the market value of
portfolio equity. Management reviews the quarterly reports from the OCC, which
show the impact of changing interest rates on net portfolio value. The following
table sets forth our NPV as of December 31, 2021 and reflects the changes to NPV
as a result of immediate and sustained changes in interest rates as indicated.



  Change in Interest                                                                  NPV as % of
Rates In Basis Points                 Net Portfolio Value                      Portfolio Value of Assets
     (Rate Shock)            Amount        $ Change        % Change          NPV Ratio              Change
                                           (Dollars in thousands)
300bp                      $   57,543     $     3,062             5.6 %             18.2 %               13.5 %
200                            58,003           3,522             6.5 %             17.9 %               11.5 %
100                            57,311           2,830             5.2 %             17.2 %                7.5 %
Static                         54,481               -               -               16.0 %                  -
-100                           50,564          (3,917 )          (7.2 )%            14.7 %               (8.6 )%
-200                           53,185          (1,296 )          (2.4 )%            15.3 %               (4.6 )%




Net Interest Income Analysis. In addition to modeling changes in NPV, we also
analyze potential changes to net interest income ("NII") for a 12-month period
under rising and falling interest rate scenarios. The following table shows our
NII model as of December 31, 2021.



 Change in Interest
Rates in Basis Points     Net Interest
    (Rate Shock)             Income          $ Change       % Change
                       (Dollars in thousands)
300bp                     $       7,085     $    2,420           51.9 %
200                               6,431          1,766           37.9 %
100                               5,641            976           20.9 %
Static                            4,665              -            0.0 %
-100                              4,180           (485 )        (10.4 )%
-200                              4,057           (608 )        (13.0 )%



The table above indicates that at December 31, 2021in 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 should increase by $2.4 millioni.e. 51.9% at $7.1 million.




Certain shortcomings are inherent in the methodologies used in the above
interest rate risk measurements. Modeling changes require making certain
assumptions that may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. The above table assumes that
the composition of our interest sensitive assets and liabilities existing at the
date indicated remains constant uniformly across the yield curve regardless of
the duration or repricing of specific assets and liabilities. Accordingly,
although the table provides an indication of our interest rate risk exposure at
a particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
our NPV and will differ from actual results.



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Cash and capital resources




North Shore Trust and Savings maintains levels of liquid assets deemed adequate
by management. We adjust our liquidity levels to fund deposit outflows, repay
our borrowings, and to fund loan commitments. We also adjust liquidity, as
appropriate, to meet asset and liability management objectives.



Liquidity describes our ability to meet the financial obligations that arise in
the ordinary course of business. Liquidity is primarily needed to meet the
borrowing and deposit withdrawal requirements of our customers and to fund
current and planned expenditures. Our primary sources of funds are deposits,
principal and interest payments on loans and securities, and proceeds from
maturities of securities. We also have the ability to borrow from the FHLB of
Chicago. At December 31, 2021, we had $5.0 million outstanding in advances from
the FHLB of Chicago and had the capacity to borrow approximately an additional
$55.8 million from the FHLB of Chicago.



While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions, and competition. Our
most liquid assets are cash and short-term investments. The levels of these
assets are dependent on our operating, financing, lending, and investing
activities during any given period.



Our cash flows are comprised of three primary classifications: cash flows from
operating activities, investing activities, and financing activities. Net cash
provided by (used in) operating activities was $1.5 million and $(620,000) for
the year ended December 31, 2021 and 2020, respectively. Net cash used
in investing activities, which consists primarily of net change in loans
receivable and net change in investment securities, was $11.9 million and $5.9
million for the years ended December 31, 2021 and 2020, respectively. Net cash
provided by financing activities, consisting primarily of the activity in
deposit accounts and FHLB of Chicago advances, was $100.1 million and
$6.0 million for the years ended December 31, 2021 and 2020, respectively.



We are committed to maintaining a strong liquidity position. We monitor our
liquidity position on a daily basis. We anticipate that we will have sufficient
funds to meet our current funding commitments. Time deposits that are scheduled
to mature in less than one year from December 31, 2021, totaled $39.9 million.
Based on our deposit retention experience and current pricing strategy, we
anticipate that a significant portion of maturing time deposits will be
retained. However, if a substantial portion of these deposits is not retained,
we may utilize FHLB of Chicago advances or raise interest rates on deposits to
attract new accounts, which may result in higher levels of interest expense.



As of December 31, 2021, North Shore Trust and Savings was well capitalized
under the regulatory framework for prompt corrective action. During the year
ended December 31, 2020, North Shore Trust and Savings elected to begin using
the CBLR. Under CBLR, if a qualifying depository institution or depository
institution holding company elects to use such measure, such institution or
holding company will be considered well capitalized if its ratio of Tier 1
capital to average total consolidated assets (i.e., leverage ratio) exceeds 9%
in 2020 and 8.5% in 2021, subject to a limited two quarter grace period, during
which the leverage ratio cannot go 100 basis points below the then applicable
threshold, and will not be required to calculate and report risk-based capital
ratios. North Shore Trust and Savings' Tier 1 capital to Average Assets was
16.11% and 18.41% at December 31, 2021 and 2020, respectively.



Off-balance sheet arrangements. AT December 31, 2021we have had $219,000 of outstanding loan commitments. The total of our letters and lines of credit and unused lines of credit totaled $4.0 million at December 31, 2021.

Commitments. The following table summarizes our outstanding commitments to provide loans and to advance additional amounts under letters of credit, lines of credit and undisbursed construction loans to
December 31, 2021.




                                  Total Amounts
                                   Committed at                  Amount of 

Commitment Expiry – By Period

                                   December 31,
                                       2021           To 1 Year         1-3 Years         4-5 Years        After 5 Years
                                                                  (Dollars in thousands)
Unused line of credit             $        4,001     $       527       $       926       $       966       $        1,582
Commitments to originate loans               219             219                 -                 -                    -
Total commitments                 $        4,220     $       746       $       926       $       966       $        1,582




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Cash Contractual Obligations. The following table summarizes our contractual cash obligations as of December 31, 2021.



                                    Total at                            Payments Due By Period
                                  December 31,
                                      2021           To 1 Year       1-3 Years       4-5 Years       After 5 Years
                                                               (Dollars in thousands)
Time deposits                     $      72,874     $    39,927     $    24,545     $     8,402     $             -
Other borrowings                          5,000           5,000               -               -                   -
Total contractual obligations     $      77,874     $    44,927     $    24,545     $     8,402     $             -



Impact of inflation and price changes




The financial statements and related financial data presented herein regarding
North Shore Trust and Savings have been prepared in accordance with accounting
principles generally accepted in the United States of America, which generally
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in relative purchasing power
over time due to inflation. Unlike most industrial companies, virtually all of
our assets and liabilities are monetary in nature. As a result, interest rates
generally have a more significant impact on North Shore Trust and Savings'
performance than does the effect of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods and
services, since such prices are affected by inflation to a larger extent than
interest rates.


Current accounting developments

The following ASU has been issued by the FASB but is not yet effective.




The FASB issued ASU No. 2016-13, Financial Instruments- Credit Losses (Topic
326). The ASU introduces a new credit loss model, the current expected credit
loss model ("CECL"), which requires earlier recognition of credit losses, while
also providing additional transparency about credit risk.



The CECL model utilizes a lifetime "expected credit loss" measurement objective
for the recognition of credit losses for loans, held-to-maturity securities, and
other receivables at the time the financial asset is originated or acquired. The
expected credit losses are adjusted each period for changes in expected lifetime
credit losses. For available for-sale securities where fair value is less than
cost, credit-related impairment, if any, will be recognized in an allowance for
credit losses and adjusted each period for changes in expected credit risk. This
model replaces the multiple existing impairment models, which generally require
that a loss be incurred before it is recognized.



The CECL model represents a significant change from existing practice and may
result in material changes to the Bank's accounting for financial instruments.
The Bank is evaluating the effect ASU 2016-13 will have on its consolidated
financial statements and related disclosures. The impact of the ASU will depend
upon the state of the economy, and the nature of the Bank's portfolios at the
date of adoption. The new standard is effective January 2023 for emerging growth
companies.

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