UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

(Mark one)

☒QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2021~~2022

☐TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number ~~333-259483~~001-41232

NSTS BANCORP,INC.

(Exact name of the registrant as specified in its charter)


Delaware		87-2522769
~~Delaware~~		~~87-2522769~~
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)

700 S. Lewis Ave.Waukegan,, Illinois		60085
(Address of principal executive offices)		(Zip Code)

(847) 336-4430

(Registrant’~~847~~) ~~336-4430~~

~~(Registrant’s~~s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	~~None~~NSTS	~~None~~NASDAQ Capital Market

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☐☒ Yes ☒☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

~~NaN~~

As of November 10, 2022, the Registrant had 5,397,959 shares of ~~the Registrant’s~~its common stock ~~par value $0.01 per share, were issued and outstanding as of December 23, 2021.~~outstanding.

Table of Contents

NSTS Bancorp, Inc.

~~North Shore MHC and Subsidiary~~

Form 10Q

Index

PART I.	FINANCIAL INFORMATION	4
ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS	4
	CONSOLIDATED BALANCE SHEETS	4
	CONSOLIDATED STATEMENTS OF OPERATIONS	5
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)	6
	CONSOLIDATED STATEMENTS OF ~~MEMBERS’~~STOCKHOLDERS’ EQUITY	7
	CONSOLIDATED STATEMENTS OF CASH FLOWS	8
	NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	9
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	28 25
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	40 37
ITEM 4.	CONTROLS AND PROCEDURES	41 38

PART II.	OTHER INFORMATION	38
~~PART II.~~ITEM 1.	~~OTHER INFORMATION~~LEGAL PROCEEDINGS	41 38
ITEM 1.1A.	~~LEGAL PROCEEDINGS~~RISK FACTORS	41 38
ITEM ~~1A.~~2.	~~RISK FACTORS~~	41
~~ITEM 2.~~	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	41 38
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	41 38
ITEM 4.	MINE SAFETY DISCLOSURES	41 38
ITEM 5.	OTHER INFORMATION	41 38
~~ITME~~ITEM 6.	EXHIBITS	42 39
SIGNATURES		40

Table of Contents

Explanatory Note

NSTS Bancorp, Inc. was formed to serve as the stock holding company for North Shore Trust and Savings (the “Bank”) in connection with the conversion of North Shore Trust and Savings, NSTS Financial Corporation and North Shore MHC, into the stock form of ~~organization. As of September 30, 2021, the reorganization had not yet been~~organization, which was completed ~~and NSTS Bancorp, Inc. had no assets or liabilities and had not conducted any business activities other than organizational activities.~~on January 18, 2022. Accordingly, ~~the unaudited~~certain financial statements and other financial information at or prior to January 18, 2022, contained in this ~~Quarterly Report on~~ Form 10-Q relate solely to the consolidated financial results of North Shore MHC and its consolidated subsidiaries, NSTS Financial Corporation and North Shore Trust and Savings.

~~The unaudited financial statements and other financial information contained in this Quarterly~~ See also NSTS Bancorp, Inc.'s Annual Report on Form ~~10-Q should be read in conjunction with the audited financial statements, and related notes, of North Shore MHC at and~~10-K for the year ended December 31, 2020 contained in NSTS Bancorp, Inc.’s definitive prospectus dated November 10, 2021 (the “Prospectus”), as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on November 12, 2021.

Table of Contents

Part I. Financial Information

Item 1. Consolidated Financial Statements
NSTS BANCORP, INC.
~~NORTH SHORE MHC AND SUBSIDIARIES~~
Consolidated Balance Sheets


September 30, 2021


(unaudited)

December 31, 2020

September 30, 2022

(Dollars in thousands)

(unaudited)

December 31, 2021

(Dollars in thousands)

Assets:





Cash and due from banks

$
1,074

$
884
$ 1,047 $ 814
Interest-bearing bank deposits

41,663

30,984
17,070 120,797
Cash and cash equivalents

42,737

31,868
18,117 121,611
Time deposits with other financial institutions

5,701

12,436
4,219 3,469
Securities available for sale

96,994

81,620
125,267 100,950
Federal Home Loan Bank stock (FHLB)

550

512
550 550
Loans held for sale

972

1,972
104 104
Loans, net of unearned income

96,934

99,325
98,431 97,313
Allowance for loan losses

(783)

(870)
(685 ) (779 )
Loans, net

96,151

98,455
97,746 96,534
Premises and equipment, net

5,131

5,213
5,101 5,087
Accrued interest receivable

630

672
831 641
Bank-owned life insurance (BOLI)

9,024

8,890
9,203 9,071
Other assets

1,991

581
7,040 2,852
Total assets

$
259,881

$
242,219
$ 268,178 $ 340,869
Liabilities:





Deposits:





Noninterest bearing

$
12,308

$
9,734
$ 12,725 $ 99,090
Interest-bearing





Demand and NOW checking

19,933

16,365
18,710 17,931
Money market

49,941

50,143
45,529 45,414
Savings

48,537

42,250
48,926 50,312
Time deposits over $250,000

9,897

10,705
8,435 9,380
Other time deposits

64,500

57,207
49,136 63,494
Total deposits

205,116

186,404
183,461 285,621
Escrow deposits

945

1,519
936 1,442
Other borrowings

5,000

4,000
— 5,000
Accrued expenses and other liabilities

2,872

3,571
4,622 3,623
Total liabilities

213,933

195,494
$ 189,019 $ 295,686
Members' equity:




Stockholders' equity:

Common Stock ($0.01 par value; 10,000,000 shares authorized; 5,397,959 shares issued and outstanding)
54 —
Additional paid-in capital
50,416 —
Retained earnings

45,322

45,320
45,252 45,264
Accumulated other comprehensive income, net

626

1,405
Total members' equity

45,948

46,725
Total liabilities and members' equity

$
259,881

$
242,219
Unallocated common shares held by ESOP
(4,189 ) —
Accumulated other comprehensive loss, net
(12,374 ) (81 )
Total stockholders' equity
79,159 45,183
Total liabilities and stockholders' equity
$ 268,178 $ 340,869

See accompanying notes to consolidated unaudited financial statements

Table of Contents

~~NORTH SHORE MHC AND SUBSIDIARIES~~NSTS BANCORP, INC.

Consolidated Statements of Operations (unaudited)

For the three months ended

For the nine months ended

September 30,

September 30,

2022

2021

2022

2021

(Dollars in thousands)
Interest income:

Loans, including fees
$ 877 $ 853 $ 2,603 $ 2,662
Securities

Taxable
578 268 1,340 846
Tax-exempt
104 59 298 180
Federal funds sold and other
111 6 213 16
Time deposits with other financial institutions
14 11 25 59
FHLB Stock
4 4 11 10
Total interest income
1,688 1,201 4,490 3,773
Interest expense:

Deposits
192 225 574 716
Net interest income
1,496 976 3,916 3,057
(Reversal of) Provision for loan losses
(84 ) (12 ) (100 ) 5
Net interest income after provision for loan losses
1,580 988 4,016 3,052
Noninterest income:

Gain on sale of mortgage loans
30 71 99 316
Gain on sale of securities
— 131 — 131
Rental income on office building
16 11 37 32
Service charges on deposits
75 75 222 216
Increase in cash surrender value of BOLI
45 46 132 134
Other
19 39 572 142
Total noninterest income
185 373 1,062 971
Noninterest expense:

Salaries and employee benefits
993 824 3,003 2,515
Equipment and occupancy
154 168 496 509
Data processing
159 136 461 464
Professional services
141 32 411 144
Advertising
29 15 67 53
Supervisory fees and assessments
33 32 111 95
Loan expenses
16 27 65 99
Deposit expenses
61 49 149 144
Foreclosure and other real estate owned expenses
— 14 — 22
Other
92 59 394 224
Total noninterest expense
1,678 1,356 5,157 4,269
Income (Loss) before income taxes
87 5 (79 ) (246 )
Income tax benefit
(31 ) (11 ) (67 ) (248 )
Net income (loss)
$ 118 $ 16 $ (12 ) $ 2
Basic and diluted earnings (loss) per share
$ 0.02 N/A $ — N/A
Weighted average shares outstanding
4,971,930 N/A 4,644,521 N/A
See accompanying notes to consolidated unaudited financial statements
5

Table of Contents
NSTS BANCORP, INC.
Consolidated Statements of Comprehensive Income (Losses) (unaudited)


For the three months ended

For the nine months ended

September 30,

September 30,

2021

2020

2021

2020

(Dollars in thousands)
Interest income:









Loans, including fees

$
853

$
985

$
2,662

$
3,109
Securities








Taxable

268

251

846

889
Tax-exempt

59

60

180

211
Federal funds sold and other

7

8

16

122
Time deposits with other financial institutions

11

80

59

325
FHLB Stock

3

3

10

9
Total interest income

1,201

1,387

3,773

4,665
Interest expense:








Deposits

225

343

716

1,183
Net interest income

976

1,044

3,057

3,482
(Release of) provision for loan losses

(12)

90

5

310
Net interest income after provision for loan losses

988

954

3,052

3,172
Noninterest income:








Gain on sale of mortgage loans

71

246

316

392
Gain on sale of securities

131

—

131

59
Rental income on office building

11

11

32

32
Service charges on deposits

74

64

216

191
Increase in cash surrender value of BOLI

46

46

134

136
Other

40

57

142

118
Total noninterest income

373

424

971

928
Noninterest expense:








Salaries and employee benefits

824

938

2,515

2,737
Equipment and occupancy

168

167

509

519
Data processing

136

152

464

398
Advertising

15

11

53

51
Supervisory fees and assessments

32

32

95

85
Loan expenses

27

41

99

100
Foreclosure and other real estate owned expenses

14

3

22

6
Other

140

254

512

730
Total noninterest expense

1,356

1,598

4,269

4,626
Income (losses) before income taxes

5

(220)

(246)

(526)
Income tax benefit

(12)

(245)

(248)

(327)
Net income (losses)

$
17

$
25

$
2

$
(199)

For the three months ended September 30,

2022

2021

(Dollars in thousands)

Net income
$ 118 $ 16
Unrealized net holding (loss) gain on securities

Unrealized net holding (loss) gain on securities arising during period, net of realized gains on sales of $0 and $131,000, in the three months ended September 30, 2022 and 2021, respectively
(6,321 ) 80
Tax effect
1,802 (23 )
Other comprehensive (loss) income, net of taxes
(4,519 ) 57
Comprehensive (loss) income
$ (4,401 ) $ 73

For the nine months ended September 30,

2022

2021

(Dollars in thousands)

Net loss (income)
$ (12 ) $ 2
Unrealized net holding loss on securities

Unrealized net holding loss on securities arising during period, net of realized gains on sales of $0 and $131,000, in the nine months ended September 30, 2022 and 2021, respectively
(17,195 ) (1,090 )
Tax effect
4,902 311
Other comprehensive loss, net of taxes
(12,293 ) (779 )
Comprehensive loss
$ (12,305 ) $ (777 )
See accompanying notes to consolidated unaudited financial statements

Table of Contents

~~NORTH SHORE MHC AND SUBSIDIARIES~~NSTS BANCORP, INC.

Consolidated Statements of ~~Comprehensive Income (Losses)~~Stockholders’ Equity (unaudited)

For the three months ended September 30,


2021

2020

(Dollars in thousands)
Net income

$
17

$
25
Unrealized net holding gain on securities




Unrealized net holding gain on securities arising during period, net of realized gains on sales of $131,000 and $0, during the three months ended September 30, 2021 and 2020, respectively

79

376
Tax effect

(23)

(107)
Other comprehensive income, net of taxes

56

269
Comprehensive income

$
73

$
294

Accumulated

other

Unallocated

Common

Common

Additional

Retained

comprehensive

Common Share

Shares

Stock

Paid-In Capital

earnings

income (loss)

Held by ESOP

Total

(Dollars in thousands)

Quarter ended September 30, 2021

Balance at June 30, 2021
— $ — $ — $ 45,305 $ 570 $ — $ 45,875
Net income
— — — 16 — — 16
Change in net unrealized gain on securities available for sale, net
— — — — 57 — 57
Balance at September 30, 2021
— $ — $ — $ 45,321 $ 627 $ — $ 45,948

Quarter ended September 30, 2022

Balance at June 30, 2022
5,397,959 $ 54 $ 50,411 $ 45,134 $ (7,855 ) $ (4,232 ) $ 83,512
Net income
— — — 118 — — 118
ESOP shares committed to be released
— — 5 — — 43 48
Change in net unrealized loss on securities available for sale, net
— — — — (4,519 ) — (4,519 )
Balance at September 30, 2022
5,397,959 $ 54 $ 50,416 $ 45,252 $ (12,374 ) $ (4,189 ) $ 79,159


For the nine months ended September 30,

2021

2020

(Dollars in thousands)
Net income (losses)

$
2

$
(199)
Unrealized net holding gain (loss) on securities




Unrealized net holding gain (loss) on securities arising during period, net of realized gains on sales of $131,000 and $59,000, during the nine months ended September 30, 2021 and 2020, respectively

(1,090)

1,554
Tax effect

311

(443)
Other comprehensive (loss) income, net of taxes

(779)

1,111
Comprehensive (loss) income

$
(777)

$
912

Accumulated

other

Unallocated

Common

Common

Additional

Retained

comprehensive

Common Share

Share

Stock

Paid-In Capital

earnings

income (loss)

Held by ESOP

Total

(Dollars in thousands)

For the nine months ended September 30, 2021

Balance at December 31, 2020
— $ — $ — $ 45,319 $ 1,406 $ — $ 46,725
Net income
— — — 2 — — 2
Change in net unrealized loss on securities available for sale, net
— — — — (779 ) — (779 )
Balance at September 30, 2021
— $ — $ — $ 45,321 $ 627 $ — $ 45,948

For the nine months ended September 30, 2022

Balance at December 31, 2021
— $ — $ — $ 45,264 $ (81 ) — $ 45,183
Net losses
— — — (12 ) — — (12 )
Proceeds of stock offering and issuance of common shares (net of issuance costs of $2.5 million)
5,290,000 53 49,387 — — — 49,440
Issuance of common shares donated to the NSTS Charitable Foundation
107,959 1 1,008 — — — 1,009
Purchase of common shares by the ESOP (431,836 shares)
— — — — — (4,319 ) (4,319 )
ESOP shares committed to be released
— — 21 — — 130 151
Change in net unrealized loss on securities available for sale, net
— — — — (12,293 ) — (12,293 )
Balance at September 30, 2022
5,397,959 $ 54 $ 50,416 $ 45,252 $ (12,374 ) $ (4,189 ) $ 79,159
See accompanying notes to consolidated unaudited financial statements

Table of Contents

~~NORTH SHORE MHC AND SUBSIDIARIES~~NSTS BANCORP, INC.

Consolidated Statements of ~~Members’ Equity~~Cash Flows (unaudited)




Accumulated


other

Retained

comprehensive

earnings

income (loss)

Total

(Dollars in thousands)

Quarter ended September 30, 2020
Balance at June 30, 2020

$
45,107

$
1,175

$
46,382
Net income

25

25
Change in net unrealized gain (loss) on securities available for sale, net

269

269
Balance at September 30, 2020

$
45,232

$
1,444

$
46,676

Quarter ended September 30, 2021
Balance at June 30, 2021

$
45,305

$
570

$
45,875
Net income

17

17
Change in net unrealized gain (loss) on securities available for sale, net

56

56
Balance at September 30, 2021

$
45,322

$
626

$
45,948

For the nine months ended September 30,

2022

2021

(Dollars in thousands)

Cash flows from operating activities:

Net losses (income)
$ (12 ) $ 2
Adjustments to reconcile net losses (income) to net cash provided by operating activities:

Depreciation
200 202
Securities amortization and accretion, net
803 972
Loans originated for sale
(7,457 ) (14,077 )
Proceeds from sales of loans held for sale
7,556 15,393
Gain on sale of mortgage loans
(99 ) (316 )
Gain on sale of investments
— (131 )
Gain on transfer to OREO
— (15 )
(Reversal of) Provision for loan losses
(100 ) 5
Earnings on bank owned life insurance
(132 ) (134 )
Issuance of common shares donated to North Shore Trust and Savings Charitable Foundation
1,009 —
ESOP Expense
151 —
Increase (decrease) in accrued interest receivable and other assets
524 (940 )
Net decrease (increase) in accrued expenses and other liabilities
999 (698 )
Net cash provided by operating activities
3,442 263
Cash flows from investing activities:

Net (increase) decrease in portfolio loans
(1,112 ) 2,128
Principal repayments on mortgage-backed securities
13,853 12,937
Purchases of securities available for sale
(57,473 ) (39,056 )
Maturities and calls of securities available for sale
1,305 2,045
Sale of securities available for sale
— 6,769
Sale of OREO
— 68
Purchase of Federal Home Loan Bank stock
— (38 )
(Increase) Decrease in time deposits with other financial institutions, net
(750 ) 6,735
Purchases of premises and equipment, net
(214 ) (120 )
Net cash used in investing activities
(44,391 ) (8,532 )
Cash flows from financing activities:

Net change in deposits
(102,160 ) 18,712
Net change in escrow deposits
(506 ) (574 )
Repayment of FHLB Advance
(5,000 ) (4,000 )
Proceeds from FHLB Advance
— 5,000
Proceeds from issuance of common stock, net of costs
49,440 —
Loan to ESOP
(4,319 ) —
Net cash (used in) providing by financing activities
(62,545 ) 19,138
Net change in cash and cash equivalents
(103,494 ) 10,869
Cash and cash equivalents at beginning of period
121,611 31,868
Cash and cash equivalents at end of period
$ 18,117 $ 42,737
Supplemental disclosures of cash flow information:

Loan transferred to OREO
$ — $ 171
Cash paid during the period for: Interest
580 732




Accumulated


other

Retained

comprehensive

earnings

income (loss)

Total

(Dollars in thousands)

Nine months ended September 30, 2020
Balance at December 31, 2019

$
45,431

$
333

$
45,764
Net losses

(199)

(199)
Change in net unrealized gain (loss) on securities available for sale, net

1,111

1,111
Balance at September 30, 2020

$
45,232

$
1,444

$
46,676

Nine months ended September 30, 2021
Balance at December 31, 2020

$
45,320

$
1,405

$
46,725
Net income

2

2
Change in net unrealized gain (loss) on securities available for sale, net

(779)

(779)
Balance at September 30, 2021

$
45,322

$
626

$
45,948

See accompanying notes to consolidated unaudited financial statements

Table of Contents
~~NORTH SHORE MHC AND SUBSIDIARIES~~
~~Consolidated Statements of Cash Flows (unaudited)~~


For the nine months ended September 30,

2021

2020

(Dollars in thousands)
Cash flows from operating activities:




Net income (losses)

$
2

$
(199)
Adjustments to reconcile net income (losses) to net cash provided by operating activities:




Depreciation

202

219
Securities amortization and accretion, net

972

580
Loans originated for sale

(14,078)

(25,212)
Proceeds from sales of loans held for sale

15,393

20,631
Gain on sale of mortgage loans

(316)

(392)
Gain on sale of investments

(131)

(59)
Gain on transfer to OREO

(15)

—
Provision for loan losses

5

310
Earnings on bank owned life insurance

(134)

(136)
Increase in accrued interest receivable and other assets

(925)

(106)
Net increase (decrease) in accrued expenses and other liabilities

(698)

359
Net cash provided by (used in) operating activities

277

(4,005)
Cash flows from investing activities:




Net decrease (increase) in portfolio loans

2,112

(1,561)
Principal repayments on mortgage-backed securities

12,937

9,399
Purchases of securities available for sale

(39,056)

(25,282)
Maturities and calls of securities available for sale

2,045

1,465
Sale of securities available for sale

6,769

12,112
Sale of OREO

68

—
Purchase of Federal Home Loan Bank stock

(38)

—
Decrease in time deposits with other financial institutions, net

6,735

5,975
Purchases of premises and equipment, net

(120)

(45)
Net cash (used in) provided by investing activities

(8,548)

2,063
Cash flows from financing activities:




Net change in deposits

18,712

(1,341)
Net change in escrow deposits

(574)

(742)
Repayment of FHLB Advance

(4,000)

—
Proceeds from FHLB Advance

5,000

4,000
Net cash provided by financing activities

19,138

1,917
Net change in cash and cash equivalents

10,867

(25)
Cash and cash equivalents at beginning of period

31,868

32,379
Cash and cash equivalents at end of period

$
42,737

$
32,354
Supplemental disclosures of cash flow information:




Cash paid during the period for interest

$
732

$
1,222
Noncash activity:




Loans transferred to OREO

187

—

~~See accompanying notes to consolidated unaudited financial statements~~

~~Table of Contents~~

Notes to the Unaudited Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements ~~(“the financial statements”)~~ have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and conform to practices within the banking industry. The accounting policies followed in the preparation of the interim consolidated financial statements are consistent with those used in the preparation of the annual financial statements. The interim consolidated financial statements reflect all normal and recurring adjustments that are necessary, in the opinion of management, for fair statement of results for the interim periods presented. Results for the ~~period~~three and nine month periods ended September 30, ~~2021,~~2022, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021.~~2022.
Nature of Operations
NSTS Bancorp, Inc. (“NSTS” or the “Company”, “we” or “our”) was formed to serve as the stock holding company for North Shore Trust and Savings (the “Bank”) in connection with the conversion of North Shore Trust and Savings, NSTS Financial Corporation and North Shore MHC, ~~(collectively, the “Company,” “we” or “our”),~~ into the stock form of ~~organization. As of September 30, 2021, the reorganization had not been~~organization, which was completed ~~and the NSTS Bancorp, Inc. had no assets or liabilities and had not conducted any business activities other than organizational activities.~~ on January 18, 2022. Accordingly, ~~the unaudited~~certain financial statements and other financial information at or prior to January 18, 2022, contained in this ~~Quarterly Report on~~ Form ~~10-Q~~10-Q relate solely to the consolidated financial results of North Shore MHC and its consolidated subsidiaries, NSTS Financial Corporation and North Shore Trust and Savings.
NSTS Bancorp, Inc. completed its stock offering on January 18, 2022. The ~~unaudited financial statements and other financial information contained~~Company sold 5,290,000 shares of common stock at $10.00 per share in ~~this Quarterly Report on Form 10-Q should be read in conjunction~~its subscription offering for gross proceeds of approximately $53.0 million. In connection with the ~~audited financial statements, and related notes, of North Shore MHC at and for the year ended December 31, 2020 contained in the~~subscription offering, NSTS Bancorp, Inc.~~’s definitive prospectus dated November 10, 2021 (the “Prospectus”), as filed with~~ also issued 107,959 shares of common stock and $150,000 in cash to NSTS Charitable Foundation. Shares of NSTS Bancorp, Inc. stock began trading on January 19, 2022 on the ~~Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on November 12, 2021.~~Nasdaq Capital Market under the trading symbol "NSTS."
The Bank operates primarily in the northern suburbs of Chicago, Illinois. The Bank offers a variety of financial services to customers in the surrounding community. Financial services consist primarily of ~~1-4~~1-4 family mortgage loans, savings accounts, and certificate of deposit accounts. There are no significant concentrations of loans to any one industry or customer. The Bank’s exposure to credit risk is significantly affected by changes in the economy in the Bank’s market area.
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 Company was eligible for a refundable employee retention credit subject to certain criteria. The Bank qualifies 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 was recorded during the second quarter of 2022, when the Bank determined they were eligible. The credit is recorded as other non-interest income and offsets $503,000 of salaries and employee benefits previously recorded as an expense during 2021. As of September 30, 2022, the Bank cannot reasonably estimate when it will receive the refunds. The receivable is recorded in other assets on the Consolidated Balance Sheets. 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.
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements were prepared in accordance with GAAP and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the North Shore MHC’s Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The unaudited Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
~~Use of Estimates~~
~~The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management~~Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may vary from those estimates.
~~The determination of~~ Material estimates that could significantly change in the near-term include the adequacy of the allowance for loan losses, is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral.
The Bank’s loans are generally secured by specific items of collateral including real property, consumer assets, and business assets. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on local economic conditions.
While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgments of information available to them at the time of their examination. Due to these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

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~~Additional material estimates that are particularly susceptible to significant change in the near term include the~~ determination of the valuation allowance on deferred tax assets and the valuation of investment securities and the related tax effect.

~~Comprehensive Income (Losses)~~

~~Comprehensive income includes net income (losses)~~ The results of operations for the three and nine months ended September 30, 2022, are not necessarily indicative of results that may be expected for any other ~~changes~~interim period or the entire fiscal year ending December 31, 2022. Certain amounts in ~~net worth which bypass~~prior year financial statements have been reclassified to conform to the ~~statement~~current presentation. Subsequent events have been evaluated through the date of ~~operations. For all periods presented, other comprehensive income includes only one additional component, the change in unrealized gains on available-for-sale investment securities.~~

~~Cash and Cash Equivalents~~

~~For purposes of reporting cash flows, cash and cash equivalents includes cash on hand and amounts due from banks, including cash items in process of clearing.~~

~~Time Deposits with Other Financial Institutions~~

~~Time deposits with other financial institutions are carried at cost and generally mature within the next two years.~~

~~Investment Securities~~

Securities are classified as available-for-sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss). Discounts are accreted into interest income over the estimated lifeissuance of the ~~related security and premiums are amortized into income over the earlier of the call~~unaudited Consolidated Financial Statements. No significant subsequent events have occurred through this date or weighted average life of the related security using the level yield method. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Securities available-for-sale are securities that are intended to be held for indefinite periods of time, but which may not be held to maturity. These securities may be used as a part of the Bank’s asset/liability management strategy and may be sold in response to changes in interest rates, deterioration of issuer’s creditworthiness, or due to a desire to increase capital or liquidity.

The Bank conducts a periodic review of available-for-sale securities with declines in fair value below their cost to evaluate if the impairment is other than temporary. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Credit-related impairments of debt securities are recorded through earnings, and any impairment as a result of other factors is included in accumulated other comprehensive income.

~~Federal Home Loan Bank of Chicago Stock~~

The Bank, as a member of the Federal Home Loan Bank of Chicago (FHLB), is required to maintain an investment in capital stock of the FHLB. Based on redemption provisions of the FHLB, the stock has 0 quoted market price and is carried at cost of $550,000 and $512,000 at September 30, 2021 and December 31, 2020, respectively, and is evaluated for impairment at each reporting date.

~~Loans Held for Sale~~

Mortgage loans originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Mortgage loans held for sale are generally sold with servicing rights released. Gains or losses are recognized through earnings.

~~Loans~~

~~The Bank’s loan portfolio includes segments for mortgage loans and consumer loans. Mortgage loans include classes for 1-4 family, multi-family, and commercial.~~

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Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as anrequiring adjustment to the ~~related loan yield using~~financial statements or disclosures.

With the ~~interest method, adjusted~~exception of the following new significant accounting and reporting policies, the Company has not changed its significant accounting and reporting policies from those disclosed in the Company’s Form 10-K for ~~prepayments.~~the year ended December 31, 2021.

Employee Stock Ownership Plan

The ~~accrual~~ESOP shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Statements of ~~interest on all loans is discontinued at~~Financial Condition. As shares are committed to be released from collateral, the ~~time~~Bank reports compensation expense equal to the ~~loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms~~average market price of the ~~loan. In all cases, loans~~shares during the year, and the shares become outstanding for basic net income per common share computations. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce the ESOP’s debt and accrued interest.

Earnings per Share

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Unallocated ESOP shares are ~~placed on nonaccrual if collection of principal or interest is~~not deemed outstanding for earnings per share calculations. ESOP shares committed to be released are considered ~~doubtful. All interest accrued but not collected~~to be outstanding for loans that are placed on nonaccrual is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until the loans qualify for return to accrual. Loans are returned to accrual status when payment of all the principal and interest amounts contractually due is reasonably assured.

~~Allowance for Loan Losses~~

The allowance for loan losses (the “allowance”) is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility 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. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general and allocated components, as further described below.

~~General Component~~

~~The general component~~purposes of the ~~allowance for loan losses~~earnings per share computation. ESOP shares that have not been legally released, but that relate to employee services rendered during an accounting period (interim or annual) ending before the related debt service payment is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: first mortgage loans and consumer and other loans. Management uses an average of historical losses based on a time frame appropriatemade, are considered committed to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards, and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions.

~~The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:~~

~~Mortgage Loans~~

Loans in this segment are made to individuals and commercial borrowers. The loans are secured by real estate with the Bank typically in a first lien position. The Bank generally does not originate loans with a loan-to-value ratio greater than 80% unless mortgage insurance is obtained and generally does not grant loansbe released. Diluted earnings per share reflects additional common shares that would ~~be classified as subprime upon origination. The overall health of the economy, including unemployment rates and housing prices, will~~ have ~~an effect on the credit quality in this segment.~~

~~Consumer Loans~~

Loans in this segment are generally to individuals and are supported by non-real estate collateral, such as deposit accounts and personal property. Unsecured loans are also included in this segment. Repayment is dependent on the credit quality of the individual borrower or borrowers.

~~Allocated Component~~

The allocated component relates to loans that are classified as impaired. Based on internal ratings, loans are evaluated for impairment on a loan-by-loan basis. Impairment is measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateralbeen outstanding if ~~the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan.~~

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by

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management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all circumstances surrounding the loan and borrower, including the length of the delay, reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the amount of principal and interest owed.

The Bank periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (TDR). All TDRs are classified as impaired and management performs an impairment analysis at the time of restructuring.

~~Premises and Equipment~~

Land is stated at cost. Property, improvements, and equipment are stated at cost less accumulated depreciation. Depreciation is determined under the straight-line method over the following estimated useful lives of assets:


~~Land improvements~~		~~3 - 10 years~~
~~Office building and improvements~~		~~10 - 40 years~~
~~Furniture and equipment~~		~~3 - 10 years~~

~~Income Taxes~~

We record our tax provision or benefit on an interim basis using the estimated annual effective tax rate. This rate is applied to the current period ordinary income or loss to determine the income tax provision or benefit allocated to the interim period. The estimated annual effective tax rate may be significantly affected by nondeductible expenses and certain tax preference items. Adjustments to the estimated annual effective income tax rate are recognized in the period during which such estimates are revised.

Deferred taxes are recognized using the asset/liability method. Deferred tax assets are recognized for deductible temporary differences, operating loss and tax credit carryforwards; deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the financial statement amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceed the amount measured as described above, if any, is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet, along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest and penalties associated with unrecognized tax benefits, if any, are classified as additional income taxes in the statement of operations. Bank management believes that the Bank maintains 0 uncertain tax positions for tax reporting purposes and accordingly, 0 liability is required to be recorded.

~~The Bank is subject to U.S. federal income tax~~dilutive potential common shares had been issued, as well as any adjustment to income ~~tax of~~that would result from the ~~States of Illinois and Wisconsin.~~assumed issuance.

~~Other Real Estate Owned~~

Property acquired in satisfaction of debt or through foreclosure is carried at the lower of cost or market value less estimated costs to sell. At foreclosure, if the fair value of the property acquired is less than the recorded investment in the related loan, a reduction in the

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carrying amount of the loan is recognized with a charge to the allowance for loan losses. The cost of carrying the assets subsequent to foreclosure and any decrease in the market value occurring after that date are charged to operating expenses as incurred.
~~Bank-owned Life Insurance~~
The Bank purchased life insurance policies on certain key executives. Bank-owned life insurance is recorded at the amount estimated to be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due which are probable at settlement.
~~Service Charges on Deposits~~
Service charges on deposits represent general service fees for monthly account maintenance and activity or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue, or some other individual attribute-based revenue. Revenue is recognized when the Bank’s performance obligation is completed, which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time performance obligations are satisfied.
Accounting Developments
~~Accounting for Leases~~
The FASB amended its standard related to the accounting for leases. Under the new standard, lessees will now be required to recognize substantially all leases on the balance sheet as both a right-of-use asset and a liability. The standard has two types of leases for income statement recognition purposes: operating leases and finance leases. Operating leases will result in the recognition of a single lease expense on a straight-line basis over the lease term similar to the treatment for operating leases under existing standards. Finance leases will result in an accelerated expense similar to the accounting for capital leases under existing standards. The determination of lease classification as operating or finance will be done in a manner similar to existing standards.
The new standard also contains amended guidance regarding the identification of embedded leases in service contracts and the identification of lease and non-lease components in an arrangement. The new standard is effective for annual periods beginning after December 15, 2021, and any interim periods within annual reporting periods that begin after December 15, 2022. The Bank has reviewed the amendment and determined it will not have a material impact on the Bank’s financial statements.
Accounting for Financial Instruments – Credit Losses
The FASB issued ASU No. ~~2016-13,~~2016-13, Financial ~~Instruments—~~Instruments— Credit Losses (Topic ~~326)~~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~~2016-13 will have on its consolidated financial statements and related disclosures. The impact of the ASU will depend upon ~~the final standard (as amended),~~ the state of the economy, and the nature of the Bank’s portfolios at the date of adoption. For the Bank, the new standard is effective January 2023.
10
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Note 2: Securities
The amortized cost and estimated fair value of debt securities at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, by contractual maturity, are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying
13

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the securities may be called or repaid without any penalties, therefore, these securities have been included in the below table based on average remaining life.

Mortgage-backed

Collateralized

U.S. government

Municipal

residential

mortgage

Total available-for-
September 30, 2021

agency obligations

obligations

obligations

obligations

sale

Mortgage-backed

Collateralized

(Dollars in thousands)

U.S. Treasury Notes

U.S. government

Municipal

residential

mortgage

Total available-for-

September 30, 2022

agency obligations

obligations

obligations

obligations

sale

(Dollars in thousands)

1 year or less

$
—

$
1,231

$
456

$
1,071

$
2,758
$ 6,447 $ — $ 927 $ — $ 156 $ 7,530
1 to 5 years

3,938

3,777

31,185

17,535

56,435
5,809 10,783 4,824 22,163 25,232 68,811
5 to 10 years

6,507

2,867

13,837

9,984

33,195
— 8,721 2,698 14,389 10,015 35,823
After 10 years

—

2,970

—

1,636

4,606
— — 10,594 — 2,509 13,103
Fair value

10,445

10,845

45,478

30,226

96,994
12,256 19,504 19,043 36,552 37,912 125,267
Gross unrealized gains

163

464

426

441

1,494
— — — — — —
Gross unrealized losses

(39)

(12)

(309)

(259)

(619)
(181 ) (1,903 ) (3,979 ) (6,097 ) (5,148 ) (17,308 )
Amortized cost

$
10,321

$
10,393

$
45,361

$
30,044

$
96,119
$ 12,437 $ 21,407 $ 23,022 $ 42,649 $ 43,060 $ 142,575

Mortgage-backed

Collateralized

U.S. government

Municipal

residential

mortgage

Total available-for-
December 31, 2020

agency obligations

obligations

obligations

obligations

sale

Mortgage-backed

Collateralized

  (Dollars in thousands)

U.S. government

Municipal

residential

mortgage

Total available-for-

December 31, 2021

agency obligations

obligations

obligations

obligations

sale

(Dollars in thousands)

1 year or less

$
1,000

$
768

$
1,443

$
383

$
3,594
$ — $ 1,631 $ 356 $ 1,064 $ 3,051
1 to 5 years

4,862

3,726

34,486

14,452

57,526
5,587 3,941 29,375 16,097 55,000
5 to 10 years

1,285

4,354

7,165

5,564

18,368
4,466 2,244 12,417 11,976 31,103
After 10 years

—

2,132

—

—

2,132
— 10,184 — 1,612 11,796
Fair value

7,147

10,980

43,094

20,399

81,620
10,053 18,000 42,148 30,749 100,950
Gross unrealized gains

154

518

884

534

2,090
73 423 259 279 1,034
Gross unrealized losses

(17)

(18)

(22)

(66)

(123)
(78 ) (14 ) (612 ) (443 ) (1,147 )
Amortized cost

$
7,010

$
10,480

$
42,232

$
19,931

$
79,653
$ 10,058 $ 17,591 $ 42,501 $ 30,913 $ 101,063

As of September 30, ~~2021,~~2022, and December 31, ~~2020,~~2021, no securities were pledged to secure public deposits or for other purposes as required or permitted by law.
Information pertaining to securities with gross unrealized losses at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is as follows:

Less than 12 Months

12 Months or Longer

Total

Less than 12 Months

12 Months or Longer

Total

(Dollars in thousands)

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized


Value

Losses

Value

Losses

Value

Losses
September 30, 2021

(Dollars in thousands)

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses

September 30, 2022

U.S. Treasury Notes
$ 12,256 $ (181 ) $ — $ — $ 12,256 $ (181 )
U.S. government agency obligations

$
2,383

$
23

$
1,154

$
16

$
3,537

$
39
15,628 (1,520 ) 2,876 (383 ) 18,504 (1,903 )
Municipal obligations

—

—

242

12

242

12
18,820 (3,952 ) 223 (27 ) 19,043 (3,979 )
Mortgage-backed residential obligations

19,537

284

2,213

25

21,750

309
21,554 (3,058 ) 14,998 (3,039 ) 36,552 (6,097 )
Collateralized mortgage obligations

18,762

259

—

—

18,762

259
23,281 (2,427 ) 13,978 (2,721 ) 37,259 (5,148 )
Total

$
40,682

$
566

$
3,609

$
53

$
44,291

$
619
$ 91,539 $ (11,138 ) $ 32,075 $ (6,170 ) $ 123,614 $ (17,308 )
December 31, 2020












December 31, 2021

U.S. government agency obligations

$
1,284

$
17

$
—

$
—

$
1,284

$
17
$ 4,020 $ (62 ) $ 1,105 $ (16 ) $ 5,125 $ (78 )
Municipal obligations

—

—

238

18

238

18
2,399 (8 ) 247 (6 ) 2,646 (14 )
Mortgage-backed residential obligations

5,265

17

1,170

5

6,435

22
26,540 (535 ) 2,781 (77 ) 29,321 (612 )
Collateralized mortgage obligations

8,694

66

241

—

8,935

66
16,715 (338 ) 4,386 (105 ) 21,101 (443 )
Total

$
15,243

$
100

$
1,649

$
23

$
16,892

$
123
$ 49,674 $ (943 ) $ 8,519 $ (204 ) $ 58,193 $ (1,147 )

At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, certain investment securities were in unrealized loss positions. Some investment securities have declined in value but do not presently represent realized losses. Unrealized losses on investment securities have not been recognized into income because the issuers’ bonds are of high credit quality, the Bank has the intent and ability to hold the securities

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for the foreseeable future, and the declines in fair value are primarily due to market volatility. The fair values are expected to recover as the bonds approach their maturity dates.
~~The following table provides a summary~~
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There were no sales of securities available-for-sale during the ~~proceeds~~three and nine months ended September 30, 2022 . There were $131,000 of realized gains from sales of securities available-for-sale ~~as well as gross gains~~during the three and ~~losses, for the periods presented.~~nine months ended September 30, 2021.

Three months ended September 30,

Nine months ended September 30,


2021

2020

2021

2020

(Dollars in thousands)
Proceeds from sales of securities available-for-sale

$
6,769

$
—

$
6,769

$
12,112

Gross realized gains

131

—

131

114
Gross realized losses

—

—

—

(55)

Note 3: Loans and allowance for loan losses
A summary of loans by major category as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 is as follows:


September 30, 2021

December 31, 2020

September 30, 2022

December 31, 2021

(Dollars in thousands)

(Dollars in thousands)

First mortgage loans





1-4 family residential

$
87,184

$
87,197
$ 89,765 $ 88,028
Multi-family

4,221

5,737
3,597 3,497
Commercial

4,453

5,340
3,985 4,604
Total first mortgage loans

95,858

98,274
97,347 96,129
Consumer loans

324

385
211 372
Total loans

96,182

98,659
97,558 96,501
Net deferred loan costs

752

666
873 812
Allowance for loan losses

(783)

(870)
(685 ) (779 )
Total loans, net

$
96,151

$
98,455
$ 97,746 $ 96,534

First mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balance of these loans totaled ~~$16.9~~$14.2 million and ~~$16.0~~$15.8 million at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Custodial escrow balances maintained in connection with the loans serviced were ~~$142,000~~$175,000 and ~~$268,000~~$270,000 at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.
In the normal course of business, loans are made to directors and officers of the ~~Bank (related parties).~~Bank. The terms of these loans, including interest rate and collateral, are similar to those prevailing for comparable transactions with other customers and do not involve more than a normal risk of collectability. At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, such borrowers were indebted to the Bank in the aggregate amount of ~~$687,000~~$581,000 and ~~$928,000,~~$556,000, respectively.

Table of Contents
Changes in the allowance for loan losses as of and for the three and nine months ended September 30, 2022 and 2021 were as follows:

September 30, 2022

1-4 family

residential

Multi-family

Commercial

Consumer

Total

(Dollars in thousands)

Three months ended

Beginning balance
$ 713 $ 26 $ 26 $ 4 $ 769
Charge-offs
— — — — —
Recoveries
— — — — —
Net recoveries (charge-offs)
— — — — —
(Release of) Provision for loan losses
(79 ) (2 ) (4 ) 1 (84 )
Ending balance
$ 634 $ 24 $ 22 $ 5 $ 685

September 30, 2022

1-4 family

residential

Multi-family

Commercial

Consumer

Total

(Dollars in thousands)

Nine months ended

Beginning balance
$ 675 $ 69 $ 25 $ 10 $ 779
Charge-offs
— — — — —
Recoveries
6 — — — 6
Net recoveries (charge-offs)
6 — — — 6
(Release of) Provision for loan losses
(47 ) (45 ) (3 ) (5 ) (100 )
Ending balance
$ 634 $ 24 $ 22 $ 5 $ 685

September 30, 2021

1-4 family

residential

Multi-family

Commercial

Consumer

Total

(Dollars in thousands)

Three months ended

Beginning balance
$ 707 $ 48 $ 27 $ 10 $ 792
Charge-offs
— — — — —
Recoveries
3 — — — 3
Net recoveries (charge-offs)
3 — — — 3
(Release of) Provision for loan losses
1 (13 ) — — (12 )
Ending balance
$ 711 $ 35 $ 27 $ 10 $ 783

September 30, 2021

1-4 family

residential

Multi-family

Commercial

Consumer

Total

(Dollars in thousands)

Nine months ended

Beginning balance
$ 798 $ 29 $ 38 $ 5 $ 870
Charge-offs
— — — (99 ) (99 )
Recoveries
7 — — — 7
Net recoveries (charge-offs)
7 — — (99 ) (92 )
(Release of) Provision for loan losses
(94 ) 6 (11 ) 104 5
Ending balance
$ 711 $ 35 $ 27 $ 10 $ 783
13
Table of Contents
~~Changes~~The balance in the allowance for loan losses and the ~~related loan balance information~~recorded investment in loans by portfolio segment and based on impairment method as of ~~and for the three and nine months ended~~ September 30, 2022 and December 31, 2021, ~~and 2020~~ were as follows:

September 30, 2021

1-4 family

residential

Multi-family

Commercial

Consumer

Unallocated

Total

(Dollars in thousands)
Three months ended:


















Beginning balance

$
695

$
52

$
25

$
10

$
—

$
792
Charge-offs

—

—

—

—

—

—
Recoveries

3

—

—

—

—

3
Net recoveries (charge-offs)

3

—

—

—

—

3
(Release of) provision for loan losses

1

(13)

—

—

—

(12)
Ending balance

$
679

$
39

$
25

$
10

$
30

$
783

Collectively evaluated

Individually evaluated

Total

Recorded

Recorded

Recorded

Allowance for

investment in

Allowance for

investment in

Allowance for

investment in

loan losses

loans

loan losses

loans

loan losses

loans

(Dollars in thousands)

September 30, 2022

1-4 family residential
$ 548 $ 88,781 $ 86 $ 984 $ 634 $ 89,765
Multi-family
24 3,597 — — 24 3,597
Commercial
22 3,985 — — 22 3,985
Consumer
5 211 — — 5 211
Total
$ 599 $ 96,574 $ 86 $ 984 $ 685 $ 97,558
December 31, 2021

1-4 family residential
$ 557 $ 86,892 $ 118 $ 1,136 $ 675 $ 88,028
Multi-family
69 3,497 — — 69 3,497
Commercial
25 4,604 — — 25 4,604
Consumer
10 372 — — 10 372
Total
$ 661 $ 95,365 $ 118 $ 1,136 $ 779 $ 96,501

September 30, 2020

1-4 family

residential

Multi-family

Commercial

Consumer

Unallocated

Total

(Dollars in thousands)
Three months ended:


















Beginning balance

$
538

$
24

$
13

$
1

$
40

$
616
Charge-offs

—

—

—

—

—

—
Recoveries

3

—

—

—

—

3
Net recoveries

3

—

—

—

—

3
(Release of) provision for loan losses

18

—

(1)

—

73

90
Ending balance

$
559

$
24

$
12

$
1

$
113

$
709

September 30, 2021

1-4 family

residential

Multi-family

Commercial

Consumer

Unallocated

Total

(Dollars in thousands)
Nine months ended:


















Beginning balance

$
798

$
29

$
38

$
5

$
—

$
870
Charge-offs

—

—

—

(99)

—

(99)
Recoveries

7

—

—

—

—

7
Net recoveries (charge-offs)

7

—

—

(99)

—

(92)
Provision for loan losses

(126)

10

(13)

104

30

5
Ending balance

$
679

$
39

$
25

$
10

$
30

$
783

September 30, 2020

1-4 family

residential

Multi-family

Commercial

Consumer

Unallocated

Total

(Dollars in thousands)
Nine months ended:


















Beginning balance

$
361

$
10

$
9

$
8

$
—

$
388
Charge-offs

—

—

—

—

—

—
Recoveries

11

—

—

—

—

11
Net recoveries

11

—

—

—

—

11
Provision for loan losses

187

14

3

(7)

113

310
Ending balance

$
559

$
24

$
12

$
1

$
113

$
709

~~Table of Contents~~

Collectively evaluated

Individually evaluated

Total

Recorded

Recorded

Recorded

Allowance for

investment in

Allowance for

investment in

Allowance for

investment in

loan losses

loans

loan losses

loans

loan losses

loans

(Dollars in thousands)
September 30, 2021


















1-4 family residential

$
555

$
85,205

$
124

$
1,979

$
679

$
87,184
Multi-family

39

4,221

—

—

39

4,221
Commercial

25

4,453

—

—

25

4,453
Consumer

10

324

—

—

10

324
Unallocated

30

—

30






Total

$
659

$
94,203

$
124

$
1,979

$
783

$
96,182
December 31, 2020












1-4 family residential

$
648

$
84,774

$
150

$
2,423

$
798

$
87,197
Multi-family

29

5,737

—

—

29

5,737
Commercial

38

5,340

—

—

38

5,340
Consumer

5

286

—

99

5

385
Total

$
720

$
96,137

$
150

$
2,522

$
870

$
98,659

The Bank evaluates collectability based on payment activity and other factors. The Bank uses a graded loan rating system as a means of identifying potential problem loans, as follows:
Pass
Loans in these categories are performing as expected with low to average risk.
Special Mention
Loans in this category are internally designated by management as “watch loans.” These loans are starting to show signs of potential weakness and are closely monitored by management.
Substandard
Loans in this category are internally designated by management as “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the paying capacity of the obligors or the current net worth of the collateral pledged. Substandard loans present a distinct possibility that the Bank will sustain losses if such weaknesses are not corrected.
Doubtful
Loans classified as doubtful have all the weaknesses inherent in those designated as “substandard” with the added characteristic that the weaknesses may make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
On an annual basis, or more often if needed, the Bank formally reviews the ratings on commercial loans. In addition, the Bank ~~engages~~performs an independent ~~third party to~~ review of a significant portion of the commercial loan portfolio. Management uses the results of the independent review as part of its annual review process.

Table of Contents
The following table presents loan balances based on risk rating as of September 30, ~~2021~~2022 and December 31, ~~2020:~~2021:


Pass

Special Mention

Substandard

Doubtful

Total loans

Pass

Special Mention

Substandard

Doubtful

Total loans

(Dollars in thousands)
September 30, 2021











(Dollars in thousands)

September 30, 2022

1-4 family residential

$
86,670

$
409

$
105

$
—

$
87,184
$ 89,527 $ 44 $ 194 $ — $ 89,765
Multi-family

4,221

—

—

—

4,221
3,597 — — — 3,597
Commercial

4,453

—

—

—

4,453
3,985 — — — 3,985
Consumer

324

—

—

—

324
211 — — — 211
Total

$
95,668

$
409

$
105

$
—

$
96,182
$ 97,320 $ 44 $ 194 $ — $ 97,558
December 31, 2020










December 31, 2021

1-4 family residential

$
86,500

$
417

$
280

$
—

$
87,197
$ 87,881 $ 45 $ 102 $ — $ 88,028
Multi-family

5,737

—

—

—

5,737
3,497 — — — 3,497
Commercial

5,340

—

—

—

5,340
4,604 — — — 4,604
Consumer

286

99

—

—

385
372 — — — 372
Total

$
97,863

$
516

$
280

$
—

$
98,659
$ 96,354 $ 45 $ 102 $ — $ 96,501

The aging of the Bank’s loan portfolio as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, is as follows:




Greater than








90 Days Past

Total Past Due

31-89 Days Past Due

Due and

and Non-

Total Loan

and Accruing

Accruing

Non-Accrual

Accrual

Current

Balance

31-89 Days Past Due and Accruing

Greater than 90 Days Past Due and Accruing

Non-Accrual

Total Past Due and Non-Accrual

Current

Total Loan Balance

(Dollars in thousands)
September 30, 2021













(Dollars in thousands)

September 30, 2022

1-4 family residential

$
—

$
43

$
105

$
148

$
87,036

$
87,184
$ — $ — $ 159 $ 159 $ 89,606 $ 89,765
Multi-family

—

—

—

—

4,221

4,221
— — — — 3,597 3,597
Commercial

—

—

—

—

4,453

4,453
— — — — 3,985 3,985
Consumer

—

—

—

—

324

324
— — — — 211 211
Total

$
—

$
43

$
105

$
148

$
96,034

$
96,182
$ — $ — $ 159 $ 159 $ 97,399 $ 97,558

December 31, 2020













December 31, 2021

1-4 family residential

$
—

$
75

$
280

$
355

$
86,842

$
87,197
$ — $ 41 $ 102 $ 143 $ 87,885 $ 88,028
Multi-family

—

—

—

—

5,737

5,737
— — — — 3,497 3,497
Commercial

—

—

—

—

5,340

5,340
— — — — 4,604 4,604
Consumer

99

—

—

99

286

385
— — — — 372 372
Total

$
99

$
75

$
280

$
454

$
98,205

$
98,659
$ — $ 41 $ 102 $ 143 $ 96,358 $ 96,501

18
15
Table of Contents
Loans individually evaluated for impairment as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, were as follows:


Recorded investment

Unpaid principal balance

Related allowance

Recorded investment

Unpaid principal balance

Related allowance

(Dollars in thousands)
September 30, 2021







(Dollars in thousands)

September 30, 2022

With no related allowance recorded







1-4 family residential

$
1,135

$
1,457

$
—
$ 437 $ 640 $ —
Multi-family

—

—

—
— — —
Commercial

—

—

—
— — —
Consumer

—

—

—
— — —
Total

$
1,135

$
1,457

$
—
$ 437 $ 640 $ —
With a related allowance recorded







1-4 family residential

$
844

$
854

$
124
$ 547 $ 553 $ 86
Multi-family

—

—

—
— — —
Commercial

—

—

—
— — —
Consumer

—

—

—
— — —
Total

$
844

$
854

$
124
$ 547 $ 553 $ 86
Balance at September 30, 2021

$
1,979

$
2,311

$
124
December 31, 2020






Balance at September 30, 2022
$ 984 $ 1,193 $ 86
December 31, 2021

With no related allowance recorded







1-4 family residential

$
1,348

$
1,676

$
—
$ 355 $ 595 $ —
Multi-family

—

—

—
— — —
Commercial

—

—

—
— — —
Consumer

99

99

—
— — —
Total

$
1,447

$
1,775

$
—
$ 355 $ 595 $ —
With a related allowance recorded







1-4 family residential

$
1,075

$
1,120

$
150
$ 781 $ 797 $ 118
Multi-family

—

—

—
— — —
Commercial

—

—

—
— — —
Consumer

—

—

—
— — —
Total

$
1,075

$
1,120

$
150
$ 781 $ 797 $ 118
Balance at December 31, 2020

$
2,522

$
2,895

$
150
Balance at December 31, 2021
$ 1,136 $ 1,392 $ 118

19
16
Table of Contents
The average recorded investment and interest income recognized for the loans individually evaluated for impairment for the three months ended September 30, ~~2021~~ 2022 and ~~2020,~~2021, were as follows:


Average recorded


investment

Interest income recognized

Average recorded investment

Interest income recognized

(Dollars in thousands)

(Dollars in thousands)

September 30, 2022

With no related allowance recorded

1-4 family residential
$ 421 $ 6
Multi-family
— —
Commercial
— —
Consumer
— —
Total
$ 421 $ 6
With a related allowance recorded

1-4 family residential
$ 552 $ 5
Multi-family
— —
Commercial
— —
Consumer
— —
Total
$ 552 $ 5
Balance for the Three Months Ended September 30, 2022
$ 973 $ 11
September 30, 2021





With no related allowance recorded





1-4 family residential

$
1,141

$
15
$ 1,141 $ 15
Multi-family

—

—
— —
Commercial

—

—
— —
Consumer

—

—
— —
Total

$
1,141

$
15
$ 1,141 $ 15
With a related allowance recorded




��
1-4 family residential

$
850

$
10
$ 850 $ 10
Multi-family

—

—
— —
Commercial

—

—
— —
Consumer

—

—
— —
Total

$
850

$
10
$ 850 $ 10
Balance for the three months ended September 30, 2021

$
1,991

$
25
September 30, 2020




With no related allowance recorded




1-4 family residential

$
974

$
13
Multi-family

—

—
Commercial

—

—
Consumer

—

—
Total

$
974

$
13
With a related allowance recorded




1-4 family residential

$
1,092

$
13
Multi-family

—

—
Commercial

—

—
Consumer

—

—
Total

$
1,092

$
13
Balance for the three months ended September 30, 2020

$
2,066

$
26
Balance for the Three Months Ended September 30, 2021
$ 1,991 $ 25

20
~~Table of Contents~~
The average recorded investment and interest income recognized for the loans individually evaluated for impairment for the nine months ended September 30, ~~2021~~ 2022 and ~~2020,~~2021, were as follows:


Average recorded


investment

Interest income recognized

Average recorded investment

Interest income recognized

(Dollars in thousands)

(Dollars in thousands)

September 30, 2022

With no related allowance recorded

1-4 family residential
$ 324 $ 21
Multi-family
— —
Commercial
— —
Consumer
— —
Total
$ 324 $ 21
With a related allowance recorded

1-4 family residential
$ 554 $ 19
Multi-family
— —
Commercial
— —
Consumer
— —
Total
$ 554 $ 19
Balance for the nine months ended September 30, 2022
$ 878 $ 40
September 30, 2021





With no related allowance recorded





1-4 family residential

$
1,155

$
52
$ 1,155 $ 52
Multi-family

—

—
— —
Commercial

—

—
— —
Consumer

—

—
— —
Total

$
1,155

$
52
$ 1,155 $ 52
With a related allowance recorded





1-4 family residential

$
860

$
29
$ 860 $ 29
Multi-family

—

—
— —
Commercial

—

—
— —
Consumer

—

—
— —
Total

$
860

$
29
$ 860 $ 29
Balance for the nine months ended September 30, 2021

$
2,015

$
81
$ 2,015 $ 81
September 30, 2020




With no related allowance recorded




1-4 family residential

$
988

$
39
Multi-family

—

—
Commercial

—

—
Consumer

—

—
Total

$
988

$
39
With a related allowance recorded




1-4 family residential

$
1,100

$
37
Multi-family

—

—
Commercial

—

—
Consumer

—

—
Total

$
1,100

$
37
Balance for the nine months ended September 30, 2020

$
2,088

$
76

17
Table of Contents
Troubled debt restructurings provide for modifications to repayment terms; more specifically, modifications to loan interest rates. Management performs an impairment analysis at the time of restructuring and periodically thereafter. Any reserve required is recorded through a provision to the allowance for loan losses.
There were 0no new troubled debt restructurings during the three and nine months ended months ended September 30, ~~2021~~2022 or ~~2020.~~2021. In March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed into law. Among other things, the CARES Act ~~suspends~~suspended the requirements related to accounting for TDRs for certain loan modifications related to the ~~COVID-19~~COVID-19 pandemic.
The Bank has minimal direct exposure to consumer, commercial, and other small businesses that may be negatively impacted by ~~COVID-19,~~COVID-19, but management has analyzed and increased the qualitative factors in these and other loan categories for incurred, but not yet identified loan losses attributable to ~~COVID-19.~~COVID-19. As of September 30, ~~2021,~~2022, management did not see significant disruption with existing customers related to ~~COVID-19.~~COVID-19. However, ~~Management~~during the years ended December 31, 2020 and 2021, management did grant customer requests to defer payments on 50 loans with unpaid balances of $9.7 ~~million between March 2020 and September 2021.~~million. As of September 30, ~~2021, 2 loans remain in deferral with unpaid balances of $127,000.~~2022, all COVID-19 loan modifications have returned to repayment. Management has also assisted small businesses that could benefit from the CARES Act, particularly in the SBA’s Paycheck Protection Program (“PPP”). As of September 30, ~~2021, the Company had approximately $71,000 of outstanding~~2022, all PPP loans ~~to small businesses under this program. The loans are guaranteed~~have been forgiven by the ~~SBA and loan proceeds to borrowers are forgivable by the SBA if certain criteria are met.~~SBA.
21
18
Table of Contents
Note 4: Other Real Estate Owned
At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the balance of other real estate owned was ~~$118,000~~$0 and ~~$0,~~$68,000, respectively.
The following table represents the movement in OREO during the periods presented.


Three months ended September 30,

Nine months ended September 30,

2021

2020

2021

2020

Three months ended September 30,

Nine months ended September 30,

(Dollars in thousands)

2022

2021

2022

2021

(Dollars in thousands)

Transfer of loan to OREO

$
118

$
—

$
187

$
—
$ — $ 109 $ — $ 171
Sale of OREO

68

—

68

—
— 68 — 68
Gross gain realized on transfer to OREO

9

—

15

—
— 9 — 15
Gross gain realized on sale of OREO

—

—

—

—
— — — —

~~The recorded investment of~~There were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process ~~is $60,000 and $111,000,~~ as of September 30, ~~2021~~2022 and there were $60,000 as of December 31, ~~2020, respectively.~~2021.
Note 5: Deposits
As of September 30, ~~2021,~~2022, for years below ended September 30, the scheduled maturities of time deposits are as follows:

For the 12 months ended

September 30,

Amount

Amount

(Dollars in thousands)
2022

$
39,392

(Dollars in thousands)

2023

14,765
$ 31,736
2024

10,282
13,222
2025

5,695
6,288
2026 and beyond

4,263
2026
3,881
2027 and beyond
2,444
Total

$
74,397
$ 57,571

In the normal course of business, deposit accounts are held by directors and executive officers of the ~~Bank (related parties).~~Bank. The terms for these accounts, including interest rates, fees, and other attributes, are similar to those prevailing for comparable transactions with other customers and do not involve more than the normal level of risk associated with deposit accounts. At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, total deposits held by directors and officers of the Bank were ~~$1.6 million~~$717,000 and ~~$4.3~~$1.1 million, respectively.
Note 6: Other Borrowings
On May ~~21, 2021,~~ 12, 2022, the Bank ~~obtained a non-interest bearing~~repaid the existing FHLB advance totaling $5.0 ~~million. This advance is collateralized by loans pledged to the FHLB and matures~~million with a 0% interest rate that was due on May 21, 2022. Additionally, on May 21, 2021, the Bank repaid the existing non-interest bearing FHLB advance totaling $4.0 million that was due on May 24, 2021.The Bank is eligible to borrow up to a total of $63.7 million and $60.8 million at September 30, 2022 and December 31, 2021, respectively, which would be collateralized by $80.5 million and $76.8 million of first mortgage loans under a blanket lien arrangement at September 30, 2022 and December 31, 2021, respectively.
19
Table of Contents
Note 7: Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1
Quoted prices in active markets for identical assets or liabilities
~~Quoted prices in active markets for identical assets or liabilities~~
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or ~~other inputs that are~~can be corroborated by observable market data for substantially the full term of the assets or ~~can be corroborated by observable market data for substantially the full term of the assets or~~ liabilities
22
~~Table of Contents~~
Level 3
Unobservable inputs supported by little or no market activity and are significant to the fair value of the ~~fair value of the~~ assets or liabilities
An asset’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at September 30, ~~2021~~2022 or December 31, ~~2020.~~2021.
Available-for-Sale Securities (Recurring)
Where quoted market prices are available in an active market, securities such as U.S. Treasuries, would be classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities would be classified within Level 3 of the hierarchy.
~~Other Real Estate Owned (Nonrecurring)~~
The Bank records other real estate owned at fair value less costs to sell. Fair value is commonly based on recent real estate appraisals which are typically updated no less frequently than annually. These appraisals usually utilize a single valuation approach or may use a combination of approaches including comparable sales and the income approach. Adjustments may be made in the appraisal process by the independent appraisers to adjust for differences between comparable sales and income data available. Other real estate owned properties are evaluated on an annual basis for additional impairment and adjusted accordingly.
Impaired Loans (Nonrecurring)
Impaired loans are recorded at fair value on a nonrecurring basis. The fair value of loans is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. Impaired loans that are valued based on the present value of future cash flows are not considered in the fair value hierarchy.
23
20
Table of Contents
The following table presents the Bank’s assets that are measured at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of September 30, ~~2021~~2022 and December 31, ~~2020:~~2021:

Fair Value Measurements Using


Fair Value

Level 1

Level 2

Level 3

Fair Value Measurements Using

(Dollars in thousands)
September 30, 2021









Fair Value

Level 1

Level 2

Level 3

(Dollars in thousands)

September 30, 2022

Securities Available-for-sale

U.S. Treasury Notes
$ 12,256 $ 12,256 $ — $ —
U.S. government agency obligations
19,504 — 19,504 —
Municipal obligations
19,043 — 19,043 —
Mortgage-backed residential obligations
36,552 — 36,552 —
Collateralized mortgage obligations
37,912 — 37,912 —
Total
$ 125,267 $ 12,256 $ 113,011 $ —

December 31, 2021

Securities Available-for-sale









U.S. government agency obligations

$
10,445

$
0

$
10,445

$
0
$ 10,053 $ — $ 10,053 $ —
Municipal obligations

10,845

0

10,845

0
18,000 — 18,000 —
Mortgage-backed residential obligations

45,478

0

45,478

0
42,148 — 42,148 —
Collateralized mortgage obligations

30,226

0

30,226

0
30,749 — 30,749 —
Loans held for sale

972

0

972

0
Total

$
97,966

$
0

$
97,966

$
0
$ 100,950 $ — $ 100,950 $ —

December 31, 2020








Securities Available-for-sale








U.S. government agency obligations

$
7,147

$
0

$
7,147

$
0
Municipal obligations

10,980

0

10,980

0
Mortgage-backed residential obligations

43,094

0

43,094

0
Collateralized mortgage obligations

20,399

0

20,399

0
Loans held for sale

1,972

0

1,972

0
Total

$
83,592

$
0

$
83,592

$
0

The Bank may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with accounting principles generally accepted in the United States of America. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis and the valuation techniques used to measure nonrecurring Level 3 fair value measurements as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, were as follows:

Fair Value

Level 1

Level 2

Level 3

(Dollars in thousands)
September 30, 2021








Impaired loans

$
721

0

0

$
721
OREO

118

0

0

118

December 31, 2020








Impaired loans

$
925

0

0

$
925

Fair Value

Level 1

Level 2

Level 3

(Dollars in thousands)

September 30, 2022

Impaired loans
$ 461 — — $ 461

December 31, 2021

Impaired loans
$ 663 — — $ 663

There were no gains or losses recognized on assets measured on a nonrecurring basis during the nine months ended September 30,2022 or 2021.The numerical range of unobservable inputs for the valuation assumptions used in calculating the amounts disclosed above is not meaningful to this presentation.
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Table of Contents
Note 8: Fair Value of Financial Instruments
Financial instruments are classified within the fair value hierarchy using the methodologies described in Note 137 – Fair Value Measurements. The following disclosures include financial instruments that are not carried at fair value on the Consolidated Balance Sheets.
~~The carrying value of short-term financial instruments approximates the fair value of these instruments. These~~
Certain financial instruments generally expose the Company to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market. ~~Under~~The carrying value of these financial instruments assumes to approximate the fair value ~~hierarchy,~~of these instruments. These instruments include cash and cash equivalents, ~~as well as non-interest-bearing~~non-interest bearing deposit accounts, ~~are classified as Level 1.~~ Time deposits with other financial institutions, FHLB stock, escrow deposits, FHLB Advances and accrued interest receivable and ~~payable are classified as Level 2.~~payable.
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~~Table of Contents~~
The carrying amounts and estimated fair values by fair value hierarchy of certain financial instruments are as follows:

Carrying

Estimated

Amount

Level 1

Level 2

Level 3

Fair Value

(Dollars in thousands)

September 30, 2022

Financial assets:

Loans, net
$ 97,746 $ — $ — $ 89,122 $ 89,122
Loans held for sale
104 — 107 — 107
Financial liabilities:

Interest-bearing deposits
$ 170,736 $ — $ 149,202 $ — $ 149,202

December 31, 2021

Financial assets:

Loans, net
$ 96,534 $ — $ — $ 95,612 $ 95,612
Loans held for sale
104 — 112 — 112
Financial liabilities:

Interest-bearing deposits
$ 186,531 $ — $ 181,564 $ — $ 181,564

Carrying





Estimated


Amount

Level 1

Level 2

Level 3

Fair Value

(Dollars in thousands)
September 30, 2021










Financial assets:










Loans, net

$
96,151

$
0

$
98,483

$
0

$
98,483
Financial liabilities:










Interest-bearing deposits

$
192,808

$
0

$
191,318

$
0

$
191,318
FHLB Advance

5,000

0

5,009

0

5,009

December 31, 2020










Financial assets:










Loans, net

$
98,455

$
0

$
102,034

$
0

$
102,034
Financial liabilities:










Interest-bearing deposits

$
176,670

$
0

$
177,280

$
0

$
177,280
FHLB Advance

4,000

0

4,012

0

4,012

Note 9: Capital Ratios

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under accounting principles generally accepted in the United States of America, regulatory reporting requirements and regulatory capital standards. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulatory reporting standards to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, common equity Tier 1 capital to total risk-weighted assets and of Tier I capital to average assets, as such individual components and calculations are defined by related standards.

As of September 30, ~~2021,~~2022 the most recent notification from the regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification which management believes have changed the Bank’s category. On November 13, 2019, the federal regulators finalized and adopted a regulatory capital rule establishing a new community bank leverage ratio (“CBLR”), which became effective on January 1, 2020. The intent of CBLR is to provide a simple alternative measure of capital adequacy for electing qualifying depository institutions and depository institution holding companies, as directed under the Economic Growth, Relief, and Consumer Protection Act. 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% 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. In April 2020, under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the 9% leverage ratio threshold was temporarily reduced to 8% in response to the ~~COVID-19~~COVID-19 pandemic. The threshold ~~will increase~~increased to 8.5% in 2021 and ~~return~~returned to 9% in 2022. The Bank elected to begin using CBLR for the first quarter of 2020. Management believes, as of September 30, ~~2021,~~2022, that the Bank met all capital adequacy requirements to which it was subject.

25
22
Table of Contents
The Bank’s actual capital amounts and ratios as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, are presented below:

Minimum Required to be

Actual

Well-Capitalized (1)

Amount

Ratio
��
Amount

Ratio

As of September 30, 2021

(Dollars in thousands)

Tier 1 capital (to Average Assets)

$
44,276

18.33
%
$
20,528

>8.5
%
As of December 31, 2020

Tier 1 capital (to Average Assets)

$
44,256

18.41
%
$
21,636

>8
%

Minimum Required to be

Actual

Well-Capitalized (1)

Amount

Ratio

Amount

Ratio

As of September 30, 2022

(Dollars in thousands)

Tier 1 capital (to Average Assets)
$ 65,210 23.78 % $ 24,685 >9%
As of December 31,2021

Tier 1 capital (to Average Assets)
$ 44,262 16.11 % $ 23,349 >8.5%

~~(1)~~(1) As defined by regulatory agencies. Failure to exceed the leverage ratio thresholds required under CBLR in the future, subject to any applicable grace period, would require the Bank to return to the risk-based capital ratio thresholds previously utilized under the fully phased-in Basel III Capital Rules to determine capital adequacy.
Note 10: Commitments and Contingencies

In the ordinary course of business, the Bank has various commitments and contingent liabilities that are not reflected in the accompanying financial statements. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the financial position of the Bank.

Financial Instruments
The Bank does not engage in the use of interest rate swaps or futures, forwards or option contracts.

At September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, unused lines of credit and outstanding commitments to originate loans were as follows:


September 30, 2021

December 31, 2020

(Dollars in thousands)
Total commitments

$
5,695

$
5,156

September 30, 2022

December 31, 2021

(Dollars in thousands)

Unused line of credit
$ 2,936 $ 4,001
Commitments to originate loans
351 219
Total commitments
$ 3,287 $ 4,220

Concentrations of Credit Risk
The Bank generally originates single-family residential loans within its primary lending area which is Waukegan, Illinois and the surrounding area. The Bank’s underwriting policies require such loans to be made at approximately 80% loan-to-value, based upon appraised values, unless private mortgage insurance is obtained, or the loan is guaranteed by the government. These loans are secured by the underlying properties.

The Bank maintains its cash in deposit accounts at the Federal Reserve Bank or other institutions, the balances of which may exceed federally insured limits. The Bank has not experienced any losses in such accounts. The Bank believes it is not exposed to any significant credit risk on cash and cash equivalents.

Interest Rate Risk
The Bank assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, fair values of its financial instruments will change when interest rate levels change, and that change may be either favorable or unfavorable to the Bank. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the overall interest rate risk.

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~~Table of Contents~~
Litigation
Due to the nature of its business activities, the Bank is at times subject to legal action which arises in the normal course of business. In the opinion of management, the ultimate resolution of these matters is not expected to have a material effect on the financial position or results of operations of the Bank.

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Table of Contents
Note 11: Earnings Per Share
~~Note 11: Subsequent Events~~
~~We have evaluated~~Basic EPS represents income available to common stockholders divided by the ~~effects~~weighted-average number of ~~events~~common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares (such as stock options) were exercised or converted into additional common shares that should then share in the earnings of the entity. Diluted EPS is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding for the period, plus the effect of potential dilutive common share equivalents.
There were no securities or other contracts that had a dilutive effect during the three and ~~transactions through~~nine months ended September 30, 2022, and therefore the ~~date of this filing~~weighted-average common shares outstanding used to calculate both basic and diluted EPS are the same. Shares held by the Employee Stock Ownership Plan ("ESOP") that have ~~occurred subsequent~~not been allocated to employees in accordance with the terms of the ESOP, referred to as "unallocated ESOP shares", are not deemed outstanding for EPS calculations. EPS data is not applicable for three and nine months ended months ended September 30, ~~2021. Other than~~2021 as the Company had no shares outstanding.

Three Months Ended September 30,

Nine months ended September 30,

2022

2022

(Income in thousands)

Net income (loss) applicable to common shares
$ 118 $ (12 )

Average number of common shares outstanding
5,397,959 5,042,050
Less: Average unallocated ESOP shares
426,029 397,529
Average number of common shares outstanding used to calculate basic earnings per common share
4,971,930 4,644,521
Earnings (loss) per common share basic and diluted
$ 0.02 $ (0.00 )
All unallocated ESOP shares have been excluded from the calculation of basic and diluted EPS.
Note 12: ESOP
Employees participate in an Employee Stock Ownership Plan ("ESOP"). The ESOP borrowed funds from the Company to purchase 431,836 shares of Conversion as discussed below, management does not believe there were any material subsequent events during this period that would have required further recognition or disclosure in the unaudited consolidated financial statements included in this report.
~~Plan of Conversion~~
stock at $10 per share. The ~~Boards of Directors of North Shore MHC and NSTS Financial Corporation have adopted the Plan of Conversion. Pursuant~~Bank makes discretionary contributions to the ~~Plan of Conversion, our organization will convert form the mutual holding company form of organization~~ESOP, as well as paying dividends on unallocated shares to the ~~stock form~~ESOP, and the ESOP uses funds it receives to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation. Participants receive the shares at the end of ~~organization. North Shore MHC~~employment. Dividends on allocated shares increase participants accounts.
There were no contributions to the ESOP during the firstnine months of 2022, as the initial annual loan payment will be ~~merged into NSTS Financial Corporation,~~made during the fourth quarter. Expense recorded was $48,000 and ~~North Shore MHC will no longer exist. NSTS Financial Corporation, which owns 100% of North Shore Trust~~$151,000 during the three and ~~Savings, will be merged into NSTS Bancorp, Inc. When the conversion is completed, all of the outstanding common stock of North Shore Trust and Savings will be owned by NSTS Bancorp, Inc.~~nine months ended months ended September 30, 2022, and ~~all of~~is recognized over the ~~outstanding common stock of NSTS Bancorp, Inc. will be owned~~service period.
Shares held by ~~public shareholders. The Securities and Exchange Commission declared NSTS Bancorp, Inc.’s Registration Statement effective on November 10, 2021.~~the ESOP were as follows:

As of September 30, 2022

(Dollars in thousands)
Shares committed for allocation
12,960
Unallocated
418,876
Total ESOP shares
431,836

Fair value of unearned shares at September 30, 2022
$ 4,532
27
24
Table of Contents
ITEM2. ~~MANAGEMENT’S~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section is intended to assist in the understanding of our financial performance through a discussion of our financial condition as of September 30, ~~2021~~2022 and as compared to our financial condition as of December 31, ~~2020,~~2021, and our results of operations for the three and nine ~~and three-month periods~~months ended months ended September 30, ~~2021~~2022 and ~~2020.~~2021. This section should be read in conjunction with the unaudited interim consolidated financial statements and notes thereto appearing in Part I, Item 1 of this Quarterly Report on Form ~~10-Q and NSTS Bancorp, Inc.’s prospectus, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) on November 12, 2021.~~10-Q.
Forward-Looking Statements
~~Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may be considered~~
This filing contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which ~~are based on certain current assumptions and describe our future plans, strategies and expectations,~~ can ~~generally~~ be identified by the use of ~~the~~ words ~~“may,” “will,” “should,” “could,” “would,” “plan,” “potential,”~~such as “estimate,” “project,” “believe,” “intend,” “anticipate,” ~~“expect,~~“plan,” ~~“target”~~“seek,” “expect” and words of similar ~~expressions.~~meaning. These forward-looking statements include, but are not limited to:
~~Forward-looking~~
●
statements of our goals, intentions and expectations;
●
statements regarding our business plans, prospects, growth and operating strategies;
●
statements regarding the quality of our loan and investment portfolios; and
●
estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
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Table of Contents
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: general economic conditions, either nationally or in our market areas, that are worse than expected; conditions related to the recent global coronavirus outbreak that has and will continue to pose risks and could harm our business and results of operations;
●
general economic conditions, either nationally or in our market areas, that are different than expected
●
changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses; our ability to access cost-effective funding; fluctuations in real estate values and both residential and commercial real estate market conditions; demand for loans and deposits in our market area; our ability to implement and change our business strategies; competition among depository and other financial institutions; inflation and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make; adverse changes in the securities or secondary mortgage markets; changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums; changes in monetary or fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; changes in the quality or composition of our loan or investment portfolios; technological changes that may be more difficult or expensive than expected; a failure or breach of our operational or security systems or infrastructure, including cyber-attacks; the inability of third party providers to perform as expected; our ability to manage market risk, credit risk and operational risk in the current economic environment; our ability to enter new markets successfully and capitalize on growth opportunities; our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related there to; changes in consumer spending, borrowing and savings habits; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board; our ability to retain key employees; and direction of loan delinquencies and charge-offs and changes in estimates of the adequacy of the allowance for loan losses;
●
our ability to access cost-effective funding;
●
major catastrophes such as tornadoes, floods or other natural disasters, the related disruption to local, regional and global economic activity and financial markets, and the impact that any of the foregoing may have on us and our customers and other constituencies;
●
further data processing and other technological changes that may be more difficult or expensive than expected;
●
success or consummation of new business initiatives may be more difficult or expensive than expected;
●
the inability of third-party service providers to perform;
●
fluctuations in real estate values and both residential and commercial real estate market conditions;
●
demand for loans and deposits in our market area;
●
our ability to continue to implement our business strategies;
●
competition among depository and other financial institutions;
●
inflation and changes in the interest rate environment that reduce our margins and yields, reduce the fair value of financial instruments or reduce the origination levels in our lending business, or increase the level of defaults, losses and prepayments on loans;
●
adverse changes in the securities markets;
●
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
●
our ability to manage market risk, credit risk and operational risk in the current economic conditions;
●
our ability to enter new markets successfully and capitalize on growth opportunities;
●
our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;
●
changes in consumer spending, borrowing and savings habits;
●
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
●
our ability to hire and retain key employees; and
●
our compensation expense associated with equity allocated or awarded to our employees.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Except as required by applicable law or regulation, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
28
26
Table of Contents
General
On January 18, 2022, NSTS Bancorp, Inc. (“the Company”) became the holding company for North Shore Trust and Savings (“the Bank”) when North Shore MHC completed its conversion into the stock holding company form of organization. In connection with the conversion, the Company sold 5,290,000 shares of common stock at a price of $10 per share, for gross proceeds of $52.9 million. The Company also contributed 107,959 shares of common stock and $150,000 in cash to North Shore Trust and Savings Charitable Foundation, Inc. Shares of the Company's common stock began trading on January 19, 2022 on the Nasdaq Capital Market under the trading symbol “NSTS.”
NSTS Bancorp,Inc.
NSTS Bancorp, Inc. is a Delaware corporation which was incorporated in September 2021. As a savings and loan holding company, NSTS Bancorp, Inc. ~~will be~~is regulated by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”). ~~To date, NSTS Bancorp, Inc. has engaged in organizational activities only. Following the conversion, NSTS Bancorp, Inc.’s~~The Company’s primary business ~~activity will~~activities relate to owning all of the outstanding shares of capital stock of ~~North Shore Trust and Savings.~~the Bank.
The unaudited financial statements and other financial information contained in this Quarterly Report on Form 10-Q should be read in conjunction with ~~the audited financial statements, and related notes, of~~ North Shore ~~MHC at~~MHC's Consolidated Financial Statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020 contained in NSTS Bancorp, Inc.’s definitive prospectus dated November 10, 2021 (the “Prospectus”), as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on November 12, 2021.
North Shore Trust and Savings
North Shore Trust and Savings, a federally-chartered stock savings institution, was established in 1921 as North Shore Building and Loan, an Illinois-chartered institution. Since its inception, ~~our organization~~the Bank has operated as a traditional savings institution focused primarily on serving the banking needs of customers in our market area of Lake County, Illinois and adjacent communities. We operate from our headquarters and main banking office in Waukegan, Illinois, as well as two additional full-service branch offices located in Waukegan and Lindenhurst, Illinois, respectively. We have a loan production office in Chicago, Illinois. Our primary business activity is attracting deposits from the general public and using those funds to originate one- to four-family residential mortgage loans and purchase investments. We are subject to comprehensive regulation and examination by the Office of the Comptroller of the Currency (the “OCC”).
In 2005, North Shore Trust and Savings converted to a federally-chartered savings institution and reorganized into the mutual holding company form of organization. Currently, North Shore Trust and Savings is a wholly-owned subsidiary of NSTS Financial Corporation, a federally-chartered corporation which is a wholly-owned subsidiary of North Shore MHC, a federally-chartered mutual holding company. The mutual holding company has not issued any shares of capital stock to the public.
~~Conversion of North Shore MHC~~
Pursuant to the terms of North Shore MHC’s Plan of Conversion, North Shore MHC will convert from the mutual holding company to the stock holding company corporate structure. Upon the completion of the conversion, North Shore MHC and NSTS Financial Corporation will cease to exist, and North Shore Trust and Savings will be a wholly owned subsidiary of NSTS Bancorp, Inc. At present, all depositors and certain borrowers as of specified eligibility dates have voting rights in North Shore MHC as to all matters requiring member approval. Upon completion of the conversion, depositors and those certain borrowers as of specified eligibility dates of North Shore Trust and Savings will cease to have any voting rights in North Shore MHC and all voting rights in North Shore MHC will be vested in NSTS Bancorp, Inc. as the sole shareholder of North Shore Trust and Savings. The stockholders of NSTS Bancorp, Inc. will possess exclusive voting rights and rights to NSTS Bancorp, Inc. stock.
Our Business and Franchise
For 100 years, we have served Lake County, Illinois and the surrounding communities. We have established deep ties to the community and developed customer relationships which have spanned generations. We pride ourselves in matching our products and services to the needs of the community.
29
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Table of Contents
Our principal business consists of originating loans for one- to four-family residential properties, multi-family and non-owner occupied commercial real estate loans, and to a lesser extent home equity loans and lines of credit, construction loans, and other consumer loans in the market areas surrounding our branch footprint. We also established a loan production office in the Roscoe Village neighborhood of Chicago, Illinois in 2016 to originate loans outside of our branch network in a more densely populated metropolitan area, which we believe benefits us geographically. We attract retail deposits from the general public in the areas surrounding our main office and branches, offering a wide variety of deposit products. We also invest in investment securities. Our revenues are derived primarily from interest on loans, noninterest income from the sale of one- to four-family residential mortgage loans in the secondary market and interest on investments. Our primary sources of funds are deposits, and principal and interest payments on loans and securities.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated unaudited interim financial statements for the ~~quarter~~three and nine months ended months ended September 30, ~~2021,~~2022, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results could differ from these estimates. Our significant accounting policies are discussed in detail in the Company’s ~~prospectus, filed with~~Annual Report on Form 10-K for the ~~Securities and Exchange Commission pursuant to Rule 424(b)(3) on November 12,~~year ended December 31, 2021. There have been no material changes to our critical accounting policies as compared to the critical accounting policies described in the ~~prospectus.~~Annual Report on Form 10-K.
~~Impact of~~
COVID-19
~~During~~
In light of the ~~first quarter~~recent events surrounding the COVID-19 pandemic, we are continually assessing the effects of ~~2020, global financial markets experienced significant volatility resulting from~~ the ~~spread of a novel coronavirus known as COVID-19.~~pandemic on our employees, customers and communities. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. In response to the pandemic, the State of Illinois imposed restrictions on travel and business operations, advising or requiring individuals to limit or forego time outside of their homes, and ordering the temporary closures of many businesses. These measures increased unemployment in our market area and negatively impacted many businesses, thereby threatening the repayment ability of some of our borrowers.
~~To address the economic impact in the United States,~~ the Coronavirus Aid, Relief, and Economic Security Act ~~of 2020~~ (the ~~“CARES Act”~~"CARES Act") was enacted. The CARES Act contains many provisions related to banking, lending, mortgage forbearance and taxation. We worked diligently to help support our customers through the PPP, loan modifications and loan deferrals. During the years ended December 31, 2020 and 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 September 30, 2022, 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 provided 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 September 30, 2022, all COVID-19 loan modifications have returned to repayment status.
Under the provisions of the CARES Act signed into law on March 27, 2020. The CARES Act included a number of provisions that affected us, including accounting relief for troubled debt restructurings (“TDRs”). The CARES Act also established the Paycheck Protection Program (“PPP”) through the Small Business Administration (the “SBA”). In addition, the Federal Reserve Board took steps to bolster the economy by, among other things, reducing the federal funds rate2020 and the ~~discount-window borrowing rate to near zero.~~
~~In response to the pandemic, we implemented protocols and processes to help protect our employees, customers and communities. These measures included:~~
● Operating our branches under a drive-through model with appointment-only lobby service, leveraging our enhanced network technology to quickly implement business continuity plans that included critical operations teams being divided and dispersed to separate locations and, when possible, having employees work remotely.
● Offering assistance to our customers affected by the COVID-19 pandemic, including payment deferrals, waiving certain fees, suspending property foreclosures, and participating in lending programs for businesses under the CARES Act, including the PPP.
30
~~Table~~subsequent extension of ~~Contents~~
~~We implemented various consumer and commercial real estate loan modification programs to provide our borrowers relief from the economic impacts of COVID-19. Based on guidance in~~ the CARES Act, the Bank was eligible for a refundable employee retention credit subject to certain criteria. The Bank qualified for the Employee Retention 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 Employee Retention 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 was recorded during the second quarter of 2022, when the Bank determined it was eligible. The credit is recorded as ~~extended by the Consolidated Appropriations Act (“CAA”, 2021), COVID-19 related modifications to loans that were current~~other non-interest income and offsets $503,000 of salaries and employee benefits previously recorded as of December 31, 2019 are not required to be designated as TDRs under U.S. GAAP through January 1, 2022. In addition, the bank regulatory agencies issued interagency guidance stating that banks may presume borrowers are not experiencing financial difficulty for COVID-19 related short-term modifications (i.e., six months or less) granted to loans that were current as of the loan modification program implementation date, therefore supporting these modifications are not required to be classified as TDRs under US GAAP. Since January 1, 2020, we granted short-term payment deferrals on 50 loans, totaling approximately $9.7 million, that were otherwise performing.an expense during 2021. As of September 30, ~~2021, two loans totaling $127,000 remain in deferral.~~
~~We obtained approval from~~2022, the ~~SBA to offer PPP loans to our customers in need. We originated 24 loans totaling $865,000 from~~Bank cannot reasonably estimate when it will receive the ~~first round of PPP funding. All of these loans received full forgiveness. We originated 16 loans for $413,000 from the second round of PPP funding. As~~refunds. The CARES Act and related Employee Retention Credit was terminated as of September 30, 2021, ~~15 loans totaling $71,000 remain outstanding~~ and ~~awaiting forgiveness.~~therefore the Bank does not expect to file for any additional refunds.
~~EXECUTIVE OVERVIEW~~
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Table of Contents
Overview
This discussion is intended to focus on certain financial information regarding our consolidated company and may not contain all the information that is important to the reader. The purpose of this discussion is to provide the reader with a more thorough understanding of ~~the~~ our financial statements. As such, this discussion should be read carefully and in conjunction with the consolidated financial statements and accompanying notes contained elsewhere in this report.
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~~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.
~~Financial highlights~~
Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The following table shows for the ~~nine months ended September 30, 2021 include:~~
● ~~Net income of $2,000 for the nine months ended September 30, 2021 compared to a net loss of $199,000 for the nine-months ended September 30, 2020;~~
● ~~Net interest margin of 1.82% for the year to date 2021, a decrease of 26 basis points when compared to the first nine months of 2020;~~
● ~~Loans, net of $96.2 million, a decrease of 2.34% when compared to December 31, 2020;~~
● ~~Allowance for loan losses decreased to $783,000, compared to $870,000 as of December 31, 2020;~~
● ~~Provision for loan losses of $5,000 for the nine months ended September 30, 2021, compared to $310,000 for the first nine months of 2020;~~
● ~~Deposits of $205.1 million, an increase of 10.04% compared to December 31, 2020;~~
● ~~Regulatory capital remained strong with ratios exceeding all regulatory required thresholds.~~
~~For~~periods indicated the ~~three months ended September 30, 2021 our return~~total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average ~~equity (“ROE”)~~interest-bearing liabilities, expressed both in dollars and ~~return~~rates, and the net interest margin. All average balances are based on ~~average~~daily balances. The table also reflects the yields on the Company’s interest-earning assets ~~(“ROA”) were 0.15%~~ and ~~0.03%, respectively, compared to 0.22% and 0.04%,~~costs of interest-bearing liabilities for the three months ended September 30, 2020. For the nine months ended September 30, 2021 our ROE and ROA were 0.01% and 0.00%, respectively, compared to (0.58)% and (0.11)%, for the nine months ended September 30, 2020.periods shown.
31
29
Table of Contents

For the Three Months Ended September 30,

2022

2021

Average

Average

Outstanding

Average Yield/

Outstanding

Average Yield/

Balance

Interest

Rate

Balance

Interest

Rate

(Dollars in thousands)

Interest-earning assets:

Loans, net
$ 96,751 $ 877 3.63 % $ 97,179 $ 853 3.51 %
Federal funds sold and interest-bearing deposits in other banks
24,480 111 1.81 % 24,638 6 0.10 %
Time deposits with other financial institutions
4,243 14 1.32 % 5,728 11 0.77 %
Securities available for sale
127,644 682 2.14 % 97,608 327 1.34 %
FHLB stock
550 4 2.91 % 550 4 2.91 %
Total interest-earning assets
253,668 $ 1,688 2.66 % 225,703 $ 1,201 2.13 %
Noninterest-earning assets
20,618 15,624
Total assets
$ 274,286 $ 241,327
Interest-bearing liabilities:

Interest-bearing demand
$ 17,547 $ 2 0.05 % $ 18,718 $ 2 0.04 %
Money market
46,497 24 0.21 % 46,330 24 0.21 %
Savings
48,489 18 0.15 % 45,344 17 0.15 %
Time deposits
60,699 148 0.98 % 63,903 182 1.14 %
Total interest-bearing deposits
$ 173,232 $ 192 0.44 % $ 174,295 $ 225 0.52 %
Other borrowings⁽¹⁾
— — — % 5,000 — — %
Total interest-bearing liabilities
173,232 $ 192 0.44 % 179,295 $ 225 0.50 %
Noninterest-bearing liabilities
17,554 16,156
Total liabilities
$ 190,786 $ 195,451
Equity
83,500 45,876
Total liabilities and equity
$ 274,286 $ 241,327
Net interest income
$ 1,496 $ 976
Interest rate spread⁽²⁾
2.22 % 1.63 %
Net interest-earning assets⁽³⁾
$ 80,436 $ 46,408
Net interest margin⁽⁴⁾
2.36 % 1.73 %
Average interest-earning assets to average-interest bearing liabilities
146.43 % 125.88 %
~~COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020~~

For the Three Months Ended September 30,

2021

2020

Average

Average

Outstanding

Average Yield/

Outstanding

Average Yield/

Balance

Interest

Rate

Balance

Interest

Rate

(Dollars in thousands)

Interest-earning assets:

















Loans, net

$
97,179

$
853

3.51
%
$
101,900

$
985

3.87
%
Federal funds sold and interest-bearing deposits in other banks

24,638

7

0.11
%

37,196

8

0.09
%
Time deposits with other financial institutions

5,728

11

0.77
%

17,104

80

1.87
%
Securities available for sale

97,608

327

1.34
%

69,206

311

1.80
%
FHLB of Chicago stock⁽¹⁾

550

3

2.18
%

512

3

2.34
%
Total interest-earning assets

225,703

$
1,201

2.13
%

225,918

$
1,387

2.46
%
Noninterest-earning assets

15,624





14,920





Total assets

$
241,327





$
240,838





Interest-bearing liabilities:













Interest-bearing demand

$
18,718

$
2

0.04
%
$
14,779

$
3

0.08
%
Money market

46,330

24

0.21
%

49,340

38

0.31
%
Savings

45,344

17

0.15
%

40,954

26

0.25
%
Time deposits

63,903

182

1.14
%

69,545

276

1.59
%
Total interest-bearing deposits

$
174,295

$
225

0.52
%
$
174,618

$
343

0.79
%
Other borrowings⁽²⁾

5,000

—

0.00
%

4,000

—

0.00
%
Total interest-bearing liabilities

179,295

225

0.50
%

178,618

343

0.77
%
Noninterest-bearing liabilities

16,156





15,964





Total liabilities

$
195,451





$
194,582





Equity

45,876





46,256





Total liabilities and equity

$
241,327





$
240,838





Net interest income⁽¹⁾



976





1,044



Interest rate spread⁽³⁾





1.63
%





1.69
%
Net interest-earning assets⁽⁴⁾

$
46,408





$
47,300





Net interest margin⁽⁵⁾





1.73
%





1.85
%
Average interest-earning assets to average-interest bearing liabilities

125.88
%





126.48
%





32
30
Table of Contents

For the Nine Months Ended September 30,

2021

2020

Average

Average

Outstanding

Average Yield/

Outstanding

Average Yield/

Balance

Interest

Rate

Balance

Interest

Rate

(Dollars in thousands)

Interest-earning assets:

















Loans, net

$
96,968

$
2,662

3.66
%
$
99,307

$
3,109

4.17
%
Federal funds sold and interest-bearing deposits in other banks

25,892

16

0.08
%

36,889

122

0.44
%
Time deposits with other financial institutions

7,827

59

1.01
%

19,373

325

2.24
%
Securities available for sale

93,242

1,026

1.47
%

67,612

1,100

2.17
%
FHLB stock⁽¹⁾

537

10

2.48
%

512

9

2.34
%
Total interest-earning assets

224,466

3,773

2.24
%

223,693

4,665

2.78
%
Noninterest-earning assets

16,768





16,073





Total assets

241,234





$
239,766





Interest-bearing liabilities:













Interest-bearing demand

17,488

$
6

0.05
%
$
13,993

9

0.09
%
Money market

47,052

72

0.20
%

52,188

210

0.54
%
Savings

44,464

50

0.15
%

40,364

76

0.25
%
Time deposits

64,931

588

1.21
%

70,686

888

1.68
%
Total interest-bearing deposits

$
173,935

$
716

0.55
%
$
177,231

$
1,183

0.89
%
Other borrowings⁽²⁾

4,487

—

0.00
%

1,927

—

0.00
%
Total interest-bearing liabilities

178,422

$
716

0.54
%

179,158

1,183

0.88
%
Noninterest-bearing liabilities

16,703





14,823





Total liabilities

$
195,125





$
193,981





Equity

46,109





45,785





Total liabilities and equity

$
241,234





$
239,766





Net interest income⁽¹⁾



3,057





3,482



Interest rate spread⁽³⁾



1.70
%






1.90
%
Net interest-earning assets⁽⁴⁾

$
46,044





$
44,535





Net interest margin⁽⁵⁾



1.82
%






2.08
%
Average interest-earning assets to average-interest bearing liabilities

125.81
%





124.86
%





For the Nine Months Ended September 30,

2022

2021

Average

Average

Outstanding

Average Yield/

Outstanding

Average Yield/

Balance

Interest

Rate

Balance

Interest

Rate

(Dollars in thousands)

Interest-earning assets:

Loans, net
$ 96,726 $ 2,603 3.59 % $ 96,968 $ 2,662 3.66 %
Federal funds sold and interest-bearing deposits in other banks
47,288 213 0.60 % 25,892 16 0.08 %
Time deposits with other financial institutions
3,810 25 0.87 % 7,827 59 1.01 %
Securities available for sale
116,683 1,638 1.87 % 93,242 1,026 1.47 %
FHLB stock
550 11 2.67 % 537 10 2.48 %
Total interest-earning assets
265,057 $ 4,490 2.26 % 224,466 3,773 2.24 %
Noninterest-earning assets
20,491 16,768
Total assets
$ 285,548 $ 241,234
Interest-bearing liabilities:

Interest-bearing demand
$ 17,492 $ 7 0.05 % $ 17,488 6 0.05 %
Money market
45,751 69 0.20 % 47,052 72 0.20 %
Savings
48,595 55 0.15 % 44,464 50 0.15 %
Time deposits
63,261 443 0.93 % 64,931 588 1.21 %
Total interest-bearing deposits
$ 175,099 $ 574 0.44 % $ 173,935 $ 716 0.55 %
Other borrowings(1)
2,601 — — % 4,487 — — %
Total interest-bearing liabilities
177,700 $ 574 0.43 % 178,422 716 0.54 %
Noninterest-bearing liabilities
24,993 16,703
Total liabilities
$ 202,693 $ 195,125
Equity
82,855 46,109
Total liabilities and equity
$ 285,548 $ 241,234
Net interest income
$ 3,916 3,057
Interest rate spread(2)
1.83 % 1.70 %
Net interest-earning assets(3)
$ 87,357 $ 46,044
Net interest margin(4)
1.97 % 1.82 %
Average interest-earning assets to average-interest bearing liabilities
149.16 % 125.81 %
(1)
~~Includes dividend income from FHLB stock which is included in “Other Income” in the December 31, 2020 and 2019 financial statements.~~
~~(2)~~
Other borrowings consists of 0% interest rate FHLB advances.
~~(3)~~
(2)
Equals the difference between the yield on average earning-assets and the cost of average interest-bearing liabilities.
~~(4)~~
(3)
Equals total interest-earning assets less total interest-bearing liabilities.
~~(5)~~
(4)
Equals net interest income divided by average interest-earning assets.
31
Table of Contents
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
General. For the three months ended September 30, 2022, the Company had net income of $118,000, compared to net income of $16,000 for the same period ended September 30, 2021. The increase in net income is primarily the result of a reversal of the provision for loan losses, and an increase in interest income, primarily from securities available for sale, offset by a decrease in noninterest income and an increase in noninterest expense. Additionally, for the nine months ended September 30, 2022, the Company had a net loss of $12,000, compared to net income of $2,000 for the same period ended September 30, 2021. The changes in net income (loss) are primarily the result of an increase of noninterest expenses, which are expected to reoccur in future periods and are the result of additional expenses related to being a public company, offset by the recognition of the Employee Retention Credit during the second quarter of 2022.
Net Interest ~~Income and Margin~~
Income. Net interest income was ~~$976,000 for the three months ended September 30, 2021 compared to~~$1.5 million and $1.0 million for the three months ended September 30, ~~2020.~~2022 and 2021. Net interest income was $3.9 million and $3.1 million for the nine months ended September 30, 2022 and 2021, ~~compared to $3.5 million for the first nine months of 2020. This decrease was due to a decline in net interest margin, partially offset by balance sheet growth.~~respectively.
The average yield on total interest-earning assets ~~decreased 33~~increased 53 basis points in the third quarter of ~~2021~~2022 compared to ~~2020.~~2021. This increase was driven by an increase of 12 basis points in the average yield on loans, net, to 3.63%, an increase of 80 basis points for the average yield on investments, net, to 2.14%, and an increase in the average yield on interest-bearing deposits in other banks of 171 basis points, to 1.81%. Management continues to deploy funds into the investments portfolio, helping to increase the average yield earned on investments. The average yield on total interest-earning assets ~~decreased 54~~increased 2 basis points in the first nine months of ~~2021~~2022 compared to ~~2020. This decrease was primarily due~~2021.
During 2021, borrowers continued to take advantage of the lower interest rate ~~environment. The decrease was partially offset by~~environment and refinanced their mortgages, driving down the yield on loans during 2021 and the beginning of 2022. However, during 2022, as interest rates on mortgages have risen, the average yield on the loan portfolio has increased.
Notwithstanding a ~~change~~general increase in ~~our asset mix, in which management invested available cash in securities available for sale to achieve a higher yield.~~
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~~Table of Contents~~
~~The~~market interest rates during 2022, the cost of interest-bearing liabilities decreased 276 basis points for the three months ended September 30, ~~2021 from~~2022 compared to the three months ended September 30, ~~2020. The cost of interest-bearing liabilities~~2021, and decreased 3411 basis points infor the ~~first~~ nine months ~~of 2021~~ended September 30, 2022 compared to ~~2020.~~the nine months ended September 30, 2021. The net decrease in our funding costs was primarily ~~due~~driven by a decrease in the average yield of time deposits. During the first quarter of 2022, subsequent to the conversion closing, certain customers withdrew their funds held in time deposits prior to the maturity of these deposits. Upon the withdrawal of these funds, the customers were charged an interest penalty which resulted in a lower ~~prevailing market interest rates. Our~~overall funding ~~costs declined less than~~cost during the ~~rates earned on our interest earning assets.~~quarter.
We continue to deploy various asset liability management strategies to manage our interest rate risk. Our net interest margin could continue to experience pressure due to reduced earning asset yields and increased competition for quality loan opportunities.
Provision for Loan ~~Losses~~
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.
~~Provision for loan losses decreased by $102,000, or 113.33%, due to~~
During the three months ended September 30, 2022 and 2021, a reversal of provision of $84,000 and $12,000, respectively, was recorded. During the nine months ended September 30, 2022, a reversal of provision of $100,000 was recorded, compared to a provision of $5,000 for the same period ending September 30, 2021. The reversal of the provision in 2022 was primarily the result of strong economic factors leading to a reduction in the qualitative adjustment of the allowance for loan loss. The rolling average unemployment rate in Kenosha/Lake Counties continues to decline. Additionally, the Bank has reduced its qualitative adjustment due to reduced COVID-19 uncertainties. The Bank has not experienced losses specific to COVID-19 during the pandemic. Net recoveries of $6,000 were recorded during the nine months ended September 30, 2022, compared to net charge-offs of $92,000 during the same period ended September 30, 2021. Additionally, during the three months ended September, 2022, there were no recoveries or charge-offs recorded. During the three months ended September 30, 2021, ~~compared to a provision of $90,000 for the three months ended September 30, 2020. We recorded net~~ recoveries of $3,000 for the three months ended September 30, 2021 and 2020. The higher provision during the three months ended September 30, 2020 was primarily due to the uncertainty surrounding the economic impact of the COVID-19 pandemic.were recorded.
Provision for loan losses decreased by $305,000, or 98.39%, to $5,000 during the nine months ended September 30, 2021 compared to $310,000 for the nine months ended September 30, 2020. We recorded net charge-offs of $92,000 for the nine months ended September 30, 2021, compared to a net recovery of $11,000 for the nine months ended September 30, 2020. We recorded a higher provision during the nine months ended September 30, 2020 due to organic loan growth during the period of $1.3 million to $98.9 million at September 30, 2020 compared to $97.7 million at December 31, 2019, and the uncertainty surrounding the economic impact of the COVID-19 pandemic.
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.
34
32
Table of Contents
Noninterest ~~Income~~Income. The following table shows the components of noninterest income for the periods presented.

Three months ended September 30,

Nine months ended September 30,

Three months ended September 30,

Nine months ended September 30,

Noninterest income:

2021

2020

2021

2020

2022

2021

2022

2021

(Dollars in thousands)

(Dollars in thousands)
Gain on sale of mortgage loans

$
71

$
246

$
316

$
392
$ 30 $ 71 $ 99 $ 316
Gain on sale of investments

131

—

131

59
Gain on sale of securities
— 131 — 131
Rental income on office building

11

11

32

32
16 11 37 32
Service charges on deposits

74

64

216

191
75 75 222 216
Increase in cash surrender value of BOLI

46

46

134

136
45 46 132 134
Non-interest income other

40

57

142

118
Other
19 39 572 142
Total noninterest income

$
373

$
424

$
971

$
928
$ 185 $ 373 $ 1,062 $ 971

Noninterest income decreased ~~$51,000,~~$188,000, or ~~12.03%~~50.4%, to $185,000 for the quarter ended September 30, 2022 compared to $373,000 for the quarter ended September 30, ~~2021 compared to $424,000 for the quarter ended September 30, 2020.~~2021. The primary driver of the decrease is the absence of gain on sale of securities during the three months ended September 30, 2022 compared to $131,000 during the three months ended September 30, 2021. Management did not sell any securities during the three months ended September 30, 2022 due to the unrealized loss position of the portfolio. Additionally, the decrease was driven by a decrease in the gain on sale of loans. During the three months ended September 30, 2022, we sold $1.8 million in loans compared to $3.1 million during the three months ended September 30, 2021. The decrease in sale of mortgage loans was partially due to the decision to originate a higher percentage of loans for the portfolio, as well as an overall decrease in total loans originated during the period.
Noninterest income increased $91,000, or 9.4%, to $1.1 million for the nine months ended September 30, 2022 compared to $971,000 for the same period ended September 30, 2021. The increase is due to the recognition of the Employee Retention Credit during the second quarter of 2022, offset by a reduction in the volume of mortgage loans sold and the resulting gain on the sale of mortgage loans. During the ~~three~~nine months ended September 30, ~~2021,~~2022, we sold ~~$3.0~~$7.5 million in loans compared to ~~$11.5~~$15.4 million during the nine months ended September 30, 2021. The decrease in sale of mortgage loans was partially due to the decision to originate a higher percentage of loans for the portfolio, as well as an overall decrease in total loans originated during the period. Additionally, there were no gains on sales of securities during the nine months ended September 30, 2022 compared to $131,000 during the nine months ended September 30, 2021. Management did not sell any securities during the three months ended September 30, ~~2020. This decrease was partially offset by a gain on sale~~2022 due to the unrealized loss position of ~~investments~~the portfolio.
Noninterest Expense. The following table shows the components of noninterest expense for the periods presented.

Three months ended September 30,

Nine months ended September 30,

Noninterest expense:

2022

2021

2022

2021

(Dollars in thousands)

Salaries and employee benefits
$ 993 $ 824 $ 3,003 $ 2,515
Equipment and occupancy
154 168 496 509
Data processing
159 136 461 464
Professional services
141 32 411 144
Advertising
29 15 67 53
Supervisory fees and assessments
33 32 111 95
Loan expenses
16 27 65 99
Deposit expenses
61 49 149 144
Foreclosure and other real estate owned expenses
— 14 — 22
Other
92 59 394 224
Total noninterest expense
$ 1,678 $ 1,356 $ 5,157 $ 4,269
Noninterest expense increased $322,000, or 24.5%, to $1.7 million for the three months ended September 30, 2022 compared to $1.4 million for the three months ended September 30, 2021. The primary drivers for the increase in noninterest expense are salaries and employee benefits and professional services expenses. The Bank, in accordance with our strategic plan, continues to invest in hiring and growing the strength of our lending team, resulting in an increase in the average number of full-time equivalent employees during the ~~third quarter~~period to 38 employees as of September 30, 2022, compared to 35 employees as of September 30, 2021. Additionally, in an effort to attract and retain employees, the Bank established an Employee Stock Ownership Plan "ESOP" at the closing of the conversion, which resulted in the recognition of additional ESOP related expenses of $54,000 during the three months ended September 30, 2022. Professional service fees increased $109,000, or 340.6%, to $141,000 during the three months ended September 30, 2022 compared to $32,000 for the three months ended September 30, 2021. This increase is the results of additional expenses associated with being a public company and are expected to reoccur in future periods.
Noninterest ~~income~~expense increased ~~$43,000,~~$888,000, or ~~4.63%~~20.8%, to ~~$971,000~~$5.2 million for the nine months ended September 30, ~~2021~~2022 compared to $928,000 for the nine months ended September 30, 2020. During the nine months ended September 30, 2021, we sold $6.6 million in securities available for sale, resulting in a gain of $131,000, compared to a gain on sale of securities available for sale of $59,000 during the same period in 2020. This increase was partially offset by a decrease in the gain on sale of mortgage loans for the nine months ended September 30, 2021 compared to 2020. During the nine months ended September 30, 2021, we sold approximately $15.1 million in loans, compared to $20.2 million in sales during the nine months ended September 30, 2020. Other noninterest income increased for the nine months ended September 30, 2021 compared 2020 due to the fee income recognized upon the forgiveness of the PPP loans.
~~Noninterest Expense~~

Three months ended September 30,

Nine months ended September 30,
Noninterest expense:

2021

2020

2021

2020

(Dollars in thousands)
Salaries and employee benefits

$
824

$
938

$
2,515

$
2,737
Equipment and occupancy

168

167

509

519
Data processing

136

152

464

398
Advertising

15

11

53

51
Supervisory fees and assessments

32

32

95

85
Loan expenses

27

41

99

100
Foreclosure and other real estate owned expenses

14

3

22

6
Non-interest expense other

140

254

512

730
Total noninterest expense

$
1,356

$
1,598

$
4,269

$
4,626

~~Noninterest expense decreased $357,000, or 7.72%,~~ to $4.3 million for the nine months ended September 30, ~~2021 compared to $4.6 million~~2021. The primary drivers for the increase in noninterest expense are salaries and employee benefits and professional services expenses. Salaries and employee benefits increased $488,000, or 19.4% as a result of an increase in the number of full-time equivalent employees during the periods. Additionally, ESOP related expenses of $151,000 was recognized during the nine months ended September 30, ~~2020. The primary decrease in noninterest expense was a decrease in salaries and employee benefits due~~2022. Professional service fees increased $267,000, or 185.4%, to ~~a decrease in the number of average full-time equivalent employees~~$411,000 during ~~the period from 40 for~~ the nine months ended September 30, ~~2020~~2022 compared to 35$144,000 for the nine months ended September 30, 2021. This ~~decrease was partially offset by an~~ increase ~~in data processing expense driven by an increase in network management costs as a~~is the result of ~~technological upgrades to promote new products, services and technology. Upon consummation of the conversion and stock offering, we expect noninterest expense to increase because of costs~~additional expenses associated with ~~operating as~~being a public company ~~including~~and are expected to reoccur in future periods. Other noninterest expense increased $170,000, or 75.9.0%, to $394,000 during the ~~increased compensation~~nine months ended September 30, 2022 compared to $224,000 for the nine months ended September 30, 2021, primarily due to additional expenses associated with the ~~purchase of shares of common stock by our employee stock ownership plan and~~filing for 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.Employee Retention Credit.
35
~~Table of Contents~~
Provision for Income Tax ~~Benefit~~
Expense (Benefit). During the three months ended September 30, 2022, the Company recognized income tax benefit of $31,000, compared to an income tax benefit of $11,000 during the same period ended September 30, 2021. The increase in benefit is primarily due to the recognition of deferred tax assets during the third quarter of 2022. Income tax benefit decreased ~~$79,000,~~$181,000, or ~~24.16%~~73.0%, to $67,000 for the nine months ended September 30, 2022 compared to $248,000 for the nine months ended September 30, 2021, primarily due to the recognition of the Employee Retention Credit income during 2022.
33
Table of Contents
COMPARISON OF FINANCIAL CONDITION AT September 30, 2022 and December 31, 2021

At September 30,

At December 31,

2022

2021

(Dollars in thousands)

Selected Consolidated Financial Condition Data:

Cash and cash equivalents
$ 18,117 $ 121,611
Securities available for sale
125,267 100,950
FHLB stock
550 550
Loans receivable, net
97,746 96,534
Total assets
268,178 340,869
Total deposits
183,461 285,621
FHLB advances
— 5,000
Total equity
$ 79,159 $ 45,183
Total Assets. Total assets decreased $72.7 million, or 21.3%, to $268.2 million at September 30, 2022 compared to ~~$327,000~~$340.9 million at December 31, 2021. The decrease was primarily due to a decrease in cash and cash equivalents as a result of refunds issued due to the oversubscription of stock purchases related to the stock offering.
Cash and cash equivalents. The funds received as part of the conversion were primarily held in cash and cash equivalents at December 31, 2021, and excess funds were disbursed during the first quarter of 2022. The disbursement resulted in a decrease in cash and cash equivalents during the period. Additionally, management continued to deploy the remaining funds from the stock offering primarily in securities available for sale, resulting in a further decrease to the balance of cash and cash equivalents as of September 30, 2022, compared to December 31, 2021. The Bank continues to maintain levels of liquid assets deemed adequate by management.
Securities available for sale. Securities available for sale increased $24.3 million, or 24.1%, to $125.3 million at September 30, 2022 compared to $101.0 million at December 31, 2021. This increase was the result of management’s efforts to reduce the cash and cash equivalents balance by investing in higher yielding assets. During the nine months ended September 30, ~~2020, primarily due to a reconciliation~~2022, the Bank purchased $57.5 million in securities available for sale, which was partially offset by principal repayments and maturities of ~~the estimated tax provision to the actual tax provision.~~
~~COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2021 AND DECEMBER 31, 2020~~

At September 30,

At December 31,

2021

2020

(Dollars in thousands)
Selected Consolidated Financial Condition Data:






Cash and cash equivalents

$
42,737

$
31,868
Securities available for sale

96,994

81,620
FHLB stock

550

512
Loans receivable, net

96,151

98,455
Total assets

259,881

242,219
Total deposits

205,116

186,404
FHLB advances

5,000

4,000
Total equity

$
45,948

$
46,725

~~Growth in assets is primarily attributable to~~$13.9 million, an increase in the ~~core deposits~~unrealized loss on available for sale securities of ~~personal checking, savings~~$12.3 million and ~~money market accounts, which increased the cash~~amortization and ~~cash equivalents held at the Federal Reserve.~~
~~The decrease in total loans is the result~~accretion of ~~forgiveness~~premiums and discounts of ~~PPP loans, held as of December 31, 2020, during~~$803,000. During the nine months ended September 30, ~~2021,~~2022, the Bank purchased U.S. Treasury Notes of ~~approximately $865,000,~~$12.3 million, resulting in a slight adjustment to the mix of the securities available-for-sale as well as ~~various commercial and multi-family loan prepayments totaling $3.8 million. The loan prepayments were primarily driven by~~reducing the ~~low-rate environment as well as higher housing prices. The investors in these categories were able to refinance their current loans at a lower rate or sell~~duration of the ~~properties for~~portfolio while maintaining a higher ~~return~~yielding portfolio.
Loans, net. Our loans, net, increased by $1.2 million, or 1.3%, to $97.7 million at September 30, 2022 compared to $96.5 million at December 31, 2021. During the nine months ended September 30, 2022, the Bank originated $13.5 million in loans held for investment. These originations were offset by loan repayments and maturities of $12.3 million. During the nine months ended September 30, 2022, two large commercial loans paid off early, resulting in a decrease of the commercial loan balance of $1.8 million. At September 30, 2022, the allowance for loan losses was $685,000, a decrease of $94,000, or 12.1% compared to $779,000 at December 31, 2021. The decrease in the allowance for loan losses was primarily the result of improving economic factors leading to a reduction in the qualitative adjustment of the allowance for loan loss. During the nine months ended September 30, 2022, the non-accrual balance increased to $159,000, compared to $102,000 at December 31, 2021. One loan on ~~investment.~~non-accrual as of December 31, 2021 paid off during the second quarter of 2022. During the nine months ended September 30, 2022, two loans moved to non-accrual, one of which paid off during the second quarter of 2022. Our non-performing loans to total loans increased to 0.17% at September 30, 2022 compared to 0.15% at December 31, 2021.

September 30, 2021

December 31, 2020

(Dollars in thousands)
First mortgage loans






1-4 family residential

$
87,184

$
87,197
Multi-family

4,221

5,737
Commercial

4,453

5,340
Total first mortgage loans

95,858

98,274
Consumer loans

324

385
Total loans

96,182

98,659
Net deferred loan costs

752

666
Allowance for loan losses

(783)

(870)
Total loans, net

$
96,151

$
98,455

Deposits. The decrease in total deposits of $102.2 million, or 35.8%, was primarily the result of refunds issued due to the oversubscription of stock purchases related to the stock offering and a capital infusion into the Bank in the amount of half the net proceeds received as part of the conversion. As of December 31, 2021, prior to the conversion, the Company held a deposit account at the Bank of approximately $87.3 million. Subsequent to the conversion, the balance of the deposit account held at the Bank is eliminated during consolidation. Additionally, prior to September 30, 2021, the Bank received an increase in ~~securities available for sale was due~~funds within the deposit accounts as individuals opened accounts to ~~available cash that was invested~~receive priority in ~~securities~~purchasing stock as part of the offering. Subsequent to ~~achieve a higher yield. All~~the conversion, approximately $10.0 million in funds remaining in those accounts were withdrawn by depositors. Majority of ~~our investment securities are classified as available for sale~~these funds were held in short-term time deposits and were subject to interest penalties upon withdrawal.
Other borrowings. During the nine months ended September 30, 2022, the Bank repaid the 0% interest FHLB Advance of $5.0 million, resulting in no Other Borrowings as of September 30, ~~2021.~~2022.
Total equity. Total equity increased $34.0 million, or 75.2%, to $79.2 million at September 30, 2022 compared to $45.2 million at December 31, 2021. The increase in ~~deposits was driven~~total equity is the result of the net proceeds of the conversion stock offering, less unallocated shares of the ESOP, offset by anthe increase in ~~account openings during~~ the ~~third quarter of 2021, which resulted in approximately 450 new accounts with balances of $16.1 million. The increase in account openings was driven by the public notice of our proposed conversion.~~unrealized loss on securities available for sale.
36
34
Table of Contents
Asset Quality
The following table sets forth certain information with respect to our nonperforming assets. The ~~decrease~~increase in ~~nonaccrual~~non-accrual loans from December 31, 2021 to September 30, 2022 was the result of two loans ~~transferring~~moving to ~~other real estate owned during the period. Of the two loans transferred to other real estate owned,~~non-accrual, one ~~was sold as~~ of ~~September 30, 2021. The decrease in restructured loans still accruing is primarily the result of three restructured loans paying~~which paid off during the ~~first nine months~~second quarter of ~~2021.~~2022.

At September 30,

At December 31,



2021


2020

(Dollars in thousands)

Nonaccrual loans

$
105

$
280

Loans 90+ days past due and accruing

43

75

Total non-performing loans

148

355

Other real estate owned, net

118

—

Total non-performing assets

266

355

Restructured loans still accruing

1,541

1,824

Total non-performing assets and performing TDRs

$
1,807

$
2,179

Asset Quality Ratios: ⁽¹⁾

Non-accrual loans as a percent of total loans outstanding

0.11
%

0.28
%
Non-performing assets as a percent of total assets⁽¹⁾

0.10
%

0.15
%
Non-performing assets and TDRs as a percent of total assets⁽²⁾

0.70
%

0.90
%
Allowance for loan losses as a percent of total loans outstanding

0.81
%

0.88
%
Allowance for loan losses as a percent of non-performing loans⁽³⁾

529.05
%

245.07
%
Net charge-offs (recoveries) to average loans receivable

0.13
%

(0.02)
%

At September 30,

At December 31,

2022

2021

(Dollars in thousands)

Nonaccrual loans
$ 159 $ 102
Loans 90+ days past due and accruing
— 41
Total non-performing loans
159 143
Other real estate owned, net
— —
Total non-performing assets
159 143
Restructured loans still accruing
910 1,035
Total non-performing assets and performing TDRs
$ 1,069 $ 1,178

Asset Quality Ratios: (1)

Non-accrual loans as a percent of total loans outstanding
0.16 % 0.11 %
Non-performing assets as a percent of total assets(1)
0.06 % 0.04 %
Non-performing assets and TDRs as a percent of total assets(2)
0.40 % 0.35 %
Allowance for loan losses as a percent of total loans outstanding
0.70 % 0.81 %
Allowance for loan losses as a percent of non-performing loans(3)
430.82 % 544.76 %
Net charge-offs (recoveries) to average loans receivable
(0.01 )% 0.07 %
(1)
Asset quality ratios and capital ratios are end of period ratios, except for net charge-offs to average loans receivable.
(2)
Non-performing assets consist of non-performing loans and real estate owned. Non-performing loans consist of all loans 90 days or more past due. Real estate owned consists of real estate acquired through foreclosure, real estate acquired by acceptance of a deed-in-lieu of foreclosure.
(3)
~~(3)~~Non-performing loans consist of non-accrual loans and loans that are 90 or more days past due and still accruing.
~~Non-performing loans consist of non-accrual loans and loans that are 90 or more days past due and still accruing.~~
As
The allowance for loan losses, as a percentage of total loans at 0.70% and 0.81% as of September 30, ~~2021,~~2022 and December 31, 2021. The balance of allowance for loan losses decreased to $685,000 at September 30, 2022, primarily the result of improving economic factors leading to a reduction in the qualitative adjustment of the allowance for loan ~~losses was $783,000, or 0.81%~~loss.
35
Table of ~~total loans, compared with $870,000, or 0.88%~~Contents
Liquidity and Capital Resources
The Bank maintains levels of ~~total loans~~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 ~~of December 31, 2020. The decrease~~appropriate, to meet asset and liability management objectives.
Liquidity describes our ability to meet the financial obligations that arise in the ~~allowance~~ordinary course of business. Liquidity is ~~due~~ 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 September 30, 2022, we had no outstanding in advances from the FHLB of Chicago and had the capacity to borrow approximately $63.7 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 operating activities was $3.4 million and $263,000 for the nine months ended September 30, 2022 and 2021, respectively. Net cash used in investing activities, which consists primarily of net change in loans receivable and net change in investment securities, was $44.4 million and $8.5 million for the nine months ended September 30, 2022 and 2021, respectively, with the increase in cash used driven by the purchase of securities held in the available for sale portfolio. Net cash used in financing activities, consisting primarily of the activity in deposit accounts offset by proceeds from the issuance of common stock, was $62.5 million for the nine months ended September 30, 2022. Net cash providing by financing activities, consisting primarily of the activity in deposit accounts offset by proceeds from the issuance of common stock, was $19.1 for the nine months ended September 30, 2021.
We are committed to maintaining a ~~decrease~~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 ~~qualitative factors related to COVID-19~~less than one year from September 30, 2022, totaled $31.7 million. Based on our deposit retention experience and current ~~economic conditions, including, but~~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 ~~limited~~retained, we may utilize FHLB of Chicago advances or raise interest rates on deposits to ~~the decreased unemployment rate for Lake County, Illinois, and Kenosha County, Wisconsin.~~attract new accounts, which may result in higher levels of interest expense.
We established a short-term loan modification program, allowing the deferral of scheduled payments for a 90-day period beginning in April 2020. Modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief were not considered TDRs. Borrowers who were considered current were ones whose loans were less than 30 days past due on their contractual payments at the time the modification was entered. We modified 50 loans with unpaid balances of $9.7 million between March 2020 and September 2021. As of September 30, 2021, two loans remain in deferral with unpaid balances of $127,000, consisting of 1-4 family residential mortgage loans. These deferrals remained within the CARES Act and the March 2020 interagency guidance and were not considered TDRs.
~~Capital Adequacy~~
Our consolidated equity was $45.9 million and $46.7 million as of September 30, 2021 and December 31, 2020, respectively. The decrease from December 31, 2020 was primarily driven by a reduction in the unrealized gains (losses) on securities available-for-sale, net of tax of $780,000.
37
~~Table of Contents~~
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under accounting principles generally accepted in the United States of America, regulatory reporting requirements and regulatory capital standards. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulatory reporting standards to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, common equity Tier 1 capital to total risk-weighted assets and of Tier I capital to average assets, as such individual components and calculations are defined by related standards.
As of September 30, ~~2021, the most recent notification from the regulators categorized~~2022, the Bank aswas well capitalized under the regulatory framework for prompt corrective action. ~~There are no conditions or events since that notification which management believes have changed~~During the ~~Bank’s category. On November 13, 2019,~~year ended December 31, 2020, the ~~federal regulators finalized and adopted a regulatory capital rule establishing a new community bank leverage ratio (“CBLR”), which became effective on January 1, 2020. The intent of CBLR is~~Bank elected to ~~provide a simple alternative measure of capital adequacy for electing qualifying depository institutions and depository institution holding companies, as directed under~~begin using the ~~Economic Growth, Relief, and Consumer Protection Act.~~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 2022 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. ~~In April 2020, under the Coronavirus Aid, Relief,~~North Shore Trust and Economic Security Act (CARES Act), the 9% leverage ratio threshold was temporarily reduced to 8% in response to the COVID-19 pandemic. The threshold will increase to 8.5% in 2021 and return to 9% in 2022. The Bank elected to begin using CBLR for the first quarter of 2020. Management believes, as of September 30, 2021, that the Bank met all capital adequacy requirements to which it was subject. The Bank'sSavings’ Tier 1 capital to Average Assets was ~~18.33%~~23.78% and ~~18.41%~~16.11% at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.
~~MARKET AND LIQUIDITY RISK MANAGEMENT~~
Management’s objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established liquidity, long, investment, borrowing, and capital policies. The Bank’s Asset Liability Management Committee (“ALCO”) is charged with the responsibility of monitoring these policies, which are designed to ensure an acceptable asset/liability composition. Two critical areas of focus for ALCO are interest rate risk and liquidity risk management.
~~Interest Rate Risk Management~~
In the normal course of business, we are exposed to market risk arising from fluctuations in interest rates. ALCO measures and evaluates interest rate risk so that the Bank can meet customer demands for various types of loans and deposits. Measurements used to help manage interest rate sensitivity include an earnings simulation model and an economic value of equity (“EVE”) model.
~~Earnings simulation.~~ Management believes that interest rate risk is best estimated by our earnings simulation modeling. Forecasted levels of earning assets, interest-bearing liabilities, and off-balance sheet financial instruments are combined with ALCO forecasts of market interest rates for the next 12 months and other factors in order to produce various earnings simulations and estimates. To help limit interest rate risk, we have guidelines for earnings at risk which seek to limit the variance of net interest income from gradual changes in interest rates. For changes up or down in rates from management’s flat interest rate forecast over the next 12 months, policy limits for net interest income variances are as follows:
● ~~+/- 20% for a gradual change of 400 basis points~~
● ~~+/- 15% for a gradual change of 300 basis points~~
● ~~+/- 10% for a gradual change of 200 basis points~~
● ~~+/- 8% for a gradual change of 100 basis points~~
38
~~Table of Contents~~
Off-Balance Sheet Arrangements.At September 30, ~~2021, the earnings simulation model indicated that the Bank was in compliance with the policy guidelines noted above.~~
~~Economical Value~~2022, we had $351,000 of ~~Equity.~~ ~~EVE measures the extent that the estimated economic values of our assets, liabilities,~~outstanding commitments to originate loans. Our total letters and off-balance sheet items will change as a result of interest rate changes. Economic values are estimated by discounting expected cash flows from assets, liabilities, and off-balance sheet items, which establishes a base case EVE. In contract with our earnings simulation model, which evaluates interest rate risk over a 12-month timeframe, EVE uses a terminal horizon which allows for the re-pricing of all assets, liabilities, and off-balance sheet items. Further, EVE is measured using values as of a point in time and does not reflect any actions that ALCO might take in responding to or anticipating changes in interest rates, or market and competitive conditions. To help limit interest rate risk, we have stated policy guidelines for an instantaneous basis point change in interest rates, such that our EVE should not decrease from our base case by more than the following:
● ~~+/- 20% for a gradual change of 400 basis points~~
● ~~+/- 15% for a gradual change of 300 basis points~~
● ~~+/- 10% for a gradual change of 200 basis points~~
● ~~+/- 5% for a gradual change of 100 basis points~~
~~At September~~ ~~30, 2021, the EVE model indicated that the Bank was in compliance with our policy guidelines noted above.~~
Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in marketing interest rates, and other economic and market factors, including market perceptions. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types of assets and liabilities may lag behind changes in general rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as interest rate caps and floors) which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates or economic stress, which may differ across industries and economic sectors. ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios in seeking satisfactory, consistent levels of profitability within the framework of the Bank’s established liquidity, loan, investment, borrowing, and capital policies.
~~Liquidity Risk Management~~
Liquidity management involves meeting the present and future financial obligations of the Bank with the sale or maturity of assets or with the occurrence of additional liabilities. Liquidity needs are met with cash on hand, deposits in other banks, federal funds sold, and unencumbered securities classified as available for sale. At September 30, 2021, liquid assets totaled $163.3 million, or 62.83% of total assets and 76.34% of total liabilities.
~~Securities provide a constant source of liquidity through paydowns and maturities. We maintain short-term borrowing arrangements, namely federal funds~~ lines of credit ~~with larger financial institutions as an additional source~~and unused lines of ~~liquidity and the Bank’s membership with the FHLB also provides a source of borrowings with numerous rate and term structures.~~
Management monitors the liquidity position regularly and attempts to maintain a position which utilizes available funds most efficiently. As a result, w believes we maintain overall liquidity sufficient to satisfy our depositors’ requirements and meets the credit ~~needs of our clients’ during this period of uncertain economic conditions related to the COVID-19 pandemic. Management will continue to closely monitor our liquidity as these conditions change.~~
~~For the nine-months ended~~totaled $2.9 million at September 30, 2021, cash provided from operations was $277,000, compared to $4.0 million for the nine-months ended September 30, 2020. Investing activities provided (used) $(8.5) million and $2.1 million, while financing activities provided $19.1 million and $1.9 million for the same periods.
39
~~Table of Contents~~
~~Off-Balance Sheet arrangement, commitments, contingencies and contractual obligations~~2022.
In the ordinary course of business, the Bank has various commitments and contingent liabilities that are not reflected in the accompanying financial statements. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the financial position of the Bank.
~~Financial Instruments~~
Commitments. The ~~Bank does not engage in the use of interest rate swaps or futures, forwards or option contracts.~~
~~At September 30, 2021 and December 31, 2020,~~following table summarizes our outstanding commitments to originate loans ~~were as follows:~~and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and undisbursed construction loans at September 30, 2022.

September 30,

December 31,

2021

2020

(Dollars in thousands)
Total commitments

$
5,694

$
5,156

~~Concentrations~~
36
Table of ~~Credit Risk~~Contents

Total Amounts Committed at

Amount of Commitment Expiration – Per Period

September 30, 2022

To 1 Year

1-3 Years

4-5 Years

After 5 Years

(Dollars in thousands)

Unused line of credit
$ 2,936 $ 150 $ 649 $ 747 $ 1,390
Commitments to originate loans
351 351 — — —
Total commitments
$ 3,287 $ 501 $ 649 $ 747 $ 1,390
Contractual Cash Obligations. The ~~Bank generally originates single-family residential loans within its primary lending area which is Waukegan, Illinois~~following table summarizes our contractual cash obligations at September 30, 2022.

Total at

Payments Due By Period

September 30, 2022

To 1 Year

1-3 Years

4-5 Years

After 5 Years

(Dollars in thousands)

Time deposits
$ 57,571 $ 31,736 $ 19,510 $ 6,325 $ —
Total contractual obligations
$ 57,571 $ 31,736 $ 19,510 $ 6,325 $ —
Impact of Inflation and the surrounding area. The Bank’s underwriting policies require such loans to be made at approximately 80% loan-to-value, based upon appraised values, unless private mortgage insurance is obtained, or the loan is guaranteed by the government. These loans are secured by the underlying properties.Changing Prices
The Bank maintains its cash in deposit accounts at the Federal Reserve Bank or other institutions, the balances of which may exceed federally insured limits. The Bank has not experienced any losses in such accounts. The Bank believes it is not exposed to any significant credit risk on cash and cash equivalents.
~~IMPACT OF INFLATION AND CHANGING PRICES~~
The consolidated financial statements and the accompanying notes presented elsewhere in this document have been prepared in accordance with U.S. GAAP, which generally requires the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. Unlike most ~~operating~~industrial companies, virtually all of our assets and liabilities are monetary in nature. ~~The impact of inflation is reflected in the increased cost of operations.~~ As a result, interest rates have a greater impact on our performance than inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
~~CHANGES IN ACCOUNTING PRINCIPLES~~
Changes in Accounting Principles
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 ~~information regarding recent~~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 ~~pronouncements, see “Recent Accounting Pronouncements” in Note 1~~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 ~~Notes to Consolidated Financial Statements contained herein.~~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.
ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
~~The information called~~
Not required for ~~by Item 3 is set forth in Item 2 under the caption “MARKET AND LIQUIDITY RISK MANAGEMENT” and is incorporated herein by reference.~~smaller reporting companies.
40
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ITEM4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to provide assurance that the information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the ~~Securities~~SEC. Under the supervision and ~~Exchange Commission. An evaluation~~with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the ~~effectiveness~~design and operation of our disclosure controls and procedures at(as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this ~~report was carried out under the supervision and with the participation of the management of North Shore MHC., including our Chief Executive Officer and Chief Financial Officer.~~report. Based ~~on such~~upon that evaluation, the ~~Chief Executive Officer~~principal executive officer and ~~the Chief Financial Officer~~principal financial officer concluded that, as of September 30, 2022, our disclosure controls and procedures were effective asto provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the ~~end of such period.~~SEC and is accumulated and communicated to the Company's management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting during the quarter ended September 30, ~~2021,~~2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PARTII. OTHER INFORMATION
ITEM1. LEGAL PROCEEDINGS
We are not presently involved in any legal proceedings of a material nature. From time to time, we are subject to various legal actions arising in the normal course of our business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on our financial condition, results of operations or cash flows.
ITEM1A. RISK FACTORS
~~There were no material changes to the risk factors relevant to our operations as described in our Prospectus filed on November 12, 2021 beginning on page 16, “Risk Factors.”~~
Not required for smaller reporting companies.
ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM5. OTHER INFORMATION
None.
41
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ITEM6. EXHIBITS
31.1
Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of Steven G. Lear, President and Chief Executive Officer.
31.2

Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of Carissa H. Schoolcraft, Chief Financial Officer.
32.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Stephen G. Lear, ~~Chairman,~~ President and Chief Executive Officer, and Carissa H. Schoolcraft, Chief Financial Officer*
~~101.~~101.INS

~~INS~~Inline XBRL Instance Document
(the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
~~101.~~
101.SCH

~~SCH~~Inline XBRL Taxonomy Extension Schema Document
~~101.~~
101.CAL

~~CAL~~Inline XBRL Taxonomy Extension Calculation Linkbase Document
~~101.~~
101.DEF

~~LAB~~Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
~~101.~~
101.PRE

~~PRE~~Inline XBRL Taxonomy Extension Presentation Linkbase Document
~~101.~~104

~~DEF XBRL Taxonomy Extension Definition Linkbase Document~~
~~104~~

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*The ~~certifications~~certification attached as Exhibit 32.1 to this quarterly report on Form 10-Q is “furnished” to the Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

42
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

NSTS BANCORP, INC.

Dated: ~~December 23, 2021~~November 14, 2022

By:
/s/ Stephen G. Lear

Stephen G. Lear

President and Chief Executive Officer

(Principal Executive Officer)

Dated: ~~December 23, 2021~~November 14, 2022

By:
/s/ Carissa H. Schoolcraft

Carissa H. Schoolcraft

Chief Financial Officer

(Principal Financial and Accounting Officer)

43
40
~~Table of Contents~~


	September 30, 2021
	(unaudited)		December 31, 2020
					*September 30, 2022*
	(Dollars in thousands)
					*(unaudited)*			*December 31, 2021*
					(Dollars in thousands)
Assets:
Cash and due from banks	$	1,074	$	884	$	1,047		$	814
Interest-bearing bank deposits		41,663		30,984		17,070			120,797
Cash and cash equivalents		42,737		31,868		18,117			121,611
Time deposits with other financial institutions		5,701		12,436		4,219			3,469
Securities available for sale		96,994		81,620		125,267			100,950
Federal Home Loan Bank stock (FHLB)		550		512		550			550
Loans held for sale		972		1,972		104			104
Loans, net of unearned income		96,934		99,325		98,431			97,313
Allowance for loan losses		(783)		(870)		(685	)		(779	)
Loans, net		96,151		98,455		97,746			96,534
Premises and equipment, net		5,131		5,213		5,101			5,087
Accrued interest receivable		630		672		831			641
Bank-owned life insurance (BOLI)		9,024		8,890		9,203			9,071
Other assets		1,991		581		7,040			2,852
Total assets	$	259,881	$	242,219	$	268,178		$	340,869
Liabilities:
Deposits:
Noninterest bearing	$	12,308	$	9,734	$	12,725		$	99,090
Interest-bearing
Demand and NOW checking		19,933		16,365		18,710			17,931
Money market		49,941		50,143		45,529			45,414
Savings		48,537		42,250		48,926			50,312
Time deposits over $250,000		9,897		10,705		8,435			9,380
Other time deposits		64,500		57,207		49,136			63,494
Total deposits		205,116		186,404		183,461			285,621
Escrow deposits		945		1,519		936			1,442
Other borrowings		5,000		4,000		—			5,000
Accrued expenses and other liabilities		2,872		3,571		4,622			3,623
Total liabilities		213,933		195,494	$	189,019		$	295,686
Members' equity:
Stockholders' equity:
Common Stock ($0.01 par value; 10,000,000 shares authorized; 5,397,959 shares issued and outstanding)						54			—
Additional paid-in capital						50,416			—
Retained earnings		45,322		45,320		45,252			45,264
Accumulated other comprehensive income, net		626		1,405
Total members' equity		45,948		46,725
Total liabilities and members' equity	$	259,881	$	242,219
Unallocated common shares held by ESOP						(4,189	)		—
Accumulated other comprehensive loss, net						(12,374	)		(81	)
Total stockholders' equity						79,159			45,183
Total liabilities and stockholders' equity					$	268,178		$	340,869

	*For the three months ended*						*For the nine months ended*
	*September 30,*						*September 30,*
	*2022*			*2021*			*2022*			*2021*
	(Dollars in thousands)
Interest income:
Loans, including fees	$	877		$	853		$	2,603		$	2,662
Securities
Taxable		578			268			1,340			846
Tax-exempt		104			59			298			180
Federal funds sold and other		111			6			213			16
Time deposits with other financial institutions		14			11			25			59
FHLB Stock		4			4			11			10
Total interest income		1,688			1,201			4,490			3,773
Interest expense:
Deposits		192			225			574			716
Net interest income		1,496			976			3,916			3,057
(Reversal of) Provision for loan losses		(84	)		(12	)		(100	)		5
Net interest income after provision for loan losses		1,580			988			4,016			3,052
Noninterest income:
Gain on sale of mortgage loans		30			71			99			316
Gain on sale of securities		—			131			—			131
Rental income on office building		16			11			37			32
Service charges on deposits		75			75			222			216
Increase in cash surrender value of BOLI		45			46			132			134
Other		19			39			572			142
Total noninterest income		185			373			1,062			971
Noninterest expense:
Salaries and employee benefits		993			824			3,003			2,515
Equipment and occupancy		154			168			496			509
Data processing		159			136			461			464
Professional services		141			32			411			144
Advertising		29			15			67			53
Supervisory fees and assessments		33			32			111			95
Loan expenses		16			27			65			99
Deposit expenses		61			49			149			144
Foreclosure and other real estate owned expenses		—			14			—			22
Other		92			59			394			224
Total noninterest expense		1,678			1,356			5,157			4,269
Income (Loss) before income taxes		87			5			(79	)		(246	)
Income tax benefit		(31	)		(11	)		(67	)		(248	)
Net income (loss)	$	118		$	16		$	(12	)	$	2
Basic and diluted earnings (loss) per share	$	0.02			N/A		$	—			N/A
Weighted average shares outstanding		4,971,930			N/A			4,644,521			N/A


	For the three months ended				For the nine months ended
	September 30,				September 30,
	2021		2020		2021		2020

	(Dollars in thousands)
Interest income:
Loans, including fees	$	853	$	985	$	2,662	$	3,109
Securities
Taxable		268		251		846		889
Tax-exempt		59		60		180		211
Federal funds sold and other		7		8		16		122
Time deposits with other financial institutions		11		80		59		325
FHLB Stock		3		3		10		9
Total interest income		1,201		1,387		3,773		4,665
Interest expense:
Deposits		225		343		716		1,183
Net interest income		976		1,044		3,057		3,482
(Release of) provision for loan losses		(12)		90		5		310
Net interest income after provision for loan losses		988		954		3,052		3,172
Noninterest income:
Gain on sale of mortgage loans		71		246		316		392
Gain on sale of securities		131		—		131		59
Rental income on office building		11		11		32		32
Service charges on deposits		74		64		216		191
Increase in cash surrender value of BOLI		46		46		134		136
Other		40		57		142		118
Total noninterest income		373		424		971		928
Noninterest expense:
Salaries and employee benefits		824		938		2,515		2,737
Equipment and occupancy		168		167		509		519
Data processing		136		152		464		398
Advertising		15		11		53		51
Supervisory fees and assessments		32		32		95		85
Loan expenses		27		41		99		100
Foreclosure and other real estate owned expenses		14		3		22		6
Other		140		254		512		730
Total noninterest expense		1,356		1,598		4,269		4,626
Income (losses) before income taxes		5		(220)		(246)		(526)
Income tax benefit		(12)		(245)		(248)		(327)
Net income (losses)	$	17	$	25	$	2	$	(199)

	*For the three months ended September 30,*
	*2022*			*2021*
	(Dollars in thousands)
Net income	$	118		$	16
Unrealized net holding (loss) gain on securities
Unrealized net holding (loss) gain on securities arising during period, net of realized gains on sales of $0 and $131,000, in the three months ended September 30, 2022 and 2021, respectively		(6,321	)		80
Tax effect		1,802			(23	)
Other comprehensive (loss) income, net of taxes		(4,519	)		57
Comprehensive (loss) income	$	(4,401	)	$	73

	*For the nine months ended September 30,*
	*2022*			*2021*
	(Dollars in thousands)
Net loss (income)	$	(12	)	$	2
Unrealized net holding loss on securities
Unrealized net holding loss on securities arising during period, net of realized gains on sales of $0 and $131,000, in the nine months ended September 30, 2022 and 2021, respectively		(17,195	)		(1,090	)
Tax effect		4,902			311
Other comprehensive loss, net of taxes		(12,293	)		(779	)
Comprehensive loss	$	(12,305	)	$	(777	)


	For the three months ended September 30,
	2021		2020

	(Dollars in thousands)
Net income	$	17	$	25
Unrealized net holding gain on securities
Unrealized net holding gain on securities arising during period, net of realized gains on sales of $131,000 and $0, during the three months ended September 30, 2021 and 2020, respectively		79		376
Tax effect		(23)		(107)
Other comprehensive income, net of taxes		56		269
Comprehensive income	$	73	$	294

									*Accumulated*
									*other*			*Unallocated*
	*Common*		*Common*		*Additional*		*Retained*		*comprehensive*			*Common Share*
	*Shares*		*Stock*		*Paid-In Capital*		*earnings*		*income (loss)*			*Held by ESOP*			*Total*
			(Dollars in thousands)
			*Quarter ended September 30, 2021*
Balance at June 30, 2021		—	$	—	$	—	$	45,305	$	570		$	—		$	45,875
Net income		—		—		—		16		—			—			16
Change in net unrealized gain on securities available for sale, net		—		—		—		—		57			—			57
Balance at September 30, 2021		—	$	—	$	—	$	45,321	$	627		$	—		$	45,948
			*Quarter ended September 30, 2022*
Balance at June 30, 2022		5,397,959	$	54	$	50,411	$	45,134	$	(7,855	)	$	(4,232	)	$	83,512
Net income		—		—		—		118		—			—			118
ESOP shares committed to be released		—		—		5		—		—			43			48
Change in net unrealized loss on securities available for sale, net		—		—		—		—		(4,519	)		—			(4,519	)
Balance at September 30, 2022		5,397,959	$	54	$	50,416	$	45,252	$	(12,374	)	$	(4,189	)	$	79,159


	For the nine months ended September 30,
	2021		2020

	(Dollars in thousands)
Net income (losses)	$	2	$	(199)
Unrealized net holding gain (loss) on securities
Unrealized net holding gain (loss) on securities arising during period, net of realized gains on sales of $131,000 and $59,000, during the nine months ended September 30, 2021 and 2020, respectively		(1,090)		1,554
Tax effect		311		(443)
Other comprehensive (loss) income, net of taxes		(779)		1,111
Comprehensive (loss) income	$	(777)	$	912


			Accumulated
			other
	Retained		comprehensive
	earnings		income (loss)		Total

	(Dollars in thousands)
	Quarter ended September 30, 2020
Balance at June 30, 2020	$	45,107	$	1,175	$	46,382
Net income		25				25
Change in net unrealized gain (loss) on securities available for sale, net				269		269
Balance at September 30, 2020	$	45,232	$	1,444	$	46,676
	Quarter ended September 30, 2021
Balance at June 30, 2021	$	45,305	$	570	$	45,875
Net income		17				17
Change in net unrealized gain (loss) on securities available for sale, net				56		56
Balance at September 30, 2021	$	45,322	$	626	$	45,948


					Mortgage-backed		Collateralized
	U.S. government		Municipal		residential		mortgage		Total available-for-
September 30, 2021	agency obligations		obligations		obligations		obligations		sale
																				*Mortgage-backed*			*Collateralized*
	(Dollars in thousands)
											*U.S. Treasury Notes*			*U.S. government*			*Municipal*			*residential*			*mortgage*			*Total available-for-*
September 30, 2022														*agency obligations*			*obligations*			*obligations*			*obligations*			*sale*
											(Dollars in thousands)
1 year or less	$	—	$	1,231	$	456	$	1,071	$	2,758	$	6,447		$	—		$	927		$	—		$	156		$	7,530
1 to 5 years		3,938		3,777		31,185		17,535		56,435		5,809			10,783			4,824			22,163			25,232			68,811
5 to 10 years		6,507		2,867		13,837		9,984		33,195		—			8,721			2,698			14,389			10,015			35,823
After 10 years		—		2,970		—		1,636		4,606		—			—			10,594			—			2,509			13,103
Fair value		10,445		10,845		45,478		30,226		96,994		12,256			19,504			19,043			36,552			37,912			125,267
Gross unrealized gains		163		464		426		441		1,494		—			—			—			—			—			—
Gross unrealized losses		(39)		(12)		(309)		(259)		(619)		(181	)		(1,903	)		(3,979	)		(6,097	)		(5,148	)		(17,308	)
Amortized cost	$	10,321	$	10,393	$	45,361	$	30,044	$	96,119	$	12,437		$	21,407		$	23,022		$	42,649		$	43,060		$	142,575


	Less than 12 Months				12 Months or Longer				Total
													*Less than 12 Months*					*12 Months or Longer*					*Total*
	(Dollars in thousands)
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
September 30, 2021
													(Dollars in thousands)
													*Fair*		*Unrealized*			*Fair*		*Unrealized*			*Fair*		*Unrealized*
													*Value*		*Losses*			*Value*		*Losses*			*Value*		*Losses*
September 30, 2022
U.S. Treasury Notes													$	12,256	$	(181	)	$	—	$	—		$	12,256	$	(181	)
U.S. government agency obligations	$	2,383	$	23	$	1,154	$	16	$	3,537	$	39		15,628		(1,520	)		2,876		(383	)		18,504		(1,903	)
Municipal obligations		—		—		242		12		242		12		18,820		(3,952	)		223		(27	)		19,043		(3,979	)
Mortgage-backed residential obligations		19,537		284		2,213		25		21,750		309		21,554		(3,058	)		14,998		(3,039	)		36,552		(6,097	)
Collateralized mortgage obligations		18,762		259		—		—		18,762		259		23,281		(2,427	)		13,978		(2,721	)		37,259		(5,148	)
Total	$	40,682	$	566	$	3,609	$	53	$	44,291	$	619	$	91,539	$	(11,138	)	$	32,075	$	(6,170	)	$	123,614	$	(17,308	)
December 31, 2020
December 31, 2021
U.S. government agency obligations	$	1,284	$	17	$	—	$	—	$	1,284	$	17	$	4,020	$	(62	)	$	1,105	$	(16	)	$	5,125	$	(78	)
Municipal obligations		—		—		238		18		238		18		2,399		(8	)		247		(6	)		2,646		(14	)
Mortgage-backed residential obligations		5,265		17		1,170		5		6,435		22		26,540		(535	)		2,781		(77	)		29,321		(612	)
Collateralized mortgage obligations		8,694		66		241		—		8,935		66		16,715		(338	)		4,386		(105	)		21,101		(443	)
Total	$	15,243	$	100	$	1,649	$	23	$	16,892	$	123	$	49,674	$	(943	)	$	8,519	$	(204	)	$	58,193	$	(1,147	)


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(Dollars in thousands)
Proceeds from sales of securities available-for-sale	$	6,769	$	—	$	6,769	$	12,112

Gross realized gains		131		—		131		114
Gross realized losses		—		—		—		(55)

	*September 30, 2022*
	*1-4 family*
	*residential*			*Multi-family*			*Commercial*			*Consumer*		*Total*
	(Dollars in thousands)
Three months ended
Beginning balance	$	713		$	26		$	26		$	4	$	769
Charge-offs		—			—			—			—		—
Recoveries		—			—			—			—		—
Net recoveries (charge-offs)		—			—			—			—		—
(Release of) Provision for loan losses		(79	)		(2	)		(4	)		1		(84	)
Ending balance	$	634		$	24		$	22		$	5	$	685

	*September 30, 2021*
	*1-4 family*
	*residential*		*Multi-family*			*Commercial*		*Consumer*		*Total*
	(Dollars in thousands)
Three months ended
Beginning balance	$	707	$	48		$	27	$	10	$	792
Charge-offs		—		—			—		—		—
Recoveries		3		—			—		—		3
Net recoveries (charge-offs)		3		—			—		—		3
(Release of) Provision for loan losses		1		(13	)		—		—		(12	)
Ending balance	$	711	$	35		$	27	$	10	$	783


	September 30, 2021
	1-4 family
	residential		Multi-family		Commercial		Consumer		Unallocated		Total

	(Dollars in thousands)
Three months ended:
Beginning balance	$	695	$	52	$	25	$	10	$	—	$	792
Charge-offs		—		—		—		—		—		—
Recoveries		3		—		—		—		—		3
Net recoveries (charge-offs)		3		—		—		—		—		3
(Release of) provision for loan losses		1		(13)		—		—		—		(12)
Ending balance	$	679	$	39	$	25	$	10	$	30	$	783

	*Collectively evaluated*				*Individually evaluated*				*Total*
			*Recorded*				*Recorded*				*Recorded*
	*Allowance for*		*investment in*		*Allowance for*		*investment in*		*Allowance for*		*investment in*
	*loan losses*		*loans*		*loan losses*		*loans*		*loan losses*		*loans*
	(Dollars in thousands)
September 30, 2022
1-4 family residential	$	548	$	88,781	$	86	$	984	$	634	$	89,765
Multi-family		24		3,597		—		—		24		3,597
Commercial		22		3,985		—		—		22		3,985
Consumer		5		211		—		—		5		211
Total	$	599	$	96,574	$	86	$	984	$	685	$	97,558
December 31, 2021
1-4 family residential	$	557	$	86,892	$	118	$	1,136	$	675	$	88,028
Multi-family		69		3,497		—		—		69		3,497
Commercial		25		4,604		—		—		25		4,604
Consumer		10		372		—		—		10		372
Total	$	661	$	95,365	$	118	$	1,136	$	779	$	96,501


	September 30, 2020
	1-4 family
	residential		Multi-family		Commercial		Consumer		Unallocated		Total

	(Dollars in thousands)
Three months ended:
Beginning balance	$	538	$	24	$	13	$	1	$	40	$	616
Charge-offs		—		—		—		—		—		—
Recoveries		3		—		—		—		—		3
Net recoveries		3		—		—		—		—		3
(Release of) provision for loan losses		18		—		(1)		—		73		90
Ending balance	$	559	$	24	$	12	$	1	$	113	$	709


	Collectively evaluated				Individually evaluated				Total
			Recorded				Recorded				Recorded
	Allowance for		investment in		Allowance for		investment in		Allowance for		investment in
	loan losses		loans		loan losses		loans		loan losses		loans

	(Dollars in thousands)
September 30, 2021
1-4 family residential	$	555	$	85,205	$	124	$	1,979	$	679	$	87,184
Multi-family		39		4,221		—		—		39		4,221
Commercial		25		4,453		—		—		25		4,453
Consumer		10		324		—		—		10		324
Unallocated		30		—		30
Total	$	659	$	94,203	$	124	$	1,979	$	783	$	96,182
December 31, 2020
1-4 family residential	$	648	$	84,774	$	150	$	2,423	$	798	$	87,197
Multi-family		29		5,737		—		—		29		5,737
Commercial		38		5,340		—		—		38		5,340
Consumer		5		286		—		99		5		385
Total	$	720	$	96,137	$	150	$	2,522	$	870	$	98,659


	Pass		Special Mention		Substandard		Doubtful		Total loans
											*Pass*		*Special Mention*		*Substandard*		*Doubtful*		*Total loans*
	(Dollars in thousands)
September 30, 2021
											(Dollars in thousands)
September 30, 2022
1-4 family residential	$	86,670	$	409	$	105	$	—	$	87,184	$	89,527	$	44	$	194	$	—	$	89,765
Multi-family		4,221		—		—		—		4,221		3,597		—		—		—		3,597
Commercial		4,453		—		—		—		4,453		3,985		—		—		—		3,985
Consumer		324		—		—		—		324		211		—		—		—		211
Total	$	95,668	$	409	$	105	$	—	$	96,182	$	97,320	$	44	$	194	$	—	$	97,558
December 31, 2020
December 31, 2021
1-4 family residential	$	86,500	$	417	$	280	$	—	$	87,197	$	87,881	$	45	$	102	$	—	$	88,028
Multi-family		5,737		—		—		—		5,737		3,497		—		—		—		3,497
Commercial		5,340		—		—		—		5,340		4,604		—		—		—		4,604
Consumer		286		99		—		—		385		372		—		—		—		372
Total	$	97,863	$	516	$	280	$	—	$	98,659	$	96,354	$	45	$	102	$	—	$	96,501


			Greater than
			90 Days Past				Total Past Due
	31-89 Days Past Due		Due and				and Non-				Total Loan
	and Accruing		Accruing		Non-Accrual		Accrual		Current		Balance
													*31-89 Days Past Due and Accruing*		*Greater than 90 Days Past Due and Accruing*		*Non-Accrual*		*Total Past Due and Non-Accrual*		*Current*		*Total Loan Balance*
	(Dollars in thousands)
September 30, 2021
													(Dollars in thousands)
September 30, 2022
1-4 family residential	$	—	$	43	$	105	$	148	$	87,036	$	87,184	$	—	$	—	$	159	$	159	$	89,606	$	89,765
Multi-family		—		—		—		—		4,221		4,221		—		—		—		—		3,597		3,597
Commercial		—		—		—		—		4,453		4,453		—		—		—		—		3,985		3,985
Consumer		—		—		—		—		324		324		—		—		—		—		211		211
Total	$	—	$	43	$	105	$	148	$	96,034	$	96,182	$	—	$	—	$	159	$	159	$	97,399	$	97,558

December 31, 2020

December 31, 2021
1-4 family residential	$	—	$	75	$	280	$	355	$	86,842	$	87,197	$	—	$	41	$	102	$	143	$	87,885	$	88,028
Multi-family		—		—		—		—		5,737		5,737		—		—		—		—		3,497		3,497
Commercial		—		—		—		—		5,340		5,340		—		—		—		—		4,604		4,604
Consumer		99		—		—		99		286		385		—		—		—		—		372		372
Total	$	99	$	75	$	280	$	454	$	98,205	$	98,659	$	—	$	41	$	102	$	143	$	96,358	$	96,501


	Recorded investment		Unpaid principal balance		Related allowance
							*Recorded investment*		*Unpaid principal balance*		*Related allowance*
	(Dollars in thousands)
September 30, 2021
							(Dollars in thousands)
September 30, 2022
With no related allowance recorded
1-4 family residential	$	1,135	$	1,457	$	—	$	437	$	640	$	—
Multi-family		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	1,135	$	1,457	$	—	$	437	$	640	$	—
With a related allowance recorded
1-4 family residential	$	844	$	854	$	124	$	547	$	553	$	86
Multi-family		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	844	$	854	$	124	$	547	$	553	$	86
Balance at September 30, 2021	$	1,979	$	2,311	$	124
December 31, 2020
Balance at September 30, 2022							$	984	$	1,193	$	86
December 31, 2021
With no related allowance recorded
1-4 family residential	$	1,348	$	1,676	$	—	$	355	$	595	$	—
Multi-family		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Consumer		99		99		—		—		—		—
Total	$	1,447	$	1,775	$	—	$	355	$	595	$	—
With a related allowance recorded
1-4 family residential	$	1,075	$	1,120	$	150	$	781	$	797	$	118
Multi-family		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	1,075	$	1,120	$	150	$	781	$	797	$	118
Balance at December 31, 2020	$	2,522	$	2,895	$	150
Balance at December 31, 2021							$	1,136	$	1,392	$	118


	Average recorded
	investment		Interest income recognized
					*Average recorded investment*		*Interest income recognized*
	(Dollars in thousands)
					(Dollars in thousands)
September 30, 2022
With no related allowance recorded
1-4 family residential					$	421	$	6
Multi-family						—		—
Commercial						—		—
Consumer						—		—
Total					$	421	$	6
With a related allowance recorded
1-4 family residential					$	552	$	5
Multi-family						—		—
Commercial						—		—
Consumer						—		—
Total					$	552	$	5
Balance for the Three Months Ended September 30, 2022					$	973	$	11
September 30, 2021
With no related allowance recorded
1-4 family residential	$	1,141	$	15	$	1,141	$	15
Multi-family		—		—		—		—
Commercial		—		—		—		—
Consumer		—		—		—		—
Total	$	1,141	$	15	$	1,141	$	15
With a related allowance recorded							��
1-4 family residential	$	850	$	10	$	850	$	10
Multi-family		—		—		—		—
Commercial		—		—		—		—
Consumer		—		—		—		—
Total	$	850	$	10	$	850	$	10
Balance for the three months ended September 30, 2021	$	1,991	$	25
September 30, 2020
With no related allowance recorded
1-4 family residential	$	974	$	13
Multi-family		—		—
Commercial		—		—
Consumer		—		—
Total	$	974	$	13
With a related allowance recorded
1-4 family residential	$	1,092	$	13
Multi-family		—		—
Commercial		—		—
Consumer		—		—
Total	$	1,092	$	13
Balance for the three months ended September 30, 2020	$	2,066	$	26
Balance for the Three Months Ended September 30, 2021					$	1,991	$	25


For the 12 months ended
September 30,	Amount		*Amount*
	(Dollars in thousands)
2022	$	39,392
			(Dollars in thousands)
2023		14,765	$	31,736
2024		10,282		13,222
2025		5,695		6,288
2026 and beyond		4,263
2026				3,881
2027 and beyond				2,444
Total	$	74,397	$	57,571


	Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
									*Fair Value Measurements Using*
	(Dollars in thousands)
September 30, 2021
									*Fair Value*		*Level 1*		*Level 2*		*Level 3*
									(Dollars in thousands)
September 30, 2022
Securities Available-for-sale
U.S. Treasury Notes									$	12,256	$	12,256	$	—	$	—
U.S. government agency obligations										19,504		—		19,504		—
Municipal obligations										19,043		—		19,043		—
Mortgage-backed residential obligations										36,552		—		36,552		—
Collateralized mortgage obligations										37,912		—		37,912		—
Total									$	125,267	$	12,256	$	113,011	$	—

December 31, 2021
Securities Available-for-sale
U.S. government agency obligations	$	10,445	$	0	$	10,445	$	0	$	10,053	$	—	$	10,053	$	—
Municipal obligations		10,845		0		10,845		0		18,000		—		18,000		—
Mortgage-backed residential obligations		45,478		0		45,478		0		42,148		—		42,148		—
Collateralized mortgage obligations		30,226		0		30,226		0		30,749		—		30,749		—
Loans held for sale		972		0		972		0
Total	$	97,966	$	0	$	97,966	$	0	$	100,950	$	—	$	100,950	$	—

December 31, 2020
Securities Available-for-sale
U.S. government agency obligations	$	7,147	$	0	$	7,147	$	0
Municipal obligations		10,980		0		10,980		0
Mortgage-backed residential obligations		43,094		0		43,094		0
Collateralized mortgage obligations		20,399		0		20,399		0
Loans held for sale		1,972		0		1,972		0
Total	$	83,592	$	0	$	83,592	$	0

	*Carrying*								*Estimated*
	*Amount*		*Level 1*		*Level 2*		*Level 3*		*Fair Value*
	(Dollars in thousands)
September 30, 2022
Financial assets:
Loans, net	$	97,746	$	—	$	—	$	89,122	$	89,122
Loans held for sale		104		—		107		—		107
Financial liabilities:
Interest-bearing deposits	$	170,736	$	—	$	149,202	$	—	$	149,202


December 31, 2021
Financial assets:
Loans, net	$	96,534	$	—	$	—	$	95,612	$	95,612
Loans held for sale		104		—		112		—		112
Financial liabilities:
Interest-bearing deposits	$	186,531	$	—	$	181,564	$	—	$	181,564


	Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value

	(Dollars in thousands)
September 30, 2021
Financial assets:
Loans, net	$	96,151	$	0	$	98,483	$	0	$	98,483
Financial liabilities:
Interest-bearing deposits	$	192,808	$	0	$	191,318	$	0	$	191,318
FHLB Advance		5,000		0		5,009		0		5,009

December 31, 2020
Financial assets:
Loans, net	$	98,455	$	0	$	102,034	$	0	$	102,034
Financial liabilities:
Interest-bearing deposits	$	176,670	$	0	$	177,280	$	0	$	177,280
FHLB Advance		4,000		0		4,012		0		4,012


					Minimum Required to be
	Actual				Well-Capitalized (1)
	Amount		Ratio	��	Amount		Ratio

As of September 30, 2021	(Dollars in thousands)
Tier 1 capital (to Average Assets)	$	44,276	18.33	%	$	20,528	>8.5	%
As of December 31, 2020
Tier 1 capital (to Average Assets)	$	44,256	18.41	%	$	21,636	>8	%

						*Minimum Required to be*
	*Actual*					*Well-Capitalized (1)*
	*Amount*		*Ratio*			*Amount*		*Ratio*
As of September 30, 2022	*(Dollars in thousands)*
Tier 1 capital (to Average Assets)	$	65,210		23.78	%	$	24,685		>9%
As of December 31,2021
Tier 1 capital (to Average Assets)	$	44,262		16.11	%	$	23,349		>8.5%

	*Three Months Ended September 30,*		*Nine months ended September 30,*
	*2022*		*2022*
	(Income in thousands)
Net income (loss) applicable to common shares	$	118	$	(12	)

Average number of common shares outstanding		5,397,959		5,042,050
Less: Average unallocated ESOP shares		426,029		397,529
Average number of common shares outstanding used to calculate basic earnings per common share		4,971,930		4,644,521
Earnings (loss) per common share basic and diluted	$	0.02	$	(0.00	)

	*As of September 30, 2022*

	(Dollars in thousands)
Shares committed for allocation		12,960
Unallocated		418,876
Total ESOP shares		431,836

Fair value of unearned shares at September 30, 2022	$	4,532