NSTS Bancorp Inc

Note1: Summary of Significant Accounting Policies

The accompanying consolidated financial statements (“the financial statements”) have been prepared in conformity with accounting principles generally accepted in the United States of America and conform to practices within the banking industry.

Nature of Operations

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, from the mutual to the stock form of organization, which was completed on* January 18, 2022.The audited financial statements as well as other financial information at or prior to January 18, 2022contained in this Annual Report on Form10*-K 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 Company sold 5,290,000 shares of common stock at $10.00 per share in its subscription offering for gross proceeds of approximately $53.0 million. In connection with the subscription offering, NSTS Bancorp, Inc. also issued 107,959 shares of common stock and $150,000 in cash to NSTS Charitable Foundation. Shares of NSTS Bancorp, Inc. common stock began trading on January 19, 2022*on the 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 ofone tofour-family mortgage loans, savings accounts, and certificate of deposit accounts. There areno significant concentrations of loans to anyone industry or customer. The Bank’s exposure to credit risk is significantly affected by changes in the economy in the Bank’s market area.

All significant intercompany balances and transactions have been eliminated in consolidation.

Certain amounts in prior year financial statements have been reclassified to conform to the2023 presentation.

Employee Retention Credit

Under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on* March 27, 2020and the subsequent extension of the CARES Act, the Bank was eligible for a refundable employee retention credit subject to certain criteria. The Bank qualified for the tax credit for the quarters ended June 30, 2021and 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 thesecond quarter of2022, when the Bank determined it was eligible. The credit is recorded as other non-interest income and offsets $503,000 of salaries and employee benefits expense previously recorded during2021. During2023, the Bank has received $259,000 of the Employee Retention Credit, which represents the tax credit for the quarter ended* June 30, 2021.The Bank cannot reasonably estimate when it will receive the remaining refunds. A receivable is recorded in other assets on the consolidated balance sheets to reflect the remaining amount of the credit yet to be received. The CARES Act and related Employee Retention Credit was terminated as of September 30, 2021,and therefore the Company doesnot* expect to file for any additional refunds.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management 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 the adequacy of the allowance for credit 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* maybe 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 mayrequire 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.

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.

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Comprehensive Income

Comprehensive income includes net income (losses) and other changes in net worth which bypass the statement of operations. For all periods presented, other comprehensive income includes onlyone additional component, the change in unrealized gains and losses 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 nexttwo 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 life of the related security and premiums are amortized against income over the earlier of the call 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* maybe 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 liquidity.

For available-for-sale debt securities in an unrealized loss position, the Companyfirst assesses whether it intends to sell, or it is more likely thannot that it will sell, the security before recovery of its amortized cost basis. If either of the aforementioned criteria exists, the Company will record an ACL related to securities available-for-sale with an offsetting entry to the provision for credit losses on securities on the income statement. Losses are charged against the allowance when management believes the available-for-sale security is uncollectible or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on available-for-sale securities, totaling $351,000 as of* December 31, 2023,is excluded from the estimate of credit losses. If either of these criteria doesnot* exist, the Company will evaluate the securities individually to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors, such as market interest rate fluctuations.

In evaluating securities available-for sale for potential impairment, the Company considers many factors, including the financial condition and near-term prospects of the issuer, which for debt securities considers external credit ratings and recent downgrades; and its ability and intent to hold the security for a period of time sufficient for a recovery in value. The Company also considers the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies. The amount of the impairment related to other factors is recognized in other comprehensive income (loss).

Prior to the adoption of ASUNo. 2016-13 (CECL) on* January 1, 2023,*the Company evaluated its available-for-sale securities in accordance with the methodology specified in the preceding paragraph except that the credit portion of the impairment would reduce the amortized cost basis of the security.

Federal Home Loan Bank Stock

The Bank, as a member of the Federal Home Loan Bank (FHLB) system, is required to maintain an investment in capital stock of the FHLB. Based on redemption provisions of the FHLB, the stock hasno quoted market price and is carried at cost of$550,000 at* December 31, 2023and2022* 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 the lower of cost or market 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 forone tofour-family, construction, multi-family, and commercial.

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 credit losses on loans, 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 an adjustment to the related loan yield using the interest method, adjusted for prepayments.

The accrual of interest on all loans is discontinued at the time the loan is90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual if collection of principal or interest is considered doubtful. All interest accrued butnot collected 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.

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Allowance for Credit Losses

The allowance for credit losses (“ACL”) is an estimate of the expected credit losses on the loans held for investment, unfunded loan commitments, and available-for-sale debt securities portfolios.

Allowance for Credit Losses on Loans

The ACL is calculated according to GAAP standards and is maintained by management at a level believed adequate to absorb estimated credit losses that are expected to occur within the existing loan portfolio through their contractual terms. The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans. Determination of the ACL is inherently subjective in nature since it requires significant estimates and management judgment, and includes a level of imprecision given the difficulty of identifying and assessing the factors impacting loan repayment and estimating the timing and amount of losses. While management utilizes its best judgment and information available, the ultimate adequacy of the ACL is dependent upon a variety of factors beyond the Company’s direct control, including, butnot limited to, the performance of the loan portfolio, consideration of current economic trends, changes in interest rates and property values, estimated losses on pools of homogeneous loans based on an analysis that uses historical loss experience for prior periods, portfolio growth and concentration risk, management and staffing changes, the interpretation of loan risk classifications by regulatory authorities and other credit market factors. While each component of the ACL is determined separately, the entire balance is available for the entire loan portfolio.

The ACL methodology consists of measuring loans on a collective (pool) basis when similar risk characteristics exist. The Company has identifiedfive loan portfolios and measures the ACL using the Scaled CECL Allowance for Losses Estimator (“SCALE”) method. The loan portfolios areone tofour-family residential real estate, commercial real estate, multi-family real estate, construction and consumer. The SCALE method uses publicly available data from Schedule RI-C of the Call Report to derive the initial proxy expected lifetime loss rates. These proxy expected lifetime loss rates are then adjusted for bank-specific facts and circumstances to arrive at the final ACL estimate that adequately reflects the Company’s loss history and credit risk within our portfolio.

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

1-4 family mortgage loans in this segment are made to individuals. The loans are secured by real estate with the Bank typically in afirst lien position. The Bank generally doesnot originate loans with a loan-to-value ratio greater than 80% unless mortgage insurance is obtained and generally doesnot grant loans 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.

Although terms for commercial real estate and multi-family residential loans vary, our underwriting standards generally allow for termsnot exceeding 30 years and loan-to-value ratios ofnot more than 75%. Interest rates are typically adjustable, based upon designated market indices such as The Wall Street Journal prime rate, or fixed-rate, and fees are charged to the borrower at the origination of the loan. The actual lives of such loans generally are less than their contractual terms to maturity due to prepayments and re-financings. Generally, we obtain personal guarantees of the principals as additional collateral for commercial real estate and multi-family residential loans.

Commercial real estate and multi-family residential lending involve a greater degree of risk thanone - tofour -family residential lending. These risks include larger loans to individual borrowers and loan payments that are dependent upon the successful operation of the project or the borrower’s business. These risks can be affected by supply and demand conditions of rental housing units, office and retail space and other commercial space in the project’s market area. We attempt to minimize these risks for loans we originate by soliciting loans from businesses with existing operating performance. We also use conservative debt coverage ratios in our underwriting, and periodically monitor the operation of the business or project and the physical condition of the property.

Construction lending is generally originated with a loan-to-value ratio, based on the estimated cost to construct, less than or equal to 80%. Additionally, the construction loan terms generally include interest only payments for thefirst 18 months. The overall costs of construction, building material supply chain and health of the economy, including housing prices, will have an effect on the credit quality in this segment.

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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.

The qualitative factors applied to each loan portfolio consist of the impact of other internal and external qualitative and credit market factors as assessed by management through a detailed loan review, ACL analysis and credit discussions. These internal and external qualitative and credit market factors include:

The impact of the above listed internal and external qualitative and credit market risk factors is assessed within predetermined ranges to adjust the ACL totals calculated.

In addition to the pooled analysis performed for the majority of our loan and commitment balances, we also review those loans that have collateral dependency or nonperforming status which requires a specific review of that loan, per our individually analyzed CECL calculations.

Loans are charged off against the ACL when management believes the uncollectibility of a loan balance is confirmed, while recoveries of amounts previously charged-off are credited to the ACL. Approved releases from previously established ACL reserves authorized under our ACL methodology also reduce the ACL. Additions to the ACL are established through the provision for credit losses on loans, which is charged to expense.

The Company’s ACL methodology is intended to reflect all loan portfolio risk, but management recognizes the inability to accurately depict all future credit losses in a current ACL estimate, as the impact of various factors cannot be fully known. Accrued interest receivable on loans, totaling $392,000 as of* December 31, 2023,*is excluded from the amortized cost basis of financing receivables for the purpose of determining the allowance for credit losses.

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Allowance for Credit Losses on Unfunded Loan Commitments

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk by a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL related to off-balance sheet credit exposures, which is within other liabilities on the Company’s Consolidated Balance Sheet, is estimated at each balance sheet date under the CECL model, and is adjusted as determined necessary through the provision for credit losses on the statement of operations. The estimate for ACL on unfunded loan commitments includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

Prior to the implementation of ASUNo. 2016-13 (CECL) on* January 1, 2023,the allowance for credit losses was subject to the guidance included in ASC310* and ASC450. Under that guidance, the Company was required to use an incurred loss methodology to estimate credit losses that were estimated to be incurred in the loan portfolio and that could ultimately materialize into confirmed losses in the form of charge-offs. The incurred loss methodology was a backward-looking approach to loss recognition and based on the concept of a triggering event having taken place, causing a loss to be inherent within the portfolio. Additionally, loans that were identified as impaired under the definition of ASC310, were required to be assessed on an individual basis. The allowance for credit losses and resulting provision expense levels for comparative periods presented were estimated in accordance with these requirements.

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 of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments:first mortgage loans and consumer loans. Management uses an average of historical losses based on a time frame appropriate 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.

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 collateral 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 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 arenot 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:

Income Taxes

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 thannot that some portion or all of the deferred tax assets willnot 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 thannot that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken arenot 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 than50% 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 maintainsno uncertain tax positions for tax reporting purposes and accordingly,no liability is required to be recorded.

The Bank is subject to U.S. federal income tax as well as income tax of the States of Illinois and Wisconsin.

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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 carrying amount of the loan is recognized with a charge to the allowance for credit 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.

Dividend Restrictions

Banking regulations require maintaining certain capital levels and* may*limit the dividends paid by the Bank to the holding company or by the holding company to its stockholders.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Bank, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Bank doesnot maintain effective control over the transferred assets through an agreement to repurchase them before maturity.

Stock Based Compensation

The Company maintains an equity incentive plan under which restricted stock and stock options* maybe granted to employees and directors, see Note12.*

The Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards in accordance with ASC718, “Compensation-Stock Compensation”. The Company estimates the per share fair value of option grants on the date of grant using the Black-Scholes option pricing model using assumptions for the expected dividend yield, expected stock price volatility, risk-free interest rate and expected option term. These assumptions are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. The Black-Scholes option pricing model also contains certain inherent limitations when applied to options that arenot traded on public markets.

The per share fair value of options is highly sensitive to changes in assumptions. In general, the per share fair value of options will move in the same direction as changes in the expected stock price volatility, risk-free interest rate and expected option term, and in the opposite direction as changes in the expected dividend yield. For example, the per share fair value of options will generally increase as expected stock price volatility increases, risk-free interest rate increases, expected option term increases and expected dividend yield decreases. The use of different assumptions or different option pricing models could result in materially different per share fair values of options.

The Company recognizes compensation expense for the fair values of these awards, which have graded vesting, on a straight-line basis over the requisite service period of the awards. The Company’s accounting policy is to recognize forfeitures as they occur. Forfeited shares are added back to the pool of shares available for future grants.

Employee Stock Ownership Plan

The ESOP shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Balance Sheets. As shares are committed to be released from collateral, the Bank reports compensation expense equal to the average market price of the 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.

Treasury Stock

Treasury stock acquired is recorded at cost and is carried as a reduction of stockholders’ equity in the Consolidated Balance Sheets. Treasury stock issued is valued based on the “last in,first out” inventory method. The difference between the consideration received upon issuance and the carrying value is charged or credited to additional paid-in capital.

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 arenot deemed outstanding for earnings per share calculations. ESOP shares committed to be released are considered to be outstanding for purposes of the earnings per share computation. ESOP shares that havenot 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 made, are considered committed to be released. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.

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Note2: Securities

The amortized cost and estimated fair value of debt securities at* December 31, 2023and2022*, by contractual maturity, are shown below. Maturities* maydiffer from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may*be called or repaid without any penalties, therefore, these securities have been included in 1 to 5 years based on average remaining life.

As of* December 31, 2023and2022*, no securities were pledged to secure public deposits or for other purposes as required or permitted by law. At* December 31, 2023* and2022, there wereno holdings of securities of anyone issuer, other than the U.S. Government and its agencies, in an amount greater than10% of equity.

Information pertaining to securities with gross unrealized losses at* December 31, 2023and2022*, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is as follows:

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At* December 31, 2023and2022,* certain investment securities were in unrealized loss positions. There wereno securities with identified credit losses at* December 31, 2023,andno* securities with other than temporary impairment losses at* December 31, 2022.Unrealized losses havenot* been recognized into income because, based on management's evaluation, the decline in fair value is largely due to increased market rates, temporary market conditions and trading spreads, and, as such, are considered to be temporary by the Bank. In addition, management has the intent and ability to hold the securities until they mature or they recover their carrying values.

All U.S. Treasuries, U.S. government agency obligations, mortgage-based residential obligations and collateralized mortgage obligations are agency-issued or government-sponsored enterprise issued. Agency-issued securities are generally guaranteed by a U.S. government agency, such as the Government National Mortgage Association. Government-sponsored enterprises, such as the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, or the Small Business Administration, have either a direct or implied guarantee by the U.S. government.

The Bank holdstwo classifications of municipal bonds, general obligation bonds and revenue bonds. General obligation bonds are backed by the general revenue of the issuing municipality, while revenue bonds are supported by a specific revenue source. All general obligation and revenue bonds have a bond rating of investment grade by Standard and Poor's or Moody's Investor Services or arenot rated. There have beenno declines in investment grade ratings on bonds in a loss position and as of* December 31, 2023,*all municipal bonds are paying as agreed.

The following table represents the proceeds from the sale of securities available-for-sale and the related gross gains and losses during the periods presented.

Note3: Loans

A summary of loans by major category as of* December 31, 2023and2022* is as follows:

First mortgage loans serviced for others arenot included in the accompanying Consolidated Balance Sheets. The unpaid principal balance of these loans totaled$13.2 million and$13.7 million at* December 31, 2023and2022*, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing were$231,000 at* December 31, 2023and2022*.

In the normal course of business, loans are made by the Bank to directors and officers of the Company and the Bank (related parties). The terms of these loans, including interest rate and collateral, are similar to those prevailing for comparable transactions with other customers and donot involve more than a normal risk of collectability. At* December 31, 2023and2022*, such borrowers were indebted to the Bank in the aggregate amount of$550,000 and$597,000, respectively.

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Note4: Allowance for Credit Losses

The following tables present the activity in the allowance for credit losses and allowance for loan losses for the years ended* December 31, 2023and2022:*

The ACL on loans excludes $14,000 of allowance for off-balance sheet exposures as of* December 31, 2023*recorded within Other Liabilities on the Consolidated Balance Sheets.

The balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of* December 31, 2022*were as follows:

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As of* December 31, 2023,collateral dependent loans totaled $200,000 in theone* tofour-family residential loan segment. These loans are collateralized by residential real estate and haveno ACL as of* December 31, 2023.There wereno* other collateral dependent loans as of* December 31, 2023.*

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 arenot 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 performs an independent 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.

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The following tables present the credit risk profile of the Company's loan portfolio based on risk rating category and year of origination as of* December 31, 2023and the risk rating category and class of loan as of December 31, 2022.*

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The aging of the Bank’s loan portfolio as of* December 31, 2023and2022,* is as follows:

The following table presents the amortized cost basis of loans on nonaccrual status recorded at* December 31, 2023and2022.*

Loans individually evaluated for impairment by class of loans as of* December 31, 2022*were are follows:

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net, due to immateriality. For purposes of this disclosure, the unpaid principal balance isnot reduced for partial charge-offs.

The Bank* may*modify loans to borrowers experiencing financial difficulty by providing modifications to repayment terms; more specifically, modifications to loan interest rates. Management performs an analysis at the time of loan modification. Any reserve required is recorded through a provision to the allowance for credit losses on loans.

As of* January 1, 2023,the Company adopted ASU2022*-02, Financial Instruments - Credit Losses (Topic326*): Troubled Debt Restructuring and Vintage Disclosures*, see Note1. There wereno modifications on loans to borrowers experiencing financial difficulty during the year ended* December 31, 2023.There wereno new troubled debt restructurings during the year ended December 31, 2022.*

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Note5: Premises and Equipment

The components of premises and equipment as of* December 31, 2023and2022*, are as follows:

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Note6: Other Real Estate Owned

There wasno other real estate owned ("OREO") at* December 31, 2023and2022.* Additionally, there wasno movement in OREO during the years ended* December 31, 2023and2022.*

The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process is $64,000 as of* December 31, 2023.There wereno consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process as of December 31, 2022.*

Note7: Deposits

As of* December 31, 2023*, for years below ended* December 31,*the scheduled maturities of time deposits are as follows:

In the normal course of business, deposit accounts are held by directors and officers of the Bank (related parties). The terms for these accounts, including interest rates, fees, and other attributes, are similar to those prevailing for comparable transactions with other customers and donot involve more than the normal level of risk associated with deposit accounts. At* December 31, 2023and2022*, total deposits held by directors and officers of the Company and the Bank were$739,000 and$724,000, respectively.

Note8: Other Borrowings

During the year ended* December 31, 2023,the Company borrowed $5.0 million from the FHLB Chicago at a rate of 4.78% for24* months, payable on* June 20, 2025.*The advance is collateralized by loans pledged to the FHLB and is payable at maturity, with a prepayment penalty if repayment is made prior to the maturity date.

Additionally, during thefourth quarter of2023, the Company borrowed $10.0 million from the Federal Reserve Bank of Chicago as part of the Bank Term Funding Program, at a rate of 5.31% for 12 months, payable in* November 2024.The borrowing was repaid in December 2023.The borrowing was collateralized by securities pledged to the FRB and was payable at maturity withno* prepayment penalty.

The following table shows certain information regarding our borrowings at or for the dates indicated:

The following table shows the outstanding advances, additional borrowing capacity and total borrowing capacity from the FHLB Chicago at the dates presented.

The eligible borrowings are collateralized by $102.6 million and $86.6 million offirst mortgage loans under a blanket lien arrangement at * December 31, 2023and2022* , respectively. Additionally, at* December31,* 2023 and2022 we had a $10.0 million federal funds line of credit with the BMO Harris Bank, none of which was drawn at* December31,* 2023 and2022.

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Note9: Income Taxes

Income tax expense for the years ended* December 31, 2023and2022*, is summarized as follows:

The difference between the income tax expense shown on the statements of income and the amounts computed by applying the statutory federal income tax rate to income before income taxes is primarily due to tax-exempt income, the change in valuation allowance, and the adjustment of deferred taxes for enacted changes in tax laws. The provision for income taxes differs from that computed are as follows:

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The tax effects of existing temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at* December 31, 2023and2022*, are as follows:

The Bank doesnot expect the total amount of unrecognized tax benefits to change significantly in the nexttwelve months. Gross Federal net operating losses (NOL) as of* December 31, 2023and2022* are $5.0 million, and $1.7 million, respectively. A portion of the Federal NOL, related to charitable contributions, totaling $1.3 million, as of* December 31, 2023,will expire in2027.* The remainder of the Federal NOL doesnot expire. During2023, management assessed the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated is the cumulative taxable loss incurred over thefour-year period ended* December 31, 2023.*Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.

On the basis of this evaluation, as of* December 31, 2023,a full valuation allowance of $2.1 million on Federal NOLs and other temporary differences, other than those arising from the unrealized loss on securities available-for-sale, has been recorded to recognize only the portion of the deferred tax asset that is more likely thannot* to be realized.

NOL carryforwards for state income tax purposes were approximately $5.6 million and $3.9 million at* December 31, 2023and2022*, respectively, and will begin expiring in2024. Due to the uncertainty that the Bank will be able to generate future state taxable income sufficient to utilize the net operating loss carryforwards, a full valuation allowance of $532,000 has been recorded on the related deferred tax asset.

There wereno uncertain tax positions outstanding as of* December 31, 2023and2022*. As of* December 31, 2023*, tax years remaining open for State of Illinois and Wisconsin were 2019 through2022. Federal tax years that remained open were 2020 through2022. As of* December 31, 2023*, there were alsono unrecognized tax benefits that are expected to significantly increase or decrease within the nexttwelve months.

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Note10: 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 of total and Tier I capital to risk-weighted assets, common equity Tier1 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* December 31, 2023*, the most recent notification from the regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There areno 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 Tier1* capital to average total assets (i.e., leverage ratio) exceeds9% subject to a limitedtwo quarter grace period, during which the leverage ratio cannot go100 basis points below the then applicable threshold, and willnot be required to calculate and report risk-based capital ratios. The Bank elected to begin using CBLR for thefirst quarter of2020. Management believes, as of* December 31, 2023*, that the Bank met all capital adequacy requirements to which it was subject.

The Bank’s actual capital amounts and ratios as of* December 31, 2023and2022*, are presented below:

(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 Company to return to the risk-based capital ratio thresholds previously utilized under the fully phased-in Basel III Capital Rules to determine capital adequacy.

The Company's principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that the Bank* maypay without prior approval of regulatory agencies. Under these regulations, the amount of dividends that the Bank maypay in any calendar year is limited to the current year's profits, combined with the retained profit of the previoustwo* years, subject to the capital requirements described above which include a requirement that the Bank maintain a capital conservation buffer of 2.5% on all risk-based capital requirements in order to avoid additional limitations on capital distributions.

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Note11: Benefit Plans

Management implemented a401(k)-benefit plan during2007. Employee contributions are matched up to thefirst 6% of compensation contributed by the employee. Employer match contributions totaled$161,000 for2023 and$150,000 for2022.

As part of the conversion, North Shore Trust and Savings established the Employee Stock Ownership Plan ("ESOP") for its employees. Shares of the ESOP will be released and allocated to employees based on the ratio of each such participant's compensation. Refer to Note12 for additional information surrounding the ESOP and related expenses.

The Bank sponsors a noncontributory Profit-Sharing Plan covering all employees who have worked more than1,000 hours during the plan year. Profit sharing expense for the years ended2023 and2022 was $0.

Note12: Stock Based Compensation

ESOP

In connection with the Bank’s mutual to stock conversion in* January 2022,the Bank established the North Shore Trust and Savings Employee Stock Ownership Plan (“ESOP”) for all eligible employees. The ESOP purchased 431,836 shares of Company common stock in the Company’s initial public offering at $10.00 per share with the proceeds of atwenty-five* (25) year loan from the Company in the amount of $4.3 million. The interest rate on the ESOP loan is fixed at 3.25%. The Bank intends to make annual contributions to the ESOP that at a minimum will permit the ESOP to repay the principal and interest due on the ESOP debt. However, the Bank* mayprepay the principal of the note, partially or in full and without penalty or premium at any time and from time to time without prior notice to the holder. Any dividends declared on Company common stock held by the ESOP andnot* allocated to the account of a participant can be used to repay the loan. As the ESOP loan is repaid, shares of Company common stock pledged as collateral for the loan are released from the loan suspense account for allocation to Plan participants on the basis of each active participant’s proportional share of compensation. Participants vest 100% in their ESOP allocations after five years of service. In connection with the implementation of the ESOP, participants were given credit for past service with the Bank for vesting purposes. Participants will become fully vested upon death, disability, retirement, a change in control, or termination of the ESOP. Generally, participants will receive distributions from the ESOP upon separation from service. The plan reallocates any unvested shares of common stock forfeited upon termination of employment among the remaining participants in the plan.

ESOP compensation represents the average fair market value of the shares of Company common stock allocated or committed to be released as of that date. The difference between the market price and the cost of shares committed to be released is recorded as an adjustment to additional paid-in capital. Dividends, if any, on allocated shares are recorded as a reduction of retained earnings and dividends, if any, on unallocated shares are recorded as a reduction of the debt service. The ESOP compensation expense for the year ended* December 31, 2023and2022* was $199,000 and $246,000

Shares held by the ESOP were as follows:

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Equity Incentive Plan

At the Company's annual meeting of stockholders held on* May 24, 2023,stockholders approved the NSTS Bancorp, Inc.2023 Equity Incentive Plan (“2023* Equity Plan”), which provides for the granting of up to 755,714 shares (215,918 shares of restricted stock and 539,796 shares available for future grants of stock options) of the Company’s common stock pursuant to equity awards made under the2023 Equity Plan.

Stock options granted under the2023 Equity Plan generally vest in equal annual installments over a service period offive years beginning on the date of grant. The vesting of the options accelerates upon death, disability or an involuntary termination at or following a change in control of the Company. Stock options are generally granted at an exercise price equal to the fair value of the Company’s common stock on the grant date based on the closing market price of the Company's common stock on the date of grant, and have an expiration period often years. In* June 2023,the Company granted 465,500 stock options under the2023* Equity Plan. As of* December 31, 2023,the Company has 74,296 shares available for future grants of stock options under the2023* Equity Plan.

The fair value of stock options granted is estimated utilizing the Black-Scholes option pricing model using the following assumptions: an expected life of 6.5 years, risk-free rate of 3.82%, volatility of 29.0% and a dividend yield of 0.0%. Due to the limited historical information of the Company’s stock, management considered the weighted historical volatility of the common stock of the Company and other similar entities for an appropriate period in determining the volatility rate used in the estimation of fair value. The expected life of the stock option was estimated using the simplified method. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company recognizes compensation expense for the fair values of these awards, which have graded vesting, on a straight-line basis over the requisite service period of the awards. Upon exercise of vested options, management expects tofirst draw on treasury stock as the source for shares. The weighted average grant date fair value of stock options granted during the year ended* December 31, 2023*was $3.56.

The following is a summary of the Company's stock option activity and related information for the periods presented. There wasno stock option activity for the year ended* December 31, 2022.*

(1) Dollars in thousands.

Expected future expense relating to the non-vested options outstanding as of* December 31, 2023is $1.4 million over a weighted average period of 4.5 years. As of December 31, 2023,*the Company had 442,500 in nonvested stock options with a weighted average remaining life of 9.5 years.

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Restricted shares granted under the2023 Equity Plan generally vest in equal annual installments over a service period offive years beginning on the date of grant. The vesting of the awards accelerates upon death, disability or an involuntary termination at or following a change in control of the Company. The product of the number of shares granted and the grant date closing market price of the Company’s common stock determines the fair value of restricted shares under the2023 Equity Plan. Management recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period.

On* June 15, 2023,the Company granted to employees, under the2023* Equity Plan,187,200 shares of restricted stock with a total grant-date fair value of $1.8 million. These restricted stock awards vest in equal installments over afive-year period beginningone year from the date of grant. As of* December 31, 2023,the Company has 28,718 shares of restricted stock available for future grants under the2023* Equity Plan.

The following is a summary of the status of the Company's restricted shares as of* December 31, 2023*and changes thereto during the period presented.

Expected future expense related to the non-vested restricted shares outstanding as of period end is $1.5 million over a weighted average period of 4.5 years.

The following table presents the stock based compensation expense for the periods presented.

For the year ended* December 31, 2023,the total deferred tax benefit related to the $519,000 of stock based compensation expense was $123,000. Due to the passing of Director Dolan,23,000 stock options and 9,200 restricted stock awards vested during thefourth* quarter of the year ended* December 31, 2023.The early vesting of the stock options and restricted stock awards resulted in an additional expense of $73,000 and $77,000, respectively, during the year ended December 31, 2023.*

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Note13: Commitments and Contingencies

In the ordinary course of business, the Bank has various commitments and contingent liabilities that arenot reflected in the accompanying financial statements. In the opinion of management, the ultimate disposition of these matters isnot expected to have a material adverse effect on the financial position of the Bank.

Financial Instruments

The Bank doesnot engage in the use of interest rate swaps or futures, forwards or option contracts.

At* December 31, 2023and2022*, unused lines of credit and outstanding commitments to originate loans were as follows:

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* mayexceed federally insured limits. The Bank hasnot* experienced any losses in such accounts. The Bank believes it isnot 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.

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 isnot expected to have a material effect on the financial position or results of operations of the Bank.

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Note14: 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 ofthree levels of inputs that* may*be used to measure fair value:

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 beenno changes in the methodologies used at* December 31, 2023and2022*.

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 Level1 of the valuation hierarchy. If quoted market prices arenot 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, butnot limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level2 of the valuation hierarchy. In certain cases where Level1 or Level2 inputs arenot available, securities would be classified within Level3 of the hierarchy.

Individually Evaluated (Nonrecurring)

Individually evaluated (formerly, 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* mayutilize 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 Level3* classification of the inputs for determining fair value. Non-real estate collateral* maybe 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 Level3* fair value classification. Individually evaluated loans are evaluated on a quarterly basis for additional credit losses and adjusted accordingly.

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* December 31, 2023and2022*:

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The Bank* maybe 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. There wereno* assets measured at fair value on a nonrecurring basis as of* December 31, 2023and the valuation techniques used to measure nonrecurring Level3* fair value measurements as of* December 31, 2023and2022*, were as follows:

The numerical range of unobservable inputs for the valuation assumptions used in calculating the amounts disclosed above isnot meaningful to this presentation.

Note15: Fair Value of Financial Instruments

Financial instruments are classified within the fair value hierarchy using the methodologies described in Note14 – Fair Value Measurements.

Fair value estimates, methods and assumptions for the Company’s financial instruments that arenot recorded at fair value on a recurring or non-recurring basis are set forth below.

Loans, net: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential mortgage and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories. Estimated fair value of loans is determined using a discounted cash flow model that employs an exit discount rate that reflects the current market pricing for loans with similar characteristics and remaining maturity, adjusted for estimated credit losses inherent in the portfolio at the balance sheet date.

Interest-bearing deposits: The fair value of interest-bearing deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using rates for currently offered deposits of similar remaining maturities.

Other borrowings: The fair value of borrowings is based on securities dealers’ estimated fair values, when available, or estimated using discounted cash flow analysis. The discount rates used approximate the rates offered for similar borrowings of similar remaining terms.

Certain financial instruments generally expose the Company to limited credit risk and haveno stated maturities or have short-term maturities and carry interest rates that approximate market. The carrying value of these financial instruments assumes to approximate the fair value of these instruments. These instruments include cash and cash equivalents, non-interest-bearing deposit accounts, time deposits with other financial institutions, FHLB stock, escrow deposits and accrued interest receivable and payable.

The carrying amounts and estimated fair values by fair value hierarchy of certain financial instruments are as follows:

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Note16: Earnings Per Share

Basic EPS represents income available to common stockholders divided by the weighted-average number of 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 wereno securities or other contracts that had a dilutive effect during thetwelve months ended* December 31, 2023* and2022, and therefore the 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 havenot been allocated to employees in accordance with the terms of the ESOP, referred to as "unallocated ESOP shares", arenot deemed outstanding for purposes of the EPS calculation.

All unallocated ESOP shares have been excluded from the calculation of basic and diluted EPS. The computation of diluted earnings per share excludes certain outstanding share option awards that were outstanding and anti-dilutive, since the grant date fair value of these outstanding share option awards exceeded the average market price of the Company's common shares.

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Note17: Condensed Parent Only Financial Information

The Parent Company’s condensed balance sheet and related condensed statements of operations and cash flows are as follows.

Condensed Balance Sheets

Condensed Statements of Operations

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Condensed Statements of Cash Flows

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Note18: Changes in Accounting Principles

Accounting for Financial Instruments– Credit Losses

In* June 2016,the FASB issued ASUNo.* 2016-13, “Financial Instruments–Credit Losses (Topic326*): Measurement of Credit Losses on Financial Instruments*,” also known as Current Expected Credit Losses, or CECL. ASU2016-13 was issued to provide financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date to enhance the decision making process. The CECL model utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities, and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. For available for-sale securities where fair value is less than cost, credit-related impairment, if any, will be recognized in an allowance for credit losses and adjusted each period for changes in expected credit risk. This model replaces the multiple existing impairment models, which generally require that a loss be incurred before it is recognized.

We adopted ASU2016-13 using the current expected credit loss (“CECL”) methodology for financial assets measured at amortized cost, effective* January 1, 2023.Results for the periods beginning after January 1, 2023are presented under ASU2016*-13, while prior period amounts are reported in accordance with the previously applicable accounting standards. The Company recorded a reduction to retained earnings of approximately $279,000 upon adoption of ASU2016-13. The transition adjustment included an increase to the allowance for credit losses on loans of $384,000 and an increase to the allowance for credit losses on off-balance sheet credit exposure of approximately $5,000. The transition adjustment included a corresponding increase in deferred tax assets.

The following table illustrates the impact of ASU2016-13 adoption:

In* March 2022,FASB issued ASU2022*-02, Financial Instruments-Credit Losses (Topic326*): Troubled Debt Restructurings and* Vintage Disclosures**.** The amendments in this update eliminate the accounting guidance and related disclosures for TDRs by creditors in Subtopic310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty and requiring an entity to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. The amendments in this update are effective for fiscal years beginning after* December**15,* 2022, including interim periods within those fiscal years and are applied prospectively, except with respect to the recognition and measurement of TDRs, where an entity has the option to apply a modified retrospective transition method. Early adoption of the amendments in this update is permitted. An entity* may*elect to early adopt the amendments regarding TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures.

As of* January 1, 2023,we adopted ASUNo.* 2022-02, which superseded the current disclosure requirements for TDRs.

Note19: Subsequent Events

Management evaluated subsequent events through* March 28, 2024*, the date the financial statements were issued. Management doesnot believe there were any material subsequent events during this period that would have required further recognition or disclosure in the consolidated financial statements included in this report.

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