Mid-Southern Bancorp, Inc. - Annual Report: 2022 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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Commission File Number: 001-38491

MID-SOUTHERN BANCORP, INC.

(Exact name of registrant as specified in its charter)

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻  No  ⌧

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ◻   No  ⌧

Indicate by check mark whether the registrant (1) 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, a smaller reporting company or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

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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 has filed a report on an attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

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

The aggregate market value of the voting stock held by non-affiliates of the registrant based upon the closing price of the registrant’s common stock of $13.61 per share as quoted on the Nasdaq Global Select Market System on June 30, 2022 was $35.4 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant

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that such person is an affiliate of the registrant.) As of March 10, 2023, there were 2,885,039 issued and outstanding shares of the registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of registrant’s Definitive Proxy Statement for the 2023 Annual Meeting of Stockholders (Part III).

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Forward-Looking Statements

This Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by use of the words “expects,” “believes,” “anticipates,” “intends,” “could,” “should” and similar expressions of the future. Forward-looking statements also include, but are not limited to, statements regarding estimated cost savings, plans and objectives for future operations, and the Company’s business and growth strategies. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to:

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Some of these and other factors are discussed in this report under the caption “Risk Factors” and elsewhere in this Form 10-K. Such developments could have an adverse impact on our financial position and our results of operations.

Any of the forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements included in this report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur and you should not put undue reliance on any forward-looking statements.

As used throughout this report, the terms “we,” “our,” “us,” or the “Company” refer to Mid-Southern Bancorp, Inc. and its consolidated subsidiary, Mid-Southern Savings Bank, FSB, unless the context otherwise requires.

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PART I

Item 1. Business

General

Mid-Southern Bancorp, Inc., an Indiana corporation, is the savings and loan holding company of Mid-Southern Savings Bank, FSB (the “Bank” or “Mid-Southern Savings Bank”). On July 11, 2018, Mid-Southern Bancorp, Inc. completed a public offering and share exchange as part of the Bank’s “second step” conversion from the mutual holding company structure and the elimination of Mid-Southern, M.H.C. (the “Conversion”). Upon consummation of the Conversion, the Company became the holding company for the Bank and now owns all of the issued and outstanding shares of the Bank’s common stock. See Note 1 of the Notes to Consolidated Financial Statements contained in Item 8 of this report for more information.

At December 31, 2022, the Company had total assets of $269.2 million, total deposits of $206.1 million and stockholders’ equity of $33.3 million. The Company’s executive offices are located in Salem, Indiana. The Company is subject to regulation by the Federal Reserve. Substantially all of the Company’s business is conducted through the Bank which is regulated by the Office of the Comptroller of the Currency ("OCC"), its primary regulator, and by the Federal Deposit Insurance Corporation ("FDIC"), the insurer of its deposits. The Bank’s deposits are insured by the FDIC up to applicable legal limits under the Deposit Insurance Fund ("DIF"). The Bank is a member of the Federal Home Loan Bank of Indianapolis ("FHLB" or “FHLB of Indianapolis”) which is one of the 11 regional banks in the Federal Home Loan Bank System (“FHLB System”).

Our Business

Our business activities are primarily conducted through Mid-Southern Savings Bank, a federally chartered savings bank headquartered in Salem, Indiana, which is located in Southern Indiana approximately 40 miles northwest of Louisville, Kentucky. Mid-Southern Savings Bank conducts business from its main office in Salem and through its branch offices located in Mitchell and Orleans, Indiana and loan production offices located in New Albany, Indiana and Louisville, Kentucky. Mid-Southern Savings Bank’s market area includes the Louisville-Jefferson County Metropolitan Statistical Area (“MSA” consisting of Clark, Floyd, Harrison, and Washington counties in Indiana and Bullitt, Henry, Jefferson, Meade, Nelson, Oldham, Shelby, Spencer and Trimble counties in Kentucky) plus Lawrence and Orange counties in Indiana, and, to a lesser extent, contiguous counties.

Mid-Southern Savings Bank’s principal business consists of originating one-to-four family residential real estate mortgage loans, including home equity lines of credit, commercial and multi-family real estate, and construction loans. We also offer commercial business and other consumer loans. We offer a variety of retail deposits to the general public in the areas surrounding our main office and our branch offices with interest rates that are competitive with those of similar products offered by other financial institutions in our market area. Our revenues are derived primarily from interest on loans and, to a lesser extent, interest on investment securities and mortgage-backed securities.

Our principal executive offices are located at 300 North Water Street, Salem, Indiana 47167 and our telephone number is (812) 883-2639. Our website address is www.mid-southern.com.

Human Capital

Mid-Southern Bancorp, Inc. values our employees, customers, vendors, marketplace and community. As of December 31, 2022, the Company had 44 total employees and 40 full time employees, none of whom are represented by a collective bargaining unit. The Company believes its relationship with its employees is good. We continually strive to recognize the contributions of each individual to our organization, and we are committed to providing a welcoming culture of respect to all. The Company provides professional development opportunities and tuition reimbursement to employees and continually seeks to improve staff retention, career development and satisfaction. All employees are evaluated at least annually so that the individual receives feedback from his or her performance and to identify opportunities for improvement.

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In light of the recent events surrounding the Coronavirus Disease 2019 (“COVID-19”) pandemic, the Company has been committed to providing a healthy and safe environment for our employees, our customers, our partners and our communities. In response to recommendations from federal, state and local health officials, we have deployed several protocols to mitigate risk, and we continually evaluate and update our protocols based upon the most-recent information available.

Market Area

We are headquartered in Salem, Indiana (Washington County). Salem is the county seat of Washington County and is located approximately 40 miles northwest of Louisville, Kentucky. We have a branch located in each of Mitchell, Indiana (Lawrence County) and Orleans, Indiana (Orange County) and loan production offices in New Albany, Indiana (Floyd County) and Louisville, Kentucky (Jefferson County). Our market area includes the Louisville-Jefferson County MSA, plus Lawrence and Orange counties in Indiana and extends into surrounding areas.

Based on the 2020 U.S. Census, the market area had an aggregate population of 1.3 million, growing 6.2% since 2010. The 2020 median household income in the market area is $56,932 which is lower than the national level of $64,994. The market area’s nonseasonally-adjusted unemployment rate as of December 2022 was 2.7%, which is lower than the national average of 3.3%, according to the U.S. Bureau of Labor Statistics.

Our market area provides a diversified economic and employment base in the manufacturing, service, healthcare, agricultural, and governmental sectors. The largest employers within the Louisville-Jefferson County MSA include a mix of healthcare, manufacturing, retail and educational services. Healthcare employs approximately 89,000 individuals or 14.2% of the workforce in the MSA, while manufacturing employs approximately 85,000 individuals or 13.6%. The largest employers include United Parcel Service, Jefferson County Public Schools, Norton Healthcare, Ford Motor Company and Humana Inc.

Orange County’s largest industry concentrations are in the manufacturing, accommodation/food services, healthcare and construction. A majority of the major employers in the county (including Electricom, Paoli Peaks, Wildwood Association, Walmart Supercenter, and IU Health Paoli Hospital) are located in the county seat of Paoli. The manufacturing section employs 25.4% of the county workforce, with accommodation/food services (driven by the French Lick and West Baden Springs resorts and casinos in French Lick) employing 14.2% of the workforce.

Lawrence County’s largest industry concentrations are in the manufacturing, healthcare, retail trade, and governmental sectors. A majority of the largest employers in the county (including GM Powertrain, IU Health Bedford Hospital, Walmart Supercenter and Stone Belt) are located in the county seat of Bedford. Lehigh Hanson, a leading supplier of cement and other building materials, operates a cement facility in Mitchell. Mitchell is located approximately ten miles south of Bedford.

Lending Activities

General. Our historical principal lending activity has been originating one-to-four family residential real estate loans, commercial real estate loans, commercial business loans, home equity lines of credit, construction and consumer loans. More recently, we have sought to increase our commercial real estate, commercial construction and commercial business lending in an effort to diversify our overall loan portfolio, increase the overall yield earned on our loans and assist in managing interest rate risk.

Our strategic plan continues to focus on residential real estate lending and to gradually increase our commercial real estate loans, commercial real estate construction loans and commercial business loans in our market area. As part of the commercial loan strategy, we seek to use our commercial relationships to grow our commercial transactional deposit accounts. While we generally retain in our portfolio all loans we originate, beginning in October 2019, we began brokering fixed-rate one-to-four family residential loans for sale in the secondary market.

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The following table presents information concerning the composition of our loan portfolio, by the type of loan as of the dates indicated:

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Loan Maturity Table

The following table illustrates the contractual maturity of our loan portfolio at December 31, 2022. Mortgages that have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The total amount of loans due after December 31, 2023, which have fixed interest rates, is $16.7 million, while the total amount of loans due after such date, which have adjustable interest rates, is $113.5 million. The table does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.

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Largest Borrowing Relationships.  At December 31, 2022, the maximum amount under federal law that we could lend to any one borrower and the borrower’s related entities was approximately $6.4 million. Our five largest lending relationships totaled $21.0 million in the aggregate, or 14.4% of our $146.2 million total loan portfolio, at December 31, 2022. The largest relationship at December 31, 2022 consisted of a $5.1 million loan collateralized by commercial real estate property. The next four largest lending relationships at December 31, 2022 were $3.2 million in loans with unfunded loan commitments totaling $1.5 million to commonly owned businesses collateralized by revenues generated by the underlying residential rental, commercial real estate and commercial business properties; a $4.5 million commercial business loan participation collateralized by revenues generated by the underlying commercial properties; $4.3 million in loans with unfunded loan commitments totaling $15,000 to commonly owned businesses collateralized by commercial

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real estate property; and a $3.9 million loan collateralized by commercial real estate. As of December 31, 2022, all of these loans were performing in accordance with their repayment terms.

One-to-Four Family Real Estate Lending. Our primary lending activity consists of the origination of loans secured by first mortgages on one-to-four family residences, substantially all of which are secured by property located in our geographic lending area. We originate primarily adjustable-rate loans. We have entered into loan brokering agreements with United Wholesale Mortgage (“UWM”) and Union Home Mortgage (“UHM”). Under the agreements we perform loan application and preliminary underwriting activities to determine if potential loans conform to the underwriting standards of Fannie Mae (“conforming”). Conforming loans are then funded by the brokers, and we receive a fee for services performed. Through these relationships, we brokered 51 loans in 2022 and 111 loans in 2021. Residential loans which do not conform to the underwriting standards of Fannie Mae ("non-conforming"), may be funded by us and held in our loan portfolio.

Most of our loans are underwritten using generally-accepted underwriting guidelines. Some one-to-four family loans we originate are retained in our portfolio. Our pricing strategy for mortgage loans includes establishing interest rates that are competitive with other local financial institutions and consistent with our internal asset and liability management objectives. During the year ended December 31, 2022, we originated $16.1 million of one-to-four family adjustable-rate mortgage (“ARM”) loans and $1.4 million of fixed-rate mortgage loans. At December 31, 2022, one-to-four family residential mortgage loans totaled $64.7 million, or 44.3%, of our total loan portfolio, of which $59.8 million were ARM loans and $4.9 million were fixed-rate loans.

A large portion of the one-to-four family residential mortgage loans we originate and retain in our portfolio consist of loans that would be considered non-conforming as it relates to the ability to sell to Fannie Mae or other secondary market purchasers. Some of these loans are also originated to meet the needs of borrowers who cannot otherwise satisfy Fannie Mae credit requirements because of personal and financial reasons which do not conform to Fannie Mae’s guidelines. Such borrowers may have higher debt-to-income ratios, or the loans are secured by unique properties in rural markets for which there are no sales of comparable properties to support the value according to secondary market requirements. We may require additional collateral or lower loan-to-value ratios to reduce the risk of these loans. As a community bank, we believe that these loans satisfy a need in our market area. As a result, subject to market conditions, we intend to continue to originate these types of loans.

We generally underwrite our one-to-four family loans based on the applicant’s employment and credit history and the appraised value of the subject property. We generally lend up to 80% of the lesser of the appraised value or purchase price for one-to-four family first mortgage loans and non-owner occupied first mortgage loans. At December 31, 2022 we had $21.4 million of non-owner occupied first mortgage loans. Properties securing our one-to-four family loans are generally appraised by independent fee appraisers who are selected in accordance with criteria approved by the board of directors. It is Mid-Southern Savings Bank’s policy to require title insurance policies on all mortgage real estate loans originated in the amount of $500,000 or more. Homeowners, liability, fire and, if required, flood insurance policies are also required for one-to-four family loans. Our real estate loans generally contain a “due on sale” clause allowing us to declare the unpaid principal balance due and payable upon the sale of the security property. The average size of our one-to-four family residential loans was approximately $83,000 at December 31, 2022.

Fixed-rate loans secured by one-to-four family residences have contractual maturities of up to 30 years. At  December 31, 2022, we had no one-to-four family loans with an original contractual maturity in excess of 30 years.

Consumer-purpose ARM loans are offered with an initial fixed rate for up to five years. Adjustments and life-time rate caps that vary based on the product, generally have a maximum annual rate change of 2.25% and a maximum overall rate change of 6.00%. Commercial-purpose ARM loans generally have negotiated structures as it relates to rate floors, caps and margins over an index. We generally use the rate on the five-year Treasury Bills to re-price our ARM loans, however, as a consequence of using caps, the interest rates on ARM loans may not be as rate-sensitive as our cost of funds. Furthermore, because loan indexes may not respond perfectly to changes in market interest rates, upward adjustments on loans may occur more slowly than increases in our cost of interest-bearing liabilities, especially during periods of rapidly increasing interest rates. Because of these characteristics, yields on ARM loans may not be sufficient to offset increases in our cost of funds.

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Included in our one-to-four family loans are manufactured home loans that are considered a permanent dwelling. We originate new and used manufactured home loans to borrowers who intend to use the home as a primary residence. Our weighted average yield on manufactured home loans at December 31, 2022 was 4.97%, compared to 4.67% for one-to-four family mortgages. At December 31, 2022, these loans totaled $4.7 million, or 3.2% of our total loan portfolio. We underwrite these loans based on our review of creditworthiness of the borrower, including credit scores, and the value of the collateral, for which we hold a security interest under Indiana law.

Manufactured home loans are higher risk than loans secured by residential real property, though this risk is reduced if the owner also owns the land on which the home is located. A small portion of our manufactured home loans involve properties on which we also have financed the land for the owner. The primary additional risk in manufactured home loans is the difficulty in obtaining adequate value for the collateral due to the cost and limited ability to move the collateral. In addition to the cost of moving a manufactured home, it is difficult for these borrowers to find a new location for their home. First-time homebuyers of manufactured homes tend to be a higher credit risk than first-time homebuyers of single-family residences, due to more limited financial resources. We attempt to work out delinquent loans with the borrower and, if that is not successful, any manufactured homes serving as collateral are repossessed and sold. At December 31, 2022, there were $93,000 in nonperforming manufactured home loans and no manufactured home properties in our other real estate owned ("OREO") or repossessed assets portfolio.

Home Equity Lending. We originate home equity loans and home equity lines of credit. We originate home equity loans and lines of credit in amounts of up to 80% of the value of the collateral, minus any senior liens on the property. Home equity lines of credit are typically originated with an adjustable rate of interest, based on the Wall Street Journal Prime Rate plus a margin. Home equity lines of credit generally have up to a ten-year draw period, during which time the funds may be paid down and redrawn up to the committed amount. Once the draw period has lapsed, the home equity line of credit matures with all moneys owed being due and payable. At December 31, 2022, home equity lines of credit totaled $2.2 million, or 1.5% of our total loan portfolio. At December 31, 2022, unfunded commitments on these lines of credit totaled $4.7 million.

Commercial and Multi-Family Real Estate Lending. We offer a variety of commercial real estate and multi-family loans. Most of these loans are secured by commercial income-producing properties, including retail centers, multi-family apartment buildings, warehouses, and office buildings located in our market area. At December 31, 2022, commercial and multi-family loans totaled $56.9 million, or 38.9% of our total loan portfolio.

Our loans secured by commercial and multi-family real estate are generally originated with a variable interest rate, fixed for a five, seven or ten-year term and a 20-year amortization period. At the end of the initial term, there is a balloon payment or the loan re-prices every one to five years during the remaining term based on an independent index matching the ongoing repricing term plus a margin of 1.0% to 4.0%. Loan-to-value ratios on our commercial and multi-family loans typically do not exceed 80% of the lower of cost or appraised value of the property securing the loan at origination.

Loans secured by commercial and multi-family real estate are generally underwritten based on the net operating income of the property, global cash flow of the borrower, quality of the real estate, the credit history and financial strength of the borrower and the quality of management involved with the property. The net operating income or global cash flow of the borrower must be sufficient to cover the payments related to the outstanding debt plus an additional coverage requirement. We generally impose a minimum project debt coverage ratio of approximately 1.2x for the borrower or 1.35x global cash flow. The global cash flow takes into consideration the living expenses of the persons involved in the request and tax obligations. For originated loans secured by income producing commercial properties, if the borrower is other than an individual, we generally require the personal guaranty of the borrower. We also generally require an assignment of rents or leases in order to be assured that the cash flow from the project will be used to repay the debt. Appraisals on properties securing commercial and multi-family loans are performed by independent state certified or licensed fee appraisers and approved by the Directors’ Loan Committee. In order to monitor the adequacy of cash flows on income-producing properties, the borrower is required to provide, at a minimum, annual financial information. From time to time, we also acquire participation interests in commercial and multi-family loans originated by other financial institutions secured by properties located in our market area or in the general proximity of our market area.

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Historically, loans secured by commercial and multi-family properties generally involve different credit risks than one-to-four family properties, including the fact they cannot be sold as easily on the secondary market. These loans typically involve larger balances to single borrowers or groups of related borrowers. Because payments on loans secured by commercial and multi-family properties are often dependent on the successful operation or management of the properties, repayment of these loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired. Commercial and multi-family loans also expose a lender to greater credit risk than loans secured by one-to-four family because the collateral securing these loans typically cannot be sold as easily as one-to-four family. In addition, some of our commercial and multi-family loans are not fully amortizing and contain large balloon payments upon maturity. Balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment. Our largest single commercial and multi-family borrowing relationship at December 31, 2022, totaled $5.1 million and is collateralized by commercial real estate properties. At December 31, 2022, this loan was performing in accordance with its repayment terms.

Construction Lending. We originate construction loans secured by single-family residences and commercial and multi-family real estate. We also originate land and lot loans, which are secured by raw land or developed lots on which the borrower intends to build a residence, and land acquisition and development loans. At December 31, 2022, our construction loans, including land and lot loans and land acquisition and development loans totaled $7.8 million, or 5.4% of our total loan portfolio. At December 31, 2022, unfunded construction loan commitments totaled $5.6 million.

We originate construction loans to individuals and contractors for the construction and acquisition of personal residences whether or not the collateral property underlying the loan is under contract for sale. At December 31, 2022, construction loans to contractors for homes that were not pre-sold totaled $752,000 and are classified as commercial real estate construction loans.

Our residential construction loans generally provide for the payment of interest only during the construction phase, which is typically up to twelve months. We typically convert construction loans to individuals to permanent loans on completion of construction but if Mid-Southern Savings Bank does not intend to provide the permanent financing, we require a take-out financing commitment prior to origination. At the end of the construction phase, the construction loan generally either converts to a longer-term mortgage loan or is paid off through a permanent loan from another lender. Residential construction loans are made up to the lesser of a maximum loan-to-value ratio of 90% of cost or 80% of appraised value at completion.

At December 31, 2022, residential construction mortgage loans to individuals totaled $1.2 million. Before making a commitment to fund a residential construction loan, we require an appraisal of the subject property by an independent licensed appraiser. During the construction phase, we make periodic inspections of the construction site and loan proceeds are disbursed directly to the contractors or borrowers as construction progresses. Typically, disbursements are made in monthly draws during the construction period. Loan proceeds are disbursed after inspection based on the percentage of completion method. We also require general liability, builder’s risk hazard insurance, title insurance (loans in excess of $500,000), and flood insurance (as applicable, for properties located or to be built in a designated flood hazard area) on all construction loans.

We also originate developed lot and land loans to individuals intending to construct in the future a residence on the property. We will generally originate these loans in an amount up to 80% of the lower of the purchase price or appraisal. These lot and land loans are secured by a first lien on the property and have a fixed rate of interest with an initial term of five years or less and a maximum amortization of 20 years. At December 31, 2022, we had five lot and land loans to individuals totaling $205,000.

We make land acquisition and development loans to experienced home builders or residential lot developers in our market area. The maximum loan-to-value limit applicable to these loans is generally 80% of the appraised market value upon completion of the project. We do not require any cash equity from the borrower if there is sufficient equity in the land being used as collateral. Development plans are required from developers prior to making the loan. Our loan officers are required to personally visit the proposed site of the development. We require that developers maintain adequate insurance coverage. Land acquisition and development loans generally are originated with a loan term up to 24 months,

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have adjustable rates of interest based on the Wall Street Journal Prime Rate and require interest only payments during the term of the loan. Development loan proceeds are disbursed periodically in increments as construction progresses and as inspection by our approved inspectors warrant. We also require these loans to be paid on an accelerated basis as the lots are sold, so that we are repaid before all the lots are sold. At December 31, 2022, we had $4.1 million in land acquisition and development loans within our commercial real estate and construction loan portfolios. At December 31, 2022, our largest land acquisition and development relationship consisted of one loan totaling $1.4 million, secured by single family residential lots located in our market area. At December 31, 2022, this loan relationship was performing in accordance with its repayment terms. At December 31, 2022, unfunded loan commitments related to land acquisition and development totaled $2.5 million.

We also offer commercial and multi-family construction loans. These loans are underwritten with construction financing for up to 12 months under terms similar to our residential construction loans. On completion of the construction period the loan by its terms converts to a permanent commercial real estate loan with terms similar to our other permanent commercial and multi-family real estate loans. At December 31, 2022, we had $6.7 million in commercial and multi-family construction loans.

Construction and land financing is generally considered to involve a higher degree of credit risk than longer-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction costs is inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property and may have to hold the property for an indeterminate period of time. Additionally, if the estimate of value is inaccurate, we may be confronted with a project that, when completed, has a value that is insufficient to generate full payment. Land loans also pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the collateral. The value of the lots securing our loans may be affected by the success of the development in which they are located. As a result, construction loans and land loans often involve the disbursement of funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property or refinance the indebtedness, rather than the ability of the borrower or guarantor to repay principal and interest. The nature of these loans is also such that they are generally more difficult to monitor. In addition, speculative construction loans to a builder are often associated with homes that are not pre-sold, and thus pose a greater potential risk than construction loans to individuals on their personal residences.

Consumer Lending. We offer a variety of secured consumer loans, including new and used manufactured homes, automobiles, boats and recreational vehicle loans, and loans secured by savings deposits. We also offer unsecured consumer loans. We originate our consumer loans primarily in our market area. All of our consumer loans are originated on a direct basis.

We make loans on new and used automobiles. Our automobile loan portfolio totaled $884,000 at December 31, 2022, or 42.6% of our consumer loan portfolio and 0.6% of our total loan portfolio. Automobile loans may be written for a term of up to 72 months and have fixed rates of interest. Loan-to-value ratios are generally up to 100% of the purchase price for qualified borrowers if the Fair Isaac Corporation (“FICO”) credit score is 700 or greater of either the borrower or co-borrower and the debt-to-income ratio is 35% or less. Borrowers who do not meet these criteria but still qualify in accordance with our underwriting guidelines may borrow up to 80% of the purchase price. We follow our internal underwriting guidelines in evaluating automobile loans, including credit scoring, verification of employment, reviewing debt-to-income ratios and valuation of the underlying collateral.

Our consumer loans also include loans secured by new and used manufactured homes not considered permanent dwellings, new and used boats, motorcycles and recreational vehicles, loans secured by deposits and unsecured personal loans, all of which, at December 31, 2022, totaled $1.2 million or 57.4% of our consumer loan portfolio and 0.8% of our total loan portfolio. These loans typically have terms from five to ten years depending on the collateral and loan-to-value ratios up to 80% and have either fixed or adjustable interest rates.

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Our unsecured consumer loans have either a fixed rate of interest generally for a maximum term of 36 months, or are revolving lines of credit of generally up to $25,000. At December 31, 2022, there were no outstanding loans or unfunded commitments for unsecured consumer lines of credit.

Consumer loans (other than our manufactured homes) generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.

Consumer loans generally entail greater risk than do one-to-four family residential mortgage loans, particularly in the case of consumer loans that are secured by rapidly depreciable assets, such as manufactured homes, automobiles, boats and recreational vehicles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower’s continuing financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

Commercial Business Lending. At December 31, 2022, commercial business loans totaled $14.7 million, or 10.0% of our total loan portfolio. Substantially all of our commercial business loans have been to borrowers in our market area. Our commercial business lending activities encompass loans with a variety of purposes and security, including loans to finance commercial vehicles and equipment. Approximately $634,000 of our commercial business loans at December 31, 2022 were unsecured. Our commercial business lending policy includes credit file documentation and analysis of the borrower’s background, capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is also an important aspect of our credit analysis. We generally require personal guarantees on both our secured and unsecured commercial business loans. Nonetheless, commercial business loans are believed to carry higher credit risk than residential mortgage loans.

Our interest rates on commercial business loans are dependent on the type of lending. Our secured commercial business loans typically have a loan-to-value ratio of up to 80% and are term loans ranging from three to five years. Secured commercial business term loans generally have a fixed rate. In addition, we typically charge loan fees of 0.25% to 2.0% of the principal amount at origination, depending on the credit quality and account relationships of the borrower. Business lines of credit are usually adjustable-rate and are based on the Wall Street Journal Prime Rate plus 0% to 3.75%, and are generally originated with both a floor and ceiling to the interest rate. Our business lines of credit have terms ranging from 12 months to 24 months and provide for interest-only monthly payments during the term.

Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The borrower’s cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Most often, this collateral is accounts receivable, inventory, equipment or real estate. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Other collateral securing loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the specific type of business and equipment used. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself (which, in turn, is often dependent in part upon general economic conditions).

Lending Authority. Both our President and Chief Executive Officer (“CEO”) and Executive Vice President and Senior Loan Officer may individually approve unsecured loans up to $100,000 and all types of secured loans up to $200,000. The Lending Group, consisting of the CEO and Senior Loan Officer, may collectively approve unsecured loans up to $150,000 and all types of secured loans up to $1.0 million. All approvals by the Lending Group must be ratified by the Directors’ Loan Committee. The Directors’ Loan Committee approves unsecured loans up to $500,000 and secured loans up to $2.0 million. Any loans over the Directors’ Loan Committee limit must be approved by the full board of directors. All loan policy exceptions must be approved by the Directors’ Loan Committee, the Lending Group, the CEO or the Senior Loan Officer up to the committee’s, Lending Group’s, CEO’s or Senior Loan Officer’s lending authority. All policy exception loans of $10,000 or more must be reported to the board of directors within 45 days.

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Loan Originations, Purchases, Sales, Repayments and Servicing

We originate both fixed-rate and adjustable-rate loans. Our ability to originate loans, however, is dependent upon customer demand for loans in our market area. Over the past few years, we have continued to originate residential and consumer loans, and increased our emphasis on commercial and multi-family, construction and land, and commercial business lending. Demand is affected by competition and the interest rate environment. During the past few years, we, like many other financial institutions, have experienced significant prepayments on loans due to the low interest rate environment prevailing in the United States. We underwrite participations to the same standards as an internally-originated loan.

In addition to interest earned on loans and loan origination fees, we receive fees for loan commitments, late payments and other miscellaneous services.

Asset Quality

When a borrower fails to make a required payment on a one-to-four family loan, we attempt to cure the delinquency by contacting the borrower. In the case of loans secured by a one-to-four family property, a late notice typically is sent 15 days after the due date, and the borrower is contacted by phone within 30 days after the due date. Generally, a delinquency letter is mailed to the borrower. All delinquent accounts are reviewed by a loan account executive or branch manager who attempts to cure the delinquency by contacting the borrower once the loan is 30 days past due. If the account becomes 90 days delinquent and an acceptable repayment plan has not been agreed upon, we generally refer the account to legal counsel with instructions to prepare a notice of intent to foreclose.

Delinquent consumer loans, as well as delinquent home equity loans and lines of credit, are handled in a similar manner to one-to-four family loans, except that appropriate action may be taken to collect any loan payment that is delinquent for more than 15 days. Once the loan is 90 days past due, it is classified as nonaccrual. Generally, credits are charged-off at 120 days past due. Our procedures for repossession and sale of consumer collateral are subject to various requirements under the applicable consumer protection laws as well as other applicable laws and the determination by us that it would be beneficial from a cost basis.

Delinquent loans are initially handled by the loan officer in charge of the loan, who is responsible for contacting the borrower. In addition, management meets weekly and reviews past due and classified loans, as well as other loans that management feels may present possible collection problems, which are reported to the board on a monthly basis. If an acceptable workout of a delinquent loan cannot be agreed upon, we generally initiate foreclosure or repossession proceedings on any collateral securing the loan.

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Delinquent Loans

Nonperforming Assets. The table below sets forth the recorded investment amounts and categories of nonperforming assets in our loan portfolio. Loans are placed on nonaccrual status when the collection of principal and/or interest become doubtful or when the loan is more than 90 days past due. Foreclosed assets include assets acquired in settlement of loans. We had no accruing loans 90 days or more delinquent for the periods reported.

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For the year ended December 31, 2022, total interest income that would have been recorded had the nonaccrual loans been current in accordance with their original terms amounted to $38,000, all of which was excluded from interest income for the year ended December 31, 2022.

Troubled Debt Restructured Loans. Troubled debt restructurings, which are accounted for under Accounting Standards Codification (“ASC”) 310-40, are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans. Such modifications to loan terms may include a lower interest rate, a reduction in principal, or a longer term to maturity. At December 31, 2022 and 2021 we had a recorded investment of $702,000 and $789,000, respectively, of loans that were classified as troubled debt restructurings and still on accrual. Included in

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nonperforming loans at December 31, 2022 and 2021 were troubled debt restructured loans of $85,000 and $101,000 respectively.

Foreclosed Assets. We owned no OREO or other repossessed assets at December 31, 2022.

Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the OCC to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose Mid-Southern Savings Bank to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated as special mention.

When we classify problem assets as either substandard or doubtful, we may establish specific allowance for loan losses in an amount deemed prudent by management. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the OCC and the FDIC, which may order the establishment of additional general or specific loss allowances.

We regularly review the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management’s review of our assets, at December 31, 2022, we had classified a recorded investment of $732,000 of our assets as substandard, which represented a variety of outstanding loans. Classified assets totaled $732,000, or 2.2% of our equity capital and 0.3% of our assets at December 31, 2022 and $976,000, or 2.1% of our equity capital and 0.4% of our assets at December 31, 2021. We had $3.4 million of our assets classified as special mention at December 31, 2022 and $87,000 classified as special mention as of December 31, 2021.

Allowance for Loan Losses. We maintain an allowance for loan losses to absorb probable loan losses in the loan portfolio. The allowance is based on ongoing assessments of the estimated probable incurred losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers the types of loans and the amount of loans in the loan portfolio, peer group information, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. Large groups of smaller balance homogeneous loans, such as one-to-four family, small commercial and multi-family, home equity and consumer loans, are evaluated in the aggregate using historical loss factors and peer group data adjusted for current economic conditions.

Our allowance for loan losses totaled $1.7 million, representing 1.2% of total loans at December 31, 2022 and $1.5 million and 1.2%, respectively, at December 31, 2021. Specific valuation reserves totaled $35,000 and $40,000 at December 31, 2022 and 2021, respectively.

Assessing the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In the opinion of management, the allowance, when taken as a whole, properly reflects estimated probable loan losses in our loan portfolio. See Notes 1 and 4 of the Notes to Consolidated Financial Statements for additional information.

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The following table sets forth an analysis of our allowance for loan losses at the dates indicated:

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The recorded investment in nonperforming loans decreased to $732,000 at December 31, 2022 from $753,000 at December 31, 2021. The allowance for loan losses as a percentage of total loans was 1.2% at both December 31, 2022 and 2021.

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The distribution of our allowance for losses on loans at the dates indicated is summarized as follows:

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