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Mid-Southern Bancorp, Inc. - Quarter Report: 2023 March (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

OR

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                      to                                   

Commission File No. 001-38491

Mid-Southern Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Indiana

82-4821705

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

300 North Water Street, Salem, Indiana 47167                 812-883-2639

(Address of principal executive offices, zip code, telephone number)

Not applicable

(Former name, former address and former fiscal year, if changed since last report) 

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

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, par value $.01 per share

MSVB

The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   No  

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

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

Large Accelerated Filer

Accelerated Filer 

Non-Accelerated Filer

Smaller Reporting Company

Emerging Growth Company

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  As of May 5, 2023, there were 2,885,039 shares of the registrant’s common stock outstanding.

Table of Contents

MID-SOUTHERN BANCORP, INC.

INDEX

    

Page

Part I

Financial Information

Item 1. Consolidated Financial Statements

Consolidated Balance Sheets (unaudited)

3

Consolidated Statements of Income (unaudited)

5

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

6

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

7

Consolidated Statements of Cash Flows (unaudited)

8

Notes to Consolidated Financial Statements (unaudited)

9-36

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

37-47

Item 3. Quantitative and Qualitative Disclosures About Market Risk

48

Item 4. Controls and Procedures

48

Part II

Other Information

Item 1. Legal Proceedings

49

Item 1A. Risk Factors

49

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

50

Item 3. Defaults Upon Senior Securities

50

Item 4. Mine Safety Disclosures

50

Item 5. Other Information

50

Item 6. Exhibits

51

Signatures

52

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Table of Contents

Item 1. Consolidated Financial Statements

MID-SOUTHERN BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share information) (Unaudited)

    

March 31, 

    

December 31, 

2023

2022

ASSETS

 

  

 

  

Cash and due from banks

$

1,249

$

979

Interest-bearing deposits with banks

 

3,222

 

4,705

Cash and cash equivalents

 

4,471

 

5,684

Securities available for sale, at fair value

 

101,559

 

105,351

Securities held to maturity

 

13

 

17

Loans, net of allowance for credit losses of $2,324 and $1,692, respectively

 

147,198

 

144,379

Federal Home Loan Bank stock, at cost

 

1,778

 

1,778

Foreclosed real estate

 

16

 

Premises and equipment

 

2,156

 

2,150

Accrued interest receivable:

 

 

Loans

 

443

 

437

Securities

 

599

 

886

Cash value of life insurance

 

3,839

 

3,826

Other assets

 

4,296

 

4,710

Total Assets

$

266,368

$

269,218

LIABILITIES

 

 

Deposits:

 

 

Noninterest-bearing

$

27,936

$

28,232

Interest-bearing

 

177,701

 

177,832

Total deposits

 

205,637

 

206,064

Borrowings

25,000

29,000

Accrued interest payable

82

12

Accrued expenses and other liabilities

 

706

 

820

Total Liabilities

 

231,425

 

235,896

COMMITMENTS AND CONTINGENCIES

 

STOCKHOLDERS’ EQUITY

 

 

Preferred stock, 1,000,000 shares authorized, $0.01 par value, no shares issued and outstanding

 

 

Common stock, 30,000,000 shares authorized, $0.01 par value, 3,565,430 shares issued and 2,885,039 shares outstanding (2,885,039 in 2022)

 

36

 

36

Additional paid-in-capital

 

30,800

 

30,777

Retained earnings, substantially restricted

 

24,611

 

24,916

Accumulated other comprehensive loss

 

(9,006)

 

(10,831)

Unearned ESOP shares

 

(1,497)

 

(1,524)

Unearned stock compensation plan

 

(407)

 

(458)

Treasury stock, at cost - 680,391 shares (680,391 in 2022)

 

(9,594)

 

(9,594)

Total Stockholders’ Equity

 

34,943

 

33,322

Total Liabilities and Stockholders’ Equity

$

266,368

$

269,218

See accompanying Notes to Consolidated Financial Statements.

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MID-SOUTHERN BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share information) (Unaudited)

Three Months Ended

March 31, 

    

2023

    

2022

INTEREST INCOME

 

  

 

  

Loans, including fees

$

1,721

$

1,315

Investment securities:

 

Mortgage-backed securities

 

190

104

Municipal tax exempt

 

413

381

Other debt securities

 

115

75

Federal Home Loan Bank dividends

 

27

4

Interest-bearing deposits with banks and time deposits

 

17

4

Total interest income

 

2,483

1,883

INTEREST EXPENSE

 

Deposits

 

346

107

Borrowings

 

277

43

Total interest expense

 

623

150

Net interest income

 

1,860

1,733

Provision for credit losses

 

52

Net interest income after provision for credit losses

 

1,808

1,733

NONINTEREST INCOME

 

Deposit account service charges

 

91

81

Brokered loan fees

15

43

Net loss on sales of securities available for sale

(27)

Increase in cash value of life insurance

 

14

14

ATM and debit card fee income

 

139

136

Other income

 

12

11

Total noninterest income

 

244

285

NONINTEREST EXPENSE

 

Compensation and benefits

 

891

833

Occupancy and equipment

 

161

138

Data processing

 

211

118

Professional fees

 

169

144

Directors' compensation

 

89

81

Stockholders' meeting expense

18

18

Supervisory examinations

 

15

18

Deposit insurance premiums

 

20

16

Marketing and business development

26

22

Other expenses

 

149

129

Total noninterest expense

 

1,749

1,517

Income before income taxes

 

303

501

Income tax (benefit) expense

 

(37)

34

Net Income

$

340

$

467

Earnings per common share:

 

Basic

$

0.13

$

0.17

Diluted

$

0.13

$

0.17

See accompanying Notes to Consolidated Financial Statements.

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MID-SOUTHERN BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands) (Unaudited)

Three Months Ended

March 31, 

    

2023

    

2022

Net Income

$

340

$

467

Other Comprehensive Income (Loss), net of tax

 

 

Unrealized gains (losses) on securities available for sale:

 

 

Net unrealized holding gains (losses) arising during the period

 

2,403

(7,837)

Income tax (expense) benefit

 

(598)

1,949

Net of tax amount

1,805

(5,888)

Reclassification adjustment for realized losses included in net income during the period

(27)

Income tax benefit

7

Net of tax amount

 

(20)

Other Comprehensive Income (Loss), net of tax

 

1,825

(5,888)

Total Comprehensive Income (Loss)

$

2,165

$

(5,421)

See accompanying Notes to Consolidated Financial Statements.

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MID-SOUTHERN BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except share information) (Unaudited)

Accumulated

Unearned

Additional

Other

Unearned

Stock

Common

Paid-in

Retained

Comprehensive

ESOP

Compensation

Treasury

    

Stock

    

Capital

    

Earnings

    

Income (Loss)

    

Shares

    

Plan

    

Stock

    

Total

Balances at January 1, 2022

$

36

$

30,694

$

23,527

$

2,096

$

(1,649)

$

(473)

$

(7,702)

$

46,529

Net income

 

467

467

Other comprehensive loss

 

(5,888)

(5,888)

Cash dividends ($0.04 per share)

(113)

(113)

ESOP shares committed to be released

13

26

39

Purchase of 16,117 treasury shares

(241)

(241)

Forfeiture of unearned stock awards

2

(2)

Exercise of stock options

(8)

111

103

Stock compensation expense

13

41

54

Balances at March 31, 2022

$

36

$

30,712

$

23,881

$

(3,792)

$

(1,623)

$

(430)

$

(7,834)

$

40,950

Balances at January 1, 2023

$

36

$

30,777

$

24,916

$

(10,831)

$

(1,524)

$

(458)

$

(9,594)

$

33,322

Impact of adoption of ASC 326

(481)

(481)

Net income

340

340

Other comprehensive income

1,825

1,825

Cash dividends ($0.06 per share)

(164)

(164)

ESOP shares committed to be released

7

27

34

Stock compensation expense

16

51

67

Balances at March 31, 2023

$

36

$

30,800

$

24,611

$

(9,006)

$

(1,497)

$

(407)

$

(9,594)

$

34,943

See accompanying Notes to Consolidated Financial Statements.

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MID-SOUTHERN BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

Three Months Ended

March 31, 

    

2023

    

2022

CASH FLOWS FROM OPERATING ACTIVITIES

 

  

 

  

Net income

$

340

$

467

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

Amortization of premiums and accretion of discounts on securities, net

 

92

 

123

Provision for credit losses

52

Stock compensation expense

67

54

Depreciation expense

 

48

 

45

ESOP compensation expense

 

34

 

39

Deferred income taxes

 

(19)

 

(32)

Increase in cash value of life insurance

 

(14)

 

(14)

Net loss on sales of securities available for sale

 

27

 

Decrease in accrued interest receivable

 

281

 

58

Increase in accrued interest payable

70

Net change in other assets and liabilities

 

(183)

 

(101)

Net Cash Provided By Operating Activities

 

795

 

639

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

Purchases of securities available for sale

(23,119)

Principal collected on mortgage-backed securities available for sale

 

972

 

2,932

Proceeds from maturities of securities available for sale

 

1,030

 

2,109

Proceeds from sales of securities available for sale

4,101

Principal collected on mortgage-backed securities held to maturity

 

4

 

1

Proceeds from redemption of Federal Home Loan Bank Stock

57

Net increase in loans receivable

 

(3,470)

 

(4,738)

Purchase of premises and equipment

 

(54)

 

(40)

Investment in cash value of life insurance

 

 

(2)

Net Cash Provided By (Used In) Investing Activities

 

2,583

 

(22,800)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

Net increase (decrease) in deposits

 

(427)

 

12,774

Repayments to Federal Home Loan Bank

 

(29,000)

 

Proceeds from Federal Reserve

25,000

Proceeds from the exercise of stock options

103

Purchase of treasury stock

(241)

Cash dividends paid

 

(164)

 

(113)

Net Cash Provided By (Used In) Financing Activities

 

(4,591)

 

12,523

Net Decrease in Cash and Cash Equivalents

 

(1,213)

 

(9,638)

Cash and cash equivalents at beginning of year

 

5,684

 

16,379

Cash and Cash Equivalents at End of Period

$

4,471

$

6,741

Supplemental Disclosures of Cash Flow Information

Cash payments for:

Interest

$

553

$

150

Net tax payments

See accompanying Notes to Consolidated Financial Statements.

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MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.           Presentation of Interim Information

Mid-Southern Bancorp, Inc., (the "Company") was incorporated in January 2018 and became the holding company for Mid-Southern Savings Bank, FSB (the "Bank"), on July 11, 2018, upon the completion of the Bank’s conversion from the mutual holding company ownership structure and the Company’s related public stock offering. Please see Note 2 – Conversion and Stock Issuance for more information.

The accompanying unaudited consolidated financial statements and notes have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2023 ("2022 Form 10-K").

In the opinion of management, the unaudited consolidated financial statements include all adjustments considered necessary for a fair presentation of the unaudited interim consolidated financial statements in accordance with GAAP. All of these adjustments are of a normal, recurring nature. Such adjustments are the only adjustments included in the unaudited consolidated financial statements. Interim results are not necessarily indicative of results for a full year or any other period.

The unaudited consolidated financial statements include the accounts of the Company and its subsidiary. All material intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform with the current period presentation. The reclassifications had no effect on net income or stockholders’ equity. In preparing the unaudited consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the allowance for credit losses, the valuation of foreclosed real estate and the underlying collateral of individually analyzed loans, deferred tax assets, and the fair value of financial instruments.

On April 5, 2012, the Jumpstart Our Business Startups Act ("JOBS Act") was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an "emerging growth company" we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our consolidated financial statements may not be comparable to companies that comply with such new or revised accounting standards.

2.           Conversion and Stock Issuance

The Company, an Indiana corporation, was organized by Mid-Southern, M.H.C. (the “MHC") and the Bank in connection with the MHC’s plan of conversion from mutual to stock form of ownership (the "Conversion"). Upon consummation of the Conversion, which occurred on July 11, 2018, 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.

3.           Investment Securities

Investment securities have been classified in the consolidated balance sheets according to management’s intent. Debt securities held by the Company include U.S. Treasury and other U.S. government agency obligations,

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MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

mortgage-backed securities and other debt securities issued by the Government National Mortgage Association ("GNMA"), a U.S. government agency, mortgage-backed securities and collateralized mortgage obligations issued by the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"), which are government-sponsored enterprises. Mortgage-backed securities ("MBS") represent participating interests in pools of long-term first mortgage loans originated and serviced by the issuers of the securities. Collateralized mortgage obligations ("CMO") are complex mortgage-backed securities that restructure the cash flows and risks of the underlying mortgage collateral. The Company also holds debt securities issued by municipalities and political subdivisions of state and local governments.

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MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Investment securities at March 31, 2023 and December 31, 2022 are summarized as follows:

    

Gross

Gross

(In thousands)

Amortized

Unrealized

Unrealized

Fair

March 31, 2023

    

Cost

    

Gains

    

Losses

    

Value

Securities available for sale:

 

  

 

  

 

  

 

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

Agency MBS

$

12,950

$

$

1,742

$

11,208

Agency CMO

 

20,564

43

2,088

18,519

 

33,514

43

3,830

29,727

Other debt securities:

 

U.S. Treasury securities

 

9,843

316

9,527

U.S. Government agency obligations

 

1,983

130

1,853

Municipal obligations

 

68,206

74

7,828

60,452

80,032

74

8,274

71,832

Total securities available for sale

$

113,546

$

117

$

12,104

$

101,559

Securities held to maturity:

 

Mortgage-backed securities:

 

Agency MBS

$

13

$

$

$

13

Total securities held to maturity

$

13

$

$

$

13

December 31, 2022

 

Securities available for sale:

 

Mortgage-backed securities:

 

Agency MBS

$

13,257

$

$

1,868

$

11,389

Agency CMO

 

21,233

18

2,257

18,994

 

34,490

18

4,125

30,383

Other debt securities:

 

U.S. Treasury securities

 

9,840

401

9,439

U.S. Government agency obligations

 

1,996

183

1,813

Municipal obligations

 

73,442

18

9,744

63,716

85,278

18

10,328

74,968

Total securities available for sale

$

119,768

$

36

$

14,453

$

105,351

Securities held to maturity:

 

Mortgage-backed securities:

 

Agency MBS

$

17

$

$

$

17

Total securities held to maturity

$

17

$

$

$

17

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MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The amortized cost and fair value of debt securities as of March 31, 2023, by contractual maturity, are shown below. Expected maturities of MBS and CMO may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty.

Available for Sale

Held to Maturity

    

Amortized

    

Fair

    

Amortized

    

Fair

(In thousands)

Cost

Value

Cost

Value

Due in one year or less

$

4,586

$

4,481

$

$

Due after one year through five years

 

11,208

10,801

Due after five years through ten years

 

4,313

4,090

Due after ten years

 

59,925

52,460

 

80,032

71,832

MBS and CMO

 

33,514

29,727

13

13

$

113,546

$

101,559

$

13

$

13

Information pertaining to investment securities available for sale with gross unrealized losses at March 31, 2023, aggregated by investment category and the length of time that individual investment securities have been in a continuous position, follows.

    

Number of

    

    

    

Gross

(Dollars in thousands)

Investment

Fair

Unrealized

March 31, 2023

Positions

Value

Losses

Securities available for sale:

 

  

 

  

 

  

Continuous loss position less than 12 months:

 

  

 

  

 

  

Agency CMO

4

$

1,144

 

$

16

Municipal obligations

10

5,287

236

Total less than 12 months

14

6,431

252

Continuous loss position more than 12 months:

 

 

 

U.S. Treasury securities

 

6

 

9,527

 

316

U.S. Government agency obligations

 

1

 

1,852

 

130

Agency MBS

 

13

 

11,208

 

1,742

Agency CMO

 

15

 

15,948

 

2,072

Municipal obligations

 

82

 

45,997

 

7,592

Total more than 12 months

 

117

 

84,532

 

11,852

Total securities available for sale

 

131

$

90,963

$

12,104

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MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Information pertaining to investment securities available for sale with gross unrealized losses at December 31, 2022, aggregated by investment category and the length of time that individual investment securities have been in a continuous loss position, follows.

Number of

Gross

(Dollars in thousands)

Investment

Fair

Unrealized

December 31, 2022

    

Positions

    

Value

    

Losses

Securities available for sale:

 

  

 

  

 

  

Continuous loss position less than 12 months:

 

  

 

  

 

  

U.S. Treasury securities

6

$

9,439

$

401

U.S. Government agency obligations

1

1,812

183

Agency MBS

8

4,701

559

Agency CMO

8

4,212

204

Municipal obligations

 

89

46,971

6,309

Total less than 12 months

112

67,135

7,656

Continuous loss position more than 12 months:

 

Agency MBS

 

5

6,687

1,309

Agency CMO

 

12

13,357

2,053

Municipal obligations

 

25

12,588

3,435

Total more than 12 months

 

42

32,632

6,797

Total securities available for sale

 

154

$

99,767

$

14,453

At March 31, 2023, the Company had no debt securities in the held to maturity classification in a loss position. The debt securities available for sale in a loss position were 89.6% and 94.7% of the Company’s total available for sale securities portfolio at March 31, 2023 and December 31, 2022, respectively. All of the debt securities in a loss position at March 31, 2023 were backed by residential first mortgage loans or were obligations issued by federal or local government-sponsored enterprises. These unrealized losses occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase. The Company does not consider available-for-sale securities with unrealized losses at March 31, 2023 to be experiencing credit losses and recognized no resulting allowance for credit losses. It is more likely than not that the Company will not be required to sell these investments before recovery of the amortized cost basis, which may be the maturity dates of the securities.

During the three-month period ended March 31, 2023, the Company realized gross losses of $27,000 on the sale of available for sale municipal securities. There were no securities sales during the three-month period ended March 31, 2022.

At March 31, 2023, U.S. agency mortgage-backed available for sale investment securities with a par value of $28.5 million were pledged as collateral for an advance from the Federal Reserve through the Bank Term Funding Program (“BTFP”). There were no investment securities pledged as collateral for any purpose as of December 31, 2022.

4.           Loans and Allowance for Credit Losses

The Company’s loan and allowance for credit loss policies are as follows:

Loans Held for Investment. Loans are stated at unpaid principal balances, less net deferred loan fees and the allowance for credit losses. The Company grants real estate mortgages, commercial business and consumer loans.

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MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A substantial portion of the loan portfolio is represented by mortgage loans to customers in southern Indiana. The ability of the Company’s customers to honor their contracts is dependent upon the real estate and general economic conditions in this area.

Loan origination and commitment fees, as well as certain direct costs of underwriting and closing loans, are deferred and amortized as a yield adjustment to interest income over the lives of the related loans using the interest method. Amortization of net deferred loan fees is discontinued when a loan is placed on nonaccrual status.

Nonaccrual Loans. The recognition of income on a loan is discontinued and previously accrued interest is reversed when interest or principal payments become 90 days past due unless, in the opinion of management, the outstanding interest remains collectible. Past due status is determined based on contractual terms. Generally, by applying the cash receipts method, interest income is subsequently recognized only as received until the loan is returned to accrual status. The cash receipts method is used when the likelihood of further loss on the loan is remote. Otherwise, the Company applies the cost recovery method and applies all payments as a reduction of the unpaid principal balance until the loan qualifies for return to accrual status. Interest income on nonaccrual loans is recognized using the cost recovery method, unless the likelihood of further loss on the loan is remote.

A loan is restored to accrual status when all principal and interest payments are brought current and the borrower has demonstrated the ability to make future payments of principal and interest as scheduled, which generally requires that the borrower demonstrate a period of performance of at least six consecutive months.

Allowance for Credit Losses on Loans. The allowance for credit losses on loans is established as losses are estimated to have occurred through a provision for credit losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

On January 1, 2023, the Company implemented Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326) as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2022-02 (collectively “ASC 326”), commonly referred to as the current expected credit loss methodology (“CECL”).  Under the CECL model, the allowance for credit losses on loans represents a valuation allowance estimated at each balance sheet date in accordance with GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loan portfolio. As a result, the opening balances for the allowance for credit losses increased by $557,000 as of January 1, 2023. The adoption reduced the Company’s retained earnings on a tax-effected basis of $425,000, with no impact on earnings.

The Company measures expected credit losses for its portfolio segments utilizing the Weighted Average Remaining Maturity (“WARM”) allowance for credit losses methodology. The WARM methodology uses an average loss rate for each loan segment and applies that rate to future expected outstanding balances of that segment. The Company selected the WARM methodology given the loan portfolio’s current size and complexity. The Company has elected to exclude accrued interest receivable and net deferred fees from its calculation of the allowance for credit losses.

The Company uses a disciplined process and methodology to evaluate the allowance for credit losses on loans on at least a quarterly basis that is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

-14-

Table of Contents

MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The allowance consists of specific and general components. The specific component relates to loans that are individually evaluated or loans otherwise classified as doubtful or substandard. For such loans that are classified as individually analyzed, an allowance is established when the discounted cash flows or collateral value of the individually analyzed loan is lower than the carrying value of that loan.

The general component covers non-classified loans and classified loans that are not individually analyzed. Such loans are pooled by portfolio segment and losses are modeled using annualized historical loss experience adjusted for qualitative factors. The historical loss experience is determined by portfolio segment and is based on the Company’s actual loss history since 2008 unless the historical loss experience is not considered indicative of the level of risk in the remaining balance of a particular portfolio segment, in which case an adjustment is determined by management. The Company’s historical loss experience is then adjusted for qualitative factors that are reviewed on a quarterly basis.

Management’s determination of the allowance for credit losses on loans considers changes and trends in the following qualitative loss factors:  lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices and management experience, national and local economic conditions, new loan trends, past due and nonaccrual loans, loan reviews, collateral values, credit concentrations and other internal and external factors such as competition, legal and regulatory changes. Each loan pool’s historical loss rate is adjusted based on positive or negative changes in the qualitative loss factor. This adjustment determines the adjusted loss rate used in management’s allowance for credit loss adequacy calculation.

Management exercises significant judgment in evaluating the relevant historical loss experience and the qualitative factors. Management also monitors the differences between estimated and actual incurred loan losses for individually analyzed loans in order to evaluate the effectiveness of the estimation process and make any changes in the methodology as necessary.

The following portfolio segments are considered in the allowance for credit losses analysis:  one-to-four family residential real estate, multi-family residential real estate, construction, commercial real estate, commercial business, and consumer loans.

Residential real estate loans primarily consist of loans to individuals for the purchase or refinance of their primary residence, with a smaller portion of the segment secured by non-owner-occupied residential investment properties and multi-family residential investment properties. Also, included within the residential real estate loan portfolio are home equity loans and junior lien loans, which are secured by liens on the borrower’s personal residence. The risks associated with residential real estate loans are closely correlated to the local housing market and general economic conditions, as repayment of the loans is primarily dependent on the borrower’s or tenant’s personal cash flow and employment status.

The Company’s construction loan portfolio consists of single-family residential properties, multi-family properties and commercial projects, and includes both owner-occupied and speculative investment properties. Risks inherent in construction lending are related to the market value of the property held as collateral, the cost and timing of constructing or improving a property, the borrower’s ability to use funds generated by a project to service a loan until a project is completed, movements in interest rates and the real estate market during the construction phase, and the ability of the borrower to obtain permanent financing.

Commercial real estate loans are comprised of loans secured by various types of collateral including office buildings, warehouses, retail space and mixed-use buildings located in the Company’s primary lending area. Risks related to commercial real estate lending are related to the market value of the property taken as collateral, the underlying cash flows and general economic condition of the local real estate market. Repayment of these loans is generally dependent on the ability of the borrower to attract tenants at lease rates or general business

-15-

Table of Contents

MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

operating cash flows that provide for adequate debt service and can be impacted by local economic conditions which impact vacancy rates and the general level of business activity. The Company generally obtains loan guarantees from financially capable parties for commercial real estate loans.

Commercial business loans include lines of credit to businesses, term loans and letters of credit secured by business assets such as equipment, accounts receivable, inventory, or other assets excluding real estate and are generally made to finance capital expenditures or fund operations. Commercial loans contain risks related to the value of the collateral securing the loan and the repayment is primarily dependent upon the financial success and viability of the borrower. As with commercial real estate loans, the Company generally obtains loan guarantees from financially capable parties for commercial business loans.

Consumer loans consist primarily of home improvement loans, automobile and truck loans, boat loans, mobile home loans, loans secured by savings deposits, and other personal loans. The risks associated with these loans are related to the local housing market and local economic conditions including the unemployment level.

Allowance for Credit Losses on Unfunded Loan Commitments. The Company records an allowance for credit losses on unfunded loan commitments through a provision for credit losses. The allowance for credit losses on unfunded loan commitments is estimated by loan segment under the CECL model using the same methodologies as funded portfolio loans, taking into consideration the likelihood that funding will occur and is included in accrued expenses and other liabilities on the Company’s consolidated balance sheets. Upon implementation of ASC 326 on January 1, 2023, the Company recorded an allowance for credit losses on unfunded loan commitments of $73,000. The adoption reduced the Company’s retained earnings on a tax-effected basis of $56,000, with no impact on earnings.

The following table summarizes the total impact of the adoption of ASC 326 on January 1, 2023:

January 1 ,2023

    

As reported under

    

Pre-ASC 326

    

Impact of ASC 326

(In thousands)

ASC 326

Adoption

Adoption

Allowance for credit losses on loans:

 

  

 

  

 

  

One-to-four family residential

$

717

$

705

$

12

Multi-family residential

 

389

 

86

 

303

Construction

101

18

83

Commercial real estate

 

775

 

650

 

125

Commercial business

 

207

 

199

 

8

Consumer

 

60

 

34

 

26

Total allowance for credit losses on loans

$

2,249

$

1,692

$

557

Total allowance for credit losses on unfunded loan commitments

$

73

$

$

73

Loan Charge-Offs. For portfolio segments other than consumer loans, the Company’s practice is to charge-off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrower’s failure to meet repayment terms, the borrower’s deteriorating or deteriorated financial condition, the depreciation of the underlying collateral, the loan’s classification as a loss by regulatory examiners, or for other reasons. A partial charge-off is recorded on a loan when the collectability of a portion of the loan has been confirmed, such as when a loan is discharged in bankruptcy, the collateral is liquidated, a loan is restructured at a reduced principal balance, or other identifiable events that lead management to determine the full principal balance of the loan will not be repaid. A specific reserve is recognized as a component of the allowance for estimated losses on individually analyzed loans. Partial charge-offs on nonperforming and individually analyzed loans are included in the Company’s historical loss experience used to estimate the general component of the allowance for credit

-16-

Table of Contents

MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

losses as discussed above. Specific reserves are not considered charge-offs in management’s evaluation of the general component of the allowance for credit losses because they are estimates and the outcome of the loan relationship is undetermined.

Consumer loans not secured by real estate are typically charged off at 90 days past due, or earlier if deemed uncollectible, unless the loans are in the process of collection. Overdrafts are charged off after 60 days past due. A charge-off is typically recorded on a loan secured by real estate when the property is foreclosed upon when the carrying value of the loan exceeds the property’s fair value less the estimated costs to sell.

Individually Analyzed Loans. A loan is individually analyzed when, based on current information and events, it is probable that the Company 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 include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not individually analyzed. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Individually analyzed loans are measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Values for individually evaluated collateral dependent loans are generally based on appraisals obtained from independent licensed real estate appraisers, with adjustments applied for estimated costs to sell the property, costs to complete unfinished or repair damaged property and other factors. New appraisals or valuations are generally obtained for all significant properties (if the value is estimated to exceed $100,000) when a loan is individually analyzed. Subsequent appraisals are obtained or an internal evaluation is prepared annually, or more frequently if management believes there has been a significant change in the market value of a collateral property securing a collateral dependent individually analyzed loan. In instances where it is not deemed necessary to obtain a new appraisal, management bases its evaluation on the original appraisal with adjustments for current conditions based on management’s assessment of market factors and inspection of the property.

At March 31, 2023, the Company had $16,000 in foreclosed residential real estate properties where physical possession has occurred. The Company did not have any foreclosed residential real estate properties where physical possession had occurred at December 31, 2022.

At March 31, 2023, there were five loans with an amortized cost of $168,000 that are secured by residential real estate property for which formal foreclosure proceedings are in process. The amortized cost of loans collateralized by residential real estate property in the process of foreclosure was $116,000 at December 31, 2022.

-17-

Table of Contents

MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Loans at March 31, 2023 and December 31, 2022 consisted of the following:

    

March 31, 

    

December 31, 

(In thousands)

2023

2022

Real estate mortgage loans:

 

  

 

  

One-to-four family residential

$

66,100

$

64,747

Multi-family residential

 

8,660

 

8,271

Construction

4,559

7,847

Commercial real estate

 

54,349

 

48,590

Commercial business loans

 

14,143

 

14,675

Consumer loans

 

1,865

 

2,077

Total loans

 

149,676

 

146,207

Deferred loan origination fees and costs, net

 

(154)

 

(136)

Allowance for credit losses on loans

 

(2,324)

 

(1,692)

Loans, net

$

147,198

$

144,379

-18-

Table of Contents

MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides the components of the Company’s recorded investment in loans at December 31, 2022:

    

One-to-Four

    

    

    

    

    

    

Family

Multi-Family

Commercial

Commercial 

Residential

Residential

Construction

Real Estate

Business

Consumer 

Total

(In thousands)

Recorded Investment in Loans:

Principal loan balance

$

64,747

$

8,271

$

7,847

$

48,590

$

14,675

$

2,077

$

146,207

Accrued interest receivable

 

178

 

14

19

182

36

8

437

Net deferred loan fees/costs

 

13

 

(24)

(32)

(106)

(24)

37

(136)

Total

$

64,938

$

8,261

$

7,834

$

48,666

$

14,687

$

2,122

$

146,508

Recorded Investment in Loans as Evaluated:

 

 

Individually evaluated

$

490

$

$

$

125

$

279

$

$

894

Collectively evaluated

 

64,448

 

8,261

7,834

48,541

14,408

2,122

145,614

Total

$

64,938

$

8,261

$

7,834

$

48,666

$

14,687

$

2,122

$

146,508

An analysis of the allowance for credit losses on loans as of December 31, 2022 is as follows:

    

One-to-Four

    

    

    

    

    

    

Family

Multi-Family

Commercial

Commercial 

Residential

Residential

Construction

Real Estate

Business

Consumer 

Total

(In thousands)

Ending allowance balance attributable to loans:

 

 

Individually evaluated

$

21

$

$

$

$

14

$

$

35

Collectively evaluated

 

684

 

86

18

650

185

34

1,657

Total

$

705

$

86

$

18

$

650

$

199

$

34

$

1,692

-19-

Table of Contents

MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

An analysis of the changes in the allowance for credit losses on loans for the three months ended March 31, 2023 is as follows:

    

One-to-Four

    

    

    

    

    

    

Family

Multi-Family

Commercial

Commercial

Residential

Residential

Construction

Real Estate

Business

Consumer

Total

(In thousands)

Allowance for credit losses on loans:

Beginning balance

$

705

$

86

$

18

$

650

$

199

$

34

$

1,692

Impact of adopting ASC 326

 

12

303

83

125

8

26

557

Provisions

 

4

25

(41)

104

(13)

(1)

78

Charge-offs

 

(5)

(5)

Recoveries

 

2

2

 

Ending balance

$

723

$

414

$

60

$

879

$

194

$

54

$

2,324

An analysis of the changes in the allowance for credit losses on loans for the three months ended March 31, 2022 is as follows:

    

One-to-Four

    

    

    

    

    

    

Family

Multi-Family

Commercial

Commercial

Residential

Residential

Construction

Real Estate

Business

Consumer

Total

(In thousands)

Allowance for credit losses on loans:

Beginning balance

$

873

$

102

$

25

$

363

$

127

$

33

$

1,523

Provisions

 

(93)

(8)

(5)

112

(7)

1

Charge-offs

 

(4)

(4)

Recoveries

 

2

1

3

 

Ending balance

$

782

$

94

$

20

$

475

$

120

$

31

$

1,522

The following table summarizes the amortized cost and allowance for credit losses allocated to loans which are collaterally dependent to determine expected credit losses as of March 31, 2023:

    

Allocated

    

Real Estate

    

Other

    

Total

    

Allowance

(In thousands)

One-to-four family residential

$

464

$

$

464

$

21

Commercial real estate

 

113

113

Commercial business

 

261

261

10

Total

$

577

$

261

$

838

$

31

-20-

Table of Contents

MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the Company’s individually analyzed loans for the three-month period ended March 31, 2022. The Company did not recognize any interest income on individually analyzed loans using the cash receipts method of accounting for the three-month period ended March 31, 2022.

Three Months Ended

March 31, 2022

Average

Interest

Recorded

Income

    

Investment

    

Recognized

Loans with no related allowance recorded:

One-to-four family residential

$

717

$

Commercial real estate

100

1

Commercial business

Consumer

1

$

818

$

1

Loans with an allowance recorded:

One-to-four family residential

$

245

$

3

Commercial real estate

68

1

Commercial business

326

4

Consumer

$

639

$

8

Total:

One-to-four family residential

$

962

$

3

Commercial real estate

168

2

Commercial business

326

4

Consumer

1

$

1,457

$

9

-21-

Table of Contents

MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the Company’s individually analyzed loans as of December 31, 2022:

    

At December 31, 2022

Unpaid

Recorded

Principal

Related

    

Investment

    

Balance

    

Allowance

(In thousands)

Loans with no related allowance recorded:

 

  

 

  

 

  

One-to-four family residential

$

762

$

820

$

Commercial real estate

 

60

 

60

 

Commercial business

 

 

 

Consumer

 

 

 

$

822

$

880

$

Loans with an allowance recorded:

 

 

 

  

One-to-four family residential

$

267

$

274

$

21

Commercial real estate

 

66

 

68

 

Commercial business

 

279

 

279

 

14

Consumer

 

 

 

$

612

$

621

$

35

Total:

 

 

 

One-to-four family residential

$

1,029

$

1,094

$

21

Commercial real estate

 

126

 

128

 

Commercial business

 

279

 

279

 

14

Consumer

 

 

 

$

1,434

$

1,501

$

35

The following table presents the amortized cost of nonaccrual loans and loans past due over 90 days and still accruing at March 31, 2023 and December 31, 2022:

At March 31, 2023

At December 31, 2022

Nonaccrual

Loans 90+

Nonaccrual

Loans 90+

Loans

Days

Loans

Days

Nonaccrual

Without an

Past Due

Nonaccrual

Without an

Past Due

    

Loans

    

Allowance

    

Still Accruing

    

Loans

    

Allowance

    

Still Accruing

 

(In thousands)

One-to-four family residential

$

612

$

171

    

$

    

$

732

    

$

193

    

$

Construction

 

146

 

 

 

 

 

Commercial real estate

 

320

 

 

 

 

 

Total

$

1,078

$

171

$

$

732

$

193

$

-22-

Table of Contents

MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present the aging of the amortized cost of loans at March 31, 2023:

Over

Total

3059 Days

6089 Days

90 Days

Total

Accruing

Nonaccrual

Total

    

Current

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Loans

    

Loans

    

Loans

(In thousands)

March 31, 2023

One-to-four family residential

$

65,022

$

466

$

$

$

466

$

65,488

$

612

$

66,100

Multi-family residential

 

8,660

 

 

 

 

 

8,660

 

 

8,660

Construction

 

4,413

 

 

 

 

 

4,413

 

146

 

4,559

Commercial real estate

 

53,976

 

53

 

 

 

53

 

54,029

 

320

 

54,349

Commercial business

 

14,143

 

 

 

 

 

14,143

 

 

14,143

Consumer

 

1,846

 

19

 

 

 

19

 

1,865

 

 

1,865

Total

$

148,060

$

538

$

$

$

538

$

148,598

$

1,078

$

149,676

The following tables present the aging of the recorded investment in loans at December 31, 2022:

Over

Total

3059 Days

6089 Days

90 Days

Total

Accruing

Nonaccrual

Total

    

Current

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Loans

    

Loans

    

Loans

(In thousands)

December 31, 2022

One-to-four family residential

$

63,610

$

596

$

$

$

596

$

64,206

$

732

$

64,938

Multi-family residential

 

8,261

 

 

 

 

 

8,261

 

 

8,261

Construction

 

7,834

 

 

 

 

 

7,834

 

 

7,834

Commercial real estate

 

48,222

 

444

 

 

 

444

 

48,666

 

 

48,666

Commercial business

 

14,676

 

11

 

 

 

11

 

14,687

 

 

14,687

Consumer

 

2,122

 

 

 

 

 

2,122

 

 

2,122

Total

$

144,725

$

1,051

$

$

$

1,051

$

145,776

$

732

$

146,508

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, public information, historical payment experience, credit documentation, and current economic trends, among other factors. The Company classifies loans based on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings:

Pass:  Loans not meeting the criteria below are considered to be pass rated loans.

Special Mention:  Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard:  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

-23-

Table of Contents

MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Doubtful:  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss:  Loans classified as loss are considered uncollectible and of such little value that their continuance on the institution’s books as an asset is not warranted.

-24-

Table of Contents

MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table shows the amortized cost of loans, segregated by portfolio segment, risk category and year of origination as of March 31, 2023 and gross charge-offs for the three months ended March 31, 2023:

Revolving

2023

2022

2021

2020

2019

Prior

Loans

Total

(In thousands)

One-to-four family residential

Pass

$

1,611

$

13,417

$

10,554

$

6,491

$

2,782

$

26,300

$

4,333

$

65,488

Special mention

 

Substandard

 

 

612

612

Doubtful

 

Loss

 

 

Total one-to-four family residential

1,611

13,417

10,554

6,491

2,782

26,912

4,333

66,100

Current period gross charge-offs

Multi-family residential

Pass

498

2,395

3,107

2,210

450

8,660

Special mention

 

Substandard

 

 

Doubtful

 

Loss

 

 

Total multi-family residential

498

2,395

3,107

2,210

450

8,660

Current period gross charge-offs

Construction

Pass

1,246

481

2,686

4,413

Special mention

 

Substandard

 

 

146

146

Doubtful

 

Loss

 

 

Total construction

1,246

481

146

2,686

4,559

Current period gross charge-offs

Commercial real estate

Pass

3,260

19,101

8,796

4,389

3,085

8,084

3,931

50,646

Special mention

 

3,383

3,383

Substandard

 

 

320

320

Doubtful

 

Loss

 

 

Total commercial real estate

3,260

19,101

12,499

4,389

3,085

8,084

3,931

54,349

Current period gross charge-offs

Commercial business

Pass

490

1,842

7,783

260

192

335

3,241

14,143

Special mention

 

Substandard

 

 

Doubtful

 

Loss

 

 

Total commercial business

490

1,842

7,783

260

192

335

3,241

14,143

Current period gross charge-offs

Consumer

Pass

188

763

678

110

48

16

62

1,865

Special mention

 

Substandard

 

 

Doubtful

 

Loss

 

 

Total consumer

188

763

678

110

48

16

62

1,865

Current period gross charge-offs

5

5

Total loans

Pass

$

7,293

$

37,999

$

30,918

$

13,460

$

6,107

$

35,185

$

14,253

$

145,215

Special mention

 

3,383

3,383

Substandard

 

 

466

612

1,078

Doubtful

 

Loss

 

 

Total loans

$

7,293

$

37,999

$

34,767

$

13,460

$

6,107

$

35,797

$

14,253

$

149,676

Current period gross charge-offs

$

$

$

$

$

$

$

5

$

5

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Table of Contents

MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the recorded investment in loans by risk category as of December 31, 2022:

    

One-to-

    

Multi-

    

    

    

    

    

Four Family

Family

Commercial

Commercial

Residential

Residential

Construction

Real Estate

Business

Consumer

Total

(In thousands)

Pass

$

64,206

$

8,261

$

7,834

$

45,256

$

14,687

$

2,122

$

142,366

Special mention

 

 

 

 

3,410

 

 

 

3,410

Substandard

 

732

 

 

 

 

 

 

732

Doubtful

 

 

 

 

 

 

 

Loss

 

 

 

 

 

 

 

Total

$

64,938

$

8,261

$

7,834

$

48,666

$

14,687

$

2,122

$

146,508

Loan Modification Disclosures Pursuant to ASU 2022-02. On January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments – Credit Losses (Topic 326) – Troubled Debt Restructurings and Vintage Disclosures, which introduced new reporting requirements for modifications of loans to borrowers experiencing financial difficulty. The adoption of ASU 2022-02 was applied on a prospective basis. A modification to a loan may arise in order to alleviate temporary difficulties in the borrower’s financial condition and/or constraints on the borrower’s ability to repay the loan, and to minimize potential losses to the Company. ASU 2022-02 requires that certain types of modifications be reported, including principal forgiveness, interest rate reduction, other-than-insignificant payment delay, term extension or any combination thereof.

There were no loans that were both experiencing financial difficulty and modified as defined under ASU 2022-02 during the three months ended March 31, 2023.

Troubled Debt Restructuring (“TDR”) Disclosures Prior to the Adoption of ASU 2022-02. Modification of a loan is considered to be a TDR if the debtor is experiencing financial difficulties and the Company grants a concession to the debtor that it would not otherwise consider. By granting the concession, the Company expects to obtain more cash or other value from the debtor, or to increase the probability of receipt, than would be expected by not granting the concession. The concession may include, but is not limited to, reduction of the stated interest rate of the loan, reduction of accrued interest, extension of the maturity date or reduction of the face amount of the debt. A concession will be granted when, as a result of the restructuring, the Company does not expect to collect all amounts due, including interest at the original stated rate. A concession may also be granted if the debtor is not able to access funds elsewhere at a market rate for debt with similar risk characteristics as the restructured debt. The Company’s determination of whether a loan modification is a TDR considers the individual facts and circumstances surrounding each modification.

A TDR can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accrual status, depending on the individual facts and circumstances of the restructuring. A TDR on nonaccrual status is restored to accrual status when the borrower has demonstrated the ability to make future payments in accordance with the restructured terms, including consistent and timely payments for at least six consecutive months in accordance with the restructured terms.

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MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the Company’s TDRs by accrual status as of December 31, 2022:

December 31, 2022

Related

Accruing

Nonaccrual

Total

Allowance

(In thousands)

One-to-four family residential

$

298

$

85

$

383

$

21

Commercial real estate

 

125

 

 

125

 

Commercial business

 

279

 

 

279

 

14

Total

$

702

$

85

$

787

$

35

At December 31, 2022 there were no commitments to lend additional funds to debtors whose loan terms have been modified in a TDR (both accruing and nonaccruing).

There were no TDRs that were restructured during the three months ended March 31, 2022.

There were no principal charge-offs recorded as a result of TDRs and there was no specific allowance for loan credit losses related to TDRs modified during the three-month period ended March 31, 2022.

There were no TDRs modified within the previous 12 months for which there was a subsequent payment default (defined as the loan becoming more than 90 days past due, being moved to nonaccrual status, or the collateral being foreclosed upon) during the three-month period ended March 31, 2022. In the event that a TDR subsequently defaults, the Company evaluates the restructuring for possible impairment. As a result, the related allowance for credit losses may be increased or charge-offs may be taken to reduce the carrying amount of the loan.

5.           Advances

At March 31, 2023 and December 31, 2022, the Company had $25.0 million in advances outstanding from the Federal Reserve and $29.0 million in advances outstanding from the FHLB, respectively. On June 27, 2019, the Company borrowed $10.0 million from the FHLB as a putable fixed-rate advance with an original maturity date of June 27, 2024 and bearing an interest rate of 1.73%. On June 27, 2022, the FHLB exercised its put option on this advance.

During the three-month period ended March 31, 2023, the Company utilized a series of short-term fixed-rate bullet advances from the FHLB in order to meet daily liquidity requirements and to fund growth in earning assets. The advances had an average term of six days. The following table sets forth information on the short-term FHLB advances during the periods presented:

Three Months Ended

    

March 31, 

    

2023

    

2022

(Dollars in thousands)

Outstanding at period-end

$

$

Average amount outstanding

20,422

Maximum amount outstanding at any month-end

26,000

Weighted average interest rate:

 

 

During period

4.57

%

End of period

%

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MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In addition, during the three-month period ended March 31, 2023, the Company utilized a $5.0 million line of credit with the FHLB. The following table sets forth information on the FHLB line of credit advances during the periods presented:

Three Months Ended

    

March 31, 

    

2023

    

2022

(Dollars in thousands)

Outstanding at period-end

$

$

Average amount outstanding

5

Maximum amount outstanding at any month-end

339

Weighted average interest rate:

 

 

During period

4.77

%

End of period

%

The advances are secured under a blanket collateral agreement with the FHLB. At March 31, 2023, the carrying value of mortgage loans pledged as security for advances was $61.8 million.

On March 12, 2023, the Federal Reserve created the BTFP to provide additional funding available to eligible depository institutions. The BTFP offers loans of up to one year in length to banks, savings associations, credit unions and other depository institutions which pledge collateral, such as U.S. Treasuries, U.S. agency securities and U.S. agency mortgage-backed securities. The collateral is valued at par, and advances under this program do not include any fees or prepayment penalties. With the introduction of the BTFP, the Company pledged as collateral U.S. agency mortgage-backed securities and borrowed $25.0 million from the BTFP at a fixed rate of 4.37% for a one-year period on March 20, 2023. Upon receipt of this funding from the BTFP, the Company repaid its advance from the Federal Home Loan Bank of Indianapolis. At March 31, 2023, the pledged securities had a par value of $28.5 million.

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MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

6.           Supplemental Disclosure for Earnings Per Share

Nonvested restricted stock shares and unallocated ESOP shares are not considered as outstanding for purposes of computing weighted average common shares outstanding. Potential dilutive common shares are excluded from the computation of diluted net income per common share in the periods where the effect would be antidilutive. Excluded from the computation of diluted net income per common share were weighted-average antidilutive shares totaling 89,403 for the three months ended March 31, 2023. No stock options for common stock and no restricted stock awards were excluded from the calculation of diluted net income per common share because their effect was antidilutive for the three-month period ended March 31, 2022.

Three Months Ended

    

March 31, 

    

2023

    

2022

(Dollars in thousands, except per share data)

Basic

 

  

 

  

Earnings:

 

  

 

  

Net income

$

340

$

467

Shares:

 

 

Weighted average common shares outstanding

 

2,700,728

 

2,811,781

Net income per common share, basic

$

0.13

$

0.17

Diluted

 

 

Earnings:

 

 

Net income

$

340

$

467

Shares:

 

 

 

 

Weighted average common shares outstanding

 

2,700,728

 

2,811,781

Add: Dilutive effect of stock options

 

101

 

2,519

Add: Dilutive effect of restricted stock

 

 

2,167

Weighted average common shares outstanding, as adjusted

 

2,700,829

 

2,816,467

Net income per common share, diluted

$

0.13

$

0.17

7.           Employee Stock Ownership Plan

In connection with the Conversion, the Bank established a leveraged ESOP for eligible employees of the Company and the Bank. The ESOP trust purchased 204,789 shares of Company common stock at the initial public offering price of $10.00 per share financed by a 20-year term loan with the Company. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Company’s discretionary contributions to the ESOP and earnings on ESOP assets. The employer loan and the related interest income are not recognized in the consolidated financial statements as the debt is serviced by employer contributions. Dividends payable on allocated shares are charged to retained earnings and are satisfied by the allocation of cash dividends to participant accounts. Dividends payable on unallocated shares are not considered dividends for financial reporting purposes. Shares held by the ESOP trust are held in a suspense account and

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Table of Contents

MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

allocated to participant accounts as principal and interest payments are made by the ESOP to the Company. Payments of principal and interest are due annually on December 31st, the Company’s fiscal year end.

As shares are committed to be released for allocation to participant accounts from collateral, the Company reports compensation expense equal to the average fair value of shares committed to be released during the year with a corresponding credit to stockholders’ equity and the shares become outstanding for earnings per share computations. The compensation expense is accrued throughout the year.

Compensation expense recognized for the three-month period ended March 31, 2023 was $34,000. Compensation expense recognized for the three-month period ended March 31, 2022 was $39,000. The ESOP trust held 52,430 allocated shares and 152,359 unallocated shares of Company common stock at March 31, 2023. The fair value of the unallocated shares was $1.7 million at March 31, 2023.

8.            Stock-based Compensation Plans

The Company’s stock-based compensation plans are described below.

2010 Equity Incentive Plan

The Bank had an equity incentive plan (the “2010 Plan”) adopted on July 27, 2010 which was assumed by the Company in connection with the Conversion. Under the 2010 Plan, 127,849 shares of common stock, as adjusted for the Conversion exchange ratio, were approved for awards of stock options and restricted stock. As of March 31, 2023, on an adjusted basis, awards for stock options totaling 78,010 shares and awards for restricted stock totaling 34,250 shares of Company common stock have been granted, net of any forfeitures, to participants in the 2010 Plan. No additional awards may be made under the 2010 Plan.

2019 Equity Incentive Plan

In September 2019, the Company’s stockholders approved the 2019 Equity Incentive Plan (the “2019 Plan”) which provides for the award of stock options and restricted stock. Under the 2019 Plan, the Compensation Committee may grant stock options that, upon exercise, result in the issuance of 255,987 shares of common stock and may grant 102,395 shares of restricted stock. At March 31, 2023, awards for stock options totaling 20,900 shares and awards for restricted stock totaling 48,319 shares of the Company common stock have been granted to participants in the 2019 Plan.

The vesting dates for stock option awards are determined by the Compensation Committee appointed by the board of directors. All unvested options become exercisable upon an option holder’s death or disability and in the event of a change in control. Option prices may not be less than the fair market value of the underlying stock at the date of the grant of the award. Restricted stock awards generally vest over a period of five years. The Plan provides that unvested restricted stock awards become fully vested upon a holder’s death or disability and in the event of a change in control. Compensation expense is recognized over the requisite service period with a corresponding credit to stockholders' equity.  The requisite service period for restricted shares is the vesting period.

The fair value of stock options granted is determined at the date of grant using the Black-Scholes option pricing model. Expected volatility is based on historical volatility of the Company's stock. The expected term of options granted represents the period of time that options are expected to be outstanding and is based on the average of the vesting term and the original contractual term as the Company does not have sufficient historical exercise data to provide a reasonable basis on which to estimate the expected term due to the limited period of time its common shares have been publicly traded. The risk-free rate for the expected life of the options is based on the U.S. Treasury yield curve in effect at the time of grant.

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Table of Contents

MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A summary of option activity as of March 31, 2023, and changes during the three-month period then ended is presented below:

    

    

    

Weighted

    

Average

Number

Weighted

Remaining

Aggregate

of

Average Exercise

Contractual

Intrinsic

 

Shares

 

Price

 

Term

 

Value

Outstanding at beginning of year

 

89,637

 

$

13.38

Granted

 

Exercised

 

Forfeited or expired

 

Outstanding at end of period

 

89,637

 

$

13.38

7.3

 

$

1,000

Vested and expected to vest

 

89,637

 

$

13.38

7.3

 

$

1,000

Exercisable at end of period

 

60,438

 

$

13.37

6.9

 

$

1,000

For the three-month periods ended March 31, 2023 and 2022, the Company recognized $16,000 and $13,000, respectively, in compensation expense related to the stock option plan. At March 31, 2023, there was $94,000 of unrecognized compensation expense related to nonvested stock options. The compensation expense is expected to be recognized over a weighted average period of 2.2 years.

A summary of the activity for the Company’s nonvested restricted shares as of March 31, 2023 and changes during the three-month period then ended is presented below:

Weighted

Number

Average

of

Grant-Date

    

Shares

    

Fair Value

Nonvested at beginning of year

 

32,839

 

$

14.05

Granted

 

Vested

 

Forfeited

 

Nonvested at end of period

 

32,839

 

$

14.05

For the three-month periods ended March 31, 2023 and 2022, the Company recognized $51,000 and $41,000, respectively, in compensation expense related to the restricted stock plans. At March 31, 2023, unrecognized compensation expense related to nonvested restricted shares was $407,000. The compensation expense is expected to be recognized over the remaining weighted average vesting period of 2.5 years.

9.           Fair Value Measurements

FASB ASC Topic 820, Fair Value Measurement, provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC Topic 820 are described as follows:

-31-

Table of Contents

MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Level 1:    Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets

Level 2:     Inputs to the valuation methodology include quoted market prices for similar assets or liabilities in active markets; quoted market prices for identical or similar assets or liabilities in markets that are not active; or inputs that are derived principally from or can be corroborated by observable market data by correlation or other means.

Level 3:     Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth on the following page. These valuation methodologies were applied to all of the Company’s financial and nonfinancial assets carried at fair value or the lower of cost or fair value. The table below presents the balances of assets measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022. There were no assets measured at fair value on a nonrecurring basis as of March 31, 2023 and December 31, 2022. The Company had no liabilities measured at fair value as of March 31, 2023 and December 31, 2022.

Carrying Value

    

Level 1

    

Level 2

    

Level 3

    

Total

(In thousands)

March 31, 2023

 

  

 

  

 

  

 

  

Assets Measured on a Recurring Basis

 

  

 

  

 

  

 

  

Securities available for sale:

 

  

 

  

 

  

 

  

Agency MBS

$

$

11,208

$

$

11,208

Agency CMO

 

 

18,519

 

 

18,519

U.S. Treasury securities

9,527

9,527

U.S. Government agency obligations

1,853

1,853

Municipal obligations

 

 

60,452

 

 

60,452

Total securities available for sale

$

$

101,559

$

$

101,559

December 31, 2022

 

  

 

  

 

  

 

  

Assets Measured on a Recurring Basis

 

  

 

  

 

  

 

  

Securities available for sale:

 

  

 

  

 

  

 

  

Agency MBS

$

$

11,389

$

$

11,389

Agency CMO

 

 

18,994

 

 

18,994

U.S. Treasury securities

 

 

9,439

 

 

9,439

U.S. Government agency obligations

 

 

1,813

 

 

1,813

Municipal obligations

 

 

63,716

 

 

63,716

Total securities available for sale

$

$

105,351

$

$

105,351

-32-

Table of Contents

MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Fair value is based upon quoted market prices, where available. If quoted market prices are not available, fair value is based on internally developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters or a matrix pricing model that employs the Bond Market Association’s standard calculations for cash flow and price/yield analysis and observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value, or the lower of cost or fair value. These adjustments may include unobservable parameters. Any such valuation adjustments have been applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities Available for Sale. Securities classified as available for sale are reported at fair value on a recurring basis. These securities are classified as Level 1 of the valuation hierarchy where quoted market prices from reputable third-party brokers are available in an active market. If quoted market prices are not available, the Company obtains fair value measurements from an independent pricing service. These securities are reported using Level 2 inputs and the fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. Changes in fair value of securities available for sale are recorded in other comprehensive income, net of income tax effect.

There have been no changes in the valuation techniques and related inputs used for assets measured at fair value on a recurring and nonrecurring basis during the three months ended March 31, 2023 and 2022. There were no transfers into or out of the Company’s Level 3 financial assets for the three-month periods ended March 31, 2023 and 2022.

GAAP requires disclosure of the fair value of financial assets and financial liabilities, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not

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Table of Contents

MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

represent the underlying value of the Company. The estimated fair values of the Company’s financial instruments are as follows:

Carrying

Fair Value Measurements Using

    

Value

    

Level 1

    

Level 2

    

Level 3

(In thousands)

March 31, 2023

 

  

 

  

 

  

 

  

Financial assets:

 

  

 

  

 

  

 

  

Cash and cash equivalents

$

4,471

$

4,471

$

$

Securities available for sale

 

101,559

 

 

101,559

 

Securities held to maturity

 

13

 

 

13

 

Loans, net

 

147,198

 

 

 

143,846

FHLB stock

 

1,778

 

N/A

 

N/A

 

N/A

Accrued interest receivable

 

1,042

 

 

1,042

 

Financial liabilities:

 

 

 

Noninterest-bearing deposits

27,936

27,936

Interest-bearing deposits

177,701

176,244

Advance from Federal Reserve

25,000

24,884

Accrued interest payable

82

82

December 31, 2022

 

  

 

  

 

  

Financial assets:

 

  

 

  

 

  

Cash and cash equivalents

$

5,684

$

5,684

$

$

Securities available for sale

 

105,351

 

 

105,351

 

Securities held to maturity

 

17

 

 

17

 

Loans, net

 

144,379

 

 

 

138,744

FHLB stock

 

1,778

 

N/A

 

N/A

 

N/A

Accrued interest receivable

 

1,323

 

 

1,323

 

Financial liabilities:

 

 

 

Noninterest-bearing deposits

 

28,232

 

28,232

 

 

Interest-bearing deposits

 

177,832

 

 

 

175,969

Advance from FHLB

29,000

29,000

Accrued interest payable

12

12

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Table of Contents

MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

10.           Revenue from Contracts with Customers

Substantially all of the Company’s revenue from contracts with customers in the scope of FASB ASC 606 is recognized within noninterest income. The following table presents the Company’s sources of noninterest income and other income within the scope of FASB ASC 606 for the three months ended March 31, 2023 and 2022:

Three Months Ended

March 31, 

    

2023

2022

(In thousands)

Deposit account service charges

$

91

$

81

Brokered loan fees

15

43

ATM and debit card fee income

139

136

Other income

8

1

Revenue from contracts with customers

253

261

Net loss on sales of securities available for sale

(27)

Increase in cash surrender value of life insurance

14

14

Other income

4

10

Other noninterest income

(9)

24

Total noninterest income

$

244

$

285

A description of the Company’s revenue streams accounted for under FASB ASC 606 follows:

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Table of Contents

MID-SOUTHERN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Deposit Account Service Charges:  The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as stop payment charges and statement rendering, are recognized at the time the transaction is executed as that is the time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs.

Brokered Loan Fees:  The Company entered into loan brokering agreements with United Wholesale Mortgage (“UWM”) and Union Home Mortgage (“UHM”). Under the agreements, the Company performs loan application and preliminary underwriting activities to determine if potential loans conform to the underwriting standards of Fannie Mae. Conforming loans are then funded by the brokers, and the Company receives a fee for services performed.

ATM and Debit Card Fee Income:  The Company earns ATM usage fees and interchange fees from debit cardholder transactions conducted through a payment network. ATM fees are recognized at the point in time the transaction occurs. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Other Income:  Other income from contracts with customers includes safe deposit box fees, check cashing and cashier’s check fees, and wire transfer fees. This revenue is recognized at the time the transaction is executed or over the period the Company satisfies the performance obligation.

11.         Recent Accounting Pronouncements

The following are summaries of recently issued or adopted accounting pronouncements that impact the accounting and reporting practices of the Company. The Company is an emerging growth company, and as such will be subject to the effective dates noted for private companies if they differ from the effective dates noted for public companies.

In March 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2023-02, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credits Structures Using the Proportional Amortization Method. These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. This guidance is effective for public business entities for fiscal years including interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted in any interim period. The Company has assessed ASU 2023-02 and does not expect it to have a material impact on its accounting and disclosures.

The Company has determined that all other recently issued accounting pronouncements will not have a material impact on the Company’s consolidated financial statements or do not apply to its operations.

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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Safe Harbor Statement for Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain 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. 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:

changes in economic conditions, either nationally or in our market area;
fluctuations in interest rates;
the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of our allowance for credit losses;
the possibility of credit losses of securities held in our securities portfolio;
our ability to access cost-effective funding;
fluctuations in the demand for loans, the number of unsold homes, land and other properties, and fluctuations in real estate values and both residential and commercial and multi-family real estate market conditions in our market area;
secondary market conditions for loans and our ability to originate loans for sale and sell loans in the secondary market;
our ability to attract and retain deposits;
our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we may acquire into our operations and our ability to realize related revenue synergies and expected cost savings and other benefits within the anticipated time frames or at all;
disruptions to the economy and the U.S. banking system caused by recent bank failures, risks associated with uninsured deposits and responsive measures taken by federal and/or state governments or banking regulators, including special assessments or increases in the cost of our deposit insurance;
legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules;
monetary and fiscal policies of the Board of Governors of the Federal Reserve (“Federal Reserve”) and the U.S. Government and other governmental initiatives affecting the financial services industry;
results of examinations of Mid-Southern Bancorp and Mid-Southern Savings Bank by our regulators, including the possibility that the regulators may, among other things, require us to increase our allowance for credit losses or to write-down assets, change Mid-Southern Savings Bank’s regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;
our ability to control operating costs and expenses;

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the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
difficulties in reducing risks associated with the loans on our balance sheet;
staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;
disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;
our ability to retain key members of our senior management team;
costs and effects of litigation, including settlements and judgments;
our ability to implement our business strategies;
increased competitive pressures among financial services companies;
changes in consumer spending, borrowing and savings habits;
the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
our ability to pay dividends on our common stock;
adverse changes in the securities markets;
the inability of key third-party providers to perform their obligations to us;
statements with respect to our intentions regarding disclosure and other changes resulting from the JOBS Act;
changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; and
other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described from time to time in our filings with the SEC, including our 2022 Form 10-K.

Any of the forward-looking statements that we make in this report and in other public statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Any of the forward-looking statements are based upon management's beliefs and assumptions at the time they are made. Except as required by applicable 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, unless the context otherwise requires.

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Overview

Our principal business consists of attracting retail deposits from the general public and investing those funds, along with borrowed funds, in loans secured by first and second mortgages on one- to four-family residences (including home equity loans and lines of credit), commercial and multi-family, consumer and commercial business loans and, to a lesser extent, construction and land loans. We offer a wide variety of consumer loan products, including automobile loans, boat loans, manufactured homes not secured by permanent dwellings and recreational vehicle loans. We intend to continue emphasizing our residential mortgage, home equity and consumer lending, while also expanding our emphasis in commercial and multi-family real estate and commercial business lending.

Our operating revenues are derived principally from earnings on interest earning assets, service charges and fees. Our primary sources of funds are deposits, advances from the Federal Reserve and Federal Home Loan Bank (“FHLB”) and other borrowings, and payments received on loans and securities. We offer a variety of deposit accounts that provide a wide range of interest rates and terms, generally including savings, money market, term certificate and checking accounts. Our noninterest expenses consist primarily of salaries and employee benefits, expenses for occupancy and marketing and computer services. Salaries and benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of lease payments, property taxes, depreciation charges, maintenance and costs of utilities.

Summary of Significant Accounting Policies

The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be significant accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

The following represent our significant accounting policies:

Allowance for Credit Losses. The allowance for credit losses represents management’s estimate of losses inherent in the loan portfolio as of the date of the balance sheet and it is recorded as a reduction of loans. The allowance is increased by the provision for credit losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for credit losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for credit losses is restricted to any individual loan and the entire allowance is available to absorb all loan losses.

The allowance for credit losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revision as more information becomes available.

On January 1, 2023, the Company implemented Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326) as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2022-02 (collectively “ASC 326”), commonly referred to as the current expected credit loss methodology (“CECL”).  Under the CECL model, the allowance for credit losses on loans represents a valuation allowance estimated at each balance sheet date in accordance with GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to

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be collected on the loan portfolio. In addition, the Company records an allowance for credit losses on unfunded loan commitments through a provision for credit losses. The allowance for credit losses on unfunded loan commitments is estimated by loan segment under the CECL model using the same methodologies as funded portfolio loans, taking into consideration the likelihood that funding will occur and is included in accrued expenses and other liabilities on the Company’s consolidated balance sheets. As a result, the opening balances for the allowance for credit losses on loans and unfunded loan commitments increased by $557,000 and $73,000, respectively, as of January 1, 2023. The adoption reduced the Company’s retained earnings on a tax-effected basis of $481,000, with no impact on earnings.

The allowance consists of specific and general components. The specific component relates to loans that are classified as individually analyzed. For loans that are individually analyzed, an allowance is established when the discounted cash flows or collateral value of the loan are lower than the carrying value of that loan.

The general component covers pools of loans, by loan segment, as well as smaller balance homogenous loans, such as residential real estate, home equity and other consumer loans. The Company measures expected credit losses for its portfolio segments utilizing the Weighted Average Remaining Maturity (“WARM”) allowance for credit losses methodology. The WARM methodology uses an average loss rate for each loan pool and applies that rate to future expected outstanding balances of that pool. These pools of loans are also adjusted for qualitative factors. The qualitative factors include:

Lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices;
National, regional and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans;
Nature and volume of the portfolio and terms of the loans;
Experience, ability and depth of the lending management and staff;
The existence and effect of any concentrations of credit, and changes in the level of such concentrations;
The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio;
Volume and severity of past due, classified and non-accrual loans, as well as other loan modifications; and
Quality of our loan review system and the degree of oversight by our board of directors.

Each factor is assigned a weight and a value to reflect improving, minor, moderate or high risk conditions based on management's best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in risk factors in a narrative accompanying the allowance for credit losses analysis and calculation.

In addition, various bank regulatory agencies periodically review the allowance for credit losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs based on their judgment about information available to them at the time of their examination.

Income Taxes. Income taxes are provided for the tax effects of certain transactions reported in the consolidated financial statements. Income taxes consist of taxes currently due plus deferred taxes related primarily to temporary differences between the financial reporting and income tax basis of the allowance for credit losses, premises and equipment, certain state tax credits, and deferred loan origination costs. The deferred tax assets and liabilities represent the future tax return consequences of the temporary differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of

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management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Estimation of Fair Values. Fair values for securities available-for-sale are obtained from an independent third-party pricing service. Where available, fair values are based on quoted prices on a nationally recognized securities exchange. If quoted prices are not available, fair values are measured using quoted market prices for similar benchmark securities. Management generally makes no adjustments to the fair value quotes provided by the pricing source. The fair values of foreclosed real estate and the underlying collateral value of individually evaluated loans are typically determined based on evaluations by third parties, less estimated costs to sell. When necessary, appraisals are updated to reflect changes in market conditions.

Non-GAAP Financial Measures

Certain non-GAAP measures are used by management to supplement the evaluation of the Company’s performance. These measures – Net interest income (tax-equivalent basis), yield on interest-earning assets (tax-equivalent basis), net interest spread (tax-equivalent basis) and net interest margin (tax-equivalent basis) – include the effects of taxable-equivalent adjustments using a federal income tax rate prevalent during the relevant year to increase tax-exempt interest income to a tax-equivalent basis. Interest income earned on certain assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments.

Net interest income (tax-equivalent basis), yield on interest-earning assets (tax-equivalent basis), net interest rate spread (tax-equivalent basis) and net interest margin (tax-equivalent basis). Net interest income (tax-equivalent basis) is a non-GAAP measure that adjusts for the tax-favored status of net interest income from certain loans and investments and is not permitted under GAAP in the consolidated statements of income. We believe this measure to be the preferred industry measurement of net interest income, and that it enhances comparability of net interest income arising from taxable and tax-exempt sources. The most directly comparable financial measure calculated in accordance with GAAP is net interest income. Yield on interest-earning assets (tax-equivalent basis) is the ratio of interest income earned from interest-earning assets, adjusted on a tax-equivalent basis, and average interest-earning assets. The most directly comparable financial measure in accordance with GAAP is yield on interest-earning assets. Net interest rate spread (tax-equivalent basis) is the difference in the average yield on average earning assets on a tax-equivalent basis and the average rate paid on average interest-bearing liabilities. The most directly comparable financial measure calculated in accordance with GAAP is net interest rate spread. Net interest margin (tax-equivalent basis) is the ratio of net interest income (tax-equivalent basis) to average earning assets. The most directly comparable financial measure in accordance with GAAP is net interest margin.

These non-GAAP financial measures should not be considered alternatives to GAAP-basis financial statements, and other bank holding companies may define these non-GAAP measures or similar measures differently. The following table presents the reconciliation of net interest income to net interest income adjusted to a fully taxable-equivalent basis assuming a relevant marginal tax for interest earned on tax-exempt assets such as municipal loans and investment securities (dollars in thousands), along with the calculation of yield on interest-earning assets (tax-equivalent basis), net interest spread (tax-equivalent basis) and net interest margin (tax-equivalent basis).

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Three Months Ended

March 31, 

Net interest income, yield on interest-earning assets, net interest rate spread, net interest margin (tax-equivalent basis):

    

2023

    

2022

    

Net interest income (GAAP)

$

1,860

$

1,733

Tax-equivalent adjustments: (1)

Loans

2

1

Tax-exempt investment securities

110

102

Net interest income (tax-equivalent basis)

$

1,972

$

1,836

Average interest-earning assets (2)

$

269,485

$

250,933

Yield on interest-earning assets

3.69

%

3.00

%

Yield on interest-earning assets (tax-equivalent basis)

3.85

%

3.17

%

Net interest rate spread

2.48

%

2.68

%

Net interest rate spread (tax-equivalent basis)

2.64

%

2.85

%

Net interest margin

2.76

%

2.76

%

Net interest margin (tax-equivalent basis)

2.93

%

2.93

%

(1) - Tax-exempt income has been adjusted to a tax-equivalent basis using the federal marginal tax rate of 21% for 2023 and 2022.

(2) - Investment securities, which are included in interest-earning assets, are based on amortized cost and do not give effect to changes in fair value that are reflected in Accumulated Other Comprehensive Income / Loss.

Comparison of Financial Condition at March 31, 2023 and December 31, 2022

Total assets decreased $2.9 million, or 1.1%, to $266.4 million at March 31, 2023 from $269.2 million at December 31, 2022.

Cash and Cash Equivalents.  Cash and cash equivalents decreased $1.2 million, or 21.3%, to $4.5 million at March 31, 2023 from $5.7 million at December 31, 2022 due primarily to net payments on advances and an increase in net loans receivable, partially offset by the net effect of activity in available for sale securities.

Loans.  Our primary lending activity is the origination of loans secured by real estate. We originate one-to-four family residential loans, multi-family residential loans, commercial business loans, commercial real estate loans and construction loans. To a lesser extent, we originate consumer loans. Net loans receivable increased $2.8 million, or 2.0%, to $147.2 million at March 31, 2023 from $144.4 million at December 31, 2022. The increase in net loans receivable was due primarily to increases in commercial real estate loans and one-to-four family residential loans, partially offset by decreases in residential construction loans and commercial construction loans. In addition, on January 1, 2023, we adopted ASC 326. As a result, the opening balances for the allowance for credit losses on loans increased by $557,000 as of January 1, 2023.

Securities Available for Sale.  Our available for sale securities portfolio consists primarily of U.S. government securities, U.S. government agency debt securities, including mortgage-backed securities and collateralized mortgage obligations, and municipal obligations. Securities available for sale decreased $3.8 million, or 3.6%, to $101.6 million at March 31, 2023 from $105.4 million at December 31, 2022. The decrease was due primarily to sales of $4.1 million in municipal obligations and $2.0 million in principal collections, calls and maturities on mortgage-backed and tax-exempt securities, partially offset by a $2.4 million gross unrealized gain in the available for sale securities portfolio.

Other Assets.  Other assets decreased $414,000 to $4.3 million at March 31, 2023 from $4.7 million at December 31, 2022 primarily due to a $327,000 decrease in the net deferred tax asset, largely attributable to the change in the tax effect on the unrealized loss on available for sale securities.

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Deposits.  Deposit accounts, primarily obtained from individuals and businesses throughout our local market area, are the primary source of funds for our lending and investments. Our deposit accounts are comprised of noninterest-bearing checking, interest-bearing checking, savings, and money market accounts and certificates of deposit. Deposits decreased $427,000, or 0.2%, to $205.6 million at March 31, 2023 from $206.1 million at December 31, 2022.

Uninsured deposits, not covered by the FDIC deposit insurance or the Indiana Public Deposit Insurance Fund (“PDIF”), were 8.3% of total deposits as of March 31, 2023 versus 10.3% as of December 31, 2022. The PDIF insures those public funds of the State of Indiana and its political subdivisions deposited in approved financial institutions. The Company does not hold public funds for any institutions outside of the State of Indiana. Deposits not insured by FDIC insurance coverage (including the public fund deposits that are covered by the PDIF) were approximately 17.0% and 19.0% as of March 31, 2023 and December 31, 2022, respectively.

Borrowings.  At March 31, 2023 and December 31, 2022, the Company had $25.0 million in advances outstanding from the Federal Reserve and $29.0 million in advances outstanding from the FHLB, respectively. On June 27, 2019, the Company borrowed $10.0 million from the FHLB as a putable fixed-rate advance with an original maturity date of June 27, 2024 and bearing an interest rate of 1.73%. On June 27, 2022, the FHLB exercised its put option on this advance.

During the three-month period ended March 31, 2023, the Company utilized a series of short-term fixed-rate bullet advances from the FHLB in order to meet daily liquidity requirements and to fund growth in earning assets. Average borrowings during the period totaled $20.4 million bearing a weighted average interest rate of 4.57% and an average term of six days. In addition, on April 13, 2022, the Company began utilizing a $5.0 million line of credit from the FHLB. As of March 31, 2023, the Company did not have an outstanding balance on the line of credit.

On March 12, 2023, the Federal Reserve created the Bank Term Funding Program (“BTFP”) to provide additional funding available to eligible depository institutions. The BTFP offers loans of up to one year in length to banks, savings associations, credit unions and other depository institutions which pledge collateral, such as U.S. Treasuries, U.S. agency securities and U.S. agency mortgage-backed securities. The collateral is valued at par, and advances under this program do not include any fees or prepayment penalties. With the introduction of the BTFP, the Company pledged as collateral U.S. agency mortgage-backed securities and borrowed $25.0 million from the BTFP at a fixed rate of 4.37% for a one-year period on March 20, 2023. Upon receipt of this funding from the BTFP, the Company repaid its advance from the Federal Home Loan Bank of Indianapolis. On March 20, 2023, the Company repaid its initial borrowing with the BTFP in exchange for an advance of $25.0 million at a fixed rate of 4.37% for a one-year period. At March 31, 2023, the pledged securities had a par value of $28.5 million.

Stockholders’ Equity.  Stockholders’ equity increased $1.6 million to $34.9 million at March 31, 2023 from $33.3 million at December 31, 2022. The increase was due primarily to an increase in the accumulated other comprehensive income (loss), net of tax, of $1.8 million and net income of $340,000, partially offset by the after-tax impact of $481,000 related to the implementation of ASC 326.

Comparison of Results of Operations for the Three Months Ended March 31, 2023 and 2022

Net Income.  Net income was $340,000 ($0.13 per common share diluted) for the three months ended March 31, 2023, compared to net income of $467,000 ($0.17 per common share diluted) for the three months ended March 31, 2022. The primary reasons for the decrease in net income between the periods were increased noninterest expenses and decreased noninterest income, partially offset by increased net interest income and an increased income tax benefit.

Net Interest Income.  Net interest income after provision for credit losses increased $75,000, or 4.3%, to $1.8 million for the three months ended March 31, 2023 compared to $1.7 million for the three months ended March 31, 2022 due primarily to an increase in average balance of and the yield earned on interest-earning assets, partially offset by an increase in the average balance of and the cost incurred on interest-earning liabilities and an increase in the provision for credit losses.

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Total interest income increased $600,000, or 31.9%, to $2.5 million for the three months ended March 31, 2023 as compared to $1.9 million the same period in 2022. The increase resulted from increases in the average balance of and the yield earned on interest-earning assets. The average balance of interest-earning assets increased to $269.5 million for the quarter ended March 31, 2023 from $250.9 million for the quarter ended March 31, 2022, due primarily to increases in loans receivable and investment securities, partially offset by decreases in interest-bearing deposits with banks. The average yield on interest-earning assets and tax-equivalent yield on interest-earning assets(1) increased to 3.69% and 3.85%, respectively, for the quarter ended March 31, 2023 from 3.00% an 3.17%, respectively, for the quarter ended March 31, 2022, due primarily to an increase in market interest rates.

Total interest expense increased $473,000, or 315.3%, to $623,000 for the three months ended March 31, 2023 compared to $150,000 for the three months ended March 31, 2022 due to increases in the average balances of and the costs incurred on interest-bearing liabilities. The average cost of interest-bearing liabilities increased to 1.21% for the quarter ended March 31, 2023 from 0.32% for the same period in 2022. The average balance of interest-bearing liabilities increased to $205.2 million for the quarter ended March 31, 2023 from $184.8 million for the same period in 2022, due primarily to increases in the average balance of borrowings and time deposits, partially offset by a decrease in savings and interest-bearing deposits. The average balance and cost of borrowings increased to $24.6 million and 4.49%, respectively, as of March 31, 2023 from $10.0 million and 1.73%, respectively, for the same period in 2022. The average cost of deposits increased to 0.77% for the quarter ended March 31, 2023 from 0.24% for the same period in 2022. As a result of the changes in interest-earning assets and interest-bearing liabilities, the interest rate spread and interest rate spread on a tax-equivalent basis(1) decreased to 2.48% and 2.64%, respectively, for the quarter ended March 31, 2023, from 2.68% and 2.85%, respectively for the quarter ended March 31, 2022. The net interest margin and net interest margin on a tax-equivalent basis(1) remained at 2.76% and 2.93%, respectively, for the quarters ended March 31, 2023 and March 31, 2022.

Provision for Credit Losses.  The amortized cost of non-performing loans decreased to $612,000, at March 31, 2023 compared to $732,000 at December 31, 2022, or 0.4% and 0.5% of total loans, respectively. At March 31, 2023, $399,000 or 65.1% of nonperforming loans were current on their loan payments.

On January 1, 2023, the Company implemented ASC 326, and as a result, the opening balances for the allowance for credit losses and reserve for unfunded loan commitments increased by $557,000 and $73,000, respectively, as of January 1, 2023. The adoption entries reduced the Company’s retained earnings on a tax-effected basis of $481,000, with no impact on earnings.

Based on an analysis of the factors described in "Summary of Significant Accounting Policies – Allowance for Credit Losses,” the Company recorded a net provision for credit losses of $52,000 for the three months ended March 31, 2023 compared to no provision recorded for three months ended March 31, 2022.

Noninterest Income.  Noninterest income decreased $41,000, or 14.4%, for the quarter ended March 31, 2023 as compared to the same period in 2022, due primarily to a reduction in brokered loan fees of $28,000 and a $27,000 net loss on the sale of available for sale investment securities, partially offset by increases of $10,000 in deposit account service charges and $3,000 in ATM and debit card fee income.

Noninterest Expense.  Noninterest expense increased $232,000, or 15.3%, for the quarter ended March 31, 2023 as compared to the same period in 2022. The increase was due primarily to increases in data processing expenses of $93,000, compensation and benefits expenses of $58,000, professional fees of $25,000, occupancy and equipment expenses of $23,000 and other expenses of $20,000.

Income Tax Expense.  The Company recorded an income tax benefit of $37,000 for the quarter ended March 31, 2023, compared to an expense of $34,000 for the same period in 2022. The income tax benefit for the quarter ended March 31, 2023 is primarily due to an increase in tax-exempt income in proportion to income before income taxes.

(1) Refer to “Non-GAAP Financial Measures” and “Reconciliation of Non-GAAP Financial Measures” above for more information and for a reconciliation of this non-GAAP financial measure to the nearest GAAP financial measure.

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Liquidity and Capital Resources

Liquidity management is both a daily and longer-term function of management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer-term basis, we maintain a strategy of investing in various lending products and investment securities, including municipal and mortgage-backed securities. We use our sources of funds primarily to meet ongoing commitments, pay maturing deposits, fund deposit withdrawals and fund loan commitments.

We maintain cash and investments that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound operation and meet demands for customer funds (particularly withdrawals of deposits). If we require funds beyond our ability to generate them internally, we have additional borrowing capacity of $37.9 million with the FHLB of Indianapolis at March 31, 2023. We could also seek supplemental funding through the Federal Reserve’s BTFP by pledging as collateral additional U.S. Treasuries, U.S. agency securities and U.S. agency mortgage-backed securities from our investment portfolio. We are required to have enough cash and investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure safe and sound operations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, we have maintained liquid assets above levels believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained.

Liquidity management involves the matching of cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs, and our ability to manage those requirements. We strive to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance we have in short-term investments at any given time will cover adequately any reasonably anticipated, immediate need for funds. Additionally, we maintain relationships with correspondent banks, which could provide funds on short-term notice if needed.

The Company is a separate legal entity from Mid-Southern Savings Bank and must provide for its own liquidity. Sources of capital and liquidity for the Company include any distributions from the Bank and the issuance of debt or equity securities. Dividends and other capital distributions from the Bank are subject to regulatory notice. On a stand-alone basis, the Company had liquid assets of $1.3 million at March 31, 2023.

Our liquidity, represented by cash and cash equivalents and investment securities, is a product of our operating, investing and financing activities. Our primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, maturities of investment securities and other short-term investments and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, which provide liquidity to meet lending requirements. We also generate cash through borrowings. We utilize borrowings to leverage our capital base and provide funds for our lending and investment activities, and to enhance our interest rate risk management.

We use our sources of funds primarily to meet ongoing commitments, to pay maturing deposits and fund withdrawals, and to fund loan commitments. At March 31, 2023, the approved outstanding loan commitments, including unused lines and letters of credit, amounted to $17.9 million. Certificates of deposit scheduled to mature in one year or less at March 31, 2023, totaled $40.5 million. It is management’s policy to manage deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that a majority of maturing deposits will remain with us.

The Bank is subject to minimum capital requirements imposed by the Office of the Comptroller of the Currency (“OCC”). Consistent with our goals to operate a sound and profitable organization, our policy is for the Bank to maintain a "well-capitalized" status under the capital categories of the OCC. Based on capital levels at March 31, 2023, the Bank exceeded all regulatory capital requirements and met the requirements to be deemed "well-capitalized" under applicable OCC regulatory guidelines.

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The Bank elected to use the Community Bank Leverage Ratio (“CBLR”) effective January 1, 2020. Effective January 1, 2022, a bank or savings institution electing to use the CBLR will generally be considered well-capitalized and to have met the risk-based and leverage capital requirements of the capital regulations if it has a leverage ratio greater than 9.0%. To be eligible to elect to use the CBLR, the bank or savings institution also must have total consolidated assets of less than $10 billion, off-balance sheet exposures of 25.0% or less of its total consolidated assets, and trading assets and trading liabilities of 5.0% or less of its total consolidated assets, all as of the end of the most recent quarter.

The Bank was considered well-capitalized under applicable federal regulatory capital guidelines with a CBLR of 15.3% at March 31, 2023 and 15.4% at December 31, 2022.

For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company’s subsidiary banks to be well capitalized under the prompt corrective action regulations.

Asset/Liability Management

Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market rates change over time. Like other financial institutions, our results of operations are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.

How We Measure Our Risk of Interest Rate Changes. As part of our attempt to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor our interest rate risk. In doing so, we analyze and manage assets and liabilities based on their interest rates and payment streams, timing of maturities, repricing opportunities, and sensitivity to actual or potential changes in market interest rates.

We are subject to interest rate risk to the extent that our interest-bearing liabilities, primarily deposits and advances, reprice more rapidly or at different rates than our interest-earning assets. In order to minimize the potential for adverse effects of material prolonged increases or decreases in interest rates on our results of operations, we have adopted an asset and liability management policy. Our board of directors sets the asset and liability management policy, which is implemented by the asset/liability committee.

The purpose of the asset/liability committee is to communicate, coordinate, and control asset/liability management consistent with our business plan and board-approved policies. The committee establishes and monitors the volume and mix of assets and funding sources, taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk and profitability goals.

The committee generally meets quarterly to, among other things, protect capital through earnings stability over the interest rate cycle; maintain our well-capitalized status; and provide a reasonable return on investment. The committee recommends appropriate strategy changes based on this review. The committee is responsible for reviewing and reporting the effects of the policy implementations and strategies to the board of directors at least quarterly. Executive management oversee the process on a daily basis.

Our asset/liability management strategy dictates acceptable limits on the amounts of change in given changes in interest rates. For interest rate increases or decreases of 100, 200, 300 and 400 basis points, our policy dictates that our Economic Value of Equity (“EVE”) ratio should not fall below 10.0%, 20.0%, 30.0% and 35%, respectively. As illustrated in the table below, we were in compliance with this aspect of our asset/liability management policy at March 31, 2023.

Mid-Southern Savings Bank uses an EVE interest rate sensitivity analysis in order to evaluate the impact of its interest rate risk on earnings and capital. This is measured by computing the changes in net EVE for its cash flow from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. EVE modeling involves discounting present values of cash flows for on and off-balance sheet items under different interest rate scenarios and provides no effect given to any steps that management might take to counter the effect of the interest rate

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movements. The discounted present value of all cash flows represents the Mid-Southern Savings Bank’s EVE and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off balance sheet items. The amount of base case EVE and its sensitivity to shifts in interest rates provide a measure of the longer-term re-pricing and option risk in the balance sheet. The table presented below, as of March 31, 2023, is an analysis of our interest rate risk as measured by changes in EVE for instantaneous and sustained parallel shifts in the yield curve, in 100 basis point increments, from no change to up and down 400 basis points.

Immediate Change

Economic Value of Equity as a

In the Level

Economic Value of Equity

% of Present Value of Assets

Of Interest Rates

    

$ Amount

    

$ Change

    

% Change

    

EVE Ratio %

    

Change

(Dollars in thousands) 

400bps

 

$

49,671

$

(10,559)

(17.5)

%

18.9

%

(4.0)

%

300bps

 

53,211

(7,019)

(11.7)

20.3

(2.7)

200bps

 

56,514

(3,716)

(6.2)

21.5

(1.4)

100bps

 

58,933

(1,297)

(2.2)

22.4

(0.5)

Static

 

60,230

-

22.9

(100)bps

 

60,269

39

0.1

22.9

(200)bps

 

58,987

(1,243)

(2.1)

22.5

(0.5)

(300)bps

 

56,073

(4,157)

(6.9)

21.3

(1.6)

(400)bps

 

59,710

(520)

(0.9)

22.7

(0.2)

In addition to monitoring selected measures of EVE, management also monitors effects on net interest income resulting from increases or decrease in rates. This process is used in conjunction with EVE measures to identify excessive interest rate risk. In managing our assets/liability mix, depending on the relationship between long- and short-term interest rates, market conditions and consumer preference, we may place somewhat greater emphasis on maximizing its net interest margin than on strictly matching the interest rate sensitivity of its assets and liabilities. Management also believes that the increased net income which may result from an acceptable mismatch in the actual maturity or re-pricing of its asset and liability portfolios can, during periods of declining or stable interest rates, provide sufficient returns to justify the increased exposure to sudden and unexpected increases in interest rates which may result from such a mismatch. Management believes that our level of interest rate risk is acceptable under this approach.

In evaluating our exposure to interest rate movements, certain shortcomings inherent in the method of analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or re-pricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in interest rates. Additionally, certain assets, such as adjustable-rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed above. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all of these factors in monitoring our exposure to interest rate risk

Off-Balance Sheet Arrangements

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded on the Company’s financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are primarily used to manage customers’ requests for funding and take the form of loan commitments and letters of credit.

For the three months ended March 31, 2023, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on the Company’s financial condition, results of operations or cash flows.

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

For information regarding the Company’s market risk, see “Risk Factors” in the Company’s 2022 Form 10-K.

Item 4.  Controls and Procedures

(a)    Evaluation of Disclosure Controls and Procedures

An evaluation of the disclosure controls and procedures as defined in Rule 13a 15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) was carried out as of March 31, 2023 under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and several other members of the Company’s senior management. In designing and evaluating the Company’s disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

The Company’s CEO and CFO concluded that based on their evaluation at March 31, 2023, the Company’s disclosure controls and procedures were effective in ensuring that information we are required to disclose in the reports we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to Company management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure, specified in the SEC’s rules and forms.

(b)    Changes in Internal Control

There were no significant changes in the Company’s internal control over financial reporting that occurred during the three months ended March 31, 2023, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by override of the control. The design of any control procedure is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

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MID-SOUTHERN BANCORP, INC.

PART II

OTHER INFORMATION

Item 1.      Legal Proceedings

Periodically, there have been various claims and lawsuits involving the Company, mainly as a plaintiff, such as claims to enforce liens, condemnation proceedings on properties in which the Company holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Company’s business. The Company is not a party to any pending legal proceedings that management believes would have a material adverse effect on its financial condition or operations.

Item 1A.    Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in our 2022 Form 10-K, under the section titled “Risk Factors”, which could materially affect our business, financial condition or future results. There have been no material changes to the risk factors described in the Company’s 2022 Form 10-K, however these are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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MID-SOUTHERN BANCORP, INC.

PART II

OTHER INFORMATION

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

(a)              Not applicable

(b)              Not applicable

(c)              During the three months ended March 31, 2023, there were no repurchases of our outstanding common shares.

On August 31, 2020, the Company announced a stock repurchase program under which the Company’s Board of Directors authorized the repurchase of up to 162,000 shares of its common stock, or approximately 5% of the outstanding shares at that time. On November 17, 2021, the Company announced that its board of directors authorized an expansion of the repurchase program, permitting the Company to purchase an additional 150,000 shares of its common stock. As of March 31, 2023, the maximum number of shares that yet may be purchased under the current program is 173,097. The repurchase program will remain effective until the total number of shares authorized is repurchased. However, the program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors we may deem appropriate. The repurchase program does not obligate the Company to purchase any particular number of shares.

Item 3.      Defaults upon Senior Securities

Not applicable.

Item 4.      Mine Safety Disclosures

Not applicable.

Item 5.      Other Information

None.

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MID-SOUTHERN BANCORP, INC.

PART II

OTHER INFORMATION

Item 6.      Exhibits

3.1

    

Articles of Incorporation of Mid-Southern Bancorp, Inc. (1)

3.2

Bylaws of Mid-Southern Bancorp, Inc., as Amended (2)

4.1

Form of Common Stock Certificate of Mid-Southern Bancorp, Inc. (1)

31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.1

Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

101

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statement of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.

104

The cover page from the Company’s Form 10-Q Report for the period ended March 31, 2023, formatted in iXBRL and contained in Exhibit 101.

(1)Filed as exhibits to Mid-Southern Bancorp, Inc.’s Registration Statement on Form S-1 (333-223875).
(2)Filed as an exhibit to Mid-Southern Bancorp, Inc.’s Form 8-K on January 22, 2021 (File No. 001-38491).

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SIGNATURES

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

    

MID-SOUTHERN BANCORP, INC.

(Registrant)

Dated May 12, 2023

BY:

/s/ Alexander G. Babey

Alexander G. Babey

President and Chief Executive Officer

(Principal Executive Officer)

Dated May 12, 2023

BY:

/s/ Robert W. DeRossett

Robert W. DeRossett

Chief Financial Officer

(Principal Financial and Accounting Officer)

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