Mid-Southern Bancorp (MSVB) 10-Q 2021 Q3 Quarterly report

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 September 30, 2021

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 October 29, 2021, there were 3,017,340 shares of the registrant’s common stock outstanding.

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)	4
	Consolidated Statements of Comprehensive Income (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited)	6
	Consolidated Statements of Cash Flows (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8-33
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	34-43
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	44
	Item 4. Controls and Procedures	44
Part II	Other Information
	Item 1. Legal Proceedings	45
	Item 1A. Risk Factors	45
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	47
	Item 3. Defaults Upon Senior Securities	47
	Item 4. Mine Safety Disclosures	47
	Item 5. Other Information	47
	Item 6. Exhibits	48
Signatures		49

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Item 1. Consolidated Financial Statements

MID-SOUTHERN BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share information) (Unaudited)

	September 30,		December 31,
	2021		2020
ASSETS
Cash and due from banks	$	1,622	$	1,778
Interest-bearing deposits with banks		16,264		7,883
Cash and cash equivalents		17,886		9,661
Securities available for sale, at fair value		108,230		104,456
Securities held to maturity		23		31
Loans, net of allowance for loan losses of $1,651 and $1,589, respectively		118,164		113,259
Federal Home Loan Bank stock, at cost		778		778
Real estate held for sale		99		99
Premises and equipment		1,928		1,898
Accrued interest receivable:
Loans		322		314
Securities		569		584
Cash value of life insurance		3,914		3,865
Other assets		341		418
Total Assets	$	252,254	$	235,363
LIABILITIES
Deposits:
Noninterest-bearing	$	27,453	$	25,939
Interest-bearing		167,775		148,174
Total deposits		195,228		174,113
Advance from Federal Home Loan Bank		10,000		11,000
Accrued interest payable		11		10
Accrued expenses and other liabilities		797		1,236
Total Liabilities		206,036		186,359
COMMITMENTS AND CONTINGENT LIABILITIES		—		—
STOCKHOLDERS’ EQUITY
Preferred stock, 1,000,000 shares authorized, $0.01 par value, 0 shares issued and outstanding		—		—
Common stock, 30,000,000 shares authorized, $0.01 par value, 3,565,430 shares issued and 3,017,425 shares outstanding (3,173,057 in 2020)		36		36
Additional paid-in-capital		30,632		30,559
Retained earnings, substantially restricted		23,265		22,299
Accumulated other comprehensive income		1,962		3,213
Unearned ESOP shares		(1,691)		(1,769)
Unearned stock compensation plan		(315)		(422)
Treasury stock, at cost - 548,005 shares (392,373 in 2020)		(7,671)		(4,912)
Total Stockholders’ Equity		46,218		49,004
Total Liabilities and Stockholders’ Equity	$	252,254	$	235,363

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				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
INTEREST INCOME
Loans, including fees	$	1,317	$	1,354	$	3,887	$	4,203
Investment securities:
Mortgage-backed securities		137		97		421		306
Municipal tax exempt		381		312		1,130		794
Other debt securities		63		62		190		196
Federal Home Loan Bank dividends		4		5		13		20
Interest-bearing deposits with banks and time deposits		1		3		2		58
Total interest income		1,903		1,833		5,643		5,577
INTEREST EXPENSE
Deposits		121		183		371		607
Borrowings		43		43		130		131
Total interest expense		164		226		501		738
Net interest income		1,739		1,607		5,142		4,839
Provision for loan losses		—		30		—		102
Net interest income after provision for loan losses		1,739		1,577		5,142		4,737
NONINTEREST INCOME
Deposit account service charges		87		45		207		127
Brokered loan fees		48		20		199		35
Net gain on sales of securities available for sale		—		—		—		104
Increase in cash value of life insurance		16		17		47		51
ATM and debit card fee income		138		110		412		312
Other income		12		10		35		28
Total noninterest income		301		202		900		657
NONINTEREST EXPENSE
Compensation and benefits		902		882		2,743		2,478
Occupancy and equipment		139		124		405		340
Data processing		103		80		323		283
Professional fees		145		145		423		440
Impairment loss on real estate held for sale		—		37		—		37
Directors' compensation		70		71		242		223
Stockholders' meeting expense		12		17		50		44
Supervisory examinations		17		15		50		47
Deposit insurance premiums		10		13		40		13
Other expenses		153		142		479		424
Total noninterest expense		1,551		1,526		4,755		4,329
Income before income taxes		489		253		1,287		1,065
Income tax expense (benefit)		33		(11)		56		74
Net Income	$	456	$	264	$	1,231	$	991
Earnings per common share:
Basic	$	0.16	$	0.09	$	0.42	$	0.31
Diluted	$	0.16	$	0.09	$	0.42	$	0.31

See accompanying Notes to Consolidated Financial Statements.

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MID-SOUTHERN BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands) (Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Net Income	$	456	$	264	$	1,231	$	991
Other Comprehensive Income (Loss), net of tax
Unrealized gains (losses) on securities available for sale:
Net unrealized holding gains (losses) arising during the period		(892)		(12)		(1,665)		1,786
Income tax benefit (expense)		221		3		414		(444)
Net of tax amount		(671)		(9)		(1,251)		1,342
Reclassification adjustment for realized gains included in net income during the period		—		—		—		104
Income tax expense		—		—		—		(26)
Net of tax amount		—		—		—		78
Other Comprehensive Income (Loss), net of tax		(671)		(9)		(1,251)		1,264
Total Comprehensive Income (Loss)	$	(215)	$	255	$	(20)	$	2,255

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
			Additional				Other		Unearned		Unearned
	Common		Paid-in		Retained		Comprehensive		ESOP		Stock		Treasury
	Stock		Capital		Earnings		Income (Loss)		Shares		Compensation		Stock		Total
Balances at January 1, 2020	$	36	$	30,415	$	21,363	$	1,281	$	(1,883)	$	(300)	$	(99)	$	50,813
Net income		—		—		385		—		—		—		—		385
Other comprehensive loss		—		—		—		(1,487)		—		—		—		(1,487)
Cash dividends ($0.02 per share)		—		—		(67)		—		—		—		—		(67)
ESOP shares committed to be released		—		7		—		—		26		—		—		33
Purchase of 17,900 treasury shares		—		—		—		—		—		—		(206)		(206)
Stock compensation expense		—		18		—		—		—		22		—		40
Balances at March 31, 2020	$	36	$	30,440	$	21,681	$	(206)	$	(1,857)	$	(278)	$	(305)	$	49,511
Net income		—		—		342		—		—		—		—		342
Other comprehensive income		—		—		—		2,760		—		—		—		2,760
Cash dividends ($0.02 per share)		—		—		(66)		—		—		—		—		(66)
ESOP shares committed to be released		—		7		—		—		26		—		—		33
Purchase of 137,630 treasury shares		—		—		—		—		—		—		(1,677)		(1,677)
Stock compensation expense		—		16		—		—		—		22		—		38
Balances at June 30, 2020	$	36	$	30,463	$	21,957	$	2,554	$	(1,831)	$	(256)	$	(1,982)	$	50,941
Net income		—		—		264		—		—		—		—		264
Other comprehensive loss		—		—		—		(9)		—		—		—		(9)
Cash dividends ($0.02 per share)		—		—		(62)		—		—		—		—		(62)
ESOP shares committed to be released		—		6		—		—		26		—		—		32
Purchase of 188,030 treasury shares		—		—		—		—		—		—		(2,359)		(2,359)
Stock compensation expense		—		18		—		—		—		21		—		39
Balances at September 30, 2020	$	36	$	30,487	$	22,159	$	2,545	$	(1,805)	$	(235)	$	(4,341)	$	48,846
Balances at January 1, 2021	$	36	$	30,559	$	22,299	$	3,213	$	(1,769)	$	(422)	$	(4,912)	$	49,004
Net income		—		—		378		—		—		—		—		378
Other comprehensive loss		—		—		—		(1,505)		—		—		—		(1,505)
Cash dividends ($0.03 per share)		—		—		(91)		—		—		—		—		(91)
ESOP shares committed to be released		—		15		—		—		26		—		—		41
Purchase of 327 treasury shares		—		—		—		—		—		—		(5)		(5)
Stock compensation expense		—		13		—		—		—		45		—		58
Balances at March 31, 2021	$	36	$	30,587	$	22,586	$	1,708	$	(1,743)	$	(377)	$	(4,917)	$	47,880
Net income		—		—		397		—		—		—		—		397
Other comprehensive income		—		—		—		925		—		—		—		925
Cash dividends ($0.03 per share)		—		—		(89)		—		—		—		—		(89)
ESOP shares committed to be released		—		14		—		—		26		—		—		40
Purchase of 5,612 treasury shares		—		—		—		—		—		—		(86)		(86)
Forfeiture of unearned stock awards		—		—		—		—		—		3		(3)		—
Exercise of stock options		—		(9)		—		—		—		—		16		7
Stock compensation expense		—		13		—		—		—		29		—		42
Balances at June 30, 2021	$	36	$	30,605	$	22,894	$	2,633	$	(1,717)	$	(345)	$	(4,990)	$	49,116
Net income		—		—		456		—		—		—		—		456
Other comprehensive loss		—		—		—		(671)		—		—		—		(671)
Cash dividends ($0.03 per share)		—		—		(85)		—		—		—		—		(85)
ESOP shares committed to be released		—		14		—		—		26		—		—		40
Purchase of 150,663 treasury shares		—		—		—		—		—		—		(2,681)		(2,681)
Stock compensation expense		—		13		—		—		—		30		—		43
Balances at September 30, 2021	$	36	$	30,632	$	23,265	$	1,962	$	(1,691)	$	(315)	$	(7,671)	$	46,218

See accompanying Notes to Consolidated Financial Statements.

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MID-SOUTHERN BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

	Nine Months Ended
	September 30,
	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,231	$	991
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums and accretion of discounts on securities, net		279		175
Provision for loan losses		—		102
Stock compensation expense		143		117
Depreciation expense		126		117
ESOP compensation expense		121		98
Impairment loss on real estate held for sale		—		37
Deferred income taxes		(28)		(40)
Increase in cash value of life insurance		(47)		(51)
Net gain on sales of securities available for sale		—		(104)
Decrease in accrued interest receivable		7		18
Increase in accrued interest payable		1		2
Net change in other assets and liabilities		24		(127)
Net Cash Provided By Operating Activities		1,857		1,335
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale		(14,084)		(30,593)
Principal collected on mortgage-backed securities available for sale		5,513		4,881
Proceeds from maturities of securities available for sale		2,853		1,505
Proceeds from sales of securities available for sale		—		4,525
Principal collected on mortgage-backed securities held to maturity		8		10
Net (increase) decrease in loans receivable		(4,905)		7,903
Purchase of premises and equipment		(100)		(19)
Investment in cash value of life insurance		(2)		(2)
Net Cash Used In Investing Activities		(10,717)		(11,790)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		21,115		11,539
Repayment of advances from Federal Home Loan Bank		(1,000)		—
Proceeds from issuance of common stock		7		—
Purchase of treasury stock		(2,772)		(4,242)
Cash dividends paid		(265)		(195)
Net Cash Provided By Financing Activities		17,085		7,102
Net Increase (Decrease) in Cash and Cash Equivalents		8,225		(3,353)
Cash and cash equivalents at beginning of year		9,661		18,817
Cash and Cash Equivalents at End of Period	$	17,886	$	15,464
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	500	$	736
Net tax payments		27		74

See accompanying Notes to Consolidated Financial Statements.

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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 26, 2021 ("2020 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 loan losses, the valuation of foreclosed real estate and the underlying collateral of impaired 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 condensed 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.

In connection with the Conversion, the Company sold a total of 2,559,871 shares of common stock in an offering to certain depositors of the Bank and others, including 204,789 shares purchased by the Bank’s employee stock ownership plan ("ESOP") funded by a loan from the Company (see Note 6 of the Notes to Consolidated Financial Statements). All shares were sold at a purchase price of $10.00 per share. Costs to complete the stock offering were deducted from the gross proceeds of the offering.

Proceeds from the offering, net of $1.2 million in expenses, totaled $24.4 million. The Company used $2.0 million of the net proceeds to fund the ESOP and made a $10.2 million capital contribution to the Bank. In addition, concurrent with the offering, each share of Bank common stock owned by public stockholders was exchanged for 2.3462 shares of the Company’s common stock, with cash being paid in lieu of issuing any

-8-

fractional shares. As a result of the offering, exchange and cash in lieu of fractional shares, the Company issued 3,565,430 shares.

The Company has established a liquidation account in an amount equal to the MHC’s ownership interest in the stockholders’ equity of the Bank as reflected in the latest consolidated balance sheet contained in the final prospectus plus the value of the net assets of the MHC as reflected in the latest balance sheet of the MHC prior to the effective date of the conversion (excluding its ownership of Bank common stock). The liquidation account will be maintained for the benefit of eligible account holders who maintain deposit accounts with the Bank after conversion.

The conversion was accounted for as a change in corporate form with the historic basis of the Bank’s assets, liabilities and equity unchanged as a result.

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 mortgage-backed securities and other debt securities issued by the Government National Mortgage Association ("GNMA"), a U.S. government agency, and 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.

-9-

Investment securities at September 30, 2021 and December 31, 2020 are summarized as follows:

			Gross		Gross
(In thousands)	Amortized		Unrealized		Unrealized		Fair
September 30, 2021	Cost		Gains		Losses		Value
Securities available for sale:
Mortgage-backed securities:
Agency MBS	$	12,616	$	78	$	99	$	12,595
Agency CMO		25,525		90		296		25,319
		38,141		168		395		37,914
Other debt securities:
Municipal obligations		67,477		2,965		126		70,316
Total securities available for sale	$	105,618	$	3,133	$	521	$	108,230
Securities held to maturity:
Mortgage-backed securities:
Agency MBS	$	23	$	—	$	—	$	23
Total securities held to maturity	$	23	$	—	$	—	$	23
December 31, 2020
Securities available for sale:
Mortgage-backed securities:
Agency MBS	$	10,094	$	146	$	—	$	10,240
Agency CMO		27,588		207		24		27,771
		37,682		353		24		38,011
Other debt securities:
Municipal obligations		62,497		3,954		6		66,445
Total securities available for sale	$	100,179	$	4,307	$	30	$	104,456
Securities held to maturity:
Mortgage-backed securities:
Agency MBS	$	31	$	—	$	—	$	31
Total securities held to maturity	$	31	$	—	$	—	$	31

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The amortized cost and fair value of debt securities as of September 30, 2021, 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	$	425	$	431	$	—	$	—
Due after one year through five years		4,941		5,098		—		—
Due after five years through ten years		5,759		6,146		—		—
Due after ten years		56,352		58,641		—		—
		67,477		70,316		—		—
MBS and CMO		38,141		37,914		23		23
	$	105,618	$	108,230	$	23	$	23

Information pertaining to investment securities available for sale with gross unrealized losses at September 30, 2021, 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
September 30, 2021	Positions	Value		Losses
Securities available for sale:
Continuous loss position less than 12 months:
Agency MBS	4	$	7,374	$	99
Agency CMO	8		11,312		216
Municipal obligations	13		8,877		126
Total less than 12 months	25		27,563		441
Continuous loss position more than 12 months:
Agency CMO	2		3,600		80
Total more than 12 months	2		3,600		80
Total securities available for sale	27	$	31,163	$	521

Information pertaining to investment securities available for sale with gross unrealized losses at December 31, 2020, aggregated by investment category and the length of time that individual investment securities have been in a continuous loss position, follows. At December 31, 2020, the Company did 0t have any securities in a continuous loss position for more than 12 months.

	Number of			Gross
(Dollars in thousands)	Investment	Fair		Unrealized
December 31, 2020	Positions	Value		Losses
Securities available for sale:
Continuous loss position less than 12 months:
Agency CMO	9	$	16,223	$	24
Municipal obligations	2		1,494		6
Total less than 12 months	11		17,717		30
Total securities available for sale	11	$	17,717	$	30

Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and

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the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At September 30, 2021, the debt securities available for sale in a loss position had depreciated approximately 1.64% from the amortized cost basis. All of the debt securities in a loss position at September 30, 2021 were backed by residential first mortgage loans or were obligations issued by federal or local government-sponsored enterprises. These unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition for purposes of evaluating whether declines in value are other-than-temporary, management considers whether the securities are issued by the federal government, its agencies or sponsored enterprises or local governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As the Company has the ability to hold the debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other-than-temporary.

Additional deterioration in market and economic conditions related to the recent Coronavirus Disease 2019 (“COVID-19”) pandemic may have an adverse impact on credit quality in the future and result in other-than-temporary impairment charges.

There were 0 securities sales during the three- and nine-month periods ended September 30, 2021. There were 0 securities sales during the three-month period ended September 30, 2020. During the nine-month period ended September 30, 2020, the Company realized gross gains of $111,000 on the sale of available for sale MBS and municipal obligations and gross losses of $7,000 on the sale of available for sale municipal obligations.

4.           Loans and Allowance for Loan Losses

The Company’s loan and allowance for loan 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 loan losses. The Company grants real estate mortgages, commercial business and consumer loans. 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 impaired 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 Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Additions to the allowance for loan losses are made by the provision for loan losses charged to earnings. Loan losses are charged against the allowance when

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management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Company uses a disciplined process and methodology to evaluate the allowance for loan losses 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.

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

The general component covers non-classified loans and classified loans that are found, upon individual evaluation, to not be impaired. 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 over the most recent twenty calendar quarters 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 loan losses 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 is what determines the adjusted loss rate used in management’s allowance for loan 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 loans considered impaired 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 loan loss analysis:  one-to-four family residential real estate, multi-family residential real estate, residential construction, commercial construction, commercial real estate non owner occupied, commercial real estate owner occupied, junior liens, home equity lines of credit, 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

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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 farmland, 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 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.

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 loans individually evaluated for impairment. Partial charge-offs on nonperforming and impaired loans are included in the Company’s historical loss experience used to estimate the general component of the allowance for loan losses as discussed above. Specific reserves are not considered charge-offs in management’s evaluation of the general component of the allowance for loan 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.

Impaired Loans. A loan is considered impaired 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 in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all 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. Impairment is 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.

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Values for 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 identified as impaired. 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 impaired loan. In instances where it is not deemed necessary to obtain a new appraisal, management bases its impairment evaluation on the original appraisal with adjustments for current conditions based on management’s assessment of market factors and inspection of the property.

At September 30, 2021, there were 0 loans secured by residential real estate property for which formal foreclosure proceedings are in process. The recorded investment in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure was $36,000 at December 31, 2020.

Loans at September 30, 2021 and December 31, 2020 consisted of the following:

	September 30,		December 31,
(In thousands)	2021		2020
Real estate mortgage loans:
One-to-four family residential	$	63,624	$	66,130
Multi-family residential		8,350		8,964
Residential construction		1,425		2,083
Commercial real estate		33,235		30,171
Commercial real estate construction		1,081		851
Commercial business loans		10,079		5,212
Consumer loans		2,094		1,442
Total loans		119,888		114,853
Deferred loan origination fees and costs, net		(73)		(5)
Allowance for loan losses		(1,651)		(1,589)
Loans, net	$	118,164	$	113,259

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The following table provides the components of the Company’s recorded investment in loans at September 30, 2021:

	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	$	63,624	$	8,350	$	2,506	$	33,235	$	10,079	$	2,094	$	119,888
Accrued interest receivable		181		20		8		75		33		5		322
Net deferred loan fees/costs		4		(17)		(12)		(54)		(38)		44		(73)
Recorded investment in loans	$	63,809	$	8,353	$	2,502	$	33,256	$	10,074	$	2,143	$	120,137
Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment	$	874	$	—	$	—	$	239	$	338	$	—	$	1,451
Collectively evaluated for impairment		62,935		8,353		2,502		33,017		9,736		2,143		118,686
Ending balance	$	63,809	$	8,353	$	2,502	$	33,256	$	10,074	$	2,143	$	120,137

The following table provides the components of the Company’s recorded investment in loans at December 31, 2020:

	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	$	66,130	$	8,964	$	2,934	$	30,171	$	5,212	$	1,442	$	114,853
Accrued interest receivable		183		13		7		92		14		5		314
Net deferred loan fees/costs		7		(6)		(12)		(40)		11		35		(5)
Recorded investment in loans	$	66,320	$	8,971	$	2,929	$	30,223	$	5,237	$	1,482	$	115,162
Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment	$	1,489	$	—	$	—	$	281	$	382	$	—	$	2,152
Collectively evaluated for impairment		64,831		8,971		2,929		29,942		4,855		1,482		113,010
Ending balance	$	66,320	$	8,971	$	2,929	$	30,223	$	5,237	$	1,482	$	115,162

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An analysis of the allowance for loan losses as of September 30, 2021 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 for impairment	$	21	$	—	$	—	$	—	$	21	$	—	$	42
Collectively evaluated for impairment		945		99		25		368		137		35		1,609
Ending balance	$	966	$	99	$	25	$	368	$	158	$	35	$	1,651

An analysis of the allowance for loan losses as of December 31, 2020 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 for impairment	$	21	$	—	$	—	$	8	$	26	$	—	$	55
Collectively evaluated for impairment		971		98		55		298		87		25		1,534
Ending balance	$	992	$	98	$	55	$	306	$	113	$	25	$	1,589

An analysis of the changes in the allowance for loan losses for the three months ended September 30, 2021 is as follows:

	One-to-Four
	Family		Multi-Family				Commercial		Commercial
	Residential		Residential		Construction		Real Estate		Business		Consumer		Total
	(In thousands)
Allowance for loan losses:
Beginning balance	$	999	$	103	$	32	$	312	$	137	$	29	$	1,612
Provisions		(73)		(4)		(7)		56		21		7		—
Charge-offs		—		—		—		—		—		(3)		(3)
Recoveries		40		—		—		—		—		2		42
Ending balance	$	966	$	99	$	25	$	368	$	158	$	35	$	1,651

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An analysis of the changes in the allowance for loan losses for the nine months ended September 30, 2021 is as follows:

	One-to-Four
	Family		Multi-Family				Commercial		Commercial
	Residential		Residential		Construction		Real Estate		Business		Consumer		Total
	(In thousands)
Allowance for loan losses:
Beginning balance	$	992	$	98	$	55	$	306	$	113	$	25	$	1,589
Provisions		(70)		1		(30)		62		24		13		—
Charge-offs		—		—		—		—		—		(9)		(9)
Recoveries		44		—		—		—		21		6		71
Ending balance	$	966	$	99	$	25	$	368	$	158	$	35	$	1,651

An analysis of the changes in the allowance for loan losses for the three months ended September 30, 2020 is as follows:

	One-to-Four
	Family		Multi-Family				Commercial		Commercial
	Residential		Residential		Construction		Real Estate		Business		Consumer		Total
	(In thousands)
Allowance for loan losses:
Beginning balance	$	984	$	94	$	50	$	320	$	83	$	25	$	1,556
Provisions		9		7		3		9		—		2		30
Charge-offs		(2)		—		—		—		—		(4)		(6)
Recoveries		1		—		—		—		—		1		2
Ending balance	$	992	$	101	$	53	$	329	$	83	$	24	$	1,582

An analysis of the changes in the allowance for loan losses for the nine months ended September 30, 2020 is as follows:

	One-to-Four
	Family		Multi-Family				Commercial		Commercial
	Residential		Residential		Construction		Real Estate		Business		Consumer		Total
	(In thousands)
Allowance for loan losses:
Beginning balance	$	955	$	83	$	44	$	289	$	102	$	25	$	1,498
Provisions		48		18		9		40		(19)		6		102
Charge-offs		(14)		—		—		—		—		(14)		(28)
Recoveries		3		—		—		—		—		7		10
Ending balance	$	992	$	101	$	53	$	329	$	83	$	24	$	1,582

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The following table summarizes the Company’s impaired loans as of September 30, 2021 and for the three and nine months ended September 30, 2021. The Company did not recognize any interest income on impaired loans using the cash receipts method of accounting for the three- and nine-month periods ended September 30, 2021.

							Three Months Ended				Nine Months Ended
	At September 30, 2021						September 30, 2021				September 30, 2021
	Unpaid						Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
	(In thousands)
Loans with no related allowance recorded:
One-to-four family residential	$	654	$	724	$	—	$	785	$	1	$	964	$	2
Commercial real estate		171		181		—		123		1		105		3
Commercial business		—		—		—		—		—		6		—
	$	825	$	905	$	—	$	908	$	2	$	1,075	$	5
Loans with an allowance recorded:
One-to-four family residential	$	220	$	219	$	21	$	220	$	2	$	228	$	7
Commercial real estate		68		72		—		123		2		153		5
Commercial business		338		342		21		343		4		352		14
	$	626	$	633	$	42	$	686	$	8	$	733	$	26
Total:
One-to-four family residential	$	874	$	943	$	21	$	1,005	$	3	$	1,192	$	9
Commercial real estate		239		253		—		246		3		258		8
Commercial business		338		342		21		343		4		358		14
	$	1,451	$	1,538	$	42	$	1,594	$	10	$	1,808	$	31

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The following table summarizes the Company’s impaired loans for the three- and nine-month periods ended September 30, 2020. The Company did not recognize any interest income on impaired loans using the cash receipts method of accounting for the three- and nine-month periods ended September 30, 2020.

	Three Months Ended				Nine Months Ended
	September 30, 2020				September 30, 2020
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
	(In thousands)
Loans with no related allowance recorded:
One-to-four family residential	$	1,255	$	1	$	1,188	$	4
Commercial real estate		281		—		262		—
Commercial business		22		—		27		1
	$	1,558	$	1	$	1,477	$	5
Loans with an allowance recorded:
One-to-four family residential	$	253	$	2	$	256	$	5
Commercial real estate		328		5		345		13
Commercial business		380		5		378		15
	$	961	$	12	$	979	$	33
Total:
One-to-four family residential	$	1,508	$	3	$	1,444	$	9
Commercial real estate		609		5		607		13
Commercial business		402		5		405		16
	$	2,519	$	13	$	2,456	$	38

The following table summarizes the Company’s impaired loans as of December 31, 2020:

	At December 31, 2020
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
	(In thousands)
Loans with no related allowance recorded:
One-to-four family residential	$	1,265	$	1,380	$	—
Commercial real estate		96		88		—
Commercial business		15		16		—
	$	1,376	$	1,484	$	—
Loans with an allowance recorded:
One-to-four family residential	$	224	$	223	$	21
Commercial real estate		185		195		8
Commercial business		367		381		26
	$	776	$	799	$	55
Total:
One-to-four family residential	$	1,489	$	1,603	$	21
Commercial real estate		281		283		8
Commercial business		382		397		26
	$	2,152	$	2,283	$	55

-20-

Nonperforming loans consists of nonaccrual loans and loans over 90 days past due and still accruing interest. The following table presents the recorded investment in nonperforming loans at September 30, 2021 and December 31, 2020:

	At September 30, 2021						At December 31, 2020
			Loans 90+						Loans 90+
			Days		Total				Days		Total
	Nonaccrual		Past Due		Nonperforming		Nonaccrual		Past Due		Nonperforming
	Loans		Still Accruing		Loans		Loans		Still Accruing		Loans
	(In thousands)
One-to-four family residential	$	621	$	—	$	621	$	1,160	$	—	$	1,160
Commercial real estate		29		—		29		96		—		96
Total	$	650	$	—	$	650	$	1,256	$	—	$	1,256

The following tables present the aging of the recorded investment in loans at September 30, 2021 and December 31, 2020:

					Over
	30‑59 Days		60‑89 Days		90 Days		Total				Total
	Past Due		Past Due		Past Due		Past Due		Current		Loans
	(In thousands)
September 30, 2021
One-to-four family residential	$	839	$	239	$	102	$	1,180	$	62,629	$	63,809
Multi-family residential		—		—		—		—		8,353		8,353
Construction		—		—		—		—		2,502		2,502
Commercial real estate		—		—		—		—		33,256		33,256
Commercial business		65		—		—		65		10,009		10,074
Consumer		4		—		—		4		2,139		2,143
Total	$	908	$	239	$	102	$	1,249	$	118,888	$	120,137

December 31, 2020
One-to-four family residential	$	1,097	$	560	$	75	$	1,732	$	64,588	$	66,320
Multi-family residential		—		—		—		—		8,971		8,971
Construction		—		—		—		—		2,929		2,929
Commercial real estate		27		—		—		27		30,196		30,223
Commercial business		—		—		—		—		5,237		5,237
Consumer		11		—		—		11		1,471		1,482
Total	$	1,135	$	560	$	75	$	1,770	$	113,392	$	115,162

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:

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.

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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.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

The following table presents the recorded investment in loans by risk category as of the dates indicated:

	One-to-		Multi-
	Four Family		Family				Commercial		Commercial
	Residential		Residential		Construction		Real Estate		Business		Consumer		Total
	(In thousands)
September 30, 2021
Pass	$	63,129	$	8,353	$	2,502	$	33,220	$	10,074	$	2,143	$	119,421
Special mention		—		—		—		—		—		—		—
Substandard		680		—		—		36		—		—		716
Doubtful		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—
Total	$	63,809	$	8,353	$	2,502	$	33,256	$	10,074	$	2,143	$	120,137
December 31, 2020
Pass	$	64,992	$	7,503	$	2,929	$	30,105	$	5,237	$	1,482	$	112,248
Special mention		—		1,468		—		—		—		—		1,468
Substandard		1,328		—		—		118		—		—		1,446
Doubtful		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—
Total	$	66,320	$	8,971	$	2,929	$	30,223	$	5,237	$	1,482	$	115,162

Modification of a loan is considered to be a troubled debt restructuring ("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.

The Coronavirus Aid, Relief, and Economic Security Act of 2020 signed into law on March 27, 2020 ("CARES Act") provides guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as

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defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act if they are less than 30 days past due on their contractual payments at the time a modification program is implemented.

On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the Financial Accounting Standards Board (“FASB”) that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired. During 2020, the Bank had modified 89 loans with $18.6 million in total principal outstanding, and all modified loans had returned to their pre-modification payment terms as of December 31, 2020.  NaN loans were modified under the CARES Act during the nine months ended September 30, 2021.

The following table summarizes the Company’s TDRs by accrual status as of September 30, 2021 and December 31, 2020:

	September 30, 2021								December 31, 2020
							Related								Related
							Allowance for								Allowance for
	Accruing		Nonaccrual		Total		Loan Losses		Accruing		Nonaccrual		Total		Loan Losses
	(In thousands)
One-to-four family residential	$	252	$	118	$	370	$	21	$	329	$	226	$	555	$	21
Commercial real estate		209		—		209		—		185		50		235		8
Commercial business		337		—		337		21		382		—		382		26
Total	$	798	$	118	$	916	$	42	$	896	$	276	$	1,172	$	55

At both September 30, 2021 and December 31, 2020 there were 0 commitments to lend additional funds to debtors whose loan terms have been modified in a TDR (both accruing and nonaccruing).

There were 0 TDRs that were restructured during the three and nine months ended September 30, 2021.

The following table summarizes information in regards to TDRs that were restructured during the three and nine months ended September 30, 2020.

	Three Months Ended September 30, 2020					Nine Months Ended September 30, 2020
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
	Number of	Outstanding		Outstanding		Number of	Outstanding		Outstanding
	Contracts	Balance		Balance		Contracts	Balance		Balance
	(In thousands)
One-to-four family residential	2	$	81	$	81	5	$	230	$	230
Commercial real estate	—		—		—	1		51		51
Total	2	$	81	$	81	6	$	281	$	281

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For the three-month period ended September 30, 2020, 2 loans were reclassified as TDRs. For TDRs that were restructured during the nine months ended September 30, 2020, the terms of the modifications included a three-month payment deferral associated with the COVID-19.

There were 0 principal charge-offs recorded as a result of TDRs and there was 0 specific allowance for loan losses related to TDRs modified during both the three- and nine-month periods ended September 30, 2021 and 2020.

There were 0 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- and nine-month periods ended September 30, 2021 and 2020. In the event that a TDR subsequently defaults, the Company evaluates the restructuring for possible impairment. As a result, the related allowance for loan losses may be increased or charge-offs may be taken to reduce the carrying amount of the loan.

5.           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. NaN stock options for common stock and 0 restricted stock awards were excluded from the calculation of diluted net income per common share because their effect was antidilutive for the three- and nine-month periods ended September 30, 2021 and 2020.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
	(Dollars in thousands, except per share data)
Basic
Earnings:
Net income	$	456	$	264	$	1,231	$	991
Shares:
Weighted average common shares outstanding		2,875,547		3,106,371		2,935,796		3,237,533
Net income per common share, basic	$	0.16	$	0.09	$	0.42	$	0.31
Diluted
Earnings:
Net income	$	456	$	264	$	1,231	$	991
Shares:
Weighted average common shares outstanding		2,875,547		3,106,371		2,935,796		3,237,533
Add: Dilutive effect of stock options		5,000		1,142		4,039		1,140
Add: Dilutive effect of restricted stock		7,627		2,803		5,512		984
Weighted average common shares outstanding, as adjusted		2,888,174		3,110,316		2,945,347		3,239,657
Net income per common share, Diluted	$	0.16	$	0.09	$	0.42	$	0.31

6.           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

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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 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 31^st, 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- and nine-month periods ended September 30, 2021 was $40,000 and $121,000, respectively. Compensation expense recognized for the three- and nine-month periods ended September 30, 2020 was $32,000 and $98,000, respectively. The ESOP trust held 27,863 allocated shares and 176,926 unallocated shares of Company common stock at September 30, 2021. The fair value of the unallocated shares was $2.7 million at September 30, 2021.

7.            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 September 30, 2021, on an adjusted basis, awards for stock options totaling 93,254 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. The 2010 Plan expired July 27, 2020.

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.

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 September 30, 2021, awards for restricted stock totaling 18,500 shares of the Company common stock have been granted to participants in the 2019 Plan. At September 30, 2021, 0 awards of stock options have been granted under the 2019 Plan.

The fair market value of stock options granted is determined at the date of grant using the binomial option pricing model. Expected volatilities are based on historical volatility of the Company's stock (for periods prior to the Conversion, the historical volatility of the Bank’s common stock). The expected term of options granted represents the period of time that options are expected to be outstanding and is based on historical trends. The

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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.

A summary of option activity under the 2010 Plan as of September 30, 2021, and changes during the nine-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	93,254	$	13.18
Granted	—		—
Exercised	(1,170)		5.11
Forfeited or expired	—		—
Outstanding at end of period	92,084	$	13.29	8.2	$	163,000
Vested and expected to vest	92,084	$	13.29	8.2	$	163,000
Exercisable at end of period	43,348	$	13.23	8.1	$	80,000

For the three- and nine-month periods ended September 30, 2021, the Company recognized $13,000 and $39,000, respectively, in compensation expense related to the stock option plan. For the three- and nine-month periods ended September 30, 2020, the Company recognized $18,000 and $52,000, respectively in compensation expense related to the stock option plan. At September 30, 2021, there was $118,000 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 September 30, 2021 and changes during the nine-month period then ended is presented below:

		Weighted
	Number	Average
	of	Grant-Date
	Shares	Fair Value
Nonvested at beginning of year	30,142	$	14.00
Granted	—		—
Vested	(1,000)		14.74
Forfeited	(200)		14.74
Nonvested at end of period	28,942	$	13.97

For the three- and nine-month periods ended September 30, 2021, the Company recognized $30,000 and $104,000, respectively, in compensation expense related to the restricted stock plans. For the three- and nine-month periods ended September 30, 2020, the Company recognized $22,000 and $66,000, respectively, in compensation expense related to the restricted stock plans. At September 30, 2021, unrecognized compensation expense related to nonvested restricted shares was $315,000. The compensation expense is expected to be recognized over the remaining weighted average vesting period of 2.7 years.

8.           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

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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:

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

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a recurring and nonrecurring basis as of September 30, 2021 and December 31, 2020. The Company had no liabilities measured at fair value as of September 30, 2021 and December 31, 2020.

	Carrying Value
	Level 1		Level 2		Level 3		Total
	(In thousands)
September 30, 2021
Assets Measured on a Recurring Basis
Securities available for sale:
Agency MBS	$	—	$	12,595	$	—	$	12,595
Agency CMO		—		25,319		—		25,319
Municipal obligations		—		70,316		—		70,316
Total securities available for sale	$	—	$	108,230	$	—	$	108,230
Assets Measured on a Nonrecurring Basis
Impaired loans:
One-to-four family residential	$	—	$	—	$	853	$	853
Commercial real estate		—		—		239		239
Commercial business		—		—		317		317
Total impaired loans	$	—	$	—	$	1,409	$	1,409
Real estate held for sale	$	—	$	—	$	99	$	99
December 31, 2020
Assets Measured on a Recurring Basis
Securities available for sale:
Agency MBS	$	—	$	10,240	$	—	$	10,240
Agency CMO		—		27,771		—		27,771
Municipal obligations		—		66,445		—		66,445
Total securities available for sale	$	—	$	104,456	$	—	$	104,456
Assets Measured on a Nonrecurring Basis
Impaired loans:
One-to-four family residential	$	—	$	—	$	1,468	$	1,468
Commercial real estate		—		—		273		273
Commercial business		—		—		356		356
Total impaired loans	$	—	$	—	$	2,097	$	2,097
Real estate held for sale	$	—	$	—	$	99	$	99

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

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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.

Impaired Loans. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of impaired loans is classified as Level 3 in the fair value hierarchy.

Impaired loans are carried at the present value of estimated future cash flows using the loan’s effective interest rate or the fair value of collateral less estimated costs to sell if the loan is collateral dependent. At both September 30, 2021 and December 31, 2020, all impaired loans other than performing TDRs were considered to be collateral dependent for the purpose of determining fair value. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable. The fair value of the collateral is generally determined based on real estate appraisals or other independent evaluations by qualified professionals, adjusted for estimated costs to sell the property, costs to complete or repair the property and other factors to reflect management’s estimate of the fair value of the collateral given the current market conditions and the condition of the collateral. At both September 30, 2021 and December 31, 2020, the significant unobservable inputs used in the fair value measurement of collateral dependent impaired loans included a discount from appraised value (including estimated costs to sell the collateral) of 10%. The Company recognized a reduction in the allowance for loan losses allocated to impaired loans of $8,000 and $13,000 for the three and nine months ended September 30, 2021, respectively. The Company recognized a reduction in the allowance for loan losses allocated to impaired loans of $3,000 for the three months ended September 30, 2020. For the nine-months ended September 30, 2020, the allowance for loan losses allocated to impaired loans remained unchanged.

Real Estate Held for Sale. Real estate held for sale is reviewed and evaluated on at least an annual basis for additional impairment and adjusted accordingly. The fair value of real estate held for sale is classified as Level 3 in the fair value hierarchy.

At both September 30, 2021 and December 31, 2020, the significant unobservable inputs used in the fair value measurement of real estate held for sale included a discount from appraised value (including estimated costs to sell the property) of 10%. The Company did 0t recognize any charges to write down real estate held for sale during both the three- and nine-month periods ended September 30, 2021. The Company recognized charges to write down real estate held for sale of $37,000 during both the three and nine months ended September 30, 2020.

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 and nine months ended September 30, 2021 and 2020. There were 0 transfers into or out of the Company’s Level 3 financial assets for the three- and nine-month periods ended September 30, 2021 and 2020.

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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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)
September 30, 2021
Financial assets:
Cash and cash equivalents	$	17,886	$	17,886	$	—	$	—
Securities available for sale		108,230		—		108,230		—
Securities held to maturity		23		—		23		—
Loans, net		118,164		—		—		120,234
FHLB stock		778		N/A		N/A		N/A
Accrued interest receivable		891		—		891		—
Financial liabilities:
Deposits		195,228		—		—		195,420
Advance from FHLB		10,000		—		10,285		—
Accrued interest payable		11		—		11		—
December 31, 2020
Financial assets:
Cash and cash equivalents	$	9,661	$	9,661	$	—	$	—
Securities available for sale		104,456		—		104,456		—
Securities held to maturity		31		—		31		—
Loans, net		113,259		—		—		117,432
FHLB stock		778		N/A		N/A		N/A
Accrued interest receivable		898		—		898		—
Financial liabilities:
Deposits		174,113		—		—		174,548
Advance from FHLB		11,000		—		11,450		—
Accrued interest payable		10		—		10		—

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9.           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 and nine months ended September 30, 2021 and 2020:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
	(In thousands)
Deposit account service charges	$	87	$	45	$	207	$	127
Brokered loan fees		48		20		199		35
ATM and debit card fee income		138		110		412		312
Other income		7		9		12		24
Revenue from contracts with customers		280		184		830		498
Net gains on investments		—		—		—		104
Increase in cash surrender value of life insurance		16		17		47		51
Other income		5		1		23		4
Other noninterest income		21		18		70		159
Total noninterest income	$	301	$	202	$	900	$	657

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

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 a loan brokering agreement with United Wholesale Mortgage (“UWM”) in October 2019. Under the agreement, 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 UWM, 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.

10.         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 notes for public companies.

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In February 2016, FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The ASU requires lessees to recognize on the balance sheet the assets and liabilities arising from operating leases. A lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. A lessee should include payments to be made in an optional period only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. For a finance lease, interest payments should be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income. For operating leases, the lease cost should be allocated over the lease term on a generally straight-line basis. For public entities the amendments in the ASU became effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For nonpublic entities, the original effective date of the guidance was for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. In November 2019, the FASB issued ASU 2019-10 which delayed the effective date of ASU 2016-02 for nonpublic entities until fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early application of the amendments in the ASU is permitted. In June 2020, the FASB issued ASU 2020-05 which delayed the effective date of ASU 2016-02 for nonpublic entities until fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early application of the amendments in the ASU continues to be permitted. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements. This ASU amended the new leases standard to give entities another option for transition and to provide lessors with a practical expedient. The transition option allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. The practical expedient provides lessors with an option to not separate non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the new revenue standard if the associated non-lease components are the predominant components. The amendments have the same effective date as ASU 2016-02. In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842), Codification Improvements. This ASU amended the new leases standard to reinstate the exception in Leases (Topic 842) for lessors that are not manufacturers or dealers in regards to determining the fair value of the underlying assets. Specifically, those lessors will use their cost, reflecting any volume or trade discounts that may apply, as the fair value of the underlying asset unless a significant lapse of time occurs between the acquisition of the underlying asset and lease commencement, in which case, those lessors will be required to apply the definition of fair value (exit price) in Fair Value Measurements and Disclosures (Topic 820).

In addition, this ASU amended the new leases standard to clarify the presentation on the statement of cash flows principal payments received under leases for depository and lending institutions for Sales-Type and Direct Financing Leases. Specifically for these entities and leases, all principal payments received under leases will be presented within investing activities on the statement of cash flows. Finally, this ASU amended the new leases standard to explicitly provide an exception to paragraph 250-10-50-3 interim disclosure requirements for an entity electing the transition method of implementation. The amendments have the same effective date as ASU 2016-02. The effect of the adoption of these ASUs will depend on leases at the time of adoption. Once adopted, the Company expects to report higher assets and liabilities as a result of including right-of-use assets and lease liabilities related to certain banking offices under noncancelable operating lease agreements; however, based on current leases, the adoption is expected to increase our consolidated balance sheets by less than 5.0% and not to have a material impact on our regulatory capital ratios.

The FASB originally issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) as amended by ASU 2018-19, ASU 2019-04 and ASU 2019-05, in June 2016. This ASU, commonly referred to as the current expected credit loss methodology (“CECL”), replaces the incurred loss methodology for recognizing credit losses under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Under the new guidance, an entity will measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The expected loss model will apply to loans and leases, unfunded lending commitments, held-to-maturity debt securities and other debt instruments measured at amortized cost. The impairment model for available-for-sale debt securities will require the recognition of credit losses through a valuation allowance when fair value is less than amortized cost,

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regardless of whether the impairment is considered to be other-than-temporary. ASU 2019-05, issued in April 2019, further provides entities that have certain financial instruments measured at amortized cost that have credit losses with an option to irrevocably elect the fair value option in Subtopic 825-10, upon adoption of Topic 326. The fair value option applies to available-for-sale debt securities. In November 2019, the FASB issued ASU No. 2019-10 which delayed the effective date of ASU 2016-13 for smaller reporting companies, as defined by the Securities and Exchange Commission (“SEC”) and other non-SEC reporting entities to fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. Early adoption is permitted as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is a smaller reporting company as defined by the SEC, and currently does not intend to early adopt CECL. Once adopted, the Company expects its allowance for loan losses to increase through a one-time adjustment to retained earnings; however, until its evaluation is complete, the magnitude of the increase will be unknown.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public entities this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For nonpublic entities this ASU is effective for fiscal years beginning after December 31, 2021, and interim periods within fiscal years beginning after December 15, 2022. The adoption of the ASU is not expected to have a material impact on the Company’s consolidated financial statements.

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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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:

● the effect of the COVID-19 pandemic, including on the Company’s credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity;

● 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 loan losses;

● the possibility of other-than-temporary impairments 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 multifamily 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;

● 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 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 loan 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;

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● our ability to control operating costs and expenses;

● 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, including the CARES Act and the other risks described from time to time in our filings with the SEC, including our 2020 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.

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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.

Significant Developments and the Impact of COVID-19

The COVID-19 pandemic is expected to have a significant adverse impact on the United States’ economy, including the banking industry, in future fiscal periods. The impact is subject to a high degree of uncertainty.

Our commercial and banking products are offered primarily in Indiana, where municipal and state-wide responses to the pandemic have led to a broad curtailment of economic activity beginning in March 2020. Governor Eric J. Holcomb issued several executive orders during 2020 with the goal to mitigate the spread of the COVID-19 virus, while slowly easing restrictions on nearly all activities. On December 10, 2020, in response to rising positivity rates, Governor Holcomb issued an executive order which implemented restrictions on gatherings and events for each county in Indiana based upon its current color-coded rating. On March 31, 2021, the governor announced that the statewide mask mandate would become an advisory, effective April 6, 2021, and the state would defer all decisions on venue capacity to local officials.

In response to the pandemic, several regulatory directives have been enacted at the federal, state and local levels, including the following:

● The Federal Reserve took action to reduce the federal funds target rate by 50 basis points on March 3, 2020 and then by another 100 basis points on March 16, 2020. The current range is 0.00% to 0.25%.

● On March 27, 2020, the CARES Act was signed into law. The CARES Act established a $2 trillion economic stimulus package, providing cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the U.S. Small Business Administration (the “SBA”), referred to as the Paycheck Protection Program (the “PPP”). Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. During the initial round of funding for PPP loans, the Bank funded 29 loans totaling $474,000. As of September 30, 2021, all loans funded in the initial round had received full forgiveness from the SBA. In late December 2020, the Emergency Coronavirus Relief Act of 2020 (the “Relief Act”) was enacted. The Relief Act extended certain provisions of the CARES Act and allotted $284 billion to the SBA for a second round of PPP loans. For the nine months ended September 30, 2021, the Bank funded 43 PPP loans totaling $815,000 as part of this second round, and 16 loans with a principal balance of $307,000 remain outstanding as of September 30, 2021. As of September 30, 2021, 27 loans with a principal balance of $508,000 had received full forgiveness from the SBA.

● In addition, the CARES Act and related bank agency regulatory guidance provide financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. Most modifications allowed deferral of principal and interest payments for 90 days. Through 2020, the Bank modified 89 loans related to the COVID-19 pandemic, and most modifications allowed deferral of principal and interest payments for 90 days. All modified loans that remain outstanding at September 30, 2021 have returned to their pre-modification payment terms. Three of these loans with a total principal balance of $167,000 as of September 30, 2021 are pre-existing TDRs. See Note 4 of the Notes to the Consolidated Financial Statements for additional disclosure of TDRs as of September 30, 2021. All loans modified due to COVID-19 will be separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate. As of September 30, 2021, none of our customers who received PPP loans were granted some form of COVID-19 related loan modification.

We currently expect that the COVID-19 pandemic and related economic developments will have an adverse impact on our business. The extent and duration of the COVID-19 economic impact is difficult to quantify, however our financial condition, capital levels and results of operations could be materially adversely affected. While the ultimate

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impact of the crisis is difficult to predict, we believe the Company is well-capitalized and has the financial stability to continue to responsibly serve its customers and communities during this unprecedented time.

In response to the pandemic, we have undertaken several actions to address the needs of our employees, our customers and our communities, including the following:

● We are working with our loan customers who have been negatively impacted by the pandemic and require loan modifications and deferrals.

● We waived fees for early withdrawals of certificates of deposit by customers due to hardship.

● We participated as a lender in the PPP through the CARES Act and the Relief Act in order to assist our customers and communities.

● While we opened the lobbies of all of our branches to customer activity on May 13, 2020, customers who are not fully vaccinated are still required to wear face masks, and we have installed signage to encourage social distancing and protective shielding in all customer-facing locations. Cleaning and other protocols remain in effect in order to mitigate risk. Our pandemic protocols are continually evaluated and updated based upon the most-recent recommendations from federal, state and local health officials.

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 multifamily, 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 multifamily 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, Federal Home Loan Bank (“FHLB”) advances 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:

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Allowance for Loan Losses. The allowance for loan losses represents management's estimate of losses inherent in the loan portfolio as of the date of the statement of condition and it is recorded as a reduction of loans. The allowance is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan 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 loan losses is restricted to any individual loan and the entire allowance is available to absorb all loan losses.

The allowance for loan 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.

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

The general component covers pools of loans, by loan class, including commercial loans not considered impaired, as well as smaller balance homogenous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based on historical loss rates for each of these categories of loans, which are 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;

● Nature and volume of the portfolio and terms of the loans;

● Experience, ability and depth of the lending management and staff;

● Changes in the value of underlying collateral for collateral-dependent loans;

● 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 value to reflect improving, stable or declining 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 conditions in a narrative accompanying the allowance for loan loss analysis and calculation.

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In addition, various bank regulatory agencies periodically review the allowance for loan 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 loan 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 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 impaired 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.

Comparison of Financial Condition at September 30, 2021 and December 31, 2020

Total assets increased $16.9 million, or 7.2%, to $252.3 million at September 30, 2021 from $235.4 million at December 31, 2020.

Cash and Cash Equivalents.  Cash and cash equivalents increased $8.2 million, or 85.1%, to $17.9 million at September 30, 2021 from $9.7 million at December 31, 2020 due primarily to an increase in deposits, partially offset by the net effect of activity in available for sale securities, an increase in net loans receivable, the repurchase of the Company’s common stock and a decrease in borrowings.

Loans.  Our primary lending activity is the origination of loans secured by real estate. We originate one-to-four family residential loans, multifamily residential loans, commercial real estate loans and construction loans, as well as commercial business loans and consumer loans. Net loans receivable increased $4.9 million, or 4.3%, to $118.2 million at September 30, 2021 from $113.3 million at December 31, 2020. The increase in net loans receivable was due primarily to increases in commercial business and commercial real estate loans, partially offset by decreases in one-to-four family residential loans. We anticipate the COVID-19 pandemic could have an adverse impact on our future loan originations.

Securities Available for Sale.  Our available for sale securities portfolio consists primarily of U.S. government agency debt securities, including mortgage-backed securities and collateralized mortgage obligations, and municipal obligations. Securities available for sale increased $3.8 million, or 3.6%, to $108.2 million at September 30, 2021 from $104.5 million at December 31, 2020. The increase was due primarily to purchases of $14.1 million in municipal obligations and federal agency mortgage-backed securities partially offset by $8.4 million in principal collections on municipal obligations and federal agency mortgage-backed securities and a $1.7 million decrease in the gross unrealized gain in the portfolio.

Securities Held to Maturity.  Our held to maturity securities portfolio consists of U.S. government agency mortgage-backed securities. Securities held to maturity decreased $8,000, or 25.8%, to $23,000 at September 30, 2021 from $31,000 at December 31, 2020 due primarily to principal repayments of mortgage-backed securities.

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-

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bearing checking, interest-bearing checking, savings, and money market accounts and certificates of deposit. Deposits increased $21.1 million, or 12.1%, to $195.2 million at September 30, 2021 from $174.1 million at December 31, 2020.

Borrowings.  On June 27, 2019, the Company borrowed $10.0 million from the FHLB which matures on June 27, 2024 and bears interest at a rate of 1.73%. On December 30, 2020, the Company borrowed $1.0 million from the FHLB, bearing an interest rate of 0.26% and matured on January 6, 2021.

Stockholders’ Equity.  Stockholders’ equity decreased $2.8 million to $46.2 million at September 30, 2021 from $49.0 million at December 31, 2020. The decrease was due primarily to the repurchase of 156,602 shares of our common stock at a total cost of $2.8 million and a decrease in the accumulated other comprehensive income, net of tax, of $1.3 million, partially offset by net income of $1.2 million.

Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2021 and 2020

Net Income.  Net income was $456,000 ($0.16 per common share diluted) for the three months ended September 30, 2021, compared to net income of $264,000 ($0.09 per common share diluted) for the three months ended September 30, 2020. For the nine months ended September 30, 2021, net income was $1.2 million ($0.42 per common share diluted) compared to $991,000 ($0.31 per common share diluted) for the same period in 2020. The primary reason for the increase in net income between the periods was increased noninterest income and net interest income partially offset by increased noninterest expenses.

Net Interest Income.  Net interest income after provision for loan losses increased $162,000, or 10.3%, to $1.7 million for the three months ended September 30, 2021 compared to $1.6 million for the three months ended September 30, 2020 due primarily to an increase in average investment securities and a decline in the cost of interest-bearing liabilities, partially offset by lower average loan receivables and higher average deposits.

Total interest income increased $70,000, or 3.8%, to $1.9 million for the three months ended September 30, 2021 as compared to $1.8 million the same period in 2020. The increase resulted from an increase in the average balance of interest-earning assets partially offset by a decrease in the yield earned on interest-earning assets. The average balance of interest-earning assets increased to $238.7 million for the quarter ended September 30, 2021 from $208.4 million for the quarter ended September 30, 2020, due primarily to increases in investment securities, partially offset by decreases in loans receivable and interest-bearing deposits with banks. The average tax equivalent yield on interest-earning assets decreased to 3.37% for the quarter ended September 30, 2021 from 3.68% for the quarter ended September 30, 2020, due primarily to a decrease in market interest rates.

Total interest expense decreased $62,000, or 27.4%, to $164,000 for the three months ended September 30, 2021 compared to $226,000 for the three months ended September 30, 2020 due to a decrease in the average cost of interest-bearing liabilities, partially offset by an increase in the average balance of interest-bearing liabilities. The average cost of interest-bearing liabilities decreased to 0.38% for the quarter ended September 30, 2021 from 0.62% for the same period in 2020. The average balance of interest-bearing liabilities increased to $174.6 million for the quarter ended September 30, 2021 from $145.2 million for the same period in 2020, due primarily to an increase in the number and balance of savings and interest-bearing demand deposit accounts, partially offset by a decrease in time deposits. The average cost of deposits decreased to 0.29% for the quarter ended September 30, 2021 from 0.54% for the same period in 2020. The market’s response to lowering deposit pricing to reflect the targeted federal funds rate decreases over the past year typically lags declines in the yield on interest earning assets. As a result of the changes in interest-earning assets and interest-bearing liabilities, the interest rate spread decreased to 2.99% from 3.06% and the net interest margin decreased to 3.09% from 3.25% for the quarters ended September 30, 2021 and 2020, respectively.

Net interest income after provision for loan losses increased $405,000, or 8.5%, to $5.1 million for the nine months ended September 30, 2021 compared to $4.7 million for the nine months ended September 30, 2020 due primarily to an increase in the average balance of interest-earning assets partially offset by a decrease in the yield earned on interest-earning assets.

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Total interest income was $5.6 million for both the nine months ended September 30, 2021 and September 30, 2020. While total interest income was essentially flat for the period, interest income from investment securities increased $445,000, partially offset by a $316,000 decrease in interest income from loans receivable and a $56,000 decrease in interest income from interest-bearing deposits with banks. The average balance of interest-earning assets increased to $235.0 million for the nine months ended September 30, 2021 from $204.7 million for the nine months ended September 30, 2020, due primarily to increases in investment securities, partially offset by decreases in loans receivable and interest-bearing deposits with banks. The average tax equivalent yield on interest-earning assets declined to 3.38% for the nine months ended September 30, 2021 from 3.78% for the nine months ended September 30, 2020, due primarily to a decrease in market interest rates.

Total interest expense decreased $237,000, or 32.1%, to $501,000 for the nine months ended September 30, 2021 compared to $738,000 for the nine months ended September 30, 2020 due to a decrease in the average cost of interest-bearing liabilities, partially offset by an increase in the average balance of interest-bearing liabilities. The average cost of interest-bearing liabilities decreased to 0.39% for the nine months ended September 30, 2021 from 0.69% for the same period in 2020. The average balance of interest-bearing liabilities increased to $169.9 million for the nine months ended September 30, 2021 from $142.1 million for the same period in 2020, due primarily to an increase in the number and balance of savings and interest-bearing demand deposit accounts, partially offset by a decrease in time deposits. The average cost of deposits decreased to 0.31% for the nine months ended September 30, 2021 from 0.61% for the same period in 2020. As a result of the changes in interest-earning assets and interest-bearing liabilities, the interest rate spread decreased to 2.99% from 3.09% and the net interest margin decreased to 3.09% from 3.29% for the nine-month periods ended September 30, 2021 and 2020, respectively.

Provision for Loan Losses.  Non-performing loans decreased to $650,000, at September 30, 2021 compared to $1.3 million at December 31, 2020, or 0.5% and 1.1% of total loans, respectively. At September 30, 2021, $422,000 or 65.0% of nonperforming loans were current on their loan payments. Based on an analysis of the factors described in "Summary of Significant Accounting Policies – Allowance for Loan Losses,” the Company did not record a provision for loan losses for the three months ended September 30, 2021, compared to a $30,000 provision for loan losses for the same period of 2020. For the nine months ended September 30, 2021, the Company did not record a provision for loan losses while it recorded a $102,000 provision for the same period in 2020. We believe the provision for loan losses could increase in future periods based on the possibility of increased loan delinquencies and defaults as a result of the COVID-19 pandemic.

Noninterest Income.  Noninterest income increased $99,000, or 49.0%, for the quarter ended September 30, 2021 as compared to the same period in 2020, due primarily to increases of $42,000, $28,000, and $28,000 in deposit account service charges, brokered loan fees and ATM and debit card fee income, respectively.

Noninterest income increased $243,000, or 37.0%, for the nine months ended September 30, 2021 as compared to the same period in 2020, due primarily to increases of $164,000, $100,000, and $80,000 in brokered loan fees, ATM and debit card fee income and deposit account service charges, respectively, partially offset by a reduction of $104,000 in net gain on sales of securities available for sale. Proceeds from sales of securities available for sale were $4.5 million for the nine months ended September 30, 2020. No available for sale securities have been sold during the nine months ended September 30, 2021.

Noninterest Expense.  Noninterest expense increased $25,000, or 1.6%, for the quarter ended September 30, 2021 as compared to the same period in 2020. The increase was due primarily to increases in data processing fees of $23,000, compensation and benefits of $20,000, occupancy and equipment expenses of $15,000 and other expenses of $11,000, partially offset by a reduction in the impairment loss on real estate held for sale of $37,000. An impairment of $37,000 was recorded during the three months ended September 30, 2020 whereas no impairment was recorded during the three months ended September 30, 2021.

Noninterest expense increased $426,000, or 9.8%, for the nine months ended September 30, 2021 as compared to the same period in 2020. The increase was due primarily to increases in compensation and benefits of $265,000, occupancy and equipment expenses of $65,000, data processing fees of $40,000, deposit insurance premiums of $27,000, directors’ compensation expense of $19,000 and other expenses of $55,000, partially offset by decreases in professional

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fees of $17,000 and a reduction in the impairment loss on real estate held for sale of $37,000. An impairment of $37,000 was recorded during the nine months ended September 30, 2020 whereas no impairment was recorded during the nine months ended September 30, 2021.

Income Tax Expense.  The Company recorded an income tax expense of $33,000 for the quarter ended September 30, 2021, compared to benefit of $11,000 for the same period in 2020. Income tax expense decreased $18,000 to $56,000 for the nine months ended September 30, 2021 as compared to $74,000 for the same period in 2020, resulting from a reduction in our effective tax rate to 4.4% for 2021 compared to 6.9% for 2020. The decrease in the effective tax rate is due primarily to increased tax-exempt investment income proportionate to overall pre-tax income.

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). At September 30, 2021, we had $126.1 million in cash and investment securities available for sale generally available for our cash needs. If we require funds beyond our ability to generate them internally, we have additional borrowing capacity with the FHLB of Indianapolis and additional collateral eligible for repurchase agreements. 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. Our liquidity, represented by cash and cash-equivalents, is a product of our operating, investing and financing activities.

We believe that the COVID-19 pandemic could place potential stresses on our liquidity management. As our customers manage their liquidity issues, we could experience an increase in the utilization of existing lines of credit and or deposit outflows. We continually monitor our liquidity for signs of stress resulting from the COVID-19 pandemic and intend to respond consistent with our asset/liability objectives.

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 $3.5 million at September 30, 2021.

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

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requirements. We also generate cash through borrowings. We utilize FHLB advances 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 September 30, 2021, the approved outstanding loan commitments, including unused lines and letters of credit, amounted to $24.9 million. Certificates of deposit scheduled to mature in one year or less at September 30, 2021, totaled $19.3 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 September 30, 2021, the Bank exceeded all regulatory capital requirements and met the requirements to be deemed "well-capitalized" under applicable OCC regulatory guidelines.

On May 23, 2018, the President signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act passed by Congress (the “Act”). The Act contains a number of provisions extending regulatory relief to banks and savings institutions and their holding companies. Effective January 1, 2020, a bank or savings institution that elects to use the Community Bank Leverage Ratio (“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% (adjusted to 8.0%, effective April 1, 2020 and 8.5% effective January 1, 2021). On October 9, 2020, the OCC along with the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, published a final rule, effective November 9, 2020, implementing a temporary change to the CBLR framework pursuant to the CARES Act, and provides a graduated increase to the 9% requirement as established under the final rule published in 2019. To be eligible to elect to use the CBLR, the bank or institution also must have total consolidated assets of less than $10 billion, off-balance sheet exposures of 25% 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 elected to use the CBLR effective January 1, 2020.

The Bank was considered well-capitalized under applicable federal regulatory capital guidelines with a CBLR of 16.5% at September 30, 2021 and 17.6% at December 31, 2020.

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. If Mid-Southern Bancorp, Inc. was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at September 30, 2021, Mid-Southern Bancorp, Inc. would have exceeded all regulatory capital requirements.

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 and nine months ended September 30, 2021, 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 2020 Form 10-K. Please refer to Item 1A “Risk Factors” of Part II in this Form 10-Q for additional information regarding the COVID-19 pandemic and the effect to the Company’s market risk through September 30, 2021.

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 September 30, 2021 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 September 30, 2021, 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 September 30, 2021, 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 light of recent developments relating to COVID-19, the Company is supplementing its risk factors contained in Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission on March 26, 2021. The following risk factor should be read in conjunction with the risk factors described in the Annual Report on Form 10-K for the year ended December 31, 2020.

The COVID-19 pandemic has adversely impacted our ability to conduct business and is expected to adversely impact our financial results and those of our customers. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic has significantly adversely affected our operations and the way we provide banking services to businesses and individuals. As an essential business, we continue to provide banking and financial services to our customers at all of our branch locations with drive-thru access also available. In addition, we continue to provide access to banking and financial services through online banking, ATMs and by telephone. If the COVID-19 pandemic worsens it could limit or disrupt our ability to provide banking and financial services to our customers.

We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of the COVID-19 pandemic. We also rely upon our third-party vendors to conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

There is pervasive uncertainty surrounding the future economic conditions that will emerge in the months and years following the start of the pandemic. As a result, management is confronted with a significant and unfamiliar degree of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset values. Because the length of the pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including recent reductions in the targeted Federal Funds Rate, until the pandemic subsides, we expect our net interest income and net interest margin will be adversely affected in the near term, if not longer. Many of our borrowers have become unemployed or may face unemployment, and certain businesses are at risk of insolvency as their revenues decline precipitously, especially in businesses related to travel, hospitality, leisure and physical personal services. Businesses may ultimately not reopen as there is a significant level of uncertainty regarding the level of economic activity that will return to our markets over time, the impact of governmental assistance, the speed of economic recovery, the resurgence of COVID-19 and its variants in subsequent seasons and changes to demographic and social norms that will take place.

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The impact of the pandemic is expected to continue to adversely affect us during 2021 and possibly longer as the ability of many of our customers to make loan payments has been significantly affected. Although the Company makes estimates of loan losses related to the pandemic as part of its evaluation of the allowance for loan losses, such estimates involve significant judgment and are made in the context of significant uncertainty as to the impact the pandemic will have on the credit quality of our loan portfolio. It is likely that increased loan delinquencies, adversely classified loans and loan charge-offs will increase in the future as a result of the pandemic. Consistent with guidance provided by banking regulators, we have modified loans by providing various loan payment deferral options to our borrowers affected by the COVID-19 pandemic. Notwithstanding these modifications, these borrowers may not be able to resume making full payments on their loans once the COVID-19 pandemic is resolved. Any increases in the allowance for credit losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.

As of September 30, 2021, we hold and service a portfolio of 16 PPP loans with a total balance of $307,000. The PPP loans are subject to the provisions of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES” Act), the Emergency Coronavirus Relief Act of 2020 (the “Relief” Act) and complex and evolving rules and guidance issued by the SBA and other government agencies. We expect that the vast majority of our PPP borrowers will seek full or partial forgiveness of their loan obligations. We could face additional risks in our administrative capabilities to service our PPP loans and risk with respect to the determination of loan forgiveness depending on the final procedures for determining loan forgiveness.

We are an entity separate and distinct from our principal subsidiary, Mid-Southern Savings Bank, and derive substantially all of our revenue at the holding company level in the form of dividends from that subsidiary. If the COVID-19 pandemic were to materially adversely affect the Bank’s regulatory capital levels or liquidity, it may result in Mid-Southern Savings Bank being unable to pay dividends to us, which may result in our not being able to pay dividends on our common stock at the same rate or at all.

Even after the COVID-19 pandemic subsides, the U.S. economy will likely require some time to recover from its effects, the length of which is unknown. and during which we may experience a recession. As a result, we anticipate our business may be materially and adversely affected during this recovery. To the extent the effects of the COVID-19 pandemic adversely impact our business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in the section entitled "Risk Factors" in our 2020 Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q.

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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)              The following table summarizes common stock repurchases during the three months ended September 30, 2021:

ISSUER PURCHASES OF EQUITY SECURITIES

				(c) Total Number	(d) Maximum
				of Shares	Number of
				Purchased	Shares That
				as Part of	May Yet Be
	(a) Total Amount	(b) Average		Publicly	Purchased
	of Shares	Price Paid		Approved Plans	Under The Plans
	Purchased	Per Share		or Programs	or Programs
July 1, 2021 through July 31, 2021	—	$	—	—	63,750
August 1, 2021 through August 31, 2021	148,121	$	17.83	9,603	54,147
September 1, 2021 through September 30, 2021	2,542	$	15.27	2,542	51,605
Total	150,663	$	17.79	12,145

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. 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.

On August 3, 2021, pursuant to authorization by its Board of Directors, the Company repurchased 138,518 shares of its common stock at a purchase price of $18.00 per share in a private transaction. The repurchase was in addition to the previously announced stock repurchase program discussed above. The Company remains well-capitalized under the applicable regulatory capital guidelines.

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 September 30, 2021, 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 September 30, 2021, 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 November 12, 2021	BY:	/s/ Alexander G. Babey
		Alexander G. Babey
		President and Chief Executive Officer
		(Principal Executive Officer)
Dated November 12, 2021	BY:	/s/ Robert W. DeRossett
		Robert W. DeRossett
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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