Mid-Southern Bancorp (MSVB) 10-Q 2022 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, 2022

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 November 04, 2022, there were 2,869,586 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 (Loss) (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	46
	Item 3. Defaults Upon Senior Securities	46
	Item 4. Mine Safety Disclosures	46
	Item 5. Other Information	46
	Item 6. Exhibits	47
Signatures		48

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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,
	2022		2021
ASSETS
Cash and due from banks	$	1,690	$	1,378
Interest-bearing deposits with banks		2,320		15,001
Cash and cash equivalents		4,010		16,379
Securities available for sale, at fair value		103,684		107,293
Securities held to maturity		18		21
Loans, net of allowance for loan losses of $1,653 and $1,523, respectively		142,473		122,568
Federal Home Loan Bank stock, at cost		1,778		778
Real estate held for sale		99		99
Premises and equipment		2,208		1,952
Accrued interest receivable:
Loans		380		296
Securities		700		701
Cash value of life insurance		3,811		3,930
Other assets		5,387		243
Total Assets	$	264,548	$	254,260
LIABILITIES
Deposits:
Noninterest-bearing	$	27,565	$	28,602
Interest-bearing		174,250		168,282
Total deposits		201,815		196,884
Advances from Federal Home Loan Bank		31,000		10,000
Accrued interest payable		31		11
Accrued expenses and other liabilities		892		836
Total Liabilities		233,738		207,731
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, 1,000,000 shares authorized, $0.01 par value, no shares issued and outstanding		—		—
Common stock, 30,000,000 shares authorized, $0.01 par value, 3,565,430 shares issued and 2,869,586 shares outstanding (3,016,653 in 2021)		36		36
Additional paid-in-capital		30,755		30,694
Retained earnings, substantially restricted		24,702		23,527
Accumulated other comprehensive income (loss)		(12,957)		2,096
Unearned ESOP shares		(1,571)		(1,649)
Unearned stock compensation plan		(344)		(473)
Treasury stock, at cost - 695,844 shares (548,777 in 2021)		(9,811)		(7,702)
Total Stockholders’ Equity		30,810		46,529
Total Liabilities and Stockholders’ Equity	$	264,548	$	254,260

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,
	2022		2021		2022		2021
INTEREST INCOME
Loans, including fees	$	1,556	$	1,317	$	4,326	$	3,887
Investment securities:
Mortgage-backed securities		158		137		405		421
Municipal tax exempt		428		381		1,233		1,130
Other debt securities		122		63		320		190
Federal Home Loan Bank dividends		21		4		30		13
Interest-bearing deposits with banks and time deposits		9		1		16		2
Total interest income		2,294		1,903		6,330		5,643
INTEREST EXPENSE
Deposits		128		121		342		371
Borrowings		166		43		275		130
Total interest expense		294		164		617		501
Net interest income		2,000		1,739		5,713		5,142
Provision for loan losses		85		—		135		—
Net interest income after provision for loan losses		1,915		1,739		5,578		5,142
NONINTEREST INCOME
Deposit account service charges		100		87		271		207
Brokered loan fees		25		48		126		199
Increase in cash value of life insurance		14		16		43		47
ATM and debit card fee income		144		138		432		412
Gain on life insurance		—		—		36		—
Other income		12		12		36		35
Total noninterest income		295		301		944		900
NONINTEREST EXPENSE
Compensation and benefits		936		902		2,752		2,743
Occupancy and equipment		161		139		437		405
Data processing		118		103		354		323
Professional fees		145		145		447		423
Loss on disposal of premises and equipment		10		—		17		—
Directors' compensation		84		70		254		242
Stockholders' meeting expense		8		12		41		50
Supervisory examinations		18		17		53		50
Deposit insurance premiums		16		10		49		40
Other expenses		171		153		524		479
Total noninterest expense		1,667		1,551		4,928		4,755
Income before income taxes		543		489		1,594		1,287
Income tax expense		31		33		89		56
Net Income	$	512	$	456	$	1,505	$	1,231
Earnings per common share:
Basic	$	0.19	$	0.16	$	0.55	$	0.42
Diluted	$	0.19	$	0.16	$	0.55	$	0.42

See accompanying Notes to Consolidated Financial Statements.

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MID-SOUTHERN BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands) (Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Net Income	$	512	$	456	$	1,505	$	1,231
Other Comprehensive Loss, net of tax
Unrealized losses on securities available for sale:
Net unrealized holding losses arising during the period		(5,381)		(892)		(20,037)		(1,665)
Income tax benefit		1,339		221		4,984		414
Net of tax amount		(4,042)		(671)		(15,053)		(1,251)
Other Comprehensive Loss, net of tax		(4,042)		(671)		(15,053)		(1,251)
Total Comprehensive Loss	$	(3,530)	$	(215)	$	(13,548)	$	(20)

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, 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
Balances at January 1, 2022	$	36	$	30,694	$	23,527	$	2,096	$	(1,649)	$	(473)	$	(7,702)	$	46,529
Net income		—		—		467		—		—		—		—		467
Other comprehensive loss		—		—		—		(5,888)		—		—		—		(5,888)
Cash dividends ($0.04 per share)		—		—		(113)		—		—		—		—		(113)
ESOP shares committed to be released		—		13		—		—		26		—		—		39
Purchase of 16,117 treasury shares		—		—		—		—		—		—		(241)		(241)
Forfeiture of unearned stock awards		—		—		—		—		—		2		(2)		—
Exercise of stock options		—		(8)		—		—		—		—		111		103
Stock compensation expense		—		13		—		—		—		41		—		54
Balances at March 31, 2022	$	36	$	30,712	$	23,881	$	(3,792)	$	(1,623)	$	(430)	$	(7,834)	$	40,950
Net income		—		—		526		—		—		—		—		526
Other comprehensive loss		—		—		—		(5,123)		—		—		—		(5,123)
Cash dividends ($0.04 per share)		—		—		(108)		—		—		—		—		(108)
ESOP shares committed to be released		—		11		—		—		26		—		—		37
Purchase of 136,780 treasury shares		—		—		—		—		—		—		(1,952)		(1,952)
Forfeiture of unearned stock awards		—		—		—		—		—		2		(2)		—
Stock compensation expense		—		11		—		—		—		41		—		52
Balances at June 30, 2022	$	36	$	30,734	$	24,299	$	(8,915)	$	(1,597)	$	(387)	$	(9,788)	$	34,382
Net income		—		—		512		—		—		—		—		512
Other comprehensive loss		—		—		—		(4,042)		—		—		—		(4,042)
Cash dividends ($0.04 per share)		—		—		(109)		—		—		—		—		(109)
ESOP shares committed to be released		—		10		—		—		26		—		—		36
Purchase of 1,589 treasury shares		—		—		—		—		—		—		(21)		(21)
Forfeiture of unearned stock awards		—		—		—		—		—		2		(2)		—
Stock compensation expense		—		11		—		—		—		41		—		52
Balances at September 30, 2022	$	36	$	30,755	$	24,702	$	(12,957)	$	(1,571)	$	(344)	$	(9,811)	$	30,810

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,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,505	$	1,231
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums and accretion of discounts on securities, net		339		279
Provision for loan losses		135		—
Stock compensation expense		158		143
Depreciation expense		145		126
Loss on disposal of premises and equipment		17		—
ESOP compensation expense		112		121
Deferred income taxes		(104)		(28)
Increase in cash value of life insurance		(43)		(47)
Gain on life insurance		(36)		—
(Increase) decrease in accrued interest receivable		(83)		7
Increase in accrued interest payable		20		1
Net change in other assets and liabilities		(32)		24
Net Cash Provided By Operating Activities		2,133		1,857
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale		(25,951)		(14,084)
Principal collected on mortgage-backed securities available for sale		6,347		5,513
Proceeds from maturities of securities available for sale		2,837		2,853
Principal collected on mortgage-backed securities held to maturity		3		8
Purchase of Federal Home Loan Bank stock		(1,057)		—
Proceeds from redemption of Federal Home Loan Bank Stock		57		—
Net increase in loans receivable		(20,040)		(4,905)
Purchase of premises and equipment		(386)		(100)
Proceeds from settlement of life insurance		203		—
Investment in cash value of life insurance		(5)		(2)
Net Cash Used In Investing Activities		(37,992)		(10,717)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		4,931		21,115
Repayments to Federal Home Loan Bank		(10,000)		(1,000)
Proceeds from Federal Home Loan Bank		31,000		—
Proceeds from the exercise of stock options		103		7
Purchase of treasury stock		(2,214)		(2,772)
Cash dividends paid		(330)		(265)
Net Cash Provided By Financing Activities		23,490		17,085
Net Increase (Decrease) in Cash and Cash Equivalents		(12,369)		8,225
Cash and cash equivalents at beginning of year		16,379		9,661
Cash and Cash Equivalents at End of Period	$	4,010	$	17,886
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	597	$	500
Net tax payments		145		27

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 25, 2022 ("2021 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.

3.           Investment Securities

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

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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.

Investment securities at September 30, 2022 and December 31, 2021 are summarized as follows:

			Gross		Gross
(In thousands)	Amortized		Unrealized		Unrealized		Fair
September 30, 2022	Cost		Gains		Losses		Value
Securities available for sale:
Mortgage-backed securities:
Agency MBS	$	13,585	$	—	$	2,090	$	11,495
Agency CMO		21,805		2		2,136		19,671
		35,390		2		4,226		31,166
Other debt securities:
U.S. Treasury securities		9,837		—		421		9,416
U.S. Government agency obligations		1,996		—		178		1,818
Municipal obligations		73,708		3		12,427		61,284
Total securities available for sale	$	120,931	$	5	$	17,252	$	103,684
Securities held to maturity:
Mortgage-backed securities:
Agency MBS	$	18	$	—	$	—	$	18
Total securities held to maturity	$	18	$	—	$	—	$	18
December 31, 2021
Securities available for sale:
Mortgage-backed securities:
Agency MBS	$	11,941	$	47	$	135	$	11,853
Agency CMO		24,196		47		465		23,778
		36,137		94		600		35,631
Other debt securities:
Municipal obligations		68,366		3,318		22		71,662
Total securities available for sale	$	104,503	$	3,412	$	622	$	107,293
Securities held to maturity:
Mortgage-backed securities:
Agency MBS	$	21	$	—	$	—	$	21
Total securities held to maturity	$	21	$	—	$	—	$	21

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The amortized cost and fair value of debt securities as of September 30, 2022, 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	$	2,270	$	2,229	$	—	$	—
Due after one year through five years		14,717		14,042		—		—
Due after five years through ten years		5,451		5,132		—		—
Due after ten years		63,103		51,115		—		—
		85,541		72,518		—		—
MBS and CMO		35,390		31,166		18		18
	$	120,931	$	103,684	$	18	$	18

Information pertaining to investment securities available for sale with gross unrealized losses at September 30, 2022, aggregated by investment category and the length of time that individual investment securities have been in a continuous loss position, follows.

	Number of			Gross
(Dollars in thousands)	Investment	Fair		Unrealized
September 30, 2022	Positions	Value		Losses
Securities available for sale:
Continuous loss position less than 12 months:
US Treasury	6	$	9,417	$	421
Agency MBS	8		4,765		650
Agency CMO	10		6,763		273
Federal agency obligations	1		1,818		178
Municipal obligations	118		58,374		11,724
Total less than 12 months	143		81,137		13,246
Continuous loss position more than 12 months:
Agency MBS	5		6,730		1,440
Agency CMO	10		11,472		1,863
Municipal obligations	3		1,728		703
Total more than 12 months	18		19,930		4,006
Total securities available for sale	161	$	101,067	$	17,252

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Information pertaining to investment securities available for sale with gross unrealized losses at December 31, 2021, aggregated by investment category and the length of time that individual investment securities have been in a continuous loss position, follows.

	Number of			Gross
(Dollars in thousands)	Investment	Fair		Unrealized
December 31, 2021	Positions	Value		Losses
Securities available for sale:
Continuous loss position less than 12 months:
Agency MBS	4	$	7,964	$	113
Agency CMO	4		4,792		46
Municipal obligations	3		2,452		22
Total less than 12 months	11		15,208		181
Continuous loss position more than 12 months:
Agency MBS	1		879		22
Agency CMO	8		12,553		419
Total more than 12 months	9		13,432		441
Total securities available for sale	20	$	28,640	$	622

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 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, 2022, the Company had no debt securities in the held to maturity classification in a loss position. At September 30, 2022, the debt securities available for sale in a loss position were 97.5% of the Company’s total available for sale securities portfolio. All of the debt securities in a loss position at September 30, 2022 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.

There were no securities sold during the three- and nine-month periods ended September 30, 2022. There were no securities sold during the three- and nine-month periods ended September 30, 2021.

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.

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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 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

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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, farmland, 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 service a loan until a project is completed, movements in interest rates and the real estate market during the construction phase, and the ability of the borrower to obtain permanent financing.

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

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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.

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, 2022, there were seven loans with a recorded investment of $249,000 that are 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 $19,000 at December 31, 2021.

Loans at September 30, 2022 and December 31, 2021 consisted of the following:

	September 30,		December 31,
(In thousands)	2022		2021
Real estate mortgage loans:
One-to-four family residential	$	64,725	$	64,098
Multi-family residential		11,350		9,385
Residential construction		1,601		1,406
Commercial real estate		47,865		36,678
Commercial real estate construction		3,996		1,632
Commercial business loans		12,466		8,804
Consumer loans		2,254		2,152
Total loans		144,257		124,155
Deferred loan origination fees and costs, net		(131)		(64)
Allowance for loan losses		(1,653)		(1,523)
Loans, net	$	142,473	$	122,568

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The following table provides the components of the Company’s recorded investment in loans at September 30, 2022:

	One-to-Four
	Family		Multi-Family				Commercial		Commercial
	Residential		Residential		Construction		Real Estate		Business		Consumer		Total
	(In thousands)
Recorded Investment in Loans:
Principal loan balance	$	64,725	$	11,350	$	5,597	$	47,865	$	12,466	$	2,254	$	144,257
Accrued interest receivable		159		17		7		147		46		4		380
Net deferred loan fees/costs		9		(31)		(24)		(104)		(23)		42		(131)
Recorded investment in loans	$	64,893	$	11,336	$	5,580	$	47,908	$	12,489	$	2,300	$	144,506
Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment	$	1,145	$	—	$	—	$	139	$	295	$	7	$	1,586
Collectively evaluated for impairment		63,748		11,336		5,580		47,769		12,194		2,293		142,920
Ending balance	$	64,893	$	11,336	$	5,580	$	47,908	$	12,489	$	2,300	$	144,506

The following table provides the components of the Company’s recorded investment in loans at December 31, 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	$	64,098	$	9,385	$	3,038	$	36,678	$	8,804	$	2,152	$	124,155
Accrued interest receivable		158		11		7		76		38		6		296
Net deferred loan fees/costs		7		(24)		(13)		(52)		(27)		45		(64)
Recorded investment in loans	$	64,263	$	9,372	$	3,032	$	36,702	$	8,815	$	2,203	$	124,387
Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment	$	1,041	$	—	$	—	$	170	$	328	$	3	$	1,542
Collectively evaluated for impairment		63,222		9,372		3,032		36,532		8,487		2,200		122,845
Ending balance	$	64,263	$	9,372	$	3,032	$	36,702	$	8,815	$	2,203	$	124,387

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An analysis of the allowance for loan losses as of September 30, 2022 is as follows:

	One-to-Four
	Family		Multi-Family				Commercial		Commercial
	Residential		Residential		Construction		Real Estate		Business		Consumer		Total
	(In thousands)
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	21	$	—	$	—	$	—	$	18	$	—	$	39
Collectively evaluated for impairment		719		112		17		593		140		33		1,614
Ending balance	$	740	$	112	$	17	$	593	$	158	$	33	$	1,653

An analysis of the allowance for loan losses as of December 31, 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	$	—	$	—	$	—	$	19	$	—	$	40
Collectively evaluated for impairment		852		102		25		363		108		33		1,483
Ending balance	$	873	$	102	$	25	$	363	$	127	$	33	$	1,523

An analysis of the changes in the allowance for loan losses for the three months ended September 30, 2022 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	$	751	$	112	$	10	$	558	$	109	$	31	$	1,571
Provisions		(13)		—		7		35		49		7		85
Charge-offs		—		—		—		—		—		(8)		(8)
Recoveries		2		—		—		—		—		3		5
Ending balance	$	740	$	112	$	17	$	593	$	158	$	33	$	1,653

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An analysis of the changes in the allowance for loan losses for the nine months ended September 30, 2022 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	$	873	$	102	$	25	$	363	$	127	$	33	$	1,523
Provisions		(138)		10		(8)		230		31		10		135
Charge-offs		—		—		—		—		—		(14)		(14)
Recoveries		5		—		—		—		—		4		9
Ending balance	$	740	$	112	$	17	$	593	$	158	$	33	$	1,653

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

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

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The following table summarizes the Company’s impaired loans as of September 30, 2022 and for the three and nine months ended September 30, 2022. 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, 2022.

							Three Months Ended				Nine Months Ended
	At September 30, 2022						September 30, 2022				September 30, 2022
	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	$	876	$	945	$	—	$	859	$	—	$	788	$	1
Commercial real estate		73		73		—		79		1		89		3
Commercial business		—		—		—		—		—		—		—
Consumer		7		7		—		4		—		3		—
	$	956	$	1,025	$	—	$	942	$	1	$	880	$	4
Loans with an allowance recorded:
One-to-four family residential	$	269	$	276	$	21	$	269	$	3	$	257	$	9
Commercial real estate		66		69		—		66		—		67		2
Commercial business		295		295		18		302		4		314		12
Consumer		—		—		—		—		—		—		—
	$	630	$	640	$	39	$	637	$	7	$	638	$	23
Total:
One-to-four family residential	$	1,145	$	1,221	$	21	$	1,128	$	3	$	1,045	$	10
Commercial real estate		139		142		—		145		1		156		5
Commercial business		295		295		18		302		4		314		12
Consumer		7		7		—		4		—		3		—
	$	1,586	$	1,665	$	39	$	1,579	$	8	$	1,518	$	27

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The following table summarizes the Company’s impaired loans for the three- and nine-month periods 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
	September 30, 2021				September 30, 2021
	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	$	785	$	1	$	964	$	2
Commercial real estate		123		1		105		3
Commercial business		—		—		6		—
	$	908	$	2	$	1,075	$	5
Loans with an allowance recorded:
One-to-four family residential	$	220	$	2	$	228	$	7
Commercial real estate		123		2		153		5
Commercial business		343		4		352		14
	$	686	$	8	$	733	$	26
Total:
One-to-four family residential	$	1,005	$	3	$	1,192	$	9
Commercial real estate		246		3		258		8
Commercial business		343		4		358		14
	$	1,594	$	10	$	1,808	$	31

-19-

The following table summarizes the Company’s impaired loans as of December 31, 2021:

	At December 31, 2021
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
	(In thousands)
Loans with no related allowance recorded:
One-to-four family residential	$	822	$	905	$	—
Commercial real estate		102		102		—
Commercial business		—		—		—
Consumer		3		3		—
	$	927	$	1,010	$	—
Loans with an allowance recorded:
One-to-four family residential	$	219	$	218	$	21
Commercial real estate		68		72		—
Commercial business		328		328		19
Consumer		—		—		—
	$	615	$	618	$	40
Total:
One-to-four family residential	$	1,041	$	1,123	$	21
Commercial real estate		170		174		—
Commercial business		328		328		19
Consumer		3		3		—
	$	1,542	$	1,628	$	40

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, 2022 and December 31, 2021:

	At September 30, 2022						At December 31, 2021
			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	$	845	$	—	$	845	$	735	$	—	$	735
Commercial real estate		4		—		4		15		—		15
Consumer		8		—		8		3		—		3
Total	$	857	$	—	$	857	$	753	$	—	$	753

-20-

The following tables present the aging of the recorded investment in loans at September 30, 2022 and December 31, 2021:

					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, 2022
One-to-four family residential	$	540	$	252	$	78	$	870	$	64,023	$	64,893
Multi-family residential		—		—		—		—		11,336		11,336
Construction		—		—		—		—		5,580		5,580
Commercial real estate		—		—		—		—		47,908		47,908
Commercial business		—		—		—		—		12,489		12,489
Consumer		—		—		—		—		2,300		2,300
Total	$	540	$	252	$	78	$	870	$	143,636	$	144,506

December 31, 2021
One-to-four family residential	$	545	$	248	$	57	$	850	$	63,413	$	64,263
Multi-family residential		—		—		—		—		9,372		9,372
Construction		—		—		—		—		3,032		3,032
Commercial real estate		451		—		—		451		36,251		36,702
Commercial business		—		—		—		—		8,815		8,815
Consumer		—		—		3		3		2,200		2,203
Total	$	996	$	248	$	60	$	1,304	$	123,083	$	124,387

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.

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.

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

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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, 2022
Pass	$	64,048	$	11,336	$	5,580	$	47,904	$	12,489	$	2,293	$	143,650
Special mention		—		—		—		—		—		—		—
Substandard		845		—		—		4		—		7		856
Doubtful		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—
Total	$	64,893	$	11,336	$	5,580	$	47,908	$	12,489	$	2,300	$	144,506
December 31, 2021
Pass	$	63,399	$	9,372	$	3,032	$	36,593	$	8,815	$	2,200	$	123,411
Special mention		—		—		—		87		—		—		87
Substandard		864		—		—		22		—		3		889
Doubtful		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—
Total	$	64,263	$	9,372	$	3,032	$	36,702	$	8,815	$	2,203	$	124,387

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 following table summarizes the Company’s TDRs by accrual status as of September 30, 2022 and December 31, 2021:

	September 30, 2022								December 31, 2021
							Related								Related
							Allowance for								Allowance for
	Accruing		Nonaccrual		Total		Loan Losses		Accruing		Nonaccrual		Total		Loan Losses
	(In thousands)
One-to-four family residential	$	300	$	88	$	388	$	21	$	306	$	101	$	407	$	21
Commercial real estate		135		—		135		—		155		—		155		—
Commercial business		295		—		295		18		328		—		328		19
Total	$	730	$	88	$	818	$	39	$	789	$	101	$	890	$	40

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At both September 30, 2022 and December 31, 2021 there were no commitments to lend additional funds to debtors whose loan terms have been modified in a TDR (both accruing and nonaccruing).

There were no TDRs that were restructured during the three and nine months ended September 30, 2022 and 2021.

There were no principal charge-offs recorded as a result of TDRs and there was no specific allowance for loan losses related to TDRs modified during both the three- and nine-month periods ended September 30, 2022 and 2021.

There were no TDRs modified within the previous 12 months for which there was a subsequent payment default (defined as the loan becoming more than 90 days past due, being moved to nonaccrual status, or the collateral being foreclosed upon) during the three- and nine-month periods ended September 30, 2022 and 2021. 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.

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5.           Advances from Federal Home Loan Bank

At September 30, 2022 and December 31, 2021, the Company had $31.0 million and $10.0 million in advances outstanding from the FHLB, respectively. On June 27, 2019, the Company borrowed $10.0 million from the FHLB as a putable fixed-rate advance with an original maturity date of June 27, 2024 and bearing an interest rate of 1.73%. On June 27, 2022 the FHLB exercised its put option on this advance.

During the three- and nine-month periods ended September 30, 2022, the Company utilized a series of short-term fixed-rate bullet advances from the FHLB in order to meet daily liquidity requirements and to fund growth in earning assets. The advances had an average term of seven days. The following table sets forth information on the short-term FHLB advances during the periods presented:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
	(Dollars in thousands)
Outstanding at period-end	$	31,000		$	—		$	31,000		$	—
Average amount outstanding		28,125			—			12,438			—
Maximum amount outstanding at any month-end		31,000			—			31,000			—
Weighted average interest rate:
During period		2.36	%		—	%		2.00	%		—	%
End of period		3.03	%		—	%		3.03	%		—	%

In addition, during the nine-month period ended September 30, 2022, the Company utilized a $5.0 million line of credit with the FHLB. The following table sets forth information on the FHLB line of credit advances during the periods presented:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
	(Dollars in thousands)
Outstanding at period-end	$	—		$	—		$	—		$	—
Average amount outstanding		—			—			264			—
Maximum amount outstanding at any month-end		—			—			3,566			—
Weighted average interest rate:
During period		—	%		—	%		1.70	%		—	%
End of period		—	%		—	%		—	%		—	%

The advances are secured under a blanket collateral agreement with the FHLB. At September 30, 2022, the carrying value of mortgage loans pledged as security for advances was $59.2 million.

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6.           Supplemental Disclosure for Earnings Per Share

Nonvested restricted stock shares and unallocated ESOP shares are not considered as outstanding for purposes of computing weighted average common shares outstanding. Potential dilutive common shares are excluded from the computation of diluted net income per common share in the periods where the effect would be antidilutive. Excluded from the computation of diluted net income per common share were weighted-average antidilutive shares totaling 3,913 and 4,708 for the three and nine months ended September 30, 2022, respectively. No stock options for common stock and no restricted stock awards were excluded from the calculation of diluted net income per common share because their effect was antidilutive for the three and nine months ended September 30, 2021.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
	(Dollars in thousands, except per share data)
Basic
Earnings:
Net income	$	512	$	456	$	1,505	$	1,231
Shares:
Weighted average common shares outstanding		2,679,500		2,875,547		2,737,396		2,935,796
Net income per common share, basic	$	0.19	$	0.16	$	0.55	$	0.42
Diluted
Earnings:
Net income	$	512	$	456	$	1,505	$	1,231
Shares:
Weighted average common shares outstanding		2,679,500		2,875,547		2,737,396		2,935,796
Add: Dilutive effect of stock options		242		5,000		251		4,039
Add: Dilutive effect of restricted stock		5,467		7,627		3,565		5,512
Weighted average common shares outstanding, as adjusted		2,685,209		2,888,174		2,741,212		2,945,347
Net income per common share, diluted	$	0.19	$	0.16	$	0.55	$	0.42

7.           Employee Stock Ownership Plan

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

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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, 2022 was $36,000 and $112,000, respectively. Compensation expense recognized for the three- and nine-month periods ended September 30, 2021 was $40,000 and $121,000, respectively. The ESOP trust held 39,847 allocated shares and 164,942 unallocated shares of Company common stock at September 30, 2022. The fair value of the unallocated shares was $2.2 million at September 30, 2022.

8.            Stock-based Compensation Plans

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

2010 Equity Incentive Plan

The Bank had an equity incentive plan (the “2010 Plan”) adopted on July 27, 2010 which was assumed by the Company in connection with the Conversion. Under the 2010 Plan, 127,849 shares of common stock, as adjusted for the Conversion exchange ratio, were approved for awards of stock options and restricted stock. As of September 30, 2022, on an adjusted basis, awards for stock options totaling 78,010 shares and awards for restricted stock totaling 34,250 shares of Company common stock have been granted, net of any forfeitures, to participants in the 2010 Plan. 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, 2022, awards for stock options totaling 4,900 shares and awards for restricted stock totaling 33,100 shares of the Company common stock have been granted, net of any forfeitures, to participants in the 2019 Plan.

The fair 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 risk-free rate for the expected life of the options is based on the U.S. Treasury yield curve in effect at the time of grant.

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A summary of option activity as of September 30, 2022, 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	98,584	$	13.42
Granted	—		—
Exercised	(7,869)		13.11
Forfeited or expired	(16,844)		13.53
Outstanding at end of period	73,871	$	13.43	7.3	$	7,000
Vested and expected to vest	73,871	$	13.43	7.3	$	7,000
Exercisable at end of period	42,871	$	13.33	7.2	$	6,000

For the three- and nine-month periods ended September 30, 2022, the Company recognized $12,000 and $37,000, respectively, in compensation expense related to the stock option plan. 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. At September 30, 2022, there was $70,000 of unrecognized compensation expense related to nonvested stock options. The compensation expense is expected to be recognized over a weighted average period of 1.4 years.

A summary of the activity for the Company’s nonvested restricted shares as of September 30, 2022 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	32,578	$	14.53
Granted	—		—
Vested	—		—
Forfeited	(450)		14.74
Nonvested at end of period	32,128	$	14.52

For the three- and nine-month periods ended September 30, 2022, the Company recognized $40,000 and $121,000, respectively, in compensation expense related to the restricted stock plans. 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. At September 30, 2022, unrecognized compensation expense related to nonvested restricted shares was $344,000. The compensation expense is expected to be recognized over the remaining weighted average vesting period of 2.3 years.

9.           Fair Value Measurements

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

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

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

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

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth on the following page. These valuation methodologies were applied to all of the Company’s financial and nonfinancial assets carried at fair value or the lower of cost or fair value. The table below presents the balances of assets measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021. The Company had no liabilities measured at fair value as of September 30, 2022 and December 31, 2021.

	Carrying Value
	Level 1		Level 2		Level 3		Total
	(In thousands)
September 30, 2022
Assets Measured on a Recurring Basis
Securities available for sale:
Agency MBS	$	—	$	11,495	$	—	$	11,495
Agency CMO		—		19,671		—		19,671
U.S. Treasury securities		—		9,416		—		9,416
U.S. Government agency obligations		—		1,818		—		1,818
Municipal obligations		—		61,284		—		61,284
Total securities available for sale	$	—	$	103,684	$	—	$	103,684
December 31, 2021
Assets Measured on a Recurring Basis
Securities available for sale:
Agency MBS	$	—	$	11,853	$	—	$	11,853
Agency CMO		—		23,778		—		23,778
Municipal obligations		—		71,662		—		71,662
Total securities available for sale	$	—	$	107,293	$	—	$	107,293

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.

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, 2022 and December 31, 2021, 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 not recognize any charges to write down real estate held for sale during both the three- and nine-month periods ended September 30, 2022 and 2021.

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, 2022 and 2021. There were no transfers into or out of the Company’s Level 3 financial assets for the three- and nine-month periods ended September 30, 2022 and 2021.

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, 2022
Financial assets:
Cash and cash equivalents	$	4,010	$	4,010	$	—	$	—
Securities available for sale		103,684		—		103,684		—
Securities held to maturity		18		—		18		—
Loans, net		142,473		—		—		136,459
FHLB stock		1,778		N/A		N/A		N/A
Accrued interest receivable		1,080		—		1,080		—
Financial liabilities:
Noninterest-bearing deposits		27,565		27,565		—		—
Interest-bearing deposits		174,250		—		—		172,445
Advance from FHLB		31,000		—		31,000		—
Accrued interest payable		31		—		31		—
December 31, 2021
Financial assets:
Cash and cash equivalents	$	16,379	$	16,379	$	—	$	—
Securities available for sale		107,293		—		107,293		—
Securities held to maturity		21		—		21		—
Loans, net		122,568		—		—		123,158
FHLB stock		778		N/A		N/A		N/A
Accrued interest receivable		997		—		997		—
Financial liabilities:
Noninterest-bearing deposits		28,602		28,602		—		—
Interest-bearing deposits		168,282		—		—		168,168
Advance from FHLB		10,000		—		10,162		—
Accrued interest payable		11		—		11		—

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10.         Revenue from Contracts with Customers

Substantially all of the Company’s revenue from contracts with customers in the scope of FASB ASC 606 is recognized within noninterest income. The following table presents the Company’s sources of noninterest income and other income within the scope of FASB ASC 606 for the three and nine months ended September 30, 2022 and 2021:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
	(In thousands)
Deposit account service charges	$	100	$	87	$	271	$	207
Brokered loan fees		25		48		126		199
ATM and debit card fee income		144		138		432		412
Other income		4		7		9		12
Revenue from contracts with customers		273		280		838		830
Increase in cash surrender value of life insurance		14		16		43		47
Gain on life insurance		—		—		36		—
Other income		8		5		27		23
Other noninterest income		22		21		106		70
Total noninterest income	$	295	$	301	$	944	$	900

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 agreements with United Wholesale Mortgage (“UWM”) and Union Home Mortgage (“UHM”). 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 the brokers, and the Company receives a fee for services performed.

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

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

11.         Recent Accounting Pronouncements

The following are summaries of recently issued or adopted accounting pronouncements that impact the accounting and reporting practices of the Company. The Company is an emerging growth company, and as such

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will be subject to the effective dates noted for private companies if they differ from the effective dates noted for public companies.

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 lessees 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 lessees 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 adoption of the ASU, as amended, effective January 1, 2022 did not have a material impact on the Company’s consolidated financial statements.

The FASB originally issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2022-02, 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

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cost, regardless of whether the impairment is considered to be other-than-temporary. In March 2022, the FASB issued ASU 2022-02, which eliminates the accounting guidance for TDRs by creditors that have adopted CECL and enhances disclosure requirements for certain loan refinancing and restructurings by creditors to borrowers experiencing financial difficulty. 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, effective January 1, 2022, did not 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 2021 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

COVID-19 was declared a pandemic by the World Health Organization on March 11, 2020. Since March 2020, jurisdictions within and outside the U.S. have imposed economic and social restrictions on the population, in general, and non-essential businesses to slow the spread of COVID-19. These restrictions, in combination with the public’s response to them, have disrupted supply chains and effectively suspended or curtailed economic activity for many industries across the U.S. and the world. Industries within the Company’s market footprint have been impacted by these supply chain disruptions as well as the corresponding inflationary pressures driven by them in combination with on-going governmental stimulus programs.

Our commercial and banking products are offered primarily in the Louisville-Jefferson County Metropolitan Statistical Area (“MSA” consisting of Clark, Floyd, Harrison and Washington counties in Indiana and Bullitt, Henry, Jefferson, Oldham, Shelby and Spencer counties in Kentucky) plus Lawrence and Orange counties in Indiana, where municipal and state-wide responses to the pandemic have led to a broad curtailment of economic activity beginning in March 2020. The Company’s operations and the markets it serves have been and will continue to be significantly impacted by the COVID-19 pandemic and the public’s response to this pandemic.

The COVID-19 pandemic and related economic developments could 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 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. We continue to follow CDC and state health office guidelines and respond to new developments.

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

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contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be significant accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

The following represent our significant accounting policies:

Allowance for Loan Losses. The allowance for loan losses represents management's estimate of losses inherent in the loan portfolio as of the date of the consolidated balance sheet 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.

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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.

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.

Non-GAAP Financial Measures

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

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

These non-GAAP financial measures should not be considered alternatives to GAAP-basis financial statements, and other bank holding companies may define these non-GAAP measures or similar measures differently. The following table presents the reconciliation of net interest income to net interest income adjusted to a fully taxable-equivalent basis

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assuming a relevant marginal tax for interest earned on tax-exempt assets such as municipal loans and investment securities (dollars in thousands), along with the calculation of yield on interest-earning assets (tax-equivalent basis), net interest spread (tax-equivalent basis) and net interest margin (tax-equivalent basis).

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Net interest income, yield on interest-earning assets, net interest spread, net interest margin (tax-equivalent basis):	2022			2021			2022			2021
���
Net interest income (GAAP)	$	2,000		$	1,739		$	5,713		$	5,142
Tax-equivalent adjustments: (1)
Loans		—			4			4			6
Tax-exempt investment securities		114			101			328			300
Net interest income (tax-equivalent basis)	$	2,114		$	1,844		$	6,045		$	5,448
Average interest-earning assets (2)	$	267,946		$	238,659		$	260,380		$	234,997
Yield on interest-earning assets		3.42	%		3.19	%		3.24	%		3.20	%
Yield on interest-earning assets (tax-equivalent basis)		3.59	%		3.37	%		3.41	%		3.38	%
Net interest spread		2.85	%		2.81	%		2.82	%		2.81	%
Net interest spread (tax-equivalent basis)		3.02	%		2.99	%		2.99	%		2.99	%
Net interest margin		2.99	%		2.92	%		2.93	%		2.92	%
Net interest margin (tax-equivalent basis)		3.16	%		3.09	%		3.10	%		3.09	%

(1) - Tax-exempt income has been adjusted to a tax-equivalent basis using the federal marginal tax rate of 21% for 2022 and 2021.

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

Comparison of Financial Condition at September 30, 2022 and December 31, 2021

Total assets increased $10.3 million, or 4.0%, to $264.5 million at September 30, 2022 from $254.3 million at December 31, 2021.

Cash and Cash Equivalents.  Cash and cash equivalents decreased $12.4 million, or 75.5%, to $4.0 million at September 30, 2022 from $16.4 million at December 31, 2021 due primarily to an increase in net loans receivable, the net effect of activity in available for sale securities and the repurchase of the Company’s common stock, partially offset by increases in borrowings and deposits.

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 $19.9 million, or 16.2%, to $142.5 million at September 30, 2022 from $122.6 million at December 31, 2021. The increase in net loans was due primarily to increases in commercial real estate loans, commercial business loans, commercial real estate construction loans and multi-family residential loans.

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 decreased $3.6 million, or 3.4%, to $103.7 million at September 30, 2022 from $107.3 million at December 31, 2021. The decrease was due primarily to a $20.0 million decrease in the gross unrealized gain in the portfolio and $9.2 million in principal collections, calls and maturities on mortgage-backed and tax-exempt securities, partially offset by purchases of $26.0 million in U.S. Treasury and related agency obligations, municipal obligations and federal agency mortgage-backed securities.

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Securities Held to Maturity.  Our held to maturity securities portfolio consists of U.S. government agency mortgage-backed securities. Securities held to maturity decreased $3,000, or 14.3%, to $18,000 at September 30, 2022 from $21,000 at December 31, 2021 due primarily to principal repayments of mortgage-backed securities.

Other Assets.  Other assets increased $5.1 million to $5.4 million at September 30, 2022 from $243,000 at December 31, 2021 primarily due to a $5.1 million increase in net deferred tax assets, largely attributable to the tax effect on the unrealized loss on available for sale 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-bearing checking, interest-bearing checking, savings, and money market accounts and certificates of deposit. Deposits increased $4.9 million, or 2.5%, to $201.8 million at September 30, 2022 from $196.9 million at December 31, 2021.

Borrowings.  In order to meet daily liquidity needs and to fund growth in earning assets, the Company utilizes short-term advances from the FHLB. On June 27, 2019, the Company borrowed $10.0 million from the FHLB bearing an interest rate of 1.73% with a scheduled maturity date of June 27, 2024. On June 27, 2022, the FHLB exercised its put option on this advance. As of September 30, 2022 total borrowings with the FHLB consisted of $31.0 million in short-term borrowings bearing a weighted average interest rate of 3.03% and an average term of seven days. In addition, on April 13, 2022, the Company began utilizing a line of credit from the FHLB. During the three-month period ended September 30, 2022, however, the Company did not draw upon the line of credit, and as of September 30, 2022 the Company did not have an outstanding balance on the line of credit.

Stockholders’ Equity.  Stockholders’ equity decreased $15.7 million to $30.8 million at September 30, 2022 from $46.5 million at December 31, 2021. The decrease was due primarily to a decrease in the accumulated other comprehensive income, net of tax, of $15.1 million and the repurchase of 154,486 shares of our common stock at a total cost of $2.2 million, partially offset by net income of $1.5 million, net of dividends of $330,000.

Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2022 and 2021

Net Income.  Net income was $512,000 ($0.19 per common share diluted) for the three months ended September 30, 2022, compared to net income of $456,000 ($0.16 per common share diluted) for the three months ended September 30, 2021. For the nine months ended September 30, 2022, net income was $1.5 million ($0.55 per common share diluted) compared to $1.2 million ($0.42 per common share diluted) for the same period in 2021. The primary reason for the increase in net income between the periods was increased net interest income after provision for loan losses and noninterest income partially offset by increased noninterest expenses.

Net Interest Income.  Net interest income after provision for loan losses increased $176,000, or 10.1%, to $1.9 million for the three months ended September 30, 2022 compared to $1.7 million for the three months ended September 30, 2021 due primarily to an increase in average balances and yields from interest-earning assets, partially offset by higher average interest-bearing liabilities and increased provision for loan losses.

Total interest income increased $391,000, or 20.5%, to $2.3 million for the three months ended September 30, 2022 as compared to $1.9 million the same period in 2021. The increase resulted from an increase in the average balances and yields of interest-earning assets. The average balance of interest-earning assets increased to $267.9 million for the quarter ended September 30, 2022 from $238.7 million for the quarter ended September 30, 2021, due primarily to increases in loans receivable and investment securities, partially offset by lower interest-bearing deposits with banks. The average yield on interest-earning assets and tax-equivalent yield on interest-earning assets⁽¹⁾ increased to 3.42% and 3.59%, respectively, for the quarter ended September 30, 2022 from 3.19% and 3.37%, respectively, for the quarter ended September 30, 2021, due primarily to higher proportions in loans receivable and investment securities.

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

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Total interest expense increased $130,000, or 79.3%, to $294,000 for the three months ended September 30, 2022 compared to $164,000 for the three months ended September 30, 2021 due to an increase in the average balance of interest-bearing liabilities and an increase in the cost of borrowings. The average balance of interest-bearing liabilities increased to $204.3 million for the quarter ended September 30, 2022 from $174.6 million for the same period in 2021, due primarily to increases in savings and interest-bearing demand deposit accounts, time deposits and FHLB borrowings. The average cost of interest-bearing liabilities increased to 0.57% for the quarter ended September 30, 2022 from 0.38% for the same period in 2021. The average cost of deposits remained at 0.29% for the quarters ended September 30, 2022 and 2021. As a result of the changes in interest-earning assets and interest-bearing liabilities, the interest rate spread and interest rate spread on a tax-equivalent basis⁽¹⁾ increased to 2.85% and 3.02%, respectively, for the quarter ended September 30, 2022, from 2.81% and 2.99%, respectively, for the quarter ended September 30, 2021. The net interest margin and the net interest margin on a tax-equivalent basis⁽¹⁾ increased to 2.99% and 3.16%, respectively, for the quarter ended September 30, 2022 from 2.92% and 3.09%, respectively, for the quarter ended September 30, 2021.

Net interest income after provision for loan losses increased $436,000, or 8.5%, to $5.6 million for the nine months ended September 30, 2022 compared to $5.1 million for the nine months ended September 30, 2021 due primarily to an increase in the average balance of interest-earning assets and an increase in the yield earned on interest-earning assets, partially offset by an increase in the average balance of interest-earning liabilities, an increase in the cost of interest-bearing liabilities and increased provision for loan losses.

Total interest income was $6.3 million for the nine months ended September 30, 2022 compared to $5.6 million for the nine months ended September 30, 2021. Interest income from loans receivable increased $439,000, while interest income from investment securities increased $217,000 and interest income from interest-bearing deposits with banks increased $14,000. The average balance of interest-earning assets increased to $260.4 million for the nine months ended September 30, 2022 from $235.0 million for the nine months ended September 30, 2021, due primarily to increases in loans receivable and investment securities, partially offset by decreases in interest-bearing deposits with banks. The average yield on interest-earning assets and average tax-equivalent yield on interest-earning assets⁽¹⁾ increased to 3.24% and 3.41%, respectively, for the nine months ended September 30, 2022 from 3.20% and 3.38%, respectively, for the nine months ended September 30, 2021, due primarily to changes in the investment asset mix.

Total interest expense increased $116,000, or 23.2%, to $617,000 for the nine months ended September 30, 2022 compared to $501,000 for the nine months ended September 30, 2021 due to increases in both the average cost and balance of interest-bearing liabilities. The average cost of interest-bearing liabilities increased to 0.42% for the nine months ended September 30, 2022 from 0.39% for the same period in 2021. The average balance of interest-bearing liabilities increased to $195.4 million for the nine months ended September 30, 2022 from $169.9 million for the same period in 2021, due primarily to an increase in savings and interest-bearing demand deposits and higher FHLB borrowings, partially offset by a decrease in time deposits. The average cost of deposits decreased to 0.26% for the nine months ended September 30, 2022 from 0.31% for the same period in 2021. As a result of the changes in interest-earning assets and interest-bearing liabilities, the interest rate spread and interest rate spread on a tax-equivalent basis⁽¹⁾ was 2.82% and 2.99%, respectively, for the nine months ended September 30, 2022. The net interest margin and the net interest margin on a tax-equivalent basis⁽¹⁾ increased to 2.93% and 3.10%, respectively, for the nine months ended September 30, 2022 from 2.92% and 3.09%, respectively, for the nine-month period ended September 30, 2021.

Provision for Loan Losses.  Non-performing loans increased to $857,000, at September 30, 2022 compared to $753,000 at December 31, 2021, or 0.6% of total loans for both periods. At September 30, 2022, $576,000 or 67.2% 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 recorded a provision for loan losses of $85,000 and $135,000 for the three and nine months ended September 30, 2022, respectively, compared to no provision for the same periods of 2021.

Noninterest Income.  Noninterest income decreased $6,000, or 2.0%, for the quarter ended September 30, 2022 as compared to the same period in 2021, due primarily to a reduction in brokered loan fees of $23,000, partially offset by increases of $13,000 and $6,000 in deposit account service charges and ATM and debit card fee income, respectively.

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Noninterest income increased $44,000, or 4.9%, for the nine months ended September 30, 2022 as compared to the same period in 2021, due primarily to increases of $64,000 and $20,000 in deposit account service charges and ATM and debit card fee income, respectively, and a $36,000 gain on life insurance, partially offset by a reduction in brokered loans fees of $73,000.

Noninterest Expense.  Noninterest expense increased $116,000, or 7.5%, for the quarter ended September 30, 2022 as compared to the same period in 2021. The increase was due primarily to increases in compensation and benefits of $34,000, occupancy and equipment expenses of $22,000, data processing expenses of $15,000, directors’ compensation of $14,000 and other expenses of $18,000.

Noninterest expense increased $173,000, or 3.6%, for the nine months ended September 30, 2022 as compared to the same period in 2021. The increase was due primarily to increases in occupancy and equipment expenses of $32,000, data processing expenses of $31,000, professional fees of $24,000, a loss on the disposal of premises and equipment of $17,000, directors’ compensation expenses of $12,000 and other expenses of $45,000, which is mostly attributable to increased advertising expenses.

Income Tax Expense.  The Company recorded an income tax expense of $31,000 for the quarter ended September 30, 2022, compared to an expense of $33,000 for the same period in 2021. Income tax expense increased $33,000 to $89,000 for the nine months ended September 30, 2022 as compared to $56,000 for the same period in 2021, resulting from an increase in our effective tax rate to 5.6% for 2022 compared to 4.4% for 2021. The increase in the effective tax rate is due primarily to an increase in pre-tax income generated from core banking activities.

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, 2022, we had $107.7 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.

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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 $970,000 at September 30, 2022.

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, which also provide liquidity to meet lending requirements, are greatly influenced by general interest rates. 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, 2022, the approved outstanding loan commitments, including unused lines and letters of credit, amounted to $20.5 million. Certificates of deposit scheduled to mature in one year or less at September 30, 2022, totaled $29.6 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, 2022, the Bank exceeded all regulatory capital requirements and met the requirements to be deemed "well-capitalized" under applicable OCC regulatory guidelines.

The Bank elected to use the Community Bank Leverage Ratio (“CBLR”) effective January 1, 2020. Effective January 1, 2022, a bank or savings institution electing to use the CBLR will generally be considered well-capitalized and to have met the risk-based and leverage capital requirements of the capital regulations if it has a leverage ratio greater than 9.0%, an increase from the 8.5% or higher ratio requirement for fiscal year 2021. To be eligible to elect to use the CBLR, the bank or savings institution also must have total consolidated assets of less than $10 billion, off-balance sheet exposures of 25.0% or less of its total consolidated assets, and trading assets and trading liabilities of 5.0% or less of its total consolidated assets, all as of the end of the most recent quarter.

The Bank was considered well-capitalized under applicable federal regulatory capital guidelines with a CBLR of 15.4% at September 30, 2022 and 16.3% at December 31, 2021.

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, 2022, 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, 2022, 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 2021 Form 10-K.

Item 4.  Controls and Procedures

(a)    Evaluation of Disclosure Controls and Procedures

An evaluation of the disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) was carried out as of September 30, 2022 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, 2022, 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, 2022, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by override of the control. The design of any control procedure is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

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MID-SOUTHERN BANCORP, INC.

PART II

OTHER INFORMATION

Item 1.      Legal Proceedings

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

Item 1A.    Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in our 2021 Form 10-K, under the section titled “Risk Factors,” which could materially affect our business, financial condition and/or operating results. There have been no material changes to the risk factors described in the Company’s 2021 Form 10-K, however these are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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MID-SOUTHERN BANCORP, INC.

PART II

OTHER INFORMATION

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

(a)              Not applicable

(b)              Not applicable

(c)              The following table summarizes common stock repurchases during the three months ended September 30, 2022:

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 Number	(b) Average		Publicly	Purchased
	of Shares	Price Paid		Announced Plans	Under The Plans
	Purchased	Per Share		or Programs	or Programs
July 1, 2022 through July 31, 2022	184	$	13.98	184	174,502
August 1, 2022 through August 31, 2022	1,056	$	13.61	1,056	173,446
September 1, 2022 through September 30, 2022	349	$	13.50	349	173,097
Total	1,589	$	13.63	1,589

On August 31, 2020, the Company announced a stock repurchase program under which the Company’s Board of Directors authorized the repurchase of up to 162,000 shares of its common stock, or approximately 5% of the outstanding shares at that time. On November 17, 2021, the Company announced that its board of directors authorized an expansion of the repurchase program, permitting the Company to purchase an additional 150,000 shares of its common stock. On May 25, 2022, the Company announced that its board of directors authorized another expansion of the repurchase program, permitting the Company to purchase an additional 142,000 shares of its common stock. The repurchase program will remain effective until the total number of shares authorized is repurchased. However, the program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors we may deem appropriate. The repurchase program does not obligate the Company to purchase any particular number of shares.

Item 3.      Defaults upon Senior Securities

Not applicable.

Item 4.      Mine Safety Disclosures

Not applicable.

Item 5.      Other Information

None.

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MID-SOUTHERN BANCORP, INC.

PART II

OTHER INFORMATION

Item 6.      Exhibits

3.1	Articles of Incorporation of Mid-Southern Bancorp, Inc. (1)
3.2	Bylaws of Mid-Southern Bancorp, Inc., as Amended (2)
4.1	Form of Common Stock Certificate of Mid-Southern Bancorp, Inc. (1)
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, 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, 2022, 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 10, 2022	BY:	/s/ Alexander G. Babey
		Alexander G. Babey
		President and Chief Executive Officer
		(Principal Executive Officer)
Dated November 10, 2022	BY:	/s/ Robert W. DeRossett
		Robert W. DeRossett
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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