UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-38491
MID-SOUTHERN BANCORP, INC.
(Exact name of registrant as specified in its charter)
Indiana
(State or other jurisdiction of incorporation or organization)
82-4821705
(I.R.S. Employer I.D. Number)
300 North Water Street, Salem, Indiana
(Address of principal executive offices)
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
47167
(Zip Code)
(812) 883-2639
Title of each class
Common Stock, Par Value $.01 per share
Trading Symbol(s)
MSVB
Name of each exchange on which registered
Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company,"
and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Smaller reporting company
Accelerated filer
Emerging growth company
Non-accelerated filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on an attestation to its management’s assessment of the effectiveness of
its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of the voting stock held by non-affiliates of the registrant based upon the closing price of the registrant’s
common stock of $12.08 per share as quoted on the Nasdaq Global Select Market System on June 30, 2020 was $38.4 million. (The
exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant
that such person is an affiliate of the registrant.) As of March 19, 2021, there were 3,172,767 issued and outstanding shares of the
registrant’s common stock.
Portions of registrant’s Definitive Proxy Statement for the 2021 Annual Meeting of Stockholders (Part III).
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
PAGE
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110
111
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Signatures
2
Forward-Looking Statements
This Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements can be identified by use of the words “expects,” “believes,”
“anticipates,” “intends,” “could,” “should” and similar expressions of the future. Forward-looking statements also include,
but are not limited to, statements regarding estimated cost savings, plans and objectives for future operations, and the
Company’s business and growth strategies. These forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that could cause actual results to differ materially from the results anticipated or implied by
our forward-looking statements, including, but not limited to:
the effect of the Coronavirus Disease 2019 (“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 multi-family real estate market conditions in
our market area;
secondary market conditions for loans and our ability to originate loans for sale and sell loans in the
secondary market;
our ability to attract and retain deposits;
our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel
we may acquire into our operations and our ability to realize related revenue synergies and expected cost
savings and other benefits within the anticipated time frames or at all;
legislative or regulatory changes that adversely affect our business including changes in regulatory policies
and principles, or the interpretation of regulatory capital or other rules;
monetary and fiscal policies of the Board of Governors of the Federal Reserve System (“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 their 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;
our ability to control operating costs and expenses;
3
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 potential effects of coronavirus on international trade (including
supply chains and export levels), and the other risks described from time to time in our filings with the SEC.
Some of these and other factors are discussed in this report under the caption “Risk Factors” and elsewhere in
this Form 10-K. Such developments could have an adverse impact on our financial position and our results of operations.
Any of the forward-looking statements are based upon management’s beliefs and assumptions at the time they
are made. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking
statements included in this report or to update the reasons why actual results could differ from those contained in such
statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and
assumptions, the forward-looking statements discussed in this report might not occur and you should not put undue reliance
on any forward-looking statements.
As used throughout this report, the terms “we,” “our,” “us,” or the “Company” refer to Mid-Southern
Bancorp, Inc. and its consolidated subsidiary, Mid-Southern Savings Bank, FSB, unless the context otherwise requires.
4
Item 1. Business
General
PART I
Mid-Southern Bancorp, Inc., an Indiana corporation, is the savings and loan holding company of Mid-Southern
Savings Bank, FSB (the “Bank” or “Mid-Southern Savings Bank”). On July 11, 2018, Mid-Southern Bancorp, Inc.
completed a public offering and share exchange as part of the Bank’s “second step” conversion from the mutual holding
company structure and the elimination of Mid-Southern, M.H.C. (the “Conversion”). Upon consummation of the
Conversion, the Company became the holding company for the Bank and now owns all of the issued and outstanding
shares of the Bank’s common stock. Concurrent with the offering, shares of Bank common stock owned by public
stockholders were exchanged for 2.3462 shares of the Company’s common stock, with cash being paid in lieu of issuing
fractional shares. All share and per share information in this report for periods prior to the Conversion has been adjusted
to reflect the 2.3462:1 exchange ratio on publicly traded shares. See Note 1 of the Notes to Consolidated Financial
Statements contained in Item 8 of this report for more information.
At December 31, 2020, the Company had total assets of $235.4 million, total deposits of $174.1 million and
stockholders’ equity of $49.0 million. The Company’s executive offices are located in Salem, Indiana. The Company is
subject to regulation by the Federal Reserve. Substantially all of the Company’s business is conducted through the Bank
which is regulated by the Office of the Comptroller of the Currency ("OCC"), its primary regulator, and by the Federal
Deposit Insurance Corporation ("FDIC"), the insurer of its deposits. The Bank’s deposits are insured by the FDIC up to
applicable legal limits under the Deposit Insurance Fund ("DIF"). The Bank is a member of the Federal Home Loan Bank
of Indianapolis ("FHLB" or “FHLB of Indianapolis”) which is one of the 11 regional banks in the Federal Home Loan
Bank System (“FHLB System”).
Our Business
Our business activities are primarily conducted through Mid-Southern Savings Bank, a federally chartered
savings bank headquartered in Salem, Indiana, which is located in Southern Indiana approximately 40 miles northwest of
Louisville, Kentucky. Mid-Southern Savings Bank conducts business from its main office in Salem and through its branch
offices located in Mitchell and Orleans, Indiana and a loan production office located in New Albany, Indiana. Mid-
Southern Savings Bank’s market area includes Washington, Lawrence, Orange and Floyd counties in Indiana, and, to a
lesser extent, contiguous counties.
Mid-Southern Savings Bank’s principal business consists of originating one-to-four family residential real estate
mortgage loans, including home equity lines of credit, and to a lesser extent, commercial and multi-family real estate, and
construction loans. We also offer commercial business and other consumer loans. We offer a variety of retail deposits to
the general public in the areas surrounding our main office and our branch offices with interest rates that are competitive
with those of similar products offered by other financial institutions in our market area. We also may utilize borrowings
as a source of funds. Our revenues are derived primarily from interest on loans and, to a lesser extent, interest on investment
securities and mortgage-backed securities.
Our principal executive offices are located at 300 North Water Street, Salem, Indiana 47167 and our telephone
number is (812) 883-2639. Our web site address is www.mid-southern.com.
Human Capital
Mid-Southern Bancorp, Inc. values our employees, customers, vendors, marketplace and community. At
December 31, 2020, we employed 47 full-time equivalent employees. We continually strive to recognize the contributions
of each individual to our organization, and we are committed to providing a welcoming culture of respect to all. The
Company provides professional development opportunities and tuition reimbursement to team members and continually
seeks to improve staff retention, career development and satisfaction. All employees are evaluated at least annually so that
the individual receives feedback from his or her performance and to identify opportunities for improvement.
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In light of the recent events surrounding the COVID-19 pandemic, the Company has been committed to providing
a healthy and safe environment for our employees, our customers, our partners and our communities. In response to
recommendations from federal, state and local health officials, we have deployed several protocols to mitigate risk, and
we continually evaluate and update our protocols based upon the most-recent information available. These protocols
include temperature checks for all employees and vendors entering buildings, face mask requirements, signage
encouraging social distancing, protective shielding in all customer-facing locations and daily cleaning routines. Whenever
possible and practical, the Company offers flexible arrangements, including remote working.
Market Area
We are headquartered in Salem, Indiana (Washington County). Salem is the county seat of Washington County
and is located approximately 40 miles northwest of Louisville, Kentucky. We have a branch located in each of Mitchell,
Indiana (Lawrence County) and Orleans, Indiana (Orange County) and a loan production office in New Albany, Indiana
(Floyd County). Our market area includes all of Lawrence, Orange, Washington and Floyd counties and extends into
surrounding areas.
Based on the 2010 U.S. Census the market area had an aggregate population of 168,814. According to the U.S.
Census Bureau’s 2015 population estimates, the market area is expected to experience an increase in its population through
2030, but then decline slightly through 2050. Three of the four counties’ population rate is estimated to decrease in our
market area from 2010 through 2050. The 2018 median household income in the four-county market area is $51,566 which
is lower than the state and national levels. Indiana’s seasonally-adjusted unemployment rate as of December 2020 was
4.3%, which is lower than the national average of 6.7%, according to the U.S. Bureau of Labor Statistics. Two counties in
our market area – Lawrence and Orange – had non-seasonally adjusted unemployment rates higher than the state’s average,
while Washington and Floyd counties had non-seasonally adjusted unemployment rates lower than the state average.
Our markets provide a diversified economic and employment base in the manufacturing, service, health care,
agricultural, and governmental sectors. Within Washington County, nine of the top ten employers are located in Salem
where we are headquartered. Salem’s largest employers include a mix of the manufacturing, health care, retail and
construction industries. Manufacturing employs nearly 2,800 individuals or 23.1% of the workforce in the county. The
largest employers include GKN Sinter Metals (powdered metal products), Kimball Office Casegoods (wood furniture),
Peerless Gear (industrial gears) and Walmart Supercenter.
Orange County’s largest industry concentrations are in the manufacturing, accommodation/food services,
healthcare, manufacturing and education sectors. A majority of the major employers in the county (including Electricom,
Wildwood Association, Paoli Peaks, Walmart Supercenter, and IU Health Paoli Hospital) are located in the county seat of
Paoli. The manufacturing section employs 25.0% of the county workforce, with accommodation/food services (driven by
the French Lick and West Baden Springs resorts and casinos in French Lick) employing 13.8% of the workforce.
Lawrence County’s largest industry concentrations are in the manufacturing, healthcare, retail trade, and
governmental sectors. A majority of the largest employers in the county (including GM Powertrain, IU Health Bedford
Hospital, Walmart Supercenter, Times-mail and Lowe’s Home Improvement) are located in the county seat of Bedford.
Lehigh Hanson, a leading supplier of cement and other building materials, operates a cement facility in Mitchell. Mitchell
is located approximately ten miles south of Bedford.
Floyd County offers a diverse mix of industry among the manufacturing, healthcare, retail trade and educational
sectors. The manufacturing sector employs 16.1% of the county workforce, with the healthcare and retail sectors
employing 15.3% and 11.4% of the workforce, respectively. New Albany is home to a majority of Floyd County’s largest
employers including Baptist Health Floyd, NYX New Albany (formerly Beach Mold & Tool), Indiana University
Southeast, Samtec Inc., Hitachi Cable America, Discount Labels, Inc. and Fire King Security Group.
Lending Activities
General. Our historical principal lending activity has been originating one-to-four family residential real estate
loans and, to a lesser extent, commercial real estate loans, commercial business loans, home equity lines of credit,
6
construction and consumer loans. More recently, we have sought to increase our commercial real estate and commercial
construction and commercial business lending in an effort to diversify our overall loan portfolio, increase the overall yield
earned on our loans and assist in managing interest rate risk.
Our strategic plan continues to focus on residential real estate lending and to gradually increase our commercial
real estate loans, commercial real estate construction loans and commercial business loans in our market area. As part of
the commercial loan strategy, we seek to use our commercial relationships to grow our commercial transactional deposit
accounts. While we generally retain in our portfolio all loans we originate, beginning in October 2019, we began brokering
fixed-rate one-to-four family residential loans for sale in the secondary market.
The following table presents information concerning the composition of our loan portfolio, by the type of loan as
of the dates indicated:
2020
2019
Amount Percent
Amount Percent
At December 31,
2018
Amount Percent
(Dollars in thousands)
2017
2016
Amount Percent
Amount Percent
Real estate loans:
One-to-four family residential
Multi-family residential
Residential construction
Commercial real estate
Commercial real estate construction
Total real estate loans
$ 66,130
8,964
2,083
30,171
851
108,199
57.6 % $ 71,606
9,260
367
32,311
2,867
116,411
7.8
1.8
26.3
0.7
94.2
57.4 % $ 80,322
7,054
—
27,153
5,100
119,629
7.4
0.3
25.9
2.3
93.3
62.9 % $ 79,899
6,352
108
22,315
2,061
110,735
5.5
—
21.3
4.0
93.7
68.6 % $ 80,982
5,464
767
23,184
710
111,107
5.4
0.1
19.1
1.8
95.0
69.2 %
4.7
0.7
19.8
0.6
95.0
Commercial business loans
5,212
4.5
6,456
5.2
5,939
4.6
3,875
3.3
3,776
3.2
Consumer loans
1,442
1.3
1,875
1.5
2,199
1.7
1,978
1.7
2,118
1.8
Total loans
114,853
100.0 % 124,742
100.0 % 127,767
100.0 % 116,588
100.0 % 117,001
100.0 %
Deferred loan origination fees and
costs, net
Allowance for loan losses
Total loans, net
Loan Maturity Table
(5)
(1,589)
$ 113,259
28
(1,498)
$ 123,272
30
(1,504)
$ 126,293
31
(1,723)
$ 114,896
24
(2,503)
$ 114,522
The following table illustrates the contractual maturity of our loan portfolio at December 31, 2020. Mortgages
that have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due.
The total amount of loans due after December 31, 2021, which have fixed interest rates, is $12.1 million, while the total
amount of loans due after such date, which have adjustable interest rates, is $89.7 million. The table does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses.
Real Estate Mortgage
One-to-Four Multi- Residential
Family
Family Construction Commercial Construction Business
Consumer Total(1)
4,025 $ 862 $
2,071 $
3,184 $
307 $
1,981 $
612 $ 13,042
(In thousands)
Commercial Commercial
11,398 1,854
50,707 6,248
12
—
7,440
19,547
Total
$ 66,130 $ 8,964 $
2,083 $ 30,171 $
542
2
851 $
2,841
390
24,899
812
76,912
18
5,212 $ 1,442 $ 114,853
Amounts due in:
$
One year or less(2)
More than one year
to five years
More than five years
(1) Excludes net deferred loan origination fees and costs.
(2) Includes demand loans, loans having no stated maturity and overdraft loans.
Largest Borrowing Relationships. At December 31, 2020, the maximum amount under federal law that we
could lend to any one borrower and the borrower’s related entities was approximately $5.8 million. Our five largest lending
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relationships totaled $10.2 million in the aggregate, or 8.9% of our $114.9 million total loan portfolio, at December 31,
2020. The largest relationship at December 31, 2020 consisted of $2.2 million to commonly owned businesses
collateralized by multi-family residential property and land to be developed for residential use with unfunded loan
commitments to this relationship totaling $950,000. The next four largest lending relationships at December 31, 2020,
were $2.5 million in loans to a business collateralized by multi-family and non-owner occupied one-to-four family
residential property; $694,000 in loans to commonly owned businesses, collateralized by non-owner occupied one-to-four
residential property and commercial real estate property with unfunded loans commitments to this relationship totaling
$1.8 million; $2.4 million in loans to commonly owned businesses collateralized by commercial business and commercial
real estate property; and $2.4 million in loans to commonly owned businesses collateralized by multi-family residential
property. As of December 31, 2020, all of these loans were performing in accordance with their repayment terms.
One-to-Four Family Real Estate Lending. Our primary lending activity consists of the origination of loans
secured by first mortgages on one-to-four family residences, substantially all of which are secured by property located in
our geographic lending area. We originate primarily adjustable-rate loans. Beginning in October 2019, we entered into a
loan brokering agreement with United Wholesale Mortgage (“UWM”). Under the agreement we perform loan application
and preliminary underwriting activities to determine if potential loans conform to the underwriting standards of Fannie
Mae (“conforming”). Conforming loans are then funded by UWM and we receive a fee for services performed. Through
this relationship, we brokered 28 loans in 2020 and seven loans in 2019. Residential loans which do not conform to the
underwriting standards of Fannie Mae ("non-conforming"), may be funded by us and held in our loan portfolio.
Most of our loans are underwritten using generally-accepted underwriting guidelines. The one-to-four family
loans we originate are generally retained in our portfolio. Our pricing strategy for mortgage loans includes establishing
interest rates that are competitive with other local financial institutions and consistent with our internal asset and liability
management objectives. During the year ended December 31, 2020, we originated $9.3 million and $986,000 of one-to-
four family adjustable-rate mortgage (“ARM”) and fixed-rate mortgage loans, respectively. At December 31, 2020, one-
to-four family residential mortgage loans totaled $66.1 million, or 57.6%, of our total loan portfolio, of which $61.9 million
were ARM loans and $4.2 million were fixed-rate loans.
A large portion of the one-to-four family residential mortgage loans we originate and retain in our portfolio consist
of loans that would be considered non-conforming as it relates to the ability to sell to Fannie Mae or other secondary
market purchasers. Some of these loans are also originated to meet the needs of borrowers who cannot otherwise satisfy
Fannie Mae credit requirements because of personal and financial reasons (i.e., divorce, bankruptcy, length of time
employed, etc.), and other aspects, which do not conform to Fannie Mae’s guidelines. Such borrowers may have higher
debt-to-income ratios, or the loans are secured by unique properties in rural markets for which there are no sales of
comparable properties to support the value according to secondary market requirements. We may require additional
collateral or lower loan-to-value ratios to reduce the risk of these loans. We believe that these loans satisfy a need in our
market area. As a result, subject to market conditions, we intend to continue to originate these types of loans.
We generally underwrite our one-to-four family loans based on the applicant’s employment and credit history
and the appraised value of the subject property. We generally lend up to 80% of the lesser of the appraised value or
purchase price for one-to-four family first mortgage loans and non-owner occupied first mortgage loans. At December 31,
2020 we had $15.2 million of non-owner occupied first mortgage loans. Properties securing our one-to-four family loans
are generally appraised by independent fee appraisers who are selected in accordance with criteria approved by the board
of directors. It is Mid-Southern Savings Bank’s policy to require title insurance policies on all mortgage real estate loans
originated in the amount of $500,000 or more. Homeowners, liability, fire and, if required, flood insurance policies are
also required for one-to-four family loans. Our real estate loans generally contain a “due on sale” clause allowing us to
declare the unpaid principal balance due and payable upon the sale of the security property. The average size of our one-
to-four family residential loans was approximately $75,000 at December 31, 2020.
Fixed-rate loans secured by one-to-four family residences have contractual maturities of up to 30 years. At
December 31, 2020, we had no one-to-four family loans with an original contractual maturity in excess of 30 years.
Consumer-purpose ARM loans are offered with an initial fixed rate for up to five years. Adjustments and life-
time rate caps that vary based on the product, generally have a maximum annual rate change of 2.25% and a maximum
8
overall rate change of 6.00%. Commercial-purpose ARM loans generally have negotiated structures as it relates to rate
floors, caps and margins over an index. We generally use the rate on the five-year Treasury Bills to re-price our ARM
loans, however, as a consequence of using caps, the interest rates on ARM loans may not be as rate-sensitive as our cost
of funds. Furthermore, because loan indexes may not respond perfectly to changes in market interest rates, upward
adjustments on loans may occur more slowly than increases in our cost of interest-bearing liabilities, especially during
periods of rapidly increasing interest rates. Because of these characteristics, yields on ARM loans may not be sufficient to
offset increases in our cost of funds.
Included in our one-to-four family loans are manufactured home loans that are considered a permanent dwelling.
We originate new and used manufactured home loans to borrowers who intend to use the home as a primary residence.
Our weighted average yield on manufactured home loans at December 31, 2020 was 4.70%, compared to 4.49% for one-
to-four family mortgages. At December 31, 2020, these loans totaled $6.2 million, or 5.4% of our total loan portfolio. We
underwrite these loans based on our review of creditworthiness of the borrower, including credit scores, and the value of
the collateral, for which we hold a security interest under Indiana law.
Manufactured home loans are higher risk than loans secured by residential real property, though this risk is
reduced if the owner also owns the land on which the home is located. A small portion of our manufactured home loans
involve properties on which we also have financed the land for the owner. The primary additional risk in manufactured
home loans is the difficulty in obtaining adequate value for the collateral due to the cost and limited ability to move the
collateral. In addition to the cost of moving a manufactured home, it is difficult for these borrowers to find a new location
for their home. First-time homebuyers of manufactured homes tend to be a higher credit risk than first-time homebuyers
of single-family residences, due to more limited financial resources. We attempt to work out delinquent loans with the
borrower and, if that is not successful, any repossessed manufactured homes are repossessed and sold. At December 31,
2020, there were $275,000 in nonperforming manufactured home loans and no manufactured home properties in our other
real estate owned ("OREO") or repossessed assets portfolio.
Home Equity Lending. We originate home equity loans and home equity lines of credit. Home equity lines of
credit generally consist of variable-rates. We originate home equity loans and lines of credit in amounts of up to 80% of
the value of the collateral, minus any senior liens on the property. Home equity lines of credit are typically originated with
an adjustable rate of interest, based on the Wall Street Journal Prime Rate plus a margin. Home equity lines of credit
generally have up to a ten-year draw period, during which time the funds may be paid down and redrawn up to the
committed amount. Once the draw period has lapsed, the home equity line of credit matures with all moneys owed being
due and payable. At December 31, 2020, home equity lines of credit totaled $3.0 million, or 2.6% of our total loan portfolio.
At December 31, 2020, unfunded commitments on these lines of credit totaled $4.2 million.
Commercial and Multi-Family Real Estate Lending. We offer a variety of commercial real estate and multi-
family loans. Most of these loans are secured by commercial income-producing properties, including retail centers, multi-
family apartment buildings, warehouses, and office buildings located in our market area. At December 31, 2020,
commercial and multi-family loans totaled $39.1 million, or 34.1% of our total loan portfolio.
Our loans secured by commercial and multi-family real estate are generally originated with a variable interest
rate, fixed for a five, seven or ten-year term and a 20-year amortization period. At the end of the initial term, there is a
balloon payment or the loan re-prices every one to five years during the remaining term based on an independent index
matching the ongoing repricing term plus a margin of 1.0% to 4.0%. Loan-to-value ratios on our commercial and multi-
family loans typically do not exceed 80% of the lower of cost or appraised value of the property securing the loan at
origination.
Loans secured by commercial and multi-family real estate are generally underwritten based on the net operating
income of the property, global cash flow of the borrower, quality and location of the real estate, the credit history and
financial strength of the borrower and the quality of management involved with the property. The net operating income or
global cash flow of the borrower must be sufficient to cover the payments related to the outstanding debt plus an additional
coverage requirement. We generally impose a minimum project debt coverage ratio of approximately 1.2x for the borrower
or 1.35x global cash flow. The global cash flow takes into consideration the living expenses of the persons involved in the
request and tax obligations. For originated loans secured by income producing commercial properties, if the borrower is
9
other than an individual, we generally require the personal guaranty of the borrower. We also generally require an
assignment of rents or leases in order to be assured that the cash flow from the project will be used to repay the debt.
Appraisals on properties securing commercial and multi-family loans are performed by independent state certified or
licensed fee appraisers and approved by the Director’s Loan Committee. In order to monitor the adequacy of cash flows
on income-producing properties, the borrower is required to provide, at a minimum, annual financial information. From
time to time we also acquire participation interests in commercial and multi-family loans originated by other financial
institutions secured by properties located in our market area or in the general proximity of our market area. During 2020
we did not purchase any commercial or multi-family loan participations.
Historically, loans secured by commercial and multi-family properties generally involve different credit risks
than one-to-four family properties, including the fact they cannot be sold as easily on the secondary market. These loans
typically involve larger balances to single borrowers or groups of related borrowers. Because payments on loans secured
by commercial and multi-family properties are often dependent on the successful operation or management of the
properties, repayment of these loans may be subject to adverse conditions in the real estate market or the economy. If the
cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may
be impaired. Commercial and multi-family loans also expose a lender to greater credit risk than loans secured by one-to-
four family because the collateral securing these loans typically cannot be sold as easily as one-to-four family. In addition,
some of our commercial and multi-family loans are not fully amortizing and contain large balloon payments upon maturity.
Balloon payments may require the borrower to either sell or refinance the underlying property in order to make the
payment, which may increase the risk of default or non-payment. Our largest single commercial and multi-family
borrowing relationship at December 31, 2020, totaled $2.4 million and is collateralized by multiple commercial real estate
properties. At December 31, 2020, these loans were performing in accordance with their repayment terms.
Construction Lending. We originate construction loans secured by single-family residences and commercial
and multi-family real estate. We also originate land and lot loans, which are secured by raw land or developed lots on
which the borrower intends to build a residence, and land acquisition and development loans. At December 31, 2020, our
construction loans, including land and lot loans and land acquisition and development loans totaled $2.9 million, or 2.5%
of our total loan portfolio. At December 31, 2020, unfunded construction loan commitments totaled $3.8 million.
We originate construction loans to individuals and contractors for the construction and acquisition of personal
residences whether or not the collateral property underlying the loan is under contract for sale. At December 31, 2020,
construction loans to contractors for homes that were not pre-sold totaled $848,000 and are classified as commercial real
estate construction loans.
Our residential construction loans generally provide for the payment of interest only during the construction
phase, which is typically up to twelve months. We typically convert construction loans to individuals to permanent loans
on completion of construction but if Mid-Southern Savings Bank does not intend to provide the permanent financing, we
require a take-out financing commitment prior to origination. At the end of the construction phase, the construction loan
generally either converts to a longer-term mortgage loan or is paid off through a permanent loan from another lender.
Residential construction loans are made up to the lesser of a maximum loan-to-value ratio of 90% of cost or 80% of
appraised value at completion.
At December 31, 2020, residential construction mortgage loans to individuals totaled $2.1 million. Before making
a commitment to fund a residential construction loan, we require an appraisal of the subject property by an independent
licensed appraiser. During the construction phase, we make periodic inspections of the construction site and loan proceeds
are disbursed directly to the contractors or borrowers as construction progresses. Typically, disbursements are made
in monthly draws during the construction period. Loan proceeds are disbursed after inspection based on the percentage of
completion method. We also require general liability, builder’s risk hazard insurance, title insurance (loans in excess of
$500,000), and flood insurance (as applicable, for properties located or to be built in a designated flood hazard area) on all
construction loans.
We also originate developed lot and land loans to individuals intending to construct in the future a residence on
the property. We will generally originate these loans in an amount up to 80% of the lower of the purchase price or appraisal.
These lot and land loans are secured by a first lien on the property and have a fixed rate of interest with an initial term of
10
five years or less and a maximum amortization of 20 years. At December 31, 2020, we had no lot and land loans to
individuals.
We make land acquisition and development loans to experienced home builders or residential lot developers in
our market area. The maximum loan-to-value limit applicable to these loans is generally 80% of the appraised market
value upon completion of the project. We do not require any cash equity from the borrower if there is sufficient equity in
the land being used as collateral. Development plans are required from developers prior to making the loan. Our loan
officers are required to personally visit the proposed site of the development. We require that developers maintain adequate
insurance coverage. Land acquisition and development loans generally are originated with a loan term up to 24 months,
have adjustable rates of interest based on the Wall Street Journal Prime Rate and require interest only payments during the
term of the loan. Development loan proceeds are disbursed periodically in increments as construction progresses and as
inspection by our approved inspectors warrant. We also require these loans to be paid on an accelerated basis as the lots
are sold, so that we are repaid before all the lots are sold. At December 31, 2020, we had $2.8 million in land acquisition
and development loans within our commercial real estate and construction loan portfolios. At December 31, 2020, our
largest land acquisition and development relationship consisted of one loan totaling $1.5 million, secured by single family
residential lots located in our market area. At December 31, 2020, this loan relationship was performing in accordance
with its repayment terms. At December 31, 2020, unfunded loan commitments related to land acquisition and development
totaled $158,000.
We also offer commercial and multi-family construction loans. These loans are underwritten with construction
financing for up to 12 months under terms similar to our residential construction loans. On completion of the construction
period the loan by its terms converts to a permanent commercial real estate loan with terms similar to our other permanent
commercial and multi-family real estate loans. At December 31, 2020, we had $851,000 in commercial and multi-family
construction loans.
Construction and land financing is generally considered to involve a higher degree of credit risk than longer-term
financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy
of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including
interest) of construction and other assumptions. If the estimate of construction costs is inaccurate, we may be required to
advance funds beyond the amount originally committed in order to protect the value of the property and may have to hold
the property for an indeterminate period of time. Additionally, if the estimate of value is inaccurate, we may be confronted
with a project that, when completed, has a value that is insufficient to generate full payment. Land loans also pose
additional risk because of the lack of income being produced by the property and the potential illiquid nature of the
collateral. The value of the lots securing our loans may be affected by the success of the development in which they are
located. As a result, construction loans and land loans often involve the disbursement of funds with repayment dependent,
in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property or refinance the
indebtedness, rather than the ability of the borrower or guarantor to repay principal and interest. The nature of these loans
is also such that they are generally more difficult to monitor. In addition, speculative construction loans to a builder are
often associated with homes that are not pre-sold, and thus pose a greater potential risk than construction loans to
individuals on their personal residences.
Consumer Lending. We offer a variety of secured consumer loans, including new and used manufactured homes,
automobiles, boats and recreational vehicle loans, and loans secured by savings deposits. We also offer unsecured
consumer loans. We originate our consumer loans primarily in our market area. All of our consumer loans are originated
on a direct basis.
We make loans on new and used automobiles. Our automobile loan portfolio totaled $674,000 at December 31,
2020, or 46.7% of our consumer loan portfolio and 0.6% of our total loan portfolio. Automobile loans may be written for
a term of up to 72 months and have fixed rates of interest. Loan-to-value ratios are generally up to 100% of the purchase
price for qualified borrowers if the Fair Isaac Corporation (“FICO”) credit score is 700 or greater of either the borrower
or co-borrower and the debt-to-income ratio is 35% or less. Borrowers who do not meet these criteria but still qualify in
accordance with our underwriting guidelines may borrow up to 80% of the purchase price. We follow our internal
underwriting guidelines in evaluating automobile loans, including credit scoring, verification of employment, reviewing
debt-to-income ratios and valuation of the underlying collateral.
11
Our consumer loans also include loans secured by new and used manufactured homes not considered permanent
dwellings, new and used boats, motorcycles and recreational vehicles, loans secured by deposits and unsecured personal
loans, all of which, at December 31, 2020, totaled $769,000 or 53.3% of our consumer loan portfolio and 0.7% of our total
loan portfolio. These loans typically have terms from five to ten years depending on the collateral and loan-to-value ratios
up to 80% and have either fixed or adjustable interest rates.
Our unsecured consumer loans have either a fixed rate of interest generally for a maximum term of 36 months,
or are revolving lines of credit of generally up to $25,000. At December 31, 2020, there were no outstanding loans or
unfunded commitments for unsecured consumer lines of credit.
Consumer loans (other than our manufactured homes) generally have shorter terms to maturity, which reduces
our exposure to changes in interest rates. In addition, management believes that offering consumer loan products helps to
expand and create stronger ties to our existing customer base by increasing the number of customer relationships and
providing cross-marketing opportunities.
Consumer loans generally entail greater risk than do one-to-four family residential mortgage loans, particularly
in the case of consumer loans that are secured by rapidly depreciable assets, such as manufactured homes, automobiles,
boats and recreational vehicles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate
source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the
borrower’s continuing financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy.
Commercial Business Lending. At December 31, 2020, commercial business loans totaled $5.2 million, or 4.5%
of our total loan portfolio. Substantially all of our commercial business loans have been to borrowers in our market area.
Our commercial business lending activities encompass loans with a variety of purposes and security, including loans to
finance commercial vehicles and equipment. Approximately $790,000 of our commercial business loans at December 31,
2020 were unsecured. Our commercial business lending policy includes credit file documentation and analysis of the
borrower’s background, capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as an
evaluation of other conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is
also an important aspect of our credit analysis. We generally require personal guarantees on both our secured and unsecured
commercial business loans. Nonetheless, commercial business loans are believed to carry higher credit risk than residential
mortgage loans.
Our interest rates on commercial business loans are dependent on the type of lending. Our secured commercial
business loans typically have a loan-to-value ratio of up to 80% and are term loans ranging from three to five years. Secured
commercial business term loans generally have a fixed rate. In addition, we typically charge loan fees of 0.25% to 2.0%
of the principal amount at origination, depending on the credit quality and account relationships of the borrower. Business
lines of credit are usually adjustable-rate and are based on the Wall Street Journal Prime Rate plus 0% to 3.75%, and are
generally originated with both a floor and ceiling to the interest rate. Our business lines of credit have terms ranging from
12 months to 24 months and provide for interest-only monthly payments during the term.
Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on
the underlying collateral provided by the borrower. The borrower’s cash flow may be unpredictable, and collateral securing
these loans may fluctuate in value. Most often, this collateral is accounts receivable, inventory, equipment or real estate.
In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be
substantially dependent on the ability of the borrower to collect amounts due from its customers. Other collateral securing
loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the
specific type of business and equipment used. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business itself (which, in turn, is often dependent in
part upon general economic conditions).
Lending Authority. Both our President and Chief Executive Officer (“CEO”) and Executive Vice President and
Senior Loan Officer may individually approve unsecured loans up to $100,000 and all types of secured loans up to
$200,000. The Lending Group (defined as President and CEO, Senior Loan Officer and Chief Credit Officer) may approve
12
unsecured loans up to $150,000 and all types of secured loans up to $1.0 million. The Director’s Loan Committee approves
unsecured loans up to $500,000 and secured loans up to $2.0 million. Any loans over the Director’s Loan Committee limit
must be approved by the full board of directors. All loan policy exceptions must be approved by the Director’s Loan
Committee, the CEO or the Senior Loan Officer up to the committee’s, CEO’s or Senior Loan Officer’s lending authority.
All policy exception loans of $10,000 or more must be reported to the board of directors within 45 days.
Loan Originations, Purchases, Sales, Repayments and Servicing
We originate both fixed-rate and adjustable-rate loans. Our ability to originate loans, however, is dependent upon
customer demand for loans in our market area. Over the past few years, we have continued to originate residential and
consumer loans, and increased our emphasis on commercial and multi-family, construction and land, and commercial
business lending. Demand is affected by competition and the interest rate environment. During the past few years, we, like
many other financial institutions, have experienced significant prepayments on loans due to the low interest rate
environment prevailing in the United States. During the years ended December 31, 2019 and 2020, we did not acquire any
loans. We underwrite participations to the same standards as an internally-originated loan.
In addition to interest earned on loans and loan origination fees, we receive fees for loan commitments, late
payments and other miscellaneous services.
Asset Quality
When a borrower fails to make a required payment on a one-to-four family loan, we attempt to cure the
delinquency by contacting the borrower. In the case of loans secured by a one-to-four family property, a late notice
typically is sent 15 days after the due date, and the borrower is contacted by phone within 30 days after the due date.
Generally, a delinquency letter is mailed to the borrower. All delinquent accounts are reviewed by a loan account executive
or branch manager who attempts to cure the delinquency by contacting the borrower once the loan is 30 days past due. If
the account becomes 90 days delinquent and an acceptable repayment plan has not been agreed upon, we generally refer
the account to legal counsel with instructions to prepare a notice of intent to foreclose.
Delinquent consumer loans, as well as delinquent home equity loans and lines of credit, are handled in a similar
manner to one-to-four family loans, except that appropriate action may be taken to collect any loan payment that is
delinquent for more than 15 days. Once the loan is 90 days past due, it is classified as nonaccrual. Generally, credits are
charged-off at 120 days past due. Our procedures for repossession and sale of consumer collateral are subject to various
requirements under the applicable consumer protection laws as well as other applicable laws and the determination by us
that it would be beneficial from a cost basis.
Delinquent loans are initially handled by the loan officer in charge of the loan, who is responsible for contacting
the borrower. In addition, management meets weekly and reviews past due and classified loans, as well as other loans that
management feels may present possible collection problems, which are reported to the board on a monthly basis. If an
acceptable workout of a delinquent loan cannot be agreed upon, we generally initiate foreclosure or repossession
proceedings on any collateral securing the loan.
13
Delinquent Loans
Nonperforming Assets. The table below sets forth the amounts and categories of nonperforming assets in our
loan portfolio. Loans are placed on nonaccrual status when the collection of principal and/or interest become doubtful or
when the loan is more than 90 days past due. Foreclosed assets include assets acquired in settlement of loans. We had no
accruing loans 90 days or more delinquent for the periods reported.
Non-accruing loans
Real estate loans
One-to-four family residential
Multi-family residential
Residential construction
Commercial real estate
Commercial real estate construction
Total real estate loans
Commercial business loans
Consumer loans
Total non-accruing loans
Foreclosed real estate
One-to-four family residential
Commercial real estate
Total foreclosed real estate
Repossessed automobiles, recreational vehicles
2020
2019
December 31,
2018
(Dollars in thousands)
2017
2016
$
1,160 $
—
—
96
—
1,256
947
—
—
235
—
1,182
$
978
—
—
313
—
1,291
$
1,333
—
—
535
—
1,868
$
1,668
—
—
699
—
2,367
—
—
4
10
19
—
1,256
—
1,182
—
1,295
—
1,878
11
2,397
—
—
—
—
—
—
—
—
—
—
—
—
138
38
176
—
313
—
313
—
Total nonperforming assets
$
1,256 $
1,182
$
1,295
$
2,054
$
2,710
Total nonperforming assets as a percentage of total assets
0.5 %
0.6 %
0.6 %
1.2 %
1.5 %
Restructured loans (excluding those on nonaccrual
status)
Real estate loans
One-to-four family residential
Commercial real estate
Total real estate loans
$
329 $
185
514
484
365
849
$
879
439
1,318
$
877
484
1,361
$
1,258
759
2,017
Commercial business loans
382
412
467
514
567
Consumer loans
Total
—
—
—
—
14
$
896 $
1,261
$
1,785
$
1,875
$
2,598
For the year ended December 31, 2020, total interest income that would have been recorded had the nonaccrual
loans been current in accordance with their original terms amounted to $69,000, all of which was excluded in interest
income for the year ended December 31, 2020.
Troubled Debt Restructured Loans. Troubled debt restructurings, which are accounted for under Accounting
Standards Codification (“ASC”) 310-40, are loans which have renegotiated loan terms to assist borrowers who are unable
to meet the original terms of their loans. Such modifications to loan terms may include a lower interest rate, a reduction in
principal, or a longer term to maturity. All troubled debt restructurings are initially classified as impaired, regardless of
whether the loan was performing at the time it was restructured. Once a troubled debt restructuring has performed
14
according to its modified terms for six months and the collection of principal and interest under the revised terms is deemed
probable, we remove the troubled debt restructuring from nonperforming status. At December 31, 2020 and 2019, we had
$896,000 and $1.3 million, respectively, of loans that were classified as troubled debt restructurings and still on accrual.
Included in nonperforming loans at December 31, 2020 and 2019 were troubled debt restructured loans of $276,000 and
$137,000 respectively.
Foreclosed Assets. We owned no OREO or other repossessed assets at December 31, 2020.
Other Loans of Concern. In addition to the nonperforming assets set forth in the table above, as of December 31,
2020, there were seven loans totaling $188,000 with respect to which known information about the possible credit
problems of the borrowers have caused management to have doubts as to the ability of the borrowers to comply with
present loan repayment terms and which may result in the future inclusion of such items in the nonperforming asset
categories. These loans have been considered individually in management’s determination of our allowance for loan losses.
The largest loan relationship of concern at December 31, 2020 totaled $54,000 and was secured by one-to-four family
residential rental property located in Washington County, Indiana. The remaining loans of concern consist of $113,000 in
residential first mortgages and $21,000 in commercial real estate loans. Loans of concern had no specific loan loss reserves
at December 31, 2020.
Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and
equity securities considered by the OCC to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is
considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of
the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured
institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the
weaknesses in those classified “substandard,” with the added characteristic that the weaknesses present make “collection
or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.”
Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose Mid-Southern
Savings Bank to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses
are required to be designated as special mention.
When we classify problem assets as either substandard or doubtful, we may establish specific allowance for loan
losses in an amount deemed prudent by management. Our determination as to the classification of our assets and the
amount of our valuation allowances is subject to review by the OCC and the FDIC, which may order the establishment of
additional general or specific loss allowances.
We regularly review the problem assets in our portfolio to determine whether any assets require classification in
accordance with applicable regulations. On the basis of management’s review of our assets, at December 31, 2020, we had
classified $1.4 million of our assets as substandard, which represented a variety of outstanding loans. Classified assets
totaled $2.9 million, or 5.9% of our equity capital and 1.2% of our assets at December 31, 2020 and $2.1 million, or 4.2%
of our equity capital and 1.0% of our assets at December 31, 2019. We had $1.5 million of assets classified as special
mention at December 31, 2020 and no assets classified as special mention as of December 31, 2019.
Allowance for Loan Losses. We maintain an allowance for loan losses to absorb probable loan losses in the loan
portfolio. The allowance is based on ongoing, monthly assessments of the estimated probable incurred losses in the loan
portfolio. In evaluating the level of the allowance for loan losses, management considers the types of loans and the amount
of loans in the loan portfolio, peer group information, historical loss experience, adverse situations that may affect the
borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. Large groups
of smaller balance homogeneous loans, such as one-to-four family, small commercial and multi-family, home equity and
consumer loans, are evaluated in the aggregate using historical loss factors and peer group data adjusted for current
economic conditions.
Our allowance for loan losses totaled $1.6 million, representing 1.4% of total loans at December 31, 2020 and
$1.5 million and 1.2%, respectively, at December 31, 2019. Specific valuation reserves totaled $55,000 and $78,000 at
December 31, 2020 and 2019, respectively.
15
Assessing the allowance for loan losses is inherently subjective as it requires making material estimates, including
the amount and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant
change. In the opinion of management, the allowance, when taken as a whole, properly reflects estimated probable loan
losses in our loan portfolio. See Notes 1 and 4 of the Notes to Consolidated Financial Statements for additional
information.
The following table sets forth an analysis of our allowance for loan losses at the dates indicated:
Balance at beginning of period
$ 1,498
$ 1,504
$ 2,503
2020
2019
2017
2016
December 31,
2018
(Dollars in thousands)
$ 1,723
Charge-offs:
One-to-four family residential
Multi-family residential
Construction
Commercial real estate
Commercial business
Consumer
Total charge-offs
Recoveries:
One-to-four family residential
Multi-family residential
Construction
Commercial real estate
Commercial business
Consumer
Total recoveries
Net charge-offs
Provision for loan losses (recapture)
Balance at end of period
Net charge-offs during the period as a percentage of
average loans outstanding during the period
Net charge-offs during the period as a percentage of
average nonperforming assets
Allowance as a percentage of nonperforming assets
Allowance as a percentage of total loans (end of
period)
14
—
—
—
21
18
53
58
—
—
—
—
17
75
182
—
—
—
2
16
200
64
—
—
19
—
18
101
$ 3,130
218
—
—
1
—
25
244
4
—
—
—
—
8
12
(41)
132
$ 1,589
48
—
—
—
—
9
57
(18)
12
$ 1,498
162
—
1
—
2
16
181
(19)
(200)
$ 1,504
6
—
—
1
—
14
21
(80)
(700)
$ 1,723
54
—
—
1
—
11
66
(178)
(449)
$ 2,503
— %
— %
— %
0.1 %
0.2 %
3.4 %
1.5 %
1.1 %
3.4 %
6.6 %
126.5 %
126.7 %
116.1 %
91.7 %
104.4 %
1.4 %
1.2 %
1.2 %
1.5 %
2.1 %
Nonperforming loans increased to $1.3 million at December 31, 2020 from $1.2 million at December 31, 2019.
The allowance for loan losses as a percentage of total loans was 1.4% and 1.2% at December 31, 2020 and 2019,
respectively.
16
The distribution of our allowance for losses on loans at the dates indicated is summarized as follows:
Percent of
Percent of Loans In
Allowance Category
To Total
2020
To Total 2019
Loans
Amount Loans
Percent of
Percent of Loans In
Allowance Category
December 31,
Percent of
Percent of Loans In
Allowance Category
Percent of
Percent of Loans In
Allowance Category
To Total To Total
2018
To Total To Total
2017
To Total To Total
2016
Percent of
Percent of Loans In
Allowance Category
To Total To Total
Loans
Amount Loans
Loans
Amount Loans
Loans
Amount Loans
Loans
(Dollars in thousands)
Amount Loans
Allocated at end of
period to:
One-to-four family
residential
Multi-family
residential
Construction
Commercial real
estate
Commercial business
Consumer
Total
$
992
0.9 %
57.6 % $
955
0.8 %
57.4 % $ 1,012
0.8 %
62.9 % $ 1,070
0.9 %
68.6 % $ 1,571
1.3 %
69.2 %
98
55
0.1
—
7.8
2.5
83
44
0.1
—
7.4
2.6
59
48
—
—
5.5
4.0
220
20
0.2
—
5.4
1.9
338
9
0.3
—
4.7
1.3
306
113
25
$ 1,589
0.3
0.1
—
1.4 %
26.3
4.5
1.3
289
102
25
100.0 % $ 1,498
0.2
0.1
—
1.2 %
25.9
5.2
1.5
259
98
28
100.0 % $ 1,504
0.2
0.1
—
1.1 %
21.3
4.6
1.7
269
111
33
100.0 % $ 1,723
0.2
0.1
—
1.4 %
19.1
3.3
1.7
404
134
47
100.0 % $ 2,503
0.3
0.1
—
2.0 %
19.8
3.2
1.8
100.0 %
Investment Activities
Federal savings banks have the authority to invest in various types of liquid assets, including United States
Treasury obligations, securities of various federal agencies, including callable agency securities, certain certificates of
deposit of insured banks and savings institutions, certain bankers’ acceptances, repurchase agreements and federal funds.
Subject to various restrictions, federal savings banks may also invest their assets in investment grade commercial paper
and corporate debt securities and mutual funds whose assets conform to the investments that the institution is otherwise
authorized to make directly.
Specific investment strategies are formulated by the ALCO committee. The ALCO committee is composed of
Mid-Southern Savings Bank’s executive management team. The board of directors will review and approve these
investment strategies and then can delegate the authority to execute to ALCO. In addition to authorizing and approving
the investment policy, the board of directors has the responsibility for the approval of strategies and for monitoring the
investment portfolio of Mid-Southern Savings Bank. Investment activities will be conducted in accordance with Mid-
Southern Savings Bank’s policy and consistent with Mid-Southern Savings Bank’s asset/liability management policy. The
board of directors has the ultimate responsibility for establishing policy and monitoring management’s compliance with
the policy. The President is responsible for all investment executions in the portfolio. Mid-Southern Savings Bank retains
the services of an investment advisor to provide advice to and consult with the board and ALCO on various investment
strategies.
The ALCO committee considers various factors when making strategic recommendations to the board of directors
including the marketability, maturity and tax consequences of the proposed investment. The maturity structure of
investments will be affected by various market conditions, including the current and anticipated slope of the yield curve,
the level of interest rates, the trend of new deposit inflows, and the anticipated demand for funds via deposit withdrawals
and loan originations and purchases.
The general objectives of our investment portfolio will be to provide liquidity when loan demand is high, to assist
in maintaining earnings when loan demand is low and to maximize earnings while satisfactorily managing risk, including
credit risk, reinvestment risk, liquidity risk and interest rate risk. Our investment quality will emphasize safer investments
with the yield on those investments secondary to not taking unnecessary risk with the available funds. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability Management.”
As a condition of membership at the FHLB, we are required to purchase and hold a certain amount of FHLB
stock. At December 31, 2020, we owned $778,000 in FHLB stock. Our stock purchase requirement is based, in part, upon
the outstanding principal balance of advances from the FHLB. FHLB stock has a par value of $100, and is carried at cost.
The composition of our investment securities portfolio at December 31, 2020, excluding FHLB stock, is as
follows: Federal agency mortgage-backed securities with an amortized cost of $37.7 million and a fair value of $38.0
million and municipal bonds with an amortized cost of $62.5 million and a fair value of $66.5 million.
17
We review investment securities on an ongoing basis for the presence of other-than-temporary impairment
(“OTTI”) taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the
change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is likely that we will be
required to sell the security before recovery of our amortized cost basis of the investment, which may be maturity, and
other factors. For debt securities, if we intend to sell the security or it is likely that we will be required to sell the security
before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If we do not intend
to sell the security and it is not more likely than not that we will be required to sell the security but we do not expect to
recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses
would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost
basis and the present value of the cash flows expected to be collected.
Projected cash flows are discounted by the original or current effective interest rate depending on the nature of
the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference
between the present value of the cash flows expected to be collected and the fair value, is recognized as a charge to other
comprehensive income. Impairment losses related to all other factors are presented as separate categories within other
comprehensive income.
At December 31, 2020, we held no investment securities for which declines in value are considered other-than-
temporary. We do not intend to sell these securities and it is more likely than not that we will not be required to sell the
securities before anticipated recovery of the remaining amortized cost basis. We closely monitor our investment securities
for changes in credit risk. If market conditions deteriorate and we determine our holdings of these or other investment
securities are OTTI, our future earnings, stockholders’ equity, regulatory capital and continuing operations could be
materially adversely affected.
The following table sets forth the composition of our securities portfolio and other investments at the dates
indicated. At December 31, 2020, our securities portfolio did not contain securities of any issuer with an aggregate carrying
value in excess of 10% of our equity capital, excluding those issued by the United States Government or its agencies.
2020
Amortized
Cost
Fair
Value
December 31,
2019
Amortized
Cost
Fair
Value
(Dollars in thousands)
2018
Amortized
Cost
Fair
Value
Securities available for sale:
Municipal obligations
Mortgage-backed
Federal agency securities
Total available for sale
Securities held to maturity:
Municipal obligations
Mortgage-backed
Total held to maturity
Restricted equity securities:
Federal Home Loan Bank stock
$ 62,497 $ 66,445 $ 36,390 $ 37,935 $ 28,653 $ 28,710
24,430
—
53,140
38,011
37,682
—
—
100,179 104,456
20,323
—
56,713
24,709
—
53,362
20,482
—
58,417
—
31
31
—
31
31
—
42
42
—
42
42
45
55
100
45
56
101
778
778
778
778
778
778
Total securities
$ 100,988 $ 105,265 $ 57,533 $ 59,237 $ 54,240 $ 54,019
Maturity of Securities
The composition and contractual maturities of our investment portfolio at December 31, 2020, excluding Federal
Home Loan Bank stock, are indicated in the following table. Weighted average yields on tax exempt securities are
presented on a tax-equivalent basis using a federal marginal tax rate of 21%. Certain mortgage-backed securities, including
18
collateralized mortgage obligations, have adjustable interest rates and will reprice annually within the various maturity
ranges. These repricing schedules are not reflected in the table below.
More than One Year to More than Five Years to
One Year or Less
Five Years
Ten Years
Weighted
Carrying Average Carrying
Value Yield
Value
Weighted
Average
Yield
Weighted
Carrying
Value
Yield
(Dollars in thousands)
Average
More than Ten Years
Weighted
Weighted
Carrying Average Carrying Average
Value
Yield
Yield
Value
Total
Securities available for sale:
Municipal obligations
Mortgage-backed securities
Total available for sale
Securities held to maturity:
Municipal obligations
Mortgage-backed securities
Total held to maturity
Sources of Funds
$
$
$
$
—
—
—
—
—
—
— % $
— %
— % $
4,339
1,812
6,151
1.92 % $
1.90 %
1.92 % $
7,598
6,446
14,044
3.50 % $ 54,508
0.89 %
29,753
2.25 % $ 84,261
3.35 % $ 66,445
1.64 % 38,011
2.72 % $ 104,456
3.26 %
1.53 %
2.61 %
— % $
— %
— % $
—
4
4
— % $
4.17 %
4.17 % $
—
3
3
— % $
2.57 %
2.57 % $
—
24
24
— % $
2.05 %
2.05 % $
—
31
31
— %
2.41 %
2.41 %
General. Our sources of funds are primarily deposits, borrowings, payments of principal and interest on loans
and funds provided from operations.
Deposits. We offer a variety of deposit accounts to both consumers and businesses having a wide range of interest
rates and terms. Our deposits consist of savings accounts, money market deposit accounts, demand accounts and
certificates of deposit. We solicit deposits primarily in our market area; however, at December 31, 2020, approximately
2.5% of our deposits were from persons outside the state of Indiana. As of December 31, 2020, core deposits, which we
define as our non-certificate or non-time deposit accounts, represented approximately 74.8% of total deposits, compared
to 64.1% as of December 31, 2019. We primarily rely on competitive pricing policies, marketing and customer service to
attract and retain these deposits and we expect to continue these practices in the future.
The flow of deposits is influenced significantly by general economic conditions, changes in money market and
prevailing interest rates and competition. The variety of deposit accounts we offer has allowed us to be competitive in
obtaining funds and to respond with flexibility to changes in consumer demand. We have become more susceptible to
short-term fluctuations in deposit flows as customers have become more interest rate conscious. We manage the pricing
of our deposits in keeping with our asset/liability management, liquidity and profitability objectives, subject to competitive
factors. Based on our experience, we believe that our deposits are relatively stable sources of funds. Despite this stability,
our ability to attract and maintain these deposits and the rates paid on them has been and will continue to be significantly
affected by market conditions.
19
We are a public funds depository and as of December 31, 2020, we had $16.6 million in public funds. These
funds consisted of $8.3 million in certificates of deposit and savings accounts and $8.3 million in checking accounts at
December 31, 2020.
Noninterest bearing checking
Interest bearing checking
Savings and money market
Time deposits:
Maturing:
Within one year
After one year, but within two
years
After two years, but within five
years
Maturing thereafter
2020
Percent
of Total
Amount
December 31,
2019
2018
Increase/
(Decrease) Amount
Percent
of Total
Amount
Percent
of Total
$ 25,939
51,522
52,779
(Dollars in thousands)
14.9 % $ 8,143 $ 17,796
39,750
29.6
36,632
30.3
11,772
16,147
12.2 % $ 18,334
41,069
27.0
38,990
24.9
12.2 %
27.2
25.8
22,610
13.0
(8,725)
31,335
21.3
17,410
11.5
9,809
5.6
(11,073)
20,882
14.2
18,310
12.1
11,454
—
6.6
—
10,880
—
574
—
0.4
—
16,995
—
11.2
—
Total
$ 174,113 100.0 % $ 27,144 $ 146,969 100.0 % $ 151,108 100.0 %
Jumbo Certificates
The following table indicates the amount of our jumbo certificates of deposit by time remaining until maturity as
of December 31, 2020. Jumbo certificates of deposit are certificates in amounts of $100,000 or more.
Maturity Period
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Total
Deposit Maturities
$
Total
(In thousands)
3,306
1,765
2,736
8,693
16,500
$
The following table sets forth the amount and maturities of time deposits categorized by rates at December 31,
2020.
0.00 - 0.99%
1.00 - 1.99%
2.00 - 2.99%
Total certificates of deposit
Amount due
After 1 Year After 3 Years
Through 3
Through 5 After 5
Within 1 year Years
Years
Years Total
(Dollars in thousands)
Percent
of Total
$
11,145 $
7,425
4,040
7,374 $
7,561
620
$
22,610 $ 15,555 $
2,639 $ — $ 21,158
18,055
—
3,069
4,660
—
—
48.2 %
41.2 %
10.6 %
5,708 $ — $ 43,873 100.0 %
Borrowings. Although deposits are our primary source of funds, we may utilize borrowings as a cost-effective
source of funds when they can be invested at a positive interest rate spread, for additional capacity to fund loan demand,
or to meet our asset/liability management goals. Our borrowings currently consist of advances from the FHLB. See Note 9
of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K for additional information.
20
We are a member of the FHLB of Indianapolis, which is part of the FHLB System. The eleven regional FHLBs
provide a central credit facility for their member institutions. We may use advances from the FHLB of Indianapolis to
supplement our supply of investable funds. The FHLB functions as a central reserve bank providing credit for its member
financial institutions. As a member, we are required to own capital stock in the FHLB and are authorized to apply for
advances on the security of such stock and certain of our whole first mortgage loans and other assets (principally securities
which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have
been met. Advances are made under several different programs, each having its own interest rate and range of maturities.
Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s
net worth or on the FHLB’s assessment of the institution’s creditworthiness. At December 31, 2020, we had $14.0 million
of available borrowing capacity with the FHLB. On June 27, 2019, the Company borrowed $10.0 million from the FHLB
which matures on June 27, 2024 and bears an interest rate of 1.73%. On December 30, 2020, the Company borrowed $1.0
million from the FHLB, bearing an interest rate of 0.26% and matured on January 6, 2021. No additional borrowings have
been made. Average short-term borrowings have not exceeded 30% of stockholders’ equity in the past two years.
The following table sets forth certain information concerning the Company’s borrowings for the periods indicated
(dollars in thousands):
Maximum amounts of FHLB advances outstanding at any month end
Average FHLB advances outstanding
Weighted average rate on FHLB advances
Maximum amounts of FRB borrowings outstanding at any month end
Balance outstanding at end of period:
FHLB advances
Taxation
2020
2018
Year Ended December 31,
2019
(Dollars in thousands)
$ 10,000
5,151
1.73 %
—
$
$ 3,000
912
1.64 %
—
$
$ 11,000
10,005
1.60 %
—
$
$ 11,000
$ 10,000
$
—
For details regarding the Company’s taxes, see Note 11 of the Notes the Consolidated Financial Statements
contained in Item 8 of this report.
Personnel
As of December 31, 2020, the Company had 47 full-time equivalent employees, none of whom are represented
by a collective bargaining unit. The Company believes its relationship with its employees is good.
Corporate Information
The Company’s principal executive offices are located at 300 N. Water Street, Salem, Indiana 47167. Its
telephone number is (812) 883-2639. The Company maintains a website with the address www.mid-southern.com. The
information contained on the Company’s website is not included as a part of, or incorporated by reference into, this Annual
Report on Form 10-K. Other than an investor’s own internet access charges, the Company makes available free of charge
through its website the Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K,
and amendments to these reports, as soon as reasonably practicable after it has electronically filed such material with, or
furnished such material to, the Securities and Exchange Commission (“SEC”).
Subsidiary Activities
Under OCC regulations, the Bank is authorized to invest up to 3.0% of its assets in subsidiary corporations
classified as service corporations, with amounts in excess of 2.0% only if primarily for community purposes, and unlimited
amounts in operating subsidiaries.
21
Mid-Southern Investments, Inc. was formed in 2017 to invest in general market municipal bonds, rather than
bank qualified municipal bonds which, although tax advantaged, may not have the yield we seek. Our capital investment
in Mid-Southern Investments as of December 31, 2020 was $49.1 million which was within the OCC limitations.
Competition
We face strong competition in attracting deposits and originating loans. Competition in originating real estate
loans comes primarily from other savings institutions, commercial banks, credit unions, life insurance companies and
mortgage brokers. Other savings institutions, commercial banks, credit unions and finance companies provide vigorous
competition in consumer lending. Commercial business competition is primarily from local commercial banks, but other
savings banks and credit unions also compete for this business. We compete by consistently delivering high-quality,
personal service to our customers which results in a high level of customer satisfaction.
Our market area has a high concentration of financial institutions, many of which are branches of large money
center and regional banks that have resulted from the consolidation of the banking industry in Indiana and other Mid-
Western states. These include such large national lenders as PNC Bank, JP Morgan Chase Bank, Fifth Third Bank, Truist
Bank and U.S. Bank and others in our market area that have greater resources than we do and offer services that we do not
provide. For example, we do not offer trust services or non-FDIC insured investments. Customers who seek "one-stop
shopping" may be drawn to institutions that offer services that we do not.
We attract our deposits through our branch office system. Competition for those deposits is principally from other
savings institutions, commercial banks and credit unions located in the same community, as well as mutual funds and other
alternative investments. We compete for these deposits by offering superior service and a variety of deposit accounts at
competitive rates. Based on the most recent data provided by the FDIC, there are approximately 40 other commercial
banks and savings institutions operating in the Louisville/Jefferson County, KY-IN MSA and 14 other commercial banks
and savings institutions in Lawrence, Orange and Washington counties of Indiana. During 2020, two competitors
announced closures of branches and Mitchell and Orleans, Indiana, and as a result, we experienced an increase in checking
and savings accounts. The number of checking and savings accounts increased 34.3% and 8.1% in our Mitchell and
Orleans branches, respectively, during the year ended December 31, 2020. Based on the most recent branch deposit data
provided by the FDIC, our share of deposits in the Louisville/Jefferson County, KY-IN MSA was approximately 0.27%.
The five largest financial institutions in that area have 70.0% of those deposits. In addition, our share of deposits in
Lawrence, Orange and Washington counties was the largest in the three-county area at 15.3%, with the five largest
institutions in the three-county area having 59.5% of the deposits.
REGULATION
The following is a brief description of certain laws and regulations which are applicable to the Company and the
Bank. The description of these laws and regulations, as well as descriptions of laws and regulations contained elsewhere
herein, does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.
Legislation is introduced from time to time in the United States Congress (“Congress”) that may affect the
Company’s and Bank’s operations. In addition, the regulations governing the Company and the Bank may be amended
from time to time by the OCC, the FDIC, the Federal Reserve Board or the SEC, as appropriate. Any such legislation or
regulatory changes in the future could have an adverse effect on our operations and financial condition. We cannot predict
whether any such changes may occur.
General
As a federally chartered savings bank, the Bank is subject to extensive regulation, examination and supervision
by the OCC, as its primary federal regulator, and the FDIC, as the insurer of its deposits. Additionally, the Company is
subject to extensive regulation, examination and supervision by the Federal Reserve as its primary federal regulator. The
Bank is a member of the FHLB System and its deposits are insured up to applicable limits by the DIF, which is
administered by the FDIC. The Bank must file reports with the OCC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions
22
of, other financial institutions. There are periodic examinations of the Bank by the OCC and of the Company by the Federal
Reserve to evaluate safety and soundness and compliance with various regulatory requirements. This regulatory structure
establishes a comprehensive framework of activities in which the Bank may engage and is intended primarily for the
protection of the DIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination policies, including policies with respect to
the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in
such policies, whether by the OCC, the Federal Reserve, the FDIC or Congress, could have a material adverse impact on
the Company and the Bank and their operations.
In connection with the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(the “Dodd-Frank Act”), the laws and regulations affecting depository institutions and their holding companies have
changed, particularly affecting the bank regulatory structure and the lending, investment, trading and operating activities
of depository institutions and their holding companies. Among other changes, the Dodd-Frank Act established the
Consumer Financial Protection Bureau (“CFPB”) as an independent bureau of the Federal Reserve Board. The CFPB
assumed responsibility for the implementation of the federal financial consumer protection and fair lending laws and
regulations and has authority to impose new requirements. The Bank is subject to consumer protection regulations issued
by the CFPB, but as a smaller financial institution, the Bank is generally subject to supervision and enforcement by the
OCC with respect to its compliance with consumer financial protection laws and CFPB regulations.
On May 24, 2018, the President signed into law the Economic Growth, Regulatory Relief, and Consumer
Protection Act passed by Congress (the “Act”). The Act contains a number of provisions extending regulatory relief to
banks and savings institutions and their holding companies. Effective January 1, 2020, a bank or savings institution that
elects to use the Community Bank Leverage Ratio (“CBLR”) will generally be considered well-capitalized and to have
met the risk-based and leverage capital requirements of the capital regulations if it has a leverage ratio greater than 9.0%
(adjusted to 8.0%, effective April 1, 2020). On October 9, 2020, the OCC along with the Federal Reserve and the FDIC,
published a final rule, effective November 9, 2020, implementing a temporary change to the CBLR framework pursuant
to the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), and provides a graduated increase from the
temporary 8.0% requirement to the 9.0% requirement as established under the final rule published in 2019. To be eligible
to elect to use the CBLR, the bank or institution also must have total consolidated assets of less than $10 billion, off-
balance sheet exposures of 25% or less of its total consolidated assets, and trading assets and trading liabilities of 5.0% or
less of its total consolidated assets, all as of the end of the most recent quarter. The Bank elected to use the CBLR effective
January 1, 2020.
Federal Regulation of Savings Institutions
Office of the Comptroller of the Currency. The OCC has extensive authority over the operations of federal
savings institutions. As part of this authority, the Bank is required to file periodic reports with the OCC and is subject to
periodic examinations by the OCC. The OCC also has extensive enforcement authority over all federal savings institutions,
including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties,
issue cease-and-desist or removal orders and initiate prompt corrective action orders. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely reports filed with the OCC. Except under
certain circumstances, public disclosure of final enforcement actions by the OCC is required by law.
All federal savings institutions are required to pay assessments to the OCC to fund the agency’s operations. The
general assessments, paid on a semi-annual basis, are determined based on the savings institution’s total assets, including
consolidated subsidiaries. The Bank’s OCC assessment for the fiscal year ended December 31, 2020 was $64,000.
The Bank’s general permissible lending limit for loans to one borrower is generally equal to the greater of
$500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral,
in which case this limit is increased to 25% of unimpaired capital and surplus). At December 31, 2020, the Bank’s lending
limit under this restriction was $5.8 million. We have no loans in excess of our lending limit.
23
The OCC’s oversight of the Bank includes reviewing its compliance with the customer privacy requirements
imposed by the Gramm-Leach-Bliley Act of 1999 (“GLBA”) and the anti-money laundering provisions of the USA Patriot
Act. The GLBA privacy requirements place limitations on the sharing of consumer financial information with unaffiliated
third parties. They also require each financial institution offering financial products or services to retail customers to
provide such customers with its privacy policy and with the opportunity to “opt out” of the sharing of their personal
information with unaffiliated third parties. The USA Patriot Act significantly expands the responsibilities of financial
institutions in preventing the use of the U.S. financial system to fund terrorist activities. Its anti-money laundering
provisions require financial institutions operating in the U.S. to develop anti-money laundering compliance programs and
due diligence policies and controls to ensure the detection and reporting of money laundering. These compliance programs
are intended to supplement requirements under the Bank Secrecy Act and the regulations of the Office of Foreign Assets
Control.
The OCC, as well as the other federal banking agencies, has adopted guidelines establishing safety and soundness
standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and
audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution that fails to
comply with these standards must submit a compliance plan.
Capital Requirements. Federally insured savings institutions, such as the Bank, are required by the OCC to
maintain minimum levels of regulatory capital. On May 24, 2018, the President signed into law the Economic Growth,
Regulatory Relief, and Consumer Protection Act passed by Congress (the “Act”). The Act contains a number of provisions
extending regulatory relief to banks and savings institutions and their holding companies. Effective January 1, 2020, a
bank or savings institution that elects to use the Community Bank Leverage Ratio (“CBLR”) will generally be considered
well-capitalized and to have met the risk-based and leverage capital requirements of the capital regulations if it has a
leverage ratio greater than 9.0% (adjusted to 8.0% effective April 1, 2020). On October 9, 2020, the OCC along with the
Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, published a final rule,
effective November 9, 2020, implementing a temporary change to the CBLR framework pursuant to the CARES Act, and
provides a graduated increase from the temporary 8.0% requirement to the 9.0% requirement as established under the final
rule published in 2019. To be eligible to elect to use the CBLR, the bank or institution also must have total consolidated
assets of less than $10 billion, off-balance sheet exposures of 25% or less of its total consolidated assets, and trading assets
and trading liabilities of 5.0% or less of its total consolidated assets, all as of the end of the most recent quarter. The Bank
elected to use the CBLR effective January 1, 2020.
Prior to adopting the CBLR in 2020, the Bank was required by the OCC to maintain minimum levels of a common
equity Tier 1 (“CET1”) capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital to risk-
based assets ratio and a Tier 1 capital to total assets leverage ratio. The capital standards require the maintenance of the
following minimum capital ratios: (i) a CET1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6.0%; (iii) a total capital
ratio of 8.0%; and (iv) a Tier 1 leverage ratio of 4.0%.
Certain changes in what constitutes regulatory capital are subject to transition periods, including the phasing-out
of certain instruments as qualifying capital. The Bank does not have any of these instruments. In addition, Tier 1 capital
includes accumulated other comprehensive income (loss), which includes all unrealized gains and losses on available for
sale debt and equity securities. Because of the Bank’s asset size, the Bank elected to take a one-time option to permanently
opt-out of the inclusion of unrealized gains and losses on available for sale debt and equity securities in its capital
calculations.
The Bank was also required to maintain a capital conservation buffer consisting of additional CET1 capital greater
than 2.5% of risk-weighted assets above the required minimum risk-based capital levels in order to avoid limitations on
paying dividends, engaging in share repurchases, and paying discretionary bonuses. With the adoption of the CBLR in
2020, the Bank is no longer required to maintain a capital conservation buffer.
In order to be considered well-capitalized under the prompt corrective action regulations, the Bank must maintain
a CBLR ratio of 8.0% in 2020. Prior to adopting the CBLR in 2020, the Bank was required to maintain a CET1 risk-based
ratio of 6.5%, a Tier 1 risk-based ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%, and
24
the Bank must not be subject to any of certain mandates by the OCC requiring it as an individual institution to meet any
specified capital level.
As of December 31, 2020, the most recent notification from the OCC categorized the Bank as “well capitalized”
under the regulatory framework for prompt corrective action. For additional information, see Note 17 of the Notes to
Consolidated Financial Statements contained in Item 8 of this Form 10-K.
Prompt Corrective Action. An institution is considered adequately capitalized if it meets the minimum capital
ratios described above. The OCC is required to take certain supervisory actions against undercapitalized savings
institutions, the severity of which depends upon the institution’s degree of undercapitalization. Subject to a narrow
exception, the OCC is required to appoint a receiver or conservator for a savings institution that is critically
undercapitalized. OCC regulations also require that a capital restoration plan be filed with the OCC within 45 days of the
date a savings institution receives notice that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. In addition, numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. Significantly undercapitalized and critically undercapitalized institutions are subject
to more extensive mandatory regulatory actions. The OCC also can take a number of discretionary supervisory actions,
including the issuance of a capital directive and the replacement of senior executive officers and directors. An institution
that is not well-capitalized is subject to certain restrictions on deposit rates and brokered deposits. At December 31, 2020,
the Bank met the regulatory requirements described above under “Capital Requirements” to be considered well-capitalized.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Indianapolis, which is one of 11
regional Federal Home Loan Banks that administer the home financing credit function of savings institutions, each of
which serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes loans or advances to members in
accordance with policies and procedures established by the Board of Directors of the FHLB, which are subject to the
oversight of the Federal Housing Finance Agency. All advances from the FHLB are required to be fully secured by
sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for
residential home financing. See “Business – Other Sources of Funds – Borrowings.” As a member, the Bank is required
to purchase and maintain stock in the FHLB. At December 31, 2020, the Bank held $778,000 in FHLB stock, which was
in compliance with this requirement. During the year ended December 31, 2020, the Bank did not purchase any FHLB
stock.
The FHLB continues to contribute to low- and moderately-priced housing programs through direct loans or
interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of the
Bank’s FHLB stock may result in a decrease in net income and possibly capital.
Federal Deposit Insurance Corporation. The DIF of the FDIC insures deposits in the Bank up to $250,000 per
separately insured deposit ownership right or category. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured institutions. The Bank’s deposit insurance
premiums for the fiscal year ended December 31, 2020 were $26,000.
Under its regulations, the FDIC sets assessment rates for established small institutions (generally, those with total
assets of less than $10 billion) based on an institution’s weighted average CAMELS component ratings and certain
financial ratios. Total base assessment rates currently range from 3 to 30 basis points, subject to certain adjustments.
Assessment rates are expected to decrease in the future as the reserve ratio increases in specified increments. The FDIC
may increase or decrease its rates by two basis points without further rule-making. In an emergency, the FDIC may also
impose a special assessment.
As required by the Dodd Frank Act, the FDIC has adopted a rule to offset the effect of the increase in the minimum
reserve ratio of the DIF on small institutions by imposing a surcharge on institutions with assets of $10 billion or more
commencing on July 1, 2016 and ending when the reserve ratio reaches 1.35%, which, the FDIC announced occurred on
25
September 30, 2018. When the reserve ratio reaches 1.38%, small institutions will receive credits for the portions of their
regular assessments that contributed to growth in the reserve ratio between 1.15% and 1.35%. Subject to certain limitations,
the credits will apply to reduce regular assessments until exhausted.
In addition to the FDIC assessments, the Financing Corporation was authorized to impose and collect, through
the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued in the 1980s to
recapitalize the former Federal Savings and Loan Insurance Corporation. The final such assessment was collected by the
FDIC in March 2019.
The FDIC also may prohibit any insured institution from engaging in any activity determined by regulation or
order to pose a serious risk to the DIF. The FDIC may terminate the deposit insurance of any insured depository institution,
including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order
or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the
hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by the FDIC. Management is not aware of
any existing circumstances which would result in termination of the deposit insurance of the Bank.
Qualified Thrift Lender Test. All federal savings institutions, including the Bank, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. This test requires a savings institution
to have at least 65% of its total assets, as defined by regulation, in qualified thrift investments on a monthly average for
nine out of every 12 months on a rolling basis. As an alternative, the savings institution may maintain 60% of its assets in
those assets specified in Section 7701(a) (19) of the Internal Revenue Code ("Code"). Under either test, such assets
primarily consist of residential housing related loans and investments.
Any institution that fails to meet the QTL test is subject to certain operating restrictions and may be required to
convert to a national bank charter, and a savings and loan holding company of such an institution may become regulated
as a bank holding company. As of December 31, 2020, the Bank met the QTL test.
Limitations on Capital Distributions. OCC regulations impose various restrictions on savings institutions with
respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-
out mergers and other transactions charged to the capital account. Generally, savings institutions, such as the Bank, that
before and after the proposed distribution are well-capitalized, may make capital distributions during any calendar year
equal to up to 100% of net income for the year-to-date plus retained net income for the two preceding years. However, an
institution deemed to be in need of more than normal supervision by the OCC may have its dividend authority restricted
by the OCC. If the Bank, however, proposes to make a capital distribution when it does not meet its capital requirements
(or will not following the proposed capital distribution) or that will exceed these net income-based limitations, it must
obtain the OCC’s approval prior to making such distribution. In addition, the Bank must file a prior written notice of a
dividend with the Federal Reserve. The Federal Reserve or the OCC may object to a capital distribution based on safety
and soundness concerns. Additional restrictions on Bank dividends may apply if the Bank fails the QTL test.
Activities of Associations and their Subsidiaries. When a savings institution establishes or acquires a subsidiary
or elects to conduct any new activity through a subsidiary that the savings institution controls, the savings institution must
file a notice or application with the OCC and, in certain circumstances with the FDIC, and receive regulatory approval or
non-objection. Savings institutions also must conduct the activities of subsidiaries in accordance with existing regulations
and orders.
With respect to subsidiaries generally, the OCC may determine that investment by a savings institution in, or the
activities of, a subsidiary must be restricted or eliminated based on safety and soundness or legal reasons.
Transactions with Affiliates. The Bank’s authority to engage in transactions with affiliates is limited by Sections
23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve’s Regulation W. The term affiliates for
these purposes generally mean any company that controls or is under common control with an institution except
26
subsidiaries of the institution. The Company and its non-savings institution subsidiaries are affiliates of the Bank. In
general, transactions with affiliates must be on terms that are as favorable to the institution as comparable transactions
with non-affiliates. In addition, certain types of transactions are restricted to an aggregate percentage of the institution’s
capital. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not
permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than
a subsidiary. FDIC-insured institutions are subject, with certain exceptions, to certain restrictions on extensions of credit
to their parent holding companies or other affiliates, on investments in the stock or other securities of affiliates and on the
taking of such stock or securities as collateral from any borrower. Collateral in specified amounts must be provided by
affiliates in order to receive loans from an institution. In addition, these institutions are prohibited from engaging in certain
tying arrangements in connection with any extension of credit or the providing of any property or service.
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”) generally prohibits a company that makes filings with
the SEC from making loans to its executive officers and directors. That act, however, contains a specific exception for
loans by a depository institution to its executive officers and directors, if the lending is in compliance with federal banking
laws. Under such laws, the Bank’s authority to extend credit to executive officers, directors and 10% stockholders
(“insiders”), as well as entities which such persons control, is limited. The law restricts both the individual and aggregate
amount of loans the Bank may make to insiders based, in part, on the Bank’s capital position and requires certain Board
approval procedures to be followed. Such loans must be made on terms substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made
pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give
preference to insiders over other employees. There are additional restrictions applicable to loans to executive officers.
Community Reinvestment Act and Consumer Protection Laws. Under the Community Reinvestment Act of
1977 (“CRA”), every FDIC-insured institution has a continuing and affirmative obligation consistent with safe and sound
banking practices to help meet the credit needs of its entire community, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does
it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OCC, in connection with the examination of the Bank, to
assess the institution’s record of meeting the credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a branch, by the Bank. The OCC may use an
unsatisfactory rating as the basis for the denial of an application. Similarly, the Federal Reserve is required to take into
account the performance of an insured institution under the CRA when considering whether to approve an acquisition by
the institution’s holding company. Due to the heightened attention being given to the CRA in the past few years, the Bank
may be required to devote additional funds for investment and lending in its local community.
In connection with its deposit-taking, lending and other activities, the Bank is subject to a number of federal laws
designed to protect consumers and promote lending to various sectors of the economy and population. The CFPB issues
regulations and standards under these federal consumer protection laws, which include the Equal Credit Opportunity Act,
the Truth-in-Lending Act, the Home Mortgage Disclosure Act and the Real Estate Settlement Procedures Act. Through its
rulemaking authority, the CFPB has promulgated several proposed and final regulations under these laws that will affect
our consumer businesses. Among these regulatory initiatives are final regulations setting “ability to repay” and “qualified
mortgage” standards for residential mortgage loans and establishing new mortgage loan servicing and loan originator
compensation standards. The Bank devotes substantial compliance, legal and operational business resources to ensure
compliance with these consumer protection standards. In addition, the OCC has enacted customer privacy regulations that
limit the ability of the Bank to disclose nonpublic consumer information to non-affiliated third parties. The regulations
require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with
non-affiliated parties.
Enforcement. The OCC has primary enforcement responsibility over federally-chartered savings institutions and
has the authority to bring action against all "institution-affiliated parties," including shareholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist
order to removal of officers or directors, receivership, conservatorship or termination of deposit insurance. Civil penalties
cover a wide range of violations. The FDIC has the authority to recommend to the OCC that enforcement action be taken
27
with respect to a particular savings institution. If action is not taken by the OCC, the FDIC has authority to take such action
under certain circumstances. Federal law also establishes criminal penalties for certain violations.
Standards for Safety and Soundness. As required by statute, the federal banking agencies have adopted
interagency guidelines prescribing standards for safety and soundness. The guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems at insured depository institutions before
capital becomes impaired. If the OCC determines that a savings institution fails to meet any standard prescribed by the
guidelines, the OCC may require the institution to submit an acceptable plan to achieve compliance with the standard.
Federal Reserve System. Previously, the Federal Reserve required that all depository institutions maintain
reserves on transaction accounts or non-personal time deposits. These reserves may be in the form of cash or non-interest-
bearing deposits with the regional Federal Reserve Bank. Interest-bearing checking accounts and other types of accounts
that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to
Regulation D reserve requirements, as are any non-personal time deposits at a bank. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy any liquidity requirements that may
be imposed by the OCC. However, effective March 26, 2020, the Federal Reserve set reserve requirement ratios to 0.0%.
Commercial Real Estate Lending Concentrations. The federal banking agencies have issued guidance on
sound risk management practices for concentrations in commercial real estate lending. The particular focus is on exposure
to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely
to be sensitive to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary
source of repayment or as an abundance of caution). The purpose of the guidance is not to limit a bank’s commercial real
estate lending but to guide banks in developing risk management practices and capital levels commensurate with the level
and nature of real estate concentrations. The guidance directs the FDIC and other bank regulatory agencies to focus their
supervisory resources on institutions that may have significant commercial real estate loan concentration risk. A bank that
has experienced rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real
estate loan, or is approaching or exceeding the following supervisory criteria may be identified for further supervisory
analysis with respect to real estate concentration risk:
Total reported loans for construction, land development and other land represent 100% or more of the bank’s
capital; or
Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total
capital or the outstanding balance of the bank’s commercial real estate loan portfolio has increased 50% or
more during the prior 36 months.
The guidance provides that the strength of an institution’s lending and risk management practices with respect to
such concentrations will be taken into account in supervisory guidance on evaluation of capital adequacy.
Environmental Issues Associated with Real Estate Lending. The Comprehensive Environmental Response,
Compensation and Liability Act (“CERCLA”), is a federal statute that generally imposes strict liability on all prior and
present "owners and operators" of sites containing hazardous waste. However, Congress acted to protect secured creditors
by providing that the term “owner and operator” excludes a person whose ownership is limited to protecting its security
interest in the site. Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial
interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property
that they hold as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors, including the
Bank, that have made loans secured by properties with potentially hazardous waste contamination (such as petroleum
contamination) could be subject to liability for cleanup costs, which could substantially exceed the value of the collateral
property.
Bank Secrecy Act/Anti-Money Laundering Laws. The Bank is subject to the Bank Secrecy Act and other anti-
money laundering laws and regulations, including the USA Patriot Act of 2001. These laws and regulations require the
Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist
financing and to verify the identity of their customers. Violations of these requirements can result in substantial civil and
28
criminal sanctions. In addition, provisions of the USA Patriot Act require the federal financial institution regulatory
agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing mergers
and acquisitions.
Other Consumer Protection Laws and Regulations. The Dodd-Frank Act established the CFPB and
empowered it to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing
consumer financial protection laws. The Bank is subject to consumer protection regulations issued by the CFPB, but as a
financial institution with assets of less than $10 billion, the Bank is generally subject to supervision and enforcement by
the OCC with respect to compliance with consumer financial protection laws and CFPB regulations.
The Bank is subject to a broad array of federal and state consumer protection laws and regulations that govern
almost every aspect of its business relationships with consumers. While the following list is not exhaustive, these include
the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfers Act, the Expedited Funds Availability
Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home
Mortgage Disclosure Act, the Fair Credit Reporting Act, the Right to Financial Privacy Act, the Home Ownership and
Equity Protection Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century
Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal
and state laws prohibiting unfair and deceptive business practices, and various regulations that implement some or all of
the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which
financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other
services. Failure to comply with these laws and regulations can subject the Bank to various penalties, including but not
limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages, and the loss of
certain contractual rights.
Savings and Loan Holding Company Regulations
General. The Company is a unitary savings and loan holding company subject to regulatory oversight of the
Federal Reserve. Accordingly, the Company is required to register and file reports with the Federal Reserve and is subject
to regulation and examination by the Federal Reserve. In addition, the Federal Reserve has enforcement authority over the
Company and its non-savings institution subsidiaries, which also permits the Federal Reserve to restrict or prohibit
activities that are determined to present a serious risk to the subsidiary savings institution. In accordance with the Dodd-
Frank Act, the federal banking regulators must require any company that controls an FDIC-insured depository institution
to serve as a source of strength for the institution, with the ability to provide financial assistance if the institution suffers
financial distress. These and other Federal Reserve policies, as well as the capital conservatism buffer requirement, may
restrict the Company’s ability to pay dividends.
Capital Requirements. For a savings and loan holding company, such as the Company, the capital regulations
apply on a consolidated basis. The Act raised the maximum amount of consolidated assets a qualifying holding company
may have to $3 billion under the Federal Reserve’s “Small Bank Holding Company and Savings and Loan Holding
Company Policy Statement” pursuant to which the Company is generally not subject to the Federal Reserve’s capital
regulations, which are generally the same as the capital regulations applicable to the Bank. A major result of this change
is to exclude most such holding companies from the minimum capital requirements of the Dodd-Frank Act. The Federal
Reserve made this change effective August 30, 2019. The Federal Reserve expects the holding company’s subsidiary banks
to be well capitalized under the prompt corrective action regulations. If the Company were subject to regulatory guidelines
for bank holding companies with $3.0 billion or more in assets at December 31, 2020, the Company would have exceeded
all regulatory requirements. See “Federal Regulation of Savings Institutions – Capital Requirements” above.
Activities Restrictions. The GLBA provides that no company may acquire control of a savings association after
May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or
for multiple savings and loan holding companies. Further, the GLBA specifies that, subject to a grandfather provision,
existing savings and loan holding companies may only engage in such activities. The Company qualifies for grandfathering
and is therefore not restricted in terms of its activities. Upon any non-supervisory acquisition by the Company of another
savings association as a separate subsidiary, the Company would become a multiple savings and loan holding company
and would be limited to activities permitted by Federal Reserve regulation.
29
Mergers and Acquisitions. The Company must obtain approval from the Federal Reserve before acquiring more
than 5.0% of the voting stock of another savings institution or savings and loan holding company or acquiring such an
institution or holding company by merger, consolidation or purchase of its assets. In evaluating an application for the
Company to acquire control of a savings institution, the Federal Reserve would consider the financial and managerial
resources and future prospects of the Company and the target institution, the effect of the acquisition on the risk to the
DIF, the convenience and the needs of the community and competitive factors.
The Federal Reserve may not approve any acquisition that would result in a multiple savings and loan holding
company controlling savings institutions in more than one state, subject to two exceptions; (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the acquisition of a savings institution in another
state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the
extent to which they permit interstate savings and loan holding company acquisitions.
Acquisition of the Company. Any company, except a bank holding company, that acquires control of a savings
association or savings and loan holding company becomes a “savings and loan holding company” subject to registration,
examination and regulation by the Federal Reserve and must obtain the prior approval of the Federal Reserve under the
Savings and Loan Holding Company Act before obtaining control of a savings association or savings and loan holding
company. A bank holding company must obtain the prior approval of the Federal Reserve under the Bank Holding
Company Act before obtaining control of, or more than 5.0% of a class of voting stock of, a savings association or savings
and loan holding company and remains subject to regulation under the Bank Holding Company Act. The term “company”
includes corporations, partnerships, associations, and certain trusts and other entities. “Control” of a savings association
or savings and loan holding company is deemed to exist if a company has voting control, directly or indirectly, of more
than 25.0% of any class of the savings association’s voting stock or controls in any manner the election of a majority of
the directors of the savings association or savings and loan holding company, and may be presumed under other
circumstances, including, but not limited to, holding in certain cases 10.0% or more of a class of voting securities. In
addition, a savings and loan holding company must obtain Federal Reserve approval prior to acquiring voting control of
more than 5.0% of any class of voting stock of another savings association or another savings association holding company.
A similar provision limiting the acquisition by a bank holding company of 5.0% or more of a class of voting stock of any
company is included in the Bank Holding Company Act.
Accordingly, the prior approval of the Federal Reserve would be required:
before any savings and loan holding company or bank holding company could acquire 5.0% or more of the
common stock of the Company; and
before any other company could acquire 25.0% or more of the common stock of the Company and may be
required for an acquisition of as little as 10.0% of such stock.
In addition, persons that are not companies are subject to the same or similar definitions of control with respect
to savings and loan holding companies and savings associations and requirements for prior regulatory approval by the
Federal Reserve in the case of control of a savings and loan holding company or by the OCC in the case of control of a
savings association not obtained through control of a holding company of such savings association.
Dividends and Stock Repurchases. The Federal Reserve’s policy statement on the payment of cash dividends
applicable to savings and loan holding companies expresses its view that a savings and loan holding company must
maintain an adequate capital position and generally should not pay cash dividends unless the company’s net income for
the past year is sufficient to fully fund the cash dividends and that the prospective rate of earnings appears consistent with
the company’s capital needs, asset quality, and overall financial condition. The Federal Reserve policy statement also
indicates that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay
dividends. In addition, a savings and loan holding company is required to give the Federal Reserve prior written notice of
any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption,
when combined with the net consideration paid for all such purchases or redemptions during the preceding twelve months,
is equal to 10.0% or more of its consolidated net worth. The Federal Reserve may disapprove such a purchase or
30
redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law,
regulation, Federal Reserve order or any condition imposed by, or written agreement with, the Federal Reserve.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act was enacted in 2002 in response to public concerns
regarding corporate accountability in connection with recent accounting scandals. The stated goals of the Sarbanes-Oxley
Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at
publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures
pursuant to the securities laws. The Sarbanes-Oxley Act generally applies to all companies, both U.S. and non-U.S., that
file or are required to file periodic reports with the SEC under the Securities Exchange Act of 1934, including the Company.
The Sarbanes-Oxley Act includes very specific additional disclosure requirements and new corporate governance
rules, and requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and
related rules. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state
regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and its committees.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Dodd-Frank-Act imposed
new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository
institutions, and capital regulations discussed above under “Savings and Loan Holding Company Regulations – Capital
Requirements.” In addition, among other requirements, the Dodd-Frank Act requires public companies, such as the
Company, to (i) provide their shareholders with a non-binding vote (a) at least once every three years on the compensation
paid to executive officers and (b) at least once every six years on whether they should have a “say on pay” vote every one,
two or three years; (ii) have a separate, non-binding shareholder vote regarding golden parachutes for named executive
officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger
the parachute payments; (iii) provide disclosure in annual proxy materials concerning the relationship between the
executive compensation paid and the financial performance of the issuer; and (iv) amend Item 402 of Regulation S-K to
require companies to disclose the ratio of the Chief Executive Officer’s annual total compensation to the median annual
total compensation of all other employees.
Information about our Executive Officers
The following table sets forth certain information regarding the executive officers of the Company and its
subsidiaries:
Name
Alexander G. Babey
Age (1)
52
Frank (Buzz) M. Benson, III.
Erica B. Schmidt
Robert W. DeRossett
(1) At December 31, 2020
59
42
51
Position
President and Chief Executive Officer, Mid-Southern Bancorp, Inc.
and Mid-Southern Savings Bank, FSB
Executive Vice President and Senior Loan Officer, Mid-Southern
Savings Bank, FSB
Executive Vice President and Chief Financial Officer, Mid-Southern
Savings Bank, FSB
Chief Financial Officer, Mid-Southern Bancorp, Inc.
Alexander G. Babey has been President and Chief Executive Officer of Mid-Southern Bancorp since its formation
in January 2018 and the President of Chief Executive Officer of Mid-Southern Savings Bank and Mid-Southern, M.H.C.
since October 2016. Prior to that, he was Executive Vice President and Chief Credit Officer from December 2013 until
October 2016. He was a credit administration consultant from June 2013 until December 2013, having served as Executive
Vice President and Senior Loan Officer of The BANK-Oldham County from May 2005 until its acquisition in May 2013.
Mr. Babey brings a wealth of banking knowledge to our Board, with particular expertise in lending and experience at both
large regional and community banks.
31
Frank (Buzz) M. Benson, III has served as the Executive Vice President and Senior Loan Officer of Mid-Southern
Savings Bank since June 2014. Prior to that, he was the Senior Vice President of Lending at Main Source Bank from 1998
until June 2014.
Erica B. Schmidt, has been the Executive Vice President and Chief Financial Officer of Mid-Southern Savings
Bank since January 2014. Prior to that, she served as Controller of Mid-Southern Savings Bank from September 2005
through December 2013. Ms. Schmidt has also been our Corporate Secretary since 2013 and Treasurer since 2008.
Robert W. DeRossett joined the Company as Chief Financial Officer of Mid-Southern Bancorp, Inc. in
February 2020. He brings significant expertise to the Company’s financial management and reporting areas. Prior to
joining the Company, Mr. DeRossett served as an independent CFO consultant for start-up companies and non-profit
entities in the Louisville, Kentucky area since 2011. In addition, he was the Director of Finance for Rabbit Hole Spirits,
LLC in Louisville, Kentucky until it was acquired by Pernod-Ricard of Paris, France in 2019. Prior to that, Mr. DeRossett
performed financial reporting, investor relations and project management roles for Providian Corporation in Louisville,
Kentucky, which was acquired by AEGON of The Hague, The Netherlands in 1997. Mr. DeRossett is a Certified Public
Accountant licensed in the Commonwealth of Kentucky since 1993 and has been a holder of the Chartered Financial
Analyst designation since 2009.
Item 1A. Risk Factors
An investment in our common stock is subject to risks inherent in our business. Before making an
investment decision, you should carefully consider the risks and uncertainties described below together with all of
the other information included in this report. In addition to the risks and uncertainties described below, other risks
and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and
adversely affect our business, financial condition and results of operations. The value or market price of our
common stock could decline due to any of these identified or other risks, and you could lose all or part of your
investment. The risks below also include forward-looking statements. This report is qualified in its entirety by these
risk factors.
The COVID-19 pandemic has adversely impacted our ability to conduct business and is expected to adversely
impact our financial results and those of our customers. The ultimate impact will depend on future developments,
which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions
taken by governmental authorities in response to the pandemic.
The COVID-19 pandemic has affected our operations and the way we provide banking services to businesses and
individuals. As an essential business, we continue to provide banking and financial services to our customers at all of our
branch locations with drive-thru access also available. In addition, we continue to provide access to banking and financial
services through online banking, ATMs and by telephone. If the COVID-19 pandemic worsens, it could limit or disrupt
our ability to provide banking and financial services to our customers.
Heightened cybersecurity, information security and operational risks may result from these remote work-from-
home arrangements. We also could be adversely affected if key personnel or a significant number of employees were to
become unavailable due to the effects and restrictions of the COVID-19 pandemic. We also rely upon our third-party
vendors to conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue
to provide us with these services, it could negatively impact our ability to serve our customers. Although we have business
continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.
There is continued uncertainty surrounding the future economic conditions that will emerge in the months and
years to come with regard to the pandemic. As a result, management is confronted with a significant and unfamiliar degree
of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset values. To date, the COVID-
19 pandemic has resulted in declines in loan demand and loan originations, other than through government sponsored
programs such as the Paycheck Protection Program (“PPP”), deposit availability, market interest rates and could negatively
impact many of our business and consumer borrower’s ability to make their loan payments. Because the length of the
pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are
32
unknown, including recent reductions in the targeted Federal Funds Rate, until the pandemic subsides, we expect our net
interest income and net interest margin will be adversely affected in the near term, if not longer. Many of our borrowers
have become unemployed or may face unemployment, and certain businesses are at risk of insolvency as their revenues
decline precipitously, especially in businesses related to travel, hospitality, leisure and physical personal services.
Businesses may ultimately not reopen as there is a significant level of uncertainty regarding the level of economic activity
that will return to our markets over time, the impact of governmental assistance, the speed of economic recovery, the
resurgence of COVID-19 in subsequent seasons and changes to demographic and social norms that will take place.
The impact of the pandemic is expected to continue to adversely affect us during 2021 and possibly longer as the
ability of many of our customers to make loan payments has been significantly affected. Although the Company makes
estimates of loan losses related to the pandemic as part of its evaluation of the allowance for loan losses, such estimates
involve significant judgment and are made in the context of significant uncertainty as to the impact the pandemic will have
on the credit quality of our loan portfolio. It is likely that increased loan delinquencies, adversely classified loans and loan
charge-offs will increase in the future as a result of the pandemic. Consistent with guidance provided by banking regulators,
we have modified loans by providing various loan payment deferral options to our borrowers affected by the COVID-19
pandemic. Notwithstanding these modifications, these borrowers may not be able to resume making full payments on their
loans once the COVID-19 pandemic is resolved. Any increases in the allowance for credit losses will result in a decrease
in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of
operations.
In light of the events surrounding the COVID-19 pandemic, the Company is continually assessing the effects of
the pandemic to its employees, customers and communities. In March 2020, the CARES Act was enacted. The CARES
Act contains many provisions related to banking, lending, mortgage forbearance and taxation, and the Company supported
its customers through the PPP, loan modifications and deferrals and fee waivers on early withdrawal of certificates of
deposit due to hardship. We could face additional risks in our administrative capabilities to service our PPP loans and risk
with respect to the determination of loan forgiveness depending on the final procedures for determining loan forgiveness.
We are an entity separate and distinct from our principal subsidiary, Mid-Southern Savings Bank, and derive
substantially all of our revenue at the holding company level in the form of dividends from that subsidiary. If the COVID-
19 pandemic were to materially adversely affect the Bank’s regulatory capital levels or liquidity, it may result in Mid-
Southern Savings Bank being unable to pay dividends to us, which may result in our not being able to pay dividends on
our common stock at the same rate or at all.
Even after the COVID-19 pandemic subsides, the U.S. economy will likely require some time to recover from its
effects, the length of which is unknown, and during which we may experience a recession. As a result, we anticipate our
business may be materially and adversely affected during this recovery.
A significant portion of our loans are commercial real estate, multi-family, construction and commercial and
business loans and consumer loans, which carry greater credit risk than loans secured by owner occupied one-to-
four family real estate.
At December 31, 2020, commercial real estate and multi-family loans totaled $39.1 million, or 34.1%,
commercial real estate construction loans totaled $851,000, or 0.7% (excluding unfunded loan commitments of $2.9
million) of our loan portfolio, commercial business loans totaled $5.2 million, or 4.5%, and consumer loans totaled $1.4
million, or 1.3%, of our total loan portfolio. We continue to focus on commercial and business loans as well as consumer
loans, and we intend to continue to originate commercial real estate and multi-family loans. Given their larger balances
and the complexity of the underlying collateral, commercial real estate, multi-family, construction and commercial
business loans generally expose a lender to greater credit risk than loans secured by owner occupied one-to-four family
real estate. These loans, as well as consumer loans, also have greater credit risk than residential real estate for the following
reasons:
Commercial real estate and multi-family loans – repayment is dependent on income being generated in
amounts sufficient to cover operating expenses, property maintenance and debt service;
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Construction loans – repayment is generally dependent on the borrower’s ability to sell the completed project,
the value of the completed project, or the successful operation of the borrower’s business after completion;
Commercial business loans – repayment is generally dependent upon the successful operation of the
borrower’s business; and
Consumer loans – repayment is dependent on the borrower’s continuing stability and the collateral may not
provide an adequate source of repayment.
If loans that are collateralized by real estate or other business assets or consumer assets become troubled and the
value of the collateral has been significantly impaired, then we may not be able to recover the full contractual amount of
principal and interest that we anticipated at the time we originated the loan, which could cause us to increase our provision
for loan losses and adversely affect our operating results and financial condition.
Commercial real estate loans typically involve larger loan balances to single borrowers or groups of related
borrowers compared to owner-occupied one-to-four family residential mortgage loans. Also, many of these types of
borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan
or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with
respect to a one-to-four family residential mortgage loan.
Further, a significant portion of our commercial real estate loans are secured by non-owner-occupied properties.
These loans expose us to greater risk of non-payment and loss than loans secured by owner-occupied properties because
repayment of such loans depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our
borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the
benefit of a rental income stream. In addition, the physical condition of non-owner-occupied properties is often below that
of owner-occupied properties due to lax property maintenance standards, which has a negative impact on the value of the
collateral properties.
Furthermore, a key component of our strategy is to continue to increase our origination of commercial business
and consumer loans, and to continue to originate commercial and multi-family real estate loans in our market area to
diversify our loan portfolio and increase our yields. The proposed increase in these types of loans significantly increases
our exposure to the risks inherent in these types of loans and our potential for losses.
Our business may be adversely affected by credit risk associated with residential property.
At December 31, 2020, $66.1 million, or 57.6% of our total loan portfolio, was secured by one-to-four family
real estate, including home equity lines of credit of $2.9 million. One-to-four family residential loans are generally
sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan
payment obligations, making loss levels difficult to predict. A decline in residential real estate values resulting from a
downturn in the housing market in our market areas may reduce the value of the real estate collateral securing these types
of loans and increase our risk of loss if borrowers default on their loans. A deterioration in economic conditions, declines
in the volume of real estate sales and/or the sales prices or elevated unemployment rates in our market areas may result in
higher rates of delinquencies, default and losses on our residential loans.
Greater seasoning of our loan portfolio could result in credit defaults in the future.
As a result of our planned growth, a significant portion of our loan portfolio at any given time may be of relatively
recent origin. Typically, loans do not begin to show signs of credit deterioration or default until they have been outstanding
for some period of time (which varies by loan duration and loan type), a process referred to as "seasoning." As a result, a
portfolio of more seasoned loans may more predictably follow a bank’s historical default or credit deterioration patterns
than a newer portfolio. The current level of delinquencies and defaults may not represent the level that may prevail as the
portfolio becomes more seasoned. If delinquencies and defaults increase, we may be required to increase our provision for
loan losses, which could have a material adverse effect on our business, financial condition, results of operations and
growth prospects.
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Our business may be adversely affected by downturns in the national economy and economic conditions in our
market area which could reduce demand for our products and services and/or result in increases in our level of
non-performing loans, which could adversely affect our operations, financial condition and earnings.
As of December 31, 2020, approximately $68.6 million, or 59.8%, of our total loans were to individuals and/or
secured by properties located in our primary market area of Washington, Lawrence, Orange and Floyd counties in Indiana.
As a result, our revenues and profitability are subject to prevailing economic, regulatory, demographic and other conditions
in Washington, Lawrence, Orange and Floyd Counties. Because our business is concentrated in this area, adverse
economic, regulatory, demographic or other developments that are limited to this area may have a disproportionately
greater effect on us than they would have if we did business in markets outside that particular geographic area. Local
economic conditions have a significant impact on the ability of our borrowers to repay loans and the value of the collateral
securing loans.
Our small size makes it more difficult for us to compete.
Our small asset size makes it more difficult to compete with other financial institutions which are generally larger
and can more easily afford to invest in the marketing and technologies needed to attract and retain customers. Because our
principal source of income is the net interest income we earn on our loans and investments after deducting interest paid on
deposits and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance such
investments is limited by the size of our loan and investment portfolios. Accordingly, we are not always able to offer new
products and services as quickly as our competitors. Our ability to originate larger loans is limited by our lower loans to
one borrower limit, which reduces our ability to compete for certain types of loans and can reduce our interest income. Our
lower earnings also make it more difficult to offer competitive salaries and benefits. In addition, our smaller customer base
makes it difficult to generate meaningful non-interest income. Finally, as a smaller institution, we are disproportionately
affected by the ongoing increased costs of compliance with banking and other regulations.
Future expansion may negatively impact our earnings.
We consider our primary market area to consist of Washington, Lawrence, Orange and Floyd counties, Indiana.
We currently operate three branches with our headquarters located in Salem, Indiana and two additional branch locations
in Orleans and Mitchell, Indiana and a loan production office in New Albany, Indiana. In March 2021, we opened a loan
production office in Louisville, Kentucky. In the future we may consider expanding our presence throughout our market
area and may also decide to pursue further expansion through the establishment of one or more branches or additional loan
production offices. The profitability of any expansion policy will depend on whether the income that we generate from the
additional branches or loan production offices we may establish will offset the increased expenses resulting from operating
new branches. It may take a period of time before any new branches or loan production offices would become profitable,
especially in areas in which we do not have an established presence. During this period, operating any new branches or
loan production offices would likely have a negative impact on our net income.
The loss of any one of our senior executive officers could hurt our operations.
We rely heavily on our senior executive officers. The loss of any one of these officers could have an adverse
effect on us because, as a small community bank, each of these officers has more responsibilities than would be typical at
a larger financial institution with more employees. In addition, as a small community bank, we have fewer management
level personnel who are in a position to assume the responsibilities of such officers’ positions with us should we need to
find replacements for any of these senior members of management.
Our business strategy includes growth, and our financial condition and results of operations could be
negatively affected if we fail to grow or fail to manage our growth effectively. Growing our operations could also
cause our expenses to increase faster than our revenues.
Our business strategy includes growth in assets, deposits and the scale of our operations. Achieving such growth
will require us to attract customers that currently bank at other financial institutions in our market area. Our ability to
successfully grow will depend on a variety of factors, including our ability to attract and retain experienced bankers, the
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continued availability of desirable business opportunities, competition from other financial institutions in our market area
and our ability to manage our growth. Growth opportunities may not be available or we may not be able to manage our
growth successfully. If we do not manage our growth effectively, our financial condition and operating results could be
negatively affected. Furthermore, there can be considerable costs involved in opening branches or loan production offices
and expanding lending capacity, and generally a period of time is required to generate the necessary revenues to offset
these costs, especially in areas in which we do not have an established presence. Accordingly, any such business expansion
can be expected to negatively impact our earnings until certain economies of scale are reached. Our expenses could be
further increased if we encounter delays in the opening of new branches or loan production offices.
We are subject to interest rate risk which could reduce our profitability and affect the value of our assets.
Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive
to many factors that are beyond our control, including general economic conditions and policies of various governmental
and regulatory agencies and, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest
rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on
deposits and borrowings, but these changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the
fair value of our financial assets and liabilities and (iii) the average duration of our mortgage-backed securities portfolio
and other interest-earning assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than
the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be
adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments
fall more quickly than the interest rates paid on deposits and other borrowings.
A sustained increase in market interest rates could adversely affect our earnings. A significant portion of our
loans have fixed interest rates and longer terms than our deposits and borrowings. As a result of the relatively low interest
rate environment, an increasing percentage of our deposits have been comprised of certificates of deposit and other
deposits yielding no or a relatively low rate of interest having a shorter duration than our assets. At December 31, 2020,
we had $22.6 million in certificates of deposit that mature within one year and $25.9 million in non-interest-bearing
demand deposits. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment. Our
net interest income could be adversely affected if the rates we pay on deposits and borrowings increase more rapidly than
the rates we earn on loans. In addition, a substantial amount of our home equity lines of credit have adjustable interest
rates. As a result, these loans may experience a higher rate of default in a rising interest rate environment
Although management believes it has implemented effective asset and liability management strategies to reduce
the potential effects of changes in interest rates on our results of operations, any substantial, unexpected, prolonged change
in market interest rates could have a material adverse effect on our financial condition and results of operations. Also, our
interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest
rate changes on our balance sheet. For additional information see Item 7. "Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Asset/Liability Management.”
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans
or other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts
adequate to finance our activities or the terms of which are acceptable to us could be impaired by factors that affect us
specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to
liquidity sources include a decrease in the level of our business activity as a result of a downturn in the Indiana markets in
which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by
factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about
the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the
continued deterioration in credit markets. Deposit flows, calls of investment securities and wholesale borrowings, and the
prepayment of loans and mortgage-related securities are also strongly influenced by such external factors as the direction
of interest rates, whether actual or perceived, and competition for deposits and loans in the markets we serve. Furthermore,
changes to the underwriting guidelines of the FHLB, for wholesale borrowings or lending policies may limit or restrict our
ability to borrow, and could therefore have a significant adverse impact on our liquidity. A decline in available funding
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could adversely impact our ability to originate loans, invest in securities, meet our expenses, or to fulfill such obligations
as repaying our borrowings or meeting deposit withdrawal demands.
Strong competition within our market area may limit our growth and profitability.
We face substantial competition in all phases of our operations from a variety of different competitors. Our future
growth and success will depend on our ability to compete effectively in this highly competitive environment. To date, we
have been competitive by focusing on our business lines in our market area and emphasizing the high level of service and
responsiveness desired by our customers. We compete for loans, deposits and other financial services with other
commercial banks, thrifts, credit unions, brokerage houses, mutual funds, insurance companies and specialized finance
companies, including “FinTech” companies. Many of our competitors offer products and services which we do not offer,
and many have substantially greater resources and lending limits, name recognition and market presence that benefit them
in attracting business. In addition, larger competitors may be able to price loans and deposits more aggressively than we
do, and newer competitors may also be more aggressive in terms of pricing loan and deposit products than we are in order
to obtain a share of the market. Some of the financial institutions and financial services organizations with which we
compete are not subject to the same degree of regulation as is imposed on bank holding companies, federally insured state-
chartered banks and national banks and federal savings banks. As a result, these nonbank competitors have certain
advantages over us in accessing funding and in providing various services. Our profitability depends upon our continued
ability to successfully compete in our market area. The greater resources and deposit and loan products offered by some
of our competitors may limit our ability to increase our interest earning assets.
Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.
Lending money is a substantial part of our business and each loan carries a certain risk that it will not be repaid
in accordance with its terms, or that any underlying collateral will not be sufficient to assure repayment. This risk is
affected by, among other things:
cash flow of the borrower and/or the project being financed;
the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;
the duration of the loan;
the character and creditworthiness of a particular borrower; and
changes in economic and industry conditions.
We maintain an allowance for loan losses, which we believe is an appropriate reserve to provide for probable
losses in our loan portfolio. The allowance is funded by provisions for loan losses charged to expense. The amount of this
allowance is determined by our management through periodic reviews and consideration of several factors, including, but
not limited to:
our general reserve, based on our historical default and loss experience, certain macroeconomic factors, and
management’s expectations of future events;
our specific reserve, based on our evaluation of non-performing loans and their underlying collateral; and
an unallocated reserve to provide for other credit losses inherent in our portfolio that may not have been
contemplated in the other loss factors.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of
subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo
material changes. Continuing deterioration in economic conditions affecting borrowers, including the impact from the
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COVID-19 pandemic, new information regarding existing loans, identification of additional problem loans and other
factors, both within and outside of our control, may require an increase in the allowance for loan losses. In addition, bank
regulatory agencies periodically review our 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 judgments different than those of management.
In addition, if charge-offs in future periods exceed the allowance for loan losses we will need additional provisions to
replenish the allowance for loan losses. Any additional provisions will result in a decrease in net income and possibly
capital, and may have a material adverse effect on our financial condition and results of operations.
A new accounting standard may require us to increase our allowance for loan losses and may have a material
adverse effect on our financial condition and results of operations.
The Financial Accounting Standards Board (“FASB”) has adopted a new accounting standard referred to as
Current Expected Credit Loss (“CECL”), which will require financial institutions to determine periodic estimates of
lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses. This will
change the current method of providing allowances for credit losses only when they have been incurred and are probable,
which may require us to increase our allowance for loan losses, and may greatly increase the types of data we would need
to collect and review to determine the appropriate level of the allowance for credit losses. This accounting pronouncement
is expected to be applicable to us as an emerging growth company, for fiscal years beginning after December 15, 2022 and
for interim reporting periods beginning after December 15, 2022. We are evaluating the impact the CECL accounting
model will have on our accounting, but expect to recognize a onetime cumulative-effect adjustment to the allowance for
loan losses as of the beginning of the first reporting period in which the new standard is effective. We cannot yet determine
the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our financial
condition or results of operations. The federal banking regulators, including the Federal Reserve, OCC and the FDIC, have
adopted a rule that gives a banking organization the option to phase in over a three-year period the day-one adverse effects
of CECL on its regulatory capital. For more on this new accounting standard, see Note 1 of the Notes to Consolidated
Financial Statements contained in Item 8 of this report.
Impairment of our investment securities could require charges to earnings, which could result in a negative impact
on our results of operations.
In assessing the impairment of investment securities, we consider the length of time and extent to which the fair
value has been less than cost, the financial condition and near-term prospects of the issuers, whether the decline in market
value was affected by macroeconomic conditions and whether we have the intent to sell the security or will be required to
sell the security before its anticipated recovery. During years ended December 31, 2020 and 2019, we did not recognize
any non-cash OTTI charges. There can, however, be no assurance that future declines in market value of our investment
securities will not result in OTTI of these assets, which would lead to accounting charges that could have a material adverse
effect on our net income and capital levels.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines
or sanctions.
The USA PATRIOT and Bank Secrecy Acts and related regulations require financial institutions to develop
programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities
are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of
Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying
and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations
could result in fines or sanctions, including restrictions on pursuing acquisitions or establishing new branches. The policies
and procedures we have adopted that are designed to assist in compliance with these laws and regulations may not be
effective in preventing violations of these laws and regulations.
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We continually encounter technological change, and we may have fewer resources than our competitors to continue
to invest in technological improvements.
The financial services industry continues to undergo rapid technological changes, with frequent introductions of
new technology-driven products and services. In addition to serving customers better, the effective use of technology
increases efficiency and enables financial institutions to reduce costs. Our future success may depend, in part, upon our
ability to address the needs of our customers by using technology to provide products and services that will satisfy customer
demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have
substantially greater resources to invest in technological improvements. We cannot assure you that we will be able to
effectively implement new technology-driven products and services or be successful in marketing these products and
services to our customers.
In October 2019, we upgraded our core processing system with the objective to improve internal reporting
capabilities for both management and the board of directors and create a scalable corporate infrastructure that will
significantly expand our ability to handle continued growth and improve our levels of operational efficiency. Further, our
new system will enhance our capabilities and capacity to offer new products and services for loan and deposit customers
and will enable us to offer more state-of-the-art technology-based services and delivery channels such as remote deposit
capture and other business banking services. As a result of this conversion, we recognized approximately $389,000 in
several one-time expenses related to contract termination expenses. We do not anticipate any additional contract
termination and deconversion expenses to be recognized in the future.
We rely on other companies to provide key components of our business infrastructure.
We rely on numerous external vendors to provide us with products and services necessary to maintain our day-
to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with
the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance
with the contracted arrangements under service level agreements because of changes in the vendor’s organizational
structure, financial condition, support for existing products and services or strategic focus or for any other reason, could
be disruptive to our operations, which in turn could have a material negative impact on our financial condition and results
of operations. We also could be adversely affected to the extent such an agreement is not renewed by the third-party vendor
or is renewed on terms less favorable to us. Additionally, the bank regulatory agencies expect financial institutions to be
responsible for all aspects of our vendors’ performance, including aspects which they delegate to third parties. Disruptions
or failures in the physical infrastructure or operating systems that support our business and customers, or cyber-attacks or
security breaches of the networks, systems or devices that our customers use to access our products and services could
result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other
compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of
operations or financial condition.
We are subject to certain risks in connection with our use of technology.
Our security measures may not be sufficient to mitigate the risk of a cyber-attack. Communications and
information systems are essential to the conduct of our business, as we use such systems to manage our customer
relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure
processing, storage, and transmission of confidential and other information in our computer systems and networks.
Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer
systems, software, and networks may be vulnerable to breaches, fraudulent or unauthorized access, denial or degradation
of service attacks, misuse, computer viruses, malware or other malicious code and cyber-attacks that could have a security
impact. If one or more of these events occur, this could jeopardize our or our customers’ confidential and other information
processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or
malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend
significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other
exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered
through any insurance maintained by us. We could also suffer significant reputational damage.
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Security breaches in our internet banking activities could further expose us to possible liability and damage our
reputation. Increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries,
vulnerabilities in third party technologies (including browsers and operating systems) or other developments could result
in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to
protect data about us, our customers and underlying transactions. Any compromise of our security could deter customers
from using our internet banking services that involve the transmission of confidential information. We rely on standard
internet security systems to provide the security and authentication necessary to effect secure transmission of data.
Although we have developed and continue to invest in systems and processes that are designed to detect and prevent
security breaches and cyber-attacks and periodically test our security, these precautions may not protect our systems from
compromises or breaches of our security measures, and could result in losses to us or our customers, our loss of business
and/or customers, damage to our reputation, the incurrence of additional expenses, disruption to our business, our inability
to grow our online services or other businesses, additional regulatory scrutiny or penalties, or our exposure to civil
litigation and possible financial liability, any of which could have a material adverse effect on our business, financial
condition and results of operations.
Our security measures may not protect us from system failures or interruptions. While we have established
policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that
such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects
of our data processing and other operational functions to certain third-party providers. While we select third-party vendors
carefully, we do not control their actions. If our third-party providers encounter difficulties including those resulting from
breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or
higher transaction volumes, cyber-attacks and security breaches or if we otherwise have difficulty in communicating with
them, our ability to adequately process and account for transactions could be affected, and our ability to deliver products
and services to our customers and otherwise conduct business operations could be adversely impacted. Replacing these
third-party vendors could also entail significant delay and expense. Threats to information security also exist in the
processing of customer information through various other vendors and their personnel.
We cannot assure you that such breaches, failures or interruptions will not occur or, if they do occur, that they
will be adequately addressed by us or the third parties on which we rely. We may not be insured against all types of losses
as a result of third-party failures and insurance coverage may be inadequate to cover all losses resulting from breaches,
system failures or other disruptions. If any of our third-party service providers experience financial, operational or
technological difficulties, or if there is any other disruption in our relationships with them, we may be required to identify
alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or
could obtain services with similar functionality as found in our existing systems without the need to expend substantial
resources, if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and result
in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability.
Any of these occurrences could have a material adverse effect on our financial condition and results of operations.
The board of directors oversees the risk management process, including the risk of cybersecurity, and engages
with management on cybersecurity issues.
Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.
As a bank, we are susceptible to fraudulent activity that may be committed against us or our customers which
may result in financial losses or increased costs to us or our customers, disclosure or misuse of our information or our
customers’ information, misappropriation of assets, privacy breaches against our customers, litigation or damage to our
reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing,
social engineering and other dishonest acts. Nationally, reported incidents of fraud and other financial crimes have
increased. In the normal course of business, we have also experienced losses due to apparent fraud and other financial
crimes. While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses
will not occur.
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We are subject to environmental liability risk associated with lending activities or properties we own.
A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental
liabilities with respect to one or more of these properties, or with respect to properties that we own in operating our
business. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans.
In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions
or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury
and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances
first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown
liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property.
In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase
our exposure to environmental liability. Our policies, which require us to perform an environmental review before
initiating any foreclosure action on non-residential real property, may not be sufficient to detect all potential environmental
hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a
material adverse effect on us.
Because we have elected to use the extended transition period for complying with new or revised accounting
standards for an emerging growth company, our financial statements may not be comparable to companies that
comply with these accounting standards as of the public company effective dates.
We have elected to use the extended transition period for complying with new or revised accounting standards
under Section 7(a)(2)(B) of the Securities Act. This election allows us to delay the adoption of new or revised accounting
standards that have different effective dates for public and private companies until those standards apply to private
companies. As a result of this election, our financial statements may not be comparable to companies that comply with
these accounting standards as of the public company effective dates. Because our financial statements may not be
comparable to companies that comply with public company effective dates, investors may have difficulty evaluating or
comparing our business, financial results or prospects in comparison to other public companies, which may have a negative
impact on the value and liquidity of our common stock. We cannot predict if investors will find our common stock less
attractive because we plan to rely on this exemption. If some investors find our common stock less attractive as a result,
there may be a less active trading market for our common stock and our stock price may be more volatile.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
At December 31, 2020, we had our main office that includes a full-service branch and two full-service branches
and a loan production office with an aggregate net book value of $1.9 million. All of our offices are owned except for the
loan production office which we lease. The operating leases require us to pay property taxes and operating expenses on
the properties. See also Note 7 of the Notes to Consolidated Financial Statements for additional information. In the opinion
of management, the facilities are adequate and suitable for our current needs. We may open additional banking offices to
better serve current customers and to attract new customers in subsequent years.
Item 3. 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 4. Mine Safety Disclosures
Not applicable.
41
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
At December 31, 2020, there were 3,565,430 shares of Company common stock issued and 3,173,057 shares of
the Company common stock outstanding, 289 stockholders of record and an estimated 537 holders in nominee or “street
name.”
Our cash dividend payout policy is reviewed regularly by management and the board of directors. Our board of
directors has declared quarterly cash dividends on our common stock for nine consecutive quarters. Any dividends declared
and paid in the future would depend upon a number of factors, including capital requirements, our financial condition and
results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. No
assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in future periods.
Our future payment of dividends may depend, in part, upon receipt of dividends from the Bank, which are restricted by
federal regulations.
Stock Repurchase
The Company’s board of directors approved its first stock repurchase program in July 2019 pursuant to which
the Company was approved to repurchase up to 178,260 shares of its common stock, or approximately 5.0% of the
outstanding shares at that time. In June 2020, the Company completed this program, purchasing 178,260 shares of its
common stock and paid an average price per share of $12.19.
In May 2020, the Company announced a stock repurchase program under which the Company was approved to
repurchase up to 171,000 shares of its common stock, or approximately 5.0% of the outstanding shares at that time. In
September 2020, the Company completed this program, purchasing 171,000 shares of its common stock and paid an
average price per share of $12.48.
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 5.0% of the outstanding
shares at that time. As of December 31, 2020, the Company had purchased 92,311 shares of its common stock under the
August 2020 repurchase program and paid an average price per share of $13.22. 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 deemed appropriate. The repurchase program does not
obligate the Company to purchase any particular number of shares. The following table sets forth information with respect
to our repurchases of our outstanding common shares during the three months ended December 31, 2020:
(a) Total Amount
of Shares
Purchased
(b) Average
Price Paid
Per Share
(c) Total Number (d) Maximum
of Shares
Purchased
as Part of
Publicly
Approved Plans
or Programs
Number of
Shares That
May Yet Be
Purchased
Under The Plans
or Programs
October 1, 2020 through October 31, 2020
November 1, 2020 through November 30, 2020
December 1, 2020 through December 31, 2020
39,411 $
200
20,000
12.93
13.75
14.40
39,411
200
20,000
89,889
89,689
69,689
Total
59,611 $
13.43
59,611
42
Securities for Equity Compensation Plans
Please refer to Item 12 in this Form 10-K for a listing of securities authorized for issuance under equity
compensation plans.
Item 6. Selected Financial Data
The summary financial information presented below is derived in part from the consolidated financial statements
of the Company. The following is only a summary and you should read it in conjunction with the consolidated financial
statements and notes beginning on page 59. The information provided below is derived in part from the audited
consolidated financial statements of the Company that appear in this Form 10-K. The following information is only a
summary and you should read it in conjunction with “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and the Consolidated Financial Statements and notes thereto contained elsewhere in this
Form 10-K.
Selected Financial Condition Data:
Total assets
Cash and cash equivalents
Loans receivable, net(1)
Investment securities available for sale, at fair value
Investment securities, held to maturity
Deposits
Borrowings
Total stockholders' equity
2020
2019
December 31,
2018
(In thousands)
2017
2016
$ 235,363 $ 208,436 $ 200,662 $ 176,677 $ 177,626
8,311
114,522
44,139
286
154,058
—
22,925
18,817
123,272
58,417
42
146,969
10,000
50,813
7,464
114,896
45,716
163
151,893
—
24,154
12,700
126,293
53,140
100
151,108
—
48,843
9,661
113,259
104,456
31
174,113
11,000
49,004
Selected Operations Data:
Interest income
Interest expense
Net interest income
Provision for loan losses (recapture)
Net interest income after provision for loan losses
Noninterest income
Noninterest expenses
Income before income taxes
Income tax expense
Net income
2020
7,451 $
936
6,515
132
6,383
865
6,022
1,226
35
1,191 $
$
$
2019
Years Ended December 31,
2018
(In thousands)
2017
8,000 $
925
7,075
12
7,063
803
6,821
1,045
85
960 $
7,276 $
729
6,547
(200)
6,747
840
5,879
1,708
295
1,413 $
6,478 $
655
5,823
(700)
6,523
884
5,252
2,155
982
1,173 $
2016
6,398
714
5,684
(449)
6,133
883
5,371
1,645
507
1,138
(1) Net of allowances for loan losses, loan in process and deferred loan fees.
43
Selected Financial Ratios and Other Data:
Performance ratios:
Return on average assets
Return on average stockholders' equity
Interest rate spread(1)
Net interest margin(2)
Efficiency ratio(3)
Average interest-earning assets to average interest-bearing liabilities
Total loans to deposits ratio
Average stockholders' equity to average assets
Stockholders' equity to total assets at end of period
Capital ratios(4):
Community Bank Leverage Ratio
Total risk-based capital (to risk-weighted assets)
Tier 1 core capital (to risk-weighted assets)
Common equity Tier 1 (to risk-weighted assets)
Tier 1 leverage (to average adjusted total assets)
Asset quality ratios:
Allowance for loan losses as a percent of total loans
Allowance for loan losses as percent of non-performing loans
Net charge-offs to average outstanding loans during the period
Non-performing loans as a percent of total loans
Non-performing assets as a percent of total assets
Other data:
Number of full-service offices
Full-time equivalent employees
2020
0.55 %
2.33
3.08
3.28
81.6
144.0
66.0
23.5
20.8
At or For the Years Ended December 31,
2018
2019
2017
0.47 %
1.92
3.52
3.73
86.6
144.6
84.9
24.6
24.4
0.74 %
4.51
3.48
3.60
79.6
130.0
84.6
16.3
24.3
0.67 %
5.10
3.40
3.50
78.3
125.1
76.8
13.1
13.7
2016
0.64 %
5.08
3.27
3.37
81.8
122.1
76.0
12.5
12.9
17.6 %
N/A
N/A
N/A
N/A
N/A
33.4 %
32.2
32.2
17.9
N/A
31.9 %
30.7
30.7
18.0
N/A
23.4 %
22.1
22.1
13.5
N/A
22.2 %
21.0
21.0
12.8
1.4 %
1.2 %
1.2 %
126.5
—
1.1
0.5
126.7
—
0.9
0.6
116.0
—
1.0
0.6
1.5 %
91.7
0.1
1.6
1.2
2.1 %
104.4
0.2
2.1
1.5
3
47
3
42
3
43
3
38
3
34
(1) Represents the difference between the weighted average yield on average interest-earning assets and the weighted
average cost of funds on average interest-bearing liabilities. Tax exempt income is reported on a tax equivalent basis
using a federal marginal tax rate of 21% for the years ended December 31, 2020, 2019 and 2018 and 34% for the years
ended December 31, 2017 and 2016.
(2) Represents net interest income as a percent of average interest-earning assets. Tax exempt income is reported on a tax
equivalent basis using a federal marginal tax rate of 21% for the years ended December 31, 2020, 2019 and 2018 and
34% for the years ended December 31, 2017 and 2016.
(3) Represents noninterest expense divided by the sum of net interest income and total noninterest income.
(4) Effective January 1, 2020, the Bank elected to use the CBLR, as provided by the Economic Growth, Regulatory Relief,
and Consumer Protection Act. The Act contains a number of provisions extending regulatory relief to banks and
savings institutions and their holding companies. A bank or savings institution that elects 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 8.0%. As a result of this election as of January 1, 2020, a
comparative ratio to prior years is not available.
44
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Our principal business consists of attracting retail deposits from the general public and investing those funds,
along with borrowed funds, in loans secured by first and second mortgages on one-to-four family residences (including
home equity loans and lines of credit), commercial and multi-family, consumer and commercial business loans and, to a
lesser extent, construction and land loans. We offer a wide variety of consumer loan products, including automobile loans,
boat loans, manufactured homes not secured by permanent dwellings and recreational vehicle loans. We intend to continue
emphasizing our residential mortgage, home equity and consumer lending, while also expanding our emphasis in
commercial and multi-family 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, 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, marketing and computer services and FDIC deposit insurance premiums.
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.
Our strategic plan targets individuals, small and medium size businesses in our market area for loan and deposit
growth. In pursuit of these goals, and while managing the size of our loan portfolio, we focused on including a significant
amount of commercial business and commercial and multi-family loans in our portfolio. A significant portion of these
commercial and multi-family and commercial business loans have adjustable rates, higher yields or shorter terms and
higher credit risk than traditional fixed-rate mortgages. Our commercial loan portfolio (commercial and multi-family real
estate, commercial construction and commercial business loans) decreased to $45.2 million, or 39.3% of our total loan
portfolio at December 31, 2020, from $50.9 million or 40.8% of our total loan portfolio, at December 31, 2019. The impact
of additional commercial and multi-family, commercial construction and commercial business loans has had a positive
impact on our interest income and has helped to further diversify our loan portfolio mix. At December 31, 2020, our
commercial real estate and commercial real estate construction portfolios totaled $31.0 million, which represents a 11.8%
decrease since December 31, 2019. At December 31, 2020, our commercial business loans were $5.2 million, which
represents a 19.3% decrease since December 31, 2019.
Our primary market area is in Washington, Lawrence, Orange and Floyd counties, Indiana. Adverse economic
conditions in our market area can reduce our rate of growth, affect our customers’ ability to repay loans and adversely
impact our financial condition and earnings. Weak economic conditions and ongoing strains in the financial and housing
markets in portions of the United States, including our market area, have presented an unusually challenging environment
for banks and their holding companies, including us. This has been particularly evident in our need to provide for credit
losses during these periods at significantly higher levels than our historical experience and has also adversely affected our
net interest income and other operating revenues and expenses.
Significant Developments and the Impact of COVID-19
The recent COVID-19 pandemic is expected to have a significant adverse impact on the United States’ economy,
including the banking industry, in future fiscal periods. The impact is subject to a high degree of uncertainty.
Our commercial and banking products are offered primarily in Indiana, where municipal and state-wide responses
to the pandemic have led to a broad curtailment of economic activity beginning in March 2020. On May 1, 2020, Governor
Eric J. Holcomb announced a five-phase plan to gradually ease restrictions with the goal of allowing nearly all activities
to resume by July 4, 2020. Due to a growing number of infections in the state, Governor Holcomb issued an executive
order on July 1, 2020 implementing “Stage 4.5” which continued face mask mandates and limitations on social gatherings
to 250 people. On September 26, 2020, the state entered “Stage 5” which removed size limitations for social gatherings
and meetings. Restaurants, bars and other indoor and outdoor venues are allowed to open to full capacity, although social
45
distancing and face masks are still required. On October 15, 2020, Governor Holcomb issued an executive order extending
the termination of Stage 5 from October 17, 2020 to November 14, 2020. On November 13, 2020, Governor Holcomb
issued an executive order, which reaffirmed the termination of Stage 5 on November 14, 2020, and established targeted
restrictions for counties that had high positivity rates of COVID-19 and continued the requirement of face masks
throughout the state. On December 10, 2020, in response to rising positivity rates, Governor Holcomb issued an executive
order which implemented restrictions on gatherings and events for each county in Indiana based upon its current color-
coded rating. Through a series of additional executive orders, the governor has continued his December 10, 2020 executive
order, with the current order scheduled to expire on March 31, 2021.
As a result of the economic contraction, according to the Indiana Department of Workforce Development,
unemployment levels in Indiana increased considerably during the pandemic, growing to a maximum state-wide seasonally
adjusted rate of 17.5% in April 2020. The state-wide seasonally-adjusted unemployment rate as of December 2020 was
4.3%, compared to 3.2% in December 2019. The combined non-seasonally-adjusted unemployment rates in Washington,
Lawrence and Orange counties (comprising a majority of our market area), are slightly higher than the state average as of
December 2020. While the social and economic impacts from COVID-19 have been concentrated in large metropolitan
areas, we anticipate to continue experiencing similar effects in smaller communities like in our market area.
In response to the pandemic, several regulatory directives have been enacted at the federal, state and local levels,
including the following:
The Federal Reserve took action to reduce the federal funds target rate by 50 basis points on March 3,
2020 and then by another 100 basis points on March 16, 2020. The current range is 0.00% to 0.25%.
On March 27, 2020, the CARES Act was signed into law. The CARES Act established a $2 trillion
economic stimulus package, providing cash payments to individuals, supplemental unemployment
insurance benefits and a $349 billion loan program administered through the U.S. Small Business
Administration (the “SBA”), referred to as the Paycheck Protection Program (the “PPP”). Under the
PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may
apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the
program, subject to numerous limitations and eligibility criteria. The Bank participated as a lender in the
PPP. Through December 31, 2020, the Bank has issued 29 loans under the PPP totaling $474,000. As of
December 31, 2020, 12 loans with a total principal balance of $268,000 received full forgiveness from
the SBA. The remaining 16 loans had an outstanding principal balance of $168,000 as of December 31,
2020. One PPP loan totaling approximately $21,000 was charged off due to the death of the borrower
but is expected to be recovered in full. We expect that the majority of our remaining PPP borrowers will
seek full or partial forgiveness of their loan obligations.
In addition, the CARES Act and related bank agency regulatory guidance provide financial institutions
the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period
of time to account for the effects of COVID-19. Through December 31, 2020, the Bank has modified 89
loans related to the COVID-19 pandemic. Most modifications allowed deferral of principal and interest
payments for 90 days. As of December 31, 2020, 78 modified loans with a principal balance of $16.2
million remained outstanding, and all modified loans have returned to their pre-modification payment
terms. Five of these loans totaling $270,000 are pre-existing TDRs. See Note 4 of the Notes to the
Consolidated Financial Statements for additional disclosure of TDRs as of December 31, 2020. All loans
modified due to COVID-19 will be separately monitored and any request for continuation of relief
beyond the initial modification will be reassessed at that time to determine if a further modification
should be granted and if a downgrade in risk rating is appropriate. As of December 31, 2020, none of
our customers who received PPP loans were granted some form of COVID-19 related loan modification.
We currently expect that the COVID-19 pandemic and related economic developments will have an adverse
impact on our business. The extent and duration of the COVID-19 economic impact is difficult to quantify, however our
financial condition, capital levels and results of operations could be materially adversely affected. While the ultimate
46
impact of the crisis is difficult to predict, we believe the Company is well-capitalized and has the financial stability to
continue to responsibly serve its customers and communities during this unprecedented time.
In response to the pandemic, we have undertaken several actions to address the needs of our employees, our
customers and our communities, including the following:
We are working with our loan customers who have been negatively impacted by the pandemic and
require loan modifications and deferrals.
We waived fees for early withdrawals of certificates of deposit by customers due to hardship.
We participated as a lender in the PPP through the CARES Act in order to assist our customers and
communities.
While we opened the lobbies of all of our branches to customer activity on May 13, 2020, per Governor’s
Holcomb’s executive orders, customers are still required to wear face masks, and we have installed
signage, stanchions and ropes to encourage social distancing and protective shielding in all customer-
facing locations. Employees receive temperature checks upon entering the buildings, and we are
observing face mask requirements, social distancing, cleaning and other protocols in order to mitigate
risk. Our pandemic protocols are continually evaluated and updated based upon the most-recent
recommendations from federal, state and local health officials.
Business Strategy
We intend to operate as a well-capitalized and profitable community bank dedicated to providing exceptional
personal service to our individual and business customers. We believe that we have a competitive advantage in the markets
we serve because of our knowledge of the local marketplace and our long-standing history of providing superior,
relationship-based customer service. Our current executive management team is comprised of individuals with strong
banking backgrounds. Erica B. Schmidt, our Executive Vice President and Chief Financial Officer, joined Mid-Southern
Savings Bank in 2005. In December 2013, Alexander Babey joined Mid-Southern Savings Bank as Executive Vice
President and Chief Credit Officer, and we appointed him as our President and Chief Executive Officer in October 2016.
In June 2014, we hired Frank (Buzz) Benson, III as Executive Vice President and Senior Loan Officer. The management
team has worked to revise our business strategy and position Mid-Southern Savings Bank for future growth and
profitability.
Our current business strategy consists of the following:
Continuing to emphasize the origination of one-to-four family residential mortgage loans. We have been
and will continue to be a significant one-to-four family residential mortgage lender to borrowers in our
market area. As of December 31, 2020, $66.1 million, or 28.1%, of our total assets consisted of one-to-four
family residential mortgage loans. We historically have held all of our loan originations, including our fixed-
rate one-to-four family residential mortgage loans, in our loan portfolio, however, beginning in October 2019
we began brokering one-to-four family residential mortgage loans.
Increasing commercial and multi-family real estate and commercial business lending. In order to increase
the yield on our loan portfolio and reduce the term to repricing, our new management team began to increase
our commercial and multi-family real estate and commercial business loan portfolios while maintaining what
we believe are conservative underwriting standards. We focus our commercial lending to small businesses
located in our market area, targeting owner occupied businesses such as manufacturers and professional
service providers. Our commercial and multi-family real estate and commercial business loan portfolios were
$39.1 million and $5.2 million, respectively, at December 31, 2020.
47
Increasing our lower-cost core deposits. NOW, Demand, savings and money market accounts are a lower
cost source of funds than certificates of deposit, and we have made a concerted effort to increase these lower-
cost transaction deposit accounts. We plan to continue to market our core transaction accounts, emphasizing
our high-quality service and competitive pricing of these products. We also offer the convenience of
technology-based products, such as bill pay, internet and mobile banking.
Managing credit risk to maintain a low level of non-performing assets. We believe strong asset quality is
a key to our long-term financial success. Our strategy for credit risk management focuses on having an
experienced team of credit professionals, well-defined policies and procedures, appropriate loan
underwriting criteria and active credit monitoring. Our non-performing assets to total assets ratio was 0.5%
and 0.6% at December 31, 2020 and 2019, respectively. At December 31, 2020, we had $1.2 million of non-
performing one-to-four family residential loans and $96,000 in non-performing commercial real estate loans.
Growing organically and through opportunistic branch acquisitions. We expect to consider both organic
growth as well as acquisition opportunities that we believe would enhance the value of our franchise and
yield potential financial benefits for our stockholders. We expect to focus our growth in our primary market
areas and Louisville, Kentucky. We will consider expanding our branch network through the acquisition of
other financial institutions, opening of additional branches or loan production offices or the acquisition of
branches if the right opportunity occurs.
Summary of Significant Accounting Policies
The discussion and analysis of the financial condition and results of operations are based on our financial
statements, which are prepared in conformity with U.S. GAAP. The preparation of these financial statements requires
management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies
discussed below to be significant accounting policies. The estimates and assumptions that we use are based on historical
experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on
the carrying value of our assets and liabilities and our results of operations.
The JOBS Act permits us an extended transition period for complying with new or revised accounting standards
affecting public companies. We have elected to take advantage of this extended transition period, which means that the
financial statements included in this annual report on Form 10-K, as well as any financial statements that we file in the
future, will not be subject to all new or revised accounting standards generally applicable to public companies for the
transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out
of the extended transition period under the JOBS Act.
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 statement of condition and it is recorded as a reduction of loans. The allowance
is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be
uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the
allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is
determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are
immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan and the entire
allowance is available to absorb all loan losses.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be
reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is
based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the
borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current
48
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 and general 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 are 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, including the value of underlying collateral for collateral dependent loans;
Nature and volume of the portfolio and terms of the loans;
Experience, ability and depth of the lending management and staff;
Volume and severity of past due, classified and non-accrual loans, as well as other loan modifications; and
Quality of our loan review system and the degree of oversight by our board of directors.
Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best
judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported
through documentation of changes in conditions in a narrative accompanying the allowance for loan loss analysis and
calculation.
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.
49
Comparison of Financial Condition at December 31, 2020 and December 31, 2019
Cash and Cash Equivalents. At December 31, 2020 and 2019, cash and cash equivalents totaled $9.7 million
and $18.8 million, respectively. Cash and cash equivalents decreased due primarily to net purchases in investments and
treasury stock, partially offset from funds provided by increases in deposits and operating activities. We have focused on
investing excess liquidity in higher yielding loans and investment securities in an effort to increase net interest income.
Loans. Our primary lending activity is the origination of loans secured by real estate. We originate one-to-four
family residential loans, multi-family residential loans, commercial real estate loans and construction loans. To a lesser
extent, we originate commercial business loans and consumer loans. In August 2016, we opened a loan production office
in New Albany, Indiana as part of our effort to increase our business lending and diversify the loan portfolio. Net loans
receivable decreased $10.0 million, or 8.1%, to $113.3 million at December 31, 2020 from $123.3 million at December 31,
2019. The decrease in net loans receivable was due primarily to decreases in one-to-four family residential loans,
commercial real estate loans and commercial real estate construction loans.
One-to-four family residential loans comprise the largest segment of our loan portfolio. At December 31, 2020,
these loans totaled $66.1 million, or 57.6% of total loans, compared to $71.6 million, or 57.4% of total loans, at
December 31, 2019. The Bank originates both fixed- and adjustable-rate one-to-four family residential loans. We have
recently increased our efforts to originate adjustable-rate one-to-four family residential loans and originated $9.3 million
and $7.5 million of adjustable-rate loans in 2020 and 2019, respectively. Management intends to continue its focus on
offering adjustable-rate mortgage loans at attractive rates.
Multi-family residential mortgage loans totaled $9.0 million, or 7.8% of total loans, at December 31, 2020
compared to $9.3 million, or 7.4% of total loans at December 31, 2019. Despite the decrease in the year-over-year balance,
we continue our effort to originate this type of loan.
Commercial real estate loans totaled $30.2 million, or 26.3% of total loans, at December 31, 2020 compared to
$32.3 million, or 25.9% of total loans, at December 31, 2019. During 2020 and 2019, we originated $5.8 million and $5.7
million, respectively, of commercial real estate loans with an emphasis on adjustable-rate loans.
Our construction loan portfolio consists of residential and commercial construction loans. Construction loans
totaled $2.9 million, or 2.5% of total loans (excluding unfunded construction loan commitments of $2.9 million), at
December 31, 2020, compared to $3.2 million, or 2.6% of total loans (excluding unfunded construction loan commitments
of $1.8 million), at December 31, 2019. Commercial construction loan originations decreased to $850,000 during 2020
from $2.7 million in 2019.
Commercial business loans totaled $5.2 million, or 4.5% of total loans at December 31, 2020, compared to $6.5
million, or 5.2% of total loans, at December 31, 2019. During 2020 and 2019, we originated commercial business loans
of $3.3 million and $2.3 million, respectively.
Consumer loans totaled $1.4 million, or 1.3% of total loans at December 31, 2020, compared to $1.9 million, or
1.5% of total loans, at December 31, 2019. Originations of consumer loans were $603,000 in 2020 compared to $1.0
million in 2019.
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. Available for sale securities increased by $46.0 million, or 78.8%, to $104.5 million at December 31, 2020
from $58.4 million at December 31, 2019. Investment securities increased due primarily to the purchase of $57.4 million
of available for sale securities and a $2.6 million increase in the unrealized gain on available for sale securities which were
partially offset by the $4.5 million sale of available for sale securities and $9.3 million from scheduled principal payments
and maturities of mortgage-backed and tax-exempt securities. During 2020, we continued our strategy to increase our
investment in municipal obligations as a component of our available for sale securities portfolio due to their higher tax-
equivalent yield. At December 31, 2020, our investment in municipal obligations was $66.4 million compared to $37.9
million at December 31, 2019.
50
Securities Held to Maturity. Our held to maturity securities portfolio consists primarily of U.S. government
agency mortgage-backed securities. Held to maturity securities decreased $11,000 for the year ended December 31, 2020.
The decrease during 2020 was due to principal repayments on mortgage-backed securities. We have not purchased
investment securities as held to maturity during the past three years.
Premises and Equipment. Premises and equipment were $1.9 million at both December 31, 2020 and 2019. See
Note 7 of the Notes to Consolidated Financial Statements contained in Item 8 of this report for further information.
Other Assets. Other assets decreased $24,000 to $418,000 at December 31, 2020 from $442,000 at December 31,
2019 primarily due to a decrease in the net deferred tax asset during 2020.
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
$27.1 million or 18.5%, during the year ended December 31, 2020, primarily as a result of increases in both interest-
bearing and noninterest-bearing accounts.
Borrowings. On June 27, 2019, the Company borrowed $10.0 million from the FHLB which matures on June 27,
2024 and bears interest at a rate of 1.73%. On December 30, 2020, the Company borrowed $1.0 million from the FHLB,
bearing an interest rate of 0.26% and matured on January 6, 2021.
Stockholders’ Equity. Stockholders’ equity decreased $1.8 million to $49.0 million at December 31, 2020 from
$50.8 million at December 31, 2019. The decrease was due primarily to the repurchase of 403,171 shares of our common
stock at a total cost of $5.0 million or an average cost of $12.48 per share, partially offset by an increase in accumulated
other comprehensive income, net of tax, of $1.9 million due primarily to increases in the fair market value of available-
for-sale investments and net income of $1.2 million, less dividends of $255,000.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table presents information regarding average balances of assets and liabilities, the total dollar
amounts of interest income and dividends from average interest-earning assets, the dollar amounts of interest expense on
average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the
periods indicated are derived by dividing income or expense by the average balances of assets or liabilities respectively,
for the periods presented. Average balances are calculated using daily balances. Nonaccrual loans are included in average
daily balances only. Loan fees are included in interest income on loans and are not material. Tax exempt income on loans
and investment securities has been calculated on a tax equivalent basis using a federal marginal tax rate of 21% for
51
the years ended December 31, 2020, 2019 and 2018. Weighted average yields for tax exempt loans and investment
securities at December 31, 2020 have been calculated on a tax equivalent basis using a federal marginal tax rate of 21%.
At
December 31,
Weighted
Average
Yield/Cost Balance Interest Yield / Cost Balance
Average
2020
Average
Years Ended December 31,
2019
2018
Average
Interest
Yield / Cost Balance Interest Yield / Cost
Interest-earning assets:
Interest bearing deposits with banks
Loans receivable, net (1)
Mortgage-backed securities
Other investment securities
Federal Home Loan Bank stock
Total interest-earning assets
Noninterest-earning assets
Total assets
Interest-bearing liabilities:
Interest-bearing checking
Savings and money market
Certificates of deposit
Total deposits
FHLB borrowings
Total interest-bearing liabilities
Noninterest-bearing liabilities
Total liabilities
Total equity
Total liabilities and equity
Net interest income (taxable equivalent basis)
Less: taxable equivalent adjustment
Net interest income
Net interest rate spread
Net interest margin
Average interest-earning assets to average interest-bearing liabilities
(Dollars in thousands)
0.02 % $ 19,049 $
4.48
1.53
3.26
2.55
3.50
121,467
20,078
46,661
778
208,033
60
5,562
422
1,695
25
7,764
0.31 % $ 14,481 $
127,556
4.58
21,773
2.10
30,683
3.63
3.21
778
3.73 % 195,271
278
6,146
555
1,185
42
8,206
1.92 % $ 14,552 $
4.82
2.55
3.86
5.40
4.20
123,361
23,493
23,510
778
185,694
236
5,809
448
877
40
7,410
1.62 %
4.71
1.91
3.73
5.14
3.99
9,637
$ 217,670
7,971
$ 203,242
6,222
$ 191,916
0.04
0.17
1.03
0.38
1.60
$ 43,679
42,981
47,836
134,496
10,006
144,502
35
85
642
762
174
936
0.08 % $ 39,903
37,564
0.20
1.34
52,462
0.57 % 129,929
5,138
1.74
135,067
0.65
44
60
731
835
90
925
0.11
0.16
1.39
0.64
1.75
0.68
$ 45,722
42,736
53,497
141,955
912
142,867
44
87
583
714
15
729
0.10
0.20
1.09
0.50
1.64
0.51
22,072
166,574
51,096
$ 217,670
18,095
153,162
50,080
$ 203,242
17,687
160,554
31,362
$ 191,916
6,828
(313)
$ 6,515
7,281
(206)
$ 7,075
6,681
(134)
$ 6,547
3.08 %
3.28 %
144.0 %
3.52 %
3.73 %
144.6 %
3.48 %
3.60 %
130.0 %
(1) Loan amount is net of deferred loan origination fees and costs, undisbursed loan funds and includes nonperforming
loans.
52
Rate/Volume Analysis
The following schedule presents the dollar amount of changes in interest income and interest expense for major
components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and that due to the changes in interest rates. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume
multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the
change due to volume and the change due to rate.
Years Ended December 31,
2020 Compared to 2019
Increase (Decrease) Due to
Volume Net
Rate
2019 Compared to 2018
Increase (Decrease) Due to
Volume Net
Rate
(Dollars in thousands)
Interest income
Interest bearing deposits with banks(1)
Loans receivable, net
Mortgage-backed securities
Other investment securities(2)
Total interest-earning assets
Interest expense
Interest-bearing checking
Savings and money market
Certificates of deposit
FHLB borrowings
Total interest-bearing liabilities
$ (350) $ 132 $ (218) $
(296) (284)
(41)
465
272
(92)
(83)
(821)
(580)
(133)
382
(549)
(14)
16
(26)
(1)
(25)
5
9
(63)
85
36
(9)
25
(89)
84
11
43 $
(1) $
135
137
7
322
—
(31)
159
1
129
195
(30)
238
402
—
4
(11)
74
67
42
330
107
245
724
—
(27)
148
75
196
Net increase (decrease) in net interest income
$ (796) $ 236 $ (560) $ 193 $ 335 $ 528
(1) Includes interest-bearing deposits (cash) at other financial institutions.
(2) Includes FHLB Stock.
Comparison of Operating Results Years Ended December 31, 2020 and 2019
Overview. The Company reported net income of $1.2 million ($0.38 per common share diluted) for the year
ended December 31, 2020, compared to net income of $960,000 ($0.29 per common share diluted) for the year ended
December 31, 2019. The significant factors that contributed to the increase in net income for 2020 was a decrease in
noninterest expenses, partially offset by a decrease in net interest income after provision for loan losses.
Net Interest Income. Net interest income decreased $560,000, or 7.9%, to $6.5 million for 2020 from $7.1
million for 2019 primarily as the result of a decrease in the average yield earned on interest-earning assets. The ratio of
average interest-earning assets to average interest-bearing liabilities decreased slightly to 144.0% for 2020 from 144.6%
for 2019. The interest rate spread decreased to 3.08% for 2020 from 3.52% for 2019.
Total interest income decreased $549,000, or 6.9%, to $7.5 million for 2020 from $8.0 million for 2019. The
decrease is primarily due to a decrease in the average yield earned on interest-earning assets. The average balance of
interest-earning assets increased to $208.0 million for 2020 from $195.3 million for 2019. The average tax-equivalent
yield on interest-earning assets decreased to 3.73% for 2020 from 4.20% for 2019 primarily due to lower market interest
rates and a shift in the asset mix from loans to investment securities.
53
Interest income on loans was $5.6 million for 2020 compared to $6.1 million for 2019. The decrease was due to
a decrease in the average tax-equivalent yield on loans to 4.58% for 2020 from 4.82% for 2019, and a decrease in average
loans outstanding of $6.1 million, or 4.8%, to $121.5 million in 2020 from $127.6 million in 2019.
Interest income on investment securities increased $249,000, or 15.7%, to $1.8 million for 2020 from $1.6 million
for 2019, primarily due to a $14.3 million increase in the average balance of total investment securities to $67.5 million
for 2020 from $53.2 million for 2019 partially offset by an 18 basis point decrease in the average tax-equivalent yield on
investment securities.
Interest income on interest-bearing deposits with banks decreased $218,000, or 78.4%, due primarily to a decrease
in the average yield to 0.31% for 2020 from 1.92% for 2019.
Total interest expense increased $11,000, or 1.2%, due to an increase in the average balance of interest-bearing
liabilities, partially offset by a decrease in the cost of interest-bearing liabilities. The average cost of interest-bearing
liabilities decreased to 0.65% for 2020 from 0.68% for 2019. The average balance of interest-bearing liabilities increased
$9.4 million to $144.5 million for 2020 from $135.1 million for 2019, due primarily to increases in both the average
balance of Federal Home Loan Bank borrowings and the average balance of savings and interest-bearing demand deposit
accounts, partially offset by a decrease in the average balance of time deposits.
Provision for Loan Losses. Based on an analysis of the factors described in “Summary of Significant Accounting
Policies – Allowance for Loan Losses”, the Company recognized a provision for loan losses of $132,000 for 2020
compared to $12,000 for 2019. Non-performing loans increased to $1.3 million, or 1.1% of total loans at December 31,
2020, compared to $1.2 million, or 0.9% of total loans at December 31, 2019. During the year ended December 31, 2020,
net charge-offs totaled $41,000 compared to $18,000 for 2019. Impaired loans decreased $291,000 or 11.9%, from $2.4
million at December 31, 2019 to $2.2 million at December 31, 2020.
Noninterest Income. Noninterest income increased $62,000, or 7.7%, to $865,000 for 2020 as compared to
$803,000 for 2019. The year-over-year increase in noninterest income was primarily due to increases of $97,000 in net
gain on sales of securities available for sale, $39,000 in ATM and debit card fee income and $57,000 in other income,
partially offset by a $127,000 decrease in deposit account service charges.
Noninterest Expense. Noninterest expense decreased $799,000, or 11.7%, to $6.0 million for 2020 as compared
to $6.8 million for 2019. The decrease was due primarily to decreases in data processing expenses of $801,000, decreases
in professional fees of $79,000, decreases in impairment loss on real estate held for sale of $67,000, decreases in
stockholders’ meeting expenses of $53,000, and other expenses of $70,000, partially offset by increases of $225,000 in
compensation and benefits expense and $48,000 in directors’ compensation expense. Data processing expenses decreased
due primarily to contract termination expenses recognized during 2019 related to the Bank’s core processing system
conversion which was completed in the fourth quarter of 2019. In October 2019, we upgraded our core processing system
with the objective to improve internal reporting capabilities for both management and the board of directors and create a
scalable corporate infrastructure that will significantly expand our ability to handle continued growth and improve our
levels of operational efficiency. Further, our new system enhances our capabilities and capacity to offer new products and
services for loan and deposit customers and will enable us to offer more state-of-the-art technology-based services and
delivery channels such as remote deposit capture and other business banking services. As a result of this conversion, we
recognized approximately $389,000 in several one-time expenses related to contract termination expenses during 2019.
Income Tax Expense. Income tax expense was $35,000 for 2020 compared to $85,000 for 2019 resulting from
reductions in pre-tax income and in the effective tax rate. The effective tax rate for 2020 decreased to 2.9% compared to
8.1% for 2019 due largely to increased tax-exempt investment income proportionate to overall pre-tax income. See Note 11
of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information.
Liquidity
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
54
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 December 31, 2020 and
2019, we had $114.1 million and $77.2 million, respectively, in cash and investment securities available for sale generally
available for our cash needs. We can also obtain funds from borrowings, primarily FHLB advances. At December 31,
2020, we had $11.0 million in FHLB advances outstanding and the ability to borrow an additional $14.0 million in FHLB
advances, subject to certain collateral requirements. 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.
Our liquidity, represented by cash and cash equivalents and investment securities, is a product of our operating,
investing and financing activities. Our primary sources of funds are deposits, amortization, prepayments and maturities of
outstanding loans and mortgage-backed securities, maturities of investment securities and other short-term investments
and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed
securities and maturing investment securities and short-term investments are relatively predictable sources of funds,
deposit flows and loan prepayments are greatly influenced by general interest rates, which provide liquidity to meet lending
requirements. We also generate cash through borrowings. We utilize 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, pay maturing deposits and fund
withdrawals, and to fund loan commitments. At December 31, 2020, the approved outstanding loan commitments,
including unused lines and letters of credit, amounted to $17.6 million. Certificates of deposit scheduled to mature in
one year or less at December 31, 2020, totaled $22.6 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.
Commitments and Off-Balance Sheet Arrangements
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in
order to meet the financing needs of its customers. For information regarding our commitments and off-balance sheet
arrangements, see Notes 15 and 16 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-
K.
55
The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of
December 31, 2020:
Commitments to originate loans
Fixed rate
Adjustable rate
Undisbursed balance of commercial and personal lines of credit
Undisbursed balance of commercial construction loans
Undisbursed balance of residential construction loans
Standby letters of credit
Capital
Total
Amounts
Committed
Due in
One
Year
(Dollars in thousands)
$
$
180 $
2,244
11,752
2,928
451
26
17,581 $
180
2,244
—
—
—
26
2,450
Mid-Southern Savings Bank is subject to minimum capital requirements imposed by regulations of the OCC.
Based on its capital levels at December 31, 2020, Mid-Southern Savings Bank exceeded these requirements as of that date.
Consistent with our goals to operate a sound and profitable organization, our policy is for Mid-Southern Savings Bank to
maintain a “well-capitalized” status under the regulatory capital categories of the OCC. Based on capital levels at
December 31, 2020, Mid-Southern Savings Bank was considered to be well-capitalized. Management monitors the capital
levels to provide for current and future business opportunities and to maintain Mid-Southern Savings Bank’s “well-
capitalized” status. See Item 1. “Business – Regulation – Federal Regulation of Savings Institutions – Capital
Requirements.” and Note 17 of the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K
for additional details on Mid-Southern Savings Bank’s regulatory capital requirements.
On May 24, 2018, the President signed into law the Economic Growth, Regulatory Relief, and Consumer
Protection Act passed by Congress (the “Act”). The Act contains a number of provisions extending regulatory relief to
banks and savings institutions and their holding companies. Effective January 1, 2020, a bank or savings institution that
elects to use the Community Bank Leverage Ratio (“CBLR”) will generally be considered well-capitalized and to have
met the risk-based and leverage capital requirements of the capital regulations if it has a leverage ratio greater than 9.0%
(adjusted to 8.0% effective April 1, 2020). On October 9, 2020, the OCC along with the Board of Governors of the Federal
Reserve System and the Federal Deposit Insurance Corporation, published a final rule, effective November 9, 2020,
implementing a temporary change to the CBLR framework pursuant to the CARES Act, and provides a graduated increase
from the temporary 8.0% requirement to the 9.0% requirement as established under the final rule published in 2019. To
be eligible to elect to use the CBLR, the bank or institution also must have total consolidated assets of less than $10 billion,
off-balance sheet exposures of 25% or less of its total consolidated assets, and trading assets and trading liabilities of 5.0%
or less of its total consolidated assets, all as of the end of the most recent quarter. The Bank elected to use the CBLR
effective January 1, 2020.
As of December 31, 2020, the Bank was considered well-capitalized under applicable federal regulatory capital
guidelines with a CBLR of 17.6%. As a result of this election as of January 1, 2020, a comparative ratio to December 31,
2019 is not available.
56
The following table shows the capital ratios of Mid-Southern Savings Bank at December 31, 2019 (dollars in
thousands):
Tier 1 Capital to total adjusted assets(1)
Tier 1 Capital to risk-weighted assets(2)
Total Capital to risk-weighted assets(2)
Common Equity Tier 1 (to risk-weighted assets) (2)
Minimum Required
to Be Well-
Capitalized
Under Prompt
Corrective
Action Provisions
Amount Ratio
Minimum Capital
Requirements
Amount Ratio
Actual
Amount Ratio
$ 37,562
37,562
39,021
37,562
17.9 % $ 8,401
9,919
32.2
12,253
33.4
8,168
32.2
4.00 % $ 10,501
9,335
8.50
11,669
10.50
7,585
7.00
5.00 %
8.00
10.00
6.50
(1) Based on total adjusted assets of $210.0 million.
(2) Based on risk-weighted assets of $116.7 million.
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 December 31, 2020, Mid-Southern Bancorp, Inc. would have exceeded all regulatory
capital requirements.
Asset/Liability Management
Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally
are established contractually for a period of time. Market rates change over time. Like other financial institutions, our
results of operations are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities.
The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk
and is our most significant market risk.
How We Measure Our Risk of Interest Rate Changes. As part of our attempt to manage our exposure to
changes in interest rates and comply with applicable regulations, we monitor our interest rate risk. In doing so, we analyze
and manage assets and liabilities based on their interest rates and payment streams, timing of maturities, repricing
opportunities, and sensitivity to actual or potential changes in market interest rates.
We are subject to interest rate risk to the extent that our interest-bearing liabilities, primarily deposits and FHLB
advances, reprice more rapidly or at different rates than our interest-earning assets. In order to minimize the potential for
adverse effects of material prolonged increases or decreases in interest rates on our results of operations, we have adopted
an asset and liability management policy. Our board of directors sets the asset and liability policy, which is implemented
by the asset/liability committee.
The purpose of the asset/liability committee is to communicate, coordinate, and control asset/liability
management consistent with our business plan and board-approved policies. The committee establishes and monitors the
volume and mix of assets and funding sources, taking into account relative costs and spreads, interest rate sensitivity and
liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with
liquidity, capital adequacy, growth, risk and profitability goals.
The committee generally meets quarterly to, among other things, protect capital through earnings stability over
the interest rate cycle; maintain our well-capitalized status; and provide a reasonable return on investment. The committee
recommends appropriate strategy changes based on this review. The committee is responsible for reviewing and reporting
the effects of the policy implementations and strategies to the board of directors at least quarterly. Executive management
oversee the process on a daily basis.
Our asset/liability management strategy dictates acceptable limits on the amounts of change in given changes in
interest rates. For interest rate increases of 100, 200, and 300 basis points, our policy dictates that our Economic Value of
57
Equity (“EVE”) ratio should not fall below 10.0%, 20.0%, and 30.0%, respectively. As illustrated in the table below, we
were in compliance with this aspect of our asset/liability management policy at December 31, 2020.
Mid-Southern Savings Bank uses an EVE interest rate sensitivity analysis in order to evaluate the impact of its
interest rate risk on earnings and capital. This is measured by computing the changes in net EVE for its cash flow from
assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. EVE
modeling involves discounting present values of cash flows for on and off-balance sheet items under different interest rate
scenarios and provides no effect given to any steps that management might take to counter the effect of the interest rate
movements. The discounted present value of all cash flows represents the Mid-Southern Savings Bank’s EVE and is equal
to the market value of assets minus the market value of liabilities, with adjustments made for off balance sheet items. The
amount of base case EVE and its sensitivity to shifts in interest rates provide a measure of the longer-term re-pricing and
option risk in the balance sheet. The table presented below, as of December 31, 2020, is an internal analysis of our interest
rate risk as measured by changes in EVE for instantaneous and sustained parallel shifts in the yield curve, in 100 basis
point increments, from no change to up 400 basis points. A decline beyond 100 basis points is not reported as any further
decline in rates is unlikely as the current federal funds rate is from 0.0% to 0.25%.
Immediate Change
In the Level
Of Interest Rates
400bps
300bps
200bps
100bps
Static
(100)bps
Economic Value of Equity as a
% of Present Value of Assets
$ Amount
Economic Value of Equity
$ Change
% Change
(Dollars in thousands)
EVE Ratio %
$
36,366 $
40,781
45,533
50,372
55,294
57,650
(18,928)
(14,513)
(9,761)
(4,922)
—
2,356
(34.2)%
(26.2)
(17.7)
(8.9)
—
4.3
14.9 %
16.8
18.7
20.7
22.7
23.7
Change
(7.8)%
(6.0)
(4.0)
(2.0)
—
1.0
In addition to monitoring selected measures of EVE, management also monitors effects on net interest income
resulting from increases or decrease in rates. This process is used in conjunction with EVE measures to identify excessive
interest rate risk. In managing our assets/liability mix, depending on the relationship between long- and short-term interest
rates, market conditions and consumer preference, we may place somewhat greater emphasis on maximizing its net interest
margin than on strictly matching the interest rate sensitivity of its assets and liabilities. Management also believes that the
increased net income which may result from an acceptable mismatch in the actual maturity or re-pricing of its asset and
liability portfolios can, during periods of declining or stable interest rates, provide sufficient returns to justify the increased
exposure to sudden and unexpected increases in interest rates which may result from such a mismatch. Management
believes that our level of interest rate risk is acceptable under this approach.
In evaluating our exposure to interest rate movements, certain shortcomings inherent in the method of analysis
presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar
maturities or re-pricing periods, they may react in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest
rates on other types may lag behind changes in interest rates. Additionally, certain assets, such as adjustable-rate
mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further,
in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed above. Finally, the ability of many borrowers to service their debt may decrease in the
event of an interest rate increase. We consider all of these factors in monitoring our exposure to interest rate risk.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises principally
from interest rate risk inherent in our lending, investing, deposit and borrowing activities. Management actively monitors
and manages its interest rate risk exposure. In addition to other risks that we manage in the normal course of business,
such as credit quality and liquidity, management considers interest rate risk to be a significant market risk that could have
a potential material effect on our financial condition and results of operations. The information contained in Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability Management”
in this Form 10-K is incorporated herein by reference.
58
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page
60
61
62
63
64
65
66-106
59
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Mid-Southern Bancorp, Inc.
Salem, Indiana
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Mid-Southern Bancorp, Inc. (the “Company”) as of
December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in
stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related
notes (collectively referred to as the “financial statements”).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in
the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United
States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal
control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for
our opinion.
We have served as the Company’s, or its predecessors’, auditor since at least 1975.
New Albany, Indiana
March 26, 2021
60
MID-SOUTHERN BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2020 AND 2019
(In thousands, except share information)
ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Cash and cash equivalents
Securities available for sale, at fair value
Securities held to maturity
Loans, net
Federal Home Loan Bank stock, at cost
Real estate held for sale
Premises and equipment
Accrued interest receivable:
Loans
Securities
Cash value of life insurance
Other assets
Total Assets
LIABILITIES
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Advances from Federal Home Loan Bank
Accrued interest payable
Accrued expenses and other liabilities
Total Liabilities
STOCKHOLDERS’ EQUITY
2020
2019
$
$
1,778
7,883
9,661
104,456
31
1,577
17,240
18,817
58,417
42
113,259
123,272
778
99
1,898
314
584
3,865
418
778
135
1,874
410
455
3,794
442
$
235,363
$
208,436
$
$
25,939
148,174
174,113
17,796
129,173
146,969
11,000
10,000
10
1,236
186,359
7
647
157,623
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 3,173,057 shares
outstanding (3,557,728 in 2019)
Additional paid-in-capital
Retained earnings, substantially restricted
Accumulated other comprehensive income
Unearned ESOP shares
Unearned stock compensation plan
Treasury stock, at cost - 392,373 shares (7,702 in 2019)
Total Stockholders’ Equity
—
—
36
30,559
22,299
3,213
(1,769)
(422)
(4,912)
49,004
36
30,415
21,363
1,281
(1,883)
(300)
(99)
50,813
Total Liabilities and Stockholders’ Equity
$
235,363
$
208,436
See notes to consolidated financial statements.
61
MID-SOUTHERN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2020 AND 2019
(In thousands, except per share information)
2020
2019
INTEREST INCOME
Loans, including fees
Investment securities:
Mortgage-backed securities
Municipal tax exempt
Other debt securities
Federal Home Loan Bank dividends
Interest-bearing deposits with banks and time deposits
Total interest income
INTEREST EXPENSE
Deposits
Borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
NONINTEREST INCOME
Deposit account service charges
Net gain on sales of securities available for sale
Increase in cash value of life insurance
ATM and debit card fee income
Other income
Total noninterest income
NONINTEREST EXPENSE
Compensation and benefits
Occupancy and equipment
Data processing
Professional fees
Impairment loss on real estate held for sale
Loss on disposal of premises and equipment
Directors' compensation
Stockholders' meeting expense
Supervisory examinations
Deposit insurance premiums
Other expenses
Total noninterest expense
Income before income taxes
Income tax expense
Net Income
Earnings per common share:
Basic
Diluted
See notes to consolidated financial statements.
62
$
5,551
$
422
1,134
259
25
60
7,451
762
174
936
6,515
132
6,383
184
104
68
419
90
865
3,453
455
381
597
37
13
343
62
64
26
591
6,022
1,226
35
$
$
$
1,191
$
0.38
0.38
$
$
6,131
555
719
275
42
278
8,000
835
90
925
7,075
12
7,063
311
7
72
380
33
803
3,228
456
1,182
676
104
—
295
115
71
33
661
6,821
1,045
85
960
0.29
0.29
MID-SOUTHERN BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2020 AND 2019
(In thousands)
Net Income
Other Comprehensive Income, net of tax
Unrealized gains on securities available for sale:
Net unrealized holding gains arising during the period
Income tax expense
Net of tax amount
Reclassification adjustment for realized gains included in net income during the
period
Income tax expense
Net of tax amount
Other Comprehensive Income, net of tax
Total Comprehensive Income
See notes to consolidated financial statements.
2020
2019
$
1,191 $
960
2,675
(665)
2,010
104
(26)
78
1,933
(481)
1,452
7
(2)
5
1,932
1,447
$
3,123 $
2,407
63
MID-SOUTHERN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER, 31, 2020 AND 2019
(In thousands, except share information)
Additional
Accumulated
Other
Unearned Unearned
Common Paid-in
Capital
Stock
Retained Comprehensive ESOP
Earnings Income (Loss) Shares
Stock
Compensation
Treasury
Stock
Total
Balances at January 1, 2019
$
36 $
30,302 $ 20,672 $
(166) $ (1,997) $
(1) $
(3) $ 48,843
Net income
Other comprehensive income
Cash dividends ($0.08 per share)
Shares released by ESOP trust
Purchase of 38,400 treasury shares
Grant of treasury stock for stock compensation
Stock compensation expense
—
—
—
—
—
—
—
—
—
—
32
—
13
68
960
—
(269)
—
—
—
—
—
1,447
—
—
—
—
—
—
—
—
114
—
—
—
—
—
—
—
—
—
960
—
1,447
—
—
(269)
146
(497)
(497)
(414)
401
—
115
—
183
Balances at December 31, 2019
$
36 $
30,415 $ 21,363 $
1,281 $ (1,883) $
(300) $
(99) $ 50,813
Net income
Other comprehensive income
Cash dividends ($0.08 per share)
Shares released by ESOP trust
Purchase of 403,171 treasury shares
Grant of treasury stock for stock compensation
Stock compensation expense
—
—
—
—
—
—
—
—
1,191
—
—
33
—
42
69
—
(255)
—
—
—
—
—
1,932
—
—
—
—
—
—
—
—
114
—
—
—
—
—
—
—
—
1,191
—
1,932
—
—
(255)
147
—
(5,044)
(5,044)
(273)
231
—
151
—
220
Balances at December 31, 2020
$
36 $
30,559 $ 22,299 $
3,213 $ (1,769) $
(422) $ (4,912) $ 49,004
See notes to consolidated financial statements.
64
MID-SOUTHERN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2020 AND 2019
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums and accretion of discounts on securities, net
Provision for loan losses
Stock compensation expense
Depreciation expense
Loss on disposal of premises and equipment
ESOP compensation expense
Impairment loss on real estate held for sale
Deferred income taxes
Increase in cash value of life insurance
Net gain on sales of securities available for sale
Increase in accrued interest receivable
Increase in accrued interest payable
Net change in other assets and liabilities
Net Cash Provided By Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale
Principal collected on mortgage-backed securities available for sale
Proceeds from maturities of securities available for sale
Proceeds from sales of securities available for sale
Principal collected on mortgage-backed securities held to maturity
Proceeds from maturities of securities held to maturity
Net decrease in loans receivable
Purchase of premises and equipment
Investment in cash value of life insurance
Net Cash Used In Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits
Advances from Federal Home Loan Bank
Purchase of treasury stock
Cash dividends paid
Net Cash Provided By Financing Activities
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and cash equivalents at beginning of year
Cash and Cash Equivalents at End of Period
See notes to consolidated financial statements.
65
2020
2019
$
1,191
$
960
242
132
220
156
13
147
37
(15)
(68)
(104)
(33)
3
(74)
1,847
(57,390)
7,039
2,220
4,526
11
—
9,881
(132)
(3)
(33,848)
27,144
1,000
(5,044)
(255)
22,845
200
12
183
143
—
146
104
(4)
(72)
(7)
(34)
7
(46)
1,592
(12,600)
7,844
934
278
13
45
3,009
(89)
(4)
(570)
(4,139)
10,000
(497)
(269)
5,095
(9,156)
6,117
18,817
12,700
$
9,661
$
18,817
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Conversion and Stock Issuance
Mid-Southern Bancorp, Inc. (the "Company"), an Indiana corporation, was organized by Mid-Southern, M.H.C. (the
"MHC") and Mid-Southern Savings Bank, FSB (the "Bank") to facilitate the "second-step" conversion of the Bank
from the mutual holding company structure to the stock holding company structure (the "Conversion"). Upon
consummation of the Conversion, which occurred on July 11, 2018, the Company became the holding company for
the Bank and now owns all of the issued and outstanding shares of the Bank’s common stock.
In connection with the Conversion, the Company sold 2,559,871 shares of common stock at a price of $10.00 per
share in an offering to certain depositors of the Bank and others, including 204,789 shares purchased by the Bank’s
employee stock ownership plan ("ESOP") funded by a loan from the Company (see Note 13). Proceeds from the
offering, net of $1.2 million in expenses, totaled $24.4 million. The Company used $2.0 million of the net proceeds
to fund the ESOP and made a $10.2 million capital contribution to the Bank. Concurrent with the offering, shares of
Bank common stock owned by public stockholders were exchanged for 2.3462 shares of the Company’s common
stock, with cash being paid in lieu of issuing fractional shares. As a result of the offering, exchange and cash in lieu
of fractional shares, the Company issued 3,565,430 shares. The Conversion has been accounted for as a change in
corporate form with the historic basis of the Bank’s assets, liabilities and equity unchanged as a result.
Nature of Operations
The Company’s principal business is the ownership and operation of the Bank. The Bank is a federal savings bank
that provides a variety of banking services to individuals and business customers through its main office, two full-
service branch offices and one loan production office in southern Indiana. The Bank’s primary source of revenue is
single-family residential mortgage loans. Mid-Southern Investments, Inc. (the "Subsidiary") is a wholly-owned
subsidiary of the Bank that holds and manages an investment securities portfolio.
Basis of Presentation, Consolidation and Reclassifications
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America ("GAAP") and conform to general practices within the banking industry. As an
"emerging growth company" as defined in Title 1 of the Jumpstart Our Business Startups Act, the Company has
elected to use the extended transition period to delay adoption of new or reissued accounting pronouncements
applicable to public companies until such pronouncements are made applicable to private companies. Accordingly,
the consolidated financial statements may not be comparable to the financial statements of public companies that
comply with such new or revised accounting standards. As of December 31, 2020, there is no significant difference
in the comparability of the consolidated financial statements as a result of this extended transition period.
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries.
Intercompany balances and transactions have been eliminated.
Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassifications
had no effect on net income or stockholders’ equity.
Statements of Cash Flows
For purposes of the statement of cash flows, the Company has defined cash and cash equivalents as cash on hand,
amounts due from banks (including cash items in process of clearing) and interest-bearing deposits with other banks
having an original maturity of 90 days or less.
66
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance
for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In
connection with the determination of the allowance for loan losses and foreclosed real estate, management obtains
independent appraisals for significant properties.
A majority of the loan portfolio consists of single-family residential and commercial real estate loans in the southern
Indiana area. Accordingly, the ultimate collectability of a substantial portion of the loan portfolio and the recovery of
the carrying amount of foreclosed real estate are susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans and foreclosed real estate, further changes
in the carrying amounts of loans and foreclosed real estate may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the
estimated losses on loans and foreclosed real estate. Such agencies may require the Company to recognize additional
changes based on their judgments about information available to them at the time of their examination. Because of
these factors, it is reasonably possible that the estimated losses on loans and foreclosed real estate may change
materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
Investment Securities
Securities Available for Sale: Securities available for sale consist of debt securities and are stated at fair value.
Amortization of premiums and accretion of discounts are recognized in interest income using methods approximating
the interest method over the period to maturity, adjusted for anticipated prepayments. Unrealized gains and losses, net
of tax, on securities available for sale are included in other comprehensive income and the accumulated unrealized
holding gains and losses are reported as a separate component of equity until realized. Realized gains and losses on
the sale of securities available for sale are determined using the specific identification method and are included in
other noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in other
comprehensive income.
Securities Held to Maturity: Debt securities for which the Company has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts that are recognized in
interest income using methods approximating the interest method over the period to maturity, adjusted for anticipated
prepayments. The Company classifies certain mortgage-backed securities as held to maturity.
Debt securities held by the Company include mortgage-backed securities and other debt securities issued by the
Government National Mortgage Association, a U.S. government agency, and mortgage-backed securities (“MBS”)
and collateralized mortgage obligations (“CMO”) issued by the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation, which are government-sponsored enterprises. MBS represent
participating interests in pools of long-term first mortgage loans originated and serviced by the issuers of the securities.
CMOs 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.
Declines in the fair value of individual available for sale and held to maturity securities below their amortized cost
that are other than temporary result in write-downs of the individual securities to their fair value. The related write-
67
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
downs are included in earnings as realized losses. In estimating other-than-temporary impairment losses, management
considers (1) the length of time and the extent to which the fair value has been less than amortized 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 for a period of time sufficient to allow for any anticipated recovery in fair value.
The Bank is a member of the Federal Home Loan Bank of Indianapolis ("FHLB"). FHLB stock is carried at cost,
classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.
Both cash and stock dividends are reported in the consolidated statements of income.
Loans and Allowance for Loan Losses
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. 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.
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
68
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
(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.
Troubled Debt Restructurings
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.
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 20 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.
69
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
Management’s determination of the allowance for loan losses considers changes and trends in the following qualitative
loss factors: loan administration, national and local economic conditions, new loan trends, past due and nonaccrual
loans, collateral values, credit concentrations and other internal and external factors such as competition, legal and
regulatory changes. Each qualitative factor is assigned a rating and a factor weight in determining the adjusted loss
factors used in management’s allowance for loan losses adequacy calculation.
Management exercises significant judgment in evaluating the relevant historical loss experience and the qualitative
factors. Management also monitors the differences between estimated and actual incurred loan losses for loans
considered impaired in order to evaluate the effectiveness of the estimation process and make any changes in the
methodology as necessary.
The following portfolio segments are considered in the allowance for loan loss analysis: one-to-four family residential
real estate, multi-family residential real estate, construction, commercial real estate, commercial business, and
consumer loans.
Residential real estate loans primarily consist of loans to individuals for the purchase or refinance of their primary
residence, with a smaller portion of the segment secured by non-owner-occupied residential investment properties and
multi-family residential investment properties. 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 farmland, office
buildings, warehouses, retail space and mixed-use buildings located in the Company’s primary lending area. Risks
related to commercial real estate lending are related to the market value of the property taken as collateral, the
underlying cash flows and general economic condition of the local real estate market. Repayment of these loans is
generally dependent on the ability of the borrower to attract tenants at lease rates or general business operating cash
flows that provide for adequate debt service and can be impacted by local economic conditions which impact vacancy
rates and the general level of business activity. The Company generally obtains loan guarantees from financially
capable parties for commercial real estate loans.
Commercial business loans include lines of credit to businesses, term loans and letters of credit secured by business
assets such as equipment, accounts receivable, inventory, or other assets excluding real estate and are generally made
to finance capital expenditures or fund operations. Commercial loans contain risks related to the value of the collateral
securing the loan and the repayment is primarily dependent upon the financial success and viability of the borrower.
As with commercial real estate loans, the Company generally obtains loan guarantees from financially capable parties
for commercial business loans.
Consumer loans consist primarily of home equity lines of credit and other loans secured by junior liens on the
borrower’s personal residence, 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.
70
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
Loan Charge-Offs
For portfolio segments other than consumer loans, the Company’s practice is to charge-off any loan or portion of a
loan when the loan is determined by management to be uncollectible due to the borrower’s failure to meet repayment
terms, the borrower’s deteriorating or deteriorated financial condition, the depreciation of the underlying collateral,
the loan’s classification as a loss by regulatory examiners, or for other reasons. A partial charge-off is recorded on a
loan when the collectability of a portion of the loan has been confirmed, such as when a loan is discharged in
bankruptcy, the collateral is liquidated, a loan is restructured at a reduced principal balance, or other identifiable events
that lead management to determine the full principal balance of the loan will not be repaid. A specific reserve is
recognized as a component of the allowance for estimated losses on loans individually evaluated for impairment.
Partial charge-offs on nonperforming and impaired loans are included in the Company’s historical loss experience
used to estimate the general component of the allowance for loan losses as discussed above. Specific reserves are not
considered charge-offs in management’s evaluation of the general component of the allowance for loan losses because
they are estimates and the outcome of the loan relationship is undetermined.
During 2020 and 2019, the Company recognized net partial charge-offs on loans totaling $2,000 and $10,000,
respectively. At December 31, 2020, the Company had seven loans with an aggregate recorded investment of
$280,000 and an aggregate unpaid principal balance of $430,000 on which net partial charge-offs of $159,000 had
been recorded. At December 31, 2019, the Company had seven loans with an aggregate recorded investment of
$284,000 and an aggregate unpaid principal balance of $517,000 on which net partial charge-offs of $167,000 had
been recorded.
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.
Foreclosed Real Estate
Foreclosed real estate includes formally foreclosed property and property obtained via a deed in lieu of foreclosure
that is currently held for sale. At the time of acquisition, foreclosed real estate is recorded at fair value less estimated
costs to sell, which becomes the property’s new basis. Any write-downs based on the property’s fair value at the date
of acquisition are charged to the allowance for loan losses. After acquisition, valuations are periodically performed
by management and property held for sale is carried at the lower of the new cost basis or fair value less costs to sell.
Costs incurred in maintaining foreclosed real estate and subsequent impairment adjustments to the carrying amount
of a property, if any, are included in net loss on foreclosed real estate in the accompanying consolidated statements of
income.
Real Estate Held for Sale
Real estate held for sale includes unimproved land originally purchased for future office development and is initially
recorded at fair value less estimated costs to sell, establishing a new cost basis. Real estate held for sale is subsequently
accounted for at the lower of cost or fair value less estimated costs to sell. Subsequent impairment loss adjustments
to the carrying amount of the property, if any, are reported in noninterest expense in the accompanying consolidated
statements of income.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. The Company uses the straight-line method
of computing depreciation at rates adequate to amortize the cost of the applicable assets over their estimated useful
71
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
lives. Maintenance and repairs are expensed as incurred. The cost and related accumulated depreciation of assets sold,
or otherwise disposed of, are removed from the related accounts and any gain or loss is included in earnings.
Cash Value of Life Insurance
Life insurance policies have been purchased on certain directors, officers and key employees to offset costs associated
with compensation and benefit programs. The Bank is the owner and is a joint or sole beneficiary of the policies.
Bank-owned life insurance is recorded at the amount that can be realized under the insurance contracts at the balance
sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at
settlement. Income from the increase in cash surrender value of the policies and income from the realization of death
benefits is reported in noninterest income.
Income Taxes
When income tax returns are filed, it is highly certain that some positions taken would be sustained upon examination
by the taxing authorities, while other positions are subject to some degree of uncertainty regarding the merits of the
position taken or the amount of the position that would be sustained. The Company recognizes the benefits of a tax
position in the financial statements of the period during which, based on all available evidence, management believes
it is more-likely-than-not (more than 50 percent probable) that the tax position would be sustained upon examination.
Income tax positions that meet the more-likely-than-not threshold are measured as the largest amount of income tax
benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The
portion of the benefits associated with the income tax positions claimed on income tax returns that exceeds the amount
measured as described above is reflected as a liability for unrecognized income tax benefits in the balance sheet, along
with any associated interest and penalties that would be payable to the taxing authorities, if there were an examination.
Interest and penalties associated with unrecognized income tax benefits are classified as additional income taxes in
the consolidated statements of income.
Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of
taxes currently due plus deferred income taxes. Income tax reporting and financial statement reporting rules differ in
many respects. As a result, there will often be a difference between the carrying amount of an asset or liability as
presented in the accompanying balance sheets and the amount that would be recognized as the tax basis of the same
asset or liability computed based on the effects of tax positions recognized, as described in the preceding paragraph.
These differences are referred to as temporary differences because they are expected to reverse in future years.
Deferred income tax assets are recognized for temporary differences where their future reversal will result in future
tax benefits. Deferred income tax assets are also recognized for the future tax benefits expected to be realized from
net operating loss or tax credit carry forwards. Deferred income tax liabilities are recognized for temporary differences
where their future reversal will result in the payment of future income taxes. Deferred income tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of
the deferred income 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 or 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.
Stock-Based Compensation
The Company has adopted the fair value based method of accounting for stock-based compensation prescribed in
Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 718-20,
Compensation – Stock Compensation, for its stock-based compensation plans.
72
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
Employee Stock Ownership Plan
The Bank has an ESOP covering substantially all employees. The cost of shares issued to the ESOP but not allocated
or committed to be released for allocation to participant accounts is presented in the consolidated balance sheets as a
reduction of stockholders’ equity. Compensation expense is recognized for the fair value of shares committed to be
released for allocation to participant accounts during the year. See Note 13.
Advertising Costs
Advertising costs are charged to operations when incurred.
Comprehensive Income
Comprehensive income consists of reported net income and other comprehensive income. Other comprehensive
income, recognized as a separate component of equity, includes the change in unrealized gains or losses on securities
available for sale. Amounts reclassified out of unrealized gains and losses on securities available for sale included in
accumulated other comprehensive income or loss are included in net gain on sale of securities in the consolidated
statements of income.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as
liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Earnings per Common Share
Basic earnings per common share is computed by dividing net income available to common shareholders by the
weighted average number of shares of common stock outstanding during the periods presented. Diluted earnings per
common share include the dilutive effect of additional potential common shares issuable under stock options,
restricted stock and other potentially dilutive securities outstanding. Earnings and dividends per share are restated for
stock splits and dividends through the date of issuance of the financial statements. Unallocated ESOP shares and
nonvested restricted stock shares are not included as outstanding for either basic or diluted earnings per share
calculations.
Recent Accounting Pronouncements
The following are summaries of recently issued accounting pronouncements that impact the accounting and reporting
practices of the Company:
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,
73
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
and interim periods within fiscal years beginning after December 15, 2021. Early application of the amendments in
the ASU is permitted. In June 2020, the FASB issued ASU 2020-05 which delayed the effective date of ASU 2016-
02 for nonpublic entities until fiscal years beginning after December 15, 2021, and interim periods within fiscal years
beginning after December 15, 2022. Early application of the amendments in the ASU continues to be permitted. In
July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements. This ASU amended the
new leases standard to give entities another option for transition and to provide lessors with a practical expedient. The
transition option allows entities to not apply the new leases standard in the comparative periods they present in their
financial statements in the year of adoption. The practical expedient provides lessors with an option to not separate
non-lease components from the associated lease components when certain criteria are met and requires them to
account for the combined component in accordance with the new revenue standard if the associated non-lease
components are the predominant components. The amendments have the same effective date as ASU 2016-02. In
March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842), Codification Improvements. This ASU amended
the new leases standard to reinstate the exception in Leases (Topic 842) for lessors that are not manufacturers or
dealers in regards to determining the fair value of the underlying assets. Specifically, those lessors will use their cost,
reflecting any volume or trade discounts that may apply, as the fair value of the underlying asset unless a significant
lapse of time occurs between the acquisition of the underlying asset and lease commencement, in which case, those
lessors will be required to apply the definition of fair value (exit price) in Fair Value Measurements and Disclosures
(Topic 820).
In addition, this ASU amended the new leases standard to clarify the presentation on the statement of cash flows
principal payments received under leases for depository and lending institutions for Sales-Type and Direct Financing
Leases. Specifically for these entities and leases, all principal payments received under leases will be presented within
investing activities on the statement of cash flows. Finally, this ASU amended the new leases standard to explicitly
provide an exception to paragraph 250-10-50-3 interim disclosure requirements for an entity electing the transition
method of implementation. The amendments have the same effective date as ASU 2016-02. The effect of the adoption
of these ASUs will depend on leases at the time of adoption. Once adopted, the Company expects to report higher
assets and liabilities as a result of including right-of-use assets and lease liabilities related to certain banking offices
under noncancelable operating lease agreements; however, based on current leases, the adoption is expected to
increase our consolidated balance sheets by less than 5.0% and not to have a material impact on our regulatory capital
ratios.
The FASB originally issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) as amended by
ASU 2018-19, ASU 2019-04 and ASU 2019-05, in June 2016. This ASU, commonly referred to as the current
expected credit loss methodology (“CECL”), replaces the incurred loss methodology for recognizing credit losses
under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader
range of reasonable and supportable information to inform credit loss estimates. Under the new guidance, an entity
will measure all expected credit losses for financial instruments held at the reporting date based on historical
experience, current conditions and reasonable and supportable forecasts. The expected loss model will apply to loans
and leases, unfunded lending commitments, held-to-maturity debt securities and other debt instruments measured at
amortized cost. The impairment model for available-for-sale debt securities will require the recognition of credit losses
through a valuation allowance when fair value is less than amortized cost, regardless of whether the impairment is
considered to be other-than-temporary. ASU 2019-05, issued in April 2019, further provides entities that have certain
financial instruments measured at amortized cost that have credit losses with an option to irrevocably elect the fair
value option in Subtopic 825-10, upon adoption of Topic 326. The fair value option applies to available-for-sale debt
securities. In November 2019, the FASB issued ASU No. 2019-10 which delayed the effective date of ASU 2016-13
for smaller reporting companies, as defined by the Securities and Exchange Commission (“SEC’) and other non-SEC
reporting entities to fiscal years beginning after December 15, 2022, including interim periods within those fiscal
periods. Early adoption is permitted as of fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. The Company is a smaller reporting company as defined by the SEC, and currently does not
intend to early adopt CECL. Once adopted, the Company expects its allowance for loan losses to increase through a
one-time adjustment to retained earnings; however, until its evaluation is complete, the magnitude of the increase will
be unknown.
74
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic
310-20): Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period
for certain callable debt securities held at a premium. The standard will take effect for public entities for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2018. For nonpublic business entities the
amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within
fiscal years beginning after December 15, 2020. In October 2020, the FASB issued ASU No. 2020-08, Codification
Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs. The ASU amends the
guidance under Subtopic 310-20 to provide that for each reporting period, to the extent that the amortized cost basis
of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess (that
is, the premium) shall be amortized to the next call date unless the premium of the individual callable debt security is
amortized based on consideration of estimated prepayments. The standard will take effect for public entities for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is not
permitted for public entities. For nonpublic business entities the amendments in this ASU are effective for fiscal years
beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early
application is permitted for nonpublic business entities for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2020. The amendments of ASU No. 2020-08 do not change the effective dates for ASU
No. 2017-08. The adoption of these ASUs is not expected to have a material impact on the Company's consolidated
financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements
to Nonemployee Share-Based Payment Accounting. This ASU amends the accounting for shared-based payments
awards to nonemployees to align with the accounting for employee awards. Under the new guidance, the existing
employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively
a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost
of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In
addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for
nonemployee awards. For public entities the amendments in this ASU are effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. For nonpublic business entities the
amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within
fiscal years beginning after December 15, 2020. The adoption of the ASU effective January 1, 2020 did not have a
material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement. This ASU removes, modifies and adds certain disclosure requirements
for fair value measurements. Among other changes, entities will no longer be required to disclose the amount of and
reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between
levels and the valuation processes for Level 3 fair value measurements, but will be required to disclose the range and
weighted average of significant observable inputs used to develop Level 3 fair value measurements held at the end of
the reporting period. The amendments in this ASU are effective for all entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the ASU.
The adoption of the ASU effective January 1, 2020 did not have a material impact on the Company’s consolidated
financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for
Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions
to the general principles in Topic 740, Income Taxes. The amendments also improve consistent application of and
simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public entities this
ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.
For nonpublic entities this ASU is effective for fiscal years beginning after December 31, 2021, and interim periods
within fiscal years beginning after December 15, 2022. The adoption of the ASU is not expected to have a material
impact on the Company’s consolidated financial statements.
75
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
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.
(2) RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is typically required to maintain reserve balances on hand and with the Federal Reserve Bank (“FRB”).
These funds are unavailable for investment but the reserve balances maintained with the FRB are interest-earning. In
response to the COVID-19 pandemic, the FRB reduced the reserve requirement to 0% effective March 26, 2020. The
average amount of those reserve balances for the year ended December 31, 2020, and 2019 were approximately
$72,000 and $423,000, respectively.
76
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
(3) INVESTMENT SECURITIES
Investment securities have been classified in the consolidated balance sheets according to management’s intent.
Investment securities at December 31, 2020 and 2019 are summarized as follows:
(In thousands)
December 31, 2020
Securities available for sale:
Mortgage-backed securities:
Agency MBS
Agency CMO
Other debt securities:
Municipal obligations
Gross
Gross
Amortized Unrealized Unrealized
Cost
Gains
Losses
Fair
Value
$ 10,094 $
27,588
37,682
146 $
207
353
— $ 10,240
27,771
24
38,011
24
62,497
3,954
6
66,445
Total securities available for sale
$ 100,179 $
4,307 $
30 $ 104,456
Securities held to maturity:
Mortgage-backed securities:
Agency MBS
$
31 $
— $
— $
Total securities held to maturity
$
31 $
— $
— $
31
31
December 31, 2019
Securities available for sale:
Mortgage-backed securities:
Agency MBS
Agency CMO
Other debt securities:
Municipal obligations
$
9,803 $
10,520
20,323
3 $
209
212
36 $
17
53
9,770
10,712
20,482
36,390
1,649
104
37,935
Total securities available for sale
$ 56,713 $
1,861 $
157 $ 58,417
Securities held to maturity:
Mortgage-backed securities:
Agency MBS
$
42 $
— $
— $
Total securities held to maturity
$
42 $
— $
— $
42
42
77
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
The amortized cost and fair value of debt securities as of December 31, 2020 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 and thus the contractual maturities are not presented below.
(In thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
MBS and CMO
— $
Available for Sale
Fair
Value
Amortized
Cost
$
— $
4,189
6,956
51,352
62,497
37,682
4,339
7,598
54,508
66,445
38,011
Cost
Held to Maturity
Amortized Fair
Value
—
—
—
—
—
31
— $
—
—
—
—
31
Information pertaining to securities with gross unrealized losses at December 31, 2020 and 2019, aggregated by
investment category and the length of time that individual securities have been in a continuous loss position, follows:
$ 100,179 $ 104,456 $
31 $
31
(Dollars in thousands)
December 31, 2020
Securities available for sale:
Continuous loss position less than 12 months:
Agency CMO
Municipal obligations
Total less than 12 months
Number of
Investment
Positions
Fair
Value
Gross
Unrealized
Losses
9 $ 16,223 $
2
11
1,494
17,717
24
6
30
Total securities available for sale
11 $ 17,717 $
30
December 31, 2019
Securities available for sale:
Continuous loss position less than 12 months:
Agency MBS
Agency CMO
Municipal obligations
Total less than 12 months
Continuous loss position more than 12 months:
Agency MBS
Agency CMO
Total more than 12 months
Total securities available for sale
3 $
2
10
15
3,304 $
1,942
7,030
12,276
9
6
104
119
6
1
7
3,696
1,089
4,785
27
11
38
22 $ 17,061 $
157
At December 31, 2020 and 2019, the Company had no debt securities in the held to maturity classification in a loss
position. At December 31, 2020 and 2019, the debt securities in the available for sale classification in a loss position
had depreciated approximately 0.17% and 0.91%, respectively, from the amortized cost basis. All of the debt securities
78
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
in a loss position at December 31, 2020 and 2019 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.
While management does not anticipate any credit-related impairment losses at December 31, 2020, additional
deterioration in market and economic conditions, including those related to the COVID-19 pandemic, may have an
adverse impact on credit quality in the future.
During the year ended December 31, 2020, the Company realized gross gains of $109,000 and gross losses of $5,000
on the sale of securities available for sale. During the year ended December 31, 2019, the Company realized gross
gains of $7,000 on the sale of securities available for sale.
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31, 2020 and 2019 consisted of the following:
(In thousands)
Real estate mortgage loans:
One-to-four family residential
Multi-family residential
Residential construction
Commercial real estate
Commercial real estate construction
Commercial business loans
Consumer loans
Total loans
Deferred loan origination fees and costs, net
Allowance for loan losses
Loans, net
2020
2019
$
66,130 $
8,964
2,083
30,171
851
5,212
1,442
114,853
71,606
9,260
367
32,311
2,867
6,456
1,875
124,742
(5)
(1,589)
28
(1,498)
$ 113,259 $ 123,272
The Company has entered into loan transactions with certain directors, officers and their affiliates (related parties). In
the opinion of management, such indebtedness was incurred in the ordinary course of business on substantially the
same terms as those prevailing at the time for comparable transactions with other persons and does not involve more
than normal risk of collectability or present other unfavorable features.
79
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
The following represents the aggregate activity for related party loans during the year ended December 31, 2020. The
beginning balance has been adjusted to reflect new directors and officers, as well as directors and officers that are no
longer with the Company.
(In thousands)
Balance, January 1, 2020 (as adjusted)
New loans
Payments
Balance, December 31, 2020
$
1,389
147
(77)
$
1,459
The Company has pledged certain loans to secure future advances or other borrowings from the FHLB. At
December 31, 2020 and 2019, the eligible blanket collateral included residential mortgage loans with a carrying value
of approximately $63.9 million and $70.4 million, respectively. See Note 9.
The following table provides the components of the Company’s recorded investment in loans at December 31, 2020:
One-to-
Four
Family
Residential Residential Construction Real Estate Business
Multi-
Family
Commercial Commercial
Consumer
Total
Recorded Investment in
Loans:
Principal loan balance
$ 66,130 $ 8,964 $
2,934 $ 30,171 $
5,212 $ 1,442 $ 114,853
(In thousands)
Accrued interest receivable
Net deferred loan fees/costs
183
7
13
(6)
7
92
(12)
(40)
14
11
5
35
314
(5)
Recorded investment in loans
$ 66,320 $ 8,971 $
2,929 $ 30,223 $
5,237 $ 1,482 $ 115,162
The following table provides the components of the Company’s recorded investment in loans at December 31, 2019:
One-to-
Four
Family
Residential Residential Construction Real Estate Business
Multi-
Family
Commercial Commercial
Consumer
Total
Recorded Investment in
Loans:
Principal loan balance
$ 71,606 $ 9,260 $
3,234 $ 32,311 $
6,456 $ 1,875 $ 124,742
(In thousands)
Accrued interest receivable
254
25
11
Net deferred loan fees/costs
23
(11)
(36)
88
(6)
26
10
6
48
410
28
Recorded investment in loans
$ 71,883 $ 9,274 $
3,209 $ 32,393 $
6,492 $ 1,929 $ 125,180
80
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
An analysis of the allowance for loan losses and recorded investment in loans as of and for the year ended December
31, 2020 is as follows:
One-to-
Four
Family
Multi-
Family
Commercial Commercial
Allowance for loan losses:
Beginning balance
Provisions
Charge-offs
Recoveries
Residential Residential Construction Real Estate Business
Consumer
Total
$
955 $
47
(14)
4
83 $
15
—
—
44 $
11
—
—
289 $
17
—
—
102 $
32
(21)
—
25 $
10
(18)
8
1,498
132
(53)
12
(In thousands)
Ending balance
$
992 $
98 $
55 $
306 $
113 $
25 $
1,589
Ending allowance balance attributable to
loans:
Individually evaluated for impairment
$
21 $
— $
— $
8 $
26 $
— $
55
Collectively evaluated for impairment
971
98
55
298
87
25
1,534
Ending balance
$
992 $
98 $
55 $
306 $
113 $
25 $
1,589
Recorded Investment in Loans as
Evaluated for Impairment:
Individually evaluated for impairment
$
1,489 $
— $
— $
281 $
382 $
— $
2,152
Collectively evaluated for impairment
64,831
8,971
2,929
29,942
4,855
1,482
113,010
Ending balance
$
66,320 $
8,971 $
2,929 $
30,223 $
5,237 $
1,482 $ 115,162
81
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
An analysis of the allowance for loan losses and recorded investment in loans as of and for the year ended December
31, 2019 is as follows:
One-to-
Four
Family
Multi-
Family
Commercial Commercial
Allowance for loan losses:
Beginning balance
Provisions
Charge-offs
Recoveries
Residential Residential Construction Real Estate Business
Consumer
Total
$
1,012 $
(47)
(58)
48
59 $
24
—
—
(In thousands)
48 $
(4)
—
—
259 $
30
—
—
98 $
4
—
—
28 $
5
(17)
9
1,504
12
(75)
57
Ending balance
$
955 $
83 $
44 $
289 $
102 $
25 $
1,498
Ending allowance balance attributable to
loans:
Individually evaluated for impairment
$
25 $
— $
— $
19 $
34 $
— $
78
Collectively evaluated for impairment
930
83
44
270
68
25
1,420
Ending balance
$
955 $
83 $
44 $
289 $
102 $
25 $
1,498
Recorded Investment in Loans as
Evaluated for Impairments:
Individually evaluated for impairment
$
1,431 $
— $
— $
600 $
412 $
— $
2,443
Collectively evaluated for impairment
70,452
9,274
3,209
31,793
6,080
1,929
122,737
Ending balance
$
71,883 $
9,274 $
3,209 $
32,393 $
6,492 $
1,929 $ 125,180
At December 31, 2020 and 2019, management applied qualitative factor adjustments to each portfolio segment as
they determined that the historical loss experience was not indicative of the level of risk in the remaining balance of
those portfolio segments. As part of their analysis of qualitative factors, management considers changes in
underwriting standards, economic conditions, trends in the volume and term of new loan originations, changes in
lending management, past due loan trends, the quality of the loan review system, collateral valuations, loan
concentrations and other internal and external factors. During the year ended December 31, 2020, management
adjusted the qualitative factors due to economic uncertainties related to the COVID-19 pandemic. At December 31,
2020, there was still considerable uncertainty about how severely the COVID-19 pandemic has impacted the loan
portfolio. As a result, management has increased the allowance qualitative factor adjustments for each portfolio
segment while considering the potential length of the pandemic, continued elevated unemployment rates, the impact
of further state and local restrictions, the impact of government stimulus activities and the timeline for economic
recovery.
At December 31, 2020, the Company's allowance for loan losses totaled $1.6 million, of which $1.5 million related
to qualitative factor adjustments. At December 31, 2019, the Company's allowance for loan losses totaled $1.5 million,
82
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
of which $1.4 million related to qualitative factor adjustments. These changes were made to reflect management's
estimates of inherent losses in the loan portfolio at December 31, 2020 and 2019.
The following table summarizes the Company’s impaired loans as of and for the year ended December 31, 2020. The
Company did not recognize any interest income on impaired loans using the cash receipts method of accounting for
the year ended December 31, 2020.
Loans with no related allowance recorded:
One-to-four family residential
Commercial real estate
Commercial business
Loans with an allowance recorded:
One-to-four family residential
Commercial real estate
Commercial business
Total:
One-to-four family residential
Commercial real estate
Commercial business
Recorded
Investment
Unpaid
Principal
Balance
Average
Recorded
Investment
Related
Allowance
(In thousands)
Interest
Income
Recognized
$
$
1,265 $
96
15
1,376 $
1,380 $
88
16
1,484 $
— $
—
—
— $
1,204 $
229
25
1,458 $
$
$
224 $
185
367
776 $
223 $
195
381
799 $
21 $
8
26
55 $
249 $
313
376
938 $
$
$
1,489 $
281
382
2,152 $
1,603 $
283
397
2,283 $
21 $
8
26
55 $
1,453 $
542
401
2,396 $
5
—
1
6
8
15
20
43
13
15
21
49
83
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
The following table summarizes the Company’s impaired loans as of and for the year ended December 31, 2019. The
Company did not recognize any interest income on impaired loans using the cash receipts method of accounting for
the year ended December 31, 2019.
Loans with no related allowance recorded:
One-to-four family residential
Commercial real estate
Commercial business
Consumer
Loans with an allowance recorded:
One-to-four family residential
Commercial real estate
Commercial business
Consumer
Total:
One-to-four family residential
Commercial real estate
Commercial business
Consumer
Recorded
Investment
Unpaid
Principal
Balance
Average
Recorded
Investment
Related
Allowance
(In thousands)
Interest
Income
Recognized
$
$
1,172 $
235
32
—
1,439 $
1,457 $
389
32
—
1,878 $
— $
—
—
—
— $
1,310 $
341
41
2
1,694 $
$
$
259 $
365
380
—
1,004 $
284 $
364
426
—
1,074 $
25 $
19
34
—
78 $
338 $
333
400
—
1,071 $
$
$
1,431 $
600
412
—
2,443 $
1,741 $
753
458
—
2,952 $
25 $
19
34
—
78 $
1,648 $
674
441
2
2,765 $
21
3
2
—
26
11
18
23
—
52
32
21
25
—
78
84
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
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 December 31, 2020 and 2019:
December 31, 2020:
One-to-four family residential
Commercial real estate
Total
December 31, 2019:
One-to-four family residential
Commercial real estate
Total
Nonaccrual
Loans
Loans 90+ Days
Past Due
Still Accruing
(In thousands)
Total
Nonperforming
Loans
$
1,160 $
96
— $
—
1,160
96
$
1,256 $
— $
1,256
$
947 $
235
— $
—
947
235
$
1,182 $
— $
1,182
The following table presents the aging of the recorded investment in loans at December 31, 2020 and 2019:
December 31, 2020
One-to-four family residential
Multi-family residential
Construction
Commercial real estate
Commercial business
Consumer
30‑59 Days 60‑89 Days Over 90 Days Total
Past Due Past Due Past Due
Past Due Current
Total
Loans
(In thousands)
$ 1,097 $
—
—
27
—
11
560 $
—
—
—
—
—
75 $ 1,732 $ 64,588 $ 66,320
8,971
—
2,929
—
30,223
—
5,237
—
1,482
—
8,971
2,929
30,196
5,237
1,471
—
—
27
—
11
Total
$ 1,135 $
560 $
75 $ 1,770 $ 113,392 $ 115,162
December 31, 2019
One-to-four family residential
Multi-family residential
Construction
Commercial real estate
Commercial business
Consumer
$ 1,425 $
—
152
477
—
7
575 $
—
—
134
—
—
238 $ 2,238 $ 69,645 $ 71,883
9,274
3,209
32,393
6,492
1,929
9,274
3,057
31,782
6,492
1,922
—
152
611
—
7
—
—
—
—
—
Total
$ 2,061 $
709 $
238 $ 3,008 $ 122,172 $ 125,180
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:
85
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
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.
Loans not meeting the criteria above that are analyzed individually as part of the above-described process are
considered to be pass rated loans.
The following table presents the recorded investment in loans by risk category as of December 31, 2020 and 2019:
December 31, 2020
Pass
Special mention
Substandard
Doubtful
Loss
One-to-
Four
Family
Residential
Multi-
Family
Residential
Commercial Commercial
Construction Real Estate
(In thousands)
Business
Consumer
Total
$
64,992 $
—
1,328
—
—
7,503 $
1,468
—
—
—
2,929 $
—
—
—
—
30,105 $
—
118
—
—
5,237 $
—
—
—
—
1,482 $ 112,248
1,468
1,446
—
—
—
—
—
—
Total
$
66,320 $
8,971 $
2,929 $
30,223 $
5,237 $
1,482 $ 115,162
December 31, 2019
Pass
Special mention
Substandard
Doubtful
Loss
$
70,611 $
—
1,272
—
—
9,274 $
—
—
—
—
3,209 $
—
—
—
—
31,949 $
—
444
—
—
6,080 $
—
412
—
—
1,929 $ 123,052
—
2,128
—
—
—
—
—
—
Total
$
71,883 $
9,274 $
3,209 $
32,393 $
6,492 $
1,929 $ 125,180
86
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
Troubled Debt Restructurings
The following table summarizes the Company’s TDRs by accrual status at December 31, 2020 and 2019:
December 31, 2020
One-to-four family residential
Commercial real estate
Commercial business
Total
December 31, 2019
One-to-four family residential
Commercial real estate
Commercial business
Total
Accruing Nonaccrual Total
(In thousands)
Related
Allowance for
Loan Losses
$ 329 $
185
382
226 $ 555 $
50
—
235
382
$ 896 $
276 $ 1,172 $
$ 484 $
365
412
— $ 484 $
137
—
502
412
$ 1,261 $
137 $ 1,398 $
21
8
26
55
25
19
34
78
The following table summarizes information in regard to TDRs that were restructured during the year ended
December 31, 2020:
One-to-four family residential
Commercial real estate
Total
Pre-Modification Post-Modification
Number of Outstanding
Contracts
Balance
Outstanding
Balance
(Dollars in thousands)
5 $
1
230 $
51
6 $
281 $
230
51
281
The following table summarizes information in regard to TDRs that were restructured during the year ended
December 31, 2019:
Commercial real estate
Total
Pre-Modification Post-Modification
Number of Outstanding
Contracts
Balance
Outstanding
Balance
(Dollars in thousands)
2 $
231 $
2 $
231 $
231
231
For TDRs that were restructured during the year ended December 31, 2020, four loans were modified related to the
COVID-19 pandemic, and two loans were related to bankruptcies. For TDRs that were restructured during the year
ended December 31, 2019, the terms of modifications included the renewal or refinancing of loans where the debtor
was unable to access funds elsewhere at a market interest rate for debt with similar risk characteristics. No charge-
87
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
offs or provisions for loan losses were recorded as a result of TDRs during the years ended December 31, 2020 and
2019.
At December 31, 2020 and 2019, the Company had no commitments to lend additional funds to debtors whose loan
terms have been modified in a TDR.
There were no TDRs modified within the previous 12 months for which there was a subsequent 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 years ended December 31, 2020 and 2019. 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. The Company did not recognize
any provisions for loan losses or net charge-offs as a result of defaulted TDRs for the years ended December 31, 2020
and 2019.
On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and
Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”. The guidance encourages
financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations
because of the effects of COVID-19. The guidance goes on to explain that in consultation with the FASB staff that
the federal banking agencies concluded that short-term modifications (e.g., six months) made on a good faith basis to
borrowers who were current as of the implementation date of a relief program are not TDRs. The CARES Act also
addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were
current as of December 31, 2019 are not TDRs. The Consolidated Appropriations Act of 2021 further extended the
relief from TDR accounting for qualified modifications to the earlier of January 1, 2022, or 60 days after the national
emergency concerning COVID-19 terminates. The Bank has applied this guidance related to payment deferrals and
other COVID-19 related loan modifications made through December 31, 2020. As of December 31, 2020, $16.2
million in loans were outstanding for which the Bank had granted payment extensions of primarily one to three
months. Of that total, $15.6 million had resumed payments and were not considered past due as of December 31,
2020.
(5) FORECLOSED REAL ESTATE
The Company did not have any foreclosed residential real estate properties where physical possession has occurred at
December 31, 2020 and 2019.
At December 31, 2020, the recorded investment in consumer mortgage loans collateralized by residential real estate
property in the process of foreclosure was $36,000. At December 31, 2019, there were no consumer mortgage loans
collateralized by residential real estate property in the process of foreclosure.
There was no net loss or gain on foreclosed real estate for the years ended December 31, 2020 and 2019.
(6) REAL ESTATE HELD FOR SALE
The Company reclassified from premises and equipment the $325,000 carrying value of land originally held for
development of a future branch office to real estate held for sale in June 2017 upon listing the property for sale. Based
on subsequent impairment assessments, impairment losses of $37,000 and $104,000 were recognized and are reported
as a component of noninterest expense in the accompanying consolidated statements of income for years 2020 and
2019, respectively.
88
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
(7) PREMISES AND EQUIPMENT
Premises and equipment as of December 31, 2020 and 2019 consisted of the following:
2020
2019
(In thousands)
Land and land improvements
Office buildings
Furniture, fixtures and equipment
Less accumulated depreciation
$
507 $
2,227
1,178
3,912
2,014
507
2,223
1,290
4,020
2,146
Total premises and equipment, net of accumulated depreciation
$ 1,898 $ 1,874
The carrying value of premises and equipment are assessed for impairment whenever events and circumstances
indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to
result from its use and eventual disposition. The factors considered by management in performing this assessment
include current operating results, trends and prospects, the manner in which the property is used, and the effects of
obsolescence, demand, competition, and other economic factors.
(8) DEPOSITS
The aggregate amount of time deposit accounts with balances that met or exceeded the Federal Deposit Insurance
Corporation ("FDIC") insurance limit of $250,000 was approximately $3.3 million and $8.4 million at December 31,
2020 and 2019, respectively.
At December 31, 2020, scheduled maturities of time deposits were as follows:
2021
2022
2023
2024
2025
Total
(In thousands)
$
22,610
9,809
5,746
706
5,002
$
43,873
The Company held deposits of approximately $3.5 million and $3.2 million for related parties at December 31, 2020
and 2019, respectively.
Interest expense on deposits is summarized as follows:
(In thousands)
Savings and interest-bearing demand deposits
Time deposits
Total
2020
2019
$
120 $
642
103
732
$
762 $
835
89
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
(9) ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 2020 and 2019, the Bank had $11.0 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 which matures on June 27, 2024 and bears an interest rate of 1.73%. On December 30, 2020, the Company
borrowed $1.0 million from the FHLB as a fixed-rate bullet advance, bearing an interest rate of 0.26% and matured
on January 6, 2021. The advances are secured under a blanket collateral agreement with the FHLB. At December 31,
2020, the carrying value of mortgage loans pledged as security for advances was $63.9 million.
(10) LEASE COMMITMENT
During 2019, the Company entered into a lease agreement expiring in July 2022 for loan production office space. At
December 31, 2020, minimum lease payments remaining under the lease are $27,000 for the year ending December
31, 2021 and $14,000 for the year ending December 31, 2022.
Total rental expense for the operating lease for each of the years ended December 31, 2020 and 2019 was $27,000.
(11) INCOME TAXES
The components of consolidated income tax expense for the years ended December 31, 2020 and 2019 were as
follows:
(In thousands)
Current
Deferred
Total
2020
2019
$
$
50 $
(15)
35 $
89
(4)
85
The reconciliation of income tax expense with the amount which would have been provided at the federal statutory
rate of 21% for the years ended December 31, 2020 and 2019, follows:
(In thousands)
Provisions at federal statutory rate
State income tax-net of federal tax benefit
Municipal interest income
Bank-owned life insurance income
Other
Total
Effective tax rate
2020
2019
$
$
257 $
27
(246)
(14)
11
35 $
219
25
(162)
(15)
18
85
2.9 %
8.1 %
Indiana tax laws enacted in 2013 and 2014 decreased the Indiana financial institutions franchise tax rate beginning in
2014 and ending in 2023. Deferred taxes have been adjusted to reflect the newly enacted rates and the period in which
temporary differences are expected to reverse.
90
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2020 and 2019 were
as follows:
(In thousands)
Deferred tax assets (liabilities):
Director deferred compensation plan
Allowance for loan losses
Valuation allowance - real estate held for sale
Nonaccrual loan interest income
Equity incentive plans
Employee stock ownership plan
Net deferred loan costs
Other
Total deferred tax assets
Depreciation
FHLB stock dividends
Prepaid expenses
Unrealized gain on securities available for sale
Net deferred loan costs
Total deferred tax liabilities
2020
2019
$
39 $
386
105
57
18
20
2
7
634
(79)
(18)
(22)
(1,064)
—
(1,183)
46
366
97
57
13
12
—
8
599
(54)
(18)
(20)
(424)
(7)
(523)
Net deferred tax asset (liability)
$
(549) $
76
At December 31, 2020 and 2019, the Company had no liability for unrecognized income tax benefits related to
uncertain tax positions and does not anticipate any increase in the liability for unrecognized tax benefits during the
next twelve months. The Company believes that its income tax positions would be sustained upon examination and
does not anticipate any adjustments that would result in a material change to its financial position or results of
operations. The Company files a consolidated U.S. federal income tax return and a combined Indiana state income
tax return. Returns filed in these jurisdictions for tax years ended on or after December 31, 2017 are subject to
examination by the relevant taxing authorities.
Prior to October 1, 1996, the Company was permitted by the Internal Revenue Code to deduct from taxable income
an annual addition to a statutory bad debt reserve subject to certain limitations. Retained earnings at December 31,
2020 and 2019 include approximately $1.4 million of cumulative deductions for which no deferred federal income
tax liability has been recorded. Reduction of these reserves for purposes other than tax bad debt losses or adjustments
arising from carry back of net operating losses would create income for tax purposes subject to the then current
corporate income tax rate. The unrecorded deferred tax liability on these amounts was approximately $294,000 at
December 31, 2020 and 2019.
(12) DEFERRED DIRECTORS COMPENSATION PLAN
The Company has a deferred compensation plan whereby certain directors defer into an account with the Company a
portion of their monthly director fees to provide income for a period of ten years following retirement. The benefits
under the contracts are fully vested and the Company accrues the interest cost on the deferred obligation. The balance
of the accrued benefit for the plan was $163,000 and $194,000 at December 31, 2020 and 2019, respectively. Deferred
compensation expense was $12,000 and $13,000 for the years ended December 31, 2020 and 2019, respectively.
91
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
(13) EMPLOYEE BENEFIT PLANS
Defined Contribution Plan:
The Company has a qualified defined contribution plan available to all eligible employees. The plan allows
participating employees to make tax-deferred contributions under Internal Revenue Code Section 401(k). The
Company contributed $73,000 and $61,000 to the plan for the years ended December 31, 2020 and 2019, respectively.
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, the Company’s fiscal year end.
As shares are committed to be released for allocation to participant accounts from collateral, the Company reports
compensation expense equal to the average fair value of shares committed to be released during the year with a
corresponding credit to stockholders’ equity and the shares become outstanding for earnings per share computations.
The compensation expense is accrued throughout the year.
Compensation expense recognized for the years ended December 31, 2020 and 2019 was $147,000 and $146,000,
respectively. Company common stock held by the ESOP trust at December 31, 2020 and 2019 was as follows:
Allocated shares
Unallocated shares
Total ESOP shares
2020
2019
27,863
176,926
16,498
188,291
204,789
204,789
Fair value of unallocated shares
$ 2,550,000 $ 2,529,000
(14) STOCK-BASED COMPENSATION PLANS
The Company’s stock-based compensation plans are described below. The compensation cost that has been charged
against income for those plans was $220,000 and $183,000 for 2020 and 2019, respectively.
The total income tax benefit recognized in the consolidated statements of income for stock-based compensation
arrangements was $46,000 and $28,000 for the years ended December 31, 2020 and 2019, respectively.
The Company accounts for any forfeitures when they occur, and any previously recognized compensation expense
for an award is reversed in the period the award is forfeited. The Company generally reissues treasury shares or issues
new shares from its authorized but unissued shares under the plans.
92
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
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 exchange ratio applied in the Conversion, were approved for awards of stock options and restricted stock. As of
December 31, 2020, on an adjusted basis, awards for stock options totaling 93,254 shares and awards for restricted
stock totaling 34,250 shares of Company common stock have been granted, net of any forfeitures, to participants in
the 2010 Plan. The 2010 Plan expired July 27, 2020.
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 December 31, 2020, awards for restricted stock totaling 18,500 shares of the
Company common stock have been granted to participants in the 2019 Plan. At December 31, 2020, no awards of
stock options have been granted under the 2019 Plan.
The vesting dates for stock option awards are determined by the Compensation Committee appointed by the board of
directors. All unvested options become exercisable upon an option holder’s death or disability and in the event of a
change in control. Option prices may not be less than the fair market value of the underlying stock at the date of the
grant of the award. Restricted stock awards generally vest over a period of five years. The Plan provides that unvested
restricted stock awards become fully vested upon a holder’s death or disability and in the event of a change in control.
Compensation expense is recognized over the requisite service period with a corresponding credit to stockholders’
equity. The requisite service period for restricted shares is the vesting period.
Stock Options:
The fair market value of stock options granted during 2019 under the 2010 Plan was estimated at the date of grant
using the Black-Scholes option pricing model. Expected volatility is based on historical volatility of the Company’s
stock. The expected term of options granted represents the period of time that options are expected to be outstanding
and is based on the average of the vesting term and the original contractual term as the Company does not have
sufficient historical exercise data to provide a reasonable basis on which to estimate the expected term due to the
limited period of time its common shares have been publicly traded. The risk-free rate for the expected life of the
options is based on the U.S. Treasury yield curve in effect at the time of grant.
The following significant assumptions were used during 2019 to estimate the fair value of stock options granted:
Expected volatility
Expected term (in years)
Expected dividends
Risk-free rate
20.2 %
7.5
0.60 %
1.86 %
The weighted-average grant-date fair value of options granted during the year ended December 31, 2019 was $3.23.
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MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
A summary of option activity under the 2010 Plan as of December 31, 2020, and changes during the year then ended
is presented below:
Outstanding at beginning of year
Granted
Exercised
Forfeited or expired
Outstanding at end of period
Vested and expected to vest
Exercisable at end of period
Weighted
Number
of
Shares
Weighted Average
Average
Exercise
Price
Remaining Aggregate
Intrinsic
Contractual
Value
Term
93,488 $ 13.17
—
—
7.03
—
—
(234)
93,254 $ 13.18
8.8 $114,000
93,254 $ 13.18
8.8 $114,000
44,518 $ 13.01
8.6 $ 62,000
At December 31, 2020, there was $157,000 of unrecognized compensation expense related to nonvested stock options.
That compensation expense is expected to be recognized over a weighted-average period of 3.0 years.
Restricted Stock:
A summary of the activity for the Company’s nonvested restricted shares during the year ended December 31, 2020,
is presented below:
Nonvested at beginning of year
Granted
Vested
Forfeited
Nonvested at end of period
Weighted
Average
Number of
Shares
Grant-Date
Fair Value
22,553 $
18,500
(10,911)
—
13.32
14.74
13.86
—
30,142 $
14.00
The total fair value of shares vested during each of the years ended December 31, 2020 and 2019, was $160,000 and
$115,000, respectively. At December 31, 2020, unrecognized compensation expense related to nonvested restricted
shares was $422,000. That compensation expense is expected to be recognized over the remaining weighted average
vesting period of 3.2 years.
(15) COMMITMENTS AND CONTINGENCIES
COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which
continues to spread throughout the United States and around the world. The COVID-19 pandemic has adversely
affected, and may continue to adversely affect economic activity globally, nationally and locally. COVID-19 and
94
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the
economies and financial markets of many countries, including the geographical area in which the Company operates.
Such events also may adversely affect business and consumer confidence, generally, and the Company and its
customers, and their respective suppliers, vendors and processors, may be adversely affected.
Due to the COVID-19 pandemic market interest rates have declined significantly, as the Federal Open Market
Committee reduced the targeted federal funds interest rate range by 150 basis points during the month of March 2020
to 0% to 0.25%. These reductions in interest rates and other effects of the COVID-19 pandemic may adversely affect
the Company's financial condition and results of operations in future periods. It is unknown how long the adverse
conditions associated with the COVID-19 pandemic will last and what the financial impact will be to the Company.
It is reasonably possible that estimates made in the financial statements could be materially and adversely impacted
in the near term as a result of these conditions, including expected credit losses on loans.
Credit-Related Financial Instruments
In the normal course of business, there are outstanding various commitments and contingent liabilities, such as
commitments to extend credit and legal claims, which are not reflected in the financial statements.
There were $26,000 in commitments under outstanding standby letters of credit at December 31, 2020. There were
no commitments under outstanding standby letters of credit at December 31, 2019.
The following is a summary of the commitments to extend credit at December 31, 2020 and 2019:
(In thousands)
Loan commitments:
Fixed rate
Adjustable rate
Undisbursed commercial and personal lines of credit
Undisbursed portion of commercial construction loans
Undisbursed portion of residential construction loans
2020
2019
$
180 $
2,244
11,774
2,928
429
—
2,869
9,162
1,508
252
Total commitments to extend credit
$
17,555 $
13,791
(16) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of
the amounts recognized in the balance sheet.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments
for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of
those instruments (see Note 15). The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each
95
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
customer’s creditworthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary
by the Company upon extension of credit, varies and is based on management’s credit evaluation of the counter-party.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a
customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Company’s policy for obtaining collateral, and the nature of
such collateral, is essentially the same as that involved in making commitments to extend credit. The Company had
no liabilities related to standby letters of credit guarantees at December 31, 2020 and 2019.
The Company has not been required to perform on any financial guarantees during the past two years. The Company
incurred no losses on its commitments in either 2020 or 2019.
(17) REGULATORY MATTERS
The Company is a bank holding company subject to capital adequacy requirements of the Board of Governors of the
Federal Reserve ("Federal Reserve") under the Bank Holding Company Act of 1956, as amended, and the regulations
of the Federal Reserve, except that, pursuant to the Economic Growth, Regulatory Relief and Consumer Protection
Act, effective August 30, 2018, a bank holding company with consolidated assets of less than $3 billion is generally
not subject to the Federal Reserve's capital regulations.
The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the Office
of the Comptroller of the Currency ("OCC"). Failure to meet minimum capital requirements can initiate certain
mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material
effect on the Bank’s financial statements. Under regulatory capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the
Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The
Bank’s capital amounts and classification under prompt corrective action guidelines are also subject to qualitative
judgments by the regulators about components, risk weightings, and other factors.
Beginning in 2020, qualifying community banks with assets of less than $10 billion are eligible to opt in to the
Community Bank Leverage Ratio (“CBLR”) framework. The CBLR is the ratio of a bank’s tangible equity capital to
average total consolidated assets. A qualifying community bank that exceeds this ratio will be deemed to be in
compliance with all other capital and leverage requirements, including the capital requirements to be considered “well
capitalized” under prompt corrective action statutes. The federal banking agencies may consider a financial
institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio
requirement. The federal banking agencies must set the minimum capital for the new CBLR at not less than 8% and
not more than 10%, and had originally set the minimum ratio at 9%. However, pursuant to the CARES Act and related
interim final rules, the minimum CBLR will be 8% for calendar year 2020, 8.5% for calendar year 2021, and 9%
thereafter. A financial institution that falls below the minimum CBLR generally has a two quarter grace period to get
back into compliance as long as it maintains a minimum CBLR of 7% for 2020, 7.5% for 2021 and 8% for 2022 and
thereafter. A financial institution can elect to be subject to or opt out of the CBLR framework at any time. As a
qualified community bank, the Bank has opted into the CBLR framework as of December 31, 2020. Management
believes that the Bank met all capital adequacy requirements to which it was subject as of December 31, 2020 and
2019.
Prior to 2020, the Bank was required to maintain minimum amounts and ratios of total, Tier 1 and common equity
Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to
average assets (as defined). In addition to the minimum capital ratios, the Bank was required to maintain a capital
conservation buffer consisting of additional common equity Tier 1 capital greater than 2.5% of risk-weighted assets
above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases,
96
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such
actions. The capital conservation buffer was 2.50% at December 31, 2019.
At December 31, 2020, the Bank’s CBLR ratio was 17.6%. Management believes that the Bank met all capital
adequacy requirements to which it was subject as of December 31, 2020 and 2019.
As of December 31, 2020, the most recent notification from the OCC categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. There are no conditions or events since that notification that
management believes have changed the Bank’s category.
The Bank’s actual capital amounts and ratios are presented in the following table. No amounts were deducted from
capital for interest-rate risk in either year. As a result of the adoption to the CBLR effective January 1, 2020, a
comparative ratio to prior year is not available.
(Dollars in thousands)
As of December 31, 2020:
Actual
Amount Ratio
Minimum for Capital
Adequacy Purposes
with Capital
Conservation Buffer:
Amount Ratio
Minimum to be Well
Capitalized under
Prompt Corrective
Action Provisions:
Amount Ratio
Community Bank Leverage Ratio
$ 39,174
17.6 %
N/A N/A
$ 17,772
8.00 %
As of December 31, 2019:
Total Capital (to risk
weighted assets)
Tier 1 Capital (to risk
weighted assets)
Common equity Tier 1
Capital (to risk
weighted assets)
Tier 1 Capital (to average
adjusted total assets)
(18) STOCKHOLDERS’ EQUITY
Dividends
$ 39,021
33.4 % $ 12,253 10.50 % $ 11,669 10.00 %
$ 37,562
32.2 % $ 9,919
8.50 % $ 9,335
8.00 %
$ 37,562
32.2 % $ 8,168
7.00 % $ 7,585
6.50 %
$ 37,562
17.9 % $ 8,401
4.00 % $ 10,501
5.00 %
The payment of dividends by the Company and Bank are subject to regulation by the Federal Reserve and OCC,
respectively. Under Indiana law, the Company is prohibited from paying a dividend if, as a result of its payment, the
Company would be unable to pay its debts as they become due in the normal course of business, or if the Company's
total liabilities would exceed its total assets. Under OCC regulations, the Bank generally may make capital
distributions during any calendar year in an amount up to 100% of net income for the year-to-date plus retained net
income for the two preceding years, so long as it is well-capitalized after the distribution. In addition, as noted above,
if the Bank does not have the required capital conservation buffer, its ability to pay dividends to the Company would
be limited.
97
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
(19) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying value and estimated fair value of financial instruments and the level
within the fair value hierarchy (see Note 22) in which the fair value measurements fall at December 31, 2020 and
2019:
(In thousands)
December 31, 2020
Financial assets:
Cash and cash equivalents
Securities available for sale
Securities held to maturity
Loans, net
FHLB stock
Accrued interest receivable
Financial liabilities:
Deposits
Advance from FHLB
Accrued interest payable
December 31, 2019
Financial assets:
Cash and cash equivalents
Securities available for sale
Securities held to maturity
Loans, net
FHLB stock
Accrued interest receivable
Financial liabilities:
Deposits
Advance from FHLB
Accrued interest payable
Fair Value Measurements Using
Carrying
Value
Level 1
Level 2
Level 3
$
9,661 $ 9,661 $
— $
104,456
31
113,259
778
898
—
—
—
N/A
—
104,456
31
—
N/A
898
—
—
—
117,432
N/A
—
174,113
11,000
10
—
—
—
—
11,450
10
174,548
—
—
$ 18,817 $ 18,817 $
— $
58,417
42
123,272
778
865
—
—
—
N/A
—
58,417
42
—
N/A
865
—
—
—
126,187
N/A
—
146,969
10,000
7
—
—
—
—
10,080
7
146,831
—
—
The carrying amounts in the preceding table are included in the consolidated balance sheets under the applicable
captions. The contractual or notional amounts of financial instruments with off-balance-sheet risk are disclosed in
Note 15, and the fair value of these instruments is considered immaterial.
The methods and assumptions used to estimate fair value are described as follows:
Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable,
demand deposits and other transaction accounts. The fair value of securities and interest-bearing time deposits in other
financial institutions is based on quoted market prices (where available) or values obtained from an independent
pricing service. The fair value of loans and fixed-maturity certificates of deposit is based on discounted cash flows
using current market rates applied to the estimated life and credit risk of the instrument. It is not practicable to
determine the fair value of FHLB stock due to restrictions placed on its transferability. The methods utilized to
98
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
measure the fair value of financial instruments at December 31, 2020 and 2019 represent an approximation of exit
price, but an actual exit price may differ.
(20) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(In thousands)
Cash payments for:
Interest
Net income taxes paid (received)
2020
2019
933 $
81
918
(43)
(21) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
(Dollars in thousands, except per share data)
2020
2019
Basic
Earnings:
Net income
Shares:
$
1,191 $
960
Weighted average common shares outstanding
3,172,057
3,361,106
Net income per common share, basic
$
0.38 $
0.29
Diluted
Earnings:
Net income
Shares:
Weighted average common shares outstanding
Add: Dilutive effect of stock options
Add: Dilutive effect of restricted stock
$
1,191 $
960
3,172,057
1,058
2,085
3,361,106
1,167
122
Weighted average common shares outstanding, as adjusted
3,175,200
3,362,395
Net income per common share, diluted
$
0.38 $
0.29
Nonvested restricted stock shares and unallocated ESOP shares are not considered as outstanding for purposes of
computing basic and diluted earnings per share. Stock options for 91,382 shares of common stock were excluded from
the calculation of diluted net income per common share because their effect was antidilutive for the years ended
December 31, 2020 and 2019. There were no antidilutive restricted stock awards excluded from the calculation of
diluted net income per common share for the years ended December 31, 2020 and 2019.
(22) FAIR VALUE MEASUREMENTS
FASB ASC Topic 820, Fair Value Measurements, 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
99
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of
the fair value hierarchy under FASB ASC Topic 820 are described as follows:
Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in
active markets. A quoted market price in an active market provides the most reliable evidence of fair
value and shall be used to measure fair value whenever available.
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.
The table below presents the balances of assets measured at fair value on a recurring and nonrecurring basis as of
December 31, 2020. The Company had no liabilities measured at fair value as of December 31, 2020.
December 31, 2020
Assets Measured on a Recurring Basis
Securities available for sale:
Agency MBS
Agency CMO
Municipal obligations
Total securities available for sale
Assets Measured on a Nonrecurring Basis
Impaired loans:
One-to-four family residential
Commercial real estate
Commercial business
Total impaired loans
Level 1 Level 2
Level 3 Total
Carrying Value
(In thousands)
$
$
— $ 10,240 $
—
—
— $ 104,456 $
27,771
66,445
— $ 10,240
—
27,771
66,445
—
— $ 104,456
$
$
— $
—
—
— $
— $ 1,468 $
—
—
— $ 2,097 $
273
356
1,468
273
356
2,097
Real estate held for sale
$
— $
— $
99 $
99
100
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
The table below presents the balances of assets measured at fair value on a recurring and nonrecurring basis as of
December 31, 2019. The Company had no liabilities measured at fair value as of December 31, 2019.
December 31, 2019
Assets Measured on a Recurring Basis
Securities available for sale:
Agency MBS
Agency CMO
Municipal obligations
Total securities available for sale
Assets Measured on a Nonrecurring Basis
Impaired loans:
One-to-four family residential
Commercial real estate
Commercial business
Total impaired loans
Level 1
Level 2
Level 3
Total
Carrying Value
(In thousands)
$
$
— $ 9,770 $
—
—
— $ 58,417 $
10,712
37,935
— $ 9,770
10,712
—
—
37,935
— $ 58,417
$
$
— $
—
—
— $
— $ 1,406 $ 1,406
581
581
—
—
378
378
— $ 2,365 $ 2,365
Real estate held for sale
$
— $
— $
135 $
135
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 below. These valuation
methodologies were applied to all of the Company’s financial assets carried at fair value or the lower of cost or fair
value.
Fair value is based upon quoted market prices, where available. If quoted market prices are not available, fair value is
based on internally developed models or obtained from third parties that primarily use, as inputs, observable market-
based parameters or a matrix pricing model that employs the Bond Market Association’s standard calculations for
cash flow and price/yield analysis and observable market-based parameters. Valuation adjustments may be made to
ensure that financial instruments are recorded at fair value, or the lower of cost or fair value. These adjustments may
include unobservable parameters. Any such valuation adjustments have been applied consistently over time. The
Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable
value or reflective of future fair values. While management believes the Company’s valuation methodologies are
appropriate and consistent with other market participants, the use of different methodologies or assumptions to
determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting
date.
Securities Available for Sale. Securities classified as available for sale are reported at fair value on a recurring basis.
These securities are classified as Level 1 of the valuation hierarchy where quoted market prices from reputable third-
party brokers are available in an active market. If quoted market prices are not available, the Company obtains fair
value measurements from an independent pricing service. These securities are reported using Level 2 inputs and the
fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S.
government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds,
credit information, and the security’s terms and conditions, among other factors. Changes in fair value of securities
available for sale are recorded in other comprehensive income, net of income tax effect.
101
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
Impaired Loans. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment
and adjusted accordingly. The fair value of impaired loans is classified as Level 3 in the fair value hierarchy.
Impaired loans are measured at the present value of estimated future cash flows using the loan’s effective interest rate
or the fair value of collateral less estimated costs to sell if the loan is collateral dependent. At December 31, 2020 and
2019, all impaired loans other than performing TDRs were considered to be collateral dependent for the purpose of
determining fair value. Collateral may be real estate and/or business assets, including equipment, inventory and/or
accounts receivable. The fair value of the collateral is generally determined based on real estate appraisals or other
independent evaluations by qualified professionals, which are then discounted to reflect management’s estimate of
the fair value of the collateral given the current market conditions and the condition of the collateral.
At December 31, 2020 and 2019, the significant unobservable inputs used in the fair value measurement of collateral
dependent impaired loans included a discount from appraised value (including estimated costs to sell the collateral)
of 10%.
The Company recognized a recapture of provisions for loan losses of $23,000 for both years ended December 31,
2020 and 2019 for impaired loans.
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 December 31, 2020 and 2019, 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 recognized charges to write down real estate held for sale to fair value of $37,000 and $104,000 during
the years ended December 31, 2020 and 2019, respectively.
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 years ended December 31, 2020 and 2019. There were no transfers in or
out of the Company’s Level 3 financial assets for the years ended December 31, 2020 and 2019.
102
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
(23) 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 years ended December 31, 2020 and 2019:
Service charges on deposit accounts
ATM transaction and point-of-sale interchange fees
Other income
Revenue from contracts with customers
Net gains on investments
Increase in cash surrender value of life insurance
Other income
Other noninterest income
$
2020
2019
(In thousands)
184 $
419
27
630
104
68
63
235
311
380
29
720
7
72
4
83
Total noninterest income
$
865 $
803
A description of the Company’s revenue streams accounted for under FASB ASC 606 follows:
Service Charges on Deposit Accounts: 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.
ATM Transaction and Point-of-Sale Interchange Fees: 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.
103
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
(24) CONCENTRATION OF CREDIT RISK
At December 31, 2020, the Company had a concentration of credit risk with correspondent banks in excess of the
federal deposit insurance limit of $746,000. The Company did not have a concentration of credit risk with
correspondent banks at December 31, 2019.
(25) PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial information for the Company (parent company only) follows:
BALANCE SHEETS
(In thousands)
ASSETS
Cash and cash equivalents
Other assets
Investment in subsidiaries
LIABILITIES AND EQUITY
Accrued expenses and other liabilities
Stockholders’ equity
STATEMENTS OF INCOME
(In thousands)
Dividends from bank subsidiary
Interest income from bank subsidiary
Total income
Other operating expenses
Loss before income taxes and equity in undistributed net income of subsidiaries
Income tax benefit
Loss before equity in undistributed net income of subsidiaries
Equity in undistributed net income of subsidiaries
As of
December 31,
2020
2019
$
6,499
166
42,387
$
11,940
73
38,843
$
49,052
$
50,856
$
48
49,004
$
43
50,813
$
49,052
$
50,856
Year Ended
December 31,
2020
2019
$
254 $
152
406
(558)
(152)
(99)
(53)
1,244
—
191
191
(451)
(260)
(58)
(202)
1,162
Net Income
$
1,191 $
960
104
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
STATEMENTS OF CASH FLOWS
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash used in operating activities:
Equity in undistributed net income of subsidiaries
Net change in other assets and liabilities
Net Cash Used In Operating Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock
Cash dividends paid
Net Cash Used In Financing Activities
Net Decrease in Cash and Cash Equivalents
Cash and cash equivalents at beginning of year
Year Ended
December 31,
2020
2019
$
1,191 $
960
(1,244)
(89)
(142)
(1,162)
23
(179)
(5,044)
(255)
(5,299)
(497)
(269)
(766)
(5,441)
(945)
11,940
12,885
Cash and Cash Equivalents at End of Year
$
6,499 $
11,940
105
MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2020 AND 2019
(26) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2020
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense (benefit)
Net income
Earnings per common share
Basic
Diluted
2019
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense (benefit)
Net income
Earnings per common share
Basic
Diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
(In thousands, except per share data)
$
1,933 $
263
1,670
57
1,613
172
1,348
437
52
1,811 $
249
1,562
15
1,547
283
1,455
375
33
$
385 $
342 $
1,833 $
226
1,607
30
1,577
202
1,526
253
(11)
264 $
1,874 $
198
1,676
30
1,646
208
1,693
161
(39)
200 $
7,451
936
6,515
132
6,383
865
6,022
1,226
35
1,191
$
$
0.12 $
0.12 $
0.10 $
0.10 $
0.09 $
0.09 $
0.07 $
0.07 $
0.38
0.38
$
1,985 $
186
1,799
—
1,799
193
1,562
430
68
1,966 $
205
1,761
—
1,761
223
1,647
337
40
$
362 $
297 $
2,027 $
267
1,760
6
1,754
215
1,888
81
(24)
105 $
2,022 $
267
1,755
6
1,749
172
1,724
197
1
196 $
8,000
925
7,075
12
7,063
803
6,821
1,045
85
960
$
$
0.11 $
0.11 $
0.09 $
0.09 $
0.03 $
0.03 $
0.06 $
0.06 $
0.29
0.29
106
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”)) was carried out under
the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several
other members of the Company’s senior management as of the end of the period covered by this annual report. The
Company’s Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2020, the Company’s
disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company
in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company’s
management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
While the Company believes the present design of its disclosure controls and procedures is effective to achieve
its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures. The
Company does not expect that its disclosure controls and procedures and internal control over financial reporting will
prevent all errors and 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 in controls or procedures can occur because of simple errors or mistakes.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or
by management override of the control. The design of any control procedure 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; 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 attributable to errors or fraud may occur and not be detected.
(b) Changes in Internal Controls: There was no change in the Company’s internal control over financial reporting
during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial reporting.
(c) Management’s Annual Report on Internal Control Over Financial Reporting: The management of Mid-
Southern Bancorp, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting.
This internal control system has been designed to provide reasonable assurance to the Company’s management and board
of directors regarding the preparation and fair presentation of the Company’s published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation
and presentation.
The management of Mid-Southern Bancorp, Inc. has assessed the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2020. To make the assessment, we used the criteria for effective internal
control over financial reporting described in Internal Control – Integrated Framework (2013), issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on our assessment, we have concluded that, as of
December 31, 2020, the Company’s internal control over financial reporting was effective based on those criteria.
This annual report does not include an attestation report of the Company’s registered public accounting firm. We
are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth
company, we may take advantage of exemptions from various reporting requirements that are applicable to other public
107
companies that are not emerging growth companies. As a result, for the year ended December 31, 2020 we were not
required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act.
Item 9B. Other Information
There was no information to be disclosed by the Company in a report on Form 8-K during the fourth quarter of
fiscal year 2020 that was not so disclosed.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information contained under the section captioned "Proposal I - Election of Directors" contained in the
Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders, and "Part I – Business – Information about
our Executive Officers" of this Form 10-K, is incorporated herein by reference.
Code of Ethics
On April 18, 2018, the board of directors adopted the Officer and Director Code of Ethics. The Code of Ethics is
applicable to each of the Company’s officers, including the principal executive officer and senior financial officers, and
requires individuals to maintain the highest standards of professional conduct. A copy of the Code of Ethics is available
on the Company’s website at www.mid-southern.com.
Audit Committee Matters and Audit Committee Financial Expert
The Company has a separately-designated standing Audit Committee, composed of Directors Bailey (Chairman),
Fisher, C. Lamb and Koch. Each member of the Audit Committee is “independent,” as defined in the Nasdaq Stock Market
Listing Standards. The Company’s board of directors has designated Mr. Bailey, Audit Committee Chairman, as its audit
committee financial expert, as defined in SEC’s Regulation S-K.
Nomination Procedures
There have been no material changes to the procedures by which shareholders may recommend nominees to the
Company’s board of directors.
Item 11. Executive Compensation
The information set forth under the sections captioned "Executive Compensation" and "Directors’ Compensation"
in the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management"
in the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders is incorporated herein by reference. The
Company is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation
of which may at a subsequent date result in a change in control of the Company.
108
Equity Compensation Plan Information. The following table summarizes share and exercise price information
about the Company’s equity compensation plans as of December 31, 2020.
Plan category
Equity compensation plans approved by security holders:
Mid-Southern Savings Bank, FSB 2010 Equity Incentive
Plan
Mid-Southern Bancorp, Inc. 2019 Equity Incentive Plan
Equity compensation plans not approved by security holders:
Total
Number of
securities to
be issued
upon exercise
of outstanding
options
Weighted-
average
price of
outstanding
options
Number of securities
remaining available for
future issuance under
equity compensation plans
excluding securities
reflected in column (A)
(A)
93,254 $
(B)
13.18
—
—
93,254
—
(C)
—
339,882
—
339,882
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information set forth under the headings “Related Party Transactions” and “Director Independence” under
the heading “Meetings and Committees of the Board of Directors and Corporate Governance Matters – Corporate
Governance” in the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders is incorporated herein by
reference.
Item 14. Principal Accounting Fees and Services
The information set forth under the section captioned “Independent Registered Public Accounting Firm” in the
Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders (excluding the information contained under
the heading of “Report of the Audit Committee”) is incorporated herein by reference.
109
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
PART IV
See “Part II –Item 8. Financial Statements and Supplementary Data.”
2. Financial Statement Schedules
All schedules are omitted because they are not required or applicable, or the required information is
shown in the consolidated financial statements or the notes thereto.
Exhibits:
3.1
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
14
16.1
21
23.1
31.1
31.2
32
101
Articles of Incorporation of Mid-Southern Bancorp, Inc. (1)
Bylaws of Mid-Southern Bancorp, Inc., as Amended (2)
Form of Common Stock Certificate of Mid-Southern Bancorp, Inc. (1)
Description of Capital Stock of Mid-Southern Bancorp, Inc. (1)
Form of Mid-Southern Bancorp, Inc. Employee Stock Ownership Plan (1)
Employment Agreement by and between Mid-Southern Savings Bank, FSB and Alexander G. Babey, as
Amended
Employment Agreement by and between Mid-Southern Savings Bank, FSB and Frank M. Benson, III (1)
Change in Control Agreement by and between Mid-Southern Savings Bank, FSB and Erica B. Schmidt (1)
Mid-Southern Savings Bank, FSB 2010 Equity Incentive Plan (1)
2019 Equity Incentive Plan (1)
Incentive Stock Option and Non-Qualified Stock Option Award Agreements of the 2019 Equity Incentive
Plan
Restricted Stock Award Agreement of the 2019 Equity Incentive Plan
Code of Ethics (3)
Letter from Monroe Shine & Co., Inc., to the Securities and Exchange Commission, dated January 25, 2021,
incorporated by reference to Exhibit 16.1 of the Company’s Current Report on Form 8-K filed January 25,
2021 (File No. 001-38491)
Subsidiaries of Registrant
Consent of Independent Registered Public Accounting Firm
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31,
2020, formatted in XBRL (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 Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and
(vi) the Notes to the Consolidated Financial Statements.
(1) Filed as an exhibit to Mid-Southern Bancorp, Inc.’s Annual Report Form 10-K on March 26, 2020 (File No. 001-
38491).
(2) Filed as an exhibit to Mid-Southern Bancorp, Inc.’s Form 8-K on January 22, 2021 (File No. 001-38491).
(3) The Company elects to satisfy Regulation S-K §229.406(c) by posting its Code of Ethics on its website at www.mid-
southern.com.
Item 16. Form 10-K Summary
None.
110
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: March 26, 2021
MID-SOUTHERN BANCORP, INC.
By: /s/ Alexander G. Babey
Alexander G. Babey
President and Chief Executive Officer
Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Dana J. Dunbar
Dana J. Dunbar
Chairman of the Board of Directors
By: /s/ Alexander G. Babey
Alexander G. Babey
President and Chief Executive Officer
Director
(Principal Executive Officer)
Date: March 26, 2021
Date: March 26, 2021
By: /s/ Robert W. DeRossett
Robert W. DeRossett
Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Larry R. Bailey
Larry R. Bailey
Director
Date: March 26, 2021
By: /s/ Trent L. Fisher
Trent L. Fisher
Director
Date: March 26, 2021
By: /s/ Kermit A. Lamb
Kermit A. Lamb
Date: March 26, 2021
By: /s/ Eric A. Koch
Eric A. Koch
Date: March 26, 2021
Date: March 26, 2021
By: /s/ Charles W. Lamb
Charles W. Lamb
Director
Date: March 26, 2021
By: /s/ Brent A. Rosenbaum
Brent A. Rosenbaum
Date: March 26, 2021
111
EXECUTIVE EMPLOYMENT AGREEMENT
This is an EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement") dated as of
October 1, 2016 (the "Effective Date"). between Mid-Southern Savings Bank, FSB (the "Bank"),
and Alexander G. Babey ("Executive").
Exhibit 10.2
Agreement
The Bank and Executive agree as follows:
1.
Employment and Term
The Bank will employ Executive as President and Chief Executive Officer, and Executive
accepts the employment, on the terms and conditions set forth in this Agreement. Unless earlier
terminated pursuant to Section 5, the initial term of this Agreement begins on the Effective Date
and ends on the three-year anniversary of the Effective Date; thereafter, the term of this Agreement
will automatically be extended for additional 12-month periods unless the Bank or Executive gives
a notice of nonrenewal to the other party at least 60 days before the end of the initial term or the
then-current 12-month period. The "Term" of this Agreement is the initial term together with all
12-month extensions. The Term will end upon the termination of this Agreement by one or more
of the parties hereto.
2.
Duties and Responsibilities
Executive will perform the duties customary for the position of President and Chief
Executive Officer and any specific duties assigned from time to time by the Bank’s Board of
Directors (the "Board"). Throughout the Term, Executive agrees to use his best efforts for the
Bank's benefit and to devote his full time, attention, and energies to the Bank's business. Executive
reports to the Bank's Board and will also serve as a member of the Bank's Board.
Executive may engage in other business activities with the Board's approval and may invest
his personal assets so long as the investment does not interfere with his performance under this
Agreement and so long as no single or group of investments place Executive's financial well- being
at risk. The Bank will provide Executive with an office, a computer, and such other facilities,
equipment. supplies, and services as are reasonably suitable to his position.
Executive will also serve as an executive officer and member of the Board of Directors of
the Bank’s parent, Mid- Southern Mutual Holding Company (the "Holding Company").
3.
Compensation; Benefits.
(a)
Base Salary. While employed by the Bank, Executive will be paid $155,000
annually (the "Base Salary") as compensation for his services under this Agreement, payable on
1
the Bank’s normal payroll schedule. Executive’s Base Salary will be reviewed periodically and
may be increased from time to time by the Board in its sole discretion. Executive’s Base Salary
may only be decreased with his consent.
(b)
Benefits. To the extent permitted under the applicable plan documents, Executive
is entitled to participate in all benefit plans and arrangements generally available to employees of
the Bank and in any supplementary benefits provided to senior executives of the Bank, all in
accordance with the terms of such plans and programs. The Bank has the right to modify the
benefits available to its employees and senior executives from time to time.
(c)
Car Allowance. The Bank will provide Executive an annual car allowance in the
amount of $10,000, payable in equal monthly installments. The car allowance will be included in
Executive's first pay check of each month, and will be treated as taxable income to Executive,
subject to normal payroll withholding.
(d)
Business Expenses. The Bank will reimburse Executive for reasonable, ordinary,
documented, and necessary business expenses incurred by Executive in performing his duties in
accordance with the Bank's expense reimbursement policy. Any reimbursements that may create
taxable income to Executive must be submitted for reimbursement as soon as practicable and will
be paid in no event later than the 74th day after the end of Bank's taxable year in which the expenses
are incurred.
(e)
Vacation and Holidays. In addition to paid holidays under the Bank's policies
applicable to employees generally, Executive is entitled to paid vacation time in accordance with
the Bank's vacation policies as in effect from time to time, which currently provide Bank
management with 20 days of paid vacation per year. Unless otherwise provided by the Bank's
vacation policies as in effect from time to time, (i) unused vacation for any year during the Term
may not be accumulated for use in subsequent years, and (ii) Executive is not entitled to any
additional compensation for failure to use vacation time.
4.
Bonuses.
(a)
Change in Control Payment.
(i)
If a Change in Control (as is defined below) of the Bank occurs during the
Term and if Executive has a Termination of Employment because (A) Executive voluntarily
terminates his employment with the Bank as of a date within 60 to 90 days after the Change in
Control, (B) Executive's employment with the Bank is terminated by the Bank without Cause
within two years after the Change in Control, or (C) Executive voluntarily terminates his
employment with the Bank for Good Reason within two years of a Change in Control; then in each
case if, and only if, Executive resigns as an officer and director of both the Bank and the Holding
Company and agrees not to file any administrative charge or lawsuit relating to Executive's prior
employment with the Bank and agrees to release Bank and all of its then current and former
directors, trustees, officers, employees, agents, members, and affiliated companies from any and
2
all claims, in an agreement in such form as is determined by the Bank, which agreement is not
revoked if allowed by its terms, the Bank shall make a "Change in Control Payment" as provided
below . Executive must execute and deliver the release agreement to the Bank on the date set by
the Bank, which shall be no later than 60 days following Executive's Termination of Employment,
and the release will be delivered by the Bank to the Executive at least 21 days before the deadline
set for its return.
(ii)
For purposes of the timing of payments under the Agreement, "Termination
of Employment" shall mean the date the Executive and the Bank reasonably anticipate that (A)
Executive will not perform any further services for the Bank or any other entity considered a single
employer with the Bank under Section 414(b) or (c) of the Internal Revenue Code of 1986, as
amended ("Code") (but substituting 50% for 80% in the application thereof) (the "Employer
Group" ), or (B) the level of bona fide services Executive will perform for the Employer Group
after that date will permanently decrease to less than 20% of the average level of bona fide services
performed over the previous 36 months (or if shorter over the duration of service). For this purpose,
service performed as an employee or as an independent contractor is counted, except that service
as a member of the Board of an Employer Group entity is not counted unless termination benefits
under this Agreement are aggregated with benefits under any other Employer Group plan or
agreement in which Executive also participates as a director. Executive will not be treated as
having a termination of his employment while he or she is on military leave, sick leave or other
bona fide leave of absence if the leave does not exceed six months or, if longer, the period during
which Executive has a reemployment right under statute or contract. If a bona fide leave of absence
extends beyond six months, Executive's employment will be considered to terminate on the first
day after the end of such six-month period, or on the day after Executive's statutory or contractual
reemployment right lapses, if later. The Bank will determine when Executive's Date of
Termination occurs based on all relevant facts and circumstances, in accordance with Treasury
Regulation Section l.409A-l (h).
(iii)
For this purpose, termination by the Bank for "Cause" shall mean
termination on account of (A) the willful and continued failure by Executive to substantially
perform his duties with the Bank after written demand for substantial performance has been
delivered to Executive by the Bank and Executive has been given a reasonable opportunity for
cure; or (B) the willful engaging by Executive in gross misconduct materially and demonstrably
injurious to the Bank or its reputation; (C) breach of fiduciary duty involving personal profit; or
(D) material violation of any law, rule or regulation other than traffic violations or similar offenses.
For purposes of this definition, no act, or failure to act, on Executive's part shall be considered
"willful" unless done, or admitted to be done, by Executive not in good faith and without
reasonably belief that Executive's action or omission was in the best interest of the Bank.
(iv)
Termination by Executive for "Good Reason" means Executive's
Termination of Employment due to his resignation from the Bank no more than 60 days after (A)
the Bank reduces or changes Executive's duties to those which are clearly not consistent with
executive status; (B) the Bank requires Executive to change his principal work location by at least
30 miles and Executive refuses to make such move; or (C) the Bank reduces Executive's base
3
salary, in each case which condition is not cured within 30 days after Executive has delivered
written notice of such condition to the Employer. In each case, Executive must give the Bank
notice of the condition within 90 days of the initial existence of the condition, or any termination
will not be considered to be for Good Reason.
(v)
The "Change in Control Payment" will equal 2 times the average of the
Executive's total taxable compensation from the Bank includable in taxable income for the five
calendar years preceding the date of the Change in Control, determined in a manner consistent
with Section 280G of the Code, subject to the maximum payment provisions below. The Change
in Control Payment shall be made in a lump sum in cash 30 days after the date of Termination of
Employment triggering the payment. This payment shall not reduce or offset any other pay or
benefits then due or owing Executive, and no reduction shall be made on account of future
employment.
(vi)
For all purposes of this Agreement, a "Change in Control" of the Bank
means: (A) an event or series of events which have the effect of any "person" as such term is used
in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), other than any trustee or other fiduciary holding securities of the Bank under any employee
benefit plan of the Bank, becoming the "beneficial owner" as defined in Rule 13d-3 under the
Exchange Act, directly or indirectly, of securities of Bank representing 50% or more of the
combined voting power of the Bank's then outstanding stock ; (B) during any period of two
consecutive years, individuals who at the beginning of such period constitute the Board of the
Bank cease for any reason to constitute a majority thereof, unless the election, or the nomination
for election by the stockholders, of each new director was approved by either the Holding
Company or by a vote of at least two-thirds of the Bank's directors then still in office who were
directors at the beginning of the period; (C) the business of the Bank is disposed of pursuant to a
partial or complete liquidation, sale of assets, or otherwise.
(vii)
In no event shall any amount payable under any provision of this Agreement
equal or exceed an amount which would cause the Bank to forfeit, pursuant to Code Section
280G(a), its deduction for any or all such amounts payable. Pursuant to this Section the Bank shall
reduce severance benefits payable under this Agreement, if such benefits alone or in conjunction
with termination benefits provided under other Bank plans or agreements between Executive and
the Bank, would cause the Bank to forfeit otherwise deductible payments; provided, however that
no benefits payable under this Agreement shall be reduced pursuant to this Section to less than $
l.00 below the amount of benefits which Bank can properly deduct under Code Section 280G(a).
(viii) Notwithstanding any other provision of this Agreement to the contrary, any
payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and
conditioned upon their compliance with Section l8(k) of the FDIA (12 U.S.C. §1828(k)) and
12C.F.R. Part 359. No Change in Control Payment will be made to Executive under this
Agreement unless the Federal Deposit Insurance Corporation (the "FDIC") and the Office of the
Comptroller of the Currency (the "OCC") provide any necessary approvals of the Change in
Control Payment prior to it being paid.
4
(b)
Discretionary Bonuses. The Board, in its sole discretion, may develop a bonus
program which includes Executive and awards Executive additional bonuses from time to time in
amounts that it determines proper. For avoidance of doubt, the Board has no obligation to award
any additional bonuses to Executive.
(c)
Forfeiture; Clawback. If, prior to payment of any Change in Control Payment or
bonus to Executive, it is determined that Executive (A) committed any fraudulent act or omission,
breach of trust or fiduciary duty, or insider abuse with regard to the Bank that has had or is likely
to have a material adverse effect on the Bank, (B) is substantially responsible for the insolvency
of, the appointment of a conservator or receiver for, or the troubled condition, as defined by
applicable regulations of the appropriate federal banking agency, of the Bank, (C) has materially
violated any applicable federal or state banking law or regulation that has had or is likely to have
a material effect on the Bank, or (D) has violated or conspired to violate Sections 215, 656, 657,
1005, 1006, 1007, 1014, 1032, or 1344 of title 18 of the United States Code, or Sections 1341 or
1343 of such title affecting the Bank, then Executive will automatically and immediately forfeit
any right to be paid such Change in Control Payment or bonus . If, after a Change in Control
Payment or bonus is paid to Executive, the Board determines in good faith that any of the matters
set forth in clauses (A) through (D) of this Section apply to the Executive, then the Executive must
promptly (and in any event, within 10 business days following written notice to Executive) return
to the Bank an amount equal to the Change in Control Payment and/or bonus in immediately
available funds.
5.
Termination.
(a)
Events of Termination. Notwithstanding any other provision of this Agreement to
the contrary, this Agreement and Executive's employment with the Bank will terminate
immediately upon the first of the following events to occur:
(i)
Executive's death or Disability (unless, in the case of Disability, waived by
the Bank);
(ii)
30 days after Executive gives notice of his voluntary termination of his
employment for any reason (unless such notice or 30-day period is waived by the Bank); or
(iii)
termination by the Bank for Cause, as defined in Section 4(a)(iii).
(b)
Effect of Termination. Upon termination of Executive's employment pursuant to
this Section 5, Executive will be entitled to his Base Salary and benefits through the date of
termination and will be entitled to no additional compensation or benefits. In addition, if Executive
is terminated for any reason, Executive must resign from all offices Executive holds with the Bank
and its affiliates.
(c)
Disability. "Disability" means Executive's inability (as determined by a physician
appointed by the Bank) due to accident or physical or mental illness, to adequately and fully
perform the duties that Executive was performing for Executive when the disability began, with
5
the reasonable expectation that such inability will continue for at least 180 days notwithstanding
any reasonable accommodation required by state or federal disability anti-discrimination laws. If
at any time during the Term the physician appointed by the Bank makes a determination with
respect to Executive's Disability, that determination shall be final, conclusive, and binding upon
the Bank, Executive, and their successors in interest.
6.
Nonsolicitation; Confidentiality
(a)
Confidentiality.
(i)
General. Executive acknowledges that the Bank continually develops
Confidential Information, that Executive may develop Confidential Information for the Bank, and
that Executive may learn of Confidential Information during the course of his employment.
Executive will comply with the policies and procedures of the Bank for protecting Confidential
Information and may never disclose to any person (except as required by applicable law or for the
proper performance of his duties and responsibilities), or use for his own benefit or gain, or
otherwise use in a manner adverse to the interests of the Protected Parties, any Confidential
Information obtained by Executive incident to his employment or other association with the Bank.
Executive understands that this restriction will continue to apply after his employment terminates,
regardless of the reason for such termination.
(ii)
Return of Documents. All documents, records, tapes, or other media of
every kind and description containing Confidential Information or otherwise relating to the
business, present or otherwise, of the Protected Parties, and any copies, in whole or in part, thereof
("Documents"), whether or not prepared by Executive, and any and all equipment or other tangible
personal property provided by the Bank for Executive's use ("Company Property"), is the sole and
exclusive property of the Bank. Executive must safeguard all Documents and Company Property,
and must surrender to the Bank at the time his employment terminates, or at such earlier time(s)
as the Board or its designee may specify, all Documents and all Company Property then in
Executive's possession or control.
(iii) Confidential Information. "Confidential Information" means any and all
information of the Protected Parties that is not generally known by the public, that is proprietary,
or that would reasonably be considered confidential. Without limiting the generality of the
foregoing , Confidential Information includes, but is not limited to, information relating to (A) the
services or products sold or offered by the Protected Parties, (B) the costs , sources of supply,
financial performance and strategic plans of the Protected Parties, (C) the identity and special
needs of the customers of the Protected Parties, and (D) the people and organizations with whom
the Protected Parties have business relationships, and the nature of those relationships.
Confidential Information also includes comparable information that the Protected Parties have
received belonging to others, or that was received by a Protected Party with an understanding that
it would not be disclosed.
6
(iv)
Protected Parties. "Protected Parties" means the Bank, the Holding
Company, their affiliates, and any direct or indirect subsidiaries thereof.
(b)
Nonsolicitation. During the Term and for a two-year period following the
termination of Executive's employment for any reason (the "Restricted Period"), Executive agrees
that he will not directly or indirectly, whether for his own account or that of any other person or
entity, attempt to or actually do any of the following:
(i)
solicit, divert, or accept any portion of the business of any Customer of a
Protected Party with respect to any product or service that is the same as, similar to, a substitute
for, or competitive with any product or service offered by such Protected Parties;
(ii)
induce any Customer of a Protected Party to cease doing business with such
Protected Party or to reduce the volume of business they do with such Protected Party;
(iii)
provide any advice to or otherwise induce a Customer of a Protected Party
to cease doing business with such Protected Party or to reduce the volume of business it does with
such Protected Party;
(iv)
in any other way interfere with a Protected Party’s business or the
relationship between a Protected Party and any other person or entity;
(v)
in any manner recruit, solicit, induce, entice, or persuade any Employee of
a Protected Party to terminate or change the Employee's employment or other relationship with
such Protected Party or discuss the prospect of an Employee of a Protected Party leaving or
changing employment with such Protected Party; or
(vi)
hire, or induce the hiring of any Employee of a Protected Party.
For purposes of this Section 6(b) and Section 6(c), (x) the term "Customer" means any person or
entity that is, or was within the one-year period immediately prior to the termination of Executive's
employment, an actual or prospective customer or client of a Protected Party; and (y) the term
"Employee" means any person or entity that is, or was during the Term, an employee, independent
contractor, director, officer, or agent of a Protected Party or any person or entity whose engagement
as an employee , independent contractor, director, officer, or agent of a Protected Party ended
during the Term or the six-month period immediately following Executive's termination.
(c)
he will not:
No Competition. Executive agrees that during the Term and the Restricted Period,
(i)
directly or indirectly, individually or as a consultant, employee, officer.
director, stockholder, partner or other owner or participant in any entity or venture other than the
Bank, accept any position or perform any services for a Competitor in any Indiana County in which
the Bank then has an office or branch or any Indiana County adjacent to a County where the Bank
has a branch; or
7
(ii)
seek or accept employment with a Customer of the Bank for the
performance, management, or supervision of services that might otherwise be provided by the
Bank in any Indiana County in which the Bank then has an office or branch or any Indiana County
adjacent to a County where the Bank has a branch.
For purposes of this Section 6(c), the term "Competitor" means any entity or venture other
than the Bank that competes with any business in which the Bank or its affiliates is engaging or in
which the Bank or such affiliates plan to engage.
(d)
Tolling of Restricted Period. If Executive violates any of the restrictive covenants
in Sections 6(b) or (c), then the Restricted Period will be tolled or will not begin to run, as the case
may be, until the date on which Executive ceases to be in violation of such covenant.
(e)
Non-Disparagement. Executive agrees and covenants that he will not at any time
make, publish, or communicate to any person or entity or in any public forum any defamatory or
disparaging remarks, comments, or statements concerning any Protected Party, its businesses, or
any of its employees, officers, existing and prospective customers, suppliers, investors, and other
associated third parties.
(f)
Exceptions. Nothing in this Section 6 prohibits Executive from purchasing or
owning less than five percent (5%) of the publicly traded securities of any entity, but only if such
ownership represents a passive investment and that Executive is not a controlling person of, or a
member of a group that controls, such entity. In addition, this Section 6 does not, in any way,
restrict or impede Executive from (i) exercising protected rights to the extent that such rights
cannot be waived by agreement or (ii) complying with any applicable law or regulation or a valid
order of a court of competent jurisdiction or an authorized government agency, provided that such
compliance does not exceed that required by the law, regulation, or order. Executive must promptly
provide written notice of any such compliance to the Bank.
(g)
Equitable Remedies. Executive acknowledges that the restrictions contained in this
Section 6, in view of the nature of the business in which the Bank is engaged, are reasonable and
necessary in order to protect the legitimate business interests of the Bank and its affiliates. The
Bank and Executive acknowledge and agree that any breach or threatened breach of the provisions
of this Section 6 would cause irreparable injury and that a remedy at law would be inadequate.
Therefore, in the event of a breach or a threatened breach by Executive of any provision of this
Section 6, the Bank is entitled to an injunction or other equitable relief in any court of competent
jurisdiction restraining Executive from the commission of such breach without any bond or other
security being required and without the necessity of showing actual damages, and to recover its
attorneys' fees, costs, and expenses related to the breach or threatened breach. Nothing contained
herein should be construed as prohibiting the Bank from pursuing any other remedies available to
it for such breach or threatened breach, including the recovery of money damages. The covenants
and disclosures in this Agreement must be construed as independent of any other provisions in this
Agreement, and the existence of any claim or cause of action by Executive against the Bank,
8
whether predicated on this Agreement or otherwise does not constitute a defense to the
enforcement by the Bank of such covenants and agreements.
7.
Miscellaneous
(a)
No Conflicts. Executive represents and warrants that (i) entering into and
performing under this Agreement will not violate any contract to which Executive is a party; (ii)
Executive is not party to any contract or subject to any restrictions that would impair his ability to
fully perform under this Agreement; (iii) entering into and performing under this Agreement will
not breach or give rise to any cause of action against Executive or the Bank under the terms of any
contract to which he is a party; (iv) Executive has disclosed to the Bank any restrictive covenants
(including noncompetition, nonsolicitation, and confidentiality) applicable to him under any
contract to which he is or was a party.
(b)
Assignment. The services to be rendered by Executive under this Agreement are
unique and personal, and Executive may not assign any of Executive's rights or delegate any of
Executive's duties under this Agreement. Except as provided in the immediately preceding
sentence, this Agreement shall benefit Executive and Executive's heirs and personal
representatives. The Bank may freely assign its obligations hereunder to any affiliate or any entity
into which the Bank merges or consolidates or to which the Bank transfers all or substantially all
of its assets.
(c)
Severability. The provisions of this Agreement are severable. If any provision of
this Agreement or application thereof is determined by a court of competent jurisdiction to be
invalid, illegal, or otherwise unenforceable (in whole or in part), the validity, legality, or
enforceability of all other applications of that provision, and of all other provisions and
applications of this Agreement, will not in any way be affected. Such invalid, illegal, or
unenforceable provision or application will be deemed not to be a part of this Agreement, and this
Agreement will then be enforced to the maximum extent allowed by applicable law. If any
provision of this Agreement is invalid in part or in whole, it will be deemed to have been amended,
whether as to time, area covered or otherwise, as and to the extent required for its validity under
applicable law and, as so amended, will be enforceable.
(d)
Notices. Any notice or consent required or permitted hereunder shall be deemed to
have been given when hand-delivered, three business days after mailing by certified mail, postage
prepaid and return-receipt requested, one business day after mailing by a recognized overnight
carrier, or upon confirmation of delivery by electronic mail, in each case to the intended recipient
at the following address (or at such other address as either party may notify the other):
If to the Bank:
Dana Dunbar
Chairman of the Board of Directors
Mid-Southern Savings Bank, FSB 300 N. Water Street
9
PO Box 545
Salem, Indiana 47167
With a copy (which does not constitute notice) to: Attn: R. James Straus
Frost Brown Todd LLC
400 West Market Street, Suite 3200 Louisville, Kentucky 40202
If to Executive:
Alexander G. Babey
3690 E Hwy 146
LaGrange, Ky 40031
(e)
Governing Law: Venue: Consent to Jurisdiction. This Agreement shall be
construed and enforced in accordance with the laws of the State of Indiana without regard to its
conflicts of laws principles to the extent they would require or permit the application of the laws
of any other jurisdiction. Subject to Section 6(g), each of the parties irrevocably agrees that any
legal action or proceeding arising out of or in connection with this Agreement may be brought and
determined in any Indiana state or federal court located in (or nearest to) Washington County,
Indiana (or if such court lacks subject matter jurisdiction, in any appropriate Indiana state or federal
court), and each of the parties irrevocably submits to the nonexclusive personal jurisdiction of the
aforesaid courts, generally and unconditionally, with regard to any such action or proceeding
arising out of or in connection with this Agreement. Each of the parties further agrees to accept
service of process in any manner permitted by such courts. Each of the parties hereby irrevocably
and unconditionally waives, and agrees not to assert, by way of motion or as a defense,
counterclaim or otherwise, in any action or proceeding arising out of or in connection with this
Agreement, (a) any claim that it is not personally subject to the jurisdiction of the above-named
courts for any reason other than the failure lawfully to serve process, (b) that it or its property is
exempt or immune from jurisdiction of any such court or from any legal process commenced in
any such court (whether through service of notice, attachment prior to judgment, attachment in aid
of execution of judgment, execution of judgment or otherwise) and (c) to the fullest extent
permitted by law, that (i) the suit, action or proceeding in any such court is brought in an
inconvenient forum, (ii) the venue or forum of such suit, action or proceeding is improper or (iii)
this Agreement, or the subject matter hereof, may not be enforced in or by any such court.
(f)
Non-Waiver. A waiver of any provision of this Agreement must be in writing, and
no such waiver will constitute a waiver of any other provision of this Agreement, whether or not
similar. No failure to enforce any provision of this Agreement may be treated as or deemed a
waiver of such provision. No waiver or consent will constitute a continuing waiver or consent or
10
commit any party to provide a waiver in the future except to the extent specifically set forth in
writing.
(g)
Entire Agreement. This Agreement constitutes the entire understanding and
agreement between, and supersedes all other agreements, understandings and communications
between the Bank or any of its affiliates and Executive. There are no other agreements, conditions
or representations, oral or written, expressed or implied with regard thereto. This Agreement may
be amended only in writing, signed by both parties.
(h)
Headings. The headings in this Agreement have been inserted solely for
convenience of reference and shall not be considered in the interpretation or construction of this
Agreement.
(i)
Construction of Terms: Pronouns and Number. For avoidance of doubt, references
in this Agreement to Executive's termination of employment include a termination by the Bank,
Executive's resignation, the end of Executive's employment due to nonrenewal of this Agreement,
or any other event that causes Executive's employment to end pursuant to the terms of this
Agreement. Wherever from the context it appears appropriate, each term stated in either the
singular or the plural includes the singular and the plural, and pronouns stated in either the
masculine, feminine, or neuter gender includes the masculine, feminine, and neuter gender.
(j)
Counterparts. This Agreement may be executed any number of counterparts, each
of which is deemed an original but all of which together constitute one and the same instrument.
This Agreement may be executed and delivered by facsimile or other electronic transmission.
(k)
Payments. All amounts payable under this Agreement shall be subject to such
deductions and withholdings as the Bank reasonably determines should be withheld pursuant to
any applicable law or regulation.
(l)
Survival. All provisions of this Agreement that by their nature should survive any
expiration or termination of this Agreement will so survive, including without limitation the
restrictive covenants contained in Section 6.
(m)
Tax Matters.
(i)
Intent to Comply. Executive and the Bank agree and confirm that this
Agreement is intended by both parties to provide for compensation that is exempt from Code
Section 409A as a short-term deferral or that does not constitute "deferred compensation" within
the meaning of Code Section 409A. This Agreement shall be interpreted, construed, and
administered in accordance with this agreed intent; provided that the Bank does not promise or
warrant any tax treatment of compensation hereunder. Executive is responsible for obtaining
advice regarding all questions as to federal, state, local income, estate, payroll, or other tax
consequences arising under this Agreement. In the event provisions of this Agreement do not
comply with Code Section 409A, Executive and the Bank agree to use reasonable business efforts
to amend this Agreement as necessary to bring it into compliance with Code Section 409A while,
11
to the largest extent possible, maintaining the economic interests hereunder of both parties. This
Agreement shall not be amended or terminated in a manner that would accelerate or delay
payments except as permitted under Treasury Regulations under Code Section 409A.
(ii)
Specified Employee. Notwithstanding anything in this Agreement to the
contrary, if Executive is a "specified employee" within the meaning of Treasury Regulation
Section 1.409A- I(i) (or any successor thereto) on Executive's termination of employment, any
payments hereunder triggered by Executive's termination of employment and that are not
separation pay under Treasury Regulations Section l.409A-l (b)(9), short-term deferral pay, or
otherwise exempt from Code Section 409A, shall not begin to be paid until the earlier to occur of
Executive's death or the date that is six months and one day after Executive's termination of
employment , and at that time, Executive will receive in one lump sum payment all of the severance
payment that would have been paid to Executive during the first six months following Executive's
termination of employment. The Bank will determine, consistent with any guidance issued under
Code Section 409A, the portion of severance payments that are required to be delayed, if any.
[Remainder of page intentionally left blank; signature page follows]
12
IN WITNESS WHEREOF, and intending to be legally bound hereby, Executive and the Bank
have executed this Agreement as of the date first set forth above.
/s/ Alexander G. Babey
Alexander G. Babey
MID-SOUTHERN SAVINGS BANK, FSB
By: /s/ Dana Dunbar
Dana Dunbar, Chairman
Signature Page to Alexander G. Babey Executive Employment Agreement
13
AMENDMENT TO EMPLOYMENT AGREEMENT
WHEREAS, Alexander G. Babey and Mid-Southern Savings Bank, FSB are parties to an
employment agreement dated October 1, 2016 (the “Agreement”); and
WHEREAS, Mid-Southern, M.H.C. is undertaking a the second step conversion from mutual to
stock form, which necessitates the amendment of the change in control provision contained in
Section 4 of the Agreement; and
WHEREAS, the Agreement may be amended by a writing signed by both parties.
Accordingly, the parties agree as follows:
1.
Section 4(a)(vi) should be revised to read as follows, to be effective immediately
prior to the second step conversion:
(vi)
For all purposes of this Agreement, a "Change in Control" of the Bank
means (A) an event or series of events that have the effect of any "person" as such term is used in
Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
other than any trustee or other fiduciary holding securities of the Company under any employee
benefit plan of the Company or the Bank, becoming the "beneficial owner" as defined in Rule 13d-
3 under the Exchange Act, directly or indirectly, of securities of the Company or the Bank
representing 50% or more of the combined voting power of the Bank’s then-outstanding stock; (B)
during any period of two consecutive years, individuals who at the beginning of such period
constitute the board of directors of the Company cease for any reason to constitute a majority
thereof, unless the election, or the nomination for election by the stockholders, of each new
Company director was approved by the vote of at least two-thirds of the Company’s directors then
still in office who were Company directors at the beginning of the period; or (C) the shareholders
of the Company approving a definitive agreement to merge or consolidate the Company with or
into another company (other than a merger or consolidation that would result in the holders of
voting securities of the Company outstanding immediately prior to such transaction continuing to
hold (either by remaining outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the combined voting power of the voting securities of the Company or
such surviving entity outstanding immediately after such transaction) or to sell or otherwise
transfer all or substantially all of the Company's assets or to adopt a plan of liquidation.
Notwithstanding the foregoing, the term "Change in Control" shall not include a second step
conversion where Mid-Southern, M.H.C. converts from mutual to stock form in connection with
a second step conversion where shares of Mid-Southern Bancorp are sold to the public and such
shares are also issued in an exchange offering to existing stockholders of the Bank.
2.
Any provision of the Agreement inconsistent with the foregoing amendment shall
be deemed amended to be consistent therewith, and the Agreement shall be interpreted
accordingly.
14
IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties have executed
this amendment to the Agreement as of the date set forth above.
EXECUTIVE
/s/ Alexander G. Babey
Alexander G. Babey
MID-SOUTHERN SAVINGS BANK, FSB
By:
/s/ Dana J. Dunbar
Dana J. Dunbar, Chairman
15
FIRST AMENDMENT
EXECUTIVE EMPLOYMENT AGREEMENT
This is the First Amendment (the “Amendment”) dated as of February 1, 2018 to the
Executive Employment Agreement dated as of October 1, 2016 (the “Agreement”) between Mid-
Southern Savings Bank, FSB (the “Bank”) and Alexander G. Babey (“Executive”).
1.
The Agreement is hereby amended so that the “Effective Date” as that term is used
in the Agreement is February 1, 2018. Unless earlier terminated pursuant to Section 5 of the
Agreement, the initial term of the Agreement begins on the new Effective Date and ends on the
three-year anniversary of the new Effective Date.
2.
All other terms of the Agreement remain in full force and effect.
IN WITNESS WHEREOF, and intending to be legally bound hereby, Executive and the
Bank have executed this Amendment as of February 1, 2018.
/s/ Alexander G. Babey
Alexander G. Babey
MID-SOUTHERN SAVINGS BANK, FSB
By:
/s/ Dana Dunbar
Dana Dunbar, Chairman
16
SECOND AMENDMENT
EXECUTIVE EMPLOYMENT AGREEMENT
This is an Amendment (“Amendment”) to the Executive Employment Agreement dated and
effective October 1, 2016 between Mid-Southern Savings Bank, FSB (the “Bank”) and Alexander
G. Babey (“Executive”), (“Employment Agreement”). This Amendment is effective as of
January 1, 2021.
WHEREAS, Executive is employed by the Bank, pursuant to the terms of the Employment
Agreement;
WHEREAS, according to Section 1 of the Employment Agreement, at the end of the initial term
of the Employment Agreement and any subsequent term, the Employment Agreement is
automatically extended for successive 12-month periods, unless either party gives notice of
nonrenewal at least 60 days in advance of the expiration of the initial term or a subsequent term;
and
WHEREAS, the parties wish to amend the Employment Agreement so that automatic renewal
after the expiration of a term is for a period of 36 months instead of 12 months.
NOW THEREFORE, in consideration of the premises and the mutual covenants and
undertakings hereinafter set forth, the Bank and Executive agree as follows:
1. Effective as of January 1, 2021, Section 1 of the Employment Agreement is deleted in its
entirety and replaced with the following:
1.
Employment and Term
The Bank will employ Executive as President and Chief Executive Officer, and
Executive accepts the employment, on the terms and conditions set forth in this Agreement. Unless
earlier terminated pursuant to Section 5, the initial term of this Agreement begins on the Effective
Date and ends on the three-year anniversary of the Effective Date; thereafter, the term of this
Agreement will automatically be extended for additional 36-month periods unless the Bank or
Executive gives a notice of non-extension to the other party at least 60 days before the end of the
initial term or the then-current 36-month period. The "Term" of this Agreement is the initial term
together with all 36-month extensions. The Term will end upon the termination of this Agreement
by one or more of the parties hereto.
[signatures on next page]
17
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first
set forth below.
MID-SOUTHERN SAVINGS BANK, FSB
By:
/s/ Dana Dunbar
Dana Dunbar, Chairman
Date: January 28, 2021
ALEXANDER G. BABEY
/s/ Alexander G. Babey
Alexander G. Babey
Date: January 28, 2021
18
Exhibit 10.7
MID-SOUTHERN BANCORP, INC.
2019 EQUITY INCENTIVE PLAN
INCENTIVE STOCK OPTION AWARD AGREEMENT
ISO No.
Grant Date:
This Incentive Stock Option Award (“ISO”) is granted by Mid-Southern Bancorp, Inc.
(“Corporation”) to [Name] (“Option Holder”) in accordance with the terms of this Incentive Stock Option
Award Agreement (“Agreement”) and subject to the provisions of the Mid-Southern Bancorp, Inc. 2019
Equity Incentive Plan, as amended from time to time (“Plan”). The Plan is incorporated herein by
reference.
1.
2.
3.
ISO Award. The Corporation grants to Option Holder ISOs to purchase [Number] Shares at an
Exercise Price of $[Number] per Share. These ISOs are subject to forfeiture until they vest and
to limits on transferability, as provided in Sections 5 and 6 of this Agreement and in Article V of
the Plan.
Vesting Dates. The ISOs shall vest as follows, subject to earlier vesting in the event of a
termination of Service as provided in Section 6 or a Change in Control as provided in Section 7:
Vesting Date
ISOs for
Number of Shares Vesting
Exercise. The Option Holder (or in the case of the death of the Option Holder, the designated
legal representative or heir of the Option Holder) may exercise the ISOs during the Exercise
Period by giving written notice to the [____________________] [include appropriate officer] in
the form required by the Committee (“Exercise Notice”). The Exercise Notice must specify the
number of Shares to be purchased, which shall be at least 100 unless fewer shares remain
unexercised. The exercise date is the date the Exercise Notice is received by the Corporation.
The Exercise Period commences on the Vesting Date and expires at 5:00 p.m., EST on the date
10 years [five years for over 10% owners of Corporation on the Grant Date] after the Grant
Date, such later time and date being hereinafter referred to as the “Expiration Date,” subject to
earlier expiration in the event of a termination of Service as provided in Section 6. Any ISOs not
exercised as of the close of business on the last day of the Exercise Period shall be cancelled
without consideration at that time.
The Exercise Notice shall be accompanied by payment in full of the Exercise Price for the Shares
being purchased. Payment shall be made: (a) in cash, which may be in the form of a check,
money order, cashier's check or certified check, payable to the Corporation, or (b) by delivering
Shares of the Corporation already owned by the Option Holder having a Fair Market Value on the
exercise date equal to the aggregate Exercise Price to be paid, or (c) by instructing the
4.
5.
6.
7.
8.
9.
Corporation to withhold Shares otherwise issuable upon the exercise having an aggregate Fair
Market Value on the exercise date equal to the aggregate Exercise Price to be paid or (d) by a
combination of thereof. Payment for the Shares being purchased upon exercise of the Option
may also be made by delivering a properly executed Exercise Notice to the Corporation, together
with a copy of irrevocable instructions to a broker to deliver promptly to the Corporation the
amount of sale or loan proceeds to pay the aggregate Exercise Price and applicable tax
withholding amounts (if any), in which event the Shares acquired shall be delivered to the broker
promptly following receipt of payment.
Related Awards. These ISOs are not related to any other Award under the Plan.
Transferability. The Option Holder may not sell, assign, transfer, pledge or otherwise encumber
any ISOs, except in the event of the Option Holder’s death, by will or by the laws of descent and
distribution or pursuant to a Domestic Relations Order.
Termination of Service. If the Option Holder terminates Service for any reason other than in
connection with a Change in Control or the death or Disability of the Option Holder, any ISOs
that have not vested as of the date of that termination shall be forfeited to the Corporation, and the
Exercise Period of any vested ISOs shall expire three months after that termination of Service
(but in no event after the Expiration Date), except where that termination of Service is due to
Retirement, in which case the Exercise Period of any vested ISOs shall expire one year after that
termination of Service (but in no event after the Expiration Date), or in the case of a Termination
for Cause, in which case all ISOs held by the Option Holder shall expire immediately. If the
Option Holder’s Service terminates on account of the Option Holder’s death or Disability, the
Vesting Date for all ISOs that have not vested or been forfeited shall be accelerated to the date of
that termination of Service, and the Exercise Period of all ISOs shall expire one year after that
termination of Service (but in no event after the Expiration Date). [Post-termination exercise
period may be modified at Committee’s election except with respect to a Termination for
Cause.]
Effect of Change in Control. In accordance with Plan Section 5.5(b)(iii), if a Change in Control
occurs and the Participant experiences an Involuntary Separation from Service other than a
Termination for Cause during the 365-day period following the date of such Change in Control,
then the Vesting Date for any non-vested ISO will be accelerated to the date of the Participant’s
Involuntary Separation from Service (unless the acquirer does not assume the outstanding ISOs or
replaces them with a benefit that the Committee determines to be of equivalent value, in which
case any nonvested ISOs will be become vested upon the effective date of the Change in
Control).
Option Holder’s Rights. The ISOs awarded hereby do not entitle the Option Holder to any
rights of a stockholder of the Corporation.
Delivery of Shares to Option Holder. Promptly after receipt of an Exercise Notice and full
payment of the Exercise Price for the Shares being acquired, the Corporation shall issue and
deliver to the Option Holder (or other person validly exercising the ISO) a certificate or
certificates representing the Shares of Common Stock being purchased, or evidence of the
issuance of such Shares in book-entry form, registered in the name of the Option Holder (or such
other person), or, upon request, in the name of the Option Holder (or such other person) and in
the name of another person in such form of joint ownership as requested by the Option Holder (or
such other person) pursuant to applicable state law. The Corporation’s obligation to deliver a
-2-
stock certificate or evidence of the issuance of Shares in book-entry form for Shares purchased
upon the exercise of an ISO can be conditioned upon the receipt of a representation of investment
intent from the Option Holder (or the Option Holder’s Beneficiary) in such form as the
Committee requires. The Corporation shall not be required to deliver stock certificates or
evidence of the issuance of Shares in book-entry form for Shares purchased prior to: (a) the
listing of those Shares on the Nasdaq; or (b) the completion of any registration or qualification of
those Shares required under applicable law.
Notice of Sale of Shares. The Option Holder (or other person who received Shares from the
exercise of the ISOs) shall give written notice to the Corporation promptly in the event of
the sale or other disposition of Shares received from the exercise of the ISOs within either:
(a) two years from the Grant Date; or (b) one year from the exercise date for the ISOs
exercised.
Adjustments in Shares. In the event of any recapitalization, forward or reverse stock split,
reorganization, merger, consolidation, spin-off, combination, exchange of Shares or other
securities, stock dividend, special or recurring dividend or distribution, liquidation, dissolution or
other similar corporate transaction or event, the Committee, in its sole discretion, shall adjust the
number of Shares or class of securities of the Corporation covered by the ISOs or the Exercise
Price of the ISOs. The Option Holder agrees to execute any documents required by the
Committee in connection with an adjustment under this Section 11.
Tax Withholding. The Corporation shall have the right to require the Option Holder to pay to
the Corporation the amount of any tax that the Corporation is required to withhold with respect to
such Shares, or in lieu thereof, to retain or sell without notice, a sufficient number of Shares to
cover the minimum amount required to be withheld, provided, however, that (a) no Shares are
withheld with a value exceeding the maximum amount of tax that may be required to be withheld
by law (or such other amount as may be permitted while still avoiding classification of the ISO as
a liability for financial accounting purposes), and (b) with respect to an ISO held by any
Participant who is subject to the filing requirements of Section 16 of the Exchange Act, any such
share withholding must be specifically approved by the Compensation Committee as the
applicable method that must be used to satisfy the tax withholding obligation or such share
withholding procedure must otherwise satisfy the requirements for an exempt transaction under
Section 16(b) of the Exchange Act. The Corporation shall have the right to deduct from all
dividends paid with respect to the Shares the amount of any taxes that the Corporation is required
to withhold with respect to such dividend payments.
Plan and Committee Decisions are Controlling. This Agreement, the award of ISOs to the
Option Holder and the issuance of Shares upon the exercise of the ISOs are subject in all respects
to the provisions of the Plan, which are controlling. Capitalized terms herein not defined in this
Agreement shall have the meaning ascribed to them in the Plan. All decisions, determinations
and interpretations by the Committee respecting the Plan, this Agreement, the award of ISOs or
the issuance of Shares upon the exercise of the ISOs shall be binding and conclusive upon the
Option Holder, any Beneficiary of the Option Holder or the legal representative thereof.
Option Holder’s Employment. Nothing in this Agreement shall limit the right of the
Corporation or any of its Affiliates to terminate the Option Holder’s service or employment as a
director, advisory director, director emeritus, officer or employee, or otherwise impose upon the
Corporation or any of its Affiliates any obligation to employ or accept the services or
employment of the Option Holder.
10.
11.
12.
13.
14.
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15.
16.
Amendment. The Committee may waive any conditions of or rights of the Corporation or
modify or amend the terms of this Agreement; provided, however, that the Committee may not
amend, alter, suspend, discontinue or terminate any provision of this Agreement if such action
may adversely affect the Option Holder without the Option Holder’s written consent. To the
extent permitted by applicable laws and regulations, the Committee shall have the authority, in its
sole discretion but with the permission of the Option Holder, to accelerate the vesting of the
Shares or remove any other restrictions imposed on the Option Holder with respect to the Shares,
whenever the Committee may determine that such action is appropriate.
Loss of ISO Status. If any of the ISOs fail, for any reason, to qualify for the special tax
treatment afforded the ISOs, they shall be treated as Non-Qualified Stock Options under
the Plan. The ISOs will lose ISO status: (a) if the Option Holder is not an employee of the
Corporation or its Affiliates from the Grant date through the date three months before the
exercise date; or (b) if the Shares acquired upon the exercise of the ISO are sold or disposed
of within one of the time periods described in Section 10.
17.
Option Holder Acceptance. The Option Holder shall signify acceptance of the terms and
conditions of this Agreement and acknowledge receipt of a copy of the Plan by signing in the
space provided below and returning the signed copy to the Corporation.
-4-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.
MID-SOUTHERN BANCORP, INC.
By
Its
ACCEPTED BY OPTION HOLDER
(Signature)
(Print Name)
(Street Address)
(City, State & Zip Code)
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MID-SOUTHERN BANCORP, INC.
2019 EQUITY INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AWARD AGREEMENT
NQSO No.
Grant Date:
This Non-Qualified Stock Option Award (“NQSO”) is granted by Mid-Southern Bancorp, Inc.
(“Corporation”) to [Name] (“Option Holder”) in accordance with the terms of this Non-Qualified Stock
Option Award Agreement (“Agreement”) and subject to the provisions of the Mid-Southern Bancorp, Inc.
2019 Equity Incentive Plan, as amended from time to time (“Plan”). The Plan is incorporated herein by
reference.
1.
2.
3.
NQSO Award. The Corporation grants to Option Holder NQSOs to purchase [Number] Shares
at an Exercise Price of $[Number] per Share. These NQSOs are subject to forfeiture and to limits
on transferability until they vest, as provided in Sections 5 and 6 of this Agreement and in Article
V of the Plan.
Vesting Dates. The NQSOs shall vest as follows, subject to earlier vesting in the event of a
termination of Service as provided in Section 6:
Vesting Date
NQSOs for
Number of Shares Vesting
Exercise. The Option Holder (or in the case of the death of the Option Holder, the designated
legal representative or heir of the Option Holder) may exercise the NQSOs during the Exercise
Period by giving written notice to the [_________________] [include appropriate officer] in the
form required by the Committee (“Exercise Notice”). The Exercise Notice must specify the
number of Shares to be purchased, which shall be at least 100 unless fewer shares remain
unexercised. The exercise date is the date the Exercise Notice is received by the Corporation.
The Exercise Period commences on the Vesting Date and expires at 5:00 p.m., EST, on the date
10 years after the Grant Date, such later time and date being hereinafter referred to as the
“Expiration Date,” subject to earlier expiration in the event of a termination of Service as
provided in Section 6. Any NQSOs not exercised as of the close of business on the last day of the
Exercise Period shall be cancelled without consideration at that time.
The Exercise Notice shall be accompanied by payment in full of the Exercise Price for the Shares
being purchased. Payment shall be made: (a) in cash, which may be in the form of a check,
money order, cashier's check or certified check, payable to the Corporation, or (b) by delivering
Shares of the Corporation already owned by the Option Holder having a Fair Market Value on the
-1-
exercise date equal to the aggregate Exercise Price to be paid, or (c) by instructing the
Corporation to withhold Shares otherwise issuable upon the exercise having an aggregate Fair
Market Value on the exercise date equal to the aggregate Exercise Price to be paid or (d) by a
combination thereof. Payment for the Shares being purchased upon exercise of the Option may
also be made by delivering a properly executed Exercise Notice to the Corporation, together with
a copy of irrevocable instructions to a broker to deliver promptly to the Corporation the amount
of sale or loan proceeds to pay the aggregate Exercise Price and applicable tax withholding
amounts (if any), in which event the Shares acquired shall be delivered to the broker promptly
following receipt of payment.
Related Awards: These NQSOs are not related to any other Award under the Plan.
Transferability. The Option Holder may not sell, assign, transfer, pledge or otherwise encumber
any NQSOs, except in the event of the Option Holder’s death, by will or by the laws of descent
and distribution or pursuant to a Domestic Relations Order. The Committee, in its sole and
absolute discretion, may allow the Option Holder to transfer one or more NQSOs to the Option
Holder’s Family Members, as provided in the Plan.
Termination of Service. If the Option Holder terminates Service for any reason other than in
connection with a Change in Control or the death or Disability of the Option Holder, any NQSOs
that have not vested as of the date of that termination shall be forfeited to the Corporation, and the
Exercise Period of any vested NQSOs shall expire three months after that termination of Service
(but in no event after the Expiration Date), except where that termination of Service is due to
Retirement, in which case the Exercise Period of any vested NQSOs shall expire one year after
that termination of Service (but in no event after the Expiration Date), or in the case of a
Termination for Cause, in which case all NQSOs held by the Option Holder shall expire
immediately. If the Option Holder’s Service terminates on account of the Option Holder’s death
or Disability, the Vesting Date for all NQSOs that have not vested or been forfeited shall be
accelerated to the date of that termination of Service, and the Exercise Period of all NQSOs shall
expire one year after that termination of Service (but in no event after the Expiration Date). [Post-
termination exercise period may be modified at Committee’s election except with respect to a
Termination for Cause.]
Effect of Change in Control. In accordance with Plan Section 5.5(b)(iii), if a Change in Control
occurs and the Participant experiences an Involuntary Separation from Service other than a
Termination for Cause during the 365-day period following the date of such Change in Control,
then the Vesting Date for any non-vested NQSO will be accelerated to the date of the
Participant’s Involuntary Separation from Service (unless the acquirer does not assume the
outstanding NQSOs or replaces them with a benefit that the Committee determines to be of
equivalent value, in which case any nonvested NQSOs will be become vested upon the effective
date of the Change in Control).
Option Holder’s Rights. The NQSOs awarded hereby do not entitle the Option Holder to any
rights of a shareholder of the Corporation.
Delivery of Shares to Option Holder. Promptly after receipt of an Exercise Notice and full
payment of the Exercise Price for the Shares being acquired, the Corporation shall issue and
deliver to the Option Holder (or other person validly exercising the NQSO) a certificate or
certificates representing the Shares of Common Stock being purchased, or evidence of the
issuance of such Shares in book-entry form, registered in the name of the Option Holder (or such
-2-
4.
5.
6.
7.
8.
9.
other person), or, upon request, in the name of the Option Holder (or such other person) and in
the name of another person in such form of joint ownership as requested by the Option Holder (or
such other person) pursuant to applicable state law. The Corporation’s obligation to deliver a
stock certificate or evidence of the issuance of Shares in book-entry form for Shares purchased
upon the exercise of an NQSO can be conditioned upon the receipt of a representation of
investment intent from the Option Holder (or the Option Holder’s Beneficiary) in such form as
the Committee requires. The Corporation shall not be required to deliver stock certificates or
evidence of the issuance of Shares in book-entry form for Shares purchased prior to: (a) the
listing of those Shares on the Nasdaq; or (b) the completion of any registration or qualification of
those Shares required under applicable law.
Adjustments in Shares. In the event of any recapitalization, forward or reverse stock split,
reorganization, merger, consolidation, spin-off, combination, exchange of Shares or other
securities, stock dividend, special or recurring dividend or distribution, liquidation, dissolution or
other similar corporate transaction or event, the Committee, in its sole discretion, shall adjust the
number of Shares or class of securities of the Corporation covered by the NQSOs or the Exercise
Price of the NQSOs. The Option Holder agrees to execute any documents required by the
Committee in connection with an adjustment under this Section 10.
Tax Withholding. The Corporation shall have the right to require the Option Holder to pay to
the Corporation the amount of any tax that the Corporation is required to withhold with respect to
such Shares, or in lieu thereof, to retain or sell without notice, a sufficient number of Shares to
cover the minimum amount required to be withheld , provided, however, that (a) no Shares are
withheld with a value exceeding the maximum amount of tax that may be required to be withheld
by law (or such other amount as may be permitted while still avoiding classification of the NQSO
as a liability for financial accounting purposes), and (b) with respect to an NQSO held by any
Participant who is subject to the filing requirements of Section 16 of the Exchange Act, any such
share withholding must be specifically approved by the Compensation Committee as the
applicable method that must be used to satisfy the tax withholding obligation or such share
withholding procedure must otherwise satisfy the requirements for an exempt transaction under
Section 16(b) of the Exchange Act. The Corporation shall have the right to deduct from all
dividends paid with respect to the Shares the amount of any taxes that the Corporation is required
to withhold with respect to such dividend payments.
Plan and Committee Decisions are Controlling. This Agreement, the award of NQSOs to the
Option Holder and the issuance of Shares upon the exercise of the NQSOs are subject in all
respects to the provisions of the Plan, which are controlling. Capitalized terms herein not defined
in this Agreement shall have the meaning ascribed to them in the Plan. All decisions,
determinations and interpretations by the Committee respecting the Plan, this Agreement, the
award of NQSOs or the issuance of Shares upon the exercise of the NQSOs shall be binding and
conclusive upon the Option Holder, any Beneficiary of the Option Holder or the legal
representative thereof.
Option Holder’s Employment. Nothing in this Agreement shall limit the right of the
Corporation or any of its Affiliates to terminate the Option Holder’s service or employment as a
director, advisory director, director emeritus, officer or employee, or otherwise impose upon the
Corporation or any of its Affiliates any obligation to employ or accept the services or
employment of the Option Holder.
10.
11.
12.
13.
14.
Amendment. The Committee may waive any conditions of or rights of the Corporation or
modify or amend the terms of this Agreement; provided, however, that the Committee may not
-3-
amend, alter, suspend, discontinue or terminate any provision of this Agreement if such action
may adversely affect the Option Holder without the Option Holder’s written consent. To the
extent permitted by applicable laws and regulations, the Committee shall have the authority, in its
sole discretion but with the permission of the Option Holder, to accelerate the vesting of the
Shares or remove any other restrictions imposed on the Option Holder with respect to the Shares,
whenever the Committee may determine that such action is appropriate.
15.
Option Holder Acceptance. The Option Holder shall signify acceptance of the terms and
conditions of this Agreement and acknowledge receipt of a copy of the Plan by signing in the
space provided below and returning the signed copy to the Corporation.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.
MID-SOUTHERN BANCORP, INC.
By
Its
ACCEPTED BY OPTION HOLDER
(Signature)
(Print Name)
(Street Address)
(City, State & Zip Code)
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Exhibit 10.8
MID-SOUTHERN BANCORP, INC.
2019 EQUITY INCENTIVE PLAN
RESTRICTED STOCK AWARD AGREEMENT
RS No.
Grant Date:
This Restricted Stock Award (“Restricted Stock Award”) is granted by Mid-Southern Bancorp,
Inc. (“Corporation”) to [Name] (“Grantee”) in accordance with the terms of this Restricted Stock Award
Agreement (“Agreement”) and subject to the provisions of the Mid-Southern Bancorp, Inc. 2019 Equity
Incentive Plan, as amended from time to time (“Plan”). The Plan is incorporated herein by reference.
1.
Restricted Stock Award. The Corporation makes this Restricted Stock Award of [Number]
Shares to Grantee [in exchange for a payment of $________]. These Shares are subject to
forfeiture and to limits on transferability until they vest, as provided in Sections 2, 3 and 4 of this
Agreement and in Article VI of the Plan.
2.
Vesting Dates: The Shares shall vest as follows:
Vesting Date
Number of Shares Vesting
3.
4.
5.
Transferability. The Grantee may not sell, assign, transfer, pledge or otherwise encumber any
Shares that have not vested, except in the event of the Grantee’s death, by will or by the laws of
descent and distribution or pursuant to a Domestic Relations Order. The Committee, in its sole
and absolute discretion, may allow the Grantee to transfer all or any portion of this Restricted
Stock Award to the Grantee’s Family Members, as provided in the Plan.
Termination of Service. If the Grantee terminates Service for any reason other than in
connection with a Change in Control or the death or Disability of the Grantee, any Shares that
have not vested as of the date of that termination shall be forfeited to the Corporation. If the
Grantee’s Service terminates on account of the Grantee’s death or Disability, the Vesting Date for
all Shares that have not vested or been forfeited shall be accelerated to the date of that termination
of Service.
Effect of Change in Control. In accordance with Plan Section 6.2(b)(iii), if a Change in Control
occurs and the Participant experiences an Involuntary Separation from Service other than a
Termination for Cause during the 365-day period following the date of such Change in Control,
then the Vesting Date for any non-vested Shares will become vested on the date of the
Participant’s Involuntary Separation from Service (unless the acquirer does not assume the
outstanding Shares or replaces them with a benefit that the Committee determines to be of
equivalent value, in which case any nonvested Shares will be become vested upon the effective
date of the Change in Control).
6.
7.
8.
9.
Stock Power. The Grantee agrees to execute a stock power with respect to each stock certificate
reflecting the Shares, or other evidence of book-entry stock ownership, in favor of the
Corporation. The Shares shall not be issued by the Corporation until the required stock powers
are delivered to the Corporation.
Delivery of Shares. The Corporation shall issue stock certificates or evidence of the issuance of
such Shares in book-entry form, in the name of the Grantee reflecting the Shares vesting on each
Vesting Date in Section 2. The Corporation shall retain these certificates or evidence of the
issuance of Shares in book-entry form until the Shares represented thereby become vested. Prior
to vesting, the Shares shall be subject to the following restriction, communicated in writing to the
Corporation’s stock transfer agent:
These shares of common stock are subject to the terms of an Award
Agreement between Mid-Southern Bancorp, Inc. and [NAME] dated
[GRANT DATE] made pursuant to the terms of the Mid-Southern
Bancorp, Inc. 2019 Equity Incentive Plan, copies of which are on file at
the executive offices of Mid-Southern Bancorp, Inc., and may not be
sold, encumbered, hypothecated or otherwise transferred except in
accordance with the terms of such Plan and Award Agreement.
Grantee’s Rights Regarding Dividends and Voting. Any dividends declared and paid with
respect to Shares that are subject to this Agreement shall be held by the Company on behalf of the
Grantee until the Grantee vests in those Shares, as provided for in the Plan. If the Grantee vests
in Shares, then the held dividends related to those Shares shall be paid to the Grantee or the
Grantee’s Beneficiary in a lump sum, without interest, within thirty (30) days following the
applicable Vesting Date. If the Grantee does not vest in Shares, then the Grantee shall
immediately forfeit his or her interest in the held dividends related to those Shares. The Grantee
may exercise all voting rights appurtenant to the Shares.
Delivery of Shares to Grantee. Upon the vesting of any Shares, the restrictions in Sections 3
and 4 shall terminate, and the Corporation shall deliver only to the Grantee (or, if applicable, the
Grantee’s Beneficiary, estate or Family Member) a certificate (without the legend referenced in
Section 7) or evidence of the issuance of Shares in book-entry form, and the related stock power
in respect of the vesting Shares. The Corporation’s obligation to deliver a stock certificate for
vested Shares, or evidence of the issuance of Shares in book-entry form, can be conditioned upon
the receipt of a representation of investment intent from the Grantee (or the Grantee’s
Beneficiary, estate or Family Member) in such form as the Committee requires. The Corporation
shall not be required to deliver stock certificates for vested Shares, or evidence of the issuance of
Shares in book-entry form, prior to: (a) the listing of those Shares on the Nasdaq; or (b) the
completion of any registration or qualification of those Shares required under applicable law.
10.
Adjustments in Shares. In the event of any recapitalization, forward or reverse stock split,
reorganization, merger, consolidation, spin-off, combination, exchange of Shares or other
securities, stock dividend, special or recurring dividend or distribution, liquidation, dissolution or
other similar corporate transaction or event, the Committee, in its sole discretion, shall adjust the
number of Shares or class of securities of the Corporation covered by this Agreement. Any
additional Shares or other securities received by the Grantee as a result of any such adjustment
shall be subject to all restrictions and requirements applicable to Shares that have not vested. The
Grantee agrees to execute any documents required by the Committee in connection with an
adjustment under this Section 10.
-2-
11.
12.
13.
14.
15.
Tax Election. The Grantee understands that an election may be made under Section 83(b)
of the Code to accelerate the Grantee’s tax obligation with respect to receipt of the Shares
from the Vesting Dates to the Grant Date by timely submitting an election to the Internal
Revenue Service substantially in the form attached hereto (or in accordance with the
Internal Revenue Service rules in effect at the time the election is made, e.g., electronically).
This election shall not accelerate when dividends related to those Shares will be paid.
Tax Withholding. The Corporation shall have the right to require the Grantee to pay to the
Corporation the amount of any tax that the Corporation is required to withhold with respect to
such Shares, or in lieu thereof, to retain or sell without notice, a sufficient number of Shares to
cover the minimum amount required to be withheld, provided, however, that (a) no Shares are
withheld with a value exceeding the maximum amount of tax that may be required to be withheld
by law (or such other amount as may be permitted while still avoiding classification of the
Restricted Stock Award as a liability for financial accounting purposes), and (b) with respect to a
Restricted Stock Award held by any Participant who is subject to the filing requirements of
Section 16 of the Exchange Act, any such share withholding must be specifically approved by the
Compensation Committee as the applicable method that must be used to satisfy the tax
withholding obligation or such share withholding procedure must otherwise satisfy the
requirements for an exempt transaction under Section 16(b) of the Exchange Act. The
Corporation shall have the right to deduct from all dividends paid with respect to the Shares the
amount of any taxes that the Corporation is required to withhold with respect to such dividend
payments.
Plan and Committee Decisions are Controlling. This Agreement and the award of Shares to
the Grantee are subject in all respects to the provisions of the Plan, which are controlling.
Capitalized terms herein not defined in this Agreement shall have the meaning ascribed to them
in the Plan. All decisions, determinations and interpretations by the Committee respecting the
Plan, this Agreement or the award of Shares shall be binding and conclusive upon the Grantee,
any Beneficiary of the Grantee or the legal representative thereof.
Grantee’s Employment. Nothing in this Agreement shall limit the right of the Corporation or
any of its Affiliates to terminate the Grantee’s service or employment as a director, advisory
director, director emeritus, officer or employee, or otherwise impose upon the Corporation or any
of its Affiliates any obligation to employ or accept the services or employment of the Grantee.
Amendment. The Committee may waive any conditions of or rights of the Corporation or
modify or amend the terms of this Agreement; provided, however, that the Committee may not
amend, alter, suspend, discontinue or terminate any provision of this Agreement if such action
may adversely affect the Grantee without the Grantee’s written consent. To the extent permitted
by applicable laws and regulations, the Committee shall have the authority, in its sole discretion
but with the permission of the Grantee, to accelerate the vesting of the Shares or remove any
other restrictions imposed on the Grantee with respect to the Shares, whenever the Committee
may determine that such action is appropriate.
16.
Grantee Acceptance. The Grantee shall signify acceptance of the terms and conditions of this
Agreement and acknowledge receipt of a copy of the Plan by signing in the space provided below
and returning the signed copy to the Corporation.
-3-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the
date first above written.
ra
MID-SOUTHERN BANCORP, INC.
By
Its
ACCEPTED BY GRANTEE
(Signature)
(Print Name)
(Street Address)
(City, State & Zip Code)
-4-
STOCK POWER
(One stock power for each stock certificate or grant in book-entry form issued)
For value received, I hereby sell, assign, and transfer to Mid-Southern Bancorp, Inc. (the “Corporation”)
____________ shares of the capital stock of the Corporation, standing in my name on the books and
records of the aforesaid Corporation, represented by Certificate No. ____________________ or otherwise
identified in book-entry form as ___________________, and do hereby irrevocably constitute and
appoint the Secretary of the Corporation attorney, with full power of substitution, to transfer this stock on
the books and records of the aforesaid Corporation.
Dated:
In the presence of:
83(b) ELECTION FORM
TO:
Internal Revenue Service Center
[Address where the employee files his or her personal income tax return]
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
Name:
Address:
Social Security Number ____ - __ - ____
Property with respect to which this Election is made: _______ shares of the common stock of
Mid-Southern Bancorp, Inc.
Date of Grant or Transfer: ____________, _____.
Taxable Year for which Election is made: Calendar Year _____.
Nature of the Restrictions to which the Property is Subject: (i) a vesting schedule pursuant to
which the taxpayer will not be fully vested in the property until ___________.
Fair Market Value of the Property upon receipt by taxpayer $___________.
Amount Paid for the Property: ____________.
Copies of this Election have been furnished to ___________________________.
A copy of this Election also shall be attached to my IRS Form 1040 for calendar year _____.
Date
Signature
Subsidiaries of the Registrant
Exhibit 21
Parent
Mid-Southern Bancorp, Inc.
Subsidiaries
Mid-Southern Savings Bank, FSB
Percentage
of Ownership
100%
Jurisdiction or
State of Incorporation
Federal
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Mid-Southern Bancorp, Inc.’s Registration Statement on Form S-8 (Nos. 333-226919
and 333-238774) of our report dated March 26, 2021 relating to the consolidated financial statements, contained in this Annual Report
on Form 10-K for Mid-Southern Bancorp, Inc. for the year ended December 31, 2020.
/s/ Monroe Shine & Co., Inc.
New Albany, Indiana
March 26, 2021
Exhibit 31.1
Certification Required
By Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934
I, Alexander G. Babey, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Mid-Southern Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this annual report is being
prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fiscal fourth quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing
the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 26, 2021
/s/ Alexander G. Babey
Alexander G. Babey
Chief Executive Officer
Exhibit 31.2
Certification Required
By Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934
I, Robert W., DeRossett, certify that:
1. I have reviewed this Annual Report on Form 10-K of Mid-Southern Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fiscal fourth quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent
function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Arch
Date: March 26, 2021
/s/ Robert W. DeRossett
Robert W. DeRossett
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
The undersigned herby certifies in his capacity as an officer of Mid-Southern Bancorp, Inc. (the “Company”) pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Annual Report on
Form 10-K that:
1.
2.
the report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended,
and
the information contained in the report fairly presents, in all material respects, the Company’s financial condition and results
of operations.
/s/ Alexander G. Babey
Alexander G. Babey
Chief Executive Officer
Dated: March 26, 2021
/s/ Robert W. DeRossett
Robert W. DeRossett
Chief Financial Officer
Dated: March 26, 2021