10-Q 1 midsouth10q63019.htm FORM 10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2019

OR

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

For the transition period from _________________  to ___________________

Commission File No. 001-38491

Mid-Southern Bancorp, Inc.
(Exact name of registrant as specified in its charter)

 
Indiana
 
82-4821705
 
 
(State or other jurisdiction of
 
(I.R.S. Employer
 
 
incorporation or organization)
 
Identification Number)
 
 
 
 
 
 
 
300 North Water Street, Salem, Indiana  47167       812-883-2639
 
  (Address of principal executive offices, zip code, telephone number)  
     
  Not applicable
 
   (Former name, former address and former fiscal year, if changed since last report)  

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

Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $.01 per share
 
MSVB
 
The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes     X      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   X     No ____

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

Large Accelerated Filer ___                               Accelerated Filer                                     Non-Accelerated Filer ___

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

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  As of August 7, 2019, there were 3,565,196 shares of the registrant’s common stock outstanding.


MID-SOUTHERN BANCORP, INC.


INDEX
Part I
Financial Information
Page
 
 
 
 
Item 1.  Consolidated Financial Statements
 
 
 
 
 
Consolidated Balance Sheets as of June 30, 2019
 
 
  and December 31, 2018 (unaudited)
3
 
 
 
 
Consolidated Statements of Income for the three and
 
 
  six months ended June 30, 2019 and 2018 (unaudited)  
4
 
 
 
 
Consolidated Statements of Comprehensive Income for the three
 
 
  and six months ended June 30, 2019 and 2018 (unaudited)
5
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity
 
 
  for the six months ended June 30, 2019 and 2018 (unaudited)
6
     
  Consolidated Statements of Cash Flows for the six months  
    ended June 30, 2019 and 2018 (unaudited)
7
 
 
 
  Notes to Consolidated Financial Statements (unaudited) 8-35
     
  Item 2.  Management’s Discussion and Analysis of Financial  
    Condition and Results of Operations 
36-45
     
  Item 3.  Quantitative and Qualitative Disclosures About  
    Market Risk 45
     
  Item 4.  Controls and Procedures
46
     
Part II
Other Information  
     
  Item 1.  Legal Proceedings
47
     
  Item 1A.  Risk Factors
47
     
  Item 2.  Unregistered Sales of Equity Securities and  
                    Use of Proceeds 47
     
  Item 3.  Defaults Upon Senior Securities
47
     
  Item 4.  Mine Safety Disclosures
47
     
  Item 5.  Other Information
47
     
  Item 6.  Exhibits
48
     
Signatures
49

-2-


Item 1. Consolidated Financial Statements
           
MID-SOUTHERN BANCORP, INC.
 
CONSOLIDATED BALANCE SHEETS
 
(In thousands, except share information) (Unaudited)
 
             
   
June 30,
   
December 31,
 
   
2019
   
2018
 
ASSETS
           
  Cash and due from banks
 
$
909
   
$
884
 
  Interest-bearing deposits with banks
   
21,239
     
11,816
 
    Cash and cash equivalents
   
22,148
     
12,700
 
                 
  Securities available for sale, at fair value
   
51,071
     
53,140
 
  Securities held to maturity
   
67
     
100
 
                 
  Loans, net
   
126,606
     
126,293
 
                 
  Federal Home Loan Bank stock, at cost
   
778
     
778
 
  Real estate held for sale
   
239
     
239
 
  Premises and equipment
   
1,881
     
1,928
 
  Accrued interest receivable:
               
    Loans
   
423
     
435
 
    Securities
   
390
     
396
 
  Cash value of life insurance
   
3,756
     
3,718
 
  Other assets
   
320
     
935
 
                 
      Total Assets
 
$
207,679
   
$
200,662
 
                 
LIABILITIES
               
  Deposits:
               
    Noninterest-bearing
 
$
16,441
   
$
18,334
 
    Interest-bearing
   
129,839
     
132,774
 
      Total deposits
   
146,280
     
151,108
 
                 
  Advances from Federal Home Loan Bank
   
10,000
     
-
 
                 
  Accrued expenses and other liabilities
   
593
     
711
 
      Total Liabilities
   
156,873
     
151,819
 
                 
STOCKHOLDERS' EQUITY
               
  Preferred stock, 1,000,000 shares authorized, $0.01 par value,
               
    no shares issued and outstanding
   
-
     
-
 
  Common stock, 30,000,000 shares authorized, $0.01 par value, 3,565,430 shares
               
    issued and 3,565,196 shares outstanding
   
36
     
36
 
  Additional paid-in capital
   
30,315
     
30,302
 
  Retained earnings, substantially restricted
   
21,197
     
20,672
 
  Accumulated other comprehensive loss gain (loss)
   
1,207
     
(166
)
  Unearned ESOP shares
   
(1,945
)
   
(1,997
)
  Unearned stock compensation plan
   
(1
)
   
(1
)
  Treasury stock, at cost - 234 shares
   
(3
)
   
(3
)
      Total Stockholders' Equity
   
50,806
     
48,843
 
                 
      Total Liabilities and Stockholders’ Equity
 
$
207,679
   
$
200,662
 

See accompanying notes to consolidated financial statements.

-3-

MID-SOUTHERN BANCORP, INC.
 
CONSOLIDATED STATEMENTS OF INCOME
 
(In thousands, except share information) (Unaudited)
 
                         
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
INTEREST INCOME
                       
  Loans, including fees
 
$
1,541
   
$
1,418
   
$
3,083
   
$
2,762
 
  Investment securities:
                               
    Mortgage-backed securities
   
139
     
103
     
288
     
209
 
    Municipal tax exempt
   
164
     
102
     
329
     
204
 
    Other debt securities
   
69
     
69
     
138
     
140
 
  Federal Home Loan Bank dividends
   
10
     
8
     
23
     
21
 
  Interest-bearing deposits with banks and time deposits
   
43
     
59
     
90
     
80
 
     Total interest income
   
1,966
     
1,759
     
3,951
     
3,416
 
                                 
INTEREST EXPENSE
                               
  Deposits
   
205
     
176
     
391
     
341
 
  Borrowings
   
-
     
6
     
-
     
15
 
     Total interest expense
   
205
     
182
     
391
     
356
 
                                 
      Net interest income
   
1,761
     
1,577
     
3,560
     
3,060
 
                                 
  Provision for loan losses
   
-
     
-
     
-
     
-
 
      Net interest income after provision for loan losses
   
1,761
     
1,577
     
3,560
     
3,060
 
                                 
NONINTEREST INCOME
                               
  Deposit account service charges
   
91
     
87
     
167
     
182
 
  Net gain on sales of securities available for sale
   
7
     
-
     
7
     
-
 
  Increase in cash value of life insurance
   
18
     
18
     
36
     
36
 
  ATM and debit card fee income
   
98
     
89
     
187
     
173
 
  Other income
   
9
     
11
     
19
     
23
 
      Total noninterest income
   
223
     
205
     
416
     
414
 
                                 
NONINTEREST EXPENSE
                               
  Compensation and benefits
   
816
     
756
     
1,574
     
1,436
 
  Occupancy and equipment
   
98
     
112
     
199
     
231
 
  Data processing
   
301
     
198
     
597
     
378
 
  Professional fees
   
172
     
112
     
321
     
219
 
  Net loss on foreclosed real estate
   
-
     
16
     
-
     
-
 
  Directors' fees
   
48
     
44
     
92
     
89
 
  Supervisory examinations
   
16
     
18
     
35
     
36
 
  Deposit insurance premiums
   
12
     
12
     
25
     
26
 
  Other expenses
   
184
     
156
     
366
     
303
 
      Total noninterest expense
   
1,647
     
1,424
     
3,209
     
2,718
 
                                 
      Income before income taxes
   
337
     
358
     
767
     
756
 
                                 
Income tax expense
   
40
     
62
     
108
     
139
 
                                 
      Net Income
 
$
297
   
$
296
   
$
659
   
$
617
 
                                 
Earnings per common share (1):
                               
      Basic
 
$
0.09
   
$
0.09
   
$
0.20
   
$
0.18
 
      Diluted
 
$
0.09
   
$
0.09
   
$
0.20
   
$
0.18
 
                                 
(1) Per share amounts for 2018 have been restated to give retroactive recognition to the exchange ratio applied
         
      in the second-step mutual to stock conversion ("Conversion") (2.3462 to one). See Note 2 to the consolidated financial statements.
 
See accompanying notes to consolidated financial statements.

-4-

MID-SOUTHERN BANCORP, INC.
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
(In thousands) (Unaudited)
 
                         
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
                         
Net Income
 
$
297
   
$
296
   
$
659
   
$
617
 
                                 
Other Comprehensive Income (Loss), net of tax
                               
  Unrealized gains (losses) on securities available for sale:
                               
     Net unrealized holding gains (losses) arising during the period
   
1,247
     
(13
)
   
1,833
     
(831
)
     Income tax (expense) benefit
   
(310
)
   
3
     
(455
)
   
207
 
        Net of tax amount
   
937
     
(10
)
   
1,378
     
(624
)
                                 
     Reclassification adjustment for realized gains included
                               
        in net income during the period
   
7
     
-
     
7
     
-
 
     Income tax expense
   
(2
)
   
-
     
(2
)
   
-
 
        Net of tax amount
   
5
     
-
     
5
     
-
 
                                 
Other Comprehensive Income (Loss), net of tax
   
932
     
(10
)
   
1,373
     
(624
)
                                 
Total Comprehensive Income (Loss)
 
$
1,229
   
$
286
   
$
2,032
   
$
(7
)
See accompanying notes to consolidated financial statements.

-5-

MID-SOUTHERN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share information) (Unaudited)
                  
 
 
 
                                                 
                     
Accumulated
                         
         
Additional
         
Other
   
Unearned
   
Unearned
             
    
Common
   
Paid-in
   
Retained
   
Comprehensive
   
ESOP
   
Stock
   
Treasury
       
    
Stock
   
Capital
   
Earnings
   
(Loss) Income
   
Shares
   
Compensation
   
Stock
   
Total
 
                                                 
Balances at January 1, 2018
 
$
1,472
   
$
3,501
   
$
19,326
   
$
(47
)
 
$
-
   
$
(3
)
 
$
(95
)
 
$
24,154
 
                                                                 
Net income
   
-
     
-
     
617
     
-
     
-
     
-
     
-
     
617
 
                                                                 
Other comprehensive loss
   
-
     
-
     
-
     
(624
)
   
-
     
-
     
-
     
(624
)
                                                                 
Grant of common stock for
                                                               
stock compensation
   
-
     
2
     
-
     
-
     
-
     
(2
)
   
-
     
-
 
                                                                 
Balances at June 30, 2018
 
$
1,472
   
$
3,503
   
$
19,943
   
$
(671
)
 
$
-
   
$
(5
)
 
$
(95
)
 
$
24,147
 
                                                                 
Balances at January 1, 2019
 
$
36
   
$
30,302
   
$
20,672
   
$
(166
)
 
$
(1,997
)
 
$
(1
)
 
$
(3
)
 
$
48,843
 
                                                                 
Net income
   
-
     
-
     
659
     
-
     
-
     
-
     
-
     
659
 
                                                                 
Other comprehensive income
   
-
     
-
     
-
     
1,373
     
-
     
-
     
-
     
1,373
 
                                                                 
Cash dividends ($0.04 per share)
   
-
     
-
     
(134
)
   
-
     
-
     
-
     
-
     
(134
)
                                                                 
ESOP shares committed to be
                                                               
released
   
-
     
13
     
-
     
-
     
52
     
-
     
-
     
65
 
                                                                 
Balances at June 30, 2019
 
$
36
   
$
30,315
   
$
21,197
   
$
1,207
   
$
(1,945
)
 
$
(1
)
 
$
(3
)
 
$
50,806
 
                                                                 
(1) Per share amounts for 2018 have been restated to give retroactive recognition to the exchange ratio applied
                 
in the Conversion (2.3462 to one). See Note 2 to the consolidated financial statements.
                         
See accompanying notes to consolidated financial statements.

-6-

MID-SOUTHERN BANCORP, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(In thousands) (Unaudited)  
             
   
Six Months Ended
 
   
June 30,
 
   
2019
   
2018
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
  Net income
 
$
659
   
$
617
 
  Adjustments to reconcile net income to net cash provided by operating activities:
               
      Amortization of premiums and accretion of discounts on securities, net
   
91
     
19
 
      Depreciation expense
   
50
     
62
 
      ESOP compensation expense
   
65
     
-
 
      Deferred income taxes
   
6
     
(4
)
      Increase in cash value of life insurance
   
(36
)
   
(36
)
      Net gain on sales of securities available for sale
   
(7
)
   
-
 
      Decrease (increase) in accrued interest receivable
   
18
     
(54
)
      Net change in other assets and liabilities
   
29
     
95
 
        Net Cash Provided By Operating Activities
   
875
     
699
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
  Purchases of securities available for sale
   
(400
)
   
-
 
  Principal collected on mortgage-backed securities available for sale
   
3,557
     
1,711
 
  Proceeds from maturities of securities available for sale
   
385
     
1,000
 
  Proceeds from sales of securities available for sale
   
278
     
-
 
  Principal collected on mortgage-backed securities held to maturity
   
8
     
32
 
  Proceeds from maturities of securities held to maturity
   
25
     
-
 
  Net increase in loans receivable
   
(313
)
   
(6,250
)
  Proceeds from the sale of foreclosed real estate
   
-
     
243
 
  Purchase of premises and equipment
   
(3
)
   
(9
)
  Investment in cash value of life insurance
   
(2
)
   
(2
)
        Net Cash Provided By (Used In) Investing Activities
   
3,535
     
(3,275
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
  Net (decrease) increase in deposits
   
(4,828
)
   
38,209
 
  Net increase in borrowings from Federal Home Loan Bank
   
10,000
     
-
 
  Cash dividends paid
   
(134
)
   
-
 
        Net Cash Provided By Financing Activities
   
5,038
     
38,209
 
                 
Net Increase in Cash and Cash Equivalents
   
9,448
     
35,633
 
                 
Cash and cash equivalents at beginning of period
   
12,700
     
7,464
 
                 
Cash and Cash Equivalents at End of Period
 
$
22,148
   
$
43,097
 
                 
Supplemental Disclosure of Cash Flow Information
               
   Cash payments for:
               
      Interest
 
$
391
   
$
356
 
      Net tax (refunds) payments
   
(43
)
   
31
 

See accompanying notes to consolidated financial statements.

-7-



MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.           Presentation of Interim Information

Mid-Southern Bancorp, Inc., (the “Company”) was incorporated in January 2018 and became the holding company for Mid-Southern Savings Bank, FSB (the “Bank”), on July 11, 2018, upon the completion of the Bank’s conversion from the mutual holding company ownership structure and the Company’s related public stock offering.  Please see Note 2 – Conversion and Stock Issuance for more information.  Accordingly, the reported results and financial information for periods ending prior to September 30, 2018 relate solely to the Bank and its wholly-owned subsidiary, Mid-Southern Investments, Inc.

The accompanying unaudited consolidated financial statements and notes have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the information and footnotes required by U.S. Generally Accepted Accounting Principles (“GAAP”) for complete financial statements.  These unaudited interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the SEC on March 22, 2019 (“2018 Form 10-K”).

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

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


2.   Conversion and Stock Issuance

The Company, an Indiana corporation, was organized by Mid-Southern, M.H.C. (“the MHC”) and the Bank in connection with the MHC's plan of conversion from mutual to stock form of ownership (the “Conversion”).  Upon consummation of the Conversion, which occurred on July 11, 2018, the Company became the holding company for the Bank and now owns all of the issued and outstanding shares of the Bank’s common stock.



-8-

MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)






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

Proceeds from the offering, net of $1.2 million in expenses, totaled $24.4 million.  The Company used $2.0 million of the net proceeds to fund the ESOP and made a $10.2 million capital contribution to the Bank.  In addition, concurrent with the offering, 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 any fractional shares.  As a result of the offering, exchange and cash in lieu of fractional shares, the Company issued 3,565,430 shares.

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

The conversion 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.

3.   Investment Securities

Investment securities have been classified in the consolidated balance sheets according to management’s intent.  Debt securities held by the Company include mortgage-backed securities and other debt securities issued by the Government National Mortgage Association (“GNMA”), a U.S. government agency, and mortgage-backed securities and collateralized mortgage obligations issued by the Federal National Mortgage Association (“FNMA”) and the Federal Home Loan Mortgage Corporation (“FHLMC”), which are government-sponsored enterprises. Mortgage-backed securities (“MBS”) represent participating interests in pools of long-term first mortgage loans originated and serviced by the issuers of the securities.  Collateralized mortgage obligations (“CMO”) are complex mortgage-backed securities that restructure the cash flows and risks of the underlying mortgage collateral.  The Company also holds debt securities issued by municipalities and political subdivisions of state and local governments.




-9-

MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Investment securities at June 30, 2019 and December 31, 2018 are summarized as follows:

         
Gross
   
Gross
       
(In thousands)
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
June 30, 2019:
 
Cost
   
Gains
   
Losses
   
Value
 
                         
Securities available for sale:
                       
  Mortgage-backed securities:
                       
    Agency MBS
 
$
8,650
   
$
8
   
$
41
   
$
8,617
 
    Agency CMO
   
12,482
     
274
     
21
     
12,735
 
     
21,132
     
282
     
62
     
21,352
 
                                 
  Other debt securities:
                               
    Municipal obligations
   
28,333
     
1,386
     
-
     
29,719
 
                                 
Total securities available
                               
  for sale
 
$
49,465
   
$
1,668
   
$
62
   
$
51,071
 
                                 
Securities held to maturity:
                               
    Agency MBS
 
$
47
   
$
1
   
$
-
   
$
48
 
    Municipal obligations
   
20
     
-
     
-
     
20
 
                                 
Total securities held to
                               
  maturity
 
$
67
   
$
1
   
$
-
   
$
68
 
                                 
December 31, 2018:
                               
                                 
Securities available for sale:
                               
  Mortgage-backed securities:
                               
    Agency MBS
 
$
9,140
   
$
-
   
$
269
   
$
8,871
 
    Agency CMO
   
15,569
     
114
     
124
     
15,559
 
     
24,709
     
114
     
393
     
24,430
 
                                 
  Other debt securities:
                               
    Municipal obligations
   
28,653
     
267
     
210
     
28,710
 
                                 
Total securities available
                               
  for sale
 
$
53,362
   
$
381
   
$
603
   
$
53,140
 
                                 
Securities held to maturity:
                               
    Agency MBS
 
$
55
   
$
1
   
$
-
   
$
56
 
    Municipal obligations
   
45
     
-
     
-
     
45
 
                                 
Total securities held to
                               
  maturity
 
$
100
   
$
1
   
$
-
   
$
101
 


The amortized cost and fair value of debt securities as of June 30, 2019, 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.

-10-

MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

   
Available for Sale
   
Held to Maturity
 
   
Amortized
   
Fair
   
Amortized
   
Fair
 
(In thousands)
 
Cost
   
Value
   
Cost
   
Value
 
Due in one year or less
 
$
-
   
$
-
   
$
20
   
$
20
 
Due after one year through five years
   
850
     
906
     
-
     
-
 
Due after five years through ten years
   
6,816
     
7,061
     
-
     
-
 
Due after ten years
   
20,667
     
21,752
     
-
     
-
 
     
28,333
     
29,719
     
20
     
20
 
MBS and CMO
   
21,132
     
21,352
     
47
     
48
 
                                 
   
$
49,465
   
$
51,071
   
$
67
   
$
68
 

Information pertaining to investment securities available for sale with gross unrealized losses at June 30, 2019, aggregated by investment category and the length of time that individual investment securities have been in a continuous position, follows.  At June 30, 2019, the Company did not have any securities held to maturity with an unrealized loss.

   
Number of
         
Gross
 
(Dollars in thousands)
 
Investment
   
Fair
   
Unrealized
 
June 30, 2019:
 
Positions
   
Value
   
Losses
 
                   
Securities available for sale:
                 
Continuous loss position less than 12 months:
                 
   Agency CMO
   
1
   
$
1,731
   
$
6
 
                         
Continuous loss position more than 12 months:
                       
   Agency MBS
   
8
     
6,186
     
41
 
   Agency CMO
   
3
     
1,872
     
15
 
     Total more than 12 months
   
11
     
8,058
     
56
 
                         
     Total securities available for sale
   
12
   
$
9,789
   
$
62
 



Information pertaining to investment securities available for sale with gross unrealized losses at December 31, 2018, aggregated by investment category and the length of time that individual investment securities have been in a continuous position, follows.  At December 31, 2018, the Company did not have any securities held to maturity with an unrealized loss.

   
Number of
         
Gross
 
(Dollars in thousands)
 
Investment
   
Fair
   
Unrealized
 
   
Positions
   
Value
   
Losses
 
                   
                   
December 31, 2018:
                 
                   
Securities available for sale:
                 
Continuous loss position less than 12 months:
                 
   Municipal obligations
   
7
   
$
3,258
   
$
19
 
                         
Continuous loss position more than 12 months:
                       
   Agency MBS
   
11
     
8,871
     
269
 
   Agency CMO
   
6
     
5,666
     
124
 
   Municipal obligations
   
21
     
11,611
     
191
 
     Total more than 12 months
   
38
     
26,148
     
584
 
                         
     Total securities available for sale
   
45
   
$
29,406
   
$
603
 



-11-


MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recover in fair value.

At June 30, 2019, the debt securities in the available for sale classification in a loss position had depreciated approximately 0.63% from the amortized cost basis.  All of the debt securities in a loss position at June 30, 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 June 30, 2019, additional deterioration in market and economic conditions may have an adverse impact on credit quality in the future.

During both the three and six month periods ended June 30, 2019, the Company realized a gross gain of $7,000 on the sale of an available for sale municipal security.  There were no securities sales during the three and six month periods ended June 30, 2018.

4.   Loans and Allowance for Loan Losses

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

Loans Held for Investment. Loans are stated at unpaid principal balances, less net deferred loan fees and the allowance for loan losses. The Company grants real estate mortgages, commercial business and consumer loans.  A substantial portion of the loan portfolio is represented by mortgage loans to customers in southern Indiana.  The ability of the Company’s customers to honor their contracts is dependent upon the real estate and general economic conditions in this area.

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

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

-12-


MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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

Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.  Additions to the allowance for loan losses are made by the provision for loan losses charged to earnings.  Loan losses are charged against the allowance when management believes the uncollectibility 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 collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

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

The general component covers non-classified loans and classified loans that are found, upon individual evaluation, to not be impaired.  Such loans are pooled by portfolio segment and losses are modeled using annualized historical loss experience adjusted for qualitative factors.  The historical loss experience is determined by portfolio segment and is based on the Company’s actual loss history over the most recent twenty calendar quarters unless the historical loss experience is not considered indicative of the level of risk in the remaining balance of a particular portfolio segment, in which case an adjustment is determined by management.  The Company’s historical loss experience is then adjusted for qualitative factors that are reviewed on a quarterly basis.

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


-13-


MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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

The following portfolio segments are considered in the allowance for loan loss analysis:  one-to-four family residential real estate, multi-family residential real estate, residential construction, commercial construction, commercial real estate non owner occupied, commercial real estate owner occupied, junior liens, home equity lines of credit, commercial business, and consumer loans.

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

The Company’s construction loan portfolio consists of single-family residential properties, multi-family properties and commercial projects, and includes both owner-occupied and speculative investment properties.  Risks inherent in construction lending are related to the market value of the property held as collateral, the cost and timing of constructing or improving a property, the borrower's ability to use funds generated by a project to 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.


-14-

MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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

Loan Charge-Offs. For portfolio segments other than consumer loans, the Company’s practice is to charge-off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrower’s failure to meet repayment terms, the borrower’s deteriorating or deteriorated financial condition, the depreciation of the underlying collateral, the loan’s classification as a loss by regulatory examiners, or for other reasons.  A partial charge-off is recorded on a loan when the collectability of a portion of the loan has been confirmed, such as when a loan is discharged in bankruptcy, the collateral is liquidated, a loan is restructured at a reduced principal balance, or other identifiable events that lead management to determine the full principal balance of the loan will not be repaid.  A specific reserve is recognized as a component of the allowance for estimated losses on loans individually evaluated for impairment.  Partial charge-offs on nonperforming and impaired loans are included in the Company’s historical loss experience used to estimate the general component of the allowance for loan losses as discussed above.  Specific reserves are not considered charge-offs in management’s evaluation of the general component of the allowance for loan losses because they are estimates and the outcome of the loan relationship is undetermined.  At June 30, 2019, the Company had 11 loans for which partial charge-offs in the aggregate of $243,000 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.

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.


-15-



MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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

At June 30, 2019, there were no loans secured by residential real estate property for which formal foreclosure proceedings are in process.  At December 31, 2018, the recorded investment in loans secured by residential real estate property for which formal foreclosure proceedings were in process was $170,000.

Loans at June 30, 2019 and December 31, 2018 consisted of the following:

   
June 30,
   
December 31,
 
(In thousands)
 
2019
   
2018
 
Real estate mortgage loans:
           
  One-to-four family residential
 
$
78,674
   
$
80,322
 
  Multi-family residential
   
9,482
     
7,054
 
  Residential construction
   
66
     
-
 
  Commercial real estate
   
28,153
     
27,153
 
  Commercial real estate construction
   
3,076
     
5,100
 
Commercial business loans
   
6,548
     
5,939
 
Consumer loans
   
2,064
     
2,199
 
    Total loans
   
128,063
     
127,767
 
                 
  Deferred loan origination fees and costs, net
   
31
     
30
 
  Allowance for loan losses
   
(1,488
)
   
(1,504
)
                 
    Loans, net
 
$
126,606
   
$
126,293
 




-16-


MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table provides the components of the Company’s recorded investment in loans at June 30, 2019:

   
One-to-Four
Family
Residential
   
Multi-Family Residential
   
Construction
   
Commercial
Real Estate
   
Commercial Business
   
Consumer
   
Total
 
   
(In thousands)
 
Recorded Investment in Loans:
                                     
Principal loan balance
 
$
78,674
   
$
9,482
   
$
3,142
   
$
28,153
   
$
6,548
   
$
2,064
   
$
128,063
 
                                                         
Accrued interest
   receivable
   
274
     
19
     
6
     
94
     
23
     
7
     
423
 
                                                         
Net deferred loan
   fees/costs
   
21
     
(11
)
   
(31
)
   
(6
)
   
11
     
47
     
31
 
                                                         
Recorded investment in
   loans
 
$
78,969
   
$
9,490
   
$
3,117
   
$
28,241
   
$
6,582
   
$
2,118
   
$
128,517
 
                                                         
Recorded Investment in Loans as Evaluated for Impairment:
                                         
Individually evaluated for
   impairment
 
$
2,467
   
$
-
   
$
-
   
$
765
   
$
440
   
$
-
   
$
3,672
 
                                                         
Collectively evaluated for
   impairment
   
76,502
     
9,490
     
3,117
     
27,476
     
6,142
     
2,118
     
124,845
 
                                                         
Ending Balance
 
$
78,969
   
$
9,490
   
$
3,117
   
$
28,241
   
$
6,582
   
$
2,118
   
$
128,517
 


The following table provides the components of the Company’s recorded investment in loans at December 31, 2018:

   
One-to-Four
Family
Residential
   
Multi-Family Residential
   
Construction
   
Commercial
Real Estate
   
Commercial Business
   
Consumer
   
Total
 
   
(In thousands)
 
Recorded Investment in Loans:
                                     
Principal loan balance
 
$
80,322
   
$
7,054
   
$
5,100
   
$
27,153
   
$
5,939
   
$
2,199
   
$
127,767
 
                                                         
Accrued interest
   receivable
   
293
     
16
     
8
     
90
     
23
     
5
     
435
 
                                                         
Net deferred loan
   fees/costs
   
16
     
(9
)
   
(31
)
   
(3
)
   
10
     
47
     
30
 
                                                         
Recorded investment in
    loans
 
$
80,631
   
$
7,061
   
$
5,077
   
$
27,240
   
$
5,972
   
$
2,251
   
$
128,232
 
                                                         
Recorded Investment in Loans as Evaluated for Impairment:
                                         
Individually evaluated for
   impairment
 
$
2,623
   
$
-
   
$
-
   
$
868
   
$
470
   
$
-
   
$
3,961
 
                                                         
Collectively evaluated for
   impairment
   
78,008
     
7,061
     
5,077
     
26,372
     
5,502
     
2,251
     
124,271
 
                                                         
Ending Balance
 
$
80,631
   
$
7,061
   
$
5,077
   
$
27,240
   
$
5,972
   
$
2,251
   
$
128,232
 



-17-



MID-SOUTHERN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     An analysis of the allowance for loan losses as of June 30, 2019 is as follows:
 
One-to-Four
Family
Residential
 
Multi-Family Residential
 
Construction
 
Commercial
Real Estate
 
Commercial
Business
 
Consumer
 
Total
 
 
(In thousands)
 
Ending allowance balance attributable to loans:
                     
                             
Individually evaluated for
   impairment
 
$
26
   
$
-
   
$
-
   
$
20
   
$
38
   
$
-
   
$
84
 
                                                         
Collectively evaluated for
   impairment
   
926
     
86
     
30
     
276
     
60
     
26
     
1,404
 
                                                         
Ending balance
 
$
952
   
$
86
   
$
30
   
$
296
   
$
98
   
$
26
   
$
1,488
 


An analysis of the allowance for loan losses as of December 31, 2018 is as follows:

 
One-to-Four
Family
Residential
 
Multi-Family Residential
 
Construction
 
Commercial
Real Estate
 
Commercial Business
 
Consumer
 
Total
 
(In thousands)
Ending allowance balance attributable to loans:
                   
                           
Individually evaluated for
   impairment
$
34
   
$
-
   
$
-
   
$
22
   
$
44
   
$
-
   
$
100
                                                       
Collectively evaluated for
   impairment
 
978
     
59
     
48
     
237
     
54
     
28
     
1,404
                                                       
Ending balance
$
1,012
   
$
59
   
$
48
   
$