SALEM – Mid-Southern Bancorp, Inc. (the “Company”) (NASDAQ: MSVB), the holding company for Mid Southern Savings Bank, FSB (the “Bank”), reported net income for the fourth quarter ended December 31, 2022, of $376,000 or $0.14 per diluted share compared to $377,000 or $0.13 per diluted share for the same period in 2021.
For the year ended December 31, 2022, the Company reported a net income of $1.9 million or $0.69 per diluted share compared to $1.6 million or $0.55 per diluted share for the same period in 2021.
Alex Babey, President, and Chief Executive Officer of the Company stated, “We are very pleased to report our earnings for 2022, with earnings per diluted share growing 25.5% over 2021 results. Our expansion into the Louisville Market through our Loan Production Office continues to produce positive results as evidenced by loans growing 17.8% over 2021 levels. We believe that we continue to meet the objectives in our strategic plan and look forward to continuing our efforts to build shareholder value through our continued commitment to our customers, communities, and employees.”
Income Statement Review
Net interest income after provision for loan losses increased $77,000, or 4.0%, for the quarter that ended December 31, 2022, to $2.0 million as compared to the quarter that ended December 31, 2021. Total interest income increased by $548,000, or 28.3% when comparing the two periods, due to increases in the average balances and yields of interest-earning assets.
The average balance of interest-earning assets increased to $269.1 million for the quarter that ended December 31, 2022, from $245.7 million for the quarter that ended December 31, 2021, due primarily to increases in loans receivable and investment securities, partially offset by lower interest-bearing deposits with banks.
The average yield on interest-earning assets and the tax-equivalent yield on interest-earning assets ( 1 ) increased to 3.70% and 3.87%, respectively, for the quarter ended December 31, 2022, from 3.16% and 3.32%, respectively, for the quarter ended December 31, 2021, due primarily to higher yields from loans and investment securities.
Total interest expense increased by $351,000, or 234.0% when comparing the two periods due to an increase in the average balance of interest-bearing liabilities and in the average cost of interest-bearing liabilities.
The average balance of interest-bearing liabilities increased to $205.5 million for the quarter that ended December 31, 2022, from $180.9 million for the same period in 2021, due primarily to increases in deposit accounts and FHLB borrowings.
The average cost of interest-bearing liabilities increased to 0.98% for the quarter that ended December 31, 2022, from 0.33% for the same period in 2021. As a result of the changes in interest-earning assets and interest-bearing liabilities, the net interest rate spread and net interest rate spread on a tax-equivalent basis (1) decreased to 2.72% and 2.89%, respectively for the quarter ended December 31, 2022, from 2.83% and 2.99%, respectively, for the quarter ended December 31, 2021.
The net interest margin and net interest margin on a tax-equivalent basis (1) increased to 2.95% and 3.12%, respectively, for the quarter ended December 31, 2022, from 2.91% and 3.08%, respectively, for the
quarter ended December 31, 2021.
Net interest income after provision for loan losses increased $513,000, or 7.3%, for the year ended December 31, 2022, to $7.6 million as compared to $7.1 million for the year ended December 31, 2021. Total interest income increased by $1.2 million, or 16.3% when comparing the two periods, due to increases in the average balances and yields of interest-earning assets.
The average balance of interest-earning assets increased to $262.6 million for the year ended December 31, 2022, from $237.7 million for the year ended December 31, 2021, due primarily to increases in loans receivable and investment securities, partially offset by lower interest-bearing deposits with banks.
The average yield on interest-earning assets and the average tax-equivalent yield on interest-earning assets (1) increased to 3.36% and 3.53%, respectively, for the year ended December 31, 2022, from 3.19% and 3.36%, respectively, for the year ended December 31, 2021, due primarily to a shift in the investment asset mix.
Total interest expense increased by $467,000, 71.7% when comparing the two periods due to increases in both the average cost and balance of interest-bearing liabilities.
The average cost of interest-bearing liabilities increased to 0.56% for the year ended December 31, 2022, from 0.38% for the same period in 2021. The average balance of interest-bearing liabilities increased to $197.9 million for the year ended December 31, 2022, from $172.7 million for the same period in 2021, due primarily to an increase in total deposit accounts and higher FHLB borrowings.
As a result of the changes in interest-earning assets and interest-bearing liabilities, the net interest rate spread and net interest rate spread on a tax-equivalent basis (1) were 2.80% and 2.97%, respectively, for the year ended December 31, 2022, from 2.81% and 2.98%, respectively, for the year ended December 31, 2021. The net interest margin and net interest margin on a tax-equivalent basis (1) increased to 2.93% and 3.10%, respectively, for the year ended December 31, 2022, from 2.92% and 3.09%, respectively, for the year ended December 31, 2021.
Noninterest income decreased $16,000, or 5.0%, for the quarter that ended December 31, 2022, as compared to the same period in 2021, due primarily to a reduction in brokered loan fees of $37,000, partially offset by increases of $18,000 in deposit account service charges.
Noninterest income increased $28,000, or 2.3%, for the year ended December 31, 2022, as compared to the same period in 2021, due primarily to increases of $82,000 and $21,000 in deposit account service charges and ATM and debit card fee income, respectively, and a $36,000 gain on life insurance, partially offset by a reduction in brokered loans fees of $110,000.
Noninterest expense increased $71,000, or 3.9%, for the quarter that ended December 31, 2022, as compared to the same period in 2021. The increase was due primarily to increases in data processing expenses of $91,000, occupancy and equipment expenses of $20,000, other expenses of $29,000, a $74,000 loss on the disposal of premises and equipment, and a $37,000 loss on the disposal of real estate held for sale, partially offset by lower compensation and benefits of $146,000 and marketing and business development expenses of $21,000.
Noninterest expense increased $244,000, or 3.7%, for the year ended December 31, 2022, as compared to the same period in 2021. The increase was due primarily to increases in data processing expenses of $122,000, occupancy and equipment expenses of $52,000, marketing and business development expenses of $37,000, $19,000 in professional fees, $16,000 in other expenses, a $91,000 loss on the disposal of premises and equipment, and a $37,000 loss on the disposal of real estate held for sale, partially offset by lower compensation and benefits of $137,000 and stockholders’ meeting expenses of $12,000.
The Company recorded an income tax expense of $2,000 for the quarter that ended December 31, 2022, compared to an income tax expense of $11,000 for the same period in 2021. Income tax expense for the year ended December 31, 2022, was $91,000 compared to an expense of $67,000 for the same period in 2021 resulting from an increase in our effective tax rate to 4.6% for 2022 compared to 4.0% for 2021. The increase in the effective tax rate is primarily due to an increase in pre-tax income generated from core banking activities.
Balance Sheet Review
Total assets as of December 31, 2022, were $269.2 million compared to $254.3 million on December 31, 2021.
The increase in total assets was primarily due to increases in net loans of $21.8 million, other assets of $4.5 million, and Federal Home Loan Bank stock of $1.0 million, partially offset by decreases in cash and cash equivalents of $10.7 million and investment securities of $1.9 million.
The increase in net loans was due primarily to increases of $11.9 million in commercial real estate loans, $5.9 million in commercial business loans, and $5.1 million in commercial real estate construction loans.
The increase in other assets was due primarily to a $4.2 million increase in net deferred tax assets, largely attributable to the tax effect on the unrealized loss on available-for-sale securities. Investment securities
decreased due primarily to a $17.2 million unrealized loss on available-for-sale securities and $10.3 million in scheduled principal payments, calls, and maturities of mortgage-backed and tax-exempt securities, partially offset by $26.0 million in purchases of available-for-sale investment securities.
Total liabilities, comprised mostly of deposits, increased $28.2 million to $235.9 million as of December 31, 2022. The increase was due primarily to a $19.0 million increase in FHLB borrowings and a $9.6 million increase in interest-bearing deposits, partially offset by a $370,000 decrease in noninterest-bearing deposits.
Credit Quality
Non-performing loans decreased to $732,000 on December 31, 2022, compared to $753,000 on December 31, 2021, or 0.5% and 0.6% of total loans on December 31, 2022, and December 31, 2021, respectively.
On December 31, 2022, $382,000 or 52.1% of non-performing loans were current on their loan payments. On December 31, 2022, non-performing troubled debt restructured loans totaled $85,000. There was no foreclosed real estate owned on either December 31, 2022, or December 31, 2021.
Based on management’s analysis of the allowance for loan losses, the Company did not record a provision for loan losses for the quarter that ended December 31, 2022, compared to a recapture for loan losses of $120,000 for the same period in 2021. The Company recognized net recoveries of $39,000 for the quarter that ended December 31, 2022, compared to net charge-offs of $8,000 for the same period in 2021.
The Company recorded a provision for loan losses of $135,000 for the year ended December 31, 2022, compared to the recapture of the provision for loan losses of $120,000 for the same period in 2021. The Company recognized net recoveries of $34,000 for the year ended December 31, 2022, compared to net recoveries of $54,000 for the same period in 2021. The allowance for loan losses totaled $1.7 million on December 31, 2022, and $1.5 million on December 31, 2021, representing 1.2% of total loans on both December 31, 2022, and December 31, 2021.
The allowance for loan losses represented 231.1% of non-performing loans on December 31, 2022, compared to 202.3% on December 31, 2021.
Capital
The Bank elected to use the Community Bank Leverage Ratio (“CBLR”) effective January 1, 2020. Effective January 1, 2022, a bank or savings institution electing to use the CBLR will generally be considered well capitalized and to have met the risk-based and leverage capital requirements of the capital regulations if it has a leverage ratio greater than 9.0%, an increase from the 8.5% or higher ratio requirement for fiscal year 2021.
To be eligible to elect to use the CBLR, the bank or savings institution also must have total consolidated assets of less than $10 billion, off-balance sheet exposures of 25.0% or less of its total consolidated assets, and trading assets and trading liabilities of 5.0% or less of its total consolidated assets, all as of the end of the most recent quarter.
On December 31, 2022, the Bank was considered well-capitalized under applicable federal regulatory capital guidelines with a CBLR of 15.4%.
The Company’s stockholders’ equity decreased to $33.3 million on December 31, 2022, from $46.5 million on December 31, 2021. The decrease was due primarily to a decrease in the accumulated other comprehensive income of $12.9 million related to unrealized losses on available-for-sale securities and the repurchase of 154,486 shares of our common stock at a total cost of $2.2 million, partially offset by net income of $1.9 million, net of dividends of $492,000.
On December 31, 2022, a total of 173,097 shares remain authorized for future purchases under the current stock repurchase plan.
Non-GAAP Financial Measures
The Company’s accounting and reporting policies conform to generally accepted accounting principles (“GAAP”) in the United States and prevailing practices in the banking industry. However, certain non GAAP measures are used by management to supplement the evaluation of the Company’s performance.
Whenever a non-GAAP financial measure is presented, the differences between the non-GAAP financial measure and the most directly comparable financial measure in accordance with GAAP are presented and reconciled. The following non-GAAP financial measures presented are defined below.
Net interest income (tax-equivalent basis), yield on interest-earning assets (tax-equivalent basis), net interest spread (tax-equivalent basis), and net interest margin (tax-equivalent basis).
These measures include the effects of taxable-equivalent adjustments using a federal income tax rate effective during the relevant year to increase tax-exempt interest income to a tax-equivalent basis. Interest income earned on certain assets is completely or partially exempt from federal income tax.
As such, these tax-exempt instruments typically yield lower returns than taxable investments. Net interest income (tax-equivalent basis) is a non-GAAP measure that adjusts for the tax-favored status of net interest income from certain loans and investments and is not permitted under GAAP in the consolidated statements of income.
Officials believe this measure to be the preferred industry measurement of net interest income, and that it enhances comparability of net interest income arising from taxable and tax-exempt sources. The most directly comparable financial measure calculated in accordance with GAAP is net interest income. Yield on interest-earning assets (tax-equivalent basis) is the ratio of interest income earned from interest-earning assets, adjusted on a tax-equivalent basis, and average interest-earning assets.
The yield for investment securities is based on amortized cost and does not give effect to changes in fair value that are reflected in Accumulated Other Comprehensive Income / Loss (“AOCI”). The most directly comparable financial measure in accordance with GAAP is the yield on interest-earning assets.
Net interest spread (tax-equivalent basis) is the difference in the average yield on average earning assets on a tax-equivalent basis and the average rate paid on average interest-bearing liabilities. The most directly comparable financial measure calculated in accordance with GAAP is net interest spread. Net interest margin (tax-equivalent basis) is the ratio of the net interest income (tax-equivalent basis) to average earning assets.
The most directly comparable financial measure in accordance with GAAP is the net interest margin. Book value per share excluding Accumulated Other Comprehensive Income / Loss. We calculate book value per share excluding AOCI as total stockholders’ equity at the end of the relevant period, less AOCI, divided by the outstanding number of common shares at the end of each period. The most directly comparable GAAP financial measure is book value per share. We provide the book value per share excluding AOCI in addition to those defined by banking regulators because we believe it is important to evaluate the balance sheet both before and after the effects of unrealized amounts associated with mark-to-market adjustments on available-for-sale investment securities.
Tangible book value per share. Tangible book value per share is a non-GAAP financial measure. We calculate tangible book value per share as total stockholders’ equity at the end of the relevant period, less goodwill and other intangible assets, divided by the outstanding number of our common shares at the end of each period. The most directly comparable GAAP financial measure is book value per share. We had no goodwill or other intangible assets as of any of the dates indicated.
As a result, tangible book value per share is the same as book value per share as of each of the dates indicated. Officials provide the tangible book value per share in addition to those defined by banking regulators because of its widespread use by investors as a means to evaluate capital adequacy.
These non-GAAP financial measures should not be considered alternatives to GAAP-basis financial statements, and other bank holding companies may define these non-GAAP measures or similar measures differently. Refer to “Reconciliation of Non-GAAP Financial Measures” below.
About Mid-Southern Bancorp, Inc.
Mid-Southern Savings Bank, FSB is a federally chartered savings bank headquartered in Salem, Indiana, approximately 40 miles northwest of Louisville, Kentucky. The Bank conducts business from its main office in Salem and through its branch offices located in Mitchell and Orleans, Indiana, and loan production offices located in New Albany, Indiana, and Louisville, Kentucky.
