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 second quarter ended June 30, 2023, of $400,000 or $0.14 per diluted share compared to $526,000 or $0.19 per diluted share for the same period in 2022. For the six months ended June 30, 2023, the Company reported net income of $740,000 or $0.27 per diluted share compared to $993,000 or $0.36 per diluted share for the same period in 2022.
Income Statement Review
Net interest income after provision for credit losses increased $3,000, or 0.2%, for the quarter ended June 30, 2023, to $1.9 million as compared to the quarter ended June 30, 2022. Total interest income increased $451,000, or 20.9%, 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 $266.8 million for the quarter ended June 30, 2023, from $262.1 million for the quarter ended June 30, 2022, due primarily to increases in loans receivable, partially offset by lower investment securities and interest-bearing deposits with banks.
The average yield on interest-earning assets and the tax-equivalent yield on interest-earning assets ( 1 ) increased to 3.90% and 4.06%, respectively, for the quarter ended June 30, 2023, from 3.29% and 3.46%, respectively, for the quarter ended June 30, 2022, due primarily to higher yields from loans, investment securities, and interest-bearing deposits with banks.
Total interest expense increased by $514,000, or 297.1% 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 $201.9 million for the quarter ended June 30, 2023, from $196.7 million for the same period in 2022, due primarily to increases in borrowings, partially offset by decreases in deposit accounts. The average cost of interest-bearing liabilities increased to 1.36% for the quarter ended June 30, 2023, from 0.35% for the same period in 2022.
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 2.54% and 2.70%, respectively for the quarter ended June 30, 2023, from 2.94% and 3.11%, respectively, for the quarter ended June 30, 2022.
The net interest margin and net interest margin on a tax-equivalent basis (1) decreased to 2.87% and 3.03%, respectively, for the quarter ended June 30, 2023, from 3.02% and 3.20% for the quarter ended June 30, 2022.
Net interest income after provision for credit losses increased $78,000, or 2.1%, for the six months ended June 30, 2023, to $3.7 million as compared to the six months ended June 30, 2022. Total interest income increased $1.1 million, or 26.0%, 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 $268.1 million for the six months ended June 30, 2023, from $256.5 million for the six months ended June 30, 2022, 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 3.79% and 3.96%, respectively, for the six months ended June 30, 2023, from 3.15% and 3.32%, respectively, for the six months ended June 30, 2022, due primarily to higher yields from loans, investment securities, and interest-bearing deposits with banks.
Total interest expense increased by $987,000, or 305.6% 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 $203.6 million for the six months ended June 30, 2023, from $190.8 million for the same period in 2022, due primarily to increases in deposit accounts and borrowings.
The average cost of interest-bearing liabilities increased to 1.29% for the six months ended June 30, 2023 from 0.34% for the same period in 2022.
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 2.50% and 2.67%, respectively for the six months ended June 30, 2023, from 2.81% and 2.98%, respectively, for the six months ended June 30, 2022. The net interest margin and net interest margin on a tax-equivalent basis (1) decreased to 2.82% and 2.98%, respectively, for the six months ended June 30, 2023, from 2.90% and
3.06% for the six months ended June 30, 2022.
Noninterest income decreased $56,000, or 15.4%, for the quarter ended June 30, 2023, as compared to the same period in 2022, due primarily to a reduction in brokered loan fees of $39,000, partially offset by an increase of $15,000 in ATM and debit card fee income and a $7,000 net gain on the disposal of foreclosed real estate. A gain on life insurance of $36,000 was recorded during the quarter ended June 30, 2022, whereas no gain was recorded during the quarter ended June 30, 2023.
Noninterest income decreased $97,000, or 14.9%, for the six months ended June 30, 2023, as compared to the same period in 2022, due primarily to a reduction in brokered loan fees of $67,000 and a $27,000 net loss on the sale of available-or-sale investment securities, partially offset by increases of $18,000 in ATM and debit card fee income and $9,000 in deposit account service charges and a $7,000 net gain on the disposal of foreclosed real estate. A gain in life insurance of $36,000 was recorded during the six months ended June 30, 2022, whereas no gain was recorded during the six months ended June 30, 2023.
Noninterest expense increased $88,000, or 5.0%, for the quarter ended June 30, 2023, as compared to the same period in 2022. The increase was due primarily to increases in data processing expenses of $103,000, stockholders’ meeting expenses of $61,000, occupancy and equipment expenses of $15,000, deposit insurance premiums of $13,000, and other expenses of $25,000, partially offset by lower compensation and benefits expenses of $50,000, marketing and business development expenses of $35,000 and professional fees of $29,000.
Noninterest expense increased $320,000, or 9.8%, for the six months ended June 30, 2023, as compared to the same period in 2022. The increase was due primarily to increases in data processing expenses of $196,000, stockholders’ meeting expenses of $61,000, occupancy and equipment expenses of $38,000, deposit insurance premiums of $17,000, and other expenses of $45,000, partially offset by lower marketing and business development expenses of $31,000 and supervisory examination expenses of $12,000.
The Company recorded an income tax expense of $9,000 for the quarter ended June 30, 2023, compared to an income tax expense of $24,000 for the same period in 2022. For the six months ended June 30, 2023, the Company recorded an income tax benefit of $28,000 compared to an income tax expense of $58,000 for the six months ended June 30, 2022.
The income tax benefit is primarily due to an increase in tax-exempt income in proportion to income before income taxes.
Balance Sheet Review
Total assets as of June 30, 2023, were $266.3 million compared to $269.2 million on December 31, 2022. The decrease in total assets was primarily due to decreases in investment securities of $6.2 million, partially offset by an increase in net loans of $3.2 million. Investment securities decreased due primarily to the sale of $4.1 million of available-for-sale investment securities, $2.8 million in scheduled principal payments, call and maturities of available-for-sale investment securities, partially offset by a $840,000 unrealized gain on available-for-sale investment securities.
The increase in net loans was due primarily to increases of $3.3 million in commercial real estate loans, $1.3 million in multi-family residential loans, and $942,000 in commercial real estate construction loans, partially offset by a $666,000 decrease in commercial business loans, a $483,000 decrease in residential construction loans and a $458,000 decrease in one-to-four family residential loans. Total liabilities, comprised mostly of deposits, decreased by $3.7 million to $232.2 million as of June 30, 2023. The decrease was due primarily to a $2.5 million decrease in noninterest-bearing deposits, a $689,000 decrease in interest-bearing deposits, and a $800,000 decrease in borrowings.
Credit Quality
Non-performing loans increased to $913,000 on June 30, 2023, compared to $732,000 on December 31, 2022, or 0.6% and 0.5% of total loans on June 30, 2023 and December 31, 2022, respectively. On June 30, 2023, $577,000, or 63.2% of non-performing loans were current on their loan payments. There was no foreclosed real estate owned on either June 30, 2023, or December 31, 2022.
During the quarter and six months ended June 30, 2023, the Company sold foreclosed real estate with a book value of $16,000 and recorded a net gain of $7,000.
On January 1, 2023, the Company implemented Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326) as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05, and ASU 2022-02 (collectively “ASC 326”), commonly referred to as the currently expected credit loss methodology (“CECL”). As a result, the opening balances for the allowance for credit losses on loans (“ACL”) and reserve for unfunded loan commitments increased by $557,000 and $73,000, respectively, as of January 1, 2023. The adoption entries reduced the Company’s retained earnings on a tax-effected basis of $481,000, with no impact on earnings.
Based on management’s analysis of the allowance for credit losses, the Company recorded a net recapture on credit losses of $16,000 for the quarter ended June 30, 2023, compared to a provision of $50,000 recorded for the same period in 2022. The Company recognized net recoveries of $20,000 for the quarter ended June 30, 2023, compared to net charge-offs of $1,000 for the same period in 2022.
The Company recorded a provision for credit losses of $36,000 for the six-month period ended June 30, 2023, compared to a provision of $50,000 for the same period in 2022. The allowance for credit losses on loans totaled $2.3 million at June 30, 2023, and $1.7 million on December 31, 2022, representing 1.6% and 1.2% of total loans on June 30, 2023, and December 31, 2022, respectively. The allowance for credit losses on loans represented 255.1% of non-performing loans on June 30, 2023, compared to 231.1% on December 31, 2022.
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 is generally considered to be 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%. 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.
As permitted by the interim final rule issued on March 27, 2020, by the federal banking regulatory agencies, the Company elected the option to delay the impact on regulatory capital related to the adoption of ASC 326, which was implemented by the Company on January 1, 2023. The initial impact of the adoption of ASC 326 will be phased out of the regulatory capital calculations over a three-year period, with 75% recognized in year one, 50% recognized in year two, and 25% recognized in year three.
On June 30, 2023, the Bank was considered well-capitalized under applicable federal regulatory capital guidelines with a CBLR of 15.6%. The Company’s stockholders’ equity increased to $34.1 million on June 30, 2023, from $33.3 million on December 31, 2022. The increase was due primarily to an increase in the accumulated other comprehensive income of $630,000 related to unrealized losses on available-for-sale securities and net income of $740,000, partially offset by a $481,000 reduction related to the implementation of ASC 326 and $328,000 in dividends. There were no share repurchases during the quarter ended June 30, 2023, and 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 rate 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.
We believe this measure to be the preferred industry measurement of net interest income, and that it enhances comparability of net interest income arising from taxable and tax-exempt sources. The most directly comparable financial measure calculated in accordance with GAAP is net interest income. Yield on interest-earning assets (tax-equivalent basis) is the ratio of interest income earned from interest-earning assets, adjusted on a tax-equivalent basis, and average interest-earning assets.
The 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 rate 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 the net interest rate spread. Net interest margin (tax-equivalent basis) is the ratio of net interest income (tax-equivalent basis) to average earning assets. The most directly comparable financial measure in accordance with GAAP is
net interest margin. 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 our 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.
We 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.
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.
