SALEM – Mid-Southern Bancorp, Inc. (the “Company”) (OTCQX: MSVB), the holding company for Mid-Southern Savings Bank, FSB (the “Bank”), reported net income for the second quarter ended June 30, 2024 of $400,000, or $0.14 per diluted share, compared to net income $400,000, or $0.14 per diluted share, for the same period in 2023. For the six months ended June 30, 2024, the Company reported net income of $367,000 or $0.13 per diluted share compared to $740,000 or $0.27 per diluted share for the same period in 2023.
Income Statement Review
Net interest income after provision for credit losses increased by $71,000, or 3.7%, for the quarter ending June 30, 2024, to $2.0 million compared to the quarter ending June 30, 2023. Total interest income decreased $13,000, or 0.5%, when comparing the two periods due to decreases in the average balances of those assets, partially offset by increases in the yields of interest-earning assets. The average balance of interest-earning assets decreased to $240.5 million for the 2024 quarter from $266.8 million for the 2023 quarter, due primarily to decreases in lower loans receivable and investment securities, partially offset by increases in interest-bearing deposits with banks. The average yield on interest-earning assets and the tax-equivalent yield on interest-earning assets ( 1 ) increased to 4.31% and 4.44%, respectively, for the quarter ended June 30, 2024, from 3.90% and 4.06%, for the quarter ended June 30, 2023, due primarily to higher yields from loans, investment securities, and interest-bearin deposits with banks. Total interest expense decreased by $34,000, or 4.9% when comparing the two periods due to a lower average balance of interest-bearing liabilities, partially offset by an increase in the average cost of interest-bearing liabilities. The average cost of interest-bearing liabilities increased to 1.48% for the June 30, 2024, quarter from 1.36% for the same period in 2023. The average balance of interest-bearing liabilities decreased to $176.9 million for the quarter ending June 30, 2024, from $201.9 million for the same period in 2023, primarily due to decreases in average deposit accounts and average increase to 3.22% and 3.35%, respectively, for the quarter ended June 30, 2023.
Net interest income after provision for credit losses increased $252,000, or 6.7%, for the six months ended June 30, 2024 to $4.0 million as compared to the six months ended June 30, 2023. Total interest income increased by $297,000, or 5.8%, when comparing the two periods due to increases in the yields of interest-earning assets, partially offset by decreases in the average balances of those assets. The average yield on interest-earning assets and the tax-equivalent yield on interest-earning assets (2) increased to 4.26% and 4.39%, respectively, for the six months ended June 30, 2024, from 3.79% and
3.96%, respectively, for the six months ended June 30, 2023, due primarily to higher yields from loans, investment securities, and interest-bearing deposits with banks. The average balance of interest-earning assets decreased to $188.9 million for the six months ended June 30, 2024, from $203.6 million for the same period in 2023, due primarily to decreases in average deposit accounts and average borrowings. The Company recorded a net recapture of credit losses on loans of $146,000 and a net provision for credit losses on unfunded loan commitments of $14,000 for the six months ended June 30, 2024, compared to a net provision for credit losses on loans of $63,000 and a net recapture of credit losses on unfunded loan commitments of $27,000 for the same period in 2023. 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) increased to 2.65% and 2.78%, respectively, for the six months ended June 30, 2024, from 2.50% and 2.67%, for the six months ended June 30, 2023. The net interest margin and net interest margin on a tax-equivalent basis (1) increased to 3.05% and 3.19%, respectively, for the six months ended June 30, 2024, from 2.82% and 2.98% for the six months ended June 30, 2023.
Noninterest income decreased $42,000, or 13.6%, for the quarter ended June 30, 2024,, compared to the same period in 2023, due primarily to reductions in brokered loan fees of $14,000, ATM and debit card fee income of $12,000, and deposit account service charges of $9,000.
Noninterest income decreased $198,000, or 35.9%, for the six months ended June 30, 2024, as compared to the same period in 2023, due primarily to a net loss on the sale of investment securities available for sale of $149,000 and reductions in brokered loan fees of $17,000, ATM and debit card fee income of $16,000 and deposit account service charges of $8,000.
Noninterest expense decreased by $3,000, or 0.2%, for the quarter ending June 30, 2024, compared to June 30, 2023. The decrease was due primarily to decreases in stockholders’ meeting expenses of $50,000, directors’ compensation of $24,000, compensation and benefits of $20,000 and other costs of $45,000, partially offset by increased professional fees of $110,000, occupancy and equipment expenses of $13,000, and data processing expenses of $9,000.
Noninterest expense increased $453,000, or 12.7%, for the six months ending June 30, 2024, compared to the six months ending June 30, 2023. The increase was due primarily to increases in professional fees of $580,000, data processing expenses of $44,000, occupancy and equipment expenses of $19,000, and deposit insurance premiums of $7,000, partially offset by lower stockholders’ meeting expenses of $67,000, directors’ compensation of $46,000, compensation and benefits of $32,000 and other expenses of $53,000.
The Company recorded an income tax expense of $41,000 for the quarter ended June 30, 2024, compared to an income tax expense of $9,000 for the same period in 2023. For the six months ended June 30, 2024, the Company recorded an income tax benefit of $54,000 compared to an income tax benefit of $28,000 for the six months ended June 30, 2023.
Balance Sheet Review
Total assets as of June 30, 2024 were $237.5 million compared to $269.0 million at December 31, 2023. The decrease in total assets was primarily due to decreases in investment securities of $24.2 million an net loans of $7.1 million. Investment securities decreased due mainly to the sale of $16.2 million of available-for-sale investment securities, $6.5 million in scheduled principal payments, call and maturities of available-for-sale investment securities, and a $1.4 million unrealized loss on available-for-sale investment securities. Net loans decreased $7.1 million, due primarily to decreases of $3.8 million in commercial business loans, $3.7 million in one-to-four family residential loans, and $1.9 million in commercial real estate loans, partially offset by increases of $1.5 million in construction loans and $512,000 in multi-family residential loans and a $146,000 decrease in the allowance for credit losses on loans. Total liabilities, comprised chiefly of deposits, decreased $31,000 to $202.3 million as of June 30, 2024. The decrease was due primarily to a $25.0 million decrease in borrowings, a $2.5 million decrease in interest-bearing deposits, and a $2.1 million decrease in noninterest-bearing deposits.
Credit Quality
Non-performing loans decreased to $307,000 on June 30, 2024, compared to $591,000 on December 31, 2023, or 0.2% and 0.4% of total loans on June 30, 2024, and December 31, 2023, respectively. On June 30, 2024, $208,000, or 67.7% of non-performing loans, were current on their loan payments. No foreclosed real estate was owned on June 30, 2024, and December 31, 2023.
Based on management’s analysis of the allowance for credit losses, the Company recorded a net recapture of credit losses on loans of $83,000 for the quarter ended June 30, 2024, compared to a net recapture of $15,000 recorded for the year-earlier quarter in 2023. The recapture for the 2024 quarter was primarily due to a decrease in the overall loan portfolio balance and changes in the loan portfolio mix during the quarter. The Company recorded a net provision for credit losses on unfunded loan commitments of $17,000 for the 2024 quarter compared to a net recapture of $1,000 for the 2023 quarter. The provision is due primarily to an increase in unfunded loan commitments during the current quarter. The Company recognized net charge-offs of $2,000 for the quarter ended June 30, 2024, compared to net recoveries of $20,000 for the same period in 2023.
The Company recorded a net recapture of credit losses on loans of $146,000 for the six months ended June 30, 202, compared to a net provision of $63,000 recorded for the year-earlier period in 2023. The Company recorded a net provision for credit losses on unfunded loan commitments of $14,000 for the six months ended June 30, 2024, compared to a net recapture of $27,000 recorded for the year-earlier period in 2023. The allowance for credit losses on loans totaled $2.0 million on June 30, 2024, and $2.2 million on December 31, 2023, representing 1.5% of total loans on June 30, 2024, and December 31, 2023, respectively. The allowance for credit losses on loans represented 663.8% of non-performing loans on June 30, 2024, compared to 369.5% on December 31, 2023.
Capital
The Bank elected to use the Community Bank Leverage Ratio (“CBLR”). A bank or savings institution electing to utilize the CBLR is generally 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%. 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 the Company implemented on January 1, 2023. The initial impact of adopting ASC 326 will be phased out of the regulatory capital calculations over three years, with 75% recognized in year one, 50% recognized in year two, and 25% identified in year three.
On June 30, 2024, the Bank was considered well-capitalized under applicable federal regulatory capital guidelines with a CBLR of 17.3%.
The Company’s stockholders’ equity decreased to $35.2 million on June 30, 2024, from $36.0 million on December 31, 2023. The decrease was due primarily to accumulated other comprehensive loss, net of tax, of $1.0 million during the six months related to unrealized losses on available-for-sale securities, partially offset by net income of $367,000, net of $330,000 in dividends. There were no share repurchases during the six months ended June 30, 2024, and 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, management uses specific non-GAAP measures 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 under GAAP are explained 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 entirely 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 income statements. We believe this measure is the preferred industry measurement of net interest income and enhances the comparability of net interest income arising from taxable and tax-exempt sources. The most directly comparable financial measure calculated per 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 affect fair value changes reflected in Accumulated Other Comprehensive Income / Loss (“AOCI”). The most directly comparable financial measure per 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 following 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 the indicated dates. As a result, tangible book value per share is the same as book value per share as of each date stated. We provide the tangible book value per share in addition to those defined by banking regulators because of its widespread use by investors 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.
