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 quarter ended December 31, 2023 of $276,000, or $0.10 per diluted share, compared to $376,000, or $0.14 per diluted share, for the same period in 2022.
For the year ended December 31, 2023, the Company reported net income of $1.5 million, or $0.54 per diluted share, compared to $1.9 million, or $0.69 per diluted share, for 2022. Income Statement Review Net interest income after provision for credit losses increased $34,000, or 1.7%, for the quarter ending December 31, 2023, to $2.0 million compared to the quarter ending December 31, 2022. When comparing the two periods, total interest income increased by $330,000, or 13.3%, due to increases in the average balances and yields of interest-earning assets. The average balance of interest-earning assets increased to $270.9 million for the 2023 quarter from $269.1 million for the 2022 quarter, due primarily to increases in loans receivable and interest-bearing deposits with banks, partially offset by lower investment securities. The average yield on interest-earning assets and the tax-equivalent yield on interest-earning assets ( 1 ) increased to 4.16% and 4.32%, respectively, for the quarter ended December 31, 2023, from 3.70% and 3.87%, for the quarter ended December 31, 2022, due primarily to higher yields from loans, investment securities, and interest-bearing deposits with banks. Total interest expense increased by $335,000, or 66.9% when comparing the two periods due to an increase in the average balance of interest-bearing liabilities and the average cost of interest-bearing liabilities. The average balance of interest-bearing liabilities increased to $206.2 million for the quarter ended December 31, 2023, from $205.5 million for the same period in 2022, due primarily to increases in deposit accounts, partially offset by decreases in borrowings. The average cost of interest-bearing liabilities increased to 1.62% for the quarter ending December 31, 2023, from 0.98% for the same period in 2022. The Company recorded a net recapture of credit losses on loans of $24,000 and a net recapture of credit losses on unfunded loan commitments of $15,000 for the quarter ended December 31, 2023, compared to no provision 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 December 31, 2023, from 2.72% and 2.89%, for the quarter ended December 31, 2022. The net interest margin and net interest margin on a tax-equivalent basis (1) decreased to 2.93% and 3.08%, respectively, for the quarter ending December 31, 2023, from 2.95% to 3.12% for the quarter ending December 31, 2022. Net interest income after provision for credit losses increased from $216,000, or 2.9%, for the year ending December 31, 2023, to $7.8 million compared to the year ending December 31, 2022. Total interest income increased $1.8 million, or 20.2%, when comparing 2023 and 2022, due to increases in the average balances and yields of interest-earning assets.
The average balance of interest-earning assets increased to $269.2 million for the year ended December 31, 2023, from $262.6 million for the year ended December 31, 2022, due primarily to increases in loans receivable and interest-bearing
deposits with banks, partially offset by a decrease in the average balance of investment securities. The average yield on interest-earning assets and the tax-equivalent yield on interest-earning assets (1) increased to 3.94% and 4.10%, respectively, for 2023 from 3.36% and 3.53%, respectively, for 2022, due primarily to higher yields from loans, investment securities, and interest-bearing deposits with banks. Total interest expense increased by $1.8 million, or 162.6%, when comparing 2023 and 2022 due to an increase in the average balance of interest-bearing liabilities and the average cost of interest-bearing liabilities. The average balance of interest-bearing liabilities increased to $204.8 million for the year ended December 31, 2023, from $197.9 million for 2022, due primarily to increases in deposit accounts and borrowings. The average cost of interest-bearing liabilities increased to 1.43% for 2023 from 0.56% for 2022. The Company recorded a net recapture of credit losses on loans of $55,000 and a net recapture of credit losses on unfunded loan commitments of $65,000 for the year ended December 31, 2023, compared to a provision for credit losses on loans of $135,000 for the year ended December 31, 2022. No provision for credit losses on unfunded loan commitments was recorded 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 2.51% and 2.67%, respectively, for the year ended December 31, 2023, from 2.80% and 2.97%, for the year ended December 31, 2022. The net interest margin and net interest margin on a tax-equivalent basis (1) decreased to 2.85% and 3.01% in 2023 from 2.93% and 3.10% in 2022.
Noninterest income decreased $17,000, or 5.6%, for the quarter ended December 31, 2023, as compared to the same period in 2022, due primarily to reductions in deposit account service charges of $18,000 and brokered loan fees of $12,000, partially offset by an increase of $14,000 in ATM and debit card fee income.
Noninterest income decreased $132,000, or 10.6%, for the year ended December 31, 2023, as compared to the same period in 2022, due primarily to a reduction in brokered loan fees of $95,000, a $27,000 net loss on the sale of available- or-sale investment securities and a decrease in deposit account service charges of $20,000, partially offset by an increase of $42,000 in ATM and debit card fee income and a $8,000 net gain on the disposal of foreclosed real estate. A gain on life insurance of $36,000 was recorded during the year ending December 31, 2022, whereas no gain was recorded during the year ending December 31, 2023.
Noninterest expense increased $133,000, or 7.0%, for the quarter ending December 31, 2023, compared to the year ending December 31, 2022. The increase was due primarily to increases in compensation and benefits of $154,000, professional fees of $122,000, data processing expenses of $29,000, deposit insurance premiums of $11,000 and occupancy and equipment of $6,000, partially offset by lower loss on disposal of premises and equipment of $74,000, lower impairment loss on real estate held for sale of $37,000, directors’ compensation of $15,000, stockholders’ meeting expense of $11,000, marketing and business development expenses of $9,000, supervisory examinations of $7,000 and other costs of $36,000.
Noninterest expenses increased by $625,000, or 9.1%, for the year ending December 31, 2023, as compared to the same period in 2022. The increase was due primarily to increases in data processing expenses of $320,000, professional fees of $188,000, compensation and benefits of $166,000, deposit insurance premiums of $51,000, stockholders’ meeting expenses of $43,000, occupancy and equipment expenses of $40,000 and other costs of $10,000, partially offset by lower loss on disposal of premises and equipment of $88,000, marketing and business development expenses of $47,000, lower impairment loss on real estate held for sale of $37,000 and lower supervisory examination expenses of $25,000.
The Company recorded an income tax benefit of $14,000 for the quarter ended December 31, 2023, compared to an income tax expense of $2,000 for the same period in 2022. For the year ended December 31, 2023, the Company recorded an income tax benefit of $25,000 compared to an income tax expense of $91,000 for the year ended December 31, 2022. The income tax benefit is primarily due to increased tax-exempt income in proportion to income before income taxes.
Balance Sheet Review
As of December 31, 2023, total assets were $269.0 million compared to $269.2 million on December 31, 2022. The decrease in total assets was primarily due to decreases in investment securities of $7.0 million and Federal Home Loan Bank stock of $1.0 million, partially offset by an increase in cash and cash equivalents of $8.0 million. Investment securities decreased due primarily to the sale of $4.1 million of available-for-sale investment securities, $5.1 million unscheduled principal payments, and call and maturities of available-for-sale investment securities, partially offset by a $2.6 million unrealized gain on available-for-sale investment securities. Net loans increased $210,000, due primarily to increases of $3.2 million in commercial real estate loans, $1.8 million in multi-family residential loans, and $1.6 million in one-to-four family residential loans, partially offset by decreases of $4.0 million in construction loans and $1.4 million in commercial business loans and a $492,000 increase in the allowance for credit losses on loans. Total liabilities, comprised chiefly of deposits, decreased by $2.9 million to $233.0 million as of December 31, 2023. The decrease was due primarily to a $1.7 million reduction in noninterest-bearing deposits, a $1.5 million decrease in interest-bearing deposits, and an $800,000 decrease in borrowings, partially offset by a $1.1 million increase in the accrued interest.
Credit Quality
Non-performing loans decreased to $591,000 on December 31, 2023, compared to $732,000 on December 31, 2022, or 0.4% and 0.5% of total loans on December 31, 2023, and December 31, 2022, respectively. On December 31, 2023, $150,000, or 25.5% of non-performing loans, were current on their loan payments. No foreclosed real estate was owned on December 31, 2023, and 2022. During the year ended December 31, 2023, the Company sold foreclosed real estate with a book value of $68,000 and recorded a net gain $8,000.
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 of credit losses on loans of $24,000 for the quarter ending December 31, 2023, compared to no provision recorded for the year-earlier quarter in 2022. The recapture for the 2023 quarter was due primarily to a shift in the loan portfolio mix during the quarter.
The Company recorded a net recapture of credit losses on unfunded loan commitments of $15,000 for the 2023 quarter compared to no provision recorded for the 2022 quarter. The recapture is due primarily to a decrease in unfunded loan commitments during the current quarter. The Company recognized net charge-offs of $24,000 for the quarter ended December 31, 2023, compared to net recoveries of $39,000 for the same period in 2022.
The Company recorded a net recapture of credit losses on loans of $55,000 for the year ended December 31, 2023, compared to a provision of $135,000 for 2022. The net recapture for the year ended December 31, 2023, is due primarily to a shift in the loan portfolio mix, partially offset by an increase in the credit reserve ratio (mainly owing to the implementation of ASC 326) versus an increase in loan balances for 2022. The Company recorded a net recapture of credit losses on unfunded loan commitments of $65,000 for the year ended December 31, 2023 compared to no provision for 2022.
The net recapture for the year ended December 31, 2023, and is due primarily to a decrease in unfunded loan commitments during the current year. The allowance for credit losses on loans totaled $2.2 million on December 31, 2023, and $1.7 million on December 31, 2022, representing 1.5% and 1.2% of total loans on December 31, 2023 and December 31, 2022, respectively. The allowance for credit losses on loans represented 369.5% of non-performing loans on December 31, 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 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 December 31, 2023, the Bank was considered well-capitalized under applicable federal regulatory capital guidelines with a CBLR of 15.4%.
The Company’s stockholders’ equity increased to $36.0 million on December 31, 2023, from $33.3 million on December 31, 2022. The increase was due primarily to an increase in the accumulated other comprehensive income of $1.9 million related to unrealized gains on available-for-sale securities and net income of $1.5 million, net of $655,000 in dividends, partially offset by a $481,000 reduction associated with the implementation of ASC 326. There were no share repurchases during the December 31, 2023 quarter, 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, specific 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 following 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 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 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 by 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”). Following GAAP, the most directly comparable financial measure is the interest-earning asset yield. 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 net interest rate spread is the most directly comparable financial measure calculated following GAAP. 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 per 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 and those defined by banking regulators because we believe it is crucial to evaluate the balance sheet 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.
Refer to “Reconciliation of Non-GAAP Financial Measures” below.
About Mid-Southern Bancorp, Inc. and Mid-Southern Savings Bank, FSB
Mid-Southern Bancorp, Inc. is the holding company of Mid-Southern Savings Bank, FSB, 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 in Mitchell and Orleans, Indiana, and loan production offices in New Albany, Indiana, and Louisville, Kentucky.
Cautionary Note Regarding Forward-Looking Statements
This press release contains certain forward-looking statements. Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may,” “continue,” or similar terms or variations on those terms, or the negative of those terms. Forward-looking statements, by their nature, are subject to risks and uncertainties. Specific factors that could cause actual results to differ materially from expected results include changes to the real estate and economic environment, particularly in the market areas in which the Bank operates; increased competitive pressures; changes in the interest rate environment; general economic conditions or conditions within the securities markets, and legislative and regulatory changes affecting financial institutions, including regulatory compliance
costs and capital requirements that could adversely affect the business in which the Company and the Bank are engaged.
The factors listed above could materially affect the Company’s financial performance. They could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed concerning future periods in any current statements.
Except as required by applicable law, the Company does not undertake and specifically declines any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. When considering forward-looking statements, you should consider these risks and uncertainties. It would help if you did not rely on any forward-looking statement, which speaks only as of the date made.
