MID-SOUTHERN BANCORP, INC. Overview
Our principal business consists of attracting retail deposits from the general public and investing those funds, along with borrowed funds, in loans secured by first and second mortgages on one-to-four family residences (including home equity loans and lines of credit), commercial and multi-family, consumer and commercial business loans and, to a lesser extent, construction and land loans. We offer a wide variety of consumer loan products, including automobile loans, boat loans, manufactured homes not secured by permanent dwellings and recreational vehicle loans. We intend to continue emphasizing our residential mortgage, home equity and consumer lending, while also expanding our emphasis in commercial and multi-family and commercial business lending. Our operating revenues are derived principally from earnings on interest earning assets, service charges and fees. Our primary sources of funds are deposits, FHLB advances and other borrowings, and payments received on loans and securities. We offer a variety of deposit accounts that provide a wide range of interest rates and terms, generally including savings, money market, term certificate and checking accounts. Our noninterest expenses consist primarily of salaries and employee benefits, expenses for occupancy, marketing and computer services andFDIC deposit insurance premiums. Salaries and benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of lease payments, property taxes, depreciation charges, maintenance and costs of utilities. Our strategic plan targets individuals, small and medium size businesses in our market area for loan and deposit growth. In pursuit of these goals, and while managing the size of our loan portfolio, we focused on including a significant amount of commercial business and commercial and multi-family loans in our portfolio. A significant portion of these commercial and multi-family and commercial business loans have adjustable rates, higher yields or shorter terms and higher credit risk than traditional fixed-rate mortgages. Our commercial loan portfolio (commercial and multi-family real estate, commercial construction and commercial business loans) increased to$78.2 million , or 53.5% of our total loan portfolio atDecember 31, 2022 , from$56.5 million or 45.5% of our total loan portfolio, atDecember 31, 2021 . The impact of additional commercial and multi-family, commercial construction and commercial business loans has had a positive impact on our interest income and has helped to further diversify our loan portfolio mix. AtDecember 31, 2022 , our commercial real estate and commercial real estate construction portfolios totaled$55.3 million , which represents a 44.3% increase sinceDecember 31, 2021 . AtDecember 31, 2022 , our commercial business loans were$14.7 million , which represents a 66.7% increase sinceDecember 31, 2021 . Our primary market area is theLouisville -Jefferson County MSA (which consists ofClark ,Floyd ,Harrison andWashington counties inIndiana andBullitt ,Henry ,Jefferson ,Meade ,Nelson ,Oldham ,Shelby ,Spencer andTrimble counties inKentucky ), plusLawrence andOrange counties inIndiana . Adverse economic conditions in our market area can reduce our rate of growth, affect our customers' ability to repay loans and adversely impact our financial condition and earnings. Business Strategy We intend to operate as a well-capitalized and profitable community bank dedicated to providing exceptional personal service to our individual and business customers. We believe that we have a competitive advantage in the markets we serve because of our knowledge of the local marketplace and our long-standing history of providing superior, relationship-based customer service. Our current executive management team is comprised of individuals with strong banking backgrounds.Erica B. Schmidt , the Bank's Executive Vice President and Chief Financial Officer, joinedMid-Southern Savings Bank in 2005. InDecember 2013 ,Alexander G. Babey joinedMid-Southern Savings Bank as Executive Vice President andChief Credit Officer , and we appointed him as our President and Chief Executive Officer inOctober 2016 . OnAugust 13, 2021 ,Frank (Buzz) Benson , III announced his retirement as Executive Vice President and Senior Loan Officer, effectiveJanuary 1, 2022 . OnOctober 27, 2021 ,James (Jimmy) O. King , III was hired to replace 44
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Our current business strategy consists of the following:
Continuing to emphasize the origination of one-to-four family residential
mortgage loans. We have been and will continue to be a significant one-to-four
family residential mortgage lender to borrowers in our market area. As of
?
one-to-four family residential mortgage loans. We historically have held all of
our loan originations, including our fixed-rate one-to-four family residential
mortgage loans, in our loan portfolio, however, beginning in
began brokering one-to-four family residential mortgage loans.
Increasing commercial and multi-family real estate and commercial business
lending. In order to increase the yield on our loan portfolio and reduce the
term to repricing, our new management team began to increase our commercial and
multi-family real estate and commercial business loan portfolios while
? maintaining what we believe are conservative underwriting standards. We focus
our commercial lending to small businesses located in our market area,
targeting owner occupied businesses such as manufacturers and professional
service providers. Our commercial and multi-family real estate and commercial
business loan portfolios were
Increasing our lower-cost core deposits. NOW, Demand, savings and money market
accounts are a lower cost source of funds than certificates of deposit, and we
have made a concerted effort to increase these lower-cost transaction deposit
? accounts. We plan to continue to market our core transaction accounts,
emphasizing our high-quality service and competitive pricing of these products.
We also offer the convenience of technology-based products, such as bill pay,
internet and mobile banking.
Managing credit risk to maintain a low level of non-performing assets. We
believe strong asset quality is a key to our long-term financial success. Our
strategy for credit risk management focuses on having an experienced team of
? credit professionals, well-defined policies and procedures, appropriate loan
underwriting criteria and active credit monitoring. Our non-performing assets
to total assets ratio was 0.3% at both
one-to-four family residential loans.
Growing organically and through opportunistic branch acquisitions. We expect to
consider both organic growth as well as acquisition opportunities that we
believe would enhance the value of our franchise and yield potential financial
? benefits for our stockholders. We expect to focus our growth in our primary
market areas and
network through the acquisition of other financial institutions, opening of
additional branches or loan production offices or the acquisition of branches
if the right opportunity occurs.
Summary of Significant Accounting Policies
The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity withU.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be significant accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations. The JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the financial statements included in this annual report on Form 10-K, as well as any financial statements that we file in the 45
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future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act.
The following represent our significant accounting policies:
Allowance for Loan Losses. The allowance for loan losses represents management's estimate of losses inherent in the loan portfolio as of the date of the balance sheet and it is recorded as a reduction of loans. The allowance is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan and the entire allowance is available to absorb all loan losses. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be 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 classified as impaired. For loans that are classified impaired, an allowance is established when the discounted cash flows or collateral value of the impaired loan are lower than the carrying value of that loan. The general component covers pools of loans, by loan class, including commercial loans not considered impaired, as well as smaller balance homogenous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based on historical loss rates for each of these categories of loans, which are adjusted for qualitative factors. The qualitative factors include:
? Lending policies and procedures, including underwriting standards and
collection, charge-off and recovery practices;
National, regional and local economic and business conditions as well as the
? condition of various market segments, including the value of underlying
collateral for collateral dependent loans;
? Nature and volume of the portfolio and terms of the loans;
? Experience, ability and depth of the lending management and staff;
? Volume and severity of past due, classified and non-accrual loans, as well as
other loan modifications; and
? Quality of our loan review system and the degree of oversight by our board of
directors.
Each factor is assigned a value to reflect improving, stable or declining conditions based on management's best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss analysis and calculation.
In addition, various bank regulatory agencies periodically review the allowance
for loan losses and may require an increase in the provision for possible loan
losses or the recognition of further loan charge-offs based on their judgment
about information available to them at the time of their examination.
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Income Taxes. Income taxes are provided for the tax effects of certain transactions reported in the consolidated financial statements. Income taxes consist of taxes currently due plus deferred taxes related primarily to temporary differences between the financial reporting and income tax basis of the allowance for loan losses, premises and equipment, certain state tax credits, and deferred loan origination costs. The deferred tax assets and liabilities represent the future tax return consequences of the temporary differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Estimation of Fair Values. Fair values for securities available-for-sale are obtained from an independent third-party pricing service. Where available, fair values are based on quoted prices on a nationally recognized securities exchange. If quoted prices are not available, fair values are measured using quoted market prices for similar benchmark securities. Management generally makes no adjustments to the fair value quotes provided by the pricing source. The fair values of foreclosed real estate and the underlying collateral value of impaired loans are typically determined based on evaluations by third parties, less estimated costs to sell. When necessary, appraisals are updated to reflect changes in market conditions.
Comparison of Financial Condition at
Cash and Cash Equivalents. AtDecember 31, 2022 and 2021, cash and cash equivalents totaled$5.7 million and$16.4 million , respectively. Cash and cash equivalents decreased due primarily to increases in loans receivable and purchases of investment securities available for sale, partially offset by increases in deposits, net FHLB borrowings and operating activities. We have focused on investing excess liquidity in higher yielding loans and investment securities in an effort to increase net interest income. Loans. Our primary lending activity is the origination of loans secured by real estate. We originate one-to-four family residential loans, multi-family residential loans, commercial business loans, commercial real estate loans and construction loans. To a lesser extent, we originate consumer loans. As part of our effort to increase our business lending and diversify the loan portfolio, we opened loan production offices inNew Albany, Indiana inAugust 2016 and inLouisville, Kentucky inMarch 2021 . Net loans receivable increased$21.8 million , or 17.8%, to$144.4 million atDecember 31, 2022 from$122.6 million atDecember 31, 2021 . The increase in net loans receivable was due primarily to increases in commercial real estate, commercial business loans and commercial real estate construction loans. One-to-four family residential loans comprise the largest segment of our loan portfolio. AtDecember 31, 2022 , these loans totaled$64.7 million , or 44.3% of total loans, compared to$64.1 million , or 51.6% of total loans, atDecember 31, 2021 . The Bank originates both fixed- and adjustable-rate one-to-four family residential loans. We have recently increased our efforts to originate adjustable-rate one-to-four family residential loans and originated$16.1 million and$13.7 million of adjustable-rate loans in 2022 and 2021, respectively. Management intends to continue its focus on offering adjustable-rate mortgage loans at attractive rates. Multi-family residential mortgage loans totaled$8.3 million , or 5.7% of total loans, atDecember 31, 2022 compared to$9.4 million , or 7.6% of total loans atDecember 31, 2021 . We continue our effort to originate this type of loan. Commercial real estate loans totaled$48.6 million , or 33.2% of total loans, atDecember 31, 2022 compared to$36.7 million , or 29.5% of total loans, atDecember 31, 2021 . During 2022 and 2021, we originated$18.5 million and$15.1 million , respectively, of commercial real estate loans with an emphasis on adjustable-rate loans. Our construction loan portfolio consists of residential and commercial construction loans. Construction loans totaled$7.8 million , or 5.4% of total loans (excluding unfunded construction loan commitments of$5.6 million ), atDecember 31, 2022 , compared to$3.0 million , or 2.4% of total loans (excluding unfunded construction loan commitments 47
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of
Commercial business loans totaled
Consumer loans totaled
Securities Available for Sale. Our available for sale securities portfolio consists primarily ofU.S. government securities,U.S. government agency debt securities, including mortgage-backed securities and collateralized mortgage obligations, and municipal obligations. Available for sale securities decreased by$1.9 million , or 1.8%, to$105.4 million atDecember 31, 2022 from$107.3 million atDecember 31, 2021 . Investment securities decreased due primarily to a$17.2 million decrease in the unrealized gain on available for sale securities and$10.3 million from scheduled principal payment and maturities of mortgage-backed and tax-exempt securities, partially offset by the purchase of$26.0 million of available for sale securities. AtDecember 31, 2022 , our investment in municipal obligations was$63.7 million compared to$71.7 million atDecember 31, 2021 . Securities Held to Maturity. Our held to maturity securities portfolio consists primarily ofU.S. government agency mortgage-backed securities. Held to maturity securities decreased$4,000 for the year endedDecember 31, 2022 . The decrease during 2022 was due to principal repayments on mortgage-backed securities. We have not purchased investment securities as held to maturity during the past three years.
Premises and Equipment. Premises and equipment were
Other Assets. Other assets increased
Deposits. Deposit accounts, primarily obtained from individuals and businesses throughout our local market area, are the primary source of funds for our lending and investments. Our deposit accounts are comprised of noninterest-bearing checking, interest-bearing checking, savings, and money market accounts and certificates of deposit. Deposits increased$9.2 million or 4.7%, during the year endedDecember 31, 2022 , primarily as a result of increases in interest-bearing accounts. Borrowings. OnJune 27, 2019 , the Company borrowed$10.0 million from the FHLB bearing an interest rate of 1.73% with a scheduled maturity date ofJune 27, 2024 . OnJune 27, 2022 , the FHLB exercised its put option on this advance. As ofDecember 31, 2022 , the Company borrowed$29.0 million in a short-term fixed-rate bullet loan from the FHLB, bearing an interest rate of 4.21% and which matured onJanuary 4, 2023 . In addition, onApril 13, 2022 , the Company began utilizing a$5.0 million line of credit from the FHLB, and as ofDecember 31, 2022 , the Company did not have an outstanding balance on the line of credit. Stockholders' Equity. Stockholders' equity decreased$13.2 million to$33.3 million atDecember 31, 2022 from$46.5 million atDecember 31, 2021 . The decrease was due primarily to the repurchase of 154,486 shares of our common stock at a total cost of$2.2 million or an average cost of$14.30 per share and a decrease in accumulated other comprehensive income, net of tax, of$12.9 million due primarily to decreases in the fair value of available-for-sale investments, partially offset by net income of$1.9 million , less dividends
of$492,000 . 48 Table of Contents
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities respectively, for the periods presented. Average balances are calculated using daily balances. Nonaccrual loans are included in average daily balances only. Loan fees are included in interest income on loans and are not material. Tax exempt income on loans and investment securities has been calculated on a taxable-equivalent basis using a federal marginal tax rate of 21% for the years endedDecember 31, 2022 , 2021 and 2020. Weighted average yields for tax exempt loans and investment securities atDecember 31, 2022 have been calculated on a taxable-equivalent basis using a federal marginal tax rate of 21%. Years Ended December 31, 2022 2021 2020 Average Average Average
Balance Interest Yield / Cost Balance Interest Yield / Cost Balance Interest Yield / Cost
(Dollars in thousands)
Interest-earning assets:
Interest bearing deposits with banks $ 6,370 $ 30 0.47 % $ 16,331 $ 3 0.02 % $ 19,049 $ 60 0.31 %
Loans receivable, net (taxable-equivalent basis)(1)(2) 136,766 6,046 4.42 116,659 5,255 4.50 121,467 5,562 4.58 Mortgage-backed securities 36,289 589 1.62 38,029 545 1.43 20,078 422 2.10
Other investment securities (taxable-equivalent basis)(2) 81,816 2,544 3.11 65,898 2,171 3.29 46,661 1,695 3.63 Federal Home Loan Bank stock 1,343 55 4.10 778 17 2.19 778 25 3.21 Total interest-earning assets (taxable-equivalent basis)(2)
262,584 9,264 3.53 % 237,695 7,991 3.36 % 208,033 7,764 3.73 % Noninterest-earning assets 1,170 10,367 9,637 Total assets$ 263,754 $ 248,062 $ 217,670 Interest-bearing liabilities: Interest-bearing checking$ 62,108 26 0.04 %$ 57,271 24 0.04 %$ 43,679 35 0.08 % Savings and money market 68,634 112 0.16 62,186 94 0.15 42,981 85 0.20 Certificates of deposit 44,940 411 0.91 43,181 360 0.83 47,836 642 1.34 Total deposits 175,682 549 0.31 % 162,638 478 0.29 % 134,496 762 0.57 % FHLB borrowings 22,234 569 2.56 10,017 173 1.73 10,006 174 1.74
Total interest-bearing liabilities 197,916 1,118 0.56 172,655 651 0.38 144,502 936 0.65 Noninterest-bearing liabilities
28,718 27,568 22,072 Total liabilities 226,634 200,223 166,574 Total equity 37,120 47,839 51,096 Total liabilities and equity$ 263,754 $ 248,062 $ 217,670
Net interest income (taxable-equivalent basis)(2) 8,146 7,340 6,828 Less: taxable-equivalent adjustment
(447) (409) (313)
Net interest income $ 7,699 $ 6,931 $ 6,515 Net interest rate spread (taxable-equivalent basis)(2) 2.97 % 2.98 % 3.08 % Net interest margin (taxable-equivalent basis)(2) 3.10 % 3.09 % 3.28 % Average interest-earning assets to average interest-bearing liabilities 132.7 % 137.7 % 144.0 %
(1) Loan amount is net of deferred loan origination fees and costs, undisbursed
loan funds and includes nonperforming loans.
(2) Refer to "Non-GAAP Financial Measures" and "Reconciliation of Non-GAAP
Financial Measures" below for more information and for a reconciliation of
this non-GAAP financial measure to the nearest GAAP financial measure.
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Rate/Volume Analysis
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and those related to changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
Years Ended December 31,
2022 Compared to 2021 2021 Compared to 2020
Increase (Decrease) Due to Increase (Decrease) Due to
Rate Volume Net Rate Volume Net
(Dollars in thousands)
Interest income
Interest bearing deposits with banks(1) $ 28 $ (1) $ 27 $ (50) $ (7) $ (57)
Loans receivable, net (91) 883 792 (84) (218) (302)
Mortgage-backed securities 67 (23) 44 (69) 192 123
Other investment securities(2) (58) 430 372 (126) 493 367
Total interest-earning assets (54) 1,289 1,235 (329) 460 131
Interest expense Interest-bearing checking - 2 2 (31) 20 (11) Savings and money market 7 11 18 (11) 20 9 Certificates of deposit 36 15 51 (225) (57) (282) FHLB borrowings 112 284 396 (1) - (1) Total interest-bearing liabilities 155 312
467 (268) (17) (285)
Net increase (decrease) in net interest income$ (209) $ 977 $
768
(1) Includes interest-bearing deposits (cash) at other financial institutions.
(2) Includes FHLB Stock.
Comparison of Operating Results Years Ended
Overview. The Company reported net income of$1.9 million ($0.69 per common share diluted) for the year endedDecember 31, 2022 , compared to net income of$1.6 million ($0.55 per common share diluted) for the year endedDecember 31, 2021 . The significant factors that contributed to the increase in net income for 2022 were increases in net interest income after provision for loan losses and noninterest income, partially offset by an increase in noninterest expenses. Net Interest Income. Net interest income increased$768,000 , or 11.1%, to$7.7 million for 2022 from$6.9 million for 2021 primarily as the result of increases in the average balance of and the yield earned on interest-earning assets, partially offset by an increase in the average balance of and the cost incurred from interest-bearing liabilities. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 132.7% for 2022 from 137.7% for 2021. The interest rate spread and the interest rate spread on a taxable-equivalent basis( 1 ) decreased to 2.80% and 2.97% for 2022, respectively from 2.81% and 2.98% for 2021, respectively. Total interest income increased$1.2 million , or 16.3%, to$8.8 million for 2022 from$7.6 million for 2021. The increase is primarily due to an increase in the average balance of and the yield earned on interest-earning assets. The average balance of interest-earning assets increased to$262.6 million for 2022 from$237.7 million for 2021. The average
(1) Refer to "Non-GAAP Financial Measures" and Reconciliation of Non-GAAP Financial Measures" below for more information and for a reconciliation of this non-GAAP financial measure to the nearest GAAP financial measure.
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yield and the average yield on a taxable-equivalent basis(1) on interest-earning assets increased to 3.36% and 3.53% for 2022, respectively, from 3.19% and 3.36% for 2021, respectively, primarily due to higher market interest rates and a shift in the asset mix to loans from investment securities. Interest income on loans was$6.0 million for 2022 compared to$5.2 million for 2021. The increase was due to an increase in average loans outstanding of$20.1 million , or 17.2%, to$136.8 million in 2022 from$116.7 million in 2021, partially offset by a decrease in the average yield and average yield on a taxable-equivalent basis(1) on loans receivable to 4.42% and 4.42% for 2022, respectively, from 4.50% and 4.50% for 2021, respectively.
Interest income on investment securities increased
Interest income on interest-bearing deposits with banks increased$27,000 , due primarily to an increase in the average yield to 0.48% for 2022 from 0.02% for 2021, partially offset by a decrease in the average balance of interest-bearing deposits to$6.4 million for 2022 from$16.3 million for 2021. Total interest expense increased$467,000 , or 71.7%, due to increases in the cost of interest-bearing liabilities and the average balance of interest-bearing liabilities. The average cost of interest-bearing liabilities increased to 0.56% for 2022 from 0.38% for 2021. The average balance of interest-bearing liabilities increased$25.3 million to$197.9 million for 2022 from$172.7 million for 2021, due primarily to increases in the average balance of total deposits and FHLB borrowings. TheFederal Reserve made aggressive rate actions during 2022, implementing multiple rate hikes in an effort to tame inflation that has reached its highest levels in decades. The FFTR was increased a total of 425 bps during 2022, beginning the year at a range of 0.00% to 0.25% and ending the year at a range of 4.25% to 4.50%. As a result, the Prime rate increased from 3.25% at the beginning of 2022 to 7.50% as ofDecember 31, 2022 , ending the year at its highest level since 2007. Provision for Loan Losses. Based on an analysis of the factors described in "Summary of Significant Accounting Policies - Allowance for Loan Losses," the Company recognized a provision for loan losses of$135,000 for 2022 compared to a recapture of the provision for loan losses of$120,000 for 2021. The recorded investment in non-performing loans decreased to$732,000 , or 0.5% of total loans atDecember 31, 2022 , compared to$753,000 , or 1.1% of total loans atDecember 31, 2021 . During the year endedDecember 31, 2022 , net recoveries totaled$34,000 compared to net recoveries of$54,000 for 2021. The recorded investment in impaired loans decreased$108,000 or 7.0%, from$1.5 million atDecember 31, 2021 to$1.4 million atDecember 31, 2021 . Noninterest Income. Noninterest income increased$28,000 , or 2.3%, to$1.2 million for 2022 as compared to$1.2 million for 2021. The nominal year-over-year increase in noninterest income was primarily due to increases of$82,000 in deposit account service charges,$36,000 gain in life insurance and$21,000 in ATM and debit card fee income, partially offset by$110,000 in brokered loan fees. Noninterest Expense. Noninterest expense increased$244,000 , or 3.7%, to$6.8 million for 2022 as compared to$6.6 million for 2021. The increase was due primarily to increases in data processing fees of$122,000 , occupancy and equipment expenses of$52,000 , marketing and business development expenses of$37,000 , professional fees of$19,000 , a$91,000 loss on disposal of premises and equipment and a$37,000 loss on the disposal of real estate held for sale, partially offset by decreases in compensation and benefits of$137,000 . Income Tax Expense. Income tax expense was$91,000 for 2022 compared to$67,000 for 2021 resulting from increases in pre-tax income. The effective tax rate for 2022 increased to 4.6% compared to 4.0% for 2021. See Note 10 of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information. 51 Table of Contents Liquidity Liquidity management is both a daily and longer-term function of management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer-term basis, we maintain a strategy of investing in various lending products and investment securities, including municipal and mortgage-backed securities. We use our sources of funds primarily to meet ongoing commitments, pay maturing deposits, fund deposit withdrawals and fund loan commitments. We maintain cash and investments that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound operation and meet demands for customer funds (particularly withdrawals of deposits). AtDecember 31, 2022 and 2021, we had$111.0 million and$123.7 million , respectively, in cash and investment securities available for sale generally available for our cash needs. We can also obtain funds from borrowings, primarily FHLB advances. AtDecember 31, 2022 , we had$29.0 million in FHLB advances outstanding and the ability to borrow an additional$21.0 million in FHLB advances, subject to certain collateral requirements. We are required to have enough cash and investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure safe and sound operations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, we have maintained liquid assets above levels believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained. Liquidity management involves the matching of cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs and our ability to manage those requirements. We strive to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance we have in short-term investments at any given time will cover adequately any reasonably anticipated, immediate need for funds. Additionally, we maintain relationships with correspondent banks, which could provide funds on short-term notice if needed. Our liquidity, represented by cash and cash-equivalents, is a product of our operating, investing and financing activities. Our liquidity, represented by cash and cash equivalents and investment securities, is a product of our operating, investing and financing activities. Our primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, maturities of investment securities and other short-term investments and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, which provide liquidity to meet lending requirements. We also generate cash through borrowings. We utilize FHLB advances to leverage our capital base and provide funds for our lending and investment activities, and to enhance our interest rate risk management. We use our sources of funds primarily to meet ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. AtDecember 31, 2022 , the approved outstanding loan commitments, including unused lines and letters of credit, amounted to$17.1 million . Certificates of deposit scheduled to mature in one year or less atDecember 31, 2022 , totaled$33.0 million . It is management's policy to manage deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that a majority of maturing deposits will remain with us.
Commitments and Off-Balance Sheet Arrangements
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of its customers. For information regarding our commitments and off-balance sheet arrangements, see Notes 14 and 15 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
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The following table summarizes our commitments and contingent liabilities with
off-balance sheet risks as of
Total Due in
Amounts One
Committed Year
(Dollars in thousands)
Commitments to originate loans
Fixed rate $ 539 $ 539
Adjustable rate 1,020 1,020
Undisbursed balance of commercial and personal lines of credit 9,915 -
Undisbursed balance of commercial construction loans 4,731 -
Undisbursed balance of residential construction loans
900 -
Standby letters of credit 41 41
$ 17,146 $ 1,600
Capital
Mid-Southern Savings Bank is subject to minimum capital requirements imposed by
regulations of the OCC. Based on its capital levels at December 31, 2022 ,
Mid-Southern Savings Bank exceeded these requirements as of that date.
Consistent with our goals to operate a sound and profitable organization, our
policy is for Mid-Southern Savings Bank to maintain a "well-capitalized" status
under the regulatory capital categories of the OCC. Based on capital levels at
December 31, 2022 Mid-Southern Savings Bank was considered to be
well-capitalized. Management monitors the capital levels to provide for current
and future business opportunities and to maintain Mid-Southern Savings Bank's
"well-capitalized" status. See Item 1. "Business - Regulation - Federal
Regulation of Savings Institutions - Capital Requirements" and Note 16 of the
Notes to the Consolidated Financial Statements contained in Item 8 of this
Form 10-K for additional details on Mid-Southern Savings Bank's regulatory
capital requirements.
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.
As of
For a bank holding company with less than$3.0 billion in assets, the capital guidelines apply on a bank only basis and theFederal Reserve expects the holding company's subsidiary banks to be well capitalized under the prompt corrective action regulations. IfMid-Southern Bancorp, Inc. was subject to regulatory guidelines for bank holding companies with$3.0 billion or more in assets, atDecember 31, 2022 ,Mid-Southern Bancorp, Inc. would have exceeded all regulatory capital requirements.
Asset/Liability Management
Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market rates change over time. Like other financial institutions, our results of operations are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.
How We Measure Our Risk of Interest Rate Changes. As part of our attempt to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor our interest rate risk. In doing so, we analyze
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and manage assets and liabilities based on their interest rates and payment streams, timing of maturities, repricing opportunities, and sensitivity to actual or potential changes in market interest rates.
We are subject to interest rate risk to the extent that our interest-bearing
liabilities, primarily deposits and FHLB advances, reprice more rapidly or at
different rates than our interest-earning assets. In order to minimize the
potential for adverse effects of material prolonged increases or decreases in
interest rates on our results of operations, we have adopted an asset and
liability management policy. Our board of directors sets the asset and liability
policy, which is implemented by the asset/liability committee.
The purpose of the asset/liability committee is to communicate, coordinate, and
control asset/liability management consistent with our business plan and
board-approved policies. The committee establishes and monitors the volume and
mix of assets and funding sources, taking into account relative costs and
spreads, interest rate sensitivity and liquidity needs. The objectives are to
manage assets and funding sources to produce results that are consistent with
liquidity, capital adequacy, growth, risk and profitability goals.
The committee generally meets quarterly to, among other things, protect capital
through earnings stability over the interest rate cycle; maintain our
well-capitalized status; and provide a reasonable return on investment. The
committee recommends appropriate strategy changes based on this review. The
committee is responsible for reviewing and reporting the effects of the policy
implementations and strategies to the board of directors at least quarterly.
Executive management oversee the process on a daily basis.
Our asset/liability management strategy dictates acceptable limits on the
amounts of change in given changes in interest rates. For interest rate
increases of 100, 200, and 300 basis points, our policy dictates that our
Economic Value of Equity ("EVE") ratio should not fall below 10.0%, 20.0%, and
30.0%, respectively. As illustrated in the table below, we were in compliance
with this aspect of our asset/liability management policy at December 31, 2022 .
Mid-Southern Savings Bank uses an EVE interest rate sensitivity analysis in
order to evaluate the impact of its interest rate risk on earnings and capital.
This is measured by computing the changes in net EVE for its cash flow from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. EVE modeling involves discounting
present values of cash flows for on and off-balance sheet items under different
interest rate scenarios and provides no effect given to any steps that
management might take to counter the effect of the interest rate movements. The
discounted present value of all cash flows represents the Mid-Southern Savings
Bank's EVE and is equal to the market value of assets minus the market value of
liabilities, with adjustments made for off balance sheet items. The amount of
base case EVE and its sensitivity to shifts in interest rates provide a measure
of the longer-term re-pricing and option risk in the balance sheet. The table
presented below, as of December 31, 2022 , is an analysis of our interest rate
risk as measured by changes in EVE for instantaneous and sustained parallel
shifts in the yield curve, in 100 basis point increments, from no change to up
and down 400 basis points.
Immediate Change Economic Value of Equity as a
In the Level Economic Value of Equity % of Present Value of Assets
Of Interest Rates $ Amount $ Change % Change EVE Ratio % Change
(Dollars in thousands)
400bps $ 49,067 $ (12,097) (19.8) % 18.6 % (4.6) %
300bps 52,651 (8,513) (13.9) 19.9 (3.2)
200bps 56,133 (5,031) (8.2) 21.2 (1.9)
100bps 59,166 (1,998) (3.3) 22.4 (0.8)
Static 61,164 - - 23.2 -
(100)bps 61,580 416 0.7 23.3 0.2
(200)bps 60,470 (694) (1.1) 22.9 (0.3)
(300)bps 57,842 (3,322) (5.4) 21.9 (1.3)
(400)bps 58,706 (2,458) (4.0) 22.2 (0.9)
In addition to monitoring selected measures of EVE, management also monitors
effects on net interest income resulting from increases or decrease in rates.
This process is used in conjunction with EVE measures to identify excessive
interest rate risk. In managing our assets/liability mix, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, we may place somewhat greater emphasis on maximizing its
net interest
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margin than on strictly matching the interest rate sensitivity of its assets and
liabilities. Management also believes that the increased net income which may
result from an acceptable mismatch in the actual maturity or re-pricing of its
asset and liability portfolios can, during periods of declining or stable
interest rates, provide sufficient returns to justify the increased exposure to
sudden and unexpected increases in interest rates which may result from such a
mismatch. Management believes that our level of interest rate risk is acceptable
under this approach.
In evaluating our exposure to interest rate movements, certain shortcomings
inherent in the method of analysis presented in the foregoing table must be
considered. For example, although certain assets and liabilities may have
similar maturities or re-pricing periods, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in interest
rates. Additionally, certain assets, such as adjustable-rate mortgages, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, in the event of a significant change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed above. Finally, the ability of many borrowers to service
their debt may decrease in the event of an interest rate increase. We consider
all of these factors in monitoring our exposure to interest rate risk.
Non-GAAP Financial Measures
Certain non-GAAP measures are used by management to supplement the evaluation of
the Company's performance. These measures - Net interest income
(taxable-equivalent basis), yield on loans receivable (taxable-equivalent
basis), yield on other investment securities (taxable-equivalent basis), yield
on interest-earning assets (taxable-equivalent basis), net interest rate spread
(taxable-equivalent basis) and net interest margin (taxable-equivalent basis) -
include the effects of taxable-equivalent adjustments using a federal income tax
rate prevalent during the relevant year to increase tax-exempt interest income
to a taxable-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.
We believe these taxable-equivalent measures to be the preferred industry
measurement of net interest income and its related components and that these
taxable-equivalent measures enhance comparability of net interest income arising
from taxable and tax-exempt sources. Net interest income (taxable-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. The most directly comparable
financial measure calculated in accordance with GAAP is net interest income.
Yield on loans receivable (taxable-equivalent basis) is the ratio of interest
income earned from loans, adjusted on a taxable-equivalent basis, and average
interest-earning assets. The most directly comparable financial measure in
accordance with GAAP is yield on loans receivable. Yield on other investment
securities (taxable-equivalent basis) is the ratio of interest income earned on
other investment securities, adjusted on a taxable-equivalent basis, and average
other investment securities. The most directly comparable financial measure in
accordance with GAAP is yield on other investment securities. Yield on
interest-earning assets (taxable-equivalent basis) is the ratio of interest
income earned from interest-earning assets, adjusted on a taxable-equivalent
basis, and average interest-earning assets. The most directly comparable
financial measure in accordance with GAAP is yield on interest-earning assets.
Net interest rate spread (taxable-equivalent basis) is the difference in the
average yield on average earning assets on a taxable-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
rate spread. Net interest margin (taxable-equivalent basis) is the ratio of net
interest income (taxable-equivalent basis) to average earning assets. The most
directly comparable financial measure in accordance with GAAP is net interest
margin.
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. The following table
presents the reconciliation of net interest income to net interest income
adjusted to a fully taxable-equivalent basis assuming a relevant marginal tax
for interest earned on tax-exempt assets such as municipal loans and investment
securities (dollars in thousands), along with the calculation of net interest
income (taxable-equivalent basis), yield on loans receivable (taxable-equivalent
basis), yield on other investment securities (taxable-equivalent basis), yield
on interest-earning assets (taxable-equivalent basis), net interest rate spread
(taxable-equivalent basis) and net interest margin (taxable-equivalent basis).
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Net interest income, yield on loans receivable,
yield on interest-earning assets, net interest
rate spread, net interest margin
(taxable-equivalent basis): 2022 2021 2020
Net interest income (GAAP) $ 7,699 $ 6,931 $ 6,515
Tax-equivalent adjustments:(1)
Loans 6 6 11
Tax-exempt investment securities 441 403 302
Net interest income (taxable-equivalent basis)
Average interest-earning assets(2)$ 262,584 $
237,695
Yield on loans receivable 4.42 % 4.50 % 4.57 % Yield on loans receivable (taxable-equivalent basis) 4.42 %
4.50 % 4.58 %
Yield on other investment securities 2.57 % 2.68 % 2.98 % Yield on other investment securities (taxable-equivalent basis) 3.11 %
3.29 % 3.63 %
Yield on interest-earning assets 3.36 % 3.19 % 3.58 % Yield on interest-earning assets (taxable-equivalent basis) 3.53 % 3.36 % 3.73 % Net interest rate spread 2.80 % 2.81 % 2.93 % Net interest rate spread (taxable-equivalent basis) 2.97 % 2.98 % 3.08 % Net interest margin 2.93 % 2.92 % 3.13 % Net interest margin (taxable-equivalent basis) 3.10 %
3.09 % 3.28 %
(1) Tax-exempt income has been adjusted to a taxable-equivalent basis using the
federal marginal tax rate of 21% for 2022, 2021 and 2020.
(2) Investment securities, which are included in interest-earning assets, are
based on amortized cost and do not give effect to changes in fair value that
are reflected in Accumulated Other Comprehensive Income / Loss.
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