SSBI Summit State Bank

Summit State Bank (Nasdaq: SSBI) today reported net income for the second quarter ended June 30, 2023 of $2,985,000, or $0.45 per diluted share, a decrease of $1,516,000, or 33.7%, compared to net income of $4,501,000, or $0.67 per diluted share for the second quarter ended June 30, 2022. Financial results for the quarter reflect strong net interest income offset by lower non-interest income resulting from reduced gain on sale of loan activity. Additionally, a quarterly dividend of $0.12 per share was declared for common shareholders.

The Board of Directors declared a quarterly cash dividend of $0.12 per share on July 24, 2023. The quarterly dividend will be paid on August 17, 2023 to shareholders of record on August 10, 2023.

"Our second quarter results reflected solid net interest income generation, fueled by strong loan growth,” said Brian Reed, President and CEO. “Deposits also increased with growth across half of the deposit categories. We have been very deliberate in our deposit gathering strategies, and as a result were able to grow customer deposits during the quarter, at a time when the banking industry is experiencing deposit contraction. While the net interest margin decrease was primarily related to pressure from the funding side of the balance sheet, we remain prudent with all new loan pricing, with an average loan rate of 5.66% during the quarter, compared to 5.59% in the prior quarter. Despite the challenges and headwinds facing the banking industry, our ability to grow our balance sheet organically will ultimately further enhance the value of our Bank over time.”

Second Quarter 2023 Financial Highlights (at or for the three months ended June 30, 2023)

• Net income was $2,985,000, or $0.45 per diluted share, compared to $4,501,000, or $0.67 per diluted share, in the second quarter of 2022 and $4,116,000, or $0.62 per diluted share, for the quarter ended March 31, 2023.
• Provision for credit losses was $35,000, compared to $998,000 in the second quarter a year ago.
• Net interest margin was 3.44%, compared to 3.69% in the preceding quarter and 4.36% in the second quarter a year ago.
• Second quarter revenues (net interest income plus noninterest income) decreased 12.2% to $11,113,000, compared to $12,656,000 in the second quarter a year ago.
• Annualized return on average assets was 1.03%, compared to 1.85% in the second quarter of 2022.
• Annualized return on average equity was 12.69%, compared to 21.26% in the second quarter a year ago.
• Net loans increased $86,541,000 to $924,806,000 at June 30, 2023, compared to $838,265,000 one year earlier.
• Net loans increased $17,183,000 during the quarter to $924,806,000 at June 30, 2023, compared to $907,623,000 three months earlier.
• Total deposits increased 28% to $1,048,316,000 at June 30, 2023 compared to $819,932,000 at June 30, 2022 and increased 3% when compared to the prior quarter end. Deposit growth during the quarter consisted primarily of increases in NOW and money market accounts gathered from the Bank’s existing five-branch network.
• The Bank maintains loan loss reserves at the high-end when compared to peers due to increases in nonperforming loans. This is exhibited by loans to gross loans increasing to 2.65% at June 30, 2023 compared to 1.13% at March 31, 2023 and 0.07% at June 30, 2022. Additionally, nonperforming assets to total assets increased to 2.14%, at June 30, 2023 compared to 0.91% at March 31, 2023 and 0.06% at June 30, 2022.
• Tangible book value was $13.92 per share, compared to $12.66 per share a year ago.
• Declared a quarterly cash dividend of $0.12 per share for the three months ended June 30, 2023, March 31, 2023 and June 30, 2022.

Operating Results

For the second quarter of 2023, the annualized return on average assets was 1.03% and the annualized return on average equity was 12.69%. This compared to an annualized return on average assets of 1.85% and an annualized return on average equity of 21.26%, respectively, for the second quarter of 2022. These results were above the average 0.97% return on average assets and 10.92% return on average equity posted by the 157 bank index peers that make up the Dow Jones U.S. MicroCap Bank index as of March 31, 2023.*

Summit’s net interest margin was 3.44% in the second quarter of 2023, compared to 3.69% in the preceding quarter and 4.36% in the second quarter of 2022. “The rising cost of funds outpaced earning asset yields during the quarter, resulting in net interest margin contraction compared to the prior quarter. The cost of deposits in the second quarter was 2.26% as the rapid rate increases have driven customers to switch to higher yielding deposit accounts,” said Reed.

Interest and dividend income increased 38% to $15,625,000 in the second quarter of 2023 compared to $11,346,000 in the second quarter of 2022. The increase in interest income is attributable to a $2,607,000 increase in loan interest yield primarily driven by increased loan volume and secondarily by increased rates, $1,388,000 increase in interest on deposits with banks and $284,000 increase in investment interest.

Non-interest income decreased in the second quarter of 2023 to $1,449,000 compared to $2,354,000 in the second quarter of 2022. The Bank recognized no gains on sales of SBA and USDA guaranteed loan balances in the second quarter of 2023 compared to $1,953,000 in gains on sales of SBA guaranteed loans balances in the second quarter of 2022.

Operating expenses increased in the second quarter of 2023 to $6,822,000 compared to $5,298,000 in the second quarter of 2022. The increase is primarily due to a $728,000 increase in stock appreciation rights expense and by a $470,000 increase in salaries and benefits net of deferred fees and costs.

Balance Sheet Review

Net loans increased 10% to $924,806,000 at June 30, 2023 compared to $838,265,000 at June 30, 2022 and increased 2% compared to March 31, 2023.

Total deposits increased 28% to $1,048,316,000 at June 30, 2023 compared to $819,932,000 at June 30, 2022 and increased 3% when compared to the prior quarter end. Most of the deposit growth year-over-year was due to the Bank’s ongoing focus on growing local deposits organically. At June 30, 2023, noninterest bearing demand deposit accounts decreased 11% compared to a year ago and represented 20% of total deposits; savings, NOW and money market accounts increased 14% compared to a year ago and represented 41% of total deposits, and CDs increased 98% compared to a year ago and comprised 39% of total deposits. The average cost of deposits was 2.26% in the second quarter of 2023, compared to 0.37% in the second quarter of 2022.

Shareholders’ equity was $94,435,000 at June 30, 2023, compared to $92,665,000 three months earlier and $84,664,000 a year earlier. The increase in shareholders’ equity compared to a year ago was primarily due to an increase of $12,374,000 in retained earnings offset by the $2,890,000 increase in accumulated other comprehensive loss; this change was related to an increase in the unrealized loss on available for sale securities reflecting the increase in market interest rates during the year. At June 30, 2023 tangible book value was $13.92 per share, compared to $13.76 three months earlier, and $12.66 at June 30, 2022.

Summit State Bank continues to maintain capital levels in excess of the requirements to be categorized as “well-capitalized” with tangible equity to tangible assets of 8.15% at June 30, 2023, compared to 7.99% at March 31, 2023, and 8.70% at June 30, 2022. The decrease compared to June 2022 is due to the Bank’s assets outgrowing the retention of capital to build liquidity.

Credit Quality

Nonperforming assets were $24,908,000, or 2.14% of total assets, at June 30, 2023, and consisted of ten loans; one loan totaling $3,189,000 is a real estate secured commercial loan, two loans totaling $5,960,000 are real estate secured construction and land loans and seven loans totaling $15,759,000 are commercial and agriculture secured loans. There were $11,637,000 of nonperforming assets that were individually assessed resulting in a corresponding reserve of $138,000. There were $570,000 in nonperforming assets at June 30, 2022.

Due to strong loan production when compared to the second quarter of 2022 and increases in expected losses, the Bank recorded a $35,000 provision for credit loss expense in the second quarter of 2023. This compared to $998,000 provision for credit loss expense in the second quarter of 2022. The allowance for credit losses to total loans was 1.62% on June 30, 2023 and 1.58% on June 30, 2022.

“As we enter the second half of the year, we remain focused on being a reliable source of capital for our customers through all economic cycles,” said Reed. “Although economic uncertainty persists, and unusual challenges presented to us by rapidly rising interest rates continue, we believe that with our strong deposit franchise, solid capital levels, and good credit quality we are well positioned to grow and prosper.”

About Summit State Bank

Founded in 1982 and headquartered in Sonoma County, Summit State Bank (Nasdaq: SSBI), is an award-winning community bank servicing the North Bay. The Bank serves small businesses, nonprofits, and the community, with total assets of $1,161 million and total equity of $94 million at June 30, 2023. The Bank has built its reputation over the past 40 years by specializing in providing exceptional customer service and customized financial solutions to aid in the success of its customers.

Summit State Bank is dedicated to investing in and celebrating the diverse backgrounds, cultures and talents of its employees to create high performance and support the evolving needs of its customers and community it serves. The Bank has been consistently recognized for its achievements and has been awarded Best Places to Work in the North Bay, Top Community Bank Loan Producer, Raymond James Bankers Cup, Super Premier Performing Bank, the Piper Sandler SM-ALL Star Award, and the Independent Community Bankers of America’s Best-Performing Community Banks. For more information, visit www.summitstatebank.com.

*As of March 31, 2023, the Dow Jones U.S. MicroCap Bank Index tracked 157 banks with total common market capitalization under $250 million for the following ratios: Return on average assets (ROAA) 0.97%, and return on average equity (ROAE) 10.92%.

Forward-looking Statements

The financial results in this release are preliminary. Final financial results and other disclosures will be reported in Summit State Bank’s quarterly report on Form 10-Q for the period ended June 30, 2023 and may differ materially from the results and disclosures in this release due to, among other things, the completion of final review procedures, the occurrence of subsequent events or the discovery of additional information.

Except for historical information contained herein, the statements contained in this news release, are forward-looking statements within the meaning of the “safe harbor” provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. This release may contain forward-looking statements that are subject to risks and uncertainties. Such risks and uncertainties may include but are not necessarily limited to fluctuations in interest rates, inflation, government regulations and general economic conditions, and competition within the business areas in which the Bank will be conducting its operations, including the real estate market in California and other factors beyond the Bank’s control. Such risks and uncertainties could cause results for subsequent interim periods or for the entire year to differ materially from those indicated. You should not place undue reliance on the forward-looking statements, which reflect management’s view only as of the date hereof. The Bank undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances.

Contact: Brian Reed, President and CEO, Summit State Bank (707) 568-4908

SUMMIT STATE BANK
STATEMENTS OF INCOME
(In thousands except earnings per share data)
					Three Months Ended
					June 30, 2023				March 31, 2023				June 30, 2022
					(Unaudited)				(Unaudited)				(Unaudited)
Interest and dividend income:
	Interest and fees on loans				$	13,381			$	12,939			$	10,774
	Interest on deposits with banks					1,449				906				61
	Interest on investment securities					715				719				442
	Dividends on FHLB stock					80				84				69
			Total interest income			15,625				14,648				11,346
Interest expense:
	Deposits					5,819				4,400				750
	Federal Home Loan Bank advances					48				119				200
	Junior subordinated debt					94				94				94
			Total interest expense			5,961				4,613				1,044
			Net interest income before provision for credit losses			9,664				10,035				10,302
Provision for credit losses on loans						-				400				988
Provision for (reversal of) credit losses on unfunded loan commitments						35				(33	)			10
			Net interest income after provision for (reversal of) credit
			losses on loans and unfunded loan commitments			9,629				9,668				9,304
Non-interest income:
	Service charges on deposit accounts					215				208				213
	Rental income					39				39				45
	Net gain on loan sales					-				1,435				1,953
	Other income					1,195				279				143
			Total non-interest income			1,449				1,961				2,354
Non-interest expense:
	Salaries and employee benefits					4,199				3,793				3,311
	Occupancy and equipment					442				452				416
	Other expenses					2,181				1,573				1,571
			Total non-interest expense			6,822				5,818				5,298
			Income before provision for income taxes			4,256				5,811				6,360
Provision for income taxes						1,271				1,695				1,859
			Net income		$	2,985			$	4,116			$	4,501
Basic earnings per common share					$	0.45			$	0.62			$	0.67
Diluted earnings per common share					$	0.45			$	0.62			$	0.67
Basic weighted average shares of common stock outstanding						6,697				6,688				6,687
Diluted weighted average shares of common stock outstanding						6,700				6,688				6,687

SUMMIT STATE BANK
STATEMENTS OF INCOME
(In thousands except earnings per share data)
					Six Months Ended
					June 30, 2023				June 30, 2022
					(Unaudited)				(Unaudited)
Interest and dividend income:
	Interest and fees on loans				$	26,321			$	21,193
	Interest on deposits with banks					2,355				73
	Interest on investment securities					1,434				826
	Dividends on FHLB stock					164				134
			Total interest income			30,274				22,226
Interest expense:
	Deposits					10,219				1,460
	Federal Home Loan Bank advances					167				393
	Junior Subordinated Debt					187				187
			Total interest expense			10,573				2,040
			Net interest income before provision for credit losses			19,701				20,186
Provision for credit losses on loans						400				1,123
Provision for (reversal of) credit losses on unfunded loan commitments						2				(14	)
			Net interest income after provision for (reversal of) credit
			losses on loans and unfunded loan commitments			19,299				19,077
Non-interest income:
	Service charges on deposit accounts					422				422
	Rental income					79				123
	Net gain on loan sales					1,435				3,499
	Net gain on securities					-				6
	Other income					1,473				258
			Total non-interest income			3,409				4,308
Non-interest expense:
	Salaries and employee benefits					7,992				7,275
	Occupancy and equipment					894				826
	Other expenses					3,755				3,484
			Total non-interest expense			12,641				11,585
			Income before provision for income taxes			10,067				11,800
Provision for income taxes						2,966				3,364
			Net income		$	7,101			$	8,436
Basic earnings per common share					$	1.06			$	1.26
Diluted earnings per common share					$	1.06			$	1.26
Basic weighted average shares of common stock outstanding						6,689				6,686
Diluted weighted average shares of common stock outstanding						6,690				6,686

SUMMIT STATE BANK
BALANCE SHEETS
(In thousands except share data)
				June 30, 2023				March 31, 2023				June 30, 2022
				(Unaudited)				(Unaudited)				(Unaudited)
ASSETS
Cash and due from banks				$	112,412			$	116,569			$	36,616
			Total cash and cash equivalents		112,412				116,569				36,616
Investment securities:
	Available-for-sale (at fair value; amortized cost of $97,386,
		$97,951 and $79,613)			83,593				84,841				69,926
Loans, less allowance for credit losses of $15,261, $15,252 and $13,452					924,806				907,623				838,265
Bank premises and equipment, net					5,426				5,507				5,540
Investment in Federal Home Loan Bank stock (FHLB), at cost					5,541				4,737				4,737
Goodwill					4,119				4,119				4,119
Affordable housing tax credit investments					8,586				8,773				9,050
Accrued interest receivable and other assets					16,926				14,854				12,532
			Total assets	$	1,161,409			$	1,147,023			$	980,785
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
	Demand - non interest-bearing			$	212,489			$	232,825			$	239,813
	Demand - interest-bearing				194,596				153,214				139,765
	Savings				57,003				63,895				66,938
	Money market				176,616				148,433				167,761
	Time deposits that meet or exceed the FDIC insurance limit				175,810				84,800				31,062
	Other time deposits				231,802				332,485				174,593
			Total deposits		1,048,316				1,015,652				819,932
Federal Home Loan Bank advances					-				23,000				58,600
Junior subordinated debt					5,913				5,909				5,898
Affordable housing commitment					4,435				4,435				5,998
Accrued interest payable and other liabilities					8,310				5,362				5,693
			Total liabilities		1,066,974				1,054,358				896,121
Shareholders' equity
	Preferred stock, no par value; 20,000,000 shares authorized;
		no shares issued and outstanding			-				-				-
	Common stock, no par value; shares authorized - 30,000,000 shares;
		issued and outstanding 6,784,099, 6,732,699 and 6,687,959			37,301				37,217				37,014
	Retained earnings				66,844				64,678				54,470
	Accumulated other comprehensive loss, net				(9,710	)			(9,230	)			(6,820	)
			Total shareholders' equity		94,435				92,665				84,664
			Total liabilities and shareholders' equity	$	1,161,409			$	1,147,023			$	980,785

Financial Summary
(Dollars in thousands except per share data)
		As of and for the
		Three Months Ended
		June 30, 2023				March 31, 2023				June 30, 2022
		(Unaudited)				(Unaudited)				(Unaudited)
Statement of Income Data:
Net interest income		$	9,664			$	10,035			$	10,302
Provision for credit losses on loans			-				400				988
Provision for (reversal of) credit losses on unfunded loan commitments			35				(33	)			10
Non-interest income			1,449				1,961				2,354
Non-interest expense			6,822				5,818				5,298
Provision for income taxes			1,271				1,695				1,859
Net income		$	2,985			$	4,116			$	4,501
Selected per Common Share Data:
Basic earnings per common share		$	0.45			$	0.62			$	0.67
Diluted earnings per common share		$	0.45			$	0.62			$	0.67
Dividend per share		$	0.12			$	0.12			$	0.12
Book value per common share (1)		$	13.92			$	13.76			$	12.66
Selected Balance Sheet Data:
Assets		$	1,161,409			$	1,147,023			$	980,785
Loans, net			924,806				907,623				838,265
Deposits			1,048,316				1,015,652				819,932
Average assets			1,157,193				1,135,912				975,422
Average earning assets			1,125,327				1,104,134				948,762
Average shareholders' equity			94,340				90,814				84,906
Nonperforming loans			24,908				10,411				570
Total nonperforming assets			24,908				10,411				570
Selected Ratios:
Return on average assets (2)			1.03	%			1.47	%			1.85	%
Return on average common shareholders' equity (2)			12.69	%			18.38	%			21.26	%
Efficiency ratio (3)			61.39	%			48.50	%			41.86	%
Net interest margin (2)			3.44	%			3.69	%			4.36	%
Common equity tier 1 capital ratio			9.61	%			9.58	%			9.58	%
Tier 1 capital ratio			9.61	%			9.58	%			9.58	%
Total capital ratio			11.46	%			11.44	%			11.44	%
Tier 1 leverage ratio			8.36	%			8.30	%			8.30	%
Common dividend payout ratio (4)			27.40	%			20.04	%			17.95	%
Average shareholders' equity to average assets			8.15	%			7.99	%			8.70	%
Nonperforming loans to total loans			2.65	%			1.13	%			0.07	%
Nonperforming assets to total assets			2.14	%			0.91	%			0.06	%
Allowance for credit losses to total loans			1.62	%			1.65	%			1.58	%
Allowance for credit losses to nonperforming loans			61.27	%			146.49	%			2360.36	%
(1) Total shareholders' equity divided by total common shares outstanding.
(2) Annualized.
(3) Non-interest expenses to net interest and non-interest income, net of securities gains.
(4) Common dividends divided by net income available for common shareholders.

Financial Summary
(Dollars in thousands except per share data)
		As of and for the
		Six Months Ended
		June 30, 2023				June 30, 2022
		(Unaudited)				(Unaudited)
Statement of Income Data:
Net interest income		$	19,701			$	20,186
Provision for credit losses on loans			400				1,123
Provision for (reversal of) credit losses on unfunded loan commitments			2				(14	)
Non-interest income			3,409				4,308
Non-interest expense			12,641				11,585
Provision for income taxes			2,966				3,364
Net income		$	7,101			$	8,436
Selected per Common Share Data:
Basic earnings per common share		$	1.06			$	1.26
Diluted earnings per common share		$	1.06			$	1.26
Dividend per share		$	0.24			$	0.24
Book value per common share (1)		$	13.92			$	12.66
Selected Balance Sheet Data:
Assets		$	1,161,409			$	980,785
Loans, net			924,806				838,265
Deposits			1,048,316				819,932
Average assets			1,146,612				967,308
Average earning assets			1,114,790				942,286
Average shareholders' equity			92,587				85,154
Nonperforming loans			24,908				570
Total nonperforming assets			24,908				570
Selected Ratios:
Return on average assets (2)			1.25	%			1.76	%
Return on average common shareholders' equity (2)			15.47	%			19.98	%
Efficiency ratio (3)			54.70	%			47.31	%
Net interest margin (2)			3.56	%			4.32	%
Common equity tier 1 capital ratio			9.61	%			9.83	%
Tier 1 capital ratio			9.61	%			9.83	%
Total capital ratio			11.46	%			11.77	%
Tier 1 leverage ratio			8.36	%			8.74	%
Common dividend payout ratio (4)			23.14	%			19.08	%
Average shareholders' equity to average assets			8.07	%			8.80	%
Nonperforming loans to total loans			2.65	%			0.07	%
Nonperforming assets to total assets			2.14	%			0.06	%
Allowance for credit losses to total loans			1.62	%			1.58	%
Allowance for credit losses to nonperforming loans			61.27	%			2360.36	%
(1) Total shareholders' equity divided by total common shares outstanding.
(2) Annualized.
(3) Non-interest expenses to net interest and non-interest income, net of securities gains.
(4) Common dividends divided by net income available for common shareholders.