Affinity Bancshares(AFBI) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited consolidated financial statements and management's discussion and analysis for the quarter ended March 31, 2022 Item 1. Financial Statements This section presents Affinity Bancshares, Inc.'s unaudited consolidated financial statements and detailed notes for the quarter ended March 31, 2022 Consolidated Balance Sheets The consolidated balance sheets provide a snapshot of the company's financial position at March 31, 2022, and December 31, 2021, showing a decrease in total assets and stockholders' equity, primarily driven by a reduction in cash and FHLB advances, partially offset by an increase in net loans | Metric (in thousands) | March 31, 2022 (unaudited) | December 31, 2021 (audited) | | :-------------------- | :------------------------- | :-------------------------- | | Total Assets | $760,208 | $788,088 | | Total Liabilities | $643,850 | $667,120 | | Total Stockholders' Equity | $116,358 | $120,968 | | Cash and cash equivalents | $69,898 | $111,776 | | Loans, net | $592,887 | $575,825 | | Total Deposits | $628,045 | $614,799 | | Federal Home Loan Bank advances | $10,000 | $48,988 | Consolidated Statements of Income The consolidated statements of income show a decrease in net income for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to lower interest income from PPP loans and FHLB prepayment penalties, partially offset by a significant decrease in interest expense from borrowings | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Total Interest Income | $7,279 | $9,248 | | Total Interest Expense | $(472) | $907 | | Net Interest Income before provision for loan losses | $7,751 | $8,341 | | Provision for loan losses | $250 | $450 | | Total Noninterest Income | $595 | $729 | | Total Noninterest Expenses | $5,758 | $5,892 | | Income before income taxes | $2,338 | $2,728 | | Income Tax Expense | $547 | $596 | | Net Income | $1,791 | $2,132 | | Basic Earnings Per Share | $0.26 | $0.31 | | Diluted Earnings Per Share | $0.26 | $0.31 | Consolidated Statements of Comprehensive (Loss) Income The consolidated statements of comprehensive income (loss) indicate a shift from comprehensive income in 2021 to a comprehensive loss in 2022, primarily driven by a substantial increase in net unrealized loss on available-for-sale securities | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net Income | $1,791 | $2,132 | | Net unrealized loss on available-for-sale securities, net of taxes | $(2,653) | $(278) | | Total comprehensive (loss) income | $(862) | $1,854 | Consolidated Statements of Changes in Stockholders' Equity The statements of changes in stockholders' equity reflect a decrease in total equity from December 31, 2021, to March 31, 2022, mainly due to common stock repurchases and a significant increase in accumulated other comprehensive loss from investment securities | Metric (in thousands) | December 31, 2021 | March 31, 2022 | | :-------------------- | :---------------- | :------------- | | Ending balance Total Stockholders' Equity | $120,968 | $116,358 | | Common stock repurchase | — | $(3,942) | | Change in unrealized loss on investment securities available-for-sale | $(358) | $(2,653) | | Net income | $2,132 | $1,791 | Consolidated Statements of Cash Flows The consolidated statements of cash flows show a net decrease in cash and cash equivalents for the three months ended March 31, 2022, primarily driven by cash used in investing and financing activities, including significant FHLB advance repayments and stock repurchases | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by operating activities | $3,908 | $8,666 | | Net cash used in investing activities | $(17,093) | $(27,125) | | Net cash used in financing activities | $(28,693) | $(58,396) | | Net change in cash and cash equivalents | $(41,878) | $(76,855) | | Cash and cash equivalents at end of period | $69,898 | $101,398 | Notes to Unaudited Consolidated Financial Statements This section details the company's operations, accounting policies, and specific financial statement line items, including investments, loans, deposits, and equity (1) Nature of Operations Affinity Bancshares, Inc. is a savings and loan holding company operating through Affinity Bank, which provides banking services in Georgia and specializes in dental practice and indirect automobile loans. The company underwent a mutual-to-stock conversion in January 2021, raising $37.1 million in gross proceeds - Affinity Bancshares, Inc. is a savings and loan holding company, with its operating subsidiary, Affinity Bank, primarily serving Newton County, Georgia, and surrounding areas. The Bank also originates dental practice loans and indirect automobile loans across the Southeastern United States[17][196] - The Company completed a second-step mutual-to-stock conversion on January 20, 2021, raising gross proceeds of $37.1 million from the sale of 3,701,509 shares of common stock at $10.00 per share[18][197] - The proceeds from the stock offering were used to fund an addition to the Employee Stock Ownership Plan ($3.0 million), cover offering expenses ($1.7 million), invest in the Bank's operations ($16.3 million), and retain the remainder for general corporate purposes[18][197] Earnings per Share Basic and diluted earnings per common share decreased for the three months ended March 31, 2022, compared to the same period in 2021, reflecting a lower net income despite a slight decrease in weighted average common shares outstanding | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (in thousands) | $1,791 | $2,132 | | Weighted average common shares outstanding | 6,806,405 | 6,873,137 | | Effect of dilutive common stock awards | 102,260 | 16,615 | | Diluted weighted average common shares outstanding | 6,908,665 | 6,889,752 | | Basic earnings per common share | $0.26 | $0.31 | | Diluted earnings per common share | $0.26 | $0.31 | - There were 13,454 anti-dilutive options for the three months ended March 31, 2022, compared to 190,928 anti-dilutive options for the three months ended March 31, 2021[22][201] (2) Investment Securities The company's available-for-sale investment securities decreased in fair value at March 31, 2022, compared to December 31, 2021, primarily due to increased unrealized losses across various security types, driven by changing interest rates and market conditions | Investment Securities Available-for-Sale (in thousands) | March 31, 2022 (Estimated Fair Value) | December 31, 2021 (Estimated Fair Value) | | :-------------------------------------- | :------------------------------------ | :--------------------------------------- | | U.S. Treasury securities | $4,677 | $5,050 | | Municipal securities - tax exempt | $488 | $536 | | Municipal securities - taxable | $1,880 | $790 | | U.S. Government sponsored enterprises | $10,326 | $11,542 | | Government agency mortgage-backed securities | $19,015 | $21,339 | | Corporate securities | $9,525 | $9,300 | | Total | $45,911 | $48,557 | - As of March 31, 2022, there were 57 securities in an unrealized loss position for less than 12 months and four for 12 months or greater. These losses are considered temporary due to acceptable investment grades and the company's intent and ability to hold them until recovery or maturity[26][205] - No securities were sold during the three months ended March 31, 2022 or 2021[29][208] (3) Loans and Allowance for Loan Losses Net loans increased at March 31, 2022, driven by growth in commercial real estate, construction, and consumer installment loans, partially offset by a decrease in PPP loans. The allowance for loan losses increased, with a lower provision for loan losses reflecting an improving economic outlook | Loan Classification (in thousands) | March 31, 2022 | December 31, 2021 | | :--------------------------------- | :------------- | :---------------- | | Commercial (owner occupied) | $156,332 | $158,662 | | Commercial (non-owner occupied) | $119,461 | $104,042 | | Commercial and industrial | $155,374 | $152,834 | | Paycheck Protection Program loans | $7,078 | $17,883 | | Construction, land & development | $27,138 | $16,317 | | Residential mortgage 1-4 family | $56,448 | $63,065 | | Consumer installment | $79,862 | $71,580 | | Total Loans | $601,693 | $584,384 | | Less allowance for loan losses | $(8,806) | $(8,559) | | Total Loans, net | $592,887 | $575,825 | | Allowance for Loan Losses (in thousands) | March 31, 2022 | December 31, 2021 | | :--------------------------------------- | :------------- | :---------------- | | Beginning balance | $8,559 | $6,361 | | Provision | $250 | $1,075 | | Charge-offs | $(51) | $(310) | | Recoveries | $48 | $1,433 | | Ending balance | $8,806 | $8,559 | - The allowance for loan losses to total loans was 1.46% at March 31, 2022, consistent with December 31, 2021. Excluding acquired loans, this ratio was 2.01% at March 31, 2022, down from 2.06% at December 31, 2021[308] - The allowance for loan losses to non-performing loans was 138.94% at March 31, 2022, an increase from 122.09% at December 31, 2021[308] (4) Deposits The aggregate amount of certificates of deposit of $250,000 or more decreased from December 31, 2021, to March 31, 2022 | Deposit Type (in thousands) | March 31, 2022 | December 31, 2021 | | :-------------------------- | :------------- | :---------------- | | Certificates of deposit of $250,000 or more | $20,400 | $22,600 | (5) Borrowings FHLB advances significantly decreased during the three months ended March 31, 2022, due to the repayment of acquired advances, which also resulted in the recognition of accretion from fair value adjustments | Borrowing Type (in thousands) | March 31, 2022 | December 31, 2021 | | :---------------------------- | :------------- | :---------------- | | FHLB advances | $10,000 | $49,000 | - Acquired FHLB advances totaling $49.0 million were paid off during the three months ended March 31, 2022, leading to the accretion of $1.0 million from fair value adjustments and a decrease in interest expense[57][236] - The Company had an FHLB letter of credit of $2.5 million outstanding at March 31, 2022, down from $8.0 million at December 31, 2021, used to collateralize public deposits[57][236] (6) Employee Stock Ownership Plan The Company's ESOP incurred higher expenses for the three months ended March 31, 2022, compared to the prior year, with the note payable balance remaining stable | ESOP Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------- | :-------------------------------- | :-------------------------------- | | Total ESOP expense | $81 | $57 | - The balance of the ESOP note payable was approximately $5.4 million at both March 31, 2022, and December 31, 2021[59][238] (7) Stock-Based Compensation Stock-based compensation expense slightly increased for the three months ended March 31, 2022, with no new stock options or restricted stock grants during the period. A significant amount of unrecognized compensation cost remains | Stock-Based Compensation (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Stock-based compensation expense | $113 | $110 | - As of March 31, 2022, there was approximately $1.1 million of unrecognized compensation cost related to equity award grants, expected to be recognized over a weighted average remaining vesting period of approximately 2.75 years[64][243] - No stock options or restricted stock grants were issued during the three months ended March 31, 2022[60][239] (8) Fair Value Measurements and Disclosures The company uses fair value measurements for certain assets and liabilities, classifying them into Level 1, 2, or 3 based on observability of inputs. Available-for-sale securities are recurring Level 2 assets, while impaired loans and other real estate owned are nonrecurring Level 3 assets - The Company classifies assets and liabilities at fair value into three levels: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[66][245] | Assets Recorded at Fair Value (in thousands) | March 31, 2022 | December 31, 2021 | | :------------------------------------------- | :------------- | :---------------- | | Available-for-sale securities (Level 2) | $45,911 | $48,557 | | Other real estate owned (Level 3) | $3,538 | $3,538 | | Impaired loans (Level 3) | $6,554 | $7,221 | | Total assets at fair value (nonrecurring) | $10,092 | $10,759 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's financial condition, operating results, market risk, liquidity, and capital resources for the quarter ended March 31, 2022 General This section introduces the purpose of the Management's Discussion and Analysis, providing context for the financial condition and operating results - The Management's Discussion and Analysis aims to provide insights into the financial condition and results of operations for Affinity Bancshares, Inc. as of March 31, 2022, and December 31, 2021, and for the three months ended March 31, 2022, and 2021[87][266] Cautionary Note Regarding Forward-Looking Statements This section highlights that the report contains forward-looking statements, which are subject to significant business, economic, and competitive uncertainties and contingencies. It also lists various factors, including general economic conditions, interest rate fluctuations, and the impact of the COVID-19 pandemic, that could cause actual results to differ materially from expectations - The report includes forward-looking statements identifiable by words such as 'believe,' 'intend,' 'anticipate,' 'expect,' and 'will,' which are subject to inherent business, economic, and competitive uncertainties[88][267] - Key factors that could cause actual results to differ include general economic conditions, changes in loan delinquencies, funding access, real estate values, demand for loans/deposits, interest rate environment, regulatory changes, technological changes, and the ongoing impact of the COVID-19 pandemic[89][91][92][268][270][271] Summary of Significant Accounting Policies This section details the company's significant accounting policies, including business combinations, valuation of acquired loans, allowance for loan losses, and income taxes. It emphasizes the use of estimates and assumptions in financial reporting and notes the company's election to use the extended transition period for new accounting pronouncements as an emerging growth company - The Company accounts for acquisitions using the acquisition method, recording acquired assets and assumed liabilities at estimated fair value on the purchase date[97][276] - The allowance for loan losses is a reserve for estimated credit losses, determined through an evaluation process that considers qualitative and quantitative factors, including historical loss rates, economic conditions, and collateral values[101][103][280][282] - As an 'emerging growth company' under the JOBS Act, the Company intends to delay the adoption of new or revised accounting pronouncements until they are applicable to private companies[95][274] Comparison of Financial Condition at March 31, 2022 and December 31, 2021 The company's total assets decreased by 3.5% to $760.2 million at March 31, 2022, primarily due to a significant reduction in cash and cash equivalents used to pay off Federal Home Loan Bank advances. This was partially offset by a 3.0% increase in net loans, driven by growth in commercial real estate, construction, and consumer loans, despite a decrease in PPP loans | Metric (in millions) | March 31, 2022 | December 31, 2021 | Change (Amount) | Change (%) | | :------------------- | :------------- | :---------------- | :-------------- | :--------- | | Total Assets | $760.2 | $788.1 | $(27.9) | (3.5)% | | Cash and cash equivalents | $69.9 | $111.8 | $(41.9) | (37.5)% | | Net Loans | $592.9 | $575.8 | $17.1 | 3.0% | | Securities available-for-sale | $45.9 | $48.6 | $(2.6) | (5.4)% | | Total Deposits | $628.0 | $614.8 | $13.2 | 2.1% | | FHLB Advances | $10.0 | $49.0 | $(39.0) | (79.6)% | | Stockholders' Equity | $116.4 | $121.0 | $(4.6) | (3.8)% | - Net loans increased by $17.1 million, or 3.0%, to $592.9 million, driven by commercial real estate loans (up $13.1 million or 5.0%), construction loans (up $10.8 million or 66.3%), and consumer loans (up $8.3 million or 11.6%). This growth was partially offset by a $10.8 million (60.4%) decrease in PPP loans and a $6.6 million (10.5%) decrease in residential real estate loans[107][286] - Total deposits increased by $13.2 million, or 2.1%, to $628.0 million, with increases in non-interest-bearing checking, market-rate checking, and interest-bearing checking accounts, partially offset by a decrease in certificates of deposit[110][289] Comparison of Operating Results for the Three Months Ended March 31, 2022 and 2021 Net income decreased by $341,000 to $1.8 million for the three months ended March 31, 2022, primarily due to a significant reduction in PPP loan-related interest income and FHLB prepayment penalties. However, interest expense saw a substantial decrease due to the repayment of acquired FHLB borrowings, leading to a negative interest expense | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change (Amount) | Change (%) | | :-------------------- | :-------------------------------- | :-------------------------------- | :-------------- | :--------- | | Net Income | $1,791 | $2,132 | $(341) | (16.0)% | | Interest Income | $7,279 | $9,248 | $(1,969) | (21.3)% | | Interest Expense | $(472) | $907 | $(1,379) | (152.0)% | | Net Interest Income | $7,751 | $8,341 | $(590) | (7.1)% | | Provision for Loan Losses | $250 | $450 | $(200) | (44.4)% | | Non-interest Income | $595 | $729 | $(134) | (18.4)% | | Non-interest Expenses | $5,758 | $5,892 | $(134) | (2.3)% | | Income Tax Expense | $547 | $596 | $(49) | (8.2)% | - Interest income decreased by $2.0 million, or 21.3%, primarily due to a $2.7 million decrease in PPP loan interest income as a result of loan forgiveness[120][299] - Interest expense decreased by $1.4 million, or 152.0%, to a negative $472,000, mainly due to the repayment of acquired FHLB borrowings and the recognition of $1.0 million in accretion from fair value adjustments[124][303] - Net interest margin decreased to 4.53% from 4.65%, primarily due to the decrease in PPP loans. However, the net interest rate spread increased to 4.69% from 4.39% due to FHLB borrowing repayments[127][306] - Provision for loan losses decreased to $250,000 from $450,000, reflecting an improving economic environment post-COVID-19 pandemic[129][308] - Non-interest income decreased by $134,000, or 18.4%, due to the absence of a bank-owned life insurance death benefit claim in 2022 that occurred in 2021[311] - Non-interest expenses decreased by $134,000, or 2.3%, primarily due to a decrease in occupancy expense from facilities consolidation, partially offset by increases in salaries and employee benefits[312] Management of Market Risk The company actively manages interest rate risk, its most significant market risk, through strategies like limiting wholesale funding, growing transaction deposits, and diversifying its loan portfolio. Analysis using net interest income and net economic value models indicates sensitivity to interest rate changes, with a negative asset/liability gap in the short term - The Company's primary market risk is interest rate risk, managed by the Asset/Liability Management Committee to minimize exposure to earnings and capital[314][315] - Strategies to manage interest rate risk include limiting reliance on non-core funding, growing transaction deposit accounts, increasing investment securities with shorter maturities, and diversifying the loan portfolio with more commercial and consumer loans[315][317] | Change in Interest Rates (basis points) | Year 1 Change from Level (Net Interest Income Forecast) | | :-------------------------------------- | :------------------------------------------------------ | | +400 | (3.52)% | | +200 | (1.67)% | | Level | — | | -200 | (4.99)% | | -400 | (5.95)% | | Change in Interest Rates (basis points) | Estimated Increase (Decrease) in NEV (Percent) | | :-------------------------------------- | :--------------------------------------------- | | +400 | (16.12)% | | +200 | (8.59)% | | — | — | | -200 | (0.51)% | | -400 | (-2.28)% | - At March 31, 2022, the asset/liability gap from zero days to one year was negative $52.3 million, with a gap/assets ratio of (6.89)%[331] Liquidity and Capital Resources The company maintains a strong liquidity position through deposits, loan and security payments, and available credit lines. It also exceeds all regulatory capital requirements, with the Bank categorized as 'well capitalized' at March 31, 2022 - Primary sources of funds include deposits, principal and interest payments on loans and securities, and proceeds from loan sales and security maturities[335] - Available liquidity includes a $197.4 million line of credit with FHLB (with $10.0 million outstanding), a $5.0 million unsecured federal funds line, a $7.5 million unsecured federal funds line, and an $81.7 million line with the Federal Reserve Bank of Atlanta Discount Window[335] | Capital Ratios (to Risk Weighted Assets) | March 31, 2022 (Actual Ratio) | December 31, 2021 (Actual Ratio) | | :--------------------------------------- | :---------------------------- | :------------------------------- | | Common Equity Tier 1 | 13% | 13% | | Tier I Capital | 14% | 13% | | Total Capital | 14% | 15% | - The Bank is categorized as 'well capitalized' as of March 31, 2022, exceeding all regulatory capital requirements[338] Off-Balance Sheet Arrangements and Aggregate Contractual Obligations The company has off-balance sheet risks primarily from commitments to extend credit, totaling $84.9 million at March 31, 2022. It also has contractual obligations for data processing, operating leases, borrowed funds, and deposit liabilities - Outstanding commitments to originate loans totaled $84.9 million at March 31, 2022[340] - Time deposits scheduled to mature in less than one year from March 31, 2022, totaled $43.4 million, with management expecting a substantial portion to be renewed[340] - Contractual obligations include data processing services, operating leases for premises and equipment, and agreements related to borrowed funds and deposit liabilities[341] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to the market risk disclosures provided within 'Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations,' specifically under the 'Management of Market Risk' subsection Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2022. No material changes to internal controls over financial reporting occurred during the quarter - The Company's disclosure controls and procedures were evaluated and deemed effective as of March 31, 2022[343] - No material changes in internal controls over financial reporting occurred during the quarter ended March 31, 2022[343] PART II. OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity sales, defaults, and exhibit listings Item 1. Legal Proceedings The company is not involved in any material legal proceedings beyond routine matters occurring in the ordinary course of business - The Company is not involved in any pending legal proceedings that would be material to its financial condition or results of operations as of March 31, 2022[166][345] Item 1A. Risk Factors This item is not applicable for smaller reporting companies, as indicated in the report - Item 1A. Risk Factors is not applicable for smaller reporting companies[167][346] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable to the company for the reporting period - Item 2. Unregistered Sales of Equity Securities and Use of Proceeds is not applicable[167][346] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - There were no defaults upon senior securities[167][346] Item 4. Mine Safety Disclosures This item is not applicable to the company - Item 4. Mine Safety Disclosures is not applicable[167][346] Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company repurchased 253,779 shares of its common stock in March 2022 under a publicly announced program, with 89,853 shares remaining available for repurchase | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under Plans or Programs | | :--------------------------------- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :------------------------------------------------------------------------- | | January 1, 2022 through January 31, 2022 | 0 | $0 | 0 | 343,632 | | February 1, 2022 through February 28, 2022 | 0 | $0 | 0 | 343,632 | | March 1, 2022 through March 31, 2022 | 253,779 | $15.53 | 253,779 | 89,853 | | Total | 253,779 | $15.53 | 253,779 | 89,853 | - The Board of Directors approved a stock repurchase program on January 27, 2022, authorizing the repurchase of up to 343,632 shares (approximately 5.0% of outstanding shares), with no expiration date[169][347] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the company's charter, bylaws, certifications, and financial statements formatted in inline XBRL - Exhibits include the Company's Charter and Bylaws, certifications from the Principal Executive and Financial Officers (Sections 302 and 906 of Sarbanes-Oxley Act), and financial statements in inline XBRL format[170][171][172][173][175][349][350][351][352][354] SIGNATURES The report is duly signed on behalf of Affinity Bancshares, Inc. by its Chief Executive Officer and Chief Financial Officer - The report was signed by Edward J. Cooney, Chief Executive Officer and Director, and Tessa M. Nolan, Senior Vice President and Chief Financial Officer, on May 12, 2022[178][357]